<PAGE>
As filed with the Securities and Exchange Commission on February 7, 1997.
REGISTRATION NO. 333-
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_____________
U.S. RESTAURANT PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
MARYLAND 6798 75-2687420
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code No.)
organization)
5310 HARVEST HILL ROAD
SUITE 270, L.B. 168
DALLAS, TEXAS 75230
(972) 387-1487
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
_____________
ROBERT J. STETSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
5310 HARVEST HILL ROAD
SUITE 270, L.B. 168
DALLAS, TEXAS 75230
(972) 387-1487
(Address, including zip code, and telephone number, including
area code, of agent for service)
_____________
Copies to:
KENNETH L. BETTS, ESQ.
WINSTEAD SECHREST & MINICK P.C.
1201 ELM STREET,
SUITE 5400
DALLAS, TEXAS 75270
(214) 745-5400
Approximate date of commencement of proposed sale to the
public: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT
BECOMES EFFECTIVE AND ALL OTHER CONDITIONS DESCRIBED IN THE
ENCLOSED PROXY STATEMENT/PROSPECTUS HAVE BEEN SATISFIED OR
WAIVED.
If the securities being registered on this Form are being
offered in connection with the formation of a holding company and
there is compliance with General Instruction G, please check the
following box: [ ]
If the only securities being registered on this Form are
being offered pursuant to dividend or interest reinvestment
plans, please check the following box. [ ]
If any of the securities being registered on this Form are
to be offered on a delayed or continuous basis pursuant to Rule
415 under the Securities Act of 1933, other than securities
offered only in connection with dividend or interest reinvestment
plans, check the following box. [X]
If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same offering. [ ] ______
(Calculation table continued on next page)
<PAGE>
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering. [ ] ______
If delivery of the prospectus is expected to be made
pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================
<S> <C> <C> <C> <C>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM MAXIMUM
SECURITIES TO BE REGISTERED AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF
REGISTERED (1) PRICE PER PRICE (2) REGISTRATION
UNIT FEE
- ---------------------------------------------------------------------------------------------------
Common Stock Not
$.01 par Value 6,963,640 Applicable $210,232,29 $63,707
===================================================================================================
(1) Based upon the estimated maximum number of shares of common
stock, $.01 par value per share, of the Registrant issuable
to the holders of the units of beneficial interest of U.S.
Restaurant Properties Master L.P. (the "Partnership") and
the managing general partner of the Partnership in
connection with the Conversion, as described in the enclosed
Proxy Statement/Prospectus.
(2) Estimated pursuant to Rule 457(f) of the Securities Act of
1933, as amended, based upon the average of the reported
high and low sales prices of a Unit on the New York Stock
Exchange on February 4, 1997.
__________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON
SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE
DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
==============================================================
</TABLE>
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
FORM S-4
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
LOCATION IN
FORM S-4 ITEM PROXY STATEMENT/PROSPECTUS
<S> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus ... Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus ................ Available Information;Incorporation of Certain
Documents by Reference;Table of Contents
3. Risk Factors, Ratio of
Earnings to Fixed Charges
and Other Information .................... Summary; Risk Factors
4. Terms of the Transaction ................. Summary; The Conversion;The Special Meeting;
Federal Income Tax Considerations
5. Pro Forma Financial
Information .............................. Summary; Selected Historical and Pro Forma
Financial Information and Other Data
6. Material Contacts with the
Company Being Acquired ................... Summary; The Company;Business
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed To Be Underwriters ................ Not Applicable
8. Interests of Named Experts and Counsel ... Experts; Legal Matters
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities .............................. Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants Not Applicable
11. Incorporation of Certain Information
by Reference ............................. Not Applicable
12. Information with Respect to S-2 or S-3
Registrants .............................. Not Applicable
13. Incorporation of Certain Information by
Reference ................................ Not Applicable
<PAGE>
14. Information with Respect to Registrants
Other than S-2 or S-3 Registrants ........ Summary; The Company; Management's Discussion and
Analysis of Results of Operations and Financial
Condition; Business; Policies with Respect to
Certain Activities; Market Prices of Units and
Distributions; Capitalization; Management;
Principal Stockholders; Description of Capital
Stock; Certain Provisions of Maryland Law and
of the REIT Corporation's Articles and Bylaws;
Comparative Rights of Unitholders and Stockholders
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies Summary; The Company; Management's Discussion and
Analysis of Results of Operations and Financial
Condition; Business; Policies with Respect to
Certain Activities; Market Prices of Units and
Distributions; Capitalization; Management;
Principal Stockholders; Description of Capital
Stock; Certain Provisions of Maryland Law and
of the REIT Corporation's Articles and Bylaws;
Comparative Rights of Unitholders and Stockholders
16. Information with Respect to S-2 or S-3
Companies ................................ Not Applicable
17. Information with Respect to Companies
Other than S-2 or S-3 Companies .......... Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations Are to be Solicited ....... Outside Front Cover Page; Summary; The
Special Meeting
19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited,
or in an Exchange Offer .................. Not Applicable
</TABLE>
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
5310 HARVEST HILL ROAD, SUITE 270, L.B. 168
DALLAS, TEXAS 75230
(972) 387-1487
(800) 322-9827
Dear Limited Partner:
We are seeking your approval to convert U.S. Restaurant
Properties Master L.P. ("USRP") to a self-advised real estate
investment trust ("REIT"). This conversion will not change
either the strategy of the company or the "flow-through" tax
advantages the company currently enjoys. The conversion will be
tax-free, and the shares of the company will continue to be
traded on the New York Stock Exchange ("NYSE") under our current
trading symbol, "USV." Your vote on this matter is important --
not voting effectively counts as a no vote, so please send in
your proxy.
WHY CONVERT TO THE REIT STRUCTURE? The answer is to enhance
investor value by employing a structure (i.e. a REIT as opposed
to a master limited partnership ("MLP")) that is more widely
accepted and endorsed by investors, particularly institutional
investors. Currently, there are only four NYSE-traded MLPs that
invest in real estate, of which USRP is one. On the other hand,
there are approximately 150 NYSE-traded REITs, and a vast
majority of those are "self-advised". As a self-advised REIT,
the company should enjoy greater access to lower-cost debt
financing, which should increase profits and the cash available
for dividends. Also, the company believes that it would enjoy
more participation from institutional investors, which should
increase the stock price relative to remaining an MLP. As the
company continues to grow and its financing requirements grow
with it, we believe that self-advised REIT status has become very
important to our future.
WHAT IS A "SELF-ADVISED" REIT? In a self-advised REIT, the
management is employed by the REIT, rather than by an external
advisor, such as the managing general partner arrangement the
company currently uses. To become self advised, your managing
general partner will assign its property management contract and
convert its aggregate 1.98% partnership interest in exchange for
REIT shares (or equivalent partnership interests), and then the
management team of your managing general partner will become
employees of the REIT. In exchange for the property management
contract and 1.98% partnership interest, the managing general
partner will receive consideration (consisting of an interest in
U.S. Restaurant Properties Operating L.P., shares of REIT common
stock and/or units in USRP) equal in value to 850,000 REIT shares
(the "Initial Shares"), and will be eligible to receive
additional shares in the year 2000 if certain targets are reached
(collectively, the "Acquisition Price"). Following the receipt
of the Initial Shares, all management fees will cease. Assuming
the continued growth of the company, the assignment and
conversion will increase the cash available for dividends to the
stockholders, and will increase net income above what it would
otherwise have been. The Acquisition Price was approved by a
special committee of outside directors of the managing general
partner, and the special committee has received a fairness
opinion with respect to such exchange from the investment banking
firm Morgan Keegan & Company, Inc.
<PAGE>
It has been less than 24 months since the limited partners
approved amendments to the partnership agreements which enabled
USRP to expand. Since that approval, the price of the Units on
the New York Stock Exchange has risen more than 90%, and
partnership dividends, net income and cash available for
distributions have all increased substantially. Your approval of
the conversion is important to take the company to its next stage
of growth and progress. We encourage you to read the Proxy
Statement/Prospectus and then vote your Units in favor of the
conversion by filling out the enclosed proxy card and returning
it to D.F. King & Co. in the enclosed, self-addressed, stamped
envelope. Not voting is the same as voting against the
conversion, so we urge everyone to vote. If you have any
questions, please call us toll free at (800-322-9827). Thank you
for your consideration of the Conversion.
Best Regards,
Robert Stetson Fred Margolin
Chief Executive Officer Chairman of the Board
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
Notice Of A Special Meeting Of
The Limited Partners on May 15, 1997
To the Limited Partners of U.S. Restaurant Properties Master L.P.:
A special meeting (the "Special Meeting") of the limited
partners (the "Limited Partners") of U.S. Restaurant Properties
Master L.P. ("USRP") will be held at __________________________
______________________________ on May 15, 1997 at 10:00 a.m., or
at any adjournment thereof, to consider and vote upon a proposed
conversion (the "Conversion") of USRP into a real estate
investment trust ("REIT").
If the Limited Partners consent, the Conversion is expected
to be effected in a tax-free transaction through the merger (the
"Merger") of USRP Acquisition, L.P., a Delaware limited
partnership that is an indirectly wholly-owned subsidiary of U.S.
Restaurant Properties, Inc., a newly formed Maryland corporation
(the "REIT Corporation") which intends to qualify as a REIT under
federal tax laws, with and into USRP and, as a result, USRP will
become a subsidiary of the REIT Corporation. U.S. Restaurant
Properties Operating L.P. (the "Operating Partnership") will
remain in existence following consummation of the Merger. The
result of the Merger would be that holders of units of beneficial
interest of USRP (the "Units") would become stockholders of the
REIT Corporation. In addition, as part of the Merger, QSV
Properties, Inc. (formerly U.S. Restaurant Properties, Inc.), the
Managing General Partner of USRP, will withdraw as managing
general partner of USRP and a corporate subsidiary will be
substituted as managing general partner of USRP pursuant to the
terms of the merger agreement. Consummation of the Merger is
contingent upon the receipt of a satisfactory ruling from the
Internal Revenue Service as to the tax-free nature of the Merger.
In the event such a ruling is not received, the Conversion will
be effected through amending the partnership agreement of the
Operating Partnership, the operating subsidiary of USRP, to
permit the admission of the REIT Corporation as a limited partner
of the Operating Partnership and amending USRP's partnership
agreement to, among other things, permit holders of Units to
exchange their Units for shares of the REIT Corporation's common
stock (the "Partnership Alternative"). A vote for the Conversion
constitutes (i) a vote approving the Merger and (ii) a vote
approving the Partnership Alternative if the Merger cannot be
consummated.
The accompanying Proxy Statement/Prospectus describes the
Conversion and the Merger and the Partnership Alternative in
greater detail.
Only Limited Partners of record as of the close of business
on _______________, 1997, are entitled to notice of, and to vote
at, the Special Meeting. Such Limited Partners may vote at the
Special Meeting either in person or by proxy. If you cannot
attend the Special Meeting, please complete, sign, date and
return the accompanying proxy card in the enclosed stamped and
self-addressed envelope so that the proxyholders may vote the
Units that you hold as a Limited Partner pursuant to your
instructions. If you attend the Special Meeting, you may revoke
your proxy and vote such Units in person.
Very truly yours,
QSV PROPERTIES, INC.,
(FORMERLY U.S. RESTAURANT PROPERTIES,
INC.) THE MANAGING GENERAL PARTNER
Dallas, Texas
_____________, 1997
<PAGE>
SUBJECT TO COMPLETION, DATED ________, 1997
U.S. RESTAURANT PROPERTIES, INC.
U.S. RESTAURANT PROPERTIES MASTER L.P.
PROXY STATEMENT/PROSPECTUS
This Proxy Statement/Prospectus relates to the proposed
conversion (the "Conversion") of U.S. Restaurant Properties
Master L.P. ("USRP") into a real estate investment trust
("REIT"). The REIT Corporation (as defined below) will be
self-advised and will continue to expand the property ownership,
management, acquisition and marketing operations of USRP, through
U.S. Restaurant Properties Operating, L.P. (the "Operating
Partnership" and, together with USRP, the "Partnerships"). Upon
completion of the Conversion, the Operating Partnership will
become a subsidiary of the REIT Corporation and the units of
beneficial interest of USRP (the "Units") will be eligible for
sale on the New York Stock Exchange (the "NYSE") as shares of
common stock, $.001 par value per share (the "Common Stock"), of
the REIT Corporation.
This Proxy Statement/Prospectus is being furnished to the
limited partners (the "Limited Partners") of USRP in connection
with the solicitation of proxies by QSV Properties, Inc.
(formerly U.S. Restaurant Properties, Inc.), in its capacity as
the managing general partner (the "Managing General Partner") of
USRP, for use at the special meeting of Limited Partners to be
held on May 15, 1997 (the "Special Meeting"). At the Special
Meeting, the Limited Partners will be asked to approve the
Conversion of USRP into a REIT through the merger of USRP with a
partnership subsidiary of the REIT Corporation, with USRP being
the surviving entity (the "Merger") and, as a result, becoming a
subsidiary of the REIT Corporation. See "The Conversion--The
Merger." Pursuant to the Merger, each holder of Units will
receive one share of Common Stock for each Unit so held.
Consummation of the Merger is contingent upon the receipt of a
satisfactory ruling from the Internal Revenue Service as to the
tax-free nature of the Merger. In the event such a ruling is not
received, the Conversion will be effected through the Partnership
Alternative (as hereinafter defined), pursuant to which, among
other things, the REIT Corporation will be admitted as a limited
partner to the Operating Partnership and the partnership
agreement of USRP will be amended to provide for the exchange of
Units for shares of Common Stock. This Proxy
Statement/Prospectus and the accompanying form of proxy are first
being mailed to the Limited Partners on or about __________,
1997.
In addition, as part of the Conversion the Managing General
Partner will withdraw as managing general partner of the
Partnerships (with a corporate subsidiary of the REIT Corporation
being substituted as general partner of both Partnerships). In
conjunction therewith, the Managing General Partner will (i)
assign its rights to fees, payable to it pursuant to the terms of
the partnership agreements, for the acquisition and management of
the Partnerships' properties to either USRP or the Operating
Partnership (depending upon how the Conversion is effected) and
(ii) convert its interests in the Partnerships (together with the
withdrawal described above, the "Termination") for shares of
Common Stock, an interest in the Operating Partnership and/or
Units (depending upon how the Conversion is effected) having in
the aggregate a value initially equal to 850,000 shares of Common
Stock and will be eligible to receive additional consideration in
the year 2000. Following the Termination, the executive officers
and other employees of the
<PAGE>
Managing General Partner will become executive officers and
employees of the REIT Corporation and no further management fees
will be payable. As a result, the Company will become self-advised.
See "The Conversion--Termination of Management Compensation Rights
and Partnership Interests."
This Proxy Statement/Prospectus also constitutes a
prospectus of U.S. Restaurant Properties, Inc., a Maryland
corporation (the "REIT Corporation"), with respect to up to _____
shares of Common Stock to be issued by the REIT Corporation
pursuant to either (i) the merger agreement to be entered into
between the REIT Corporation and USRP in the event Conversion is
effected pursuant to the Merger, or (ii) the exchange of Units
for shares of Common Stock in accordance with the terms and
conditions of USRP's amended partnership agreement in the event
the Conversion is effected pursuant to the Partnership
Alternative.
On __________, 1997, the last reported sale price of the
Units on the NYSE was $__________ per Unit.
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 Proxy Statement/Prospectus is ____________,1997.
- 2 -
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE INTO THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF
SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE REIT CORPORATION OR USRP. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE COMMON STOCK
OFFERED HEREBY SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE REIT
CORPORATION OR USRP SINCE THE DATE HEREOF OR THAT THE INFORMATION
SET FORTH OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE. THIS PROXY STATEMENT/PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
PURCHASE, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION OF AN OFFER OR PROXY SOLICITATION.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES CERTAIN DOCUMENTS
BY REFERENCE THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH.
USRP UNDERTAKES TO PROVIDE COPIES OF SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE), WITHOUT CHARGE, TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY
STATEMENT/PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO
PRESIDENT, QSV PROPERTIES, INC., 5310 HARVEST HILL ROAD, SUITE 270,
DALLAS, TEXAS 75230 (TELEPHONE (972) 387-1487,
FAX (972) 490-9119). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, SUCH REQUESTS SHOULD BE RECEIVED BY APRIL 20, 1997.
AVAILABLE INFORMATION
USRP is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and, in accordance therewith, files reports and other information
with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed by USRP can
be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at Seven World
Trade Center, 13th Floor, New York, New York 10048 and CitiCorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60621-2511. Copies of such material can be obtained by mail from
the Public Reference Section of the Commission at 450 West Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
reports, proxy statements and other information may also be
obtained from the web site that the Commission maintains at
http://www.sec.gov. In addition, reports, proxy statements and
other information concerning USRP may be inspected at the offices
of the NYSE, 20 Broad Street, New York, New York 10005.
Reports, proxy statements and other information concerning
USRP may also be obtained electronically through a variety of
databases, including, among others, the Commission's Electronic
Data Gathering and Retrieval ("EDGAR") program, Knight-Rider
Information Inc., Federal Filing/Dow Jones and Lexis/Nexis.
- 3 -
<PAGE>
The REIT Corporation has filed with the Commission a
Registration Statement on Form S-4 (together with all amendments,
supplements and exhibits thereto, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock to be issued pursuant to
the Conversion. This Proxy Statement/Prospectus does not contain
all of the information set forth in the Registration Statement,
certain parts of which have been omitted in accordance with the
rules and regulations of the Commission. For further information,
reference is hereby made to the Registration Statement. Any
statements contained herein concerning the provisions of any
document filed as an exhibit to the Registration Statement or
otherwise filed with the Commission are not necessarily complete,
and in each instance reference is made to the copy of such document
so filed. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by USRP with
the Commission pursuant to the Exchange Act, are incorporated
herein by reference:
(1) Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, as amended by Forms 10-K/A
filed on May 23, 1996 and June 12, 1996;
(2) Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1996, June 30, 1996 and
September 30, 1996;
(3) Current Report on Form 8-K dated April 19, 1996, as
amended by the Form 8-K/A filed April 30, 1996;
Current Report on Form 8-K dated June 17, 1996;
Current Report on Form 8-K dated December 30, 1996,
as amended by the Form 8-K/A filed January 21,
1997; and
(4) Registration Statement on Form 8-A dated
February 6, 1986 and Amendment No. 1 to
Registration Statement on Form 8-A dated
February 20, 1986.
All documents filed by USRP pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this
Proxy Statement/Prospectus and prior to the date of the Special
Meeting shall be deemed to be incorporated by reference herein and
to be a part hereof from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement/Prospectus to the
extent that a statement contained herein or in any other
subsequently filed document that 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 Proxy Statement/Prospectus.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
AVAILABLE INFORMATION.................................................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................................... 4
SUMMARY ................................................................................ 10
Overview of the Conversion...................................................... 10
The Special Meeting............................................................. 10
Advantages of the Conversion.................................................... 11
Recommendation of the Managing General Partner.................................. 12
Conflicts of Interest........................................................... 13
The Company..................................................................... 13
Mechanics of the Conversion..................................................... 15
The Merger...................................................................... 15
Risk Factors and Other Special Considerations................................... 18
Termination of Property Management Contract and Partnership Interests........... 18
No Dissenters' Appraisal Rights ................................................ 19
Tax Consequences of the Conversion.............................................. 20
Summary of Comparison of Taxation of Stockholders and Unitholders............... 23
Effects of the Conversion on Rights of Unitholders.............................. 25
Comparison of Rights of Unitholders and Stockholders............................ 26
Market Prices of Units and Distributions........................................ 27
RISK FACTORS............................................................................. 28
Conflicts of Interest........................................................... 28
Tax Consequences of the Conversion.............................................. 28
Adverse Consequences of Failure to Qualify as a REIT; Other Tax Liabilities..... 31
Absence of Appraisal Rights..................................................... 32
Comparative Rights of the Units and Common Stock................................ 32
Substitution of Trading of Common Stock for Units............................... 32
Future Dilution................................................................. 32
Adverse Effect of Increases in Interest Rates................................... 33
No Restrictions on Changes in Investment, Financing and Other Policies.......... 33
Certain Antitakeover Provisions; Ownership Limits............................... 33
Acquisition and Expansion Risks................................................. 34
Investment Concentration in Single Industry..................................... 35
Dependence on Success of Burger King............................................ 35
Possible Rent Defaults and Failure to Renew Leases and Franchise Agreements..... 35
Real Estate Investment Risks.................................................... 35
Dependence on Key Personnel..................................................... 38
Competition..................................................................... 38
- 5 -
<PAGE>
Development Risks............................................................... 38
Risk of Newly-Constructed Restaurant Properties................................. 39
THE COMPANY.............................................................................. 40
History and Structure of USRP................................................... 40
The REIT Corporation............................................................ 40
Strategy ....................................................................... 41
THE CONVERSION........................................................................... 43
Background of the Conversion.................................................... 43
Advantages of the Conversion.................................................... 43
The Merger...................................................................... 45
Partnership Alternative......................................................... 49
Termination of Property Management Contract and Partnership Interests........... 50
Analysis of the Special Committee............................................... 52
Fairness Opinion................................................................ 56
No Dissenters' Appraisal Rights................................................. 62
Costs of the Conversion......................................................... 62
Consequences If Conversion Is Not Approved...................................... 63
Fiduciary Duties................................................................ 63
Accounting Treatment............................................................ 64
THE SPECIAL MEETING...................................................................... 64
Eligible Units.................................................................. 65
Required Legal Opinion.......................................................... 65
Required Vote................................................................... 65
Abstentions and Broker Non-Votes................................................ 66
Proxies ....................................................................... 66
Revocation of Proxies........................................................... 66
Proxy Solicitor................................................................. 67
Solicitations by the Managing General Partner................................... 67
SELECTED HISTORICAL AND PRO FORMA FINANCIAL
INFORMATION AND OTHER DATA...................................................... 68
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION................................ 71
Overview ....................................................................... 71
Results of Operations........................................................... 72
Liquidity and Capital Resources................................................. 74
Inflation....................................................................... 75
Seasonality..................................................................... 75
- 6 -
<PAGE>
BUSINESS ................................................................................ 76
General ....................................................................... 76
Industry ....................................................................... 76
Investment Criteria............................................................. 77
Properties...................................................................... 78
Leases with Restaurant Operators................................................ 80
Ownership of Real Estate Interests.............................................. 82
Use and Other Restrictions on the Operation and Transfer of Burger King
Restaurant Properties..................................................... 83
Restaurant Alterations and Reconstruction....................................... 84
Competition..................................................................... 84
Regulation...................................................................... 85
Insurance....................................................................... 86
Employees....................................................................... 86
Legal Proceedings............................................................... 87
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES.............................................. 87
Investment Policies............................................................. 87
Financing Policies.............................................................. 88
Affiliate Transaction Policy.................................................... 89
Certain Other Policies.......................................................... 90
PRICE RANGE OF UNITS AND DISTRIBUTION POLICY............................................. 91
CAPITALIZATION........................................................................... 93
MANAGEMENT............................................................................... 94
Directors and Executive Officers................................................ 94
Executive Compensation.......................................................... 96
Employment Agreements........................................................... 96
Indemnification Agreements...................................................... 97
Insurance....................................................................... 97
Certain Transactions with Related Parties....................................... 97
PRINCIPAL STOCKHOLDERS................................................................... 97
DESCRIPTION OF CAPITAL STOCK............................................................. 98
Description of Securities....................................................... 98
General ....................................................................... 98
Common Stock.................................................................... 98
Preferred Stock................................................................. 99
Restrictions on Transfer........................................................ 100
- 7 -
<PAGE>
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE REIT CORPORATION'S ARTICLES AND BYLAWS............................... 103
Classification of the Board of Directors........................................ 103
Limitation of Liability and Indemnification..................................... 104
Business Combinations........................................................... 105
Control Share Acquisitions...................................................... 105
Amendment to the Articles....................................................... 106
Dissolution of the Company...................................................... 106
Advance Notice of Director Nominations and New Business......................... 106
Meetings of Stockholders........................................................ 107
COMPARATIVE RIGHTS OF UNITHOLDERS AND STOCKHOLDERS....................................... 107
General ....................................................................... 107
Management...................................................................... 108
Voting Rights................................................................... 108
Special Meetings................................................................ 109
Amendment of Master Partnership Agreement and Articles of Incorporation......... 109
Limited Liability............................................................... 110
Dissolution of the Partnership and the REIT Corporation and Termination of
REIT Status.............................................................. 110
Liquidation Rights.............................................................. 111
Limitations of Liability of General Partners and Trustees....................... 111
Indemnification................................................................. 111
Derivative Actions.............................................................. 112
Inspection of Books and Records................................................. 112
Distributions and Dividends..................................................... 113
FEDERAL INCOME TAX CONSIDERATIONS........................................................ 113
A. The Merger............................................................. 113
1. Qualification as Nonrecognition Transaction................... 113
2. Tax Consequences to USRP...................................... 115
3. Tax Consequences to Unitholders............................... 116
4. Tax Consequences to the REIT Corporation...................... 118
5. Tax Consequences of the REIT Corporation's Qualification as
a REIT........................................................ 119
B. Partnership Alternative................................................ 130
1. Partnership Status............................................ 130
2. Partner Status................................................ 133
3. Tax Consequences of Unit Ownership............................ 133
4. Tax Treatment of Operations................................... 136
5. Treatment of Short Sales...................................... 139
6. Alternative Minimum Tax....................................... 139
7. Tax-Exempt Entities, Regulated Investment
Companies and Foreign Investors............................... 140
- 8 -
<PAGE>
8. Uniformity of Units........................................... 141
9. Disposition of Units: Exchange for Shares in the REIT
Corporation................................................... 141
10. Constructive Termination or Dissolution of Partnership........ 143
11. Partnership Income Tax information Returns and
Partnership Audit Procedures.................................. 144
12. Information Return Filing Requirements........................ 145
13. Nominee Reporting............................................. 145
14. State and Other Taxes......................................... 145
C. Differences between a Partnership and a REIT........................... 146
ERISA CONSIDERATIONS..................................................................... 147
Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs................. 148
Status of the Company under ERISA............................................... 149
LEGAL MATTERS............................................................................ 149
EXPERTS ................................................................................ 149
SIGNATURES............................................................................... 1
INDEX TO FINANCIAL STATEMENTS............................................................ F-1
APPENDIXES
A. Agreement and Plan of Merger........................................... A-1
B. Fairness Opinion....................................................... B-1
C. Material Amendments to Master Partnership Agreement.................... C-1
D. Material Amendments to Operating Partnership Agreement................. D-1
</TABLE>
- 9 -
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED
ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS. REFERENCE IS MADE
TO, AND THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE
DETAILED INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE
INTO THIS PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO.
LIMITED PARTNERS ARE URGED TO READ CAREFULLY THIS PROXY
STATEMENT/PROSPECTUS AND THE APPENDICES HERETO IN THEIR ENTIRETY.
AS USED IN THIS PROXY STATEMENT/PROSPECTUS, UNLESS OTHERWISE
REQUIRED BY THE CONTEXT, THE TERM "REIT CORPORATION" MEANS U.S.
RESTAURANT PROPERTIES, INC., A MARYLAND CORPORATION, THE TERM
"USRP" MEANS U.S. RESTAURANT PROPERTIES MASTER L.P., THE TERM
"OPERATING PARTNERSHIP" MEANS U.S. RESTAURANT PROPERTIES
OPERATING L.P., AND THE TERM "MANAGING GENERAL PARTNER" MEANS QSV
PROPERTIES, INC. (FORMERLY U.S. RESTAURANT PROPERTIES, INC., A
DELAWARE CORPORATION), IN ITS CAPACITY AS MANAGING GENERAL
PARTNER OF EACH OF THE PARTNERSHIPS. USRP AND THE OPERATING
PARTNERSHIP ARE GENERALLY REFERRED TO TOGETHER HEREIN AS THE
"PARTNERSHIPS." ALL REFERENCES HEREIN TO THE "COMPANY" WHEN USED
WITH RESPECT TO THE ACQUISITION, OWNERSHIP AND OPERATION OF THE
PROPERTIES REFER TO THE COMBINED OPERATIONS OF THE PARTNERSHIPS,
PRIOR TO THE CONVERSION, AND THE COMBINED OPERATIONS OF THE REIT
CORPORATION AND THE PARTNERSHIPS, AS APPLICABLE, FOLLOWING THE
CONVERSION.
OVERVIEW OF THE CONVERSION
This Proxy Statement/Prospectus relates to a proposal to
convert USRP into a REIT in a tax-free transaction. As it is
presently constituted, USRP is a publicly-traded limited
partnership. As a result of the Conversion, the Operating
Partnership will become a subsidiary of the REIT Corporation and
the Units will be eligible for sale on the NYSE as shares of
Common Stock. The REIT Corporation will be "self-advised"
through the assignment by the Managing General Partner of its
rights to fees, payable to it pursuant to the terms of the
Partnership Agreements (as hereinafter defined), for the
acquisition and management of the Company's properties (the
"Property Management Contract") and the subsequent employment of
the management team of the Managing General Partner by the REIT
Corporation. The holders of Units (the "Unitholders") will
continue to hold the same economic position in the assets owned
by the Company as prior to the Conversion. FOR THE CONVERSION TO
BE APPROVED, THE AFFIRMATIVE VOTE OF THE HOLDERS OF MORE THAN 50%
OF THE TOTAL NUMBER OF OUTSTANDING UNITS IS REQUIRED FOR APPROVAL
OF THE CONVERSION. ACCORDINGLY, ABSTENTIONS AND BROKER NON-VOTES
WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE CONVERSION.
THE SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING. The Special
Meeting will be held on Thursday, May 15, 1997, at 10:00 a.m.
(Dallas time), at ___________________. At the Special Meeting,
the Limited Partners will be asked to approve the Conversion.
RECORD DATE; LIMITED PARTNERS ENTITLED TO VOTE. The
Managing General Partner has fixed the close of business on
____________, 1997 as the record date (the "Record Date") for the
- 10 -
<PAGE>
determination of Limited Partners entitled to notice of, and to
vote at, the Special Meeting and any adjournment thereof. On
that date, USRP had issued and outstanding _____________ Units.
VOTING AND REVOCATION OF PROXIES. To vote by proxy, a
Limited Partner must complete, sign, date and deliver the proxy
card to D. F. King & Company before the Special Meeting. Unless
indicated to the contrary on the proxy card, the directions given
on the proxy card will be for all of the Units that such Limited
Partner may vote. If a Limited Partner signs and returns a proxy
card without giving any directions, the proxyholder will vote
such Limited Partner's Units for the approval of the Conversion.
A Limited Partner may revoke its proxy at any time prior to
the proxyholder's voting of the Units to which such proxy applies
by: (i) submitting a later dated proxy to D.F. King & Company or
someone else who attends the Special Meeting, (ii) attending the
Special Meeting and delivering a written notice of revocation of
the proxy to the representative of D.F. King & Company present at
the Special Meeting, or (iii) delivering a written notice of
revocation of the proxy to D.F. King & Company at its address set
forth herein, which D.F. King & Company receives on or before
___________, 1997.
ADVANTAGES OF THE CONVERSION
The Board of Directors of the Managing General Partner (the
"Board of Directors") is recommending that the Limited Partners
vote in favor of the Conversion because it believes that the
Conversion will result in the following advantages to the Limited
Partners:
- The greater number of investors that currently consider
investments in REITs as compared to partnerships may
affect the market price per share of Common Stock
versus the market price per Unit, based on comparable
levels of the Company's operating performance, although
no assurance can be given that any increase will occur.
- Management believes that, based upon the large amounts
of capital raised by REITs during the past several
years, the higher level of holdings by institutional
investors and the greater number of research analysts
and brokerage firms following and making markets in
REITs as compared to real estate limited partnerships,
the Company may have greater access to public and
private sources of debt and equity capital than it now
has, potentially enabling the Company to raise capital
on more favorable terms than are now available.
Because the Company's strategy is to continue to
acquire properties to increase earnings and dividends,
the ability to access more, lower cost capital should
enable the Company to grow at a more rapid rate.
- Following the Conversion, the Company will be able to
raise additional capital through the issuance of
various classes of securities (including preferred
stock) which may not be dilutive to holders of Common
Stock.
- 11 -
<PAGE>
- As part of the Conversion, the Managing General Partner
will be assigning the Property Management Contract to
either the Operating Partnership or USRP (depending
upon how the Conversion is effected) and converting its
aggregate 1.98% partnership interest in the
Partnerships (the "Partnership Interests") into shares
of Common Stock, a limited partner interest in the
Operating Partnership or Units (depending upon how the
Conversion is effected). In either event, the REIT
Corporation will become self-advised and will, as a
result of the termination of all management fees, have
additional cash for distribution to its stockholders.
For the year ended December 31, 1996, the Managing
General Partner was paid $2.6 million with respect to
the Property Management Contract and the Partnership
Interests.
- Following the Conversion, the Operating Partnership
will remain in existence. As a result, the REIT
Corporation will be an "umbrella partnership" REIT
("UPREIT"), thereby permitting the Company to continue
to acquire properties in tax-free exchanges with other
partnerships.
- The Conversion is expected to ultimately result in cost
savings of approximately $200,000 per year as a result
of the elimination of the need to generate and mail
certain tax reporting information to Limited Partners.
Upon receipt of shares of Common Stock, Limited
Partners will also be relieved of having to deal with
the burdensome and time consuming Federal income tax
reporting attributable to a publicly-traded
partnership.
See "The Conversion--Advantages of the Conversion." The
advantages of the Conversion should be considered by the Limited
Partners in light of the risks associated with the Conversion.
See "Risk Factors."
RECOMMENDATION OF THE MANAGING GENERAL PARTNER
The Board of Directors has approved the Conversion and has
determined that the Conversion is in the best interests of, and
on terms that are fair to, the Unitholders. The Managing General
Partner recommends approval and adoption of the Conversion by the
Unitholders. The Board of Directors believes that the Conversion
will result in the benefits to the Limited Partners described
above under "--Advantages of the Conversion." The Board of
Director's substantive recommendations and conclusions are based
on the analysis of the advantages and risks of converting from
partnership to REIT form and making the changes in operating
format described herein. See "The Conversion--Advantages of the
Conversion" and "Risk Factors."
- 12 -
<PAGE>
CONFLICTS OF INTEREST
In considering the recommendation of the Managing General
Partner with respect to the Conversion, the Limited Partners
should be aware that a majority of the members of the Board of
Directors, by virtue of their ownership interests in and/or
positions or affiliations with the Managing General Partner, were
subject to conflicts of interest in determining the Acquisition
Price and the resulting consideration to be received by the
Managing General Partner with respect to the Termination.
Accordingly, the Board of Directors appointed a special committee
(the "Special Committee") composed of the independent members
thereof to review and make a recommendation with respect to the
Acquisition Price. Neither member of the Special Committee is an
affiliate of, or otherwise has any economic interest in, the
Managing General Partner. Morgan Keegan & Company, Inc. ("Morgan
Keegan"), the Special Committee's financial advisor, has rendered
an opinion that, as of the date hereof, the Acquisition Price is
fair, from a financial point of view, to the Unitholders. The
Board of Directors does not believe that the intention of the
members of the Special Committee to serve as directors of the
REIT Corporation following the Conversion results in a material
conflict of interest.
THE COMPANY
USRP. USRP acquires, owns and manages income-producing
properties that it leases on a triple net basis to operators of
fast food and casual dining restaurants, primarily BURGER KING-registered
trademark-(BURGER KING -registered trademark- is a registered trademark of
Burger King Brands, Inc.) and other national and regional brands, including
DAIRY QUEEN-registered trademark- (DAIRY QUEEN-registered trademark- is a
registered trademark of American Dairy Queen Corporation), HARDEE'S-registered
trademark- is a registered trademark of Hardee's Food Systems, Inc.) and
CHILI'S-registered trademark- (CHILI'S-registered trademark- is a
registered trademark of Brinker Restaurant Corporation). USRP
acquires properties either from third party lessors or from
operators on a sale/leaseback basis. Under a triple net lease,
the tenant is obligated to pay all costs and expenses, including
all real property taxes and assessments, repairs and maintenance
and insurance. Triple net leases do not require substantial
reinvestment by the property owner and, as a result, more cash
from operations may be used for distributions to Unitholders or
for acquisitions.
USRP is one of the largest publicly-owned entities in the
United States dedicated to acquiring, owning and managing
restaurant properties. At December 31, 1996, USRP's portfolio
consisted of 322 restaurant properties in 44 states (the
"Properties"), approximately 99% of which were leased. From
USRP's initial public offering in 1986 until March 31, 1995,
USRP's portfolio was limited to approximately 125 restaurant
properties, all of which were leased on a triple net basis to
operators of Burger King restaurants. In May 1994, an investor
group led by Robert J. Stetson and Fred H. Margolin acquired the
Managing General Partner. In March 1995, certain amendments to
the Partnership Agreements were proposed by the new management
and adopted by the Limited Partners which amendments authorized
USRP to acquire additional properties, including restaurant
properties not affiliated with Burger King Corporation ("BKC").
Since adoption of the amendments, USRP has acquired 200 properties
for an aggregate purchase price of approximately $117 million,
including 184 properties acquired since January 1, 1996 and has
- 13 -
<PAGE>
entered into binding agreements to acquire 54 additional
restaurant properties (the "Acquisition Properties") for an
aggregate purchase price of approximately $30 million. Upon
acquisition of the Acquisition Properties, USRP's portfolio will
consist of an aggregate of 376 properties in 44 states,
consisting of 173 Burger King restaurants, 40 DAIRY QUEEN
restaurants, 30 GRANDY'S-registered trademark- (GRANDY'S-registered
trademark- is a registered trademark of Grandy's, Inc.) restaurants,
28 HARDEE'S restaurants, 18 PIZZA HUT-registered trademark- (PIZZA HUT
- -registered trademark- is a registered trademark of Pizza Hut, Inc.)
restaurants, 10 SCHLOTZSKY'S-registered trademark- (SCHLOTZSKY's is a
registered trademark of Schlotzsky's, Inc.) restaurants, eight CHILI'S
restaurants, three KFC-registered trademark- (KFC-registered trademark-
is a registered trademark of KFC Corporation) restaurants, two TACO
BELL-registered trademark- (TACO BELL-registered trademark- is a
registered trademark of Taco Bell Corp.) restaurants and 64 other
properties, most of which are regional brands.
USRP is a Delaware limited partnership. The principal
executive offices of USRP and the Managing General Partner are
located at 5310 Harvest Hill Road, Suite 270, Dallas, Texas
75230. The telephone number is (972) 387-1487.
THE REIT CORPORATION. The REIT Corporation is a
newly-formed Maryland corporation, all of the stock of which is
currently owned by the Managing General Partner, that was
organized to succeed to the operations of USRP pursuant to the
Conversion. The REIT Corporation has not engaged in any
activities other than in connection with its organization and the
Conversion. Upon consummation of the Conversion pursuant to the
Merger, the current partners of USRP will become stockholders of
the REIT Corporation and the Operating Partnership will become a
subsidiary of the REIT Corporation. In the event that the
Partnership Alternative is used to effect the Conversion, the
REIT Corporation will become a limited partner of the Operating
Partnership and the Unitholders will have the right to exchange
their Units for shares of Common Stock.
The principal executive offices of the REIT Corporation are
located at 5310 Harvest Hill Road, Suite 270, Dallas, Texas
75230. The telephone number is (972) 387-1487.
BUSINESS AND ACQUISITION STRATEGY. After the Conversion,
the Company's strategy will be to continue its operations in
substantially the same manner in which it has been operated and
to acquire, develop, own and manage additional properties
throughout the United States and internationally. The Company's
primary business objective will be to maximize cash available for
distribution to its stockholders and partners, if any. The
Company will seek to achieve growth in cash available for
distribution by aggressively managing and leasing the Properties
and by acquiring other restaurant properties. Cash available for
distribution will also be affected by external factors such as
inflation and changes in general economic conditions. The
Company's business objectives also include protecting the
Company's capital and providing the opportunity to realize
capital growth from appreciation in the value of a diversified
portfolio of investments. There can be no assurance that these
objectives will be realized.
The Company intends to continue to expand its portfolio by
acquiring triple net leased properties and structuring
sale/leaseback transactions consistent with its existing
strategies prior to the Conversion. Those strategies include
focusing primarily on restaurant properties, investing
- 14 -
<PAGE>
in major restaurant brands, acquiring existing restaurants,
consolidating smaller portfolios and maintaining a conservative
capital structure. In addition, the proposed amendments to the
Partnership Agreements will give the Company increased
flexibility to pursue other investment opportunities that arise
during the ordinary course of acquiring and leasing restaurant
properties. As part of its strategy of expanding its restaurant
property portfolio, the Company intends to build-out properties
in conjunction with other food vendors, such as convenience
stores, and retail outlets. See "The Company--Strategy."
The Company's investments may be in any form of debt,
equity, convertible or hybrid instrument or combination thereof.
Equity investments will generally be made with the intention of a
long-term holding period. Although debt investments also are
expected to be generally long-term in nature, the term of such
instruments is subject to individual circumstances. It is
possible the Company's investments may be subject to existing
mortgage financing and other indebtedness which have priority
over the interests of the Company. The Company may pursue its
investment objectives independently and/or with other entities,
through joint ventures or other types of co-ownership, in which
the Company may have a majority or minority position. See
"Policies with Respect to Certain Activities--Investment
Policies."
The Company's management team consists of senior executives
with extensive experience in the acquisition, operation and
financing of fast food and casual dining restaurants. As a
result, management has an extensive network of contacts within
the franchised fast food and casual dining restaurant industry.
See "Management."
MECHANICS OF THE CONVERSION
THE MERGER
GENERAL. The Conversion will be effected by the Merger
unless the Company does not receive a satisfactory private letter
ruling (the "Ruling") from the Internal Revenue Service (the
"IRS") regarding the tax-free nature of the Merger prior to
August 31, 1997, or such later date as may be agreed to by the
Special Committee, in its sole discretion. If the Ruling is
unfavorable or otherwise unsatisfactory to the Managing General
Partner, the Conversion will be effected by the Partnership
Alternative. See "-- The Partnership Alternative." If the
Ruling is satisfactory to the Managing General Partner, the
Conversion would be effected by the Merger pursuant to the terms
and conditions of the Merger Agreement. In accordance with the
terms of the Merger Agreement, USRP Acquisition, L.P. (the "REIT
Sub"), a Delaware partnership that is an indirectly wholly-owned
subsidiary of the REIT Corporation, will be merged with and into
USRP with USRP being the surviving entity. The Operating
Partnership will remain in existence following the Merger, with
USRP, the REIT Corporation and one or more of the REIT
Corporation's corporate subsidiaries as the sole partners
thereof following consummation of the Merger.
If the Conversion is approved by the Limited Partners and a
satisfactory Ruling is received from the IRS, the Conversion
would be effected by the Merger as follows:
- 15 -
<PAGE>
- The Unitholders will receive in exchange for their
Units one (1) share of Common Stock for each Unit held
by them prior to the Conversion, or an aggregate of
6,984,003 shares of Common Stock (99% of all shares of
Common Stock to be outstanding immediately following
the Conversion) on account of the Unitholders'
aggregate 99% interest in USRP.
- The Managing General Partner will initially receive
69,637 shares of Common Stock (1% of all shares of
Common Stock to be outstanding immediately following
the Conversion) on account of the Managing General
Partner's 1% interest in USRP.
THE MERGER AGREEMENT. The Merger will be effected pursuant
to the terms and conditions of the Merger Agreement. A vote in
favor of the Conversion will constitute a vote for approval of
the Merger Agreement. The Merger Agreement, attached as APPENDIX
A hereto and incorporated herein by reference, provides that,
subject to the conditions thereof, the REIT Corporation will
indirectly acquire the operations of USRP through the merger of
USRP with a partnership subsidiary of the REIT Corporation with
USRP as the surviving entity and, as a result, becoming a
subsidiary of the REIT Corporation. Concurrently with the
Merger, the Managing General Partner will withdraw as managing
general partner of USRP and, pursuant to the terms of the Merger
Agreement, a corporate subsidiary of the REIT Corporation will be
substituted as managing general partner of USRP. The Merger will
become effective after all of the conditions to consummation of
the Merger have been satisfied, including the receipt of a
favorable Ruling from the IRS, or on such later date as the
parties may mutually agree, by filing with the Secretary of State
of the State of Delaware a certificate of merger as required by
applicable Delaware law. If the Conversion is approved and
effected by the Merger, it is anticipated that the Merger will be
effective on or prior to ______________, 1997.
The obligations of the parties to effect the Merger are
subject to certain conditions, including (i) the approval and
adoption of the Merger Agreement and the transactions
contemplated thereby by the affirmative vote of the holders of a
majority of the outstanding Units as of the Record Date; (ii) no
statute, rule or regulation having been enacted or promulgated by
any governmental authority which prohibits the exchange of Units
for Common Stock or consummation of the Merger; (iii) no order or
injunction of a United States or state court of competent
jurisdiction in effect prohibiting the exchange of Units or
consummation of the Merger; (iv) the receipt by USRP of an
opinion of counsel to the effect that the Merger will be treated
as part of a transaction described in Section 351 of the Internal
Revenue Code of 1986, as amended (the "Code"); (v) the receipt of
a favorable Ruling from the IRS as to treatment of the Merger as
part of a transaction described in Section 351 of the Code;
(vi) the receipt of all permits, qualifications and other
governmental approvals that are required under applicable law in
connection with the Merger and the other transactions
contemplated by the Merger Agreement; (vii) the approval of the
Common Stock for listing on the NYSE upon official notice of
issuance; and (viii) the approval of the amendments to the
Partnership Agreements by the affirmative vote of the holders of
a majority of the Units outstanding as of the Record Date. These
conditions may not be waived by USRP.
- 16 -
<PAGE>
AMENDMENTS TO PARTNERSHIP AGREEMENTS. In order to effect
the Conversion and to provide greater operating flexibility
following the Conversion, certain amendments are proposed to be
made to the partnership agreement of USRP (the "Master
Partnership Agreement") and the partnership agreement of the
Operating Partnership (the "Operating Partnership Agreement" and,
together with the Master Partnership Agreement, the "Partnership
Agreements") to, among other things, provide for the Termination
and to provide the general partner of the Operating Partnership
flexibility to issue different classes of partnership interests.
A vote in favor of the Conversion will constitute a vote in favor
of the amendments to the Partnership Agreements described below.
The proposed amendments to the Operating Partnership Agreement
include:
- To establish a price for the assignment of the Property
Management Contract and the conversion of the
partnership interest of the Managing General Partner in
the Operating Partnership for an interest in the
Operating Partnership (which assignment and conversion
shall occur at such time as the Managing General
Partner ceases to be the managing general partner of
the Operating Partnership, whether by transfer of
interest, withdrawal or removal (other than for
"cause"));
- To permit the admission of new limited partners of the
Operating Partnership at the discretion of the managing
general partner;
- To provide a mechanism to permit holders of interests
in the Operating Partnership to exchange such interests
for shares of Common Stock;
- To permit the issuance of Operating Partnership
interests with terms comparable to shares of preferred
stock which may, from time to time, be issued by the
REIT Corporation; and
- To expand the powers of the Operating Partnership to
enable it to originate loans secured by real estate and
to acquire properties not exclusively used by
restaurants.
The proposed amendments to the Master Partnership Agreement include:
- To provide for the assignment of the Property
Management Contract of the Managing General Partner
under the Master Partnership Agreement concurrently
with such assignment under the Operating Partnership
Agreement.
PARTNERSHIP ALTERNATIVE
In the event that the Ruling is not obtained from the IRS or
is unfavorable or otherwise unacceptable to the Managing General
Partner, in its sole discretion, the Conversion would be effected
through the admission of the REIT Corporation as a limited
partner of the Operating Partnership and the exchange of Units
for shares of Common Stock by the Unitholders from time to time,
at their discretion, pursuant to the exchange right to be
provided for in the amended
- 17 -
<PAGE>
Master Partnership Agreement, as described below. If the
Conversion is effected pursuant to the Partnership Alternative,
the Unitholders will not be required to exchange the Units for
shares of Common Stock until such time as they want to sell
their Units. In order to effect the Partnership Alternative,
certain amendments are proposed to be made to the Partnership
Agreements in addition to the amendments to the Partnership
Agreements described above under "--The Merger--Amendments to
the Partnership Agreements." A vote in favor of the
Conversion will constitute a vote in favor of the
amendments to the Partnership Agreements described below.
If the Conversion is effected through the Partnership
Alternative, the Operating Partnership Agreement will be amended
to permit the transfer of the Managing General Partner's general
partner interest in the Operating Partnership to any limited
partner, including the REIT Corporation or an affiliate of any
limited partner. Additionally, if the Conversion is effected
through the Partnership Alternative, the Master Partnership
Agreement would be amended as follows:
- To permit the transfer of the Managing General
Partner's general partner interest in USRP to the REIT
Corporation or an affiliate of the REIT Corporation;
and
- To provide a mechanism to permit the Unitholders to
exchange Units for shares of Common Stock (which right
shall only become effective at such time as the Units
are no longer traded on the NYSE and the Company has
completed its initial public offering (the "IPO") and
the Common Stock is listed on the NYSE).
RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS
The Conversion and an investment in shares of Common Stock
involve certain risks. Before voting on the Conversion, the
Limited Partners should carefully consider the information set
forth under "Risk Factors."
TERMINATION OF PROPERTY MANAGEMENT CONTRACT AND PARTNERSHIP INTERESTS
GENERAL. As noted above, one of the amendments to the
Partnership Agreements being proposed in order to effect the
Conversion is the establishment of the price (the "Acquisition
Price") to be paid for the assignment of the Property Management
Contract and the conversion of the Partnership Interests. If the
Conversion is effected by the Merger, the Managing General
Partner will withdraw as managing general partner of the
Partnerships on the later of the approval of the Conversion by
the Limited Partners or the receipt of a favorable Ruling from
the IRS and, pursuant to the terms of the Merger Agreement, a
corporate subsidiary of the REIT Corporation will be substituted
as managing general partner of the Partnerships. If the
Partnership Alternative is adopted, the Managing General Partner
will withdraw as the managing general partner of the Partnerships
on the earlier of the approval of the Conversion by the Limited
Partners or August 31, 1997 (unless extended by the Special
Committee, in its sole discretion) and a corporate subsidiary of
the REIT Corporation would be substituted as managing general
partner of the Partnerships. In conjunction with either such
withdrawal, the Managing General Partner
- 18 -
<PAGE>
will assign the Property Management Contract to the Operating
Partnership (if the Conversion is effected through the Merger)
or USRP (if the Conversion is effected through the Partnership
Alternative) and the Partnership Interests will be converted
pursuant to the terms of the Merger Agreement and/or the
Partnership Agreements, as applicable, for the Acquisition
Price. As a result of the Termination, the Company will become
self-advised.
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 Acquisition Price consists of two
components because of the Special Committee's interest in
protecting the stockholders of the REIT Corporation from being
diluted from the issuance of the Acquisition Shares (as defined
below) and to establish a price to be paid for the Property
Management Contract and the Partnership Interests which cannot be
valued with certainty. The Initial Share Consideration is equal
to the value of 850,000 shares of Common Stock, and shall consist
of shares of Common Stock, Units and/or an interest in the
Operating Partnership, as applicable, depending upon how the
Conversion is effected (collectively, the "Initial Shares"). The
Initial Shares shall be issued by the REIT Corporation, USRP or
the Operating Partnership, as applicable, as soon as practicable
following the date of the Termination, but in no event later than
30 days thereafter. The Contingent Share Consideration is equal
to the value of up to 550,000 shares of Common Stock (subject to
adjustment in the event of certain dilutive events), and shall
consist of shares of Common Stock, Units and/or an interest in
the Operating Partnership, as applicable, depending upon how the
Conversion is effected (collectively, the "Contingent Shares"
and, together with the Initial Shares, the "Acquisition 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 the
Managing General Partner for fiscal year 2000 pursuant to the
Property Management Contract and the Property Interests (less
certain expenses to be incurred by the REIT Corporation following
the Termination) by $4.25. The Managing General Partner will not
receive any dividends with respect to the Contingent Shares, or
otherwise have any rights with respect thereto, until they are
issued.
THE FAIRNESS OPINION. Morgan Keegan is acting as the
financial advisor to the Special Committee in connection with
establishing the Acquisition Price and has rendered its opinion
to the Special Committee that the Acquisition Price is fair, from
a financial point of view, to the Unitholders. The full text of
Morgan Keegan's opinion is set forth as APPENDIX B to this Proxy
Statement/Prospectus. See "The Conversion--Fairness Opinion."
NO DISSENTERS' APPRAISAL RIGHTS
Unitholders who object to the Conversion will have no
dissenters' appraisal rights (i.e., the right, instead of
receiving Common Stock, to seek a judicial determination of the
"fair value" of their Units and to compel USRP to purchase Units
for cash in that amount) under state law or the Master
Partnership Agreement, nor will such rights be voluntarily
accorded to the Unitholders by the Company. Thus, approval of
the Conversion by the holders of a majority of all Units
outstanding on the Record Date will bind all Unitholders, and
objecting Unitholders will
- 19 -
<PAGE>
have no alternative to receipt of Common Stock other than selling
their Units in the market. The Units are currently listed on the
NYSE under the ticker symbol "USV." If the Conversion is
effected by the Merger, the Common Stock is expected to be listed
on the NYSE effective at the time the Merger is consummated. If
the Conversion is effected through the Partnership Alternative,
the Common Stock is expected to be listed on the NYSE at such
time as the Company completes the IPO. See "The Conversion--No
Dissenters' Appraisal Rights."
TAX CONSEQUENCES OF THE CONVERSION
TAX CONSEQUENCES OF THE MERGER. Although pursuant to the
Merger, USRP will be the surviving entity (and become a
subsidiary of the REIT Corporation), for federal income tax
purposes USRP will be deemed to have been terminated in the
Merger. For federal income tax purposes, the Merger will
generally be tax-free to USRP and the Unitholders under Sections
351 and 731 of the Code except to the extent (if any) that USRP's
aggregate tax basis in its assets is less than the liabilities
assumed and taken subject to by the REIT Corporation in the
Merger. It is expected that the USRP's aggregate tax basis in
its assets will exceed the sum of such liabilities, so that USRP
itself should not recognize gain upon the Merger. However,
Unitholders whose adjusted basis in their Units or in partnership
property is less than their share of USRP's nonrecourse
indebtedness will recognize gain to the extent of such
difference. As of December 31, 1996, USRP had approximately
$4 million of nonrecourse debt and, therefore, the Managing
General Partner believes that no registered Unitholder will be
required to recognize any such gain.
It is a condition precedent to consummation of the Merger
that the IRS issue a favorable Ruling as to treatment of the
Merger as part of a transaction described in Section 351 of the
Code. The Ruling, however, is conditioned upon the accuracy of
certain factual assumptions and representations. If the IRS
should subsequently determine that the assumptions or
representations were materially inaccurate, the IRS would not be
bound by the Ruling and might challenge the nonrecognition
treatment of the Merger in whole or in part. There can be no
assurance that any such challenge could be successfully resisted
by USRP. If the Merger should fail to qualify as tax-free under
Section 351, each Unitholder could be required to recognize gain
or loss equal to the difference between the sum of the value of
the Common Stock received by the Unitholder plus the Unitholder's
share of partnership liabilities and the Unitholder's share of
USRP's tax basis in the property at the time of the Merger. Any
losses previously allocated by USRP to a Unitholder that have not
been used because of the at-risk, basis or passive activity
limitations can be used to offset gain recognized on the Merger.
Unitholders should consult their own tax advisors to determine
whether they will recognize gain in the Merger. See "Federal
Income Tax Considerations--The Merger."
REIT STATUS. A qualified REIT is not subject to federal
income tax if its dividends paid to stockholders for each year
equal or exceed the sum of the REIT's adjusted ordinary taxable
income plus its capital gains, because the REIT is allowed a
deduction for such dividends paid. The dividends are includible
in the income of a REIT's stockholders. If a REIT should fail to
qualify as a REIT for any year, or should fail to pay sufficient
dividends, the REIT could be
- 20 -
<PAGE>
required to pay federal income or excise taxes, thereby reducing
the cash available for distribution to its stockholders.
The REIT Corporation intends to operate in a manner that
will enable it to qualify as a REIT under the Code commencing
with the taxable year in which the Merger is consummated.
Although the Managing General Partner believes that the REIT
Corporation will be so organized and will so operate and that it
initially will qualify as a REIT, no assurance can be given that
the REIT Corporation in fact will qualify or remain qualified as
a REIT. Qualification as a REIT involves the application of
highly technical and complex Code provisions and Treasury
Regulations for which there are only limited judicial or
administrative interpretations. The determination of various
factual matters and circumstances not entirely within the REIT
Corporation's control may affect its ability to qualify as a
REIT. Moreover, no assurance can be given that new legislation,
regulations, administrative interpretations or court decisions
will not significantly alter the tax laws regarding qualification
as a REIT or the federal income tax consequences of such
qualification. USRP is not aware of any current facts or
circumstances that would generate a change in such tax laws so as
to significantly and adversely affect the REIT Corporation's
ability to qualify or operate as a REIT.
If in any taxable year the REIT Corporation were to fail to
qualify as a REIT, the REIT Corporation would be subject to
federal income tax at regular corporate rates on its taxable
income, calculated without any deduction for dividends paid to
stockholders. Moreover, unless entitled to relief under certain
statutory provisions, the REIT Corporation would be disqualified
from treatment as a REIT for the four taxable years following the
year in which such qualification was lost. Even if the REIT
Corporation subsequently requalified as a REIT, it might be
required to make distributions at that time equal to any earnings
accumulated during the period of non-REIT status and to pay a
full corporate-level tax on any unrealized gain in its assets as
of the date of requalification ("built-in gain").
Any taxes payable by the REIT Corporation would reduce the
funds available for distribution to stockholders for each of the
years involved. During the period in which the REIT Corporation
had lost its REIT status, the REIT Corporation would no longer be
required by the Code to make any distributions to stockholders.
Although the REIT Corporation 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 REIT Corporation's board of directors to revoke the election
for the REIT Corporation to qualify as a REIT. See "Federal
Income Tax Considerations--The Merger--Tax Consequences of the
REIT Corporation's Qualification as a REIT--Failure to Qualify."
CERTAIN TAXES IMPOSED ON A REIT. If the REIT Corporation
qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that
is currently distributed to its stockholders. However, the REIT
Corporation will be subject to federal income or excise taxes at
various rates on the following: (i) undistributed REIT taxable
income, including net capital gains; (ii) "alternative minimum
taxable income" (under certain circumstances); (iii) net income
from the sale or other disposition of "foreclosure property," or
- 21 -
<PAGE>
other nonqualifying income from "foreclosure property;" (iv) net
income from "prohibited transactions;" (v) net income
attributable to the greater of the amount by which the REIT
Corporation fails the 75% or 95% gross income tests if the REIT
Corporation maintains its qualification as a REIT; (vi) the
excess of required distributions over the amounts actually
distributed; and (vii) "built-in gain" recognized on the
disposition of an asset during the 10-year period following
acquisition by the REIT Corporation of the asset from a C
corporation in a carryover-basis transaction. See "Federal
Income Tax Considerations--The Merger -- Tax Consequences of the
REIT Corporation's Qualification as a REIT--Taxation of the REIT
Corporation as a REIT."
DISTRIBUTION REQUIREMENTS. In order to obtain the favorable
tax treatment associated with REITs qualifying under the Code,
the REIT Corporation generally will be required each year to
distribute to its stockholders at least 95% of its otherwise
taxable income (after certain adjustments). In addition, the
REIT Corporation will be subject to a 4% nondeductible excise tax
on the amount, if any, by which certain distributions paid by it
with respect to any taxable year are less than the sum of 85% of
its ordinary income plus 95% of its capital gain net income for
the taxable year. The REIT Corporation intends to make timely
distributions to stockholders in amounts sufficient to satisfy
the annual distribution requirements in order to qualify as a
REIT and to avoid liability for federal income or excise taxes.
The REIT Corporation may experience timing differences between
(i) the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of
such expenses in arriving at REIT taxable income. In addition,
the REIT Corporation may recognize net capital gain in excess of
the cash received in connection with the sale of property subject
to indebtedness. In such cases, the REIT Corporation may have
less cash available for distribution than is necessary to meet
the annual distribution requirements, and in order to meet such
requirements, the REIT Corporation may arrange for short-term (or
possibly long-term) borrowings or pay distributions in the form
of taxable stock dividends. Furthermore, under certain
circumstances, the REIT Corporation may be able to rectify a
failure to meet the distribution requirements by paying
"deficiency dividends" to stockholders in a later year which
would be included in the REIT Corporation's deduction for
dividends paid for the earlier year. See "Federal Income Tax
Considerations--The Merger--Tax Consequences of the REIT
Corporation's Qualification as a REIT--Taxation of the REIT
Corporation as a REIT."
TAX CONSEQUENCES OF THE PARTNERSHIP ALTERNATIVE. If the
Conversion is effected pursuant to the Partnership Alternative,
no gain or loss should be recognized by the Unitholders as a
result of the amendments to the Partnership Agreements and the
admission of the REIT Corporation as a limited partner of the
Operating Partnership. A Unitholder's eventual exchange of Units
for shares in the REIT Corporation will be a taxable event;
however, no exchange of Units will be required if the Conversion
is effected pursuant to the Partnership Alternative until such
time as the Unitholder wishes to sell its Units. See "Federal
Income Tax Considerations--Partnership Alternative--Disposition
of Units; Exchange for Shares in the REIT Corporation." Prior to
such exchange, the Unitholders generally will continue to be
taxed in the same manner as they were taxed preceding the
admission of the REIT Corporation into the Operating Partnership.
- 22 -
<PAGE>
SUMMARY OF COMPARISON OF TAXATION OF STOCKHOLDERS AND UNITHOLDERS
TAXATION OF STOCKHOLDERS. The following discussion assumes
that the REIT Corporation qualifies as a REIT for federal income
tax purposes. See generally "Federal Income Tax Considerations--
The Merger--Tax Consequences of the REIT Corporation's
Qualification as a REIT--Taxation of Stockholders."
Generally, distributions to stockholders of the REIT
Corporation will be taxable as ordinary income up to the amount
of the REIT Corporation's current or accumulated earnings and
profits. Distributions in excess of the REIT Corporation's
current or accumulated earnings and profits will be treated first
as a tax-free return of capital; distributions in excess of a
stockholder's tax basis in its Common Stock will be taxable as
gain realized from the sale of such Common Stock. Dividends that
are properly designated by the REIT Corporation as capital gain
dividends will be treated generally as long-term capital gains
for the taxable year (to the extent they do not exceed the REIT
Corporation's actual net capital gain). In contrast with
partners in a partnership as described below, the stockholders
will not recognize income in excess of the fair market value of
any property (including money) distributed by the REIT
Corporation.
Distributions by a REIT in excess of its taxable income may
result in immediate recognition of taxable gain to a stockholder
whose tax basis has been reduced to zero, whereas any gain
attributable to such distributions by USRP may generally be
deferred until the sale of property or the Unitholder's Units.
Stockholders may not deduct on their income tax returns any
net operating losses or net capital losses of the REIT
Corporation. Any such losses may, however, be carried forward by
the REIT Corporation and used to reduce the REIT Corporation's
taxable income, capital gains and the amount that the REIT
Corporation will be required to distribute in order to remain
qualified as a REIT.
A transferee Unitholder is entitled to the benefit of
certain basis adjustments under Section 754 of the Code upon a
sale or exchange of Units or the death of a Unitholder. There
will be no Section 754 adjustments upon the sale or exchange of
Common Stock or the death of a stockholder of the REIT
Corporation. Basis adjustments attributable to Unitholders will
become part of the REIT Corporation's basis for its assets at the
time of the Merger. Unitholders who would have been entitled to
additional depreciation deductions attributable to such
adjustments will no longer be able to utilize such deductions to
reduce their share of annual income from the property. The REIT
Corporation's depreciation deductions (including those
attributable to the special basis adjustments of former
Unitholders) will be allocated ratably among the stockholders in
determining the portion of the REIT Corporation's distributions
that will be taxable as ordinary dividends. As a result, for
each year following the Merger, Unitholders with significant
positive Section 754 adjustments (generally those who purchased
their Units at higher prices and on more recent dates) will
generally recognize somewhat greater amounts of taxable income
than if the Merger had not occurred. Upon a sale of property,
the capital gain will similarly be calculated uniformly by the
REIT Corporation, resulting in greater capital gain dividends for
stockholders
- 23 -
<PAGE>
who had significant positive Section 754 adjustments
and smaller capital gain dividends for stockholders who had
negative or less significant positive Section 754 adjustments (or
would have had such adjustments if the Merger had not been
consummated) than if property were to have been sold by USRP
without the Merger. No consideration has been given to the
impact on particular Unitholders described above in arriving at
the number of shares of Common Stock to be received by each
Unitholder. See "Federal Income Tax Considerations-- Partnership
Alternative--Tax Treatment of Operations--Section 754 Election."
The REIT Corporation is required to demand of its
stockholders who own of record 5% or more of the Common Stock
(assuming there are more than 2,000 stockholders of record)
information respecting the Common Stock actually or
constructively owned by such stockholders. The REIT Corporation
is required to maintain a list of those stockholders who fail to
comply, and noncomplying stockholders are required to include the
required information in their tax returns. See "Federal Income
Tax Considerations--The Merger--Tax Consequences of the REIT
Corporation's Qualification as a REIT--Share Ownership;
Reporting."
TAXATION OF UNITHOLDERS. The following discussion
summarizes the taxation of Unitholders as partners in USRP. See
generally, "Federal Income Tax Considerations--Partnership
Alternative."
Unitholders are subject to tax based on their distributive
share of the income, gain, loss, deductions and credits of USRP,
regardless of whether USRP distributes any cash or property to
the Unitholders during the taxable year. A Unitholder may,
therefore, realize taxable income in excess of cash
distributions. For example, a Unitholder may realize taxable
income in excess of cash distributions if (i) USRP retains cash
in excess of depreciation and original issue discount deductions
to repay loans made to USRP or to make other nondeductible
expenditures, (ii) Units are transferred, (iii) property is sold,
or (iv) a Unitholder's share of USRP's indebtedness decreases
reducing the Unitholder's adjusted tax basis in its Units below
zero. A Unitholder generally is entitled to deduct its
distributive share of partnership losses, if any, only to the
extent permitted by the basis, at-risk and passive activity loss
limitations.
USRP elected under Section 754 of the Code to adjust the
basis of partnership property upon certain transfers of Units so
that the transferee Unitholder's proportionate share of the
adjusted basis of partnership property equals his basis in his
Units. As a result, a transferee Unitholder who purchases a Unit
at a price greater than the transferor's share of USRP's basis in
partnership property will recognize in most circumstances less
taxable income (or more loss) upon the sale of partnership
property than if the election were not in effect. On the other
hand, a transferee Unitholder who purchased a Unit at a cost less
than the transferor's share of USRP's basis in its property will
recognize, in most circumstances, more income (or less loss) upon
the sale of partnership property than if the election were not in
effect. The election also has an impact on the amount of
depreciation deductions allocated to a transferee Unitholder. A
similar election is not available to a REIT. See "--Taxation of
Stockholders," above.
- 24 -
<PAGE>
EFFECTS OF THE CONVERSION ON RIGHTS OF UNITHOLDERS
As a result of the Conversion, Unitholders will become
stockholders of the REIT Corporation. The REIT Corporation is a
Maryland corporation, while USRP is a Delaware limited
partnership. For a summary comparison of the material
differences between the corporate law of the State of Maryland
and the partnership law of the State of Delaware, see
"Comparative Rights of Unitholders and Stockholders."
- 25 -
<PAGE>
COMPARISON OF RIGHTS OF UNITHOLDERS AND STOCKHOLDERS
The following summarizes certain rights of Unitholders
currently as compared to the rights of stockholders if the
Conversion is approved. For a more detailed description, see
"Comparative Rights of Unitholders and Stockholders."
<TABLE>
<CAPTION>
UNITHOLDERS STOCKHOLDERS
----------- ------------
<S> <C> <C>
Right to Elect No right to elect directors of Vote to elect directors.
Management managing general partner.
Right to 80% of Unitholders must vote to Two-thirds vote of stockholders is
Remove remove managing general partner required to remove members of the
Management without cause (a majority with cause). Board of Directors, provided that
cause exists.
General In addition to approval of certain Stockholder approval is required for
Voting Rights fundamental actions, Unitholder (i) election or removal of directors;
Regarding approval is required for certain (ii) with certain exceptions,
Governance financial and investment decisions, amendment of the Articles of
including (i) sale of all or Incorporation; (iii) termination of
substantially all of the assets and the REIT Corporation's existence;
(ii) merger or consolidation of (iv) reorganization of the REIT
USRP or the Operating Partnership. Corporation; and (v) merger,
consolidation or share exchange of
the REIT Corporation, or the sale or
disposition of substantially all of
the REIT Corporation's assets.
Dissolution Requires consent of a majority of all Requires approval of two-thirds of
Unitholders stockholders
Liquidation Unitholders share ratably in Stockholders share ratably in any
Rights accordance with percentage interests. assets remaining after satisfaction of
obligations to creditors and any
liquidation preferences of Preferred
Shares.
</TABLE>
- 26 -
<PAGE>
MARKET PRICES OF UNITS AND DISTRIBUTIONS
The Units are listed for trading on the NYSE under the
ticker symbol "USV." The following table sets forth, for the
periods indicated, the closing sale price of the Units as
reported on the NYSE in such periods and the cash dividends paid
in such periods. As of February 3, 1997, the record number of
Unitholders was 1,809.
<TABLE>
<CAPTION>
1994 High Low Distribution
---- ---- --- ------------
<S> <C> <C> <C>
1st quarter............................. $ 16 3/4 $ 15 7/8 $ .39
2nd quarter............................. 17 1/4 15 3/8 .39
3rd quarter............................. 17 1/2 16 3/4 .41
4th quarter ............................ 17 3/8 13 .42
---------
$ 1.61
=========
<CAPTION>
1995 High Low Distribution
---- ---- --- ------------
1st quarter............................. $ 16 1/2 $ 14 1/4 $ .42
2nd quarter............................. 17 1/8 15 3/4 .42
3rd quarter............................. 18 7/8 16 3/4 .43
4th quarter............................. 20 1/4 18 .44
---------
$ 1.71
=========
<CAPTION>
1996 High Low Distribution
---- ---- --- ------------
1st quarter............................. $ 23 3/8 $ 19 1/2 $ .47
2nd quarter............................. 25 21 1/8 .48
3rd quarter............................. 25 3/8 21 1/2 .485
4th quarter ............................ 28 1/4 22 5/8 .50
---------
$ 1.935
=========
1997 High Low Distribution
---- ---- --- ------------
1st quarter (through February 3, 1997).. $ 30 3/4 $ 27 1/8 $ -
</TABLE>
- 27 -
<PAGE>
RISK FACTORS
LIMITED PARTNERS SHOULD CAREFULLY CONSIDER, IN ADDITION TO THE
OTHER INFORMATION PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS,
THE MATTERS DESCRIBED BELOW IN DETERMINING WHETHER TO VOTE FOR
THE CONVERSION.
CONFLICTS OF INTEREST
The Partnership Agreements provide that the Operating
Partnership pay fixed and percentage fees annually to the
Managing General Partner relating to the properties owned and
acquired by the Partnership. In connection with the Termination,
the Managing General Partner will be issued the Acquisition
Shares designed to compensate it for the assignment of the
Property Management Contract and the conversion of the
Partnership Interests based on the Acquisition Price. The
Limited Partners should be aware that a majority of the members
of the Board of Directors, by virtue of their ownership interests
in and/or positions or affiliations with the Managing General
Partner, were subject to a conflict of interest in determining
the Acquisition Price. See "The Conversion--Termination of
Property Management Contract and Partnership Interests."
The Board of Directors appointed the Special Committee to
review and make a recommendation with respect to the Acquisition
Price. Neither member of the Special Committee is an affiliate
of, or otherwise has any economic interest in, the Managing
General Partner or its affiliates. The Board of Directors does
not believe that the intention of the members of the Special
Committee to serve as directors of the REIT Corporation following
the Conversion resulted in a material conflict of interest.
In addition, the Special Committee retained Morgan Keegan to
review the Acquisition Price and to provide an opinion that the
Acquisition Price is fair, from a financial point of view, to the
Unitholders. Morgan Keegan was selected to provide this service
based upon Morgan Keegan's qualifications, expertise and
reputation as an investment bank and as a professional in the
securities industry. Morgan Keegan delivered an opinion to the
Special Committee on _____________, 1997 that as of the date
hereof the Acquisition Price was fair, from a financial point of
view, to the Unitholders. No limitations were placed on Morgan
Keegan by the Special Committee or other parties to the
Conversion with respect to the investigations made or the
procedures followed by Morgan Keegan in rendering its opinion.
See "The Conversion--Termination of Property Management Contract
and Partnership Interests."
TAX CONSEQUENCES OF THE CONVERSION
TAX CONSEQUENCES OF THE MERGER. The Merger will generally
be tax-free to USRP and the Unitholders under Section 351 of the
Code except to the extent (if any) that USRP's aggregate tax
basis in its assets is less than the liabilities assumed and
taken subject to by the REIT Corporation in the Merger. It is
expected that USRP's aggregate tax basis in its assets will
exceed the sum of such liabilities, so that USRP itself should
not recognize gain upon the
- 28 -
<PAGE>
Merger. Gain recognized by USRP, if any, would be allocated
among the Unitholders in accordance with the Master Partnership
Agreement. However, Unitholders whose adjusted basis in their
Units or in partnership property is less than their share of
USRP's nonrecourse indebtedness (i.e., who have negative tax
capital accounts) will recognize gain to the extent of such
difference.
The Merger is conditioned on the issuance by the IRS of a
favorable Ruling as to treatment of the Merger as part of a
transaction described in Section 351 of the Code. The Ruling,
however, will be conditioned upon the accuracy of certain factual
assumptions and representations. If the IRS should subsequently
determine that the assumptions or representations were materially
inaccurate, the IRS would not be bound by the ruling and might
challenge the nonrecognition treatment of the Merger in whole or
in part. There can be no assurance that any such challenge could
be successfully resisted by USRP. If the Merger should fail to
qualify as tax-free under Section 351, each Unitholder could be
required to recognize gain or loss equal to the excess, if any,
of the sum of the value of the Common Stock received by the
Unitholder plus the Unitholder's share of partnership liabilities
over the Unitholder's share of USRP's tax basis in its assets at
the time of the Merger. Unitholders should consult their own tax
advisors to determine whether they will recognize gain in the
Merger. See "Federal Income Tax Considerations--The Merger--
Qualification as Nonrecognition Transaction."
TAX CONSEQUENCES OF PARTNERSHIP ALTERNATIVE. There are
numerous federal and state income tax considerations associated
with owning and disposing of Units. See "Federal Income Tax
Considerations--Partnership Alternative." Under the Partnership
Alternative, prior to their exchange of Units for shares of
Common Stock, Unitholders will continue to be taxed in the same
manner as they were taxed preceding the admission of the REIT
Corporation as a limited partner of the Operating Partnership. A
Unitholders' eventual exchange of Units for shares of Common
Stock will be a taxable event.
POTENTIAL LOSS OF PARTNERSHIP STATUS. The availability to a
Unitholder of the federal income tax benefits of an investment in
USRP depends in large part on the classification of the
Partnerships as partnerships for federal income tax purposes.
Based upon certain representations of the Managing General
Partner, Winstead Sechrest & Minick P.C., tax counsel to the
Partnership, has rendered its opinion that under current law and
regulations, the Partnerships will be classified as partnerships
for federal income tax purposes. However, the opinion of counsel
is not binding on the IRS. No advance ruling from the IRS as to
such status has been or will be requested. If the IRS were to
challenge the federal income tax status of the Partnerships or
the amount of a Unitholder's allocable share of the Partnerships'
taxable income, such challenge could result in an audit of the
Unitholder's entire tax return and in adjustments to items on
that return that are unrelated to the ownership of Units. In
addition, each Unitholder would bear the cost of any expenses
incurred in connection with an examination of his personal tax
return. If USRP were to fail to qualify as a partnership for
federal income tax purposes, the REIT Corporation could fail to
qualify as a REIT. See "--Adverse Consequences of Partner to
Qualify as a REIT; Other Tax Liabilities."
- 29 -
<PAGE>
It is not clear whether USRP will continue to be a "publicly
traded partnership" for purposes of Section 7704 of the Code
after the Units are no longer listed on the NYSE. Counsel's
opinion is based on the assumption that at least 90% of USRP's
gross income for each taxable year will constitute either (i)
real property rents, (ii) gain from the sale or other disposition
of real property, or (iii) other qualifying income within the
meaning of Section 7704(d) of the Code.
If either Partnership were taxable as a corporation or
treated as an association taxable as a corporation in any taxable
year, its income, gains, losses, deductions and credits would be
reflected only on its tax return rather than being passed through
to its partners, and its taxable income would be taxed at
corporate rates. In addition, its distributions to each of its
partners would be treated as dividend income (to the extent of
its current and accumulated earnings and profits), and, in the
absence of earnings and profits, as a nontaxable return of
capital (to the extent of such partner's tax basis in his
interest therein), or as taxable capital gain (after such
partner's tax basis in his interest therein is reduced to zero).
Furthermore, losses realized by such Partnership would not flow
through to the Unitholders. Accordingly, treatment of either
Partnership as a corporation for federal income tax purposes
would probably result in a material reduction in a Unitholder's
cash flow and after-tax return. See "Federal Income Tax
Considerations--Partnership Alternative--Partnership Status."
LIMITED DEDUCTIBILITY OF PARTNERSHIP LOSSES. Losses
generated by USRP, if any, will be available to Unitholders that
are subject to the passive activity loss limitations of Section
469 of the Code to offset only future income generated by USRP
and cannot be used to offset income to a Unitholder from other
passive activities or investments or any other source if USRP
continues to be a "publicly traded partnership." Losses from
USRP that are not deductible because of the passive activity loss
limitations may be deducted when the Unitholder disposes of all
of his Units in a fully taxable transaction with an unrelated
party. Net passive income from USRP may be offset only by a
Unitholder's investment interest expense and by unused
partnership losses carried over from prior years. See "Federal
Income Tax Considerations--Partnership Alternative--Tax
Consequences of Unit Ownership--Limitations on the Deductibility
of Losses."
RISK OF CHALLENGE TO PARTNERSHIP ALLOCATIONS. Certain
aspects of the allocations contained in the Partnership
Agreements may be challenged successfully by the IRS. If an
allocation contained in the Partnership Agreements is not given
effect for federal income tax purposes, items of income, gain,
loss, deduction or credit could be reallocated to the Unitholders
and the managing general partner in accordance with their
respective interests in such items, based upon all the relevant
facts and circumstances. Such reallocation among the Unitholders
and the managing general partner of such items of income, gain,
loss, deduction or credit allocated under the Partnership
Agreements could result in additional taxable income to the
Unitholders. Such reallocation of partnership items also could
affect the uniformity of the intrinsic federal tax
characteristics of the Units. See "Federal Income Tax
Considerations--Partnership Alternative--Tax Consequences of Unit
Ownership--Allocation of Partnership Income, Gain, Loss and
Deduction."
- 30 -
<PAGE>
POSSIBLE UNSUITABILITY OF UNITS FOR TAX-EXEMPT ENTITIES,
REGULATED INVESTMENT COMPANIES AND FOREIGN INVESTORS. An
investment in Units may not be suitable for tax-exempt entities,
regulated investment companies and foreign investors. See
"Federal Income Tax Considerations--Partnership Alternative--Tax
Treatment of Operations--Tax-Exempt Entities, Regulated
Investment Companies and Foreign Investors."
RISK OF TAX LIABILITY EXCEEDING CASH DISTRIBUTIONS OR
PROCEEDS FROM DISPOSITIONS OF UNITS. Because USRP is not a
taxable entity and incurs no federal income tax liability, a
Unitholder will be required to pay federal income tax and, in
certain cases, state and local income taxes on his allocable
share of USRP's income, whether or not he receives cash
distributions from USRP. There can be no assurance that
Unitholders will receive cash distributions equal to their
allocable share of taxable income from USRP. Further, upon the
sale or other disposition of Units, a Unitholder may incur tax
liability in excess of the amount of cash received. To the
extent that a Unitholder's tax liability exceeds the amount
distributed to him or the amount he receives on the sale or other
disposition of his Units, he will incur an out-of-pocket expense.
See "Federal Income Tax Considerations--Partnership Alternative--
Tax Consequences of Unit Ownership."
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
The REIT Corporation intends to operate so as to qualify as
a REIT under the Code. Although the REIT Corporation believes it
has been and will continue to be organized and operated in such a
manner, no assurance can be given that the REIT Corporation 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 REIT
Corporation's control may affect the REIT Corporation's ability
to qualify as a REIT. For example, in order to qualify as a
REIT, at least 95% of the REIT Corporation's gross income in any
year must be derived from qualifying sources and the REIT
Corporation 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 REIT Corporation, however, is not
aware of any pending tax legislation that would adversely affect
the REIT Corporation's ability to operate as a REIT.
If in any taxable year the REIT Corporation were to fail to
qualify as a REIT, the REIT Corporation 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 REIT Corporation also would be
disqualified from treatment as a REIT for the four taxable years
following the year during which qualification was lost. As a
result, the funds available for distribution to the REIT
Corporation's stockholders would be reduced for each of the years
involved. In addition, dividends would no longer be required to
be paid. To
- 31 -
<PAGE>
the extent that dividends to stockholders would have
been paid in anticipation of the REIT Corporation's qualification
as a REIT, the REIT Corporation might be required to borrow funds
or to liquidate certain of its investments to pay the applicable
tax. Although the REIT Corporation 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 of directors of the REIT Corporation (the "REIT
Board") to revoke the REIT election. See "Federal Income Tax
Considerations--The Merger--Tax Consequences of the REIT
Corporation's Qualification as a REIT."
ABSENCE OF APPRAISAL RIGHTS
Under applicable law and the Master Partnership Agreement,
Unitholders will have no dissenters' appraisal rights or other
similar rights in connection with the Conversion, nor will such
rights be voluntarily accorded to the Unitholders by the Company.
Accordingly, Unitholders who do not wish to own Common Stock must
either sell their Units prior to the consummation of the Merger
or sell their Common Stock subsequent thereto. See "The
Conversion--No Dissenters' Appraisal Rights."
COMPARATIVE RIGHTS OF THE UNITS AND COMMON STOCK
There are certain material differences between the rights of
holders of the Units and holders of shares of Common Stock which
arise generally because of the differences between laws governing
limited partnerships and laws governing corporations, as well as
from their respective governing instruments. These differences
relate to, among other matters, management, voting rights and the
right to compel dissolution. For instance, holders of shares of
Common Stock have the right to elect the directors of the REIT
Corporation, whereas holders of Units do not elect those persons
who manage USRP. However certain matters that require the
approval of the Limited Partners do not require the approval of
stockholders, including, the powers of USRP and the managing
general partner. See "Comparative Rights of Unitholders and
Stockholders."
SUBSTITUTION OF TRADING OF COMMON STOCK FOR UNITS
The Common Stock is expected to be approved for listing on
the NYSE. There can be no assurance given, however, that the
market price of the Common Stock will initially or thereafter
equal the market price of the Units.
FUTURE DILUTION
Because the REIT Corporation plans to issue additional
shares of Common Stock after the Conversion in connection with
the IPO and may issue additional shares of Common Stock
thereafter, the Unitholders will experience dilution in their
percentage interest in the Company, generally without any
requirement of stockholder approval. See "Description of Capital
Stock."
- 32 -
<PAGE>
ADVERSE EFFECT OF INCREASES IN INTEREST RATES
One of the factors that may influence the market price of
the Common Stock is the annual yield from distributions made by
the Company on the Common Stock as compared to yields on certain
financial instruments. Thus, a general increase in market
interest rates could result in higher yields on certain financial
instruments which could adversely affect the market price for the
Common Stock, since alternative investment vehicles may be more
attractive.
NO RESTRICTIONS ON CHANGES IN INVESTMENT, FINANCING AND OTHER
POLICIES
The investment and financing policies of the Company, and
its policies with respect to all other activities, including its
growth, debt, capitalization, dividends and operating policies,
will be determined by the REIT Board. Although the REIT 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 REIT Board without a vote of the stockholders or partners, if
any, 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."
CERTAIN ANTITAKEOVER PROVISIONS; OWNERSHIP LIMITS
CHARTER PROVISIONS. Certain provisions of the REIT
Corporation's Articles of Incorporation (the "Articles") 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 REIT Corporation would be
substantially impeded by such antitakeover provisions. Moreover,
in order for the REIT Corporation 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 REIT Corporation's
REIT qualification, the Articles prohibit ownership either
directly or under the applicable attribution rules of the Code of
more than 8.75% 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 REIT Board. See "Description of
Capital Stock," "Certain Provisions of Maryland Law and of the
REIT Corporation's Articles and Bylaws" and "Federal Income Tax
Considerations."
STAGGERED BOARD. The REIT Board will be divided into three
classes. The terms of the first, second and third classes will
expire in 1998, 1999 and 2000, respectively. Directors of each
class will be elected for a three-year term upon the expiration
of the current class's term. The staggered terms for directors
may affect the stockholders' ability to effect a change in
control of the REIT Corporation even if a change in control were
in the stockholders' best interest. See "Certain Provisions of
Maryland Law and of the REIT Corporation's Articles and Bylaws."
- 33 -
<PAGE>
PREFERRED STOCK. The Articles authorize the REIT Board to
issue up to 10 million shares of preferred stock and to establish
the preferences and rights of any such shares issued. See
"Description of Capital Stock--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 interest. No shares of preferred stock
will be issued or outstanding upon consummation of the
Conversion.
ACQUISITION AND EXPANSION RISKS
FAILURE TO ACQUIRE ACQUISITION PROPERTIES. As of the date
hereof, the Company has 54 properties under binding agreements of
acquisition. In connection with the execution of such
agreements, the Company made deposits of approximately $500,000
which may be non-refundable in whole or in part if the Company
elects not to close some or all of such acquisitions.
RISK OF REFINANCING 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.
Refinancing will depend upon the creditworthiness of the Company
and the availability of financing under market conditions at the
time such refinancing is required. Such refinancing of the
Company's borrowings could result in higher interest costs and
adversely affect results from operations. Payment of the
interest on, or amortization of, any such indebtedness could also
decrease the cash distributable to stockholders and partners, if
any, if the financing and other costs of the Company's growth
strategy exceed any incremental revenue generated.
RISK OF LEVERAGE. In order to fund the Company's growth
strategy, the Company may borrow funds and grant liens on its
properties to secure such indebtedness. If the Company were
unable to repay or otherwise default in respect of any
indebtedness, the Company's properties could become subject to
foreclosure. The Company's charter documents do not restrict the
amount of such indebtedness, and the extent of the Company's
indebtedness from time to time may affect its interest costs,
results of operations and its ability to respond to future
business adversities and changing economic conditions. The
Company has implemented a non-binding policy to maintain a ratio
of total indebtedness of 50% or less to the greater of total
market capitalization or the original cost of all of the
Company's properties as of the date of such calculation. Because
it is anticipated that the Company will not fix all of its
interest costs for the long term, future changes in interest
rates may positively or negatively affect the Company.
RISK OF MANAGING EXPANDED PORTFOLIO. At March 31, 1995, the
Company owned and managed fewer than 125 restaurant properties.
The Properties now consist of 322 restaurant properties. As a
result of the rapid growth of the Company's portfolio and the
anticipated additional growth, there can be no assurance that
management will be able to adapt its management, administrative,
accounting and operational systems to respond to the growth
represented by the Acquisition Properties or any future growth.
In addition, there can be no assurance that the Company will be
able to maintain its current rate of growth or negotiate and
- 34 -
<PAGE>
acquire any acceptable properties in the future. A larger
portfolio of properties could 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.
INVESTMENT CONCENTRATION IN SINGLE INDUSTRY
The Company's current strategy is to continue to acquire
interests in restaurant properties, specifically fast food and
casual dining restaurant properties. 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 and partners. See
"Business."
DEPENDENCE ON SUCCESS OF BURGER KING
Of the Properties, 173 are occupied by operators of Burger
King restaurants. In addition, the Company intends to acquire
additional Burger King properties. As a result, the Company is
subject to the risks inherent in investments concentrated in a
single franchise brand, such as a reduction in business following
adverse publicity related to the brand or if the Burger King
restaurant chain (and its franchisees) were to suffer a
system-wide decrease in sales, the ability of franchisees to pay
rents (including percentage rents) to the Company may be
adversely affected. See "Business--Properties."
POSSIBLE RENT DEFAULTS AND 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 29
years at December 31, 1996 and an average remaining term of nine
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.
The Company has attempted to extend the terms of certain of its
existing leases pursuant to an "early renewal program," but in
connection therewith has had to commit to paying for certain
improvements on such properties. See "Business--Leases with
Restaurant Operators."
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 and partners 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
- 35 -
<PAGE>
neighborhood characteristics, changes in interest rates and
the availability, cost and terms of mortgage funds, 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 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 LIABILITY THAT COULD RESULT FROM ENVIRONMENTAL
MATTERS. 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 use 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 obtained. 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 assessment, which may include soil testing,
ground water monitoring or borings to locate underground storage
tanks, is ordered for further evaluation and, depending upon the
results of such assessment, the transaction is consummated or the
acquisition is terminated. Certain of the Phase I surveys
obtained on the Properties revealed potential environmental
concerns and the Company has had Phase II reports prepared with
respect to such Properties.
None of the environmental surveys prepared to date has
revealed any environmental liability or compliance concern at the
Properties that the Company believes would have a material
- 36 -
<PAGE>
adverse effect on the Company's business, assets, results of
operations or liquidity, nor is the Company aware of any such
liability or concern. Nevertheless, it is possible that Phase I
surveys 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. 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.
AMERICANS WITH DISABILITIES ACT. The Americans with
Disabilities Act (the "ADA") generally requires that all public
accommodations, including restaurants, comply with certain
federal requirements relating to physical access and use by
persons with physical disabilities. A determination that the
Company or one of the Company's properties 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. While the Company believes that compliance with
the ADA can be accomplished without undue costs, the costs of
compliance may be substantial and may adversely impact the
ability of such lessees to pay rentals to the Company. In
addition, a determination that the Company is not in compliance
with the ADA could result in the imposition of fines or an award
of damages to private litigants.
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, including the Acquisition 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 Company's properties (including the
Properties and the Acquisition 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 unfeasible 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.
- 37 -
<PAGE>
DEPENDENCE ON KEY PERSONNEL
Robert J. Stetson, currently President and Chief Executive
Officer of the Managing General Partner, and Fred H. Margolin,
currently Chairman of the Board of the Managing General Partner,
will, following the Termination, hold similar positions with the
REIT Corporation. The Company's continued success is dependent
upon the efforts and abilities of these and other of its key
executive officers. In particular, the loss of the services of
either Mr. Stetson or Mr. Margolin 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. Following the Termination,
the REIT Corporation will enter into employment contracts with
each of Messrs. Stetson and Margolin. See "Management--
Employment Agreements."
COMPETITION
ACQUISITIONS. Numerous entities and individuals compete
with the Company to acquire triple net leased 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 attractive triple net leased properties or sale/leaseback
transactions in the future.
OPERATIONS. The restaurants operated on the properties are
subject to significant competition (including competition from
other national and regional fast food restaurant chains)
including other Burger King restaurants, local restaurants,
restaurants owned by BKC or affiliated entities, 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.
DEVELOPMENT RISKS
The Company may pursue certain restaurant property
developments. New project developments are subject to numerous
risks, including construction delays or costs that may exceed
budgeted or contracted amounts, new project commencement risks
such as receipt of zoning, occupancy and other required
governmental approvals and permits and the incurrence of
development costs in connection with projects that are not
pursued to completion. In addition, development involves the
risk that developed properties will not produce desired revenue
levels once leased, the risk of competition for suitable
development sites from competitors which may
- 38 -
<PAGE>
have greater financial resources than the Company and the risk
that debt or equity financing is not available on acceptable terms.
There can be no assurance that development activities might not be
curtailed or, if consummated, will perform in accordance with the
Company's expectations and distributions to stockholders and
partners, if any, might be adversely affected.
RISK OF NEWLY-CONSTRUCTED RESTAURANT PROPERTIES
The Company may pursue the acquisition of newly-constructed
restaurant properties that do not have operating histories. The
acquisition of newly-constructed restaurant properties involves
numerous risks, including the risk that newly-constructed
restaurant properties will not produce desired revenue levels
(and, therefore, lease rentals) once opened.
- 39 -
<PAGE>
THE COMPANY
HISTORY AND STRUCTURE OF USRP
USRP, formerly Burger King Investors Master L.P, was formed
in 1985 by BKC and QSV Properties Inc. ("QSV"), both of which
were at that time wholly-owned subsidiaries of The Pillsbury
Company. QSV acted as the managing general partner of the
Partnership. BKC was a special general partner of the
Partnership 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 BKC. From 1986 through March
1995, the Master Partnership Agreement limited the activities of
the Company to managing the original portfolio of properties.
In May 1994, an investor group led by Messrs. Stetson and
Margolin, acquired QSV and later changed its name to U.S.
Restaurant Properties, Inc. In March 1995, the Managing General
Partner proposed and the Limited Partners adopted certain
amendments to the Partnership Agreements that authorized the
Company to acquire additional properties not affiliated with BKC.
The Company operates through the Operating Partnership,
formerly Burger King Operating Limited Partnership, which holds
the interests in most of the Properties. USRP owns the entire
99.01% limited partnership interest in the Operating Partnership.
The Partnerships are Delaware limited partnerships and continue
in existence until December 31, 2035, unless sooner dissolved or
terminated.
In 1996, the Partnerships organized U.S. Restaurant
Properties Business Trust I and U.S. Restaurant Properties
Business Trust II, Delaware business trusts. These trusts were
organized to facilitate obtaining mortgage financing.
The principal executive offices of USRP and the Managing
General Partner are located at 5310 Harvest Hill Road, Suite 270,
Dallas, Texas 75230. The telephone number is (972) 387-1487,
FAX (972) 490-9119.
THE REIT CORPORATION
The REIT Corporation is a newly-formed Maryland corporation,
all of the stock of which is currently owned by the Managing
General Partner, that was organized to succeed to the operations
of USRP pursuant to the Conversion. The REIT Corporation was
created for the purpose of effecting the Conversion. Prior to
the Conversion, the REIT Corporation will have no substantial
assets or operations. The REIT Corporation has not engaged in
any activities other than in connection with its organization and
the Conversion. Upon consummation of the Conversion pursuant to
the Merger, the REIT Corporation will indirectly acquire the
operations of USRP through the Merger of USRP into a partnership
subsidiary of the REIT Corporation with USRP being the surviving
entity. If the Conversion is effected pursuant to the Partnership
- 40 -
<PAGE>
Alternative, the REIT Corporation will initially be
admitted as a limited partner of the Operating Partnership, and
at such time as the Managing General Partner effects the
Termination, a corporate subsidiary of the REIT Corporation will
become the managing general partner of each of the Partnerships.
Certain members of the initial REIT Board are the same as
the members of the Board of Directors of the Managing General
Partner. The executive officers of the REIT Corporation include
Mr. Stetson and Mr. Margolin, the President and Chief Executive
Officer and Chairman of the Board of Directors, respectively, of
the Managing General Partner. Mr. Stetson and Mr. Margolin will
hold the same positions with the Company. See "Management."
Upon consummation of the Conversion pursuant to the Merger,
the current partners of USRP will become the stockholders of the
REIT Corporation and the Operating Partnership will become a
subsidiary of the REIT Corporation. If the Conversion is
effected pursuant to the Partnerships Alternative, the Master
Partnership Agreement will be amended to provide the Unitholders
with the right to exchange each Unit for one share of Common
Stock. Until such time as all Unitholders exchange their Units
for shares of Common Stock, USRP will remain in existence. After
the Conversion, the Company's business strategy will be to
continue the operations of the Company in substantially the same
manner in which it has been operated prior to the Conversion and
to acquire, develop, own and manage additional restaurant
properties throughout the United States and internationally. The
Company's investment objectives will be to maximize cash
available for distribution to its stockholders and partners, if
any, to protect the Company's capital and to provide the
opportunity to realize capital growth from the appreciation in
value of a diversified portfolio of properties.
The principal executive offices of the REIT Corporation are
located at 5310 Harvest Hill Road, Suite 270, Dallas, Texas
75230. The telephone number is (972) 387-1487.
STRATEGY
The Company's principal business objective is to expand and
diversify its property portfolio through frequent acquisitions of
small to medium-sized portfolios of fast food and casual dining
restaurant properties. As part of its strategy of expanding its
restaurant property portfolio, the Company intends to build-out
properties in conjunction with other food vendors, such as
convenience stores, and retail outlets. The Company intends to
achieve growth and diversification while maintaining low
portfolio investment risk through adherence to proven acquisition
criteria with a conservative capital structure. The Company
intends to continue to expand its portfolio by acquiring triple
net leased properties and structuring sale/leaseback transactions
consistent with the following strategies:
- FOCUS ON RESTAURANT PROPERTIES. The Company will take
advantage of senior management's extensive experience in
fast food and casual dining restaurant operations to
identify new investment opportunities and acquire
restaurant properties satisfying the Company's investment
criteria. Management believes, based on its
- 41 -
<PAGE>
industry knowledge and experience, that relative to
other real estate sectors, restaurant properties provide
numerous acquisition opportunities at attractive valuations.
In addition, the proposed amendments to the Partnership
Agreements will give the Company increased flexibility to
pursue other investment opportunities that arise during
the ordinary course of acquiring and leasing restaurant
properties.
- INVEST IN MAJOR RESTAURANT BRANDS. The Company intends
to continue to acquire properties operated as major
national and regional restaurant brands, such as Burger
King, DAIRY QUEEN, HARDEE'S and CHILI'S by competent,
financially-stable operators. Certain of the Properties
are also operated as GRANDY'S, PIZZA HUT, KFC and TACO
BELL restaurants. Management believes, based on its
industry knowledge and experience, that successful
restaurants operated under these types of brands will
continue to offer stable, consistent income to the
Company with minimal risk of default or non-renewal of
the lease and franchise agreement. As a result of its
concentration on major national and regional brands, in
the last three fiscal years, of all rental revenues due,
more than 99.5% has been collected.
- ACQUIRE EXISTING RESTAURANTS. The Company's strategy
will continue to focus primarily on the acquisition of
existing fast food and casual dining chain restaurant
properties that have a history of profitable operations
with a remaining term on the current lease of at least
five years. The average remaining lease term for the
Properties is nine years. Management believes, based on
its industry knowledge and experience, that acquiring
existing restaurant properties provides a higher
risk-adjusted rate of return to the Company than
acquiring newly-constructed restaurants.
- CONSOLIDATE SMALLER PORTFOLIOS. Management believes,
based on its industry knowledge and experience, that
pursuing multiple transactions involving smaller
portfolios of restaurant properties (generally having an
acquisition price of less than $3 million) results in a
more attractive valuation because the size of such
transactions generally does not attract large
institutional property owners. Smaller buyers typically
are not well capitalized and may be unable to compete 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. In certain circumstances, however, the
Company has identified, evaluated and pursued portfolios
valued at up to $50 million that present attractive
risk/return ratios.
- MAINTAIN CONSERVATIVE CAPITAL STRUCTURE. The Company
anticipates maintaining its policy of limiting the ratio
of total indebtedness to 50% or less of the greater of
(i) the aggregate market value of all issued and
outstanding Units, if any, and Common Stock plus total
outstanding indebtedness or (ii) the original cost of all
of the Company's properties as of the date of such
calculation. The Company, however, may from time to time
reevaluate its borrowing policies in light of
then-current economic
- 42 -
<PAGE>
conditions, relative costs of debt and equity capital,
market values of properties, growth and acquisition
opportunities and other factors.
THE CONVERSION
BACKGROUND OF THE CONVERSION
Management of the Managing General Partner initiated
discussions with the Board of Directors in April 1996 regarding
the possibility of converting USRP into REIT form. Management
believed that the market capitalization of USRP did not properly
reflect its underlying asset values. In addition, management was
aware of the increasingly favorable market reaction to REITs as
evidenced by increases in share prices of existing REITs and
successful initial public offerings by newly-formed REITs.
The Board of Directors has approved the Conversion and has
determined that the Conversion is in the best interests of, and
on terms that are fair to, the Unitholders. The Managing General
Partner recommends approval and adoption of the Conversion by the
Limited Partners. The Board of Directors believes that the
Conversion will result in the benefits to the Unitholders
described below under "--Advantages of the Conversion." The
Board of Directors believes that these advantages outweigh the
risks associated with the Conversion described under "Risk
Factors." The Board of Director's substantive recommendations
and conclusions are based on the analysis of the advantages and
risks of converting from partnership to REIT form and making the
changes in operating format described herein.
ADVANTAGES OF THE CONVERSION
The Board of Directors is recommending that the Limited
Partners consent to the Conversion because it believes that the
Conversion will result in the following advantages to the
Unitholders: (i) the potential for improved market value of the
Common Stock as compared to the Units; (ii) greater access by the
Company to public and private sources of debt and equity capital;
(iii) the ability to issue various classes of securities;
(iv) the reduction in the costs of managing the Properties;
(v) the ability to retain the operating partnership structure;
and (vi) savings in administrative costs relating to federal
income tax reporting and administration for the Unitholders.
These factors, each of which is more fully described below, are
closely inter-related, and relative weights were not assigned to
them. The Board of Directors believes that none of these
advantages can be fully realized in the current format.
THE POTENTIAL FOR IMPROVED MARKET VALUE. The greater number
of investors that currently consider investments in REITs as
compared to partnerships, may affect the market price per share
of Common Stock versus the market price per Unit. Management
also believes that certain institutional investors in real
estate, such as mutual funds, restrict virtually all of their
investments to REITs and generally do not invest in partnerships.
The Conversion may, therefore, expand the potential investment
base of the Company to include institutional and other investors
that do not typically invest in partnership equity securities
because of various tax and administrative
- 43 -
<PAGE>
reasons. This, in turn, could result in a more active and
diversified trading market for the Common Stock than currently
exists for the Units. In addition, the Board of Directors anticipates
that the Common Stock (as compared to the Units) will receive
increased market interest through expanded review and evaluation
by research analysts.
POTENTIALLY GREATER ACCESS TO EQUITY AND DEBT MARKETS.
Because certain types of investors do not typically invest in
limited partnership securities, the Company, as a REIT, may have
greater access to the public and private equity capital markets
than it now has, potentially enabling the Company to raise
capital on more favorable terms than are now available.
Management believes that certain investment bankers will only
provide financial services to real estate entities that have
adopted the REIT structure. Accordingly, following the
Conversion, the Company may be able to attract greater interest
from a larger number of investment bankers thereby increasing the
Company's financing options. Additionally, it is management's
experience that rating agencies look more favorably on real
estate entities that are self-advised. Because the Company's
strategy is to continue to acquire properties to increase
earnings, the ability to access more, lower cost capital should
enable the Company to grow at a more rapid rate. No assurance
can be given that the Company will be able to issue additional
equity or debt securities after the Conversion, or that the
Conversion will result in any increase in the Company's investor
base or the receipt of any additional investor interest or a
reduction in the cost of capital.
ISSUANCE OF VARIOUS CLASSES OF SECURITIES. Following the
Conversion, the Company will be able to raise additional capital
through the issuance of various classes of securities (including
preferred stock) which may not be dilutive to holders of Common
Stock.
REDUCED MANAGEMENT EXPENSE. As part of the Conversion, the
Managing General Partner will be effecting the Termination.
Accordingly, the REIT Corporation will become self-advised and
will, as a result of the termination of all management fees, have
additional cash for distribution to its stockholders. For the
year ended December 31, 1996, the Managing General Partner was
paid $2.6 million with respect to the Property Management
Contract and the Partnership Interests.
NEW STRUCTURE RETAINS OPERATING PARTNERSHIP. Following the
Conversion, the Operating Partnership will remain in existence
and will continue to own the Properties. As a result, the REIT
Corporation will be an UPREIT, thereby permitting the Company to
continue to be able to effect certain tax-free property
acquisitions through the issuance of Operating Partnership
interests to sellers of such properties that are partnerships.
The Company has acquired a significant portion of the Properties
through such exchanges and management believes future
acquisitions will be similarly structured.
COST SAVINGS RESULTING FROM THE SIMPLIFICATION OF TAX
REPORTING. USRP's organization as a limited partnership makes
the preparation of tax returns by Limited Partners and USRP
complex, expensive and burdensome. The Board of Directors
believes that the cost of complying with the partnership
reporting requirements at the USRP level is significantly greater
than the cost of complying with the reporting requirements
applicable to the REIT Corporation. In this
- 44 -
<PAGE>
regard, the Board of Directors believes that the Company,
following the ultimate completion of the Conversion, will realize
annual savings of administrative costs of approximately $200,000.
Further, the ownership of Common Stock rather than Units will
greatly simplify tax reporting with respect to an investment in the
Company for each Limited Partner's individual federal tax returns
in future years.
The advantages of the Conversion should be considered by the
Limited Partners in light of the risks associated with the
Conversion described herein. See "Risk Factors."
THE MERGER
If the Ruling from the IRS is satisfactory to the Managing
General Partner, the Conversion would be effected by the merger
of USRP with the REIT Corporation. The Merger will be effected
pursuant to the Merger Agreement. In accordance with the terms
of the Merger Agreement, USRP would be merged into a partnership
subsidiary of the REIT Corporation with USRP being the surviving
entity. The Operating Partnership will remain in existence
following the Merger, with USRP, the REIT Corporation and one or
more of the REIT Corporation's corporate subsidiaries as the sole
partners thereof following consummation of the Merger.
Pursuant to the terms of the Merger Agreement, the
Unitholders will receive in exchange for their Units one share of
Common Stock for each Unit held by them prior to the Conversion,
or an aggregate of 6,894,003 shares of Common Stock (99% of all
shares of Common Stock to be outstanding following the
Conversion) on account of the Unitholders' aggregate 99%
percentage interest in USRP. The Managing General Partner will
initially receive 69,637 shares of Common Stock (1% of all shares
of Common Stock to be outstanding following the Conversion) as
part of the Acquisition Price on account of the Termination. See
"--Termination of Property Management Contract and Partnership
Interests."
THE MERGER AGREEMENT.
If the Conversion is effected by the Merger (i.e., a
favorable Ruling is received), the Merger will be effected
pursuant to the terms and conditions of the Merger Agreement. A
vote in favor of the Conversion will constitute a vote approving
the Merger Agreement. The Merger Agreement provides that,
subject to the conditions thereof, the REIT Corporation will
indirectly acquire the operations of USRP through the merger of
the REIT Sub with and into USRP with USRP as the surviving entity
and, as a result, becoming a subsidiary of the REIT Corporation.
Concurrently with the Merger, the Managing General Partner will
withdraw as managing general partner of USRP and, pursuant to the
terms of the Merger Agreement, a corporate subsidiary of the REIT
Corporation will be substituted as managing general partner of
USRP. The following is a summary of certain provisions of the
Merger Agreement. Such summary is qualified in its entirety by
reference to the Merger Agreement.
EFFECTIVE TIME. The Merger will become effective after all
of the conditions to consummation of the Merger have been
satisfied or on such later date as the parties may
- 45 -
<PAGE>
mutually agree (the "Effective Time"), by filing with the Secretary
of State of the State of Delaware a certificate of merger as required by
applicable Delaware law. See "--Conditions to the Merger" below.
It is presently anticipated that the Effective Time of the Merger
will be 11:59 p.m. on ______________, 1997.
AGREEMENTS OF THE REIT CORPORATION AND USRP. The Merger
Agreement provides, among other things, that (i) USRP will use
its best efforts to obtain the approval of the Merger Agreement
by Limited Partners holding a majority of the outstanding Units
on the Record Date, and (ii) the REIT Corporation will use its
best efforts to obtain approval to list the shares of Common
Stock on the NYSE subject to notice of issuance.
The Merger Agreement provides that the Company shall
indemnify and hold harmless, and advance expenses to, the
Managing General Partner and, as applicable, each officer,
director, partner or other person controlling either the Managing
General Partner or any affiliate of it against any costs or
expenses (including reasonable attorney's fees, judgments, fines,
losses, claims, damages or liabilities) incurred in connection
with any claim, action, suit, proceeding or investigation,
whether civil, criminal, administrative or investigative, arising
out of or pertaining to the transactions contemplated by the
Merger Agreement, whether asserted or claimed prior to, at or
after the Effective Time, to the fullest extent permitted by law.
In addition, the Merger Agreement provides that the Company shall
assume and agree to comply with USRP's indemnity obligations
under the Master Partnership Agreement with respect to
liabilities arising out of actions or omissions occurring prior
to the Effective Time.
CONDITIONS TO THE MERGER. The obligations of each party to
effect the Merger are subject, among other things, to the
following conditions: (i) the approval and adoption of the
Merger Agreement and transactions contemplated thereby by the
affirmative vote of the holders of a majority of the outstanding
Units; (ii) no statute, rule or regulation having been enacted or
promulgated by any governmental authority which prohibits the
exchange of Units for Common Stock or consummation of the Merger;
(iii) no order or injunction of a United States or state court of
competent jurisdiction in effect prohibiting the exchange of
Units or consummation of the Merger; (iv) the receipt by USRP of
an opinion of counsel to the effect that the Merger will be
treated as part of a transaction described in Section 351 of the
Code; (v) the receipt of a favorable Ruling from the IRS as to
treatment of the Merger as part of a transaction described in
Section 351 of the Code; (vi) the receipt of all permits,
qualifications and other governmental approvals as are required
under applicable law in connection with the Merger and other
transactions contemplated by the Merger Agreement; (vii) the
approval of the Common Stock for listing on the NYSE upon
official notice of issuance; and (viii) the approval of the
amendments to the Partnership Agreements by the affirmative vote
of the holders of a majority of the Units outstanding as of the
Record Date. These conditions may not be waived by USRP.
REPRESENTATIONS AND WARRANTIES. The Merger Agreement
contains representations and warranties as to (i) the due
organization and good standing of each of the parties thereto;
(ii) the authority of each of the parties thereto to enter into
the Merger Agreement and to perform the transactions contemplated
thereby; and (iii) the absence of conflicts with the execution of the
- 46 -
<PAGE>
Merger Agreement by each of the parties thereto and the
performance by each of the parties thereto of the transactions
contemplated thereby.
TERMINATION AND AMENDMENT. The Merger Agreement may be
terminated at any time prior to the consummation of the Merger by
mutual written consent of the REIT Corporation and USRP. In the
event of such termination of the Merger Agreement, the Merger
Agreement will become void and have no effect.
At any time before or after approval and adoption of the
Merger Agreement by the Limited Partners, the Merger Agreement
may be amended in any manner (except the right of Unitholders to
receive one share of Common Stock in exchange for every Unit) as
may be determined in the judgment of the REIT Board and the Board
of Directors to be necessary, desirable or expedient in order to
clarify the intention of the parties thereto or to effect or
facilitate the purposes and intent of the Merger Agreement. If
any amendment to the Merger Agreement is material to the Limited
Partners' decision to vote for or against its approval and
adoption, the Company will distribute to the Limited Partners
information regarding the amendment prior to the expiration of
the solicitation period and the solicitation period will be
extended to the extent necessary to allow Limited Partners to
consider fully the implications of such amendment.
AMENDMENTS TO THE PARTNERSHIP AGREEMENTS.
In order to effect the Conversion and to provide greater
operating flexibility following the Conversion, certain
amendments to the Partnership Agreements are proposed to be made.
The proposed amendments to the Operating Partnership Agreement
(i) establish the Acquisition Price in connection with the
Termination (which shall occur at such time as the Managing
General Partner ceases to be the managing general partner of the
Operating Partnership, whether by transfer of interest,
withdrawal or removal (other than for "cause")); (ii) permit the
issuance of Operating Partnership interests with terms comparable
to preferred stock which may, from time to time, be issued by the
REIT Corporation; (iii) expand the powers of the Operating
Partnership to enable it to originate loans secured by real
estate and to acquire property not exclusively used by
restaurants; (iv) permit the admission of new limited partners at
the discretion of the managing general partner; and (v) provide a
mechanism to permit holders of interests in the Operating
Partnership to exchange such interests for shares of Common
Stock. The proposed amendment to the Master Partnership
Agreement establishes the Acquisition Price. Copies of the
material amended provisions of the Master Partnership Agreement
and the Operating Partnership Agreement are attached hereto as
APPENDIX C and APPENDIX D, respectively, and are incorporated
herein by reference. A vote in favor of the Conversion will
constitute a vote approving each of the amendments to the
Partnership Agreements described below. The Master Partnership
Agreement requires the Limited Partners to approve by a majority
vote any amendment to the Operating Partnership Agreement if such
an amendment to the corresponding provision of the Master
Partnership Agreement would require a majority vote of the
Limited Partners. Each of the proposed amendments to the
Operating Partnership Agreement requires such a vote.
- 47 -
<PAGE>
Article III and Section 7.2 of the Operating Partnership
Agreement will be amended to expressly grant to the Operating
Partnership and the managing general partner of the Operating
Partnership on behalf of the Operating Partnership, respectively,
the power and authority to originate loans or otherwise provide
financing, whether through guarantees, letters of credit or
otherwise, secured by liens on real estate to borrowers who meet
the Operating Partnership's underwriting criteria, which shall be
established by the managing general partner of the Operating
Partnership.
Section 5.4 of the Operating Partnership Agreement will be
amended to allow the issuance of additional interests in the
Operating Partnership ("Operating Partnership Interests"). Such
Operating Partnership Interests may be issued in one or more
classes, or one or more series of any such classes, with such
designations, preferences and relative, participating, optional
or other special rights powers and duties, including rights,
powers and duties senior to other Operating Partnership
Interests, all as may be determined by the managing general
partner of the Operating Partnership in its sole and absolute
discretion. Additional Operating Partnership Interests may not
be issued to USRP or the REIT Corporation unless either (i) the
additional Operating Partnership Interests are issued in
connection with the grant, award or issuance of Units or shares
of capital stock of the REIT Corporation, which Units or shares
have designations, preferences and other rights such that the
economic interests attributable to such Units or shares are
substantially similar to the designations, preferences and other
rights of the additional Operating Partnership Interests issued
to USRP or the REIT Corporation and (ii) USRP or the REIT
Corporation shall make a capital contribution to the Operating
Partnership in an amount equal to the proceeds, if any, raised in
connection with the issuance of such Units or shares of capital
stock, or the additional Operating Partnership Interests are
issued to all partners in proportion to their respective
percentage interests in the Operating Partnership.
Following the date of execution of the amended Operating
Partnership Agreement, neither USRP nor the REIT Corporation may
grant, award or issue additional Units or shares of capital
stock, or rights, options, warrants or convertible or
exchangeable securities containing the right to subscribe for or
purchase such Units or shares of capital stock (collectively "New
Securities"), other than to all holders of such Units or shares
of capital stock unless (i) the Managing General Partner shall
cause the Operating Partnership to issue to USRP or the REIT
Corporation Operating Partnership Interests or rights, options,
warrants or convertible or exchangeable securities of the
Operating Partnership having designations, preferences and other
rights, all such that the economic interests are substantially
the same as those of the New Securities, and (ii) USRP or the
REIT Corporation makes a capital contribution to the Operating
Partnership of the proceeds from the grant, award or issuance of
such New Securities and from the exercise of rights contained in
such New Securities.
A new Section 5.5 will be added to the Operating Partnership
Agreement to permit the exchange of interests in the Operating
Partnership for shares of Common Stock based on the exchange
formula provided therein.
- 48 -
<PAGE>
Section 9.1 of the Operating Partnership Agreement, relating
to the compensation of the managing general partner of the
Operating Partnership, will be amended to provide for the
assignment of the Property Management Contract at such time as
the Managing General Partner ceases to be the managing general
partner of the Operating Partnership or of USRP, whether as a
result of transfer, withdrawal or removal (other than for cause).
Section 9.1 will also be amended to cause the successor managing
general partner to issue to the Managing General Partner a
percentage interest in the Operating Partnership equal to the
Acquisition Price (less the value of the number of shares of
Common Stock and/or Units otherwise received as part of the
Acquisition Price).
Section 9.3 of the Operating Partnership Agreement will be
amended to provide for the payment of fees to the Managing
General Partner (prior to the Termination) for the origination of
mortgage loans on generally the same terms and conditions as
apply to the acquisition of restaurant properties.
Section 11.2 of the Operating Partnership Agreement will be
amended to allow the Managing General Partner to transfer its
general partner interest in the Operating Partnership to any
limited partner or an affiliate of any limited partner. As a
result, the Managing General Partner will be able to transfer its
general partner interest in the Operating Partnership to the REIT
Corporation or a subsidiary of the REIT Corporation.
PARTNERSHIP ALTERNATIVE
GENERAL. If the Ruling is not obtained from the IRS or is
unfavorable or otherwise unacceptable to the Managing General
Partner, the Conversion would be effected through the admission
of the REIT Corporation as a limited partner of the Operating
Partnership and the exchange of Units for shares of Common Stock
by the Unitholders from time to time, at their discretion,
pursuant to the exchange rights to be provided for in the amended
Master Partnership Agreement, as described below. If the
Conversion is effected pursuant to the Partnership Alternative,
the Unitholders will not be required to exchange the Units for
shares of Common Stock until such time as they want to sell their
Units. In order to effect the Partnership Alternative, certain
amendments are proposed to be made to the Partnership Agreements
in addition to those amendments described above under "--The
Merger--Amendments to the Partnership Agreements." A vote in
favor of the Conversion will constitute a vote approving each of
the amendments to the Partnership Agreements described below.
AMENDMENTS TO THE MASTER PARTNERSHIP AGREEMENT. If the
Conversion is effected through the Partnership Alternative,
certain amendments are proposed to be made to the Master
Partnership Agreement, including (i) permitting the transfer of
the Managing General Partner's general partner interest in USRP
to the REIT Corporation or an affiliate of the REIT Corporation
and (ii) providing a mechanism to permit the Unitholders to
exchange Units for shares of Common Stock (which right, in the
event the Partnership Alternative is adopted, would only become
effective at such time as the Units are no longer traded on the
NYSE and the Company has completed the IPO and the Common Stock
is listed on the NYSE).
- 49 -
<PAGE>
AMENDMENTS TO THE OPERATING PARTNERSHIP AGREEMENT. If the
Conversion is effected through the Partnership Alternative,
certain amendments would need to be made to the Operating
Partnership Agreement, including permitting the transfer of the
Managing General Partner's general partner interest in the
Operating Partnership to any limited partner, including the REIT
Corporation, or an affiliate of any limited partner.
TERMINATION OF PROPERTY MANAGEMENT CONTRACT AND PARTNERSHIP
INTERESTS
GENERAL. As noted above, one of the amendments to the
Partnership Agreements being proposed in order to effect the
Conversion is the establishment of the Acquisition Price to be
paid for the Property Management Contract and the Partnership
Interests. If the Conversion is effected by the Merger, the
Managing General Partner will withdraw as managing general
partner of the Partnerships or the later of the approval of the
Conversion by the Limited Partners or the receipt of a favorable
Ruling from the IRS and, pursuant to the terms of the Merger
Agreement, a corporate subsidiary of the REIT Corporation will be
substituted as managing general partner of the Partnerships. It
is currently contemplated that, if the Partnership Alternative is
adopted, the Managing General Partner will withdraw as the
managing general partner of the Partnerships on the earlier of
the approval of the Conversion by the Limited Partners or August
31, 1997 (unless extended by the Special Committee, in its sole
discretion) and a corporate subsidiary of the REIT Corporation
would be substituted as managing general partner of the
Partnerships. In conjunction with either such withdrawal, the
Managing General Partner will assign the Property Management
Contract to the Operating Partnership (if the Conversion is
effected through the Merger) or USRP (if the Conversion is
effected through the Partnership Alternative), and the
Partnership Interests will be converted pursuant to the terms of
the Merger Agreement and/or the Partnership Agreements, as
applicable, for the Acquisition Price. As a result of the
Termination, the Company would become self-advised.
THE ACQUISITION PRICE. The Acquisition Price consists of
two components: (i) the Initial Share Consideration and (ii) the
Contingent Share Consideration. The Acquisition Price consists
of two components because of the Special Committee's interest in
protecting the stockholders of the REIT Corporation from being
diluted from the issuance of the Acquisition Shares and to
establish a price to be paid for the Property Management Contract
and the Partnership Interests which cannot be valued with
certainty. The Initial Share Consideration is equal to the value
of 850,000 shares of Common Stock, and shall consist of shares of
Common Stock, Units and/or an interest in the Operating
Partnership, depending upon how the Conversion is effected
(collectively, the "Initial Shares"). The Initial Shares shall
be issued by the REIT Corporation, USRP or the Operating
Partnership, as applicable, as soon as practicable following the
date of the Termination, but in no event later than 30 days
thereafter. At the time of the Termination, the officers and
employees of the Managing General Partner will become officers
and employees of the REIT Corporation, and the Managing General
Partner will have no further obligation to provide any management
services to any of the REIT Corporation, USRP or the Operating
Partnership.
- 50 -
<PAGE>
The Contingent Share Consideration equal to the value of up
to a maximum number of 550,000 shares of Common Stock, and shall
consist of shares of Common Stock, Units and/or an interest in
the Operating Partnership, depending upon how the Conversion is
effected (collectively, the "Contingent Shares" and, together
with the Initial Shares, the "Acquisition Shares") (which number
or classification shall be adjusted to give effect to any
dividend or distribution of shares of capital stock, rights or
warrants to the holders of Common Stock, any reclassification or
change of the shares of Common Stock, including, without
limitation, a stock split, or any merger or consolidation of the
REIT Corporation or sale of assets to another corporation, any
which occurs after the date of the Termination). The exact
number of Contingent Shares to be issued will be determined by
dividing the (i) amount by which the MGP Net Income (as defined
below) for fiscal year 2000 of the Operating Partnership exceeds
$3,612,500 by (ii) $4.25, and rounding the resulting number up to
the nearest whole number. "MGP Net Income" means the dollar
amount of fees and distributions which would otherwise have been
payable to the Managing General Partner in the year 2000 by the
Operating Partnership and USRP pursuant to the Property
Management Contract and the Partnership Interests had the
Managing General Partner operated the Operating Partnership on a
continuous basis from the date of the Termination through
December 31, 2000, less $775,000 (the projected amount of
expenses which would otherwise have been payable to the Managing
General Partner by the Operating Partnership in 2000 which will
be incurred by the REIT Corporation).
For example, if the MGP Net Income for the year 2000 is
$5,100,000 ($5.875 million revenues less $775,000 expenses) then
the Contingent Share Consideration would be an additional 350,000
Contingent Shares.
The Contingent Shares, if any, shall be issued by the REIT
Corporation or the Operating Partnership, as applicable, as soon
as practicable following the end of fiscal year 2000, but in no
event later than March 31, 2001. The Managing General Partner
will not receive any dividends with respect to the Contingent
Shares, or otherwise have any rights with respect thereto, until
they are issued.
REIT CORPORATION OFFICER COMPENSATION. Each of Robert J.
Stetson and Fred H. Margolin shall enter into employment
agreements with the REIT Corporation as of the date of the
Termination. These employment agreements will provide, among
other things, that each of them will have the same positions,
responsibilities and authority that each currently holds as an
officer of the Managing General Partner. Additionally, each
employment agreement will specifically provide 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 per year. See
"Management--Employment Agreements."
ASSIGNMENT AND WITHDRAWAL AGREEMENT. The Termination will be
effected pursuant to an agreement (the "Withdrawal Agreement") to be
entered into by and among the Managing General Partner, the REIT
Corporation and the Operating Partnership. Pursuant to the Withdrawal
Agreement, the Managing General Partner will agree not to sell the
Initial Shares or
- 51 -
<PAGE>
the Contingent Shares for a period of two years from the date
of receipt thereof, as applicable. In addition, the terms of the
Withdrawal Agreement shall provide that in the event of a "change
in control" (as defined in the Withdrawal Agreement) of the REIT
Corporation at any time prior to December 31, 2000 all 550,000
Contingent Shares shall be issued to the Managing General Partner.
CONFLICTS OF INTEREST. In considering the recommendation of
the Managing General Partner with respect to the Conversion, the
Limited Partners should be aware that a majority of the members
of the Board of Directors thereof, by virtue of their ownership
interests in and/or positions or affiliations with the Managing
General Partner, were subject to conflicts of interest in
determining the Acquisition Price and the resulting consideration
to be received by the Managing General Partner with respect to
the Property Management Contract and the Partnership Interests.
Accordingly, the Special Committee was appointed to review and
make a recommendation with respect to the Acquisition Price.
ANALYSIS OF THE SPECIAL COMMITTEE
At the December 16, 1996 meeting of the Board of Directors,
Messrs. Stetson and Margolin ("Management") indicated that they
planned to submit a proposal to USRP pursuant to which either (i)
the Unitholders would become stockholders of a newly-formed
self-advised REIT that would indirectly own the assets currently
owned by the Partnerships, or (ii) the Partnerships would become
self-advised. Management indicated that such proposal would
address the consideration that the Managing General Partner would
receive in connection with its withdrawal as managing general
partner of the Partnerships and the assignment of the Property
Management Contract and the conversion of the Partnership
Interests. Because of the conflict of interest caused by the
fact that four of the six directors of the Managing General
Partner are also stockholders of the Managing General Partner,
the Board of Directors appointed Gerald H. Graham and Eugene G.
Taper (the two directors who are not stockholders of the Managing
General Partner) to serve as members of a special committee (the
"Special Committee") to make a recommendation to the Board of
Directors as to whether or not it considered the Acquisition
Price to be fair, from a financial point of view, to the Limited
Partners. The Board of Directors appointed Dr. Graham as
Chairman of the Special Committee, agreed to pay the members of
the Special Committee $5,000 each for serving as members of the
Special Committee, authorized the Special Committee to engage (at
USRP's expense) legal counsel to represent the Special Committee
and a financial advisor to advise the Special Committee, and
agreed to reimburse the members of the Special Committee for
expenses that they incurred serving on the Special Committee.
The Special Committee selected and engaged legal counsel.
The Special Committee engaged Morgan Keegan as financial
advisor to the Special Committee. Morgan Keegan is an investment
banking firm that regularly renders valuations of businesses and
securities in connection with mergers and acquisitions,
competitive biddings, secondary distributions of listed and
unlisted securities, private placements, and valuations for
various purposes. The Special Committee interviewed four
investment banking firms as candidates to be the financial
advisor to the Special Committee. The Special Committee selected
- 52 -
<PAGE>
Morgan Keegan because of its extensive experience with real
estate investment trusts, both as a managing underwriter of
public securities offerings by REITs and mergers and acquisitions
involving REITs and because Morgan Keegan was familiar with USRP
and the Managing General Partner, having served as managing
underwriter in connection with USRP's June 1996 public offering
and as a financial advisor to USRP in connection with such
offering.
On December 30, 1996, Management submitted a proposal to the
Special Committee that provided for a formula pursuant to which
the Managing General Partner would receive partnership units (i)
upon the closing of the transaction based on the net income of
the Managing General Partner prior to the closing and (ii) for
each of the 10 quarters thereafter based on the growth in funds
from operations before interest of USRP for such 10 quarters.
Morgan Keegan indicated to the Special Committee that based on
projections provided by Management, the Managing General Partner
would receive approximately 1,700,000 shares under such proposal
if USRP were to meet its projections. The Special Committee
rejected this proposal.
On January 10, 1997, Management submitted a new proposal to
the Special Committee pursuant to which the Managing General
Partner would withdraw as the managing general partner of the
Partnerships and assign the Property Management Contract and
convert the Partnership Interests in exchange for 1,630,000
shares issued over time as follows: 640,000 shares on or before
September 30, 1997, 220,000 shares on or before January 1, 1998
and 110,000 shares for each of the next seven quarters.
The Special Committee held two meetings with its legal
counsel and financial advisor to consider the January 10, 1997
proposal. On January 15, 1997, the Special Committee rejected
that proposal and submitted a proposal to Management pursuant to
which the Managing General Partner would assign the Property
Management Contract and convert the Partnership Interests in
exchange for 1,100,000 shares, of which 900,000 shares would be
issued at the closing and 200,000 shares would be issued if USRP
(or the REIT Corporation) achieved projected funds from operation
per unit for the year ended December 31, 1998. The offer was
made subject to the execution and delivery of documentation that
is satisfactory to the Special Committee to implement the
Conversion and to the condition that satisfactory arrangements
are made so that a Unitholder who wants to sell in the open
market after the Conversion will be able to convert his or her
Units to Common Stock and sell such Common Stock with the same
speed he or she can presently sell Units (i.e., the conversion
and subsequent sale will be transparent to the Unitholder).
The Special Committee and Management then met on January 16,
1997 and negotiated the terms of the proposal. Although the
Special Committee and Management did not agree upon terms at that
meeting, they agreed to seek to negotiate a proposal within the
following framework: (i) a certain number of shares would be
issued at closing, and (ii) additional shares (up to a stated
maximum number) would be issued based on what the Managing
General Partner would have received based on the current Property
Management Contract. The discussions ranged between 1,300,000
shares and 1,600,000 shares and varied with regard to timing, the
- 53 -
<PAGE>
number of shares that would be guaranteed and the number of
shares that would be contingent and the basis upon which
contingent shares would be issued. The Special Committee also
introduced the concept of having the Managing General Partner
agree not to sell the shares received upon the closing of the
Termination for a two-year period after closing and Management's
agreement that their cash compensation as employees of the REIT
Corporation would not exceed a certain level for a certain period
of time after the closing. Management introduced the concept of
providing a mechanism for the Managing General Partner's
receiving the contingent shares if the REIT Corporation were
acquired prior to the end of the period that would be used to
determine the number of contingent shares to be issued.
The Special Committee and Management continued negotiations
for several days, and on January 22, 1997, Management presented a
proposal to the Special Committee. The Special Committee
requested additional detail with regard to certain issues. On
January 27, 1997, Management submitted a more detailed proposal
to the Special Committee and followed up in a telephone
conference with certain additional details (collectively, the
"January 27, 1997 Proposal"), the primary terms of which are as
follows:
1. The Managing General Partner would assign the Property
Management Contract and convert the Partnership
Interests at the earlier of the effectiveness of the
IPO by the REIT Corporation or August 31, 1997, unless
a later date was agreed upon by the Special Committee
and the Managing General Partner.
2. The Managing General Partner would receive 850,000
Units (or, such number of shares of Common Stock as a
holder of 850,000 Units would receive in the Conversion
or an interest in the Operating Partnership equal in
value to 850,000 Units that would be convertible into
or exchangeable for such number of shares of Common
Stock as a holder of 850,000 Units would receive in the
Conversion, depending upon how the Conversion is
effected) for the assignment of the Property Management
Contract and the conversion of the Partnership
Interests.
3. The Managing General Partner might also receive
additional consideration equal in value to up to
550,000 Units (or, such number of shares of Common
Stock as a holder of 550,000 Units would receive in the
Conversion or an interest in the Operating Partnership
equal in value to 550,000 Units that would be
convertible into or exchangeable for such number of
shares of Common Stock as a holder of 550,000 Units
would receive in the Conversion, depending upon how the
Conversion is effected) but only if the
management/general partner fees and distributions that
the Managing General Partner would have received if the
arrangements that are currently in place had not been
terminated, reaches or exceeds certain levels in the
year ended December 31, 2000. For every $4.25 of
management/general partner fees and distributions which
would have been earned in the year ended December 31,
2000, the Managing General Partner would receive one
Unit (or share or interest in the Operating Partnership
(or its equivalent allowing for splits, etc.) less the
Units (or shares or interests in the Operating
Partnership) already received (850,000) subject
- 54 -
<PAGE>
to a maximum 550,000 additional Units. For the purposes
of this calculation, the management/general partner fees
and distributions will be the management/general
partner revenues which would have been received during
the year ended December 31, 2000 as prescribed by the
Partnership Agreements less $775,000, which is the
projected expenses of the Managing General Partner in
the year ended December 31, 2000 which would then be
incurred by the REIT Corporation or USRP. If the REIT
Corporation or USRP, as applicable, is acquired by an
unrelated third party prior to December 31, 2000 and
pursuant to that acquisition there is a change of
control of the REIT or USRP, as applicable, the entire
maximum contingent share consideration would be issued
to the Managing General Partner at the time of such
acquisition.
4. Messrs. Stetson and Margolin would agree not to receive
annual cash compensation as employees of the REIT
Corporation or the Partnerships of more than $300,000
each in each year up to and including the year ended
December 31, 2000.
5. The Managing General Partner would agree not to sell
the 850,000 Units (or shares or interests in the
Operating Partnership) it receives as the initial
consideration until at least two years after receipt
thereof and not to sell any Contingent Shares received
until after December 31, 2002.
6. The Managing General Partner indicated that the
relevant documentation to evidence the issuance of the
Units (or shares or interests in the Operating
Partnership) to the Managing General Partner would be
in form that was satisfactory to the Special Committee,
and that satisfactory arrangements would be made to
ensure that a Unitholder who wants to sell in the open
market after the closing of the Conversion would be
able to convert his or her Units to shares of Common
Stock (if applicable) and sell such shares of Common
Stock with the same speed he or she can presently sell
partnership units (i.e., the conversion and subsequent
sale would be transparent to the Unitholder).
On February 5, 1997, the Special Committee met and Morgan
Keegan made a presentation and gave its oral opinion to the
Special Committee that the Acquisition Price set forth in the
January 27, 1997 Proposal was fair, from a financial point of
view, to the Limited Partners. At that February 5, 1997 meeting,
the Special Committee recommended to the Board of Directors of
the Managing General Partner that it considered the Acquisition
Price set forth in the January 27, 1997 Proposal to be fair, from
a financial point of view, to the Limited Partners. The Special
Committee conditioned its recommendation on the issuance by
Morgan Keegan of an additional fairness opinion on the date of
this Proxy Statement/Prospectus to the effect that as of the date
of the Proxy Statement/Prospectus the Acquisition Price proposed
to be issued to the Managing General Partner was fair, from a
financial point of view, to the Limited Partners.
- 55 -
<PAGE>
FAIRNESS OPINION
MORGAN KEEGAN FAIRNESS OPINION. The Special Committee
retained Morgan Keegan to act as its financial advisor and to
render its opinion concerning the fairness to the Unitholders,
from a financial point of view, of the Termination, the
transaction whereby the Managing General Partner will withdraw as
managing general partner of the Partnerships, and assign its
Property Management Contract and convert the Partnership
Interests in exchange for the Acquisition Price pursuant to the
Withdrawal Agreement. Morgan Keegan did not recommend to USRP
that any specific consideration would constitute the appropriate
consideration to be paid.
At a meeting of the Special Committee held on February 5,
1997, Morgan Keegan made a presentation and gave its oral opinion
to the Special Committee that the Acquisition Price is fair, from
a financial point of view, to the Unitholders. In addition,
Morgan Keegan confirmed, in a written opinion dated as of the
date of this Proxy Statement/Prospectus that, as of such date,
the Acquisition Price is fair, from a financial point of view, to
the Unitholders (the "Fairness Opinion"). The Fairness Opinion
addresses the transaction to which it relates in the context of
the information available on that date. Events occurring after
the date may materially affect the assumptions used in preparing
the Fairness Opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF MORGAN KEEGAN, WHICH SETS
FORTH THE ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, THE
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN
ARRIVING AT SUCH OPINION, THE ASSUMPTIONS MADE AND THE LIMITS OF
ITS REVIEW, IS ATTACHED HERETO AS APPENDIX B, AND IS INCORPORATED
HEREIN BY REFERENCE. UNITHOLDERS ARE URGED TO REACH SUCH OPINION
IN ITS ENTIRETY. MORGAN KEEGAN'S OPINION IS DIRECTED ONLY TO THE
FAIRNESS TO THE UNITHOLDERS, FROM A FINANCIAL POINT OF VIEW, OF
THE ACQUISITION PRICE. THE FAIRNESS OPINION DOES NOT ADDRESS ANY
OTHER ASPECT OF THE TRANSACTION OR RELATED REIT CONVERSION AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY UNITHOLDER AS TO HOW
SUCH UNITHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE SUMMARY
OF THE OPINION OF MORGAN KEEGAN SET FORTH IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF SUCH OPINION.
EXPERIENCE OF MORGAN KEEGAN. Morgan Keegan is a nationally
recognized investment banking firm and is regularly engaged in
the valuation of businesses and securities in connection with
mergers and acquisitions, competitive biddings, secondary
distributions of listed and unlisted securities, private
placements and valuations for various purposes. The Special
Committee selected Morgan Keegan as its financial advisor on the
basis of such experience and expertise in transactions similar to
the Termination and Morgan Keegan's familiarity with the real
estate and REIT industries.
SUMMARY OF MATTERS CONSIDERED. In arriving at its opinion,
Morgan Keegan reviewed (i) this Proxy Statement/Prospectus as
filed with the Commission on February 7, 1997, (ii) the
- 56 -
<PAGE>
Partnership Agreements (and the proposed amendments thereto) and
(iii) an unexecuted draft of the Withdrawal Agreement (which, for
purposes of its analysis, it assumed that any further revisions,
including the filling in of blank spaces and the attachment of
final exhibits and appendices, would not materially alter the
terms and provisions of such documents and that such documents
would be executed as finalized) and certain publicly-available
financial information and internal financial analyses concerning
USRP and the Operating Partnership and internal financial
analyses concerning the Managing General Partner and held
discussions with members of senior management of USRP and the
Managing General Partner regarding the business and prospects of
the companies and the business and prospects of the USRP on a
self-advised basis. In addition, Morgan Keegan reviewed the
reported price and trading volume of the Units, compared certain
financial information of the Managing General Partner with
similar information for certain selected companies engaged in the
real estate management industry whose securities are publicly
traded, reviewed the financial terms of selected recent business
combinations, reviewed certain pro forma analyses regarding the
business and prospects of USRP after the Termination and
performed such other studies and analyses as Morgan Keegan
considered appropriate. Morgan Keegan was not asked to consider
or provide an opinion, and is not expressing any opinion, with
respect to (i) the fairness of the Conversion, other than the
Acquisition Price, (ii) the fairness of the Acquisition Price
from any point of view other than from a financial point of view,
(iii) the fairness of any other alternative transaction or
structures available to USRP or the Operating Partnership with
respect to the acquisition or withdrawal of the Managing General
Partner or any other transaction involving the Managing General
Partner, or (iv) the effect of federal, state or other tax laws,
rules or regulations on the USRP or any other party to the
Conversion arising from the Termination and Withdrawal Agreement
and related transactions.
ASSUMPTIONS. In connection with its review and analysis and
in arriving at its opinion, Morgan Keegan assumed the accuracy,
completeness and fairness of any information provided to or
otherwise reviewed by Morgan Keegan, including, without
limitation, this Proxy Statement/Prospectus, and relied upon such
information being complete and accurate in all respects. Morgan
Keegan did not independently verify any of such information.
Morgan Keegan also assumed the correctness of and relied upon the
representations and warranties of all parties contained in the
Withdrawal Agreement. Morgan Keegan also relied upon the
judgment of the management of the Managing General Partner as to
the reasonableness and achievability of the financial and
operating projections and the assumptions and bases therefore
provided to it, and assumed that such projections reflected the
best currently available estimates and judgment of the management
of the Managing General Partner and that, subject to reasonable
discounts attributable to the likelihood of achieving such
results, such projections and forecasts would be realized in the
amounts and time period then estimated by the management of the
Managing General Partner. Morgan Keegan was not engaged to
assess the achievability of such projections or assumptions.
Morgan Keegan was not engaged to, and did not conduct a physical
inspection or appraisal of any of the assets, properties or
facilities of either USRP, the Operating Partnership or the
Managing General Partner, nor was it furnished with any such
evaluation or appraisal. Morgan Keegan assumed that the
conditions to the Termination and the Withdrawal Agreement would
be satisfied.
- 57 -
<PAGE>
ANALYSIS AND CONCLUSION. The following is a summary of the
financial and comparative analyses performed by Morgan Keegan in
connection with the preparation of the Fairness Opinion:
The Termination is structured as the withdrawal of the
Managing General Partner as the managing general partner of the
Partnerships and the amendment of the Partnership Agreements to
terminate the Property Management Contract. In consideration of
the Managing General Partner's agreement to withdraw as the
general partner and to assign the Property Management Contract
and convert the Partnership Interests, the Managing General
Partner will initially receive the Initial Consideration of
850,000 Units (or such number of shares of Common Stock as a
holder of 850,000 Units would receive in the Conversion or an
interest in the Operating Partnership equal in value to 850,000
Units that would be convertible or exchangeable for such number
of shares of Common Stock as a holder of 850,000 Units would
receive in the Conversion, depending upon how the Conversion is
effected). Additionally, the Managing General Partner has the
right to receive the Contingent Consideration, of 550,000 Units
(or such number of shares of Common Stock as a holder of 550,000
Units would receive in the Conversion or an interest in the
Operating Partnership equal in value to 550,000 Units that would
be convertible or exchangeable for such number of shares of
Common Stock as a holder of 550,000 Units would receive in the
Conversion, depending upon how the Conversion is effected).
Additionally, the Managing General Partner has the right to
receive the Contingent Consideration, of 550,000 shares of Common
Stock and will consist of shares of Common Stock, an interest in
the Operating Partnership and/or Units (depending upon how the
Conversion is effected) (the "Contingent Shares") at December 31,
2000, if certain cash flow targets are attained. Morgan Keegan
estimates the present value of the Acquisition Price to be
between $28 million and $34 million, giving effect to the
restrictions on transfer applicable to the units (or shares)
being issued, the probability that the cash flow targets
necessary to earn the Contingent Shares will be attained and the
fact that no dividends will be paid on the Contingent Shares
until they are earned.
In determining the fairness of the Acquisition Price from a
financial point of view, to the Unitholders, Morgan Keegan
endeavored to value the fees that would be payable by the
Partnerships to the Managing General Partner but for the
Termination. Because the Termination does not involve the
acquisition of the Managing General Partner, some of the
traditional valuation methodologies were less appropriate than
others.
Morgan Keegan determined that the most appropriate
methodology was to determine the present value to the
Partnerships of the fees that it would have to pay to the
Managing General Partner but for the Termination. In determining
the present value to the Partnerships of these fees, Morgan
Keegan looked at the historical level of fees paid annually by
the Partnerships to the Managing General Partner, as well as
management's projections for those fees, which are largely a
function of the growth and performance of the Partnerships. In
addition to valuing the management fees payable to the Managing
General Partner, Morgan Keegan analyzed the likely effect on the
Partnerships as a result of the Termination in terms of funds
from operations per share.
- 58 -
<PAGE>
In performing its analysis, Morgan Keegan considered a
variety of valuation methodologies, including: (i) discounted
cash flow analysis, (ii) comparable company analysis and
(iii) comparable transaction analysis. Morgan Keegan also
analyzed the Termination utilizing a pro forma merger analysis
and a contribution analysis.
DISCOUNTED CASH FLOW ANALYSIS. Morgan Keegan used a
discounted cash flow analysis to value the future stream of fees
that would have been payable to the Managing General Partner had
the Termination not occurred. Morgan Keegan performed a
discounted cash flow analysis of the projected unrestricted cash
flow of the Managing General Partner for fiscal years 1997
through 2001, based on operating projections and other
information provided by USRP and the Managing General Partner.
Morgan Keegan took into account certain expenses historically
paid by the Managing General Partner that would be paid by the
REIT Corporation upon consummation of the Termination, including
salaries and general and administrative expenses. Using this
information, Morgan Keegan calculated a range of equity values
for the Managing General Partner based on the sum of (i) the
present value of the free cash flows of the Managing General
Partner and (ii) the present value of the estimated terminal
value for the Managing General Partner assuming that it was sold
at the end of fiscal year 2001. In performing its discounted
cash flow analysis, Morgan Keegan assumed, among other things,
discount rates ranging from 10% to 27.5% (depending on the
predictability of the income from various fees under the Property
Management Contract) and terminal multiples of EBIT of 6.0x to
9.0x. Those discount rates and terminal multiples reflect Morgan
Keegan's qualitative judgments concerning the specific risk
associated with such an investment and the historical and
projected operating performance of the Managing General Partner.
This analysis resulted in a range of equity values for the
Managing General Partner of $34.9 million to $57.9 million.
Morgan Keegan focused its analysis on the midpoint of these
discount rates and terminal multiples. Such analysis implied an
equity value range for the Managing General Partner of $41.4
million to $49.0 million.
COMPARABLE COMPANY ANALYSIS. Morgan Keegan also analyzed
selected publicly-traded real estate companies engaged primarily
as managers and advisors in the real estate business. Morgan
Keegan considered the following companies: CB Commercial
Holdings, Grubb & Ellis Company, Hallwood Realty Partners, Inc.,
Insignia Financial Group, Inc. and NHP, Inc. Morgan Keegan
compared the market value of each, as determined by the closing
price recorded for each company's common stock, with each
company's revenue, net income, EBITDA and EBIT. In addition,
Morgan Keegan determined the market value and the adjusted market
value of each comparable company and calculated trading multiples
based on revenue, EBITDA, EBIT and net income. Based on the
median multiples of the comparable companies, this analysis
resulted in a range of equity values for the Managing General
Partner of $3.3 million to $50.0 million. Morgan Keegan focused
its analysis on EBIT and on EBITDA and determined a range of $20
million to $50 million. No company used in this group of
comparable companies was similar to the Managing General Partner
in terms of the fee structure and income stream payable under the
Property Management Contract, and the companies all are larger
and more diversified than the Managing General Partner.
Accordingly, these comparable companies did not provide a
meaningful method of valuing the Managing General Partner.
COMPARABLE ACQUISITIONS. Morgan Keegan also analyzed
acquisitions by selected public companies engaged primarily in the real
estate management, development and acquisition business. Under this
- 59 -
<PAGE>
approach, Morgan Keegan considered, among others, the
acquisitions of Security Management Corporation, ConCap,
O'Donnell Property Services, Allegiance Realty Group, National
Property Investors and Angeles Corporation by Insignia Group,
Inc.; the acquisition of BT Venture Corporation by Boddie-Noell
Properties, Inc. and the consolidation of Franchise Finance
Corporation of America with existing related real estate limited
USRPs. Morgan Keegan determined the multiples of market value
and adjusted market value to revenue, EBITDA, EBIT and net income
for each of these companies. Morgan Keegan then applied these
multiples to the revenue, EBITDA, EBIT and net income of the
Managing General Partner. Morgan Keegan also considered other
financial and other operating characteristics of these companies
in its analysis.
Morgan Keegan also reviewed certain acquisitions of real
estate advisory and management companies by publicly traded
REITs. This review included calculating the multiples obtained
by comparing the prices paid to acquire such companies with the
advisory fees earned by the acquired companies during the last
full fiscal year prior to the REIT's becoming self-advised.
Under this approach, Morgan Keegan considered Bradley Real Estate
Trust, Boddie-Noell Properties, Inc., Burnham Pacific Properties,
Inc., Meditrust, Health Care REIT, Inc., Storage Equities, Inc.,
Shurgard Storage Centers, Inc., Realty Income Corporation,
Mid-America Apartment Communities, Inc., Summit Properties,
Associated Estates Realty Corporation, Paragon Group, Inc. and
Criimi Mae Inc. Based on the multiples of revenue, EBITDA, EBIT,
funds from operations and net income of the comparable
transactions, this analysis resulted in a range of values for the
Managing General Partner of $3.6 million to $75.3 million.
Morgan Keegan focused its analysis on the median range of values
which resulted in a range of values for the Managing General
Partner of $15.0 million to $30.0 million. Morgan Keegan also
considered other financial and operating characteristics of these
companies in its analysis. No company or transaction was similar
to the Managing General Partner in terms of the fee structure and
income stream payable under the Partnership Agreements.
Accordingly, these comparable companies did not provide a
meaningful method of valuing the Managing General Partner.
PRO FORMA MERGER ANALYSIS. Morgan Keegan also analyzed the
effects of the Termination on the financial projections of the
Partnerships. USRP's stand alone projections for 1997 through
2000 were compared with pro forma combined company projections
for funds from operations and other measures of profitability.
The pro forma funds from operations per share figures derived
from this calculation were then compared to the Partnerships'
projected funds from operations per share in order to determine
the degree of dilution, if any, to the Unitholders subsequent to
the Termination. This analysis indicated that the Termination
should be accretive to the pro forma combined company's funds
from operations per share for each year from 1997 through 2000.
This analysis included calculations of funds from operations in a
manner consistent with the Partnerships' current policy and did
not take into account any effects from converting to a REIT,
which could affect the actual accretion/dilution realized as a
result of the Termination.
CONTRIBUTION ANALYSIS. Morgan Keegan analyzed the
contribution of the Partnerships and the Managing General Partner
to the projected 1997 through 2000 operating results of the
combined company. Morgan Keegan calculated the percentage
contribution for each company to total income, EBIT, net income
and funds from operations. Morgan Keegan then calculated the
percentage ownership on a post-transaction basis for both existing
Unitholders and the Managing General Partner. Morgan Keegan concluded
that from the Unitholders' perspective, the Managing General Partner's
percentage contribution to total income, EBIT, net income and
- 60 -
<PAGE>
funds from operations compares favorably with its percentage
ownership of the combined company.
Based on the foregoing, Morgan Keegan concluded that, based
on various assumptions and considerations, the Acquisition Price
is fair, from a financial point of view, to the Unitholders.
The summary set forth above does not purport to be a
complete description of the presentation by Morgan Keegan to the
Special Committee or of the analyses performed by Morgan Keegan.
The preparation of a fairness opinion is not necessarily
susceptible to partial analysis or summary description. Morgan
Keegan believes that its analyses and the summary set forth above
must be considered as a whole and that selecting portions of its
analyses, without considering all analyses, or of the above
summary, without considering all factors and analyses, would
create an incomplete view of the process underlying the analyses
presented to the Special Committee set forth in Morgan Keegan's
fairness opinion. In addition, Morgan Keegan may have deemed
various assumptions more or less probable than other assumptions,
so that the ranges of valuations resulting from any particular
analysis described above should not be taken to represent the
actual value of the payments to the Managing General Partner or
the combined company.
In performing its analyses, Morgan Keegan made numerous
assumptions with respect to industry performance, general
business and economic conditions and other matters, many of which
are beyond the control of the Partnerships or the Managing
General Partner. The analyses performed by Morgan Keegan are not
necessarily indicative of actual values or actual future results,
which may be significantly more or less favorable than suggested
by such analyses. Such analyses were prepared solely as part of
Morgan Keegan's analysis of the fairness, from a financial point
of view, of the Acquisition Price and were discussed with the
Special Committee. The analyses do not purport to be appraisals
or to reflect the prices at which a company might actually be
sold or the prices at which any securities may trade at the
present time or at any time in the future. In addition, as
described above, Morgan Keegan's presentation to Special
Committee and its Fairness Opinion was one of many factors taken
into consideration by the Special Committee in making its
determination to approve the Acquisition Price.
COMPENSATION AND MATERIAL RELATIONSHIPS. The Special
Committee has engaged Morgan Keegan to provide investment banking
advice and services in connection with the Special Committee's
review and analysis of the Termination. USRP agreed to pay
Morgan Keegan: (i) a fee of $50,000 upon execution of an
engagement letter, and (ii) a fee of $175,000 at the time of
delivery of the Fairness Opinion.
USRP has also agreed to reimburse Morgan Keegan for
reasonable out-of-pocket expenses, including fees and
disbursements of counsel, incurred by Morgan Keegan in carrying
out its duties under the engagement letter, and to indemnify
Morgan Keegan for certain liabilities to which it may be
subjected in connection with its engagement.
- 61 -
<PAGE>
In addition to rendering the opinion, Morgan Keegan has in
the past provided investment banking services to USRP, for which
it received customary fees. In June 1996, Morgan Keegan acted as
the lead manager of the Partnership's 1,800,000 Unit offering.
In addition to the underwriting fees and commissions of
approximately $__________, USRP paid Morgan Keegan a financial
advisory fee of $200,000. In ________________, 1996, an
affiliate of Morgan Keegan provided a $20 million mortgage
warehouse facility to USRP in exchange for customary fees and
interest payments on amounts outstanding thereunder at a rate of
300 basis points over LIBOR. This facility was paid in full in
_________________, 199__. In the ordinary course of its
business, Morgan Keegan may trade the Units for its own account
and for the account of its customers and may at any time hold a
short or long position in such securities. Morgan Keegan has
expressed no opinion as to the prices or trading range at which
the Units may trade following the date of its opinion or upon
completion of the Termination.
NO DISSENTERS' APPRAISAL RIGHTS
Limited Partners who object to the Conversion will have no
dissenters' appraisal rights (i.e., the right, instead of
receiving Common Stock, to seek a judicial determination of the
"fair value" of their Units and to compel USRP to purchase Units
for cash in that amount) under state law or the Master
Partnership Agreement, nor will such rights be voluntarily
accorded to the Limited Partners by the Company. Thus, approval
of the Conversion by the holders of a majority of all Units
outstanding on the Record Date will bind all Limited Partners,
and objecting Limited Partners will have no alternative to
receipt of Common Stock other than selling their Units in the
market. The Units are currently listed on the NYSE under the
symbol "USV." If the Conversion is effected through the Merger,
the Common Stock is expected to be listed on the NYSE effective
at the time the Merger is consummated. If the Conversion is
effected through the Partnership Alternative, the Common Stock is
expected to be listed on the NYSE at such time as the Company
completes the IPO.
COSTS OF THE CONVERSION
The Managing General Partner estimates the total cost and
expense of the Conversion will be approximately $580,000, whether
or not completed. Such costs and expenses include registration
fees, legal and accounting fees and expenses, recording and
filing expenses and printing fees and expenses. The costs of the
Conversion, whether or not successfully completed, will be paid
by USRP. Therefore, the Managing General Partner and the
Unitholders will ultimately absorb the costs of the proposal to
effect the Conversion, whether or not the Conversion is approved
or completed. The following is a statement of certain estimated
fees and expenses incurred in connection with the Conversion:
- 62 -
<PAGE>
Securities and Exchange Commission fees................. $ 63,707
Legal fees and expenses................................. 100,000
Special Committee fees and expenses
(including fees to its financial and legal advisors). 245,000
Accounting fees and expenses............................ 50,000
Printing, engraving and mailing expenses................ 75,000
Miscellaneous (including solicitation costs)............ 46,293
----------
TOTAL................................................ $ 580,000
==========
CONSEQUENCES IF CONVERSION IS NOT APPROVED
It is expected that, if the Conversion is not approved by
the Limited Partners, or if the Conversion is not consummated for
any reason, the Company will continue in its current form. No
other transaction is currently being considered by the Company as
an alternative to the Conversion.
FIDUCIARY DUTIES
As general partner of a limited partnership, the Managing
General Partner owes the Unitholders, under Delaware law, the
fiduciary duties of good faith, fairness and loyalty in handling
the affairs of USRP. This fiduciary duty, to the extent not
modified by the Master Partnership Agreement, may include a duty
to refrain from self-dealing to the advantage of the Managing
General Partner at the expense of USRP. The Master Partnership
Agreement generally provides that the Managing General Partner
and its affiliates may enter into transactions with USRP,
provided that the price and terms of such transaction are fair to
the Partnership and are not less favorable to USRP than those
generally prevailing with respect to comparable transactions
between unrelated parties. Thus, the fiduciary duty of the
Managing General Partner may be more limited than would otherwise
be the case, absent such provisions. The Managing General
Partner believes that it has satisfied its fiduciary duties to
Unitholders in connection with the proposal of the Conversion and
the Termination. It was with due regard to its fiduciary
responsibilities to USRP and the Unitholders that the Managing
General Partner concluded that a Special Committee of the
independent directors of its Board of Directors be formed to
represent properly the interests of the Unitholders in connection
with the Termination.
The Managing General Partner may also have obligations under
securities and state corporate laws to disclose all material
information concerning USRP's affairs at certain times. The
Managing General Partner believes that through quarterly and
annual filings on Form 10-Q and 10-K, annual tax reporting on
Form K-1 and disclosing the information contained herein, it has
satisfied its duties to disclose all material information to
Unitholders.
Following consummation of the Conversion, the directors of
the Managing General Partner will serve as the directors of the REIT
Corporation. As a general matter (and except as modified by agreement),
under Maryland law, a director's fiduciary duties to stockholders of a
- 63 -
<PAGE>
Maryland corporation are substantially similar
to the fiduciary duties of a general partner of a Delaware
limited partnership to its limited partners. State law
applicable to both limited partnerships and corporations provides
that the duties (including fiduciary duties) and liabilities
relating thereto of a general partner to a limited partnership or
its partners or of a director to a corporation or its
stockholders, may be expanded or restricted by provisions in the
applicable partnership agreement or charter instrument. In this
regard, the Master Partnership Agreement provides that the
Managing General Partner shall not be liable to USRP or to the
Unitholders for any losses incurred as a result of any act or
omission of the Managing General Partner if the conduct did not
constitute actual fraud, willful misconduct or gross negligence
and the Managing General Partner acted in a manner it believed to
be in, or not opposed to, the interests of USRP. Further, the
Master Partnership Agreement provides broad indemnification
rights in favor of the Managing General Partner so long as its
conduct meets the standard referenced in the preceding sentence.
With respect to the REIT Corporation, the Articles provide that a
director of the REIT Corporation shall not be liable for any act
or omission in the director's capacity as a director, except to
the extent the director is found liable for (i) an act or
omission involving active and deliberate dishonesty or (ii) a
transaction in which the director received an improper personal
benefit. The directors are broadly indemnified and held harmless
so long as the liability otherwise to be indemnified for does not
result from any act or omission of such director that involves
actual fraud or willful misconduct or a transaction from which
such director derived an improper benefit.
The nature of fiduciary duties is an evolving area of law
and it is unclear whether or to what extent there are differences
in such fiduciary duties. However, it is possible the fiduciary
duties of a director of the REIT Corporation to its stockholders
could be less than those of the Managing General Partner to the
Unitholders. Unitholders who have questions concerning fiduciary
duties should consult their legal counsel.
ACCOUNTING TREATMENT
For financial accounting purposes, the Conversion will be
treated as a reorganization of affiliated entities, with the
assets and liabilities recorded at their historical costs, except
for the Termination. The cost of terminating the Property
Management Contract by the Operating Partnership or the REIT
Corporation, as the case may be, will be charged to expense at
the time of the transaction and the costs of the reorganization
will be expensed as incurred.
THE SPECIAL MEETING
The Managing General Partner has established the close of
business on ____________, 1997, as the Record Date for
determining Limited Partners entitled to notice of, and to vote
at, the Special Meeting and at any adjournment thereof. On that
date, USRP had issued and outstanding ________ Units. No matters
other than the Conversion and certain procedural matters may be
discussed or voted upon at the Special Meeting.
- 64 -
<PAGE>
ELIGIBLE UNITS
The presence, in person or by proxy, of Limited Partners
holding more than 50% of the total number of outstanding Units
that Limited Partners hold will constitute a quorum at the
Special Meeting. A Limited Partner may hold such Units as either
the recordholder thereof or as the recordholder of a Depositary
Receipt with respect thereto. An assignee of Units that the
Managing General Partner has not admitted to USRP as a Limited
Partner, however, will be unable to vote at the Special Meeting.
Such assignee's Units will also not be considered outstanding for
purposes of determining whether a quorum exists at the Special
Meeting or whether the requisite number of Limited Partners
approve the Conversion. Additional Units acquired by a Limited
Partner with respect to which the Managing General Partner has
not admitted such Limited Partner to USRP will also not be
considered outstanding for purposes of the Special Meeting and
the Limited Partner will be unable to vote such Units.
If a person beneficially owns Units through a Depositary
Receipt issued to a broker or other nominee holder, such person
must instruct such broker or nominee holder how to vote the Units
that such person beneficially owns. If such person does not give
such instructions, the broker or other nominee holder will not
vote such person's Units. Failure to vote any Units on whether
to approve the Conversion will have the same effect as voting
against such proposal because its approval requires a majority of
the outstanding eligible Units to vote in its favor.
The Managing General Partner has admitted to USRP as Limited
Partners all assignees of Units as of ____________, 1997. As of
the Record Date, there were ________ Units held by Limited
Partners that were eligible to vote at the Special Meeting.
REQUIRED LEGAL OPINION
As required under the Partnership Agreements, before the
Special Meeting USRP will obtain an opinion from legal counsel
that the proposed amendments to the Partnership Agreements would
not cause: (i) the loss of limited liability of USRP under the
Operating Partnership's exiting partnership agreement or of the
Limited Partners under the existing Master Partnership Agreement,
and (ii)USRP or the Operating Partnership to be treated as an
association taxable as a corporation for federal income tax
purposes. The Managing General Partner has requested USRP's
legal counsel to render this opinion. Such legal counsel has
indicated that it will be able to render this opinion, subject to
certain qualifications that the Managing General Partner has
determined are reasonable. If for some reason such legal counsel
cannot render the contemplated opinion before the Special
Meeting, the Managing General Partner would adjourn the Special
Meeting to a later date or cancel it.
REQUIRED VOTE
As required under the Partnership Agreements, the
Managing General Partner has proposed the approval of the
Conversion and approved it in writing. For the Conversion to take
- 65 -
<PAGE>
effect, the Limited Partners must vote more than 50% of the total
number of outstanding Units eligible to be voted in favor of the
Conversion at the Special Meeting.
Limited Partners will possess one vote for each Unit
eligible to be voted that they hold. Limited Partners voting
against the Conversion will not possess any appraisal rights with
respect to their Units. See "The Conversion--No Dissenters'
Appraisal Rights."
ABSTENTIONS AND BROKER NON-VOTES
The Partnership Agreements provide that with respect to
Depositary Receipts that a person holds for the account of
another person, such as Depositary Receipts that a broker holds
for its client, the person holding the Depositary Receipts for
the account of the other person must vote the respective Units
pursuant to the instructions of the person on whose behalf it
holds them. Moreover, under the rules of the NYSE, brokers
holding Depositary Receipts on behalf of their clients may not
vote the respective Units on whether to approve the Conversion
without their clients' authorization. A broker therefore will
not vote any Units on whether to approve the Conversion without
receiving instructions on how to vote from such broker's client.
Accordingly, there will be no broker non-votes to consider at the
Special Meeting.
With respect to the Conversion, abstentions, as well as
broker non-votes, will have the same effect as a vote against
approval because more than 50% of the total number of outstanding
eligible Units must approve such proposal, rather than just a
majority of those eligible Units present at the Special Meeting.
PROXIES
Proxyholders will vote the eligible Units represented by
valid proxies at the Special Meeting in accordance with the
directions given on the proxy card concerning whether to approve
the Conversion. Moreover, the proxyholders intend to vote such
Units on any procedural matters coming before the Special Meeting
in accordance with their best judgment. Unless indicated to the
contrary thereon, the directions given on a Limited Partner's
Proxy Card will be for all of such Limited Partner's eligible
Units.
IF A LIMITED PARTNER SIGNS AND RETURNS A PROXY CARD WITHOUT
GIVING ANY DIRECTIONS ON HOW TO VOTE ON THE CONVERSION, THE
PROXYHOLDER WILL VOTE SUCH LIMITED PARTNER'S ELIGIBLE UNITS FOR
THE APPROVAL OF THE CONVERSION.
REVOCATION OF PROXIES
A Limited Partner may revoke its proxy at any time prior to
the proxyholder's voting of the Units to which such proxy applies
by: (i) submitting a later dated proxy to D.F. King & Company or
someone else who attends the Special Meeting, (ii) attending the
Special Meeting and delivering a written notice of revocation of
the proxy to the representative of D.F. King & Company present at the
Special Meeting, or (iii) delivering a written notice of revocation of the
- 66 -
<PAGE>
proxy to D.F. King & Company at the address set forth herein, which
D.F. King & Company receives on or before ____________, 1997.
PROXY SOLICITOR
The Partnership has retained D.F. King & Company to
distribute the attached letter from the Managing General Partner,
the attached notice of the Special Meeting, this Proxy
Statement/Prospectus and the Proxy Card and to collect completed
Proxy Cards. Pursuant to the requirements of the Partnership
Agreements, D.F. King & Company has mailed these documents to
each Limited Partner as of the Record Date. D.F. King & Company
has also distributed them to various banks, brokerage firms, and
other custodians, nominees and fiduciaries that may hold
Depositary Receipts or Units on behalf of someone else
(collectively, the "Nominee Holders"). The Partnership will pay
D.F. King & Company a fee of approximately $__________ for such
services and reimburse it for its out-of-pocket expenses. The
Partnership will also reimburse Nominee Holders for the
reasonable expenses that they incur when forwarding the attached
letter from the Managing General Partner, the attached notice of
the Special Meeting, this Proxy Statement and the Proxy Card to
the beneficial owners of the Units.
SOLICITATIONS BY THE MANAGING GENERAL PARTNER
The directors, officers and employees of the Managing
General Partner may solicit proxies in favor of the Conversion by
mail, personal interview, telephone, facsimile transmission or
other means. They will receive no additional compensation
therefor.
- 67 -
<PAGE>
<TABLE>
<CAPTION>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL
INFORMATION AND OTHER DATA
(DOLLARS AND UNITS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)
U.S. RESTAURANT
U.S. RESTAURANT PROPERTIES MASTER L.P. PROPERTIES, INC.
-------------------------------------- ----------------
YEARS ENDED DECEMBER 31,(1)
---------------------------
Pro Forma
1991 1992 1993 1994 1995 1995(2)
---- ---- ---- ---- ---- -------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Total revenues............. $ 8,750 $ 8,489 $ 8,332 $ 8,793 $ 9,780 $ 29,444
EXPENSES:
Rent................... 1,177 1,187 1,295 1,348 1,405 2,328
Depreciation and
amortization....... 1,499 1,473 1,383 1,361 1,541 7,567
Taxes, general and
administrative..... 1,062 1,097 1,008 1,144 1,419 1,465
Interest expense
(income), net...... 36 60 44 (4) 192 6,206
Provision for write
down or disposition
of properties...... 943 2,186 74 11 - -
---------- ---------- --------- ---------- --------- ----------
Total expenses......... 4,717 6,003 3,804 3,860 4,557 17,566
---------- ---------- --------- ---------- --------- ----------
Net income............. $ 4,033 $ 2,486 $ 4,528 $ 4,933 $ 5,223 $ 11,878
========== ========== ========= ========== ========= ==========
Net income allocable
to Unitholders..... $ 3,952 $ 2,436 $ 4,437 $ 4,834 $ 5,119 N/A
Weighted average
number of
Units/Shares
outstanding........ 4,635 4,635 4,635 4,635 4,638 8,354
Net income per Unit/Share $ 0.85 $ 0.53 $ 0.96 $ 1.04 $ 1.10 $ 1.42
Cash distributions
declared per
Unit applicable
to respective year $ 1.58 $ 1.54 $ 1.48(3) $ 1.61 $ 1.71 N/A
CASH FLOW DATA:
Cash flow from
operating activities $ 7,725 $ 7,366 $ 7,475 $ 6,990 $ 9,287 $ 20,872
Cash flow from
(used in) investing
activities......... $ - $ - $ 1,130 $ - $ (12,038) $ (124,505)
Cash flow from
(used in) financing
activities......... $ (7,732) $ (7,542) $ (8,302) $ (7,569) $ 2,077 $ 105,092
</TABLE>
- 68 -
<PAGE>
<TABLE>
<CAPTION>
U.S. Restaurant Properties U.S. Restaurant
Master L.P. Properties,Inc.
-------------------------------- ---------------
Nine Months Ended September 30,
-----------------------------------------------------
Pro Forma
1995(1) 1996(1) 1996(2)
------- ------- -------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
STATEMENT OF INCOME:
Total revenues........................................ $ 7,210 $ 13,012 $ 22,369
EXPENSES:
Rent .............................................. 1,022 1,446 1,798
Depreciation and amortization......................... 1,053 2,593 5,594
Taxes, general and administrative..................... 1,095 1,607 1,342
Interest expense (income), net........................ 47 1,592 4,310
------------- ------------ -----------
Total expenses........................................ 3,217 7,238 13,044
------------- ------------ -----------
Net income............................................ $ 3,993 $ 5,774 $ 9,325
============= ============ ===========
Net income allocable to Unitholders................... $ 3,914 $ 5,660 N/A
Weighted average number of Units/Shares outstanding... 4,633 5,830 8,354
Net income per Unit/Share............................. $ 0.84 $ 0.97 $ 1.11
Cash distributions declared per Unit applicable
to respective period.............................. $ 1.27 $ 1.35 N/A
CASH FLOW DATA:
Cash flow from operating activities................... $ 7,001 $ 10,461 $ 17,013
Cash flow from (used in)
investing activities.............................. $ (5,600) $ (67,399) $ (114,211)
Cash flow from (used in)
financing activities.............................. $ (1,962) $ 56,950 $ 103,015
</TABLE>
<TABLE>
<CAPTION>
U.S. Restaurant Properties Master L.P.
December 31,(1) September 30, 1996
-------------------------------------- ------------------
U.S. Restaurant
Properties, Inc.
1991 1992 1993 1994 1995 Historical(1) Pro Forma(2)
---- ---- ---- ---- ---- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net investment in direct financing leases $ 27,383 $ 24,760 $ 22,910 $ 21,237 $ 19,371 $ 17,631 $ 17,631
Land..................................... 24,388 23,816 23,414 23,414 27,493 41,435 67,751
Buildings and leasehold
improvements, net...................... 1,797 1,919 1,734 1,548 6,257 62,647 88,854
Equipment................................ - - - - 224 3,021 3,021
Intangibles, net......................... 18,920 17,123 15,503 14,317 14,804 13,992 23,416
Total assets............................. 74,170 69,087 65,322 62,889 71,484 143,858 205,679
Line of credit........................... - - - - 10,931 36,015 78,134
Mortgages................................ - - - - - - 3,946
Capitalized lease obligations............ 1,302 1,138 966 775 563 411 411
General partners' capital................ 1,527 1,429 1,357 1,308 1,241 1,197 -
Limited partners' capital................ 71,082 66,287 62,757 60,361 58,071 104,023 -
Stockholders' equity..................... - - - - - - 120,029
OTHER DATA:
Number of properties..................... 123 123 123 123 139 269 376
<FN>
- ---------------------------
- 69 -
<PAGE>
(1) The historical information for the years ended December 31,
1991, 1992, 1993, 1994, and 1995 was derived from USRP's
audited consolidated financial statements. The historical
information for the nine months ended September 30, 1995 and
1996 was derived from USRP's unaudited consolidated
financial statements. USRP's audited consolidated financial
statements as of December 31, 1994 and 1995 and for the
three years ended December 31, 1995, are included elsewhere
in this Proxy Statement/Prospectus. USRP's unaudited
consolidated financial statements as of September 30, 1995
and 1996 and for the nine months ended September 30, 1995
and 1996 are included elsewhere in this Proxy
Statement/Prospectus.
(2) The unaudited pro forma consolidated statement of income
information for the year ended December 31, 1995 and the
nine months ended September 30, 1996 is presented as if the
following had occurred as of January 1, 1995: (a) the
purchase of 200 properties for $116,533,000, including the
value of 439,003 Units valued at $8,897,000, completed since
December 31, 1994, (b) the purchase of 54 properties (16
properties of QSR Income Properties, Ltd. and 38 properties
from other sellers) that are currently under binding
contracts for $30,249,000, including the value of 530,622
Units valued at $15,388,000, (c) the additional long-term
debt of $82,080,000 required to purchase the properties
acquired and under contract, (d) the issuance of 1,800,000
Units in June 1996 for net proceeds of $40,203,000, and (e)
the Termination. The unaudited pro forma balance sheet data
as of September 30, 1996, represents USRP's September 30,
1996 balance sheet adjusted on a pro forma basis to reflect
as of September 30, 1996: (a) the purchase of 53 properties
for $31,769,000, (b) the purchase of 54 properties that are
currently under binding contracts for $30,249,000, including
the value of 530,622 Units valued at $15,388,000, (c) the
additional long-term debt of $46,065,000 required to
purchase the properties acquired and under contract and (d)
the Termination. The unaudited pro forma income statement
and balance sheet information is not necessarily indicative
of what the actual financial position of USRP would have
been at September 30, 1996 or what the actual results of
operations of USRP for the nine months ended September 30,
1996 or the year ended December 31, 1995 would have been had
all of these transactions occurred and such information does
not purport to represent the future financial position or
results of operations of USRP. See the pro forma balance
sheet and statements of income included elsewhere in this
Proxy Statement/Prospectus.
(3) Excludes special capital transaction distributions of $.24
per Unit.
</FN>
</TABLE>
- 70 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The Company derives its revenue from the leasing of the
Company's restaurant properties to operators on a "triple net"
basis, which is a lease that imposes on the tenant all
obligations for real property taxes and assessments, repairs and
maintenance and insurance. To the extent the landlord retains
any of these responsibilities, the lease becomes less than
"triple net."
The Company's leases provide for a base rent plus a
percentage of the restaurant's sales in excess of a threshold
amount. Total restaurant sales, the primary determinant of the
Company's revenues, are a function of the number of restaurants
in operation and their performance. 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.
Some of the leases of the Company's properties are treated
as direct financing leases, rather than operating leases, for
purposes of generally accepted accounting principles ("GAAP");
however, the leases do not grant the lessees thereunder the right
to acquire the properties at the expiration of such leases. As a
result, the lease is reflected as an asset on the Company's
balance sheet as net investment in direct financing leases, and
the underlying depreciable real property is not considered an
asset of the Partnership for GAAP purposes. Accordingly, the
related depreciation is not reflected on the Company's income
statement; instead, there is a charge for amortization of the
investment in direct financing leases. For tax accounting
purposes, however, the depreciable real property is treated as
being owned by the Company (and not a direct financing lease) and
the related charge for depreciation is reflected on the Company's
income statement. Primarily due to this treatment, GAAP revenue
and net income differ from gross rental receipts and net income,
as determined for tax purposes. The reconciliation between the
GAAP and tax treatment of these leases is described in Note 9 to
the Company's audited consolidated financial statements included
elsewhere in the Proxy Statement/Prospectus. Management believes
that all acquisitions made by USRP since December 31, 1995, as
well as all future acquisitions and related leases, will qualify
as operating leases according to GAAP and, therefore, were not
and will not be recorded as a net investment in direct financing
leases.
The following discussion should be read in conjunction with
"Selected Historical and Pro Forma Financial Information and
Other Data" and all of the financial statements and notes thereto
included elsewhere in this Prospectus/Proxy Statement.
- 71 -
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 TO NINE MONTHS
ENDED SEPTEMBER 30, 1995
The number of restaurants owned at September 30, 1996 was
269 compared to 129 at September 30, 1995, a 109% increase.
The Company's total revenues for the nine months ended
September 30, 1996 increased 80% over the nine months ended
September 30, 1995. Rental revenues from properties owned
throughout the nine-month periods ended September 30, 1996 and
September 30, 1995 increased 6% in 1996 over 1995. The remaining
increase in revenues for the nine months ended September 30, 1996
over the comparable period in 1995 was attributable to the 140
properties acquired on various dates during the 12 months ended
September 30, 1996.
Expenses for the nine months ended September 30, 1996
increased 125% to $7,238,000 compared to $3,217,000 for the
comparable period in 1995. This increase in expenses was
primarily due to the increase in the number of restaurant
properties owned by the Company and the related financing costs.
Ground rent expense for the nine months ended September 30,
1996 increased 41% to $1,446,000, compared to $1,022,000 for the
comparable period in 1995. The increase in expense was due to
the addition of 18 new ground leases relating to the acquisitions
made in the first three quarters of 1996 and nominal rental
escalations on existing ground leases. Depreciation and
amortization increased 146% for the nine months ended
September 30, 1996, to $2,593,000 compared to $1,053,000 for the
comparable period in 1995. This was primarily due to the
increase in the number of restaurant properties owned by the
Company.
Taxes and general and administrative expenses increased 47%
for the nine months ended September 30, 1996 to $1,607,000,
compared to $1,095,000 for the comparable period in 1995. This
increase was due to increased professional fees, consulting fees
and other various general and administrative expenses that relate
directly to the increased activity of the Company.
Interest expense, net increased to $1,592,000 for the nine
months ended September 30, 1996 compared to $47,000 for the
comparable period in 1995. This increase is primarily due to
financing of acquisitions.
Net income allocable to Unitholders for the nine months
ended September 30, 1996 was $5,660,000 or $0.97 per Unit, up 15%
or $0.13 per Unit from $3,914,000 or $0.84 per Unit for the
comparable period in 1995. This was attributable to the increase
in total revenues and management's ability to limit expenses.
- 72 -
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED
DECEMBER 31, 1994
The number of restaurants owned at December 31, 1995 was 139
compared to 123 at December 31, 1994, a 13% increase. Total
sales in restaurants located on Company real estate in 1995 were
$135,297,000 compared to $122,315,000 reported in 1994, a 10.6%
increase, which was attributable to the increase in the number of
restaurants in the portfolio and to an increase in the average
sales per store.
The Company's total revenues in 1995 increased 11.2% to
$9,780,000 compared to $8,793,000 recorded in 1994. Rental
revenues from properties owned throughout 1994 and 1995 increased
6.4% in 1995 over 1994. The remaining increase in revenues in
1995 over 1994 was attributable to the 16 properties acquired on
various dates during the last half of 1995.
Expenses for 1995 increased 18% to $4,557,000 compared to
$3,860,000 for 1994 (including a write down of $11,000 in 1994
which was related to one closed property). This increase in
expenses was primarily due to the increase in the number of
restaurant properties owned by the Company and related financing
costs.
Ground rent expense in 1995 increased 4.3% to $1,405,000,
compared to $1,348,000 for 1994. The increase in expense was due
to the addition of six new ground leases relating to the 1995
acquisitions and nominal rent escalations on existing ground
leases. Depreciation and amortization increased 13.2% in 1995 to
$1,541,000 compared to $1,361,000 for 1994. This was primarily
due to the increase in the number of restaurant properties owned
by the Company.
Taxes and general and administrative expenses increased 24%
in 1995 to $1,419,000, compared to $1,144,000 for 1994. This
increase was due to increased professional fees, consulting fees
and other various general administration expenses that relate
directly to the increased activity of the Company.
Interest expense (income), net increased to $192,000
compared to ($4,000) for 1994. This increase is primarily due to
the financing of acquisitions.
There were no write downs of assets and intangible values
related to closed properties during 1995, as compared to write
downs for 1994 of $11,000. Write downs are not a normal part of
the Company's business. However, store closings do occur
periodically in retail businesses, including the Company's.
Management does not believe that there is an established trend in
its business with respect to store closings because virtually all
of the restaurant properties are currently performing on their
leases and are not in default.
Net income allocable to Unitholders in 1995 was $5,119,000
or $1.10 per Unit, up 5.8% or $0.06 per Unit from $4,834,000 or
$1.04 per Unit in 1994. This was attributable to the increase in
total revenues and management's ability to limit expenses.
- 73 -
<PAGE>
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED
DECEMBER 31, 1993
The number of restaurants owned at December 31, 1994 and
1993 was 123. Total sales in restaurants located on Company real
estate in 1994 were $122,315,000 compared to $112,880,000
reported in 1993, an 8.4% increase, which was attributable to an
increase in the average sales per store.
The Company's total revenues in 1994 increased 5.5% to
$8,793,000 compared to $8,332,000 recorded in 1993. The Company
owned and leased 123 sites throughout 1993 and 1994.
Expenses excluding the provision for write down of
properties for 1994 increased 3.2% to $3,849,000 compared to
$3,730,000 for 1993. Write downs of assets and intangible values
related to closed properties during 1994 were $11,000 as compared
to write downs for 1993 of $74,000. Write downs are not a normal
part of the Company's business.
Net income allocable to Unitholders in 1994 was $4,834,000
or $1.04 per Unit, up 8.3% from $4,437,000 or $0.96 per Unit in
1993. This was attributable to increased total revenues while
expenses remained relatively constant.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash
requirements is rental revenues generated by the Company's
properties. Cash generated by the portfolio in excess of
operating needs is used to reduce amounts outstanding under the
Company's credit agreements. As a result, amounts are drawn
under the Company's credit agreements to cover payment of
quarterly distributions. Currently, the Company's primary source
of funding for acquisitions is its existing revolving line of
credit. The Company anticipates meeting its future long-term
capital needs through the incurrence of additional debt or the
issuance of additional equity, along with cash generated from
internal operations.
As of December 31, 1996, the Company had approximately $30
million outstanding under its $95 million line of credit with a
syndicate of banks (excluding $500,000 subject to letters of
credit). This line of credit is secured by the Company's real
estate including its leasehold interests. The Company may
request advances under this line of credit to finance the
acquisition of restaurant properties, to repair and update
restaurant properties and for working capital. The banks will
also issue standby letters of credit for the account of the
Company under this loan facility. This credit agreement expires
on June 27, 1998 and provides that borrowings thereunder bear
interest at 180 basis points over the London Interbank Offered
Rate (LIBOR). Interest expense for 1995 was $199,000 and
$1,592,000 for the nine months ended September 30, 1996.
The Company paid distributions in 1995 of $1.69 per Unit, which
represented 95% of cash flow from operations based upon taxable income.
The Company paid distributions for the first three quarters of 1996 of
$1.435 per Unit. The Company has historically distributed from
- 74 -
<PAGE>
75% to 95% of the estimated cash generated from operations within the
general objective of continued annual growth in the distributions. In
order to qualify as a REIT, the REIT Corporation must make annual
distributions to stockholders of at least 95% of its REIT taxable
income. Future distributions by the REIT Corporation will be at
the discretion of the REIT Board and will depend on actual
results of operations, the financial condition of the Company,
capital requirements or other factors management deems relevant.
During 1995 and the nine months ended September 30, 1996, the
Company distributed an aggregate of $8,002,000 and $7,981,000,
respectively, to its partners. See "Price Range of Units and
Distribution Policy."
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 also require the restaurant operators
to pay for some or all operating expenses, property taxes,
property repair and maintenance costs and insurance, 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.
- 75 -
<PAGE>
BUSINESS
GENERAL
The Company acquires, owns and manages income-producing
properties that it leases on a triple net basis to operators of
fast food and casual dining restaurants, primarily Burger King
(the second largest restaurant chain in the United States in
terms of system wide sales), and other national and regional
brands including CHILI'S, DAIRY QUEEN, GRANDY'S, HARDEE'S, KFC,
PIZZA HUT, SCHLOTZSKY'S and TACO BELL. The Company acquires
properties either from third party lessors or from operators on a
sale/leaseback basis. Under a triple net lease, the tenant is
obligated to pay all costs and expenses, including all real
property taxes and assessments, repairs and maintenance and
insurance. Triple net leases do not require substantial
reinvestments by the property owner, and as a result more cash
from operations may be used for acquisitions and distributions to
the Company's stockholders and partners, if any.
The Company is one of the largest publicly owned entities in
the United States dedicated to acquiring, owning and managing
restaurant properties. At December 31, 1996, the Company's
portfolio consisted of 322 restaurant properties in 44 states,
approximately 99% of which were leased. From the Company's
initial public offering in 1986 until March 31, 1995, the
Company's portfolio was limited to approximately 125 restaurant
properties, all of which were leased on a triple net basis to
operators of Burger King restaurants. In May 1994, an investor
group led by Robert J. Stetson and Fred H. Margolin acquired the
Managing General Partner. In March 1995, the Managing General
Partner proposed and the Limited Partners adopted certain
amendments to the Partnership Agreements that authorized the
Company to acquire additional properties not affiliated with BKC.
Since adoption of the amendments, the Company has acquired
200 properties for an aggregate purchase price of approximately
$117 million, which includes the value of 439,003 Units. In
addition, the Company has entered into binding contracts to
acquire 54 additional restaurant properties (the "Acquisition
Properties") for an aggregate purchase price of approximately $30
million, which includes the value of 530,622 Units. Upon
acquisition of the Acquisition Properties, the Company's
portfolio will consist of an aggregate of 376 properties in 44
states consisting of 173 Burger King restaurants, eight CHILI'S
restaurants, 40 DAIRY QUEEN restaurants, 30 GRANDY'S restaurants,
28 HARDEE'S restaurants, three KFC restaurants, 18 PIZZA HUT
restaurants, 10 SCHLOTZSKY'S restaurants, two TACO BELL
restaurants and 64 other restaurants, most of which are regional
brands.
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. Total food service
industry sales during 1995 have been estimated at approximately
$277 billion. The fast food segment, which offers value
- 76 -
<PAGE>
pricing and convenience, is the largest segment in the restaurant
industry with projected 1996 sales of over $100 billion. In 1995,
industry sources estimate that fast food restaurants accounted
for 71% of total restaurant traffic, 52% of chain restaurant
locations and 47% of consumers' restaurant dollars spent.
The growth of the fast food segment has exceeded that of the
entire restaurant industry for over 20 years. According to
industry sources, fast food restaurant sales have grown at a 6.9%
compound annual growth rate with 1995 sales up 7.1% over 1994
levels. Fast food restaurant sales are anticipated to have grown
6.7% in 1996 to over $100 billion.
Industry sources suggest that, in the fast food industry,
operators are increasingly 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.
Management believes, based on its industry knowledge and
experience, that the Company 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.
Management 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.
In addition to the Company's large number of leases to
operators of Burger King restaurants, the Company also leases
more than 100 restaurant properties to operators of DAIRY QUEEN,
HARDEE'S, GRANDY'S and PIZZA HUT. Based on publicly-available
information, Burger King is the second largest fast food
restaurant system in the world in terms of system wide sales.
According to publicly-available information, there are
approximately 6,500 Burger King restaurant units in the United
States.
INVESTMENT CRITERIA
Since the previously approved amendments to the Partnership
Agreements, the Company has acquired 200 restaurant properties.
The Company intends to continue acquiring properties, including
closing the acquisition of the Acquisition Properties currently
under binding contracts. The Company will target the acquisition
of properties of national and regional fast food or casual dining
restaurant chains, which may include Burger King, that satisfy
some or all of the following criteria:
- 77 -
<PAGE>
- The rent on such properties has produced cash flow that
after deducting management fees, interest and debt
amortization, or equity issuance, would improve USRP's
existing cash flow per Unit.
- The restaurants' annual sales would be in the highest
70% of the restaurants in that chain.
- The restaurants would have historically generated at
least the normal profit for restaurants in that chain
and be projected to continue to generate a profit even
if sales decreased by 10%.
- The properties would be located where the average per
capita income was stable or increasing.
- The restaurants' franchisees would possess significant
net worth and preferably operate multiple restaurants.
- The properties would be in good repair and operating
condition.
Management receives acquisition proposals from a number of
sources. Management utilizes seven independent real estate
professionals who assist the Company in examining and analyzing
proposed acquisitions. These professionals are compensated
principally upon the Company's closing of an acquisition of
property. There can be no assurance that management will be able
to identify properties that satisfy all or a significant number
of the above criteria or that, if identified, the Company will be
able to purchase such restaurant properties.
The Company believes that it can generate improved operating
results as a result of the acquisition of additional properties
and by making loans to tenants for the renovation and improvement
of its properties. The Company also believes that expansion and
diversification of its property portfolio to include more balance
among restaurant brands will decrease its dependence on one
chain.
PROPERTIES
The Company currently has 322 restaurant properties.
Approximately 99% of these properties are leased on a triple net
basis to operators of fast food and casual dining restaurants,
primarily Burger King and other national and regional brands,
including CHILI'S, DAIRY QUEEN, GRANDY'S, HARDEE'S, KFC, PIZZA
HUT, SCHLOTZSKY'S and TACO BELL. In addition, the Company has
entered into binding contracts to acquire an additional 54
restaurant properties. Set forth below are summary descriptions
of the restaurant properties leased to the operators of various
fast food and casual dining restaurants.
BURGER KING. The Company currently owns 173 properties
operated as Burger King restaurants. These Burger King
restaurant properties are operated by more than 70 operators.
- 78 -
<PAGE>
CHILI'S. The Company currently owns eight properties
operated as CHILI'S restaurants. These CHILI'S restaurant
properties are operated by two operators.
DAIRY QUEEN. The Company currently owns 40 properties
operated as DAIRY QUEEN restaurants. These DAIRY QUEEN
restaurant properties are operated by two operators, the largest
of whom operates 37 DAIRY QUEEN restaurants.
GRANDY'S. The Company currently owns 30 properties operated
as GRANDY'S restaurants. These GRANDY'S restaurant properties
are operated by one operator.
HARDEE'S. The Company currently owns 26 properties operated
as HARDEE'S restaurants. These HARDEE'S restaurant properties
are operated by two operators, the larger of whom operates 24
HARDEE'S restaurants. In addition, the Company has entered into
a binding contract to acquire two properties operated as HARDEE'S
restaurants.
KFC. The Company currently owns two properties operated as
KFC restaurants. These KFC restaurant properties are operated by
one operator. In addition, the Company has entered into a
binding contract to acquire one property operated as a KFC
restaurant.
PIZZA HUT. The Company currently owns 12 properties
operated as PIZZA HUT restaurants. These PIZZA HUT restaurant
properties are operated by one operator. In addition, the
Company has entered into binding contracts to acquire six
properties operated as PIZZA HUT restaurants.
SCHLOTZSKY'S. The Company currently owns six properties
operated as Schlotzsky's restaurants. These SCHLOTZSKY'S
restaurant properties are operated by two operators. In
addition, the Company has entered into binding contracts to
acquire four properties operated as SCHLOTZSKY'S restaurants.
TACO BELL. The Company currently owns one property operated
as a TACO BELL restaurant. In addition, the Company has entered
into a binding contract to acquire one property operated as a
TACO BELL restaurant.
OTHER PROPERTIES. The Company currently owns an additional
24 restaurant properties, most of which are operated by
franchisees of regional brand names. In addition, the Company
has entered into binding contracts to acquire an additional 40
restaurant properties operated by franchisees of regional brand
names. From time to time, the Company may acquire restaurant
properties operated by franchisees of brand names of less
established national and regional franchisers. The Company,
however, does not intend to acquire a significant number of such
properties.
- 79 -
<PAGE>
The Company currently owns 322 properties and has entered
into binding contracts to acquire an additional 54 restaurant
properties. The table below sets forth the aggregate number of
properties owned and under contract in each state and the
franchise affiliation of such properties.
<TABLE>
<CAPTION>
Burger Dairy Pizza Taco Total
State King Chili's Queen Grandy's Hardee's KFC Hut Schlotzsky's Bell Other Properties
- ----- ------ ------- ----- -------- -------- --- --- ------------ ---- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama............. 1 1 1 3
Arizona............. 6 1 7
Arkansas............ 13 1 1 15
California.......... 16 1 17
Colorado............ 3 2 5
Connecticut......... 3 3
Delaware............ 1 1
Florida............. 6 6 12
Georgia............. 7 23 1 31
Idaho............... 1 1
Illinois............ 1 1 1 1 5 9
Indiana............. 2 1 1 7 11
Iowa................ 2 3 5
Kansas.............. 2 2
Kentucky............ 3 3
Louisiana........... 2 2
Maine............... 4 4
Maryland............ 2 1 3
Massachusetts....... 3 3
Michigan............ 4 1 5
Minnesota........... 1 2 7 10
Mississippi......... 2 2
Missouri............ 3 1 3 7
Montana............. 1 1
Nebraska............ 1 1 2
Nevada.............. 1 1
New Jersey.......... 5 5
New Mexico.......... 1 1 1 3
New York............ 5 5 10
North Carolina...... 9 4 4 17
Ohio................ 9 9
Oklahoma............ 3 7 1 1 12
Oregon.............. 5 5
Pennsylvania........ 13 1 14
South Carolina...... 7 2 1 10
Tennessee........... 3 2 5
Texas............... 10 2 40 22 2 2 3 1 18 100
Utah................ 1 1
Vermont............. 1 1 2
Virginia............ 1 1
Washington.......... 7 7
West Virginia....... 2 1 3
Wisconsin........... 5 1 6
Wyoming............. 1 1
--- --- --- --- --- --- --- --- --- --- ----
Total............... 173 8 40 30 28 3 18 10 2 64 376
=== === === === === === === === === === ====
Percentage.......... 46% 2% 8% 11% 7% 1% 5% 3% 1% 17% 100%
=== === === === === === === === === === ====
</TABLE>
LEASES WITH RESTAURANT OPERATORS
The Company's strategy is to acquire operating properties
rather than developing new 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. Management believes, based on its experience, that
this strategy reduces the Company's financial risk because the
restaurant operated on such property has a proven operating
- 80 -
<PAGE>
record that mitigates the risk of default or non-renewal under
the lease. The Company's current properties have remaining lease
terms ranging from one to 29 years.
Substantially all of the Company's existing leases are
"triple net," which means that the tenant is obligated to pay all
costs and expenses, including all real property taxes and
assessments, repairs and maintenance and insurance. The Company's
leases provide 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 year ended December 31, 1995, base rental
revenues and percentage rental revenues represented 66% and 34%,
respectively, of total gross rental revenues. Management intends
to renew and restructure leases to increase the percentage of
total rental revenues derived from base rental revenues and
decrease the percentage of total revenues from percentage rental
revenues. In addition, to encourage the early renewal of existing
leases the Company has offered certain lessees remodeling
financing. To date, the Company has renewed 38 leases early
under this program. Management considers the grants to be prudent
given the increased sales resulting at the remodeled restaurants
and the lower costs incurred because of the early lease renewals.
The Company generally acquires properties from third party
lessors or from operators in a sale/leaseback transaction in
which the operator sells the property to the Company and enters
into a long-term lease (typically 20 years). 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 Company's
current properties and properties under binding contracts.
<TABLE>
<CAPTION>
LEASE EXPIRATION SCHEDULE
Number of Leases Net Rental
Year Expiring % of Total Income (1) % of Total
- ---- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997........................................... 5 1 $ 252 2
1998........................................... 9 3 512 3
1999........................................... 27 7 1,649 8
2000........................................... 34 9 1,807 9
2001-05........................................ 105 28 6,588 33
2006-10........................................ 23 6 981 5
2011-15........................................ 33 9 1,283 6
2016-25........................................ 140 37 6,779 34
----- ----- -------- -----
376 100% $ 19,851 100%
===== ===== ======== =====
<FN>
________________________
(1) Net rental income equals the greater of 1995 rentals (including any
percentage rents based upon sales in 1995) or the base rent in the last
year of the lease, less any ground rents payable in the last year of the
lease.
</FN>
</TABLE>
- 81 -
<PAGE>
OWNERSHIP OF REAL ESTATE INTERESTS
Of the 376 restaurant properties that the Company currently
owns or has under contract, the Company owns or will own both the
land and the restaurant building in fee simple on 266 of such
properties (the "Fee Properties"), the Company owns or will own
the land and the tenant owns or will own the building on 31 of
such properties and the Company leases or will lease the land,
the building or both from a third-party lessor on 79 of such
properties (the "Leasehold Properties").
Of the 79 Leasehold Properties, 14 are properties on which
the Company leases or will lease from a third party both the
underlying land and the restaurant building and the other
improvements thereon (the "Primary Leases") and then sublease the
property to the restaurant operator. Under the terms of the
remaining 65 Leasehold Properties (the "Ground Leases"), the
Company leases or will lease the underlying land from a third
party and owns or will own the restaurant building and the other
improvements constructed thereon. In any event, 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. Each Primary Lease and each
Ground Lease, 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 assign or sublet all of
its rights and interests thereunder without obtaining the
landlord's consent, the Company is not permitted to assign or
sublet any of its rights or interests under 22 Primary Leases and
Ground Leases without obtaining the landlord'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 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.
- 82 -
<PAGE>
The Company leases or subleases (or will lease or sublease)
158 of its 322 existing restaurant properties to a BKC franchisee
under a lease/sublease, pursuant to which the franchisee is
required to operate a Burger King restaurant thereon in
accordance with the lessee's franchise agreement and to make no
other use thereof. Upon its acquisition of such properties, the
Company assumed the rights and obligations of BKC under the
leases/subleases.
Although the provisions of BKC's standard form of lease to
franchisees have changed over time, the material provisions of
the leases/subleases generally are substantially similar to BKC's
current standard form of lease (except to the extent that BKC has
granted rent reductions or deferrals or made other lease
modifications to alleviate or lessen the impact of business or
other economic problems that a franchisee may have encountered).
The leases/subleases generally provide for a term of 20 years
from the date of the opening of the restaurant and do not grant
the lessee any renewal or purchase options. The Company, however,
is required under the Partnership Agreements to renew a
lease/sublease if BKC renews or extends the lessee's franchisee
agreement. The Company believes that BKC's policy generally is to
renew a franchise agreement if BKC determines that economic and
other factors justify renewal or extension and the franchisee has
complied with all obligations under the franchise agreement. The
remaining terms of all the leases/subleases currently range from
one to 29 years, with the average remaining term being nine
years.
USE AND OTHER RESTRICTIONS ON THE OPERATION AND TRANSFER OF
BURGER KING RESTAURANT PROPERTIES
The Company was originally formed for the purpose of
acquiring all of BKC's interests in the original portfolio and
leasing or subleasing them to BKC franchisees under the
leases/subleases. Accordingly, the Partnership Agreements contain
provisions that state, except as expressly permitted by BKC, that
the Company may not use such properties for any purpose other
than to operate a Burger King restaurant. In furtherance thereof,
the Partnership Agreements: (i) require the Company, in certain
specified circumstances, to renew or extend a lease/sublease and
enter into a new lease with another franchisee of BKC, to approve
an assignment of a lease/sublease, to permit BKC to assume a
lease/sublease at any time and to renew a Primary Lease, and
(ii) impose certain restrictions and limitations upon the
Company's ability to sell, lease or otherwise transfer any
interest in such properties. The Partnership Agreements require
the Company to provide BKC notice of default under a
lease/sublease and an opportunity to cure such default prior to
taking any remedial action. The Partnership Agreements also
require the Company under certain circumstances to provide
tenants with assistance with remodeling costs. Such terms with
respect to such properties imposed on the Company by the
Partnership Agreements may be less favorable than those imposed
upon other lessors of Burger King restaurants. BKC has advised
the Company that it intends to waive or not impose certain of the
restrictive provisions contained in the Partnership Agreements
and the Company is discussing BKC's position with BKC to clarify
such provisions.
- 83 -
<PAGE>
RESTAURANT ALTERATIONS AND RECONSTRUCTION
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 38 leases/subleases.
COMPETITION
The restaurants operated on the properties are subject to
significant competition, including competition from other
national and regional fast food restaurant chains, including
other Burger King restaurants, local restaurants, 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 anticipate that it will seek to engage directly
in or meet such competition. Instead, the Company will depend
upon the experience and ability of the lessees operating the
restaurants located on the properties and the particular
franchise system generally to compete with these other
restaurants and similar operations. The Company believes that the
ability of its lessees to compete is affected by their compliance
with the image requirements at their restaurants.
Management believes, based on its industry knowledge and
experience, that the Company will compete with numerous other
publicly-owned entities, some of which dedicate substantially all
of their assets and efforts to acquiring and managing properties
operated as fast food or casual dining restaurants. In addition,
the Company will compete with numerous private firms and
individuals for the acquisition of restaurant properties. Such
investors may have greater financial resources than the Company.
- 84 -
<PAGE>
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.
ENVIRONMENTAL REGULATION. Under various federal, state and
local laws, ordinances and regulations, an owner or operator of
real property may become liable for the costs of removal or
remediation of certain hazardous substances released on or within
its property. Such liability may be imposed without regard to
whether the owner or operator knew of, or caused the release of,
the hazardous substances. In addition to liability for cleanup
costs, the presence of hazardous substances on a property could
result in the owner or operator incurring liability as a result
of a claim by an employee or another person for personal injury
or a claim by an adjacent property owner for property damage.
In connection with the Company's acquisition of a new
property, a Phase I environmental assessment is obtained. 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. If the results of a Phase I environmental
assessment reveal potential issues, a Phase II assessment, which
may include soil testing, ground water monitoring, or borings to
locate underground storage tanks, is ordered for further
evaluation. Depending upon the results of such assessment, the
transaction is either consummated or terminated.
The Company is not currently a party to any litigation or
administrative proceeding with respect to any property's
compliance with environmental standards. Furthermore, the Company
is unaware of, and does not anticipate, any such action, or the
need to expend any of its funds in the foreseeable future in
connection with its operations or ownership of existing
properties that would have a material adverse effect upon the
Company. See "Risk Factors--Real Estate Investment Risks."
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
- 85 -
<PAGE>
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.
INSURANCE
The Company requires its lessees to maintain adequate
comprehensive liability, fire, flood and extended loss insurance
provided by reputable companies with commercially reasonable and
customary deductibles. The Company also requires that it be named
as an additional insured under such policies. Certain types and
amounts of insurance are required to be carried by each
restaurant operator under the leases with the Company, and the
Company actively monitors tenant compliance with this
requirement. The Company intends to require lessees of
subsequently acquired properties to obtain similar insurance
coverage. There are, however, certain types of losses generally
of a catastrophic nature, such as earthquakes and floods, that
may be either uninsurable or not economically insurable, as to
which the Company's properties are at risk depending on whether
such events occur with any frequency in such areas. An uninsured
loss could result in a loss to the Company of both its capital
investment and anticipated profits from the affected property. 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 using insurance proceeds to replace a facility
after it has been damaged or destroyed infeasible. Under such
circumstances, the insurance proceeds received by the Company
might be inadequate to restore its economic position with respect
to such property.
EMPLOYEES
The Company currently employs 16 individuals on either a
full or part-time basis. In addition, the Company retains, on an
independent contract basis, other parties in connection with the
operation of the Company and its properties, including auditing,
legal, property origination and other services.
- 86 -
<PAGE>
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 current
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 management and may be amended or revised from time to time at
the discretion of the REIT Board without a vote of the
stockholders of the REIT Corporation. No assurance can be given
that the Company's investment objectives will be attained or that
the value of the Company will not decrease. As the sole general
partner of the Operating Partnership, the REIT Corporation will
also determine the investment policies of the Operating
Partnership.
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE. The
Company's primary business objective is to maximize stockholder
value by maintaining long-term growth in cash available for
distribution to its stockholders. The Company intends to pursue
this objective by continuing to acquire triple net leased
properties and structuring sale/leaseback transactions consistent
with its strategies prior to the Conversion. The Company's
policy is to acquire or develop assets where the Company believes
that opportunities exist for acceptable investment returns. See
"The Company--Strategy."
The Company expects to pursue its investment objectives
primarily through the direct ownership of properties. The
Company intends to invest in or develop restaurant properties.
As part of its strategy of expanding its restaurant property
portfolio, the Company intends to build-out properties in
conjunction with other food vendors, such as convenience stores,
and retail outlets. All of the Company's properties will be
managed directly by 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
its 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 REIT 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
- 87 -
<PAGE>
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
percentage of ownership limitations 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--Taxation of the REIT Corporation as a
REIT."
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
As a general policy, the Company intends to maintain a ratio
of total indebtedness of 50% or less to the greater of total
market capitalization (i.e., the market value of issued and
outstanding shares of capital stock plus total consolidated debt)
or the original cost of all of the Company's properties as of the
date of such calculation. However, no assurance can be given
that the Company will be able to accomplish this objective. The
debt ratio may be based from time to time upon the stock market
value of equity, and accordingly may fluctuate with changes in
the price of the shares.
On a pro forma basis at September 30, 1996, the Company had
a ratio of debt-to-total market capitalization of 23%. See
"Capitalization." Assuming no change in market value of issued
and outstanding shares of Common Stock, the Company would be able
to incur approximately $180 million of additional indebtedness
and still maintain a ratio of debt-to-total market capitalization
of less than 50%. The Company, however, may from time to time
reevaluate its debt policy in light of current economic
conditions, relative costs of debt and equity capital, changes in
the market capitalization of the Company, acquisition
opportunities and other factors, and may modify its debt
financing policy and may increase or decrease its debt ratio
without a vote of its stockholders. Neither the Articles nor the
REIT Corporation's Bylaws contain any limitations on the amount
or percentage of indebtedness the Company may incur.
Indebtedness incurred by the Company may be in the form of
bank borrowings, purchase money obligations to the sellers of
properties, publicly or privately placed debt instruments or
financing from institutional investors or other lenders, any of
which indebtedness may be unsecured or may be secured by
mortgages or other interests in properties owned by the Company.
The recourse of the holders of such indebtedness may be to all or any part
of the properties of the Company or may be limited to the particular
property to which the indebtedness relates. Subject to any contractual
restrictions, the proceeds from any borrowings by the
- 88 -
<PAGE>
Company may be used for the payment of
dividends, for working capital, to refinance existing
indebtedness or to finance acquisitions of new properties.
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 REIT Board determines to raise
additional equity capital, the REIT 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 the Maryland
General Corporation Law (the "MGCL"). 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. See "Description of
Capital Stock."
If the REIT 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 interests
in the Operating Partnership that have been tendered to the
Operating Partnership for redemption.
The REIT Board also has the authority to cause the Operating
Partnership to issue additional partnership interests in any
manner (and on such terms and for such consideration) as it deems
appropriate, including in exchange for property. Any such
partnership interests will be redeemable at the option of the
holder, which redemption the Company intends to cause to be made
in Common Stock pursuant to the redemption rights.
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 foregoing
persons. Currently, the Master Partnership Agreement does not
restrict the ability of the Managing General Partner or its
principles from owning and/or operating restaurants on Company
properties or elsewhere.
- 89 -
<PAGE>
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 REIT 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 REIT Board
without the vote of the stockholders.
- 90 -
<PAGE>
PRICE RANGE OF UNITS AND DISTRIBUTION POLICY
The Units are listed for trading on the NYSE under the
ticker symbol "USV." As of February 3, 1997, there were
6,894,083 Units outstanding and the record number of Unitholders
was 1,809. Set forth below are the high and low sale prices for
the Units as reported by the NYSE for the indicated periods.
<TABLE>
<CAPTION>
1994 High Low Distribution
---- ---- --- ------------
<S> <C> <C> <C>
1st quarter.......................................... $ 16 3/4 $ 15 7/8 $ .39
2nd quarter.......................................... 17 1/4 15 3/8 .39
3rd quarter.......................................... 17 1/2 16 3/4 .41
4th quarter ......................................... 17 3/8 13 .42
-------
$ 1.61
=======
<CAPTION>
1995 High Low Distribution
---- ---- --- ------------
1st quarter.......................................... $ 16 1/2 $ 14 1/4 $ .42
2nd quarter.......................................... 17 1/8 15 3/4 .42
3rd quarter.......................................... 18 7/8 16 3/4 .43
4th quarter.......................................... 20 1/4 18 .44
-------
$ 1.71
=======
<CAPTION>
1996 High Low Distribution
---- ---- --- ------------
1st quarter.......................................... $ 23 3/8 $ 19 1/2 $ .47
2nd quarter.......................................... 25 21 1/8 .48
3rd quarter.......................................... 25 3/8 21 1/2 .485
4th quarter ......................................... 28 1/4 22 5/8 .50
-------
$ 1.935
=======
<CAPTION>
1997 High Low Distribution
---- ---- --- ------------
1st quarter (through February 3, 1997)............... $ 30 3/8 $ 27 1/8 $ -
</TABLE>
In July 1995, USRP announced its intention to repurchase up
to 300,000 units. At that time, management believed that the
repurchase of the Units represented a good investment value for
USRP and the Unitholders. Through September 30, 1996, USRP had
purchased 30,000 Units. No further purchases have been made or
are currently contemplated because management currently believes
that a better investment value for the Company and the
Unitholders is the acquisition of additional restaurant
properties.
- 91 -
<PAGE>
The Company intends to maximize the cash available for
distributions and enhance stockholder value by acquiring or
developing additional restaurant properties that meet its
investment criteria. See "The Company--Strategy." In
connection therewith, the Company intends to make regularly
quarterly distributions to its stockholders. Currently, on an
annualized basis, the distributions made by the Company to its
Unitholders is $2.00 per Unit. The Company has historically
distributed from 75% to 95% of its estimated cash available for
distribution. In order to qualify to be taxed as a REIT, the
REIT Corporation must make annual distributions to stockholders
of at least 95% of its REIT taxable income (determined by
excluding any net capital gain). Under certain circumstances,
the REIT Corporation may be required to make distributions in
excess of cash available for distribution in order to meet such
distribution requirements. In such a case, the REIT Corporation
may find it necessary to arrange for short-term (or possibly
long-term) borrowings or to raise funds through the issuance of
preferred stock or additional Common Stock.
Future distributions by the REIT Corporation will be at the
discretion of the REIT Board and will depend on the actual
results of operation of the REIT Corporation, its financial
condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Code and such other
factors as the REIT Board deems relevant.
The Company may in the future implement a dividend
reinvestment program under which the stockholders may elect
automatically to reinvest distributions in shares of Common
Stock. The Company may from time to time repurchase shares of
Common Stock in the open market for the purpose of fulfilling its
obligations under the program, if adopted, or may elect to issue
additional shares of Common Stock.
-92 -
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of USRP as
of September 30, 1996, and as adjusted to reflect (i) the
purchase of 53 properties for $31,769,000 completed since
September 30, 1996, (ii) the purchase of 16 properties from QSR
Income Properties, Ltd. ("QSR") for 272,353 Units (at $29 per
Unit), (iii) the purchase of 38 properties from other sellers
that are currently under binding contracts for $22,354,000,
including the value of 258,269 Units of $7,490,000, (v) the
additional borrowings of $46,065,000 required to purchase the
properties acquired and under contract, and (vi) the Managing
General Partner's assignment of its Property Management Contract
to the Operating Partnership or USRP (depending upon how the
Conversion is effected) and converting its aggregate 1.98%
partnership interest in the Partnerships (the "Partnership
Interests") into 850,000 shares of Common Stock or its equivalent
in a limited partner interest in the Operating Partnership or
Units (depending upon how the Conversion is effected) with the
common stock valued at the current market price ($29 per share)
and the related cost of this transaction aggregating $580,000 as
if such transactions had occurred on such date. 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 Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
Company on a Pro
Forma Basis
USRP Actual as Adjusted
----------- ----------------
Unaudited
(in thousands, except
Unit and Share data)
<S> <C> <C>
Line of Credit............................................... $ 36,015 $ 78,134
Mortgages.................................................... 3,946
Obligations under capitalized lease.......................... 411 411
--------- ---------
36,426 82,491
Equity of General Partners and Unitholders:
Interest of Managing General Partner...................... 1,197
Interest of Unitholders:
6,844,003 Units issued and outstanding................. 104,023
Shares of capital stock, par value $.001 per share; authorized;
10,000,000 shares of Preferred Stock, 45,000,000 shares
of Common Stock, and 5,000,000 shares of Excess
Stock; issued and outstanding: 8,354,000 shares
of Common Stock on a pro forma basis(c).................... 8 (a)
Additional paid in capital................................... 144,054 (a)
Accumulated deficit.......................................... (24,033)(b)
105,220 120,029
--------- ---------
Total Capitalization......................................... $ 141,646 $ 202,520
========= =========
Capitalization allocable to unitholders...................... $ 138,841 N/A
========= =========
Book Value per Unit/Share.................................... $ 20.29 $ 24.24
========= =========
<FN>
_______________
- 93 -
<PAGE>
(a) Reflects conversion of the Managing General Partner's and
limited partners' units into shares of common stock of the
REIT.
(b) Reflects the costs and fees as follows:
Cost of Conversion........................................ $ 580
Cost of property management contract...................... 23,453
---------
$ 24,033
=========
(c) Excludes 350,000 Units/Shares issuable upon exercise of
options held by the Managing General Partner.
</FN>
</TABLE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company is currently managed by the Managing General
Partner. Upon consummation of the Conversion, the Company will
be managed by members of the REIT Board initially comprised of
the current directors of the Managing General Partner. It is
anticipated that the REIT Board will be expanded in 1997 to
include additional independent directors. The REIT Board is
divided into three classes as nearly equal in number as possible,
with the term of office of one class expiring in each year. The
directors will be responsible for electing the Company's
executive officers, who will serve at the discretion of the REIT
Board. Robert J. Stetson, President and Chief Executive Officer
of the Managing General Partner, will serve as the REIT
Corporation's President and Chief Executive Officer and Fred H.
Margolin, Chairman of the Board of Directors of the Managing
General Partner, will serve as Chairman of the REIT Board. The
persons who will be directors, executive officers of the REIT
Corporation following consummation of the Conversion and the
Termination are as follows:
<TABLE>
<CAPTION>
POSITION(S) AND
NAME AGE OFFICES HELD
---- --- ------------
<S> <C> <C>
Robert J. Stetson 46 Chief Executive Officer,
President and Director
Fred H. Margolin 47 Chairman of the Board,
Secretary, Treasurer
Gerald H. Graham 59 Director
David K. Rolph 59 Director
Darrel L. Rolph 48 Director
Eugene G. Taper 59 Director
</TABLE>
- 94 -
<PAGE>
ROBERT J. STETSON. Mr. Stetson is the President, Chief
Executive Officer and a director of the REIT Corporation. Since
1978, Mr. Stetson has been primarily engaged in restaurant chain
management, including the acquisition and management of
restaurant properties. Prior to 1987, Mr. Stetson served in
several positions with PepsiCo Inc. and its subsidiaries,
including Chief Financial Officer of Pizza Hut. From 1987 until
1992, Mr. Stetson served as a senior executive in restaurant and
retailing subsidiaries of Grand Metropolitan PLC, the ultimate
parent corporation of Burger King. During this period, Mr.
Stetson served as the Chief Financial Officer and later
President-Retail Division of Burger King and Chief Financial
Officer and later Chief Executive Officer of Pearle Vision. As
Chief Financial Officer of Burger King, Mr. Stetson was
responsible for managing more than 750 restaurants that Burger
King leased to tenants. Mr. Stetson is also a director of
Bayport Restaurant Group, a publicly-traded restaurant company.
Mr. Stetson received a Bachelor of Arts degree from Harvard
College and an M.B.A. from Harvard Business School. Mr. Stetson
is 46 years old.
FRED H. MARGOLIN. Mr. Margolin is the Chairman, Secretary,
Treasurer and a director of the REIT Corporation. In 1977, Mr.
Margolin founded Intercon General Agency, a national 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. In 1989,
Mr. Margolin founded and became the President of American Eagle
Premium Finance Company, one of the largest independent premium
finance companies in Texas. From 1982 through 1988, Mr. Margolin
developed and then leased or sold shopping centers having an
aggregate cost of approximately $50,000,000. Mr. Margolin
received a Bachelor of Science degree from the Wharton School of
the University of Pennsylvania and an M.B.A. from Harvard
Business School. Mr. Margolin is 47 years old.
GERALD H. GRAHAM. Mr. Graham is a director of the REIT
Corporation. 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 REIT
Corporation. Mr. Rolph is the President of the Tex-Mex
restaurant chain, "Carlos O'Kellys" and the Vice President of
Sasnak Management Corp., a restaurant management company. Mr.
Rolph is 48 years old.
DARREL L. ROLPH. Mr. Rolph is a director of the REIT
Corporation. Mr. Rolph is the Secretary of "Carlos O'Kellys" and
the President of the Sasnak Management Corp., a restaurant
management company. Mr. Rolph is 59 years old.
EUGENE G. TAPER. Mr. Taper is a director of the REIT
Corporation. Mr. Taper is a certified public accountant and a
business consultant and retired partner, since 1993, of
Deloitte & Touche LLP, an international public accounting firm.
Mr. Taper is 59 years old.
- 95 -
<PAGE>
EXECUTIVE COMPENSATION
The REIT Corporation was incorporated in January 1997.
Accordingly, the REIT Corporation 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 REIT
Corporation's executive officers for the 1997 fiscal year.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
---------------------------------------------
Name and Other Annual
Principal Position Salary Bonus (1) Compensation(1)
------------------ ------ ---------- ---------------
<S> <C> <C> <C>
Robert J. Stetson
President and Chief Executive
Officer......................... $250,000 - -
Fred H. Margolin
Chairman of the Board of
Directors and Secretary......... $250,000 - -
<FN>
_____________________
(1) Any bonuses or other annual compensation paid to the REIT
Corporation's executive officers will be at the discretion
of the REIT Board and will be payable following the
conclusion of the fiscal year.
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS
Each of Messrs. Stetson and Margolin will enter into an
employment agreement (the "Employment Agreements") with the REIT
Corporation on the date of the Termination. Each of the
Employment Agreements will expire on the third anniversary of the
date thereof. Pursuant to the Employment Agreements, Mr. Stetson
will serve as President and Chief Executive Officer of the REIT
Corporation and will be paid an annual base salary of $250,000
and Mr. Margolin will serve as Chairman of the Board and
Secretary of the REIT Corporation and will be paid an annual base
salary of $250,000. The Employment Agreements provide for salary
raises at the discretion of the REIT 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 REIT Corporation is
terminated by the REIT Corporation other than for "cause" (as
defined in the Employment Agreement) or by the covered executive
for "good reason" (as defined in the Employment Agreement), the
terminated executive will be entitled to receive all salary,
accrued incentive bonuses and benefits payable pursuant to the
Employment Agreement for the remainder of the term of his
Employment Agreement. The Employment Agreements also provide
that the covered executive may terminate his employment for any
reason upon six months' prior written notice. In the event of
such a termination, the REIT
- 96 -
<PAGE>
Corporation will be obligated to pay the executive the compensation
due him up to the effective date of termination.
INDEMNIFICATION AGREEMENTS
The REIT Corporation will enter into indemnification
agreements requiring the REIT Corporation 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 REIT Corporation's Articles and Bylaws--
Limitation of Liability and Indemnification."
INSURANCE
The REIT Corporation will have directors' and officers'
liability insurance in the aggregate amount of $____ million.
Directors' and officers' liability insurance generally insures
(i) the directors and officers of the REIT Corporation from any
claim arising out of an alleged wrongful act by the directors and
officers in their respective capacities as directors and officers
and (ii) the REIT Corporation to the extent that it has
indemnified a director or officer for such loss.
CERTAIN TRANSACTIONS WITH RELATED PARTIES
In connection with the Termination, the Managing General
Partner will withdraw as the managing general partner of the
Partnerships and assign the Property Management Contract and
convert the Partnership Interests for the Acquisition Shares.
See "The Conversion--Termination of Property Management Contract
and Partnership Interests."
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding
the beneficial ownership of shares of Common Stock by (i) each
person who is expected to be a stockholder of the REIT
Corporation 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 REIT
Corporation 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 after completion of the Conversion and the
Termination, assuming the Conversion is effected through the
Merger.
- 97 -
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF ALL
BENEFICIAL OWNER(1) BENEFICIALLY OWNED SHARES
------------------- ------------------ -----------------
<S> <C> <C>
Robert J. Stetson 484,137(2) 6.6%
Fred H. Margolin 498,102(2) 6.8%
David K. Rolph 507,637(2) 6.9%
Darrel L. Rolph 469,637(2) 6.4%
Eugene G. Taper 540 *
QSV Properties, Inc. 469,637(3) 6.4%
All directors and
executive officers
as a group (6 persons) 551,142(2) 7.5
<FN>
______________
* Less than 1%.
(1) The address of each of these persons and entities is 5310
Harvest Hill Road, Suite 270, Dallas, Texas 75230.
(2) Includes 469,637 shares beneficially owned by QSV
Properties, Inc., of which Messrs. Stetson, Margolin, David
Rolph and Darrel Rolph are the stockholders and directors.
(3) Includes 69,637 shares to be issued as part of the
Acquisition Price and 350,000 shares issuable upon the
exercise of an option which is immediately exercisable.
</FN>
</TABLE>
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF SECURITIES
The summary of the terms of the REIT Corporation's capital
stock set forth below does not purport to be complete and is
subject to, and qualified in its entirety by, reference to the
Articles and the REIT Corporation's Bylaws, copies of which have
been filed as exhibits to the Registration Statement of which
this Proxy Statement/Prospectus constitutes a part. See
"Available Information."
GENERAL
The Articles authorize the REIT Corporation to issue up to
45 million shares of Common Stock, par value $.001 per share, 10
million shares of preferred stock, par value $.001 per share
("Preferred Stock"), and five million shares of excess stock, par
value $.001 per share (the "Excess Stock"). Upon completion of
the Conversion, ___________ shares of Common Stock will be issued
and outstanding. Under the MGCL, stockholders generally are not
liable for the corporation's debts or obligations.
COMMON STOCK
All shares of Common Stock offered hereby will be duly
authorized, fully paid and nonassessable. Subject to the
preferential rights of the Preferred Stock and any other shares
or series of stock hereinafter designated by the board of
directors of the REIT Corporation, holders of shares of Common Stock
will be entitled to receive dividends on the stock if, as and when
- 98 -
<PAGE>
authorized and declared by the board of directors of the
REIT Corporation out of assets legally available therefor and to
share ratably in the assets of the REIT Corporation legally
available for distribution to its stockholders in the event of
its liquidation, dissolution or winding-up after payment of, or
adequate provision for payment of, all known debts and
liabilities of the REIT Corporation. The REIT Corporation
intends to pay regular quarterly dividends.
Each outstanding share of Common Stock entitles the holder
thereof 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 shares of
Common Stock 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 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 shares of Common Stock have
no conversion, sinking fund, redemption rights or preemptive
rights to subscribe for any securities of the REIT Corporation.
Shares of Common Stock will have equal dividend,
distribution, liquidation and other rights and will have no
preference or exchange rights.
Pursuant to the 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 unless approved by the holders of at least
two-thirds of the shares of stock entitled to vote on the matter
unless a lesser percentage (but not less than a majority of all
of the votes to be cast on the matter) is set forth in the
corporation's charter. The Articles provide for the vote of the
holders of a majority of the shares of stock outstanding and
entitled to vote on the matter to approve any of such actions,
except for amendments to the Articles relating to the number of
directors and the classification of the board of directors of the
REIT Corporation which require approval of holders of at least
two-thirds of the shares of stock entitled to vote on the matter.
The transfer agent and registrar for the Common Stock is
American Stock Transfer & Trust Company.
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time,
in one or more series, as authorized by the REIT Board. Prior to
issuance of shares of each series, the REIT Board is required by
the MGCL and the Articles to fix for each such series the terms,
preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption, as are
permitted by the MGCL. The REIT Board could authorize the
issuance of shares of Preferred Stock with terms and conditions
which 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 receive a premium for their shares of Common
Stock over the then-prevailing market price of those shares of Common
- 99 -
<PAGE>
Stock. No shares of Preferred Stock are outstanding and
the REIT Corporation has no present plans to issue any Preferred
Stock.
RESTRICTIONS ON TRANSFER
For REIT Corporation to qualify as a REIT under the Code, it
must meet certain requirements concerning the ownership of its
outstanding shares of capital stock. Specifically, not more than
50% in value of the issued and outstanding shares of capital
stock of the REIT Corporation 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, and the REIT Corporation must be beneficially owned by 100
or more persons during at least 335 days of a taxable year of
12 months or during a proportionate part of a shorter taxable
year.
Because the REIT Board believes it is essential for the REIT
Corporation to continue to qualify as a REIT, the Articles,
subject to certain exceptions described below, provide that no
person may own, or be deemed to own by virtue of the attribution
provisions of the Code, more than (i) 8.75% of the number of
outstanding shares of Common Stock, except for QSV which may own
initially no more than 15.0% 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 Limitation"). The Ownership Limitation with respect
to the shares of Common Stock will be increased, to a maximum of
9.8%, and the ownership limit applicable to QSV will be
decreased, subject to a minimum percentage equal to the Ownership
Limitation in proportion to any reduction in QSV's direct or
indirect percentage ownership of the REIT Corporation as a result
of additional issuances or dispositions of securities of the REIT
Corporation. Any transfer of Common Stock or Preferred Stock
that would (a) result in any person (other than QSV with respect
to shares of Common Stock) owning, directly or indirectly, Common
Stock or Preferred Stock in excess of the Ownership Limitation,
(b) result in QSV owning directly or indirectly in excess of
15.0% of the number of outstanding shares of Common Stock (or the
decreased percentage that may be applicable), (c) 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 REIT Corporation being "closely
held" within the meaning of Section 856(h) of the Code, or
(v) cause the REIT Corporation to own, directly or
constructively, 10% or more of the ownership interests in a
tenant of the REIT Corporation'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.
Subject to certain exceptions described below, if any
purported transfer of Common Stock or Preferred Stock would
(i) result in any person owning, directly or indirectly, Common
Stock or Preferred Stock in excess of the Ownership Limitation,
(ii) result in QSV owning directly or indirectly in excess of
15.0% 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 REIT Corporation being "closely held" within the meaning of
- 100 -
<PAGE>
Section 856(h) of the Code, or (v) cause the REIT Corporation to own,
directly or constructively, 10% or more of the ownership interests in a
tenant of the REIT Corporation's or the Operating Partnership's
real property, within the meaning of Section 856(d)(2)(B) of the
Code, the Common Stock or Preferred Stock will be designated as
"Excess Stock" and 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
REIT Corporation for registration in the name of the Trust. The
Trustee of the Trust will be designated by the REIT Corporation,
but will not be affiliated with the REIT Corporation. The
beneficiary of the Trust (the "Beneficiary") will be one or more
charitable organizations that are named by the REIT Corporation.
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 (i) 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 (ii) 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 REIT Corporation, 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
REIT Corporation, or its designee, accepts such offer. The REIT
Corporation 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.
"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 shall mean the last
- 101 -
<PAGE>
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 REIT 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 REIT
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 REIT
Corporation of such event and (ii) to provide to the REIT
Corporation such other information as the REIT Corporation may
request in order to determine the effect, if any, of such
transfer on the REIT Corporation's status as a REIT.
The Articles require all persons who own, directly or
indirectly, more than 5% (or such lower percentages as required
pursuant to regulations under the Code) of the outstanding shares
of Common Stock and Preferred Stock, within 30 days after
January 1 of each year, to provide to the REIT Corporation a
written statement or affidavit stating the name and address of
such direct or indirect owner, the number of shares of Common
Stock and Preferred Stock owned directly or indirectly, and a
description of how such shares are held. In addition, each
direct or indirect shareholder shall provide to the REIT
Corporation such additional information as the REIT Corporation
may request in order to determine the effect, if any, of such
ownership on the REIT Corporation's status as a REIT and to
ensure compliance with the Ownership Limitation.
The Ownership Limitation generally will not apply to the
acquisition of shares of Common Stock or Preferred Stock by an
underwriter that participates in a public offering of such
shares. In addition, the REIT Board, upon receipt of a ruling
from the IRS or an opinion of counsel and upon such other
conditions as the REIT Board may direct, may exempt a person from
the Ownership Limitation under certain circumstances. However,
the REIT Board may not grant an exemption from the Ownership
Limit to any proposed transferee whose ownership, direct or
indirect, of shares of beneficial interest of the REIT Corporation
in excess of the Ownership Limit would result in the termination of
the REIT Corporation's status as a REIT. The foregoing
- 102 -
<PAGE>
restrictions will continue to apply until (i) the REIT
Board determines that it is no longer in the best interests of
the REIT Corporation to attempt to qualify, or to continue to
qualify, as a REIT and (ii) there is an affirmative vote of a
majority of the votes entitled to be cast on such mater at a
regular or special meeting of the stockholders of the Company.
All certificates representing shares of Common Stock or
Preferred Stock will bear a legend referring to the restrictions
described above.
The Ownership Limitation 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 receive a
premium for their shares over the then-prevailing market price or
which these holders might believe to be otherwise in their best
interest.
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE REIT CORPORATION'S ARTICLES AND BYLAWS
The following discussion summarizes certain provisions of
the MGCL and the Articles and the REIT Corporation's Bylaws.
This summary does not purport to be complete and is subject to
and qualified in its entirety by reference to the Articles and
the REIT Corporation's Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus
constitutes a part. See "Additional Information."
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Bylaws provide that the number of directors of the REIT
Corporation shall be as set forth in the Articles or as may be
established by the board of directors of the REIT Corporation but
may not be fewer than three nor more than 15. Any vacancy will
be filled, at any regular meeting or at any special meeting
called for that purpose, by a majority of the directors then in
office. The stockholders may elect a director to fill a vacancy
on the REIT Board which results from the removal of a director.
Pursuant to the terms of the Articles, following the IPO, the
directors will be divided into three classes. One class will
hold office initially for a term expiring at the annual meeting
of stockholders to be held in 1998, another class will hold
office initially for a term expiring at the annual meeting of
stockholders to be held in 1999 and another class will hold
office initially for a term expiring at the annual meeting of
stockholders to be held in 2000. As the term of each class
expires, directors in that class will be elected for a term of
three years. The REIT Corporation believes that classification
of the REIT Board will help to assure the continuity and
stability of the REIT Corporation's business strategies and
policies as determined by the REIT Board.
The classified director provision could have the effect of
making the removal of incumbent directors more time-consuming and
difficult, which could discourage a third party from making a tender
offer or otherwise attempting to obtain control of the REIT Corporation,
- 103 -
<PAGE>
even though such an attempt might be beneficial to the REIT
Corporation and its stockholders. At least two annual
meetings of stockholders, instead of one, will generally
be required to effect a change in a majority of the REIT Board.
Thus, the classified board provision could increase the
likelihood that incumbent directors will retain their positions.
Further, holders of shares of Common Stock will have no right to
cumulative voting for the election of directors. Consequently,
at each annual meeting of stockholders, the holders of a majority
of shares of Common Stock will be able to elect all of the
successors of the class of directors whose term expires at that
meeting.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Articles limit the liability of the REIT Corporation's
directors and officers to the REIT Corporation 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 REIT Corporation or its stockholders to obtain
other relief, such as an injunction or rescission.
The Articles require the REIT Corporation 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
- 104 -
<PAGE>
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
person who beneficially owns 10% or more of the voting power of
the corporation's shares or an affiliate or associate of the
corporation who, at any time within the two-year period prior to
the date in question, was the beneficial owner of 10% or more of
the voting power of the then-outstanding voting stock of the
corporation (an "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 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 REIT Corporation 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.
- 105 -
<PAGE>
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 ARTICLES
The Articles 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 REIT 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.
DISSOLUTION OF THE COMPANY
The Articles permit the dissolution of the REIT Corporation
by (i) the affirmation or vote of a majority of the entire REIT
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 REIT Corporation's Bylaws provide that with respect to
an annual meeting of stockholders, nominations of persons for election to
the REIT 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
- 106 -
<PAGE>
the REIT 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 REIT Corporation's Bylaws.
The provisions in the Articles on classification of the REIT
Board, the business combination and control share acquisition
provisions of the MGCL and the advance notice provisions of the
REIT Corporation'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 REIT Corporation shall be held on
__________________ or at such other time as set by the REIT
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 REIT Board by the Chief Executive Officer
of the REIT Corporation, by the President of the REIT Corporation
or by the REIT Board pursuant to a resolution adopted by a
majority of all directors. Such request shall state the purpose
or purposes of such meeting and the matters proposed to be acted
upon at such meeting.
COMPARATIVE RIGHTS OF UNITHOLDERS AND STOCKHOLDERS
GENERAL
USRP is organized as a Delaware limited partnership and the
REIT Corporation is organized as a corporation under the laws of
the State of Maryland. As a Delaware limited partnership, USRP
is subject to the Delaware Revised Uniform Limited Partnership
Act (the "Delaware RULPA"). As a Maryland corporation, the REIT
Corporation is subject to the MGCL.
The discussion of the comparative rights of Unitholders of
the Partnership and stockholders of the REIT Corporation set
forth below does not purport to be complete and is subject to and
qualified in its entirety by reference to the Delaware RULPA and
the MGCL and also to the Master Partnership Agreement of USRP and
the Articles and Bylaws of the REIT Corporation. Copies of these
documents have been filed as exhibits to the Registration
Statement of which this Proxy Statement/Prospectus is a part.
The REIT Corporation has been organized under the MGCL
pursuant to Articles of Incorporation filed January 29, 1997.
- 107 -
<PAGE>
MANAGEMENT
The Master Partnership Agreement of USRP provides that, with
certain limited exceptions, the Managing General Partner has
exclusive discretion to manage and control the business and
affairs of the Partnership. The Managing General Partner may be
removed for cause upon the affirmative vote of more than fifty
percent (50%) of the total number of all outstanding Units held
by all Limited Partners of record. "Cause," for purposes of the
Master Partnership Agreement, means actual fraud, gross
negligence, or willful or wanton misconduct. The Managing General
Partner may be removed without cause upon the affirmative vote of
more than eighty percent (80%) of the total number of all
outstanding Units held by all Limited Partners of record. The
directors of the Managing General Partner are elected by the
stockholders of the Managing General Partner.
Pursuant to the MGCL, the business and affairs of a
corporation are managed by or under the direction of its board of
directors. The MGCL further provides that the board of directors
may be divided into classes. In accordance with this authority,
the Articles provides for three classes of directors. The
Articles provide that the number of directors of the REIT
Corporation cannot be less than three (3) nor more than fifteen
(15). Under the Articles, the directors are divided in three
classes, as nearly equal in number as possible, with the term of
one class expiring at each annual meeting of stockholders. At
each annual meeting of stockholders, one class of directors will
be elected for a term of three years and the directors in the
other two classes will continue in office. Under the Articles, a
director may be removed, for cause only, at a meeting of
stockholders called for that purpose, by the holders of not less
than two-thirds of the outstanding Common Stock entitled to vote
in the election of directors. "Cause," for purposes of the
Articles, means acts or omissions constituting active and
deliberate dishonesty established by a final judgment or actual
receipt of an improper benefit or profit in money, property or
services. Any vacancy (including a vacancy created by an
increase in the number of directors) will be filled, at any
regular meeting or any special meeting of the directors called
for that purpose, by a majority of the REIT Board.
VOTING RIGHTS
Under the Master Partnership Agreement, Limited Partners
have voting rights with respect to (i) the removal and
replacement of the General Partners; (ii) the merger of USRP;
(iii) the sale of substantially all of USRP's assets; (iv) the
dissolution of USRP or the Operating Partnership; and
(v) material amendments to the Partnership Agreement. Each Unit
entitles the Limited Partner to cast one vote on all matters
presented to the Limited Partners. Generally, approval of
matters submitted to the Limited Partners requires the
affirmative vote of Limited Partners owning more than 50% of the
Units then outstanding. Certain limited matters require the
approval of a specified super-majority of the Units then
outstanding.
The Articles provide that the stockholders of the REIT
Corporation shall be entitled to vote only on the following
matters: (i) election or removal of directors; (ii) amendment of
the Articles (except as described below under "--Amendment of
Partnership Agreement and Articles
- 108 -
<PAGE>
of Incorporation"); (iii) termination of the REIT Corporation's existence;
(iv) reorganization of the REIT Corporation; and (v) merger,
consolidation or share exchange of the REIT Corporation, or the
sale or disposition of substantially all of the REIT
Corporation's assets. Generally, matters submitted to the
stockholders require the affirmative vote of stockholders holding
a majority of the outstanding Common Stock present in person or
by proxy entitled to vote thereon at a duly convened meeting of
stockholders.
The Bylaws of the REIT Corporation require notice at least
60 days and not more than 90 days before the anniversary of the
prior annual meeting of stockholders in order for a stockholder
(a) to nominate a director or (b) to propose new business other
than pursuant to notice of the meeting. The Bylaws contain a
similar notice requirement in connection with the nomination of
directors at a special meeting of stockholders called for the
purpose of electing one or more directors. Accordingly, failure
to act in compliance with the notice provisions will make
stockholders unable to nominate directors or propose new
business. There is no similar provision in the Master
Partnership Agreement.
SPECIAL MEETINGS
Special meetings of Limited Partners may be called by the
Managing General Partner or by Limited Partners owning at least
20% of the outstanding Units. Under the REIT Corporation's
Bylaws, a special meeting of stockholders may be called by the
Chairman of the REIT Board, the Chief Executive Officer or
President of the REIT Corporation or a majority of the REIT
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 REIT Board by the Chief Executive Officer
of the REIT Corporation, by the President of the REIT Corporation
or by the REIT Board pursuant to a resolution adopted by a
majority of all directors. Such request shall state the purpose
or purposes of such meeting and the matters proposed to be acted
upon at such meeting.
AMENDMENT OF MASTER PARTNERSHIP AGREEMENT AND ARTICLES OF
INCORPORATION
The Master Partnership Agreement may be amended solely by
action of the Managing General Partner to reflect: (i) a change
to effect or maintain the qualification of the REIT Corporation
as a REIT under the Code; (ii) a change in the name of the REIT
Corporation or the location of the principal place of business of
the REIT Corporation; (iii) a change that is (a) of an
inconsequential nature and does not adversely affect the Limited
Partners in any material respect; (b) necessary or desirable to
cure any ambiguity, to correct or supplement any provision of the
Master Partnership Agreement, that would be inconsistent with any
other provision of the Master Partnership Agreement or to make
any other provision with respect to matters or questions arising
under the Partnership Agreement that will not be inconsistent
with the provisions of the Partnership Agreement; (c) necessary
or desirable to satisfy any requirements, conditions or
guidelines contained in any opinion, directive, order, ruling or
- 109 -
<PAGE>
regulation of any Federal, state or local agency or contained in
any Federal, state or local law; (d) necessary or desirable to
facilitate the trading of the Units or comply with any rule,
regulation, guideline or requirement of any securities exchange
on which the Units are or will be listed for trading, compliance
with any of which the Managing General Partner deems to be in the
interest of the REIT Corporation and the Limited Partners; or
(e) required or contemplated by the Master Partnership Agreement;
or (iv) any other amendments similar to the foregoing. In all
other cases, an amendment to the Master Partnership Agreement
must generally be approved by Limited Partners holding a majority
of the Units then outstanding. In certain limited circumstances,
a proposed amendment to the Master Partnership Agreement may only
be effected by a specified super-majority vote of the Limited
Partners. Even in cases where Limited Partner approval is
required, no amendment may be effected without the approval of
the Managing General Partner.
An amendment to the Articles (other than the provision
relating to the classification of the REIT Board) requires the
recommendation of the REIT Board and the affirmative vote of a
majority of the outstanding Common Stock present in person or by
proxy entitled to vote at a duly convened meeting of
stockholders. An amendment to the provision of the Articles
relating to the classification of the REIT Board requires the
recommendation of the REIT Board and the affirmative vote of
two-thirds of all shares of Common Stock entitled to be voted on
the matter.
LIMITED LIABILITY
Limited Partners generally do not have personal liability
for obligations of USRP, although certain events could cause the
Limited Partners to lose their protection against limited
personal liability.
Pursuant to the MGCL and the Articles, the personal
liability of the stockholders of the REIT Corporation is limited
to the fullest extent permitted from time to time by the MGCL.
While Delaware law and Maryland law, respectively, afford
Limited Partners in USRP and stockholders in the REIT Corporation
protection against personal liability for obligations of USRP and
the REIT Corporation, certain jurisdictions may not recognize
limitations on personal liability to the extent such claims are
not satisfied by USRP or the REIT Corporation. The Board of
Directors believes that any risk of personal liability would
generally be limited to situations in which USRP's or the REIT
Corporation's public liability insurance coverage would be
insufficient to satisfy claims. See "Description of Common
Stock--General."
DISSOLUTION OF THE PARTNERSHIP AND THE REIT CORPORATION AND
TERMINATION OF REIT STATUS
Under the terms of the Master Partnership Agreement, the
Limited Partners may compel the dissolution of USRP prior to the
expiration of its term on December 31, 2035 by the affirmative
vote of more than fifty percent (50%) of the total number of all
outstanding Units held by all Limited Partners of record. USRP
is subject to dissolution upon a sale of all or
- 110 -
<PAGE>
substantially all of USRP's properties, which sale may be made with the
approval of the Managing General Partner and a majority in interest of the
Limited Partners.
The MGCL permits the voluntary dissolution of the REIT
Corporation by the affirmative vote of the holders of not less
than two-thirds of the outstanding Common Stock at a meeting of
stockholders called for that purpose. A merger, consolidation or
sale of substantially all of the assets of the REIT Corporation
must be approved by the affirmative vote of the holders of not
less than a majority of the outstanding Common Stock at a meeting
of stockholders called for that purpose.
The Articles permit the REIT Board to terminate the status
of the REIT Corporation as a REIT under the Code at any time.
Consequently, although both Limited Partners and stockholders
have voting rights with regard to the dissolution of USRP and of
the REIT Corporation, respectively, such voting rights differ in
limited respects.
LIQUIDATION RIGHTS
In the event of liquidation of USRP, holders of all Units
and the Managing General Partner would be entitled to share
ratably, in accordance with their percentage interests, in any
assets remaining after the satisfaction of obligations to
creditors.
In the event of liquidation of the REIT Corporation, the
holders of Common Stock would be entitled to share ratably in any
assets remaining after satisfaction of obligations to creditors
and any liquidation preferences on any series of Preferred Stock
that may then be outstanding.
LIMITATIONS OF LIABILITY OF GENERAL PARTNERS AND TRUSTEES
The Master Partnership Agreement provides that the Managing
General Partner, its affiliates and all officers, directors,
employees and agents of the Managing General Partner and its
affiliates shall not be liable to USRP or the Limited Partners
for losses sustained or liabilities incurred as a result of any
acts or omissions of the Managing General Partner or such other
persons if the conduct of the applicable person did not
constitute acts of actual fraud, gross negligence, or willful or
wanton misconduct and the applicable person acted in good faith
and in a manner it believed to be in, or not opposed to, the
interests of the Partnership.
The Articles contain a provision eliminating the personal
liability of a director to the REIT Corporation or its
stockholders for monetary damages to the fullest extent permitted
by Maryland statutory or decisional law, as amended or
interpreted.
INDEMNIFICATION
The Master Partnership Agreement provides that USRP shall
indemnify and hold harmless the Managing General Partner, its
affiliates and all officers, directors, employees and agents of
the Managing General Partner and its affiliates to the maximum
extent permitted by law provided
- 111 -
<PAGE>
that the indemnitee's conduct did not constitute actual fraud,
gross negligence, or willful or wanton misconduct and provided
further that the indemnitee acted in good faith and in a manner
it believed to be in, or not opposed to, the interests of USRP,
and, with respect to any original proceeding, had no reasonable
cause to believe its conduct was unlawful.
The Articles provide that the REIT Corporation shall provide
any indemnification permitted by the laws of the State of
Maryland and shall indemnify directors, officers, agents and
employees as follows: (i) the REIT Corporation shall indemnify
its directors and officers, whether serving the REIT Corporation
or at its request and any other entity, to the full extent
required or permitted by the General Laws of the State of
Maryland now or hereafter in force, including the advance of
expenses under the procedures and to the full extent permitted by
law and (ii) the REIT Corporation shall indemnify other employees
and agents, whether serving the REIT Corporation or at its
request any other entity, to such extent as shall be authorized
by the REIT Board or the REIT Corporation's Bylaws and be
permitted by law. The foregoing rights of indemnification shall
not be exclusive of any other rights to which those seeking
indemnification may be entitled.
DERIVATIVE ACTIONS
The Delaware RULPA allows a Limited Partner to institute
legal action on behalf of the USRP (a derivative action) to
recover damages from a third party or from a general partner
where the general partner has failed to institute the action. In
addition, a Limited Partner may institute legal action on behalf
of himself and other similarly situated Limited Partners (a class
action) to recover damages from a General Partner for violations
of his fiduciary duties to the Limited Partners. Limited
Partners may also have rights to bring actions in Federal court
to enforce Federal rights.
Under the MGCL, a stockholder may bring an action on behalf
of the REIT Corporation to recover a judgment in its favor (a
derivative action) where the directors have failed to institute
the action. The provisions of the MGCL relating to derivative
actions are substantially similar to the provisions of the
Delaware RULPA relating to such actions.
INSPECTION OF BOOKS AND RECORDS
Upon twenty (20) days prior written notice, at his own
expense and for a valid business purpose related to the conduct
of USRP's business, a Limited Partner may have access to
non-confidential, non-proprietary information regarding USRP,
including tax returns, a current list of the name and last known
business, residence or mailing address of each partner, a copy of
USRP's governing instruments, and certain other information
regarding the affairs of USRP. The foregoing is subject to the
Managing General Partner's right to keep confidential from
Limited Partners, for such period of time as the Managing General
Partner deems reasonable, any information which the Managing
General Partner reasonably believes to be in the nature of trade
secrets or other information the disclosure of which the Managing
General Partner in good faith believes is not in the best
interests of USRP or could damage USRP or its business.
- 112 -
<PAGE>
Similarly, upon written request, at a stockholder's own
expense and for a proper purpose reasonably related to that
stockholder's interest as a stockholder in the REIT Corporation,
any person who is a stockholder of record of the REIT Corporation
will be granted the right to examine and copy relevant books,
minutes and stock transfer records, including a list of
stockholders of the REIT Corporation.
DISTRIBUTIONS AND DIVIDENDS
Distributions and dividends on the Units and the Common
Stock may be paid if, as and when declared by the Managing
General Partner or the REIT Board, as applicable, in its
discretion.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income
tax considerations affecting the Unitholders as a result of the
Conversion. This discussion is directed principally at
Unitholders 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 Unitholders 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 and existing 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 Unitholder is advised to consult his own tax advisor
about the federal, state, local, foreign and other tax
consequences relating to the Conversion.
A. THE MERGER
1. QUALIFICATION AS NONRECOGNITION TRANSACTION
It is a condition precedent to the consummation of the
Merger that the Managing General Partner shall have received a
favorable ruling from the IRS and an opinion of Winstead Sechrest
& Minick P.C., as tax counsel, to the effect that the Merger will
be treated as part of a transaction described in Section 351 of
the Code. The ruling generally would hold that, if the REIT
Corporation elects and qualifies as a REIT for the taxable year
of the Merger, (i) the Conversion will be treated for federal
income tax purposes as a transfer of assets from USRP to the REIT
Corporation in exchange for Common Stock followed by a
distribution of the Common Stock to the Unitholders and the
Managing General Partner in liquidation of USRP, and (ii) USRP
will not recognize gain for federal income tax purposes under
Section 351(a) of the Code
- 113 -
<PAGE>
on its transfer of assets to the REIT Corporation in exchange for
Common Stock and the REIT Corporation's assumption of and taking
subject to USRP's liabilities, except to the extent (if any) that the
sum of the liabilities assumed by the REIT Corporation plus the amount of
liabilities to which the transferred assets are subject exceeds
the total adjusted basis of the assets transferred. Further, the
deemed distribution of the Common Stock would be tax-free to the
Unitholders and the Managing General Partner under Section 731 of
the Code.
Section 351 (a) of the Code sets forth the general rule that
no gain or loss will be recognized by one or more persons
transferring assets to a corporation solely in exchange for the
corporation's stock if, immediately after the exchange, the
transferors are "in control" of the transferee corporation.
"Control" is defined as the ownership of stock possessing at
least 80 percent of the total combined voting power of all
classes of stock entitled to vote and at least 80 percent of the
total number of shares of all other classes of stock of the
corporation. For purposes of the ruling request and its tax
opinion, tax counsel will assume that not more than 20% of the
Common Stock transferred to the Unitholders and the Managing
General Partner pursuant to the Merger will subsequently be sold
pursuant to plans or arrangements entered into prior to the
Merger. Neither USRP nor the Managing General Partner is aware
of any plans or arrangements that have been or will be entered
into prior to the Merger which would make this assumption
incorrect. The IRS has taken the position in a revenue ruling
that the distribution by a partnership of the stock received in a
Section 351 exchange to its partners in liquidation of the
partnership will not violate the control requirement.
Even in the case of a qualified Section 351 exchange, gain
will be recognized by the transferor if and to the extent that
the amount of the liabilities assumed and taken subject to by the
transferee exceeds the aggregate adjusted basis of the property
transferred in the exchange. Gain recognized, if any, must be
reported as ordinary income, long-term capital gain, or short-
term capital gain according to the nature and the holding period
of the transferred property. It is likely that any gain
recognized by the Partnership under this provision would be
treated as long-term capital gain. However, based on the most
recent available information, USRP's liabilities are not expected
to exceed the basis of its assets at the time of the Merger.
Consequently, no gain is expected to be recognized by USRP as a
result of the Merger.
USRP elected pursuant to Section 754 of the Code to adjust
the basis of partnership property with respect to transferee
partners in the case of a sale or exchange or a transfer upon the
death of a partner of a partnership interest. See "--Partnership
Alternative--Tax Treatment of Operations--Section 754 Election."
Although there is some uncertainty as to the impact of these
basis adjustments at USRP level, USRP will treat these amounts as
part of USRP's aggregate adjusted basis in its assets for
purposes of determining whether gain is recognized upon the
Merger. USRP can only estimate the amount of these adjustments
because of the imprecise information available concerning
transfers of Units in the context of a publicly-traded
partnership. It is estimated, however, that such adjustments in
the aggregate are substantial and that if the adjustments are
excluded from USRP's adjusted basis in its assets, there is a
risk that USRP would recognize gain in the Merger. See "--The
Merger--Tax Consequences to Unitholders--Potential Gain
Recognition" and "--The Merger--Tax Consequences to USRP."
- 114 -
<PAGE>
Section 351(a) does not apply to transfers of property to an
investment company. A REIT is an investment company if the
transfer results, directly or indirectly, in "diversification" of
the transferors' interests. The purpose of this restriction is
to prevent the tax-free pooling of investment assets by more than
one transferor. The Ruling from the IRS and the opinion of tax
counsel will assume the accuracy of the Managing General
Partner's representations that at the time of the Merger there
will not be an existing plan or arrangement (i) to achieve
diversification of USRP's (or the Unitholders') interests in one
or more additional nonrecognition transactions, (ii) to issue
additional Common Stock except pursuant to the Company's dividend
reinvestment plan, if any, and pursuant to compensatory stock
options that may be granted by the REIT Corporation to key
service providers, or (iii) to acquire any additional specific
property.
If the REIT Corporation were to be treated as an investment
company or for some other reason Section 351 did not apply to the
Merger, USRP would recognize taxable gain or loss in an amount
equal to the difference between the total value of the
consideration received (the amount of liabilities assumed and
taken subject to by the REIT Corporation in the Merger plus the
fair market value of the Common Stock received by the Partnership
in the exchange) and USRP's adjusted basis in the assets
transferred to the REIT Corporation. Generally, the gain
recognized by USRP would be allocated among the partners in
accordance with their interests in USRP. See "--The Merger--Tax
Consequences to Unitholders--Potential Gain Recognition." Neither
USRP nor the Unitholders would recognize gain or loss upon the
deemed distribution of the Common Stock by USRP.
2. TAX CONSEQUENCES TO USRP
Nonrecognition and Termination. If the Merger is treated as
a nonrecognition transaction under Section 351, USRP will not
recognize gain upon the transfer of its assets to the REIT
Corporation except to the extent (if any) that the liabilities to
which the transferred property is subject plus the liabilities
assumed by the REIT Corporation in connection with the exchange
exceed the total adjusted basis of the property transferred. It
is expected that USRP's aggregate adjusted basis in its assets
will exceed the sum of such liabilities at the time of the
Merger. However, this is subject to change prior to the Merger.
See "--The Merger--Qualification as Nonrecognition Transaction."
For Federal income tax purposes, USRP will be deemed to have
received the Common Stock and distributed it to its partners
pursuant to a liquidation of USRP. USRP will not recognize gain
or loss in the deemed liquidation and will terminate upon the
distribution of the Common Stock pursuant to the Merger.
Holding Period. To the extent transferred assets constitute
capital assets or Section 1231 assets in the hands of USRP
immediately prior to the transfer, USRP will have a holding
period in the Common Stock which will include its holding period
in the transferred assets. As to any portion of such Common
Stock which represents the value of transferred assets which are
not capital assets or Section 1231 assets in the hands of USRP,
USRP will not be entitled to include its prior holding period in
such assets. Therefore, a portion of each share of Common Stock may
- 115 -
<PAGE>
have a holding period of more than one year, a portion may
have a holding period of less than one year, and a portion may
have an entirely new holding period commencing on the day after
the Merger.
PRE-MERGER TAX TERMINATION OF THE PARTNERSHIP. Section 708
of the Code provides that if 50% or more of the capital and
profits interests in a partnership are sold or exchanged within a
single twelve-month period, the partnership will be deemed to
terminate for tax purposes. It is possible that Units
representing 50% or more of the capital and profits interests in
USRP have been or might be sold or exchanged within a single
twelve-month period prior to the Merger. The foregoing
discussion of tax consequences to USRP of the Merger assumes that
no such termination has occurred or will occur prior to the
Merger.
Upon a termination of USRP for tax purposes, it would be
deemed to have distributed its assets on the date of such
termination to the Managing General Partner and the Unitholders
who would then be deemed to have contributed such assets to a new
partnership. The new partnership would have a new basis in its
assets (other than money) equal to the aggregate basis of the
Managing General Partner and the Unitholders in their interests
in USRP, less any cash deemed distributed to such persons in
connection with the termination. Accordingly, if the total basis
of the Managing General Partner and Unitholders in their
interests in USRP were greater or less than USRP's aggregate
basis in its assets immediately prior to the termination, the new
partnership's basis in its assets after the termination would be
increased or reduced correspondingly. Moreover, the new
partnership's basis in its assets following the termination might
have to be reallocated among the various assets to reflect the
relative fair market values of those assets at the time of
termination, which may be less favorable than the previous
allocation of basis made in connection with USRP's original
acquisition of such assets. A termination of USRP could also
cause USRP or its assets to become subject to unfavorable changes
in the Federal income tax law made prior to the termination
(e.g., a lengthening of the period over which assets are
depreciated) but previously not applicable to USRP or its assets
because of protective transition rules. Elections made by the
terminated partnership would not be applicable to the
reconstituted partnership, including the election made by USRP
under Section 754 of the Code. USRP would incur additional
accounting and administrative costs with respect to the filing of
a tax return for the year ending on the date of a technical
termination. See "--Partnership Alternative--Tax Treatment of
Operations."
3. TAX CONSEQUENCES TO UNITHOLDERS
GENERAL NONRECOGNITION. It is a condition precedent to
consummation of the Merger that the IRS issue a favorable ruling
as to treatment of the Merger as part of a transaction described
in Section 351 of the Code. As a result of the treatment of the
Merger as a nonrecognition transaction under Section 351, the
Merger will generally be tax-free to the Unitholders except as
described below. See "--Potential Gain Recognition." The
Unitholders will not recognize gain or loss upon the receipt of
Common Stock in the Merger. Such Common Stock will be deemed to
be received as a tax-free property distribution in a complete
liquidation of USRP under Section 731 of the Code.
- 116 -
<PAGE>
POTENTIAL GAIN RECOGNITION. If the Merger qualifies for
nonrecognition treatment under Section 351, the Partnership will
recognize gain only to the extent (if any) that USRP's aggregate
adjusted basis in its assets is less than the liabilities assumed
or taken subject to by the REIT Corporation in the exchange. It
is expected that USRP's aggregate adjusted basis in its assets
will exceed the sum of such liabilities so that USRP itself
should not recognize gain upon the Merger. Any gain recognized
by USRP would be allocated to the Unitholders and the Managing
General Partner. See "--The Merger--Qualification as
Nonrecognition Transaction."
If for any reason the Merger did not qualify for
nonrecognition treatment under Section 351, USRP would recognize
gain or loss on the transfer of its assets to the REIT
Corporation as if USRP had sold the assets for an amount equal to
the value of the Common Stock received by the Unitholders and
Managing General Partner in the Merger, plus the amount of
liabilities assumed or taken subject to by the REIT Corporation
in the Merger. Such gain recognized would be allocated among the
Unitholders and the Managing General Partner. Each Unitholder's
basis in the Common Stock received would be increased (or
reduced) by the gain (or loss) recognized, and each Unitholder's
holding period in the Common Stock received would begin on the
day after the Merger.
Certain Unitholders may recognize gain on the Merger even if
USRP does not recognize any gain, as follows:
(a) Upon the Merger, Unitholders will be deemed to
receive a cash distribution equal to their share of USRP's
nonrecourse indebtedness, which generally will be offset by
the inclusion of that share of indebtedness in their
adjusted basis in their Units. Any Unitholder, however,
whose adjusted basis in his Units at the time of the Merger
is less than his share of such indebtedness (i.e., a
Unitholder who has a deficit capital account for tax
purposes after reflecting any basis adjustments under
Section 754 of the Code) will recognize gain to the extent
of this difference.
(b) USRP has elected pursuant to Section 754 of the
Code to adjust the basis of partnership property with
respect to transferee partners upon the sale or exchange or
transfer upon death of a partner of a partnership interest.
If as a result of such adjustments, a Unitholder's share of
USRP's liabilities assumed by the REIT Corporation exceeds
his tax basis in his share of USRP's assets, the Unitholder
will recognize gain to the extent of the excess. This
result is unlikely for most Unitholders of USRP. See "--
Partnership Alternative--Tax Consequences of Unit
Ownership."
ALLOCATION OF GAIN RECOGNIZED. If any gain were to be
recognized by USRP in the Merger, the gain (determined without
regard to Section 754 adjustments) generally would be allocated
among the partners until their capital accounts were equal to the
fair market value of the Common Stock to be received in the
Merger.
SUSPENDED DEDUCTIONS. Any loss previously allocated to a
Unitholder in prior years or during the tax year of the Merger
that has not been used because of the at-risk or basis
- 117 -
<PAGE>
limitations can be used only to the extent of any income or gain
recognized on the Merger. Generally, Unitholders subject to the
passive activity loss limitations would be able to utilize
suspended passive losses from USRP to offset gain that they might
be required to recognize on the Merger. Any passive losses not
so used may not be available until the Unitholder disposes of his
entire interest in the REIT Corporation.
TAX BASIS IN COMMON STOCK. A Unitholder's aggregate tax
basis in all Common Stock received in the Merger will equal his
aggregate basis in Units minus his share of partnership
liabilities, after adjustment for operations during the taxable
year of the Merger and any gain or loss recognized on the Merger,
but in any case not less than zero. This basis will be prorated
among all Common Stock received by the Unitholder.
HOLDING PERIOD IN COMMON STOCK. The holding period required
for long-term capital gains treatment is more than one year. For
holding period purposes, each share of Common Stock will be
divided into two parts. One part will be the portion of the
value of the Common Stock that is attributable to any ordinary
income assets transferred by USRP in the Merger; its holding
period will begin on the day following the Merger. The remaining
part will be the portion of the value of the Common Stock that is
attributable to capital assets or Section 1231 property
(generally property used in a trade or business which has been
held for more than one year and is subject to an allowance for
depreciation or is real property, other than inventory or
property held primarily for sale to customers in the ordinary
course of the taxpayer's trade or business) transferred in the
Conversion; such part will have a holding period which will
include the holding period of the Partnership in the Common Stock
distributed. USRP's holding period in the Common Stock will
include the period the assets transferred were held by USRP,
provided the assets were capital assets or Section 1231 property
on the date of the exchange. Thus, a portion of each share of
Common Stock distributed to a Unitholder will have a holding
period in the hands of the Unitholder which will include the
holding period of USRP in certain assets transferred to the REIT
Corporation, while another portion of each such share of Common
Stock in the hands of the Unitholder will have a holding period
which will commence with the date following the Merger. As a
result, a sale or disposition of any such Common Stock by the
Unitholder within one year and one day after the date of the
Merger will generate both long-term and short-term capital gain
or loss, as the case may be, to the Unitholder.
4. TAX CONSEQUENCES TO THE REIT CORPORATION
Nonrecognition. The REIT Corporation will not recognize
gain or loss on its receipt of USRP's assets in exchange for the
Common Stock. Following the Merger, substantially all the assets
and liabilities formerly owned by USRP will be owned by the REIT
Corporation through the Operating Partnership.
TAX BASIS AND HOLDING PERIOD IN ASSETS. The aggregate tax
basis of the REIT Corporation in its assets following the Merger
should equal USRP's aggregate tax basis in its assets on the date
of the Merger increased by any gain recognized by USRP on the
Merger. The REIT Corporation's holding period in the assets will
include USRP's holding period.
- 118 -
<PAGE>
DEPRECIATION DEDUCTIONS. The REIT Corporation will
depreciate the transferred assets over their remaining lives at
the same rate and using the same method as used by USRP with
respect to such assets. The REIT Corporation's basis in its
assets will generate future tax deductions to the REIT
Corporation. Although Unitholders with relatively higher bases
in their Units may be viewed (through USRP's Section 754
election) as having a greater share of such basis than other
Unitholders, no consideration has been given to the expected
future tax benefits or detriments in arriving at the number of
shares of Common Stock to be received by each Unitholder.
REPORTING REQUIREMENTS
Pursuant to Section 1.351-3(a) of the Regulations, USRP will
be required to file with its income tax return for the tax year
of the Merger, a statement which includes a description of (i)
the assets transferred, (ii) the Common Stock received in the
exchange, and (iii) any liabilities of USRP assumed by the REIT
Corporation pursuant to the Merger.
5. TAX CONSEQUENCES OF THE REIT CORPORATION'S QUALIFICATION
AS A REIT
The REIT Corporation will elect to be treated as a REIT for
Federal income tax purposes and the following is a summary of the
material Federal income tax considerations affecting the REIT
Corporation as a REIT and the Unitholders as its stockholders:
REIT QUALIFICATION. Entities like the REIT Corporation 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 REIT Corporation qualifies for taxation as a REIT,
it generally will not be subject to corporate income tax to the
extent the REIT Corporation 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
regular 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 REIT Corporation as a
REIT." In addition, if the REIT Corporation 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. The
current maximum Federal tax rate for corporations is 35%, but
that rate may increase.
The REIT Corporation will elect to be treated as a REIT for
federal income tax purposes commencing with its taxable year
ended December 31, 1997, and for each subsequent taxable year.
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. While the REIT
Corporation expects to satisfy these tests, and will use its best
efforts to do so, no assurance can be given that the REIT
Corporation will qualify as a REIT for any particular year, or
that the applicable law will not change and adversely affect the
REIT Corporation and its stockholders. See " --Failure to
Qualify as a REIT."
-119 -
<PAGE>
GENERAL QUALIFICATION REQUIREMENTS. The REIT Corporation
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 REIT Corporation must be managed by one or more directors.
The REIT Corporation expects to meet, each of these requirements.
The REIT Corporation also expects to satisfy the requirements
that are separately described below concerning share ownership
and reporting, the nature and amounts of the REIT Corporation's
income and assets and the levels of required annual
distributions.
SHARE OWNERSHIP; REPORTING. Beneficial ownership of the
REIT Corporation must be and is evidenced by transferable shares.
The REIT Corporation's capital stock must be held by at least 100
persons for approximately 92% of the days in each taxable year.
Not more than 50% of the value of the shares of capital stock 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 REIT Corporation's taxable years.
The REIT Corporation is not required to satisfy these 100 person
and 50% tests until its second taxable year for which an election
is made to be taxed as a REIT. The REIT Corporation believes
that its shares of Common Stock will be owned by a sufficient
number of investors and in appropriate proportions to permit it
to continue satisfying 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 8.75% of the outstanding Common Stock
(except for QSV which can initially own up to 15% 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
REIT Corporation's REIT status. Special rules for determining
share ownership apply to certain qualified pension and profit
sharing trusts. See "--Taxation of Tax Exempt Entities."
To monitor the REIT Corporation's compliance with the share
ownership requirements, the REIT Corporation is required to
maintain records disclosing the actual ownership of common
shares. To do so, the REIT Corporation must 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 must be
maintained as part of the REIT Corporation'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.
SOURCES OF GROSS INCOME. In order to qualify as a REIT for
a particular year, the REIT Corporation 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 REIT
Corporation to own and operate a number of its properties through
- 120 -
<PAGE>
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 REIT
Corporation 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 REIT Corporation'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 REIT Corporation'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 REIT Corporation for at least
four years.
The REIT Corporation 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 REIT Corporation 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 REIT Corporation 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 REIT Corporation will have
leases where rent is based on a percentage of gross income. Also
excluded is rent received from a person or corporation in which
the REIT Corporation (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. USRP, 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 REIT
Corporation furnishes services to the tenants or manages or
operates the property, other than through an "independent
contractor" from whom the REIT Corporation does not derive any
income. The obligation to operate through an independent
contractor generally does not apply, however, if any services
provided by the REIT Corporation 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
- 121 -
<PAGE>
in evaluating whether rent from real property would be unrelated
business taxable income when received by a tax exempt owner of
the property).
The REIT Corporation will, in most instances, directly
operate and manage its assets without using an "independent
contractor." The REIT Corporation 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 REIT Corporation 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
REIT Corporation believes that substantially all of its rental
income will be qualifying income under the 75% income test, and
that the REIT Corporation's provision of services will not cause
the rental income to fail to be included under that test.
Upon the REIT Corporation'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 REIT Corporation'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).
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 are expected to be at all times less than 5%
of the REIT Corporation's annual gross income. While the REIT
Corporation does not anticipate that it will earn substantial
amounts of nonqualifying income, if nonqualifying income exceeds
5% of the REIT Corporation's gross income, the REIT Corporation
could lose its status as a REIT. The REIT Corporation may
establish non-qualified REIT subsidiaries to hold assets
generating non-qualifying income. The gross income generated by
these subsidiaries is not included in the REIT Corporation's
gross income. However, dividends from such subsidiaries to the
REIT Corporation are included in the REIT Corporation's gross
income and qualify for the 95% income test.
If the REIT Corporation 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
- 122 -
<PAGE>
to meet the tests is due to reasonable cause
and not to willful neglect. However, in that case the REIT
Corporation 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 REIT Corporation as
a REIT."
30% INCOME TEST. The REIT Corporation 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
REIT Corporation 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 REIT Corporation's status as a REIT automatically.
Because the REIT Corporation expects to hold its assets for
long-term investment and does not anticipate selling them within
four years, the REIT Corporation expects to comply with this
requirement.
CHARACTER OF ASSETS OWNED. On the last day of each calendar
quarter, the REIT Corporation also must meet two tests concerning
the nature of its investments. First, at least 75% of the value
of the total assets of the REIT Corporation 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 REIT Corporation receives the
new capital. Second, although the balance of the REIT
Corporation's assets generally may be invested without
restriction, the REIT Corporation will not be permitted to own
(i) securities of any one non-governmental issuer that represent
more than 5% of the value of the REIT Corporation'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 REIT Corporation 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 REIT Corporation's investments will be
in properties which should represent qualifying real estate
assets.
ANNUAL DISTRIBUTIONS TO STOCKHOLDERS. To maintain REIT
status, the REIT Corporation 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 REIT Corporation 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
- 123 -
<PAGE>
noncash 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 REIT Corporation
and its stockholders). Other dividends declared before the due
date of the REIT Corporation's tax return for the taxable year
(including extensions) also will be treated as paid in the prior
year for the REIT Corporation if they are paid (i) within 12
months of the end of such taxable year and (ii) no later than the
REIT Corporation'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 REIT
Corporation for a prior year. A nondeductible excise tax equal
to 4% will be imposed on the REIT Corporation 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 REIT Corporation's "ordinary income" plus (b) 95%
of the REIT Corporation's capital gain net income plus (c) income
not distributed in earlier years minus (d) distributions in
excess of income in earlier years and (e) any amount of REIT
taxable income for such year.
The REIT Corporation will be taxed at regular corporate
rates to the extent that it retains any portion of its taxable
income (e.g., if the REIT Corporation distributes only the
required 95% of its taxable income, it would be taxed on the
retained 5%). Under certain circumstances the REIT Corporation
may not have sufficient cash or other liquid assets to meet the
distribution requirement. This could arise because of competing
demands for the REIT Corporation'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 paid before a deduction
is allowed). Although the REIT Corporation does not anticipate
any difficulty in meeting this requirement, no assurance can be
given that necessary funds will be available.
If the REIT Corporation fails to meet the 95% distribution
requirement because of an adjustment to the REIT Corporation's
taxable income by the IRS, the REIT Corporation may be able to
cure the failure retroactively by paying a "deficiency dividend"
(as well as applicable interest and penalties) within a specified
period.
- 124 -
<PAGE>
TAXATION OF THE REIT CORPORATION AS A REIT. The REIT
Corporation 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 REIT Corporation qualifies as a
REIT, it generally will be taxed only on the portion of its
taxable income that it retains (which will include undistributed
net capital gain), because the REIT Corporation will be entitled
to a deduction for its 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 REIT Corporation does not
anticipate that it will pay any such preferential dividends. The
Articles will provide for the automatic exchange of outstanding
shares for Excess Stock in circumstances in which the REIT
Corporation'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 REIT Corporation 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 REIT Corporation's ability to deduct its
dividend payments.
The REIT Corporation 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 REIT
Corporation 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
REIT Corporation's REIT Taxable Income to the REIT Corporation's
gross income (excluding capital gain and certain other items).
The REIT Corporation also will be subject to the minimum tax on
items of tax preference (excluding items specifically allocable
to the REIT Corporation's stockholders). Finally, under
regulations that are to be promulgated, the REIT Corporation 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 REIT Corporation acquires in
certain tax-free corporate transactions, to the extent the gain
is recognized during the first ten years after the REIT
Corporation acquires such assets.
FAILURE TO QUALIFY AS A REIT. For any taxable year in
which the REIT Corporation fails to qualify as a REIT, it would
be taxed at the usual 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. Any corporate level taxes generally
would reduce the amount of cash available to the REIT Corporation
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 REIT Corporation likely would be reduced
substantially. As a result, the REIT Corporation's failure to
qualify as a REIT during any taxable year could have a material
adverse effect upon the REIT Corporation and its stockholders.
If the REIT Corporation loses its REIT status, unless certain
relief provisions apply, the REIT Corporation will not be
eligible to elect REIT status again until the
- 125 -
<PAGE>
fifth taxable year which begins after the first year for which the REIT
Corporation's election was terminated.
If, after forfeiting its REIT status, the REIT Corporation
later qualifies and elects to be taxed as a REIT again, the REIT
Corporation may face significant adverse tax consequences. Prior
to the end of the year in which the REIT Corporation sought to
qualify again as a REIT, the REIT Corporation would be required
to make distributions sufficient to eliminate any earnings and
profits accumulated during its period of non-REIT status.
Moreover, immediately prior to the effectiveness of the election
to return to REIT status, the REIT Corporation would be treated
as having disposed of all of its assets in a taxable transaction,
triggering taxable gain with respect to the REIT Corporation's
appreciated assets. In that event, however, the REIT Corporation
would be permitted to elect an alternative treatment under which
those gains would be taken into account only as and when they
actually are recognized upon sales of the appreciated property
occurring within a ten-year period. The REIT Corporation would
be required to distribute at least 95% of any such recognized
gains, but it would not receive the benefit of a dividends paid
deduction to reduce those taxable gains. Thus, any such gains on
appreciated assets would be subject to double taxation (i.e., at
the corporate level as well as the stockholder level).
TAXATION OF STOCKHOLDERS. Distributions generally will be
taxable to stockholders as ordinary income to the extent of the
REIT Corporation'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 REIT
Corporation 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 REIT Corporation'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. Distributions by the REIT Corporation,
whether characterized as ordinary income or as capital gains, are
not eligible for the 70% dividends received deduction for
corporations. Stockholders are not permitted to deduct losses or
loss carry-forwards of the REIT Corporation. 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 REIT Corporation.
The REIT Corporation may generate cash in excess of its net
earnings. If the REIT Corporation distributes cash to
stockholders in excess of the REIT Corporation'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 REIT Corporation may, upon the
- 126 -
<PAGE>
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 shares will be reportable as capital gain or loss.
If a stockholder receives a long-term capital gain dividend from
the REIT Corporation 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 REIT Corporation fails to qualify
as a REIT, the stockholders generally will continue to be treated
in the same fashion described above, except that no the REIT
Corporation 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 REIT Corporation's tax
preference items.
BACKUP WITHHOLDING. The REIT Corporation 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 REIT
Corporation 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 shareholder fails to supply a correct
taxpayer identification number, (ii) when the IRS notifies the
REIT Corporation 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 shareholder 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 shareholder's Federal income tax liability.
The REIT Corporation 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 REIT Corporation.
TAXATION OF TAX EXEMPT ENTITIES. In general, a tax exempt
entity that is a stockholder of the REIT Corporation will not be
subject to tax on distributions from the REIT Corporation 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. A tax exempt entity may be subject to
tax, 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. (This general rule will not
apply if certain persons related to the qualified trust ("disqualified
persons") hold in the aggregate more than 5% of the value of the
- 127 -
<PAGE>
REIT and the REIT has accumulated earnings and profits attributable
to any period for which it did not qualify as a REIT; this exception is not
expected to apply to the REIT Corporation.)
A qualified trust owning more than 10% of a REIT must treat
a percentage of dividends from the REIT as unrelated business
taxable income. 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 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 unrelated business taxable income. These
unrelated business taxable income 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 individually
holding more than 10% of the value of the REIT collectively owns
more than 50% of the value of the REIT.
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 REIT Corporation
will constitute unrelated business taxable income 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 REIT Corporation. 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
common shares, 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 REIT Corporation of United States real property
interests and not designated by the REIT Corporation 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 REIT Corporation. 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 shares 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 REIT
Corporation expects to withhold United States income tax at the
rate of 30% on the gross amount of any such dividends paid to a
- 128 -
<PAGE>
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. Stockholder files an IRS Form 4224 with the REIT
Corporation claiming that the dividend is effectively connected
income. Dividends in excess of current and accumulated earnings
and profits of the REIT Corporation 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 REIT Corporation does not intend to make
quarterly estimates of that portion of the 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 REIT Corporation qualifies as a
REIT, dividends that are attributable to gain from sales or
exchanges by the REIT Corporation 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 foreign corporate
shareholder not entitled to treaty exemption. The REIT
Corporation is required by the Code and applicable Treasury
Regulations to withhold 35% of any dividend that could be
designated by the REIT Corporation 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 REIT
Corporation 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 REIT Corporation will be a "domestically
controlled REIT," and therefore the sale of shares will not be
subject to taxation under FIRPTA. If the shares are publicly
traded, however, no assurance can be given that the REIT
Corporation 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 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 shareholder that is a foreign
corporation), 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
- 129 -
<PAGE>
alien individual will be subject to a 30% tax on the individual's
capital gains. 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 may also be subject to the 30% branch profits tax
in the case of a stockholder that is a foreign corporation).
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 REIT Corporation 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. Consequently, prospective
stockholders should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in the REIT
Corporation.
B. PARTNERSHIP ALTERNATIVE
If the Conversion is effected pursuant to the Partnership
Alternative, no gain or loss should be recognized by the
Unitholders as a result of the amendments to the Partnership
Agreements and the admission of the REIT Corporation as a partner
in the Operating Partnership. A Unitholder's eventual exchange
of Units for shares of Common Stock will be a taxable event. See
"--Partnership Alternative--Disposition of Units: Exchange for
Shares in the REIT Corporation." Prior to such exchange, the
Unitholders generally will continue to be taxed in the same
manner as they were taxed preceding the admission of the REIT
Corporation as a limited partner of the Operating Partnership,
summarized as follows:
1. PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal
income tax liability. Each partner is required to take into
account in computing his federal income tax liability his
allocable share of income, gains, losses, deductions and credits
of the partnership, regardless of whether cash distributions are
made. Distributions by a partnership to a partner are generally
not taxable unless the distribution is in excess of the partner's
tax basis in his partnership interest.
Counsel is of the opinion that under present law, and
subject to the conditions and qualifications set forth below, for
federal income tax purposes, the Partnerships will be treated as
partnerships. Counsel's opinion as to the partnership status of
the Partnerships is based principally upon its interpretation of
the factors set forth in Treasury Regulations under Section 7701
of the Code, its interpretation of Section 7704 of the Code, and
upon certain representations made by the Managing General
Partner.
- 130 -
<PAGE>
Section 7704 of the Code provides that publicly-traded
partnerships shall, as a general rule, be taxed as corporations
despite the fact that they are not classified as associations
taxable as corporations under Section 7701. It is not clear
whether USRP will continue to be a "publicly traded partnership"
for purposes of Section 7704 of the Code after the Units are no
longer listed on the NYSE. Section 7704 of the Code provides an
exception to this general rule (the "Real Property Rent
Exception") for a publicly traded partnership if 90% or more of
its gross income for every taxable year consists of "qualifying
income." "Qualifying income" includes real property rental income
and gain from the sale or other disposition of real property and
gains from the sale or other disposition of capital assets held
for the production of income that otherwise constitutes
"qualifying income."
Real property rent is defined, under Section 7704 of the
Code, as amounts which would qualify as rent from real property
under Section 856(d) of the Code (the provisions of the Code
dealing with REITs). Although substantially all of the income of
USRP consists of qualifying rental income, USRP currently engages
in activities that give rise to non-qualifying rental income and
may enter into other such transactions in the future. Rental
income of USRP may not qualify as real property rent pursuant to
Section 856 of the Code if USRP, directly or indirectly through
the constructive ownership rules contained in Section 318 of the
Code, owns more than 10% of the capital or profits interest in
any tenant leasing real property from USRP. USRP, 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. With respect to other
transactions in which the Managing General Partner has or may
acquire an ownership interest in any tenant, the Managing General
Partner has represented that it and its affiliates will not
acquire, or allow any Unitholder owning more than 5% of total
Units outstanding to acquire, greater than a 10% ownership
interest in such tenant.
Additionally, USRP has purchased items of personalty and
equipment and leased such items to tenants in conjunction with
real property leases. To the extent that the rental income
attributable to such equipment exceeds 15% of total rental income
for the real property and equipment, such rental income would not
qualify as real property rent. USRP generally separately
allocates rental income between equipment and real property, and
the equipment component of such rental income is generally less
than 15% of the total rental income. Assuming that such
allocation is valid, no portion of the rental income attributable
to equipment and personal property should constitute
non-qualifying income.
USRP estimates that a total of 3.5% of its gross income for
taxable year 1997 will not constitute qualifying income, and
estimates that less than 3.5% of its gross income for each
subsequent taxable year will not constitute qualifying income.
If USRP fails to meet the Real Property Rent Exception to
the general rule of Section 7704 of the Code (other than a
failure determined by the IRS to be inadvertent which is cured
within a reasonable time after discovery), USRP will be treated
as if it had transferred all of its assets (subject to liabilities) to
a newly-formed corporation (on the first day of the year in which
- 131-
<PAGE>
it fails to meet the Real Property Rent Exception) in return for
stock in such corporation, and then distributed such stock to the
Unitholders in liquidation of their interest in USRP.
In rendering its opinion that neither of the Partnerships
will be treated as a corporation for federal income tax purposes,
counsel has relied on the following factual representations by
the Managing General Partner as to the Partnerships:
1. Each of the Partnerships will be operated in accordance
with applicable state partnership statutes, its Partnership
Agreement and the statements and representations made in this
Proxy Statement/Prospectus.
2. Except as otherwise required by Section 704(c) of the
Code, the general partner of each Partnership will have at least
a 0.99% interest in each material item of income, gain, loss,
deduction and credit of its respective Partnership.
3. For each taxable year, less than 10% of each
Partnership's gross income will be derived from sources other
than (i) real property rental income and gain from the sale or
other disposition of real property, or (ii) other items of
"qualifying income" within the meaning of Section 7704(d) of the
Code.
4. The Managing General Partner will act independently of
such Partnership's limited partners.
If either Partnership was taxable as a corporation or
treated as an association taxable as a corporation in any taxable
year, its income, gains, losses, deductions and credits would be
reflected only on its tax return rather than being passed through
to its partners and its taxable income would be taxed at
corporate rates. In addition, its distributions to each of its
partners would be treated as either dividend income (to the
extent of its current or accumulated earnings and profits), and,
in the absence of earnings and profits, as a nontaxable return of
capital (to the extent of such partner's tax basis in his
interest therein) or taxable capital gain (after such partner's
tax basis in his interest therein is reduced to zero).
Furthermore, losses realized by such Partnership would not flow
through to the Unitholders. Accordingly, treatment of either
Partnership as a corporation for federal income tax purposes
would probably result in a material reduction in a Unitholder's
cash flow and after-tax return. In addition, if USRP were to
fail to qualify as a partnership for federal income tax purposes,
the REIT Corporation could fail to qualify as a REIT.
The discussion below is based on the assumption that each
Partnership will be classified as a partnership for federal
income tax purposes. If that assumption proves to be erroneous,
most, if not all, of the tax consequences described below would
not be applicable to Unitholders.
- 132 -
<PAGE>
2. PARTNER STATUS
Unitholders who have become limited partners of USRP
pursuant to the provisions of the Master Partnership Agreement
will be treated as partners of USRP for federal income tax
purposes.
The IRS has ruled that assignees of partnership interests
who have not been admitted to a partnership as partners, but who
have the capacity to exercise substantial dominion and control
over the assigned partnership interests, will be treated as
partners for federal income tax purposes. On the basis of such
ruling, except as otherwise described herein, (i) assignees who
have executed and delivered transfer applications, and are
awaiting admission as limited partners of the Partnership, and
(ii) Unitholders whose Units are held in street name or by
another nominee will be treated as partners for federal income
tax purposes. As such ruling does not extend, on its facts, to
assignees of Units who are entitled to execute and deliver
transfer applications and thereby become entitled to direct the
exercise of attendant rights, but who fail to execute and deliver
transfer applications, the tax status of such Unitholders is
unclear. Such Unitholders should consult their own tax advisors
with respect to their status as partners in USRP for federal
income tax purposes. A purchaser or other transferee of Units
who does not execute and deliver a transfer application may not
receive certain federal income tax information or reports
furnished to record holders of Units unless the Units are held in
a nominee or street name account and the nominee or broker has
executed and delivered a transfer application with respect to
such Units.
A beneficial owner of Units whose Units have been
transferred to a short seller to complete a short sale would
appear to lose his status as a partner with respect to such Units
for federal income tax purposes. See "--Partnership Alternative-
- -Treatment of Short Sales."
3. TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME. USRP's income, gains,
losses, deductions and credits will consist of its allocable
share of the income, gains, losses, deductions and credits of the
Operating Partnership and dividends from its corporate
subsidiaries. Because USRP is not a taxable entity and incurs no
federal income tax liability, each Unitholder will be required to
take into account his allocable share of income, gain, loss and
deductions of the Operating Partnership (through USRP) without
regard to whether corresponding cash distributions are received
by Unitholders. Consequently, a Unitholder may be allocated
income from USRP although he has not received a cash distribution
in respect of such income.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS. Under Section 731
of the Code, distributions by USRP to a Unitholder generally will
not be taxable to such Unitholder for federal income tax purposes
to the extent of his tax basis in his Units immediately before
the distribution. Cash distributions (and, in certain circumstances,
distributions of marketable securities) in excess of such basis
generally will be considered to be gain from the sale or exchange of
the Units, taxable in accordance with the rules described under
"Partnership Alternative--Disposition of Units." The right to exchange
Units for Common Stock of the REIT Corporation may be treated as a
- 133 -
<PAGE>
marketable security, in which event the distribution of such rights
to the Unitholders would be treated as if the Unitholders received
cash equal to the fair market value of such rights received. Any
reduction in a Unitholder's share of USRP's liabilities included in his tax
basis in his Units will be treated as a distribution of cash to
such Unitholder. See "--Partnership Alternative--Tax Basis of
Units." A decrease in a Unitholder's percentage interest in USRP
because of a partnership offering of additional Units such as
upon the admission of the REIT Corporation, will decrease such
Unitholder's share of nonrecourse liabilities and, thus, will
result in a corresponding deemed distribution of cash.
A non-pro rata distribution of money or property may result
in ordinary income to a Unitholder, regardless of his tax basis
in his Units, if such distribution reduces the Unitholder's share
of the Partnership's "unrealized receivables" (including
depreciation recapture) and/or substantially appreciated
"inventory items" (both as defined in Section 751 of the Code)
(collectively, "Section 751 Assets"). To that extent, the
Unitholder will be treated as having received his proportionate
share of the Section 751 Assets and having exchanged such assets
with USRP in return for the non-pro rata portion of the actual
distribution made to him. This latter deemed exchange will
generally result in the Unitholder's realization of ordinary
income under Section 751(b) of the Code. Such income will equal
the excess of (i) the non-pro rata portion of such distribution
over (ii) the Unitholder's tax basis for the share of such
Section 751 Assets deemed relinquished in the exchange.
TAX BASIS OF UNITS. In general, a Unitholder's tax basis
for his Units initially will be equal to the price of such Units
to him. A Unitholder's tax basis will generally be increased by
(i) his share of partnership taxable income and (ii) his share of
partnership liabilities that are without recourse to any partner
("nonrecourse liabilities"), if any. Generally, a Unitholder's
tax basis in his interest will be decreased (but not below zero)
by (a) his share of partnership distributions, (b) his share of
decreases in nonrecourse liabilities of the partnership, (c) his
share of losses of the partnership and (d) his share of
nondeductible expenditures of the partnership that are not
chargeable to capital. A Unitholder's share of nonrecourse
liabilities will generally be based on his share of the
partnership's profits. Accordingly, at the time that a
Unitholder makes the adjustment to his share of partnership
properties pursuant to Section 743(b) of the Code, the Unitholder
will not be permitted to include the recourse debt financing of
the partnership but may be entitled to include a portion of the
partnership's nonrecourse financing, in such adjustment. See "--
Partnership Alternative--Tax Treatment of Operations--Section 754
Election."
LIMITATIONS ON DEDUCTIBILITY OF LOSSES. The passive loss
limitations contained in Section 469 of the Code generally
provide that individuals, estates, trusts and certain
closely-held corporations and personal service corporations can
deduct losses from passive activities (generally, activities in
which the taxpayer does not materially participate) only to the
extent of the taxpayer's income from such passive activities or
investments. The passive loss limitations are to be applied
separately with respect to publicly-traded partnerships.
Consequently, losses generated by USRP, if any, will be available
to offset only future income generated by USRP and will not be
available to offset income from other passive activities or
investments (including other publicly traded partnerships) or
salary or active business income. Passive losses that are
- 134 -
<PAGE>
not deductible because they exceed the Unitholder's income generated
by USRP may be deducted in full when the Unitholder disposes of
his entire investment in USRP to an unrelated party in a fully
taxable transaction.
A Unitholder's share of net income from USRP may be offset
by any suspended passive losses from USRP, but may not be offset
by any other current or carryover losses from other passive
activities, including those attributable to other publicly traded
partnerships. According to an IRS announcement, Treasury
regulations will be issued which characterize net passive income
from a publicly traded partnership as investment income for
purposes of deducting investment interest.
In addition to the foregoing limitations, a Unitholder may
not deduct from taxable income his share of partnership losses,
if any, to the extent that such losses exceed the lesser of
(i) the tax basis of his Units at the end of the partnership's
taxable year in which the loss occurs and (ii) the amount for
which the Unitholder is considered "at risk" under Section 465 of
the Code at the end of that year. In general, a Unitholder will
initially be "at risk" to the extent of the purchase price of his
Units. A Unitholder's "at risk" amount increases or decreases as
his tax basis in his Units increases or decreases, except that
nonrecourse liabilities (or increases or decreases in such
liabilities) of USRP generally do not affect his "at risk"
amount. Losses disallowed to a Unitholder as a result of these
rules can be carried forward and will be allowable to the
Unitholder to the extent that his tax basis or "at risk" amount
(whichever was the limiting factor) is increased in a subsequent
year. The "at risk" rules apply to an individual Unitholder, a
shareholder of a corporate Unitholder that is an S corporation
and a corporate Unitholder if 50% or more of the value of such
stock is owned directly or indirectly by five or fewer
individuals.
ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION.
The Master Partnership Agreement requires that a capital account
be maintained for each partner in accordance with the tax
accounting principles set forth in applicable Treasury
Regulations under Section 704 of the Code. Distributions upon
liquidation of USRP are to be made in accordance with positive
capital account balances.
In general, if USRP has a net profit, items of income, gain,
loss and deduction will be allocated among the general partner
and the Unitholders in accordance with their respective interests
in USRP. Notwithstanding the above, as required by Section
704(c) of the Code, certain items of partnership income, gain,
loss and deduction will be allocated to account for the
difference between the tax basis and fair market value of certain
property held by USRP ("Contributed Property"). Transactions
which result in a required Section 704(c) allocation with respect
to Contributed Property may arise if (i) a Unitholder contributes
appreciated or depreciated property, rather than cash, to USRP,
or (ii) additional Units are issued for cash, and at the time of
such issuance, the capital account of the existing partners are
restated to account for the difference between the tax basis and
fair market value of partnership property. USRP has previously
participated in several transactions described in clause (i)
above. Upon the admission of the REIT Corporation, the capital
accounts of the existing partners will be restated as
- 135 -
<PAGE>
described in clause (ii) above. Accordingly, with respect to each such
transaction, USRP will be required to make Section 704(c) allocations.
In addition, certain items of recapture income will be
allocated to the extent possible to the partner allocated the
deduction giving rise to the treatment of such gain as recapture
income in order to minimize the recognition of ordinary income by
some Unitholders, but these allocations may not be respected. If
these allocations of recapture income are not respected, the
amount of the income or gain allocated to a Unitholder will not
change, but a change in the character of the income allocated to
a Unitholder would result. Finally, although USRP does not
expect that its operations will result in the creation of
negative capital accounts, if negative capital accounts
nevertheless result, items of partnership income and gain will be
allocated in an amount and manner sufficient to eliminate the
negative balances as quickly as possible.
Under Section 704(c) of the Code, the partners in a
partnership cannot be allocated more depreciation, gain or loss
than the total amount of any such item recognized by that
partnership in a particular taxable period (the "ceiling
limitation"). To the extent the ceiling limitation is or becomes
applicable, the Partnership Agreements will require that certain
items of income and deduction be allocated in a way designed to
effectively "cure" this problem and eliminate the impact of the
ceiling limitation. Such allocations will not have substantial
economic effect because they will not be reflected in the capital
accounts of the Unitholders. Treasury Regulations under Section
704(c) of the Code permit a partnership to make reasonable
curative allocations to reduce or eliminate disparities between
the tax basis and value attributable to Contributed Properties.
Counsel is of the opinion that, allocations under USRP
Agreement will be given substantial effect for federal income tax
purposes in determining a partner's distributive share of an item
of income, gain, loss or deduction. There are, however,
uncertainties in the Treasury Regulations relating to allocations
of partnership income.
4. TAX TREATMENT OF OPERATIONS.
INCOME AND DEDUCTIONS IN GENERAL. No federal income tax
will be paid by USRP. Instead, each Unitholder will be required
to report on his income tax return his allocable share of income,
gains, losses and deductions of USRP. Such items must be
included on the Unitholder's federal income tax return without
regard to whether USRP makes a distribution of cash to the
Unitholder. A Unitholder is generally entitled to offset his
allocable share of USRP's passive income with his allocable share
of losses generated by USRP, if any. See "--Partnership
Alternative--Tax Consequences of Unit Ownership--Limitations on
Deductibility of Losses."
USRP has adopted a convention with respect to transferring
Unitholders which generally allocates the net income or net loss
of USRP proportionately to each day of the year, and treats any
Unitholder owning a Unit as of the last day of the month as
owning the Unit for the entire month.
- 136 -
<PAGE>
ACCOUNTING METHOD AND TAXABLE YEAR. USRP utilizes the
calendar year as its taxable year and adopted the accrual method
of accounting for federal income tax purposes.
DEPRECIATION METHOD. USRP elected to use the straight-line
depreciation method with respect to its real property assets.
Property subsequently acquired or constructed by USRP may be
depreciated using accelerated depreciation methods permitted by
Section 168 of the Code.
SECTION 754 ELECTION. Each Partnership has made the
election permitted by Section 754 of the Code effective for
Partnership taxable year 1996. Such election generally permits a
purchaser of Units to adjust his share of the tax basis in USRP's
properties pursuant to Section 743(b) of the Code. Such
elections are irrevocable without the consent of the IRS. The
Section 743(b) adjustment is attributed solely to a purchaser of
Units and is not added to the tax basis of USRP's assets
associated with all of the Unitholders (the "Common Bases"). The
amount of the adjustment under Section 743(b) is the difference
between the Unitholder's tax basis in his Units and the
Unitholder's proportionate share of the Common Bases attributable
to the Units pursuant to Section 743. The aggregate amount of
the adjustment computed under Section 743(b) is then allocated
among the various assets of USRP pursuant to the rules of Section
755. The Section 743(b) adjustment acts in concert with the
Section 704(c) allocations (including the curative allocations,
if respected) in providing the purchaser of Units with the
equivalent of a tax basis in his share of USRP's properties equal
to the fair market value of such share. See "--Partnership
Alternative--Tax Consequences of Unit Ownership--Allocation of
Partnership Income, Gain, Loss and Deduction" and "--Partnership
Alternative--Uniformity of Units."
Proposed Treasury Regulation Section 1.168-2(n) generally
requires the Section 743(b) adjustment attributable to recovery
property to be depreciated as if the total amount of such
adjustment were attributable to newly-acquired recovery property
placed in service when the transfer occurs. The legislative
history of Section 197 of the Code indicates that the Section
743(b) adjustment attributable to an amortizable Section 197
intangible should be similarly treated. Under Treasury
Regulation Section 1.167(c)-l(a)(6), a Section 743(b) adjustment
attributable to property subject to depreciation under Section
167 of the Code rather than cost recovery deductions under
Section 168 is generally required to be depreciated using either
the straight-line method or the 150% declining balance method.
USRP utilizes the straight line method on such property. The
depreciation and amortization methods and useful lives associated
with the Section 743(b) adjustment, therefore, may differ from
the methods and useful lives generally used to depreciate the
Common Bases in such properties. The managing general partner of
USRP is authorized to adopt a convention to preserve the
uniformity of Units despite its inconsistency with Proposed
Treasury Regulation Section 1.168-2(n) and Treasury Regulation
Section 1.167(c)-l(a)(6). See "--Partnership Alternative--
Uniformity of Units."
Although counsel is unable to opine as to the validity of
such an approach, USRP intends to depreciate the portion of a
Section 743(b) adjustment attributable to unrealized appreciation
in the value of Contributed Property (to the extent of any
unamortized disparity between the tax basis and value
attributable to Contributed Property) using a rate of
depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the Common
- 137 -
<PAGE>
Bases of such property, despite its inconsistency with Proposed
Treasury Regulation Section 1.168-2(n), Treasury Regulation
Section 1.167(c)-l(a)(6) or the legislative history of Section
197 of the Code. If USRP determines that such position cannot
reasonably be taken, USRP may adopt a depreciation or
amortization convention under which all purchasers acquiring
Units in the same month would receive depreciation or
amortization, whether attributable to Common Bases or Section
743(b) basis, based upon the same applicable rate as if they had
purchased a direct interest in USRP's property. Such an
aggregate approach may result in lower annual depreciation or
amortization deductions than would otherwise be allowable to
certain Unitholders. See "--Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made
in accordance with the principles of Section 1060 of the Code.
Based on these principles, the IRS may seek to reallocate some or
all of any Section 743(b) adjustment not so allocated by USRP to
goodwill which, as an intangible asset, would be amortizable over
a longer period of time than certain of USRP's tangible assets.
A Section 754 election is advantageous when the transferee's
tax basis in such Units is higher than such Units' share of the
aggregate tax basis in USRP's assets immediately prior to the
transfer. In such case, pursuant to the election, the transferee
will take a new and higher tax basis in his share of USRP's
assets for purposes of calculating, among other items, his
depreciation deductions and his share of any gain or loss on a
sale of USRP's assets. Conversely, a Section 754 election would
be disadvantageous if the transferee's tax basis in such Units is
lower than such Units' share of the aggregate tax basis in USRP's
assets immediately prior to the transfer. Thus, the amounts that
a Unitholder would be able to obtain on a sale or other
disposition of his Units may be affected favorably or adversely
by the elections under Section 754.
The calculations and adjustments in connection with the
Section 754 election depend, among other things, on the date on
which a transfer occurs and the price at which the transfer
occurs. To help reduce the complexity of those calculations and
the resulting administrative cost to USRP, the managing general
partner may apply the following method in making the necessary
adjustments pursuant to the Section 754 election on transfers
subsequent to the transfers pursuant to this offering: the price
paid by a transferee for his Units will be deemed to be the
lowest quoted trading price for the Units during the calendar
month in which the transfer was deemed to occur, without regard
to the actual price paid. The application of such convention
yields a less favorable tax result, as compared to adjustments
based on actual price, to a transferee who paid more than the
"convention price" for his Units. The calculations under Section
754 elections are highly complex, and there is little legal
authority concerning the mechanics of the calculations,
particularly in the context of publicly traded partnerships. It
is possible that the IRS will successfully assert that the
adjustments made by the managing general partner do not meet the
requirements of the Code or the applicable regulations and
require a different tax basis adjustment to be made.
- 138 -
<PAGE>
Should the IRS require a different tax basis adjustment to
be made, and should, in the managing general partner's opinion,
the expense of compliance exceed the benefit of the election, the
managing general partner may seek permission from the IRS to
revoke the Section 754 election previously made for USRP. Such a
revocation may increase the ratio of a Unitholder's distributive
share of taxable income to cash distributions and adversely
affect the amount that a Unitholder will receive from the sale of
his Units.
ESTIMATES OF RELATIVE FAIR MARKET VALUES AND BASIS OF
PROPERTIES. The consequences of the acquisition, ownership and
disposition of Units will depend in part on estimates by the
managing general partner of the relative fair market values and
determinations of the tax basis of the assets of USRP. The
federal income tax consequences of such estimates and
determinations of tax basis may be subject to challenge and will
not be binding on the IRS or the courts. If the estimates of
fair market value or determinations of tax basis were found to be
incorrect, the character and amount of items of income, gain,
loss, deduction or credit previously reported by Unitholders
might change, and Unitholders might be required to amend their
previously filed tax returns or to file claims for refund.
5. TREATMENT OF SHORT SALES
A Unitholder whose Units are loaned to a "short seller" to
cover a short sale of Units would appear to be considered as
having transferred beneficial ownership of such Units and would,
thus, no longer be a partner with respect to such Units during
the period of such loan. As a result, during such period, any
partnership income, gains, deductions, losses or credits with
respect to such Units would appear not to be reportable by such
Unitholder, any cash distributions received by the Unitholder
with respect to such Units would be fully taxable and all of such
distributions would appear to be treated as ordinary income. The
IRS also may contend that a loan of Units to a "short seller"
constitutes a taxable exchange. If such a contention were
successfully made, the lending Unitholder may be required to
recognize gain or loss. The IRS has announced that it is
actively studying issues relating to the tax treatment of short
sales of partnership interests.
6. ALTERNATIVE MINIMUM TAX
Each Unitholder will be required to take into account his
share of any items of partnership income, gain or loss for
purposes of the alternative minimum tax. A portion of USRP's
depreciation deductions may be treated as an item of tax
preference for this purpose. A Unitholder's alternative minimum
taxable income derived from USRP may be higher than his share of
partnership net income because USRP may use more accelerated
methods of depreciation for purposes of computing federal taxable
income or loss. Prospective Unitholders should consult with
their tax advisors as to the impact of an investment in Units on
their liability for the alternative minimum tax.
- 139 -
<PAGE>
7. TAX-EXEMPT ENTITIES, REGULATED INVESTMENT COMPANIES
AND FOREIGN INVESTORS
Employee benefit plans and most other organizations exempt
from federal income tax (including individual retirement accounts
("IRAs") and other retirement plans) are subject to federal
income tax on unrelated business taxable income ("UBIT").
Substantially all of the income of USRP is rental income from
real property which is excluded from the definition of UBIT.
However, to the extent that any rental income is attributable to
debt-financed property, as defined in Section 514 of the Code,
such income will not satisfy the rental income exclusion and will
be taxable to a tax-exempt Unitholder as an item of UBIT.
Although USRP currently has only a small amount of debt-financed
property (as defined under Section 514 of the Code), the Managing
General Partner expects such proportion of debt-financed
properties to increase as USRP continues its acquisition program.
Accordingly, a larger percentage of USRP's total income may
become UBIT.
Regulated investment companies are required to derive 90% or
more of their gross income from interest, dividends, gains from
the sale of stocks or securities or foreign currency or certain
related sources. It is not anticipated that any significant
amount of USRP's gross income will be qualifying income.
Nonresident aliens and foreign corporations, trusts or
estates that acquire Units will be considered to be engaged in
business in the United States on account of ownership of such
Units and as a consequence will be required to file federal tax
returns in respect of their distributive shares of partnership
income, gain, loss, deduction or credit and pay federal income
tax at regular rates (net of credits, including withholding) on
such income. Generally, a partnership is required by Section
1446 of the Code to pay a withholding tax on the portion of the
partnership's income that is effectively connected with the
conduct of a United States trade or business and that is
allocable to the foreign partners, regardless of whether any
actual distributions have been made to such partners. However,
under rules applicable to publicly-traded partnerships, USRP will
withhold (currently at the rate of 39.6%) on actual cash
distributions made quarterly to foreign Unitholders. Each
foreign Unitholder must obtain a taxpayer identification number
from the IRS and submit that number to the transfer agent of USRP
on a Form W-8 in order to obtain credit for the taxes withheld.
Subsequent adoption of the Treasury Regulations or the issuance
of other administrative pronouncements may require USRP to change
these procedures.
Because a foreign corporation that owns Units will be
treated as engaged in a United States trade or business, such a
Unitholder will be subject to United States branch profits tax at
a rate of 30%, in addition to regular federal income tax, on its
allocable share of USRP's earnings and profits (as adjusted for
changes in the foreign corporation's "U.S. net equity") that are
effectively connected with the conduct of a United States trade
or business. Such a tax may be reduced or eliminated by an
income tax treaty between the United States and the country with
respect to which the foreign corporate Unitholder is a "qualified
resident." In addition, such a Unitholder is subject to special
information reporting requirements under Section 6038C of the
Code.
- 140 -
<PAGE>
A foreign Unitholder who sells or otherwise disposes of a
Unit will be subject to federal income tax on gain realized on
the disposition of such Unit to the extent that such gain is
effectively connected with a United States trade or business of
the foreign Unitholder. The IRS has issued a ruling under which
all or a portion of any gain that is recognized on a sale of a
Unit by a foreign Unitholder will be subject to tax under the
rule of the preceding sentence. USRP does not expect that any
material portion of any such gain will avoid United States
taxation. If less than all of any such gain is so taxable, then
Section 897 of the Code may increase the portion of any gain that
is recognized by a foreign Unitholder that is subject to United
States income tax and withholding of 10% of the amount realized
on the disposition of a Unit may apply if that foreign Unitholder
has held more than 5% in value of the Units during the five-year
period ending on the date of the disposition or if the Units are
not regularly traded on an established securities market at the
time of the disposition.
8. UNIFORMITY OF UNITS
There can arise a lack of uniformity in the intrinsic tax
characteristics of Units sold after the date hereof and Units
outstanding as of the date hereof. Without such uniformity,
compliance with several federal income tax requirements, both
statutory and regulatory, could be substantially diminished. In
addition, such non-uniformity could have a negative impact on the
ability of a Unitholder to dispose of his interest in USRP. Such
lack of uniformity can result from the application of Proposed
Treasury Regulation Section 1.168-2(n) and Treasury Regulation
Section 1.167(c)-l(a)(6) or the application of certain "ceiling"
limitations on USRP's ability to make allocations to eliminate
disparities between the tax basis and value attributable to
partnership properties.
Depreciation conventions may be adopted or items of income
and deduction may be specially allocated in a manner that is
intended to preserve the uniformity of intrinsic tax
characteristics among all Units, despite the application of
either Proposed Treasury Regulation Section 1.168-2(n) and
Treasury Regulation Section 1.167(c)-l(a)(6) or the "ceiling"
limitations to partnership properties. Any such special
allocation will be made solely for federal income tax purposes.
In the event the IRS disallows the use of such conventions, some
or all of the adverse consequences described in the preceding
paragraph could result. See "--Partnership Alternative--
Allocation of Partnership Income, Gain, Loss and Deduction" and
"--Partnership Alternative--Tax Treatment of Operations--Section
754 Election."
9. DISPOSITION OF UNITS: EXCHANGE FOR SHARES IN THE REIT
CORPORATION
GAIN OR LOSS IN GENERAL. If a Unit is transferred to the
REIT Corporation in exchange for shares in the REIT Corporation,
or is sold or otherwise disposed of, the determination of gain or
loss from the exchange, sale or other disposition will be based
on the difference between the amount realized and the tax basis
for such Unit. See "--Partnership Alternative--Tax Consequences
of Unit Ownership--Basis of Units." Upon the exchange, sale or
other disposition of his Units, a Unitholder's "amount realized"
will be measured by the sum of the cash or fair market value of other
property received plus the portion of USRP's nonrecourse liabilities
- 141 -
<PAGE>
allocated to the Units sold. Similarly, upon a gift
of his Units, a Unitholder will be deemed to have realized gain
with respect to the portion of USRP's nonrecourse liabilities
allocable to such Units. To the extent that the amount of cash
or property received plus the allocable share of USRP's
nonrecourse liabilities exceeds the Unitholder's tax basis for
the Units disposed of (in the case of a charitable gift, only a
portion of such tax basis may be offset against the nonrecourse
debt), the Unitholder will recognize gain. The tax liability
resulting from such gain could exceed the amount of cash received
upon the disposition of such Units.
The IRS has ruled that a partner must maintain an aggregate
tax basis for his interests in a single partnership (consisting
of all interests acquired in separate transactions). On a sale
of a portion of such aggregate interest, such partner would be
required to allocate his aggregate tax basis between the interest
sold and the interest retained by some equitable apportionment
method. If applicable, the aggregation of tax basis of a
Unitholder effectively prohibits a Unitholder from choosing among
Units with varying amounts of inherent gain or loss to control
the timing of the recognition of such inherent gain or loss as
would be possible in a stock transaction. Thus, the IRS ruling
may result in an acceleration of gain or deferral of loss on a
sale of a portion of a Unitholder's Units. It is not clear
whether such ruling applies to publicly traded partnerships, such
as USRP, the interests in which are evidenced by separate
registered certificates, providing a verifiable means of
identifying each separate interest and tracing the purchase price
of such interest. A Unitholder considering the purchase of
additional Units or a sale of Units purchased at differing prices
should consult his tax advisor as to the possible consequences of
that IRS ruling.
To the extent that a portion of the gain upon the sale of a
Unit is attributable to a Unitholder's share of "substantially
appreciated inventory items" and "unrealized receivables" of
USRP, as those terms are defined in Section 751 of the Code, such
portion will be treated as ordinary income. Unrealized
receivables include (i) to the extent not previously includable
in partnership income, any rights to pay for services rendered or
to be rendered and (ii) amounts that would be subject to
recapture as ordinary income if USRP had sold its assets at their
fair market value at the time of the transfer of a Unit.
Gain from the sale or other disposition of a Unit may
constitute investment income under Section 163(d) of the Code. A
Unitholder must report to the transfer agent of USRP (on behalf
of USRP) any transfer of Units. See "--Partnership Alternative--
Information Return Filing Requirements."
The treatment of distributions received after a Unitholder
has disposed of his Units is unclear. Such a distribution may be
fully taxable as ordinary income or may reduce a Unitholder's tax
basis for the Units disposed of, resulting in a larger gain or
smaller loss from such disposition.
TRANSFEROR/TRANSFEREE ALLOCATIONS. In general, USRP's
taxable income and losses are determined annually and are prorated on
a monthly basis and subsequently apportioned among the Unitholders in
proportion to the number of Units owned by them. However, extraordinary
- 142 -
<PAGE>
gain or loss realized on a Terminating Capital Transaction is
allocated among the Unitholders of record as of the date such
Terminating Capital Transaction occurs. As a result of this monthly
allocation, a Unitholder transferring Units may be allocated income, gain,
loss, deduction and credit accrued after the transfer.
The use of the monthly conventions discussed above may not
be permitted by existing Treasury Regulations and, accordingly,
counsel is unable to opine on the validity of the method of
allocating income and deductions between the transferors and
transferees of Units. If the IRS treats transfers of Units as
occurring throughout each month and a monthly convention is not
allowed by the regulations (or only applies to transfers of less
than all of a partner's interest), the IRS may contend that
taxable income or losses of USRP must be reallocated among the
Partners. If any such contention were sustained, certain
Unitholders' respective tax liabilities would be adjusted to the
possible detriment of other Unitholders. The managing general
partner is authorized to revise USRP's method of allocation
between transferors and transferees (as well as among partners
whose interests otherwise vary during a taxable period) to comply
with any future regulations.
10. CONSTRUCTIVE TERMINATION OR DISSOLUTION OF PARTNERSHIP
Under Section 708(b)(1)(B) of the Code, a partnership will
be considered to have been terminated if within a twelve-month
period there is a sale or exchange of 50% or more of the
interests in partnership capital and profits. A termination
results in a closing of the partnership's taxable year for all
partners, and the partnership's assets are treated as having been
distributed to the partners and reconveyed to the partnership,
which is then treated as a new partnership. A constructive
termination of USRP will cause a termination of the Operating
Partnership. In the case of a Unitholder reporting on a fiscal
year other than a calendar year, the closing of a tax year of
USRP may result in more than twelve months' taxable income or
loss of USRP being includable in his taxable income for the year
of termination. In addition, each Unitholder will realize
taxable gain to the extent that any money distributed or deemed
distributed to him (including any net reduction in his share of
USRP's nonrecourse liabilities) exceeds the tax basis of his
Units.
A termination of either Partnership under Section
708(b)(1)(B) could result in adverse tax consequences to
Unitholders because it could result in a change in the tax basis
for USRP's properties and would require that new tax elections be
made by the reconstituted partnerships. In addition, such a
termination could result in a deferral of Partnership
depreciation deductions. Further, such a termination may either
accelerate the application of (or subject the reconstituted
partnerships to the application of) any change in law effective
as of a date after the termination.
USRP may not have the ability to determine when a
constructive termination occurs as a result of transfers of Units
because the Units are currently freely transferable under "street
name" ownership. Thus, USRP may be subject to penalty for
failure to file a tax return and may fail to make certain
partnership elections in a timely manner, including the Section
754 Election.
- 143 -
<PAGE>
11. PARTNERSHIP INCOME TAX INFORMATION RETURNS AND
PARTNERSHIP AUDIT PROCEDURES
USRP will use all reasonable efforts to furnish Unitholders
with tax information within 75 days after the close of each
partnership taxable year. Specifically, USRP intends to furnish
to each Unitholder a Schedule K-1 which sets forth his allocable
share of USRP's income, gains, losses, deductions and credits, if
any. In preparing such information, the managing general partner
will necessarily use various accounting and reporting conventions
to determine each Unitholder's allocable share of income, gains,
losses, deductions and credits. There is no assurance that any
such conventions will yield a result that conforms to the
requirements of the Code, regulations thereunder or
administrative pronouncements of the IRS. The managing general
partner cannot assure Unitholders, that the IRS will not contend
that such accounting and reporting conventions are impermissible.
Contesting any such allegations could result in substantial
expense to USRP. In addition, if the IRS were to prevail,
Unitholders may incur substantial liabilities for taxes and
interest.
The federal income tax information returns filed by USRP may
be audited by the IRS. The Code contains partnership audit
procedures that significantly simplify the manner in which IRS
audit adjustments of partnership items are resolved. Adjustments
(if any) resulting from such an audit may require each Unitholder
to file an amended tax return, and possibly may result in an
audit of the Unitholder's return. Any audit of a Unitholder's
return could result in adjustments of non-partnership as well as
partnership items.
Under Sections 6221 through 6233 of the Code, partnerships
generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments
by the IRS and tax settlement proceedings. The tax treatment of
partnership items of income, gain, loss, deduction and credit is
determined at the partnership level in a unified partnership
proceeding rather than in separate proceedings with the partners.
The Code provides for one partner to be designated as the "Tax
Matters Partner" for these purposes. The Master Partnership
Agreement appoints the managing general partner as the Tax
Matters Partner for USRP.
The Tax Matters Partner is entitled to make certain
elections on behalf of USRP and Unitholders and can extend the
statute of limitations for assessment of tax deficiencies against
Unitholders with respect to partnership items. In connection
with adjustments to partnership tax returns proposed by the IRS,
the Tax Matters Partner may bind any Unitholder with less than a
1% profits interest in USRP to a settlement with the IRS unless
the Unitholder elects, by filing a statement with the IRS, not to
give such authority to the Tax Matters Partner. The Tax Matters
Partner may seek judicial review (to which all the Unitholders
are bound) of a final partnership administrative adjustment and,
if the Tax Matters Partner fails to seek judicial review, such
review may be sought by any Unitholder having at least a 1%
profit interest in USRP and by Unitholders having, in the
aggregate, at least a 5% profits interest. Only one judicial
proceeding will go forward, however, and each Unitholder with an
interest in the outcome may participate.
- 144 -
<PAGE>
The Unitholders will generally be required to treat
partnership items on their federal income tax returns in a manner
consistent with the treatment of the items on the USRP
information return. In general, that consistency requirement is
waived if the Unitholder files a statement with the IRS
identifying the inconsistency. Failure to satisfy the
consistency requirement, if not waived, will result in an
adjustment to conform the treatment of the item by the Unitholder
to the treatment on USRP return. Even if the consistency
requirement is waived, adjustments to the Unitholder's tax
liability with respect to partnership items may result from an
audit of USRP's or the Unitholder's tax return. Intentional or
negligent disregard of the consistency requirement may subject a
Unitholder to substantial penalties.
12. INFORMATION RETURN FILING REQUIREMENTS
A Unitholder who sells or exchanges Units is required by
Section 6050K of the Code to notify USRP in writing of such sale
or exchange, and USRP is required to notify the IRS of such
transaction and to furnish certain information to the transferor
and transferee. However, these reporting requirements do not
apply with respect to a sale by an individual who is a citizen of
the United States and who effects such sale through a broker. In
addition, a transferor and a transferee of a Unit will be
required to furnish to the IRS the amount of the consideration
received for such Unit that is allocated to goodwill or going
concern value of USRP. Failure to satisfy such reporting
obligations may lead to the imposition of substantial penalties.
13. NOMINEE REPORTING
Under Section 6031(c) of the Code, persons who hold an
interest in USRP as a nominee for another person must report
certain information to USRP. Temporary Treasury Regulations
provide that such information should include (i) the name,
address and taxpayer identification number of the beneficial
owners and the nominee; (ii) whether the beneficial owner is
(a) a person that is not a United States person, (b) a foreign
government, an international organization or any wholly owned
agency or instrumentality of either of the foregoing, or (c) a
tax-exempt entity; (iii) the amount and description of Units
held, acquired or transferred for the beneficial owners; and
(iv) certain information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition
cost for purchases, as well as the amount of net proceeds from
sales. Brokers and financial institutions are required to
furnish additional information, including whether they are a
United States person and certain information on Units they
acquire, hold or transfer for their own account. A penalty of
$50 per failure (up to a maximum of $100,000 per calendar year)
is imposed for failure to report such information to USRP. The
nominee is required to supply the beneficial owner of the Units
with the information furnished to USRP.
14. STATE AND OTHER TAXES
In addition to federal income taxes, Unitholders may be
subject to other taxes, such as state and local income taxes,
unincorporated business taxes, and estate, inheritance or
intangible taxes that may be imposed by the various jurisdictions
in which the partners reside or in which
- 145 -
<PAGE>
either Partnership does business or owns property. Although an
analysis of those various taxes cannot be presented here, each
prospective Unitholder should consider the potential impact of such
taxes on his investment in USRP. The Operating Partnership owns property and
does business in 44 states. A Unitholder will likely be required
to file state income tax returns in such states (other than
states such as Texas and Florida not having a state income tax or
states in which USRP is required or has elected to withhold and
pay taxes on behalf of the Unitholders) and may be subject to
penalties for failure to comply with such requirements. In
addition, an obligation to file tax returns or to pay taxes may
arise in other states. Moreover, in certain states, tax losses
may not produce a tax benefit in the year incurred (if, for
example, the partner has no income from sources within that
state) and also may not be available to offset income in
subsequent taxable years.
It is the responsibility of each prospective Unitholder to
investigate the legal and tax consequences, under the laws of
pertinent states or localities, of his investment in USRP.
Accordingly, each prospective Unitholder should consult, and must
depend upon, his own tax counsel or other advisor with regard to
those matters. Further, it is the responsibility of each
Unitholder to file all state and local, as well as federal, tax
returns that may be required of such Unitholder.
C. DIFFERENCES BETWEEN A PARTNERSHIP AND A REIT
The following is a summary of the material differences, as
more specifically described above under "The Merger" and
"Partnership Alternative," between the federal tax consequences
applicable to a partnership and its partners versus those
applicable to a REIT and its stockholders.
TAXATION OF ENTITY. A partnership is not a taxable
entity. A partnership's partners recognize their allocable
share of the partnership's taxable income or loss. A REIT
is a taxable entity and must pay tax at the corporate rates
on its taxable income, but it is allowed a deduction for
distributions to its stockholders. Consequently, a REIT may
avoid federal income taxation. The Code contains several
special provisions that may apply to a REIT to cause it to
pay certain taxes.
FLOW THROUGH OF LOSS. A partnership's taxable loss is
allocated to its partners, who may utilize such losses
subject to various limitations. Losses of a REIT do not
flow through to its stockholders.
CHARACTER OF INCOME OR LOSS. Each item of income or
loss of a partnership (e.g., as rent, interest, dividends,
capital gain, etc.) retains its character as it is allocated
to the partners. This may be relevant for various
provisions of the Code including the limitation on passive
activity losses, alternative minimum tax, limitations on
itemized deductions, etc. As described above under "--The
Merger--Tax Consequences of the REIT Corporation's
Qualification as a REIT--Taxation of Stockholders," taxable
distributions from a REIT are treated as dividends except to
the extent that such distributions are designated as capital
gain distributions.
- 146 -
<PAGE>
BASIS. A partner's basis in a partnership is increased
by the partnership's income and such partner's share of
partnership indebtedness, and is decreased by losses,
distributions and reductions in his share of partnership
indebtedness. The basis of a REIT stockholder is not
affected by the REIT's income or loss or the REIT's
indebtedness, but is reduced to the extent the shareholder
receives non-taxable distributions.
REQUIREMENTS FOR QUALIFICATION. As described above
under "--The Merger--Tax Consequences of the REIT
Corporation's Qualification as a REIT--REIT Qualification,"
in order to remain qualified as a REIT, a REIT must satisfy
various income, asset, distribution, shareholder and record
keeping requirements. A publicly traded partnership has
certain income characterization requirements, but is
otherwise not subject to the same requirements as a REIT in
order to retain its classification as a partnership for tax
purposes.
BASIS ADJUSTMENTS. A transferee Unitholder is entitled
to the benefit of certain basis adjustments under Section
754 of the Code upon a sale or exchange of Units or the
death of a Unitholder. See "--Partnership Alternative--Tax
Treatment of Operations--Section 754 Election." There will
be no Section 754 adjustments upon the sale or exchange of
Common Stock or the death of a stockholder of the REIT
Corporation.
ERISA CONSIDERATIONS
The following is a summary of material considerations
arising under the Employee Retirement Income Security Act
("ERISA") and the prohibited transaction provisions of Section
4975 of the Code that may be relevant to a Unitholder (including,
with respect to the discussion contained in "Status of the
Company under ERISA," to a Unitholder that is not an employee
benefit plan, another tax-qualified retirement plan, or an
individual retirement account ("IRA")). This discussion does not
purport to deal with all aspects of ERISA or Section 4975 of the
Code or, to the extent not preempted, state law that may be
relevant to particular employee benefit plan shareholders
(including plans subject to Title I of ERISA, other retirement
plans and IRAs subject to the prohibited transaction provisions
of Section 4975 of the Code and governmental plans or church
plans that are exempt from ERISA and Section 4975 of the Code but
that may be subject to state law requirements) in light of their
particular circumstances.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON
SHARES ON BEHALF OF A UNITHOLDER WHICH IS AN ERISA PLAN, A
TAX-QUALIFIED RETIREMENT PLAN OR AN IRA OR OTHER EMPLOYEE BENEFIT
PLAN IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING THE
SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE
CODE AND (TO THE EXTENT NOT PREEMPTED) STATE LAW WITH RESPECT TO
THE PURCHASE, OWNERSHIP OR SALE OF THE COMMON SHARES BY SUCH PLAN
OR IRA.
- 147 -
<PAGE>
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of a pension, profit-sharing or other
employee benefit plan subject to Title I of ERISA (an "ERISA
Plan") should carefully consider whether an investment in the
Common Shares is consistent with his fiduciary responsibilities
under ERISA. In particular, the fiduciary requirements of Part 4
of Title I of ERISA require that an ERISA Plan's investments be
(i) prudent and in the best interests of the ERISA Plan, its
participants and beneficiaries, (ii) diversified in order to
reduce the risk of large losses, unless it is clearly prudent not
to do so, and (iii) authorized under the terms of the governing
documents of the ERISA Plan. In determining whether any
investment in the Common Shares is prudent for purposes of ERISA,
the appropriate fiduciary of an ERISA Plan should consider all of
the facts and circumstances, including whether the investment is
reasonably designed, as a part of the ERISA Plan's portfolio for
which the fiduciary has investment responsibility, to meet the
objectives of the ERISA Plan, taking into consideration the risk
of loss and opportunity for gain (or other return) from the
investment, the diversification, cash flow and funding
requirements of the ERISA Plan, and the liquidity and current
return of the ERISA Plan's portfolio. A fiduciary should also
take into account the nature of the Company's business, the
length of the Company's operating history and other matters
described under "Risk Factors and other Special Considerations."
Fiduciaries of ERISA Plans, as well as fiduciaries of IRAs,
retirement plans for self-employed individuals ("Keogh Plans")
and other plans subject to Section 4975 of the Code (IRAs, Keogh
Plans and such other plans are referred to herein as "IRC Plans")
should also consider the application of the prohibited
transaction provisions of Section 406 of ERISA and Section 4975
of the Code in making their investment decision. A "party in
interest" or "disqualified person" with respect to an ERISA Plan
or IRC Plan is subject to (i) an initial 10% excise tax on the
amount involved in any prohibited transaction involving the
assets of the plan and (ii) an excise tax equal to 100% of the
amount involved if any prohibited transaction is not corrected.
If the disqualified person who engages in the transaction is the
individual on behalf of whom an IRA is maintained (or his
beneficiary), the IRA may lose its tax-exempt status and its
assets may be deemed to have been distributed to such individual
in a taxable distribution on account of the prohibited
transaction. In addition, a fiduciary who permits an ERISA Plan
to engage in a transaction that the fiduciary knows or should
know is a prohibited transaction may be liable to the ERISA Plan
for any loss the ERISA Plan incurs as a result of the transaction
and for any profits earned by the fiduciary in the transactions.
In addition to liability for ERISA Plan losses, ERISA
imposes a civil penalty against fiduciaries of ERISA Plans who
breach the prudence and other fiduciary standards of ERISA, and
against non-fiduciaries who knowingly participate in the
transaction giving rise to the breach. A prohibited transaction
by an ERISA Plan fiduciary generally would constitute a breach of
the ERISA fiduciary standards. The civil penalty is equal to 20%
of the amount recovered from a fiduciary or non-fiduciary with
respect to such breach or knowing participation pursuant to a
settlement agreement with the United States Secretary of Labor or
a court order resulting from a proceeding instituted by the
Secretary. The penalty may be waived and, in any event, would be
offset to the extent of the responsible party's liability for
excise tax under the Code.
- 148 -
<PAGE>
STATUS OF THE COMPANY UNDER ERISA
In determining whether the fiduciary requirements of ERISA
and the prohibited transaction provisions of ERISA and the Code
apply to an entity's operations because one or more investors in
the entity's equity interest is an ERISA Plan or an IRC Plan, it
is necessary to determine whether the underlying assets of such
entity are considered "plan assets" for purposes of ERISA and the
Code. The U.S. Department of Labor has issued regulations
defining "plan assets" for this purpose (the "DOL Regulation").
An ERISA Plan fiduciary should also consider the relevance of
these principles to ERISA's prohibition on improper delegation of
responsibility for the management of plan assets, and ERISA's
imposition of co-fiduciary liability on a fiduciary who
participates in, permits (by action or inaction) the occurrence
of, or fails to remedy, a known breach by another fiduciary. In
general, the DOL Regulation provides that if an ERISA Plan or IRC
Plan acquires "publicly offered securities" of an entity, which
are sold pursuant to an effective registration statement under
the Securities Act and subsequently registered under Section
12(b) or 12(g) of the Securities Exchange Act of 1934, which are
"widely held" (i.e., held by at least 100 holders independent of
the issuer and each other), and freely transferable, the assets
of such entity will not be considered "plan assets" solely by
reason of such plan's investment in the entity.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock
being offered hereby will be passed upon for the REIT Corporation
by Winstead Sechrest & Minick P.C., Dallas, Texas. The federal
income tax consequences in connection with the Conversion will be
passed upon for USRP by Winstead Sechrest & Minick P.C., Dallas,
Texas.
EXPERTS
The consolidated financial statements of USRP as of December
31, 1995 and 1994, the related consolidated statements of income,
partners' capital and cash flows for each of the three years in
the period ended December 31, 1995 and the balance sheet of U.S.
Restaurant Properties, Inc. as of February 4, 1997, included in
this Proxy Statement/Prospectus, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports
which are included and incorporated by reference herein, and have
been so incorporated in reliance upon the reports of such firm
given upon their authority as an expert in accounting and
auditing.
The financial statements of Burger King Limited
Partnership II as of December 31, 1995 and 1994, and for each of
the three years in the period ended December 31, 1995, and the
related financial statement schedule, included in USRP's Form 8-K
dated April 19, 1996, as amended (the "April Form 8-K"), and
incorporated by reference into this Proxy Statement/Prospectus,
have been audited by KPMG Peat Marwick LLP, independent auditors,
as stated in its report included in the April Form 8-K and
incorporated by reference into this Proxy Statement/Prospectus,
and have been so included and incorporated in reliance upon the
report of such firm given upon such firm's authority as an expert
in accounting and auditing.
The financial statements of WW Services, Inc. as of
September 30, 1995 and 1994, and for each of the two years in the
period ended September 30, 1995, included in the April Form 8-K
and incorporated by reference into this Proxy
Statement/Prospectus, have been audited by Tanner and Lang, P.C.,
independent auditors, as stated in its report included
- 149 -
<PAGE>
in the April Form 8-K and incorporated by reference into this Proxy
Statement/Prospectus, and have been so included and incorporated
in reliance upon the report of such firm given upon such firm's
authority as an expert in accounting and auditing.
The financial statements of Wiggins Enterprises, Inc. as of
September 30, 1995, and for the nine months then ended, included
in the April Form 8-K and incorporated by reference into this
Proxy Statement/Prospectus, have been audited by Thigpen &
Lanier, P.C., independent auditors, as stated in its report
included in the April Form 8-K and incorporated by reference into
this Proxy Statement/Prospectus, and have been so included and
incorporated in reliance upon the report of such firm given upon
such firm's authority as an expert in accounting and auditing.
The schedule of rental income and direct operating expenses
for selected properties sold to USRP for the year ended
December 31, 1995, included in the April Form 8-K and
incorporated by reference into this Prospectus, has been audited
by BDO Seidman, LLP, independent auditors, as stated in its
report included in the April Form 8-K and incorporated by
reference into this Proxy Statement/Prospectus, and has been so
included and incorporated in reliance upon the report of such
firm given upon such firm's authority as an expert in accounting
and auditing.
The statement of direct revenues and operating expenses
applicable to stores acquired by the USRP from Matel Enterprises,
Inc. for the year ended December 31, 1995, included in the April
Form 8-K and incorporated by reference in this Proxy
Statement/Prospectus, has been audited by William C. Love,
independent auditor, as stated in his report included in the
April Form 8-K and incorporated by reference into this Proxy
Statement/Prospectus, has been audited by William C. Love,
independent auditor, as stated in his report included in the
April Form 8-K and incorporated by reference into this Proxy
Statement/Prospectus, and has been so included and incorporated
in reliance on the report of such individual given upon his
authority as an expert in accounting and auditing.
- 150 -
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
PRO FORMA FINANCIAL INFORMATION (Unaudited)
Consolidated Balance Sheet as of September 30, 1996................................................. F-4
Condensed Consolidated Statement of Income for the year ended
December 31, 1995................................................................................ F-7
Condensed Consolidated Statement of Income for the nine months
ended September 30, 1996......................................................................... F-9
U.S. RESTAURANT PROPERTIES, INC.
Independent Auditors' Report....................................................................... F-11
Balance Sheet as of February 4, 1997............................................................... F-12
Notes to Balance Sheet............................................................................. F-13
U.S. RESTAURANT PROPERTIES MASTER L.P.
Independent Auditors' Report....................................................................... F-15
Consolidated Balance Sheets at December 31, 1994 and 1995
and September 30, 1996 (Unaudited).............................................................. F-16
Consolidated Statements of Income for the years ended December 31, 1993,
1994 and 1995 and the nine months ended September 30, 1995 and 1996
(Unaudited)..................................................................................... F-17
Consolidated Statements of Partners' Capital for the years ended December 31,
1993, 1994 and 1995 and the nine months ended September 30, 1996
(Unaudited)..................................................................................... F-18
Consolidated Statements of Cash Flows for the years ended December
31, 1993, 1994 and 1995 and the nine months ended September 30, 1995
and 1996 (Unaudited)............................................................................ F-19
Notes to Consolidated Financial Statements for the years ended December
31, 1993, 1994 and 1995 and for the nine months ended September 30, 1995
and 1996 (Unaudited)............................................................................ F-21
F-1
</TABLE>
<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 "REIT Corporation") 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 Proxy
Statement/Prospectus. The pro forma consolidated financial
statements are not necessarily indicative of what the REIT
Corporation'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 REIT Corporation.
The attached pro forma consolidated financial statements
have been prepared based upon the REIT Corporation consolidating
the operations of USRP including U.S. Restaurant Properties
Operating L.P. (the "Operating Partnership") (USRP and the
Operating Partnership collectively the "Partnerships"). The
basis for the consolidation is because the REIT Corporation, or a
wholly-owned subsidiary thereof, will be the managing general
partner of the Partnerships and management of the REIT
Corporation will have 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 REIT
Corporation as of September 30, 1996 is based upon USRP's
September 30, 1996 unaudited balance sheet adjusted to reflect as
of September 30, 1996 (i) the purchase of 53 properties for
$31,769,000 completed since September 30, 1996, (ii) the purchase
of 16 properties from QSR Income Properties, Ltd. ("QSR") for
272,353 Units (at $29 per Unit), (iii) the purchase of 38
properties from other sellers that are currently under binding
contracts for $22,354,000, including the value of 258,269 Units
of $7,490,000, (v) the additional borrowings of $46,065,000
required to purchase the properties acquired and under contract,
and (vi) the Managing General Partner's assignment of its
Property Management Contract to the Operating Partnership or USRP
(depending upon how the Conversion is effected) and converting
its aggregate 1.98% partnership interest in the Partnerships (the
"Partnership Interests") into 850,000 shares of Common Stock or
its equivalent in a limited partner interest in the Operating
Partnership or Units (depending upon how the Conversion is
effected) with the common stock valued at the current market
price (assumed $29 per share) and the related cost of this
transaction aggregating $580,000.
The pro forma condensed consolidated statements of income of
the REIT Corporation for the year ended December 31, 1995 and the
nine months ended September 30, 1996 are based upon USRP's
audited statement of income for the year ended December 31, 1995
and unaudited statement of income for the nine months ended
September 30, 1996, adjusted to reflect as of January 1, 1995:
(i) the purchase of 200 properties for $116,533,000, including
the value of 439,003 Units of $8,897,000, completed since
December 31, 1994, (ii) the issuance of 1,800,000
F-2
<PAGE>
Units issued in June 1996 having net proceeds of $40,203,000, (iii)
the purchase of 16 properties from QSR for 272,353 Units (at $29 per Unit),
(iv) the purchase of 38 properties from other sellers that are
currently under binding contracts for $22,351,000, including the
value of 258,269 Units of $7,490,000, (v) the additional
borrowings of $82,080,000 required to purchase the properties
acquired and under contract, and (vi) the Managing General
Partner's assignment of its Property Management Contract to the
Operating Partnership or USRP (depending upon how the Conversion
is effected) and converting its aggregate 1.98% partnership
interest in the Partnerships (the "Partnership Interests") into
850,000 shares of Common Stock or its equivalent in a limited
partner interest in the Operating Partnership or Units (depending
upon how the Conversion is effected) with the common stock valued
at the current market price (assumed $29 per share).
When determining the number of Units that USRP will issue to
QSR in exchange for the QSR's assets, USRP has assumed that the
adjusted purchase price for QSR's assets equalled $7,721,234 plus
the current principal balance of the promissory notes of $177,000
that QSR will sell to the Company and that the average closing
price for a Unit for the five trading days immediately preceding
the closing date equalled $29. If the average trading price of
the Units increases before the closing date, USRP could issue
significantly fewer Units to QSR or if the trading price
decreases before the closing date, USRP could issue significantly
more Units to QSR.
F-3
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1996
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
U.S. Restaurant Properties Master L.P.
--------------------------------------
QSR's Other Properties REIT Company
Historical Purchases(a) Properties(b) Under Contract(c) Conversion(g) Pro Forma
---------- ------------ ------------- ----------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash ..................... $ 19 $ $ 169 $ $ 1 (d) $ 189
Receivables, net.......... 1,750 1,750
Purchase deposits......... 551 (199) (350) 2
Prepaid expenses ......... 799 799
Notes receivable.......... 2,013 177 76 2,266
Net investment in
direct financing
leases................. 17,631 17,631
Land...................... 41,435 20,280 1,581 4,455 67,751
Buildings and
leasehold
improvements,
net.................... 62,647 6,894 5,057 14,256 88,854
Machinery and
equipment, net......... 3,021 3,021
Intangibles, net.......... 13,992 4,596 1,264 3,564 23,416
----------- --------- ---------- ---------- --------- ---------
$ 143,858 $ 31,571 $ 7,898 $ 22,351 $ 1 $ 205,679
=========== ========= ========== ========== ========= =========
Accounts payable ......... $ 1,622 $ 367 $ $ $ 580 (f) $ 2,569
Deferred gain............. 590 590
Line of credit ........... 36,015 31,204 10,915 78,134
Mortgage.................. 3,946 3,946
Capitalized lease
obligations............ 411 411
General Partners'
capital................ 1,197 (1,197)(e)
Limited Partners'
capital................ 104,023 7,898 7,490 (119,411)(e)
Stockholders' equity...... 120,029 (g) 120,029
----------- --------- ---------- ---------- --------- ---------
$ 143,858 $ 31,571 $ 7,898 $ 22,351 $ 1 $ 205,679
=========== ========= ========== ========== ========= =========
<FN>
_______________________
F-4
<PAGE>
(a) Reflects pro forma adjustments for 1996 acquisitions completed
since September 30, 1996 which consist of the
purchase for each of 53 properties as follows:
Pizza Hut.................. 1 $ 260
Carlos Kelly's............. 1 1,265
Schlotzsky's............... 4 3,085
Popeye's................... 7 2,634
Grandy's................... 30 12,767
Burger King................ 2 1,229
Miami Subs................. 2 1,274
Chili's.................... 6 9,256
-- ----------
53 $ 31,770
== ==========
Total of land, buildings and leasehold
improvements, machinery and
equipment and intangibles.......... $ 31,770
Less purchase deposit previously paid (199)
Less security deposit liability....... (367)
-----------
Increase in line of credit............ $ 31,204
===========
Respective purchase price for the properties has been
allocated between land, building and intangibles 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 ended
December 31, 1996. Management does not expect material
adjustments to occur.
(b) Reflects the pro forma adjustments for QSR's properties
which are comprised of 16 properties. The total purchase
price plus appropriate capitalized costs are as follows:
16 properties.............. $ 7,721
Acquisition costs.......... 181
-------
Total land, building and leasehold
improvements and intangibles 7,902
Notes receivable........... 177
-------
8,079
Less purchase deposit previously paid (350)
Less depositary share units issued (7,898)
-------
Cash excess (deposit return less
acquisition costs)....... $ 169
========
The respective purchase price for the properties has been
allocated between land, building and intangibles 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 ended
December 31, 1996. Management does not expect material
adjustments to occur.
F-5
<PAGE>
(c) Reflects the pro forma adjustments for the properties under
binding contracts which are comprised of 38 properties as
follows:
Number of Properties Purchase Price
-------------------- --------------
Schlotzsky's............... 4 $ 3,222
Bruegger's Bagels.......... 17 12,417
Arby's..................... 2 377
Au Bou Pain................ 3 1,025
Pizza Hut.................. 4 1,860
Wendy's.................... 1 242
Regional brands............ 6 2,622
Popeye's................... 1 510
38 22,275
Note receivable............ 76
22,351
Less value of units to be
issued (258,269 units) (7,490)
Mortgages assumed.......... (3,946)
------------
Increase in line of credit $ 10,915
=============
(d) Reflects pro forma adjustment for the contribution of $1 by
QSV Properties to capitalize the REIT Corporation.
(e) Reflects pro forma adjustments to convert the General
Partner's capital into stockholders' equity. It is also
assumed that the Units owned by the limited partners will
immediately be converted to the REIT Corporation's shares.
(f) Reflects the costs associated with the REIT conversion
including legal, filing, printing, fairness opinion and
related costs.
(g) Reflects the following pro forma adjustment to stockholders'
equity relating to the Managing General Partner's assignment
of its Property Management Contract to the Operating
Partnership or USRP (depending upon how the Conversion is
effected) and converting its aggregate 1.98% partnership
interest in the Partnerships (the "Partnership Interests")
into 850,000 shares of Common Stock or its equivalent in a
limited partner interest in the Operating Partnership or
Units (depending upon how the Conversion is effected) with
the common stock valued at the current market price (assumed
$29 per share):
Value of 850,000 Initial Shares of Common Stock
or its equivalent in interests in the
Partnerships (at $29 per share -
current market value)
issued to the Managing General Partner $ 24,650
Cost of property management contract
to be expensed (23,453)
REIT organization costs to be expensed (580)
Equity related to Limited Partners
upon Conversion 119,411
REIT corporation equity 1
----------
$ 120,029
==========
F-6
</FN>
</TABLE>
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
For Year Ended December 31, 1995
(UNAUDITED)
(DOLLARS AND UNITS/SHARES IN THOUSANDS,
EXCEPT FOR PER UNIT AND SHARE DATA)
<TABLE>
<CAPTION>
U.S. Restaurant Master L.P.
---------------------------
QSR's Other Properties REIT Company
Historical Purchases(a) Properties(b) Under Contract(c) Conversion(d) Pro Forma
---------- ------------ ------------- ------------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues............ $ 9,780 $ 15,658 $ 1,327 $ 2,679 $ $ 29,444
Expenses:
Rent................... 1,405 808 115 2,328
Depreciation and
amortization......... 1,541 4,330(e) 443(e) 1,307(e) (54)(f) 7,567
Taxes, general and
administrative....... 1,419 1,137(g) 79(g) 209(g) (1,379)(h) 1,465
Interest expense
(income), net........ 192 4,990(i) 7(i) 1,125(i) (108)(j) 6,206
------------ --------- ---------- ---------- --------- ---------
Total expenses......... 4,557 11,265 644 2,641 (1,541) 17,566
------------ --------- ---------- ---------- --------- ---------
Net income................ $ 5,223 $ 4,393 $ 683 $ 38 $ 1,541 $ 11,878
============ ========= ========== ========== ========= =========
Net income allocable
to unitholders......... $ 5,119 $ 4,306 $ 669 $ 37 N/A N/A
Average number
of units/shares
outstanding............ 4,638 272(k) 258(l) 851(m) 8,354
Net income per
unit/share............. $ 1.10 $ 1.42
<FN>
_______________________
(a) Reflects pro forma adjustments to operations for the 1995
acquisitions, comprised of 16 properties acquired on various
dates from March 1995 through December 1995 plus 1996
acquisitions, comprised of 184 properties acquired on
various dates from January 1, 1996 through December 31, 1996
(b) Reflects pro forma adjustments for QSR's 16 properties.
(c) Reflects the pro forma adjustments for 38 properties under
binding contracts with other sellers.
(d) Reflects pro forma adjustments relating to the Managing
General Partner's assignment of its Property Management
Contract to the Operating Partnership or USRP (depending
upon how the Conversion is effected) and converting its
aggregate 1.98% partnership interest in the Partnerships
(the "Partnership Interests") into 850 shares of Common
Stock or its equivalent in a limited partner interest in the
Operating Partnership or Units (depending upon how the
Conversion is effected) with the common stock valued at the
current market price (assumed $29 per share).
No adjustment is shown for the cost of terminating the
Managing General Partner's property management contract
estimated to be $23,453 or for the legal, filing, printing,
fairness opinion and related costs of completing the REIT
conversion estimated to be $580. Costs related to the
reorganization will be charged
F-7
<PAGE>
to expense in the period
incurred and the cost related to the property management
contract will be expensed at the time the contract is
terminated.
(e) Reflects pro forma increase in depreciation expense related
to the purchase of the respective properties and related
capitalization fees and commissions including commissions
paid or payable to the Managing General Partner and the
amortization of related intangibles.
(f) Reflects pro forma adjustment to depreciation and
amortization expense. The reduction in expense is due to
decrease in commissions paid to the Managing General
Partner.
(g) Reflects pro forma increase in general administrative
expenses attributable to the increase in fees due to the
Managing General Partner. Such increase is comprised of 1%
of the contracted purchase price for the respective
properties and 25% of the cash flow received with respect to
such additional properties in excess of the cash flow
representing a 12% rate of return.
(h) Pro forma adjustments to taxes, general and administrative
expense are comprised of the following:
Decrease in management fees $ (2,010)
Increase in payroll expenses (currently
being paid by the Managing General
Partner) 631
--------
Net decrease $ (1,379)
========
(i) Reflects the pro forma adjustment to interest expense as a
result of the purchases of the respective properties. Pro
forma interest expense is based on the increase in debt
outstanding and borrowings for payment of distributions on
units issued at a pro forma interest rate of 7.5%.
(j) Pro forma adjustment to interest expense considers the
decrease in debt outstanding due to commissions saved, which
is partially offset by increased cash flow requirements to
pay distributions on additional shares outstanding.
Interest expense is calculated using a pro forma interest
rate of 7.5%.
(k) Reflects pro forma adjustments for units to be issued to QSR
in exchange for QSR's 16 properties established as follows:
Purchase price $ 7,898
Market value of shares at January 6, 1997 $ 29
Units to be issued 272
(l) Reflects pro forma adjustments for 258 units to be issued
for the acquisition of 16 of the 38 properties under
contract.
(m) Pro forma adjustment reflects the 850 Initial shares of
Common Stock or its equivalent in interests in the
Partnerships to be 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 REIT Corporation at $1 per
share.
F-8
</FN>
</TABLE>
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Nine Months Ended September 30, 1996
(Unaudited)
(Dollars and units/shares in thousands,
except for per unit and share data)
<TABLE>
<CAPTION>
U.S. Restaurant Properties Master L.P.
--------------------------------------
QSR's Other Properties REIT Company
Historical Purchases(a) Properties(b) Under Contract(c) Conversion(d) Pro Forma
---------- ------------ ------------- ----------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Total revenues............ $ 13,012 $ 6,353 $ 995 $ 2,009 $ $ 22,369
Expenses:
Rent...................... 1,446 266 86 1,798
Depreciation and
amortization........... 2,593 1,736 325(e) 980(e) (40)(f) 5,594
Taxes, general and
administrative......... 1,607 476(g) 59(g) 157(g) (957)(h) 1,342
Interest expense
(income), net.......... 1,592 1,978(i) 1(i) 813(i) (74)(j) 4,310
----------- --------- ---------- ----------- ---------- ---------
Total expenses............ 7,238 4,456 471 1,950 (1,071) 13,044
----------- --------- ---------- ----------- ---------- ---------
Net income................ $ 5,774 $ 1,897 $ 524 $ 59 $ 1,071 $ 9,325
=========== ========= ========== =========== ========== =========
Net income
allocable to
unitholders............ $ 5,660 $ 1,859 $ 514 $ 58 N/A N/A
Average number of
units/shares
outstanding............ 5,830 272(k) 258(l) 851(m) 8,354
Net income per
unit/share............. $ 0.97 $ 1.11
<FN>
_______________________
(a) Reflects pro forma adjustments to operations for the 1996
acquisitions, comprised of 184 properties acquired on
various dates in 1996.
(b) Reflects pro forma adjustments for QSR's 16 properties.
(c) Reflects the pro forma adjustments for 38 properties under
binding contracts with other sellers.
(d) Reflects pro forma adjustments the Managing General
Partner's assignment of its Property Management Contract to
the Operating Partnership or USRP (depending upon how the
Conversion is effected) and converting its aggregate 1.98%
Partnership Interests into 850 shares of Common Stock or its
equivalent in a limited partner interest in the Operating
Partnership or Units (depending upon how the Conversion is
effected) with the common stock valued at the current market
price (assumed $29 per share).
No adjustment is shown for the cost of terminating the
Managing General Partner's property management contract
estimated to be $23,453 or for the legal, filing, printing,
fairness opinion and related costs of completing the REIT
conversion estimated to be $580. Costs related to the
reorganization will be charged to expense in the period
incurred and the cost related to the property management
contract will be expensed at the time the contract is
terminated.
F-9
<PAGE>
(e) Reflects pro forma increase in depreciation expense related
to the purchase of the respective properties and related
capitalization fees and commissions including commissions
paid or payable to the Managing General Partner and the
amortization of related intangibles.
(f) Reflects pro forma adjustment to depreciation and
amortization expense. The reduction in depreciation expense
is due to decrease in commissions paid to the Managing
General Partner.
(g) Reflects pro forma increase in general administrative
expenses attributable to the increase in fees due to the
Managing General Partner. Such increase is comprised of 1%
of the contracted purchase price for the respective
properties and 25% of the cash flow received with respect to
such additional properties in excess of the cash flow
representing a 12% rate of return.
(h) Pro forma adjustments to taxes, general and administrative
expense are comprised of the following:
Decrease in management fees $ (1,518)
Increase in payroll expenses (currently
being paid by the Managing General
Partner) 561
--------
Net decrease $ (957)
========
(i) Reflects the pro forma adjustment to interest expense as a
result of the purchases of the respective properties. Pro
forma interest expense is based on the increase in debt
outstanding and borrowings for payment of distributions on
units issued at a pro forma interest rate of 7.2%.
(j) Pro forma adjustments to interest expense considers the
decrease in debt outstanding due to commissions saved, which
is partially offset by increased cash flow requirements to
pay distributions on additional shares outstanding.
Interest expense is calculated using a pro forma interest
rate of 7.2%.
(k) Reflects pro forma adjustments for units to be issued to QSR
in exchange for QSR's 16 properties established as follows:
Purchase price $ 7,898
Market value of shares at January 6, 1997 $ 29
Units to be issued 272
(l) Reflects pro forma adjustments for 258 units to be issued
for the acquisition of 16 of the 38 properties under
contract.
(m) Pro forma adjustment reflects the 850 Initial Shares of
Common Stock or its equivalent in interests in the
Partnerships to be 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 REIT Corporation at $1 per
share.
</FN>
</TABLE>
F-10
<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
F-11
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
BALANCE SHEET
February 4, 1997
<TABLE>
<CAPTION>
ASSETS
<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; 1,000 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-12
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
NOTES TO BALANCE SHEET
February 4, 1997
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., 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.
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").
F-13
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
NOTES TO BALANCE SHEET
4. SUBSEQUENT EVENTS
The Company has agreed to acquire (the "Acquisition") the
general partner interests held by QSV in U.S. Restaurant
Properties Master L.P. and U.S. Restaurant Properties Operating
L.P. (collectively the "Partnerships") as well as the property
management contract that QSV has with USRP by issuing 850,000
shares or its equivalent in interests in the Partnerships to QSV.
An additional 550,000 shares or its equivalent in interests in
the Partnerships 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 intends to enter into employment agreements with
Messrs. Stetson and Margolin. The agreements will be 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.
F-14
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
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, 1995 and 1994, and the related consolidated
statements of income, partners' capital, and cash flows for each
of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position
of U.S. Restaurant Properties Master L.P. as of December 31, 1995
and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 17, 1996
F-15
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
------------------------------------- -------------
1994 1995 1996
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Cash and equivalents.................................. $ 681 $ 7 $ 19
Marketable securities................................. 854 - -
Receivables, net...................................... 715 951 1,750
Purchase deposits (Note 3)............................ - 1,792 551
Prepaid expenses...................................... 123 315 799
Notes receivable (Note 10)............................ - 269 2,013
Net investment in direct financing leases............. 21,237 19,371 17,631
Land.................................................. 23,414 27,493 41,435
Buildings and leasehold improvements, net............. 1,548 6,257 62,647
Machinery and equipment, net.......................... - 224 3,021
Intangibles, net...................................... 14,317 14,804 13,992
---------- ----------- -----------
$ 62,889 $ 71,483 $ 143,858
========== =========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 445 $ 677 $ 1,622
Deferred gain on sale of property..................... - - 590
Lines of credit....................................... - 10,931 36,015
Capitalized lease obligations......................... 775 563 411
Commitments (Notes 7 and 8)...........................
General Partners' capital............................. 1,308 1,241 1,197
Limited Partners' capital............................. 60,361 58,071 104,023
---------- ----------- -----------
$ 62,889 $ 71,483 $ 143,858
========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-16
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except per unit amounts)
<TABLE>
<CAPTION>
Nine Month
Year Ended December 31, Ended September 30,
----------------------------------------- ------------------------
1993 1994 1995 1995 1996
-------- -------- --------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES FROM LEASED PROPERTIES
Rental income........................ $ 5,666 $ 6,340 $ 7,540 $ 5,506 $ 11,500
Amortization of unearned
income on direct financing
leases........................... 2,666 2,453 2,240 1,704 1,512
Total Revenues.......................... 8,332 8,793 9,780 7,210 13,012
EXPENSES
Rent................................. 1,295 1,348 1,405 1,022 1,446
Depreciation and amortization........ 1,383 1,361 1,541 1,053 2,593
Taxes, general and
administrative................... 1,008 1,144 1,419 1,095 1,607
Interest expense (income), net....... 44 (4) 192 47 1,592
---------- -------- --------- -------- ---------
3,730 3,849 4,557 3,217 7,238
Provision for write down or
disposition of properties.......... 74 11 - - -
---------- -------- --------- -------- ---------
Total Expenses....................... 3,804 3,860 4,557 3,217 7,238
---------- -------- --------- --------
Net Income.............................. $ 4,528 $ 4,933 $ 5,223 $ 3,993 $ 5,774
========== ======== ========= ======== =========
Net income allocable to
unitholders.......................... $ 4,437 $ 4,834 $ 5,119 $ 3,914 $ 5,660
========== ======== ========= ======== =========
Average number of outstanding
units................................. 4,635 4,635 4,638 4,633 5,830
========== ======== ========= ======== =========
Net income per unit..................... $ 0.96 $ 1.04 $ 1.10 $ 0.84 $ 0.97
========== ======== ========= ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-17
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(Dollars in Thousands)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
----------- --------- --------
<S> <C> <C> <C>
Balance at January 1, 1993.................................... $ 1,429 $ 66,287 $ 67,716
Net income.................................................... 91 4,437 4,528
Cash distributions............................................ (163) (7,967) (8,130)
----------- --------- --------
Balance at December 31, 1993.................................. 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.................................. 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................................. - (547) (547)
Units issued for property..................................... - 985 985
Cash distributions............................................ (158) (7,844) (8,002)
----------- --------- --------
Balance at December 31, 1995.................................. 1,241 58,071 59,312
Net income - Unaudited........................................ 114 5,660 5,774
Units issued for cash - Unaudited............................. - 40,203 40,203
Units issued for property - Unaudited......................... - 7,912 7,912
Cash distributions - Unaudited................................ (158) (7,823) (7,981)
----------- --------- --------
Balance at September 30, 1996 - Unaudited..................... $ 1,197 $ 104,023 $105,220
=========== ========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-18
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Month
Year Ended December 31, Ended September 30,
----------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income.......................... $ 4,528 $ 4,933 $ 5,223 $ 3,993 $ 5,774
Adjustments to reconcile net
income to net cash from
operating activities:
Depreciation and amortization....... 1,383 1,361 1,541 1,053 2,593
Amortization of deferred
financing costs.................. - 102
Provision for write down or
disposition of properties........ 74 11 - - -
Marketable securities............... - (854) 854 854 -
Decrease (increase) in
receivables, net................. 11 (301) (236) (141) (799)
Decrease (increase) in prepaid
expenses......................... 1 (36) (192) (87) (484)
Reduction in net investment in
direct financing leases.......... 1,469 1,673 1,866 1,383 1,740
Increase (decrease) in accounts
payable.......................... 9 203 232 (55) 945
Increase in deferred gain on sale 590
----------- --------- ---------- ---------- --------
2,947 2,057 4,065 3,007 4,687
----------- --------- ---------- ---------- --------
7,475 6,990 9,288 7,000 10,461
CASH FLOWS FROM (USED IN)
INVESTING ACTIVITIES:
Proceeds from sale of properties 1,130 - - - -
Purchase of property................ - - (8,083) (5,204) (62,774)
Purchase of intangibles............. - - (1,663) - -
Purchase of machines and
equipment....................... - - (232) (141) (2,881)
Purchase deposits paid.............. - - (1,792) - -
Increase (decrease) in notes
receivable...................... - - (269) (255) (1,744)
----------- --------- ---------- ---------- --------
1,130 - (12,039) (5,600) (67,399)
CASH FLOWS FROM (USED IN)
FINANCING ACTIVITIES:
Increase in organizational
expenses......................... - - - - (6)
Increase in intangible lease
acquisition costs............... - - - - (11)
Increase in loan origination
costs............................ - - (77) (20) (187)
F-19
<PAGE>
<CAPTION>
Nine Month
Year Ended December 31, Ended September 30,
----------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- --------
(Unaudited)
Reduction in capitalized lease
obligations...................... (172) (191) (212) (157) (152)
Proceeds from line of credit........ - - 10,931 4,736 70,349
Repayment of line of credit......... - - - - (45,265)
Cash distributions.................. (8,130) (7,378) (8,002) (5,958) (7,981)
Purchase of partnership units....... - - (547) (547) -
Purchase of special general
partner interest................. - - (16) (16) -
Sale of limited partner units....... - - - - 40,203
---------- --------- ---------- ---------- --------
(8,302) (7,569) 2,077 (1,962) 56,950
---------- --------- ---------- ---------- --------
Increase (decrease) in cash and
equivalents...................... 303 (579) (674) (562) 12
Cash and equivalents at
beginning of year................ 957 1,260 681 681 7
---------- --------- ---------- ---------- --------
Cash and equivalents at end of
year............................. $ 1,260 $ 681 $ 7 $ 119 $ 19
========== ========= ========== ========== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid during the year....... $ 109 $ 89 $ 256 $ 100 $ 1,631
========== ========= ========== ========== ========
NON-CASH INVESTING
ACTIVITIES
Fair value of units
issued for property.............. $ - $ - $ 985 $ - $ 7,912
========== ========= ========== ========== ========
Purchase deposits used (paid)...... $ - $ - $ - ($ 391) $ 1,241
========== ========= ========== ========== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-20
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
(Dollars in thousands except per unit amounts)
1. ORGANIZATION
U.S. Restaurant Properties Master L.P (the "Partnership"),
formerly Burger King Investors Master L.P, a Delaware limited
partnership, was formed on December 10, 1985. The Partnership,
through its 99% limited partnership interest in U.S. Restaurant
Properties Operating L.P. (Operating Partnership), also a
Delaware limited partnership, acquired from Burger King
Corporation (BKC) in February 1986 for $94,592 an interest in 128
restaurant properties (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". QSV Properties, Inc., (QSV), 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 for its 0.02% interest in the Operating
Partnership and Partnership.
The Partnership may issue an unlimited number of units. The
units outstanding as of December 31, 1994 and 1995 and September
30, 1996 totaled 4,635,000, 4,659,000 and 6,844,000,
respectively.
2. ACCOUNTING POLICIES
The 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 9 for a reconciliation of financial reporting income to
taxable income). The financial statements reflect the
consolidated accounts of the Partnerships after elimination of
significant inter-partnership transactions.
Cash and equivalents include short-term, highly liquid
investments with original maturities of three months or less.
Marketable securities consist of U.S. treasury securities
which have been treated as trading securities as of December 31,
1994. As a result, they are stated at market value.
F-21
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)
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.
Also included in intangible assets is the amount paid to
acquire certain leases with favorable rents payable to third
party lessors. This amount is being amortized over the remaining
lease terms.
DEPRECIATION
Depreciation is computed using the straight-line method over
estimated useful lives of 10 to 20 years for financial statement
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, and revenues and expenses as of and
for the reporting periods. Actual results may differ from such
estimates.
LONG-LIVED ASSETS
In March 1995, Statement of Financial Accounting Standard
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of" was issued. The
Partnerships adopted SFAS No. 121 in 1995. Long-lived assets
include real estate, direct financing leases, and intangibles
which are evaluated on an individual property basis. Based on
the Partnership's policy for reviewing impairment of long-lived
assets, there was no adjustment necessary to the accompanying
consolidated financial statements.
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.
F-22
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The notes receivable and the line of credit are carried at
amounts that approximate their fair value.
STOCK-BASED COMPENSATION
In October 1995, Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," was issued,
effective for calendar year 1996. This statement 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
Partnership has not completed the process of evaluating the
impact that will result from adopting such statement and
therefore is unable to disclose the impact the adoption will have
on its financial position and results of operations.
Additionally, the effect of adopting the statement will depend on
the calculated value of the units issued and the extent to which
units are used in acquiring real estate properties in the future.
INTERIM FINANCIAL DATA
The Balance Sheet as of September 30, 1996 and the
Statements of Income and Cash Flows for the quarter and nine
months ended September 30, 1996 and 1995 and the Statement of
Partners' Capital for the nine months ended September 30, 1996
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 as of
September 30, 1996, and the results of operations and changes in
financial position for the nine months ended September 30, 1995
and 1996.
F-23
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. OTHER BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
September 30,
1994 1995 1996
----------- ----------- -------------
(Unaudited)
<S> <C> <C> <C>
RECEIVABLES, NET
Receivables.................................... $ 832 $ 1,068 $ 1,867
Less allowance for doubtful
accounts................................... 117 117 117
----------- ----------- -------------
$ 715 $ 951 $ 1,750
=========== =========== =============
BUILDINGS AND LEASEHOLD
IMPROVEMENTS, NET
Buildings and leasehold improvements $ 3,892 $ 8,882 $ 66,805
Less accumulated depreciation.................... 2,344 2,625 4,158
----------- ----------- -------------
$ 1,548 $ 6,257 $ 62,647
=========== =========== =============
INTANGIBLES, NET
Intangibles.................................... $ 26,392 $ 28,178 $ 28,417
Less accumulated amortization.................. 12,075 13,374 14,425
----------- ----------- -------------
$ 14,317 $ 14,804 $ 13,992
=========== =========== =============
</TABLE>
Total purchase deposits of $1,792 and $551 at December 31,
1995 and September 30, 1996, respectively, included $1,075 and
$500 of non-refundable deposits, respectively.
On December 31, 1995, the Partnerships owned the land at 79
Properties and leased the land at 60 Properties from third party
lessors under operating leases. The Partnerships in turn leased
or subleased the land primarily to BKC franchisees under
operating leases.
On December 31, 1995, the Partnerships owned the buildings
on 124 Properties and leased the buildings on 14 Properties from
third party lessors under leases accounted for as capital leases.
The Partnerships own one property in which only the land is owned
and leased. The Partnerships leased 28 owned buildings to
franchisees under operating leases. These 28 buildings are
stated at cost, net of accumulated depreciation, on the balance
sheet. A total of 109 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 109 buildings. One
property is not currently leased.
F-24
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. OTHER BALANCE SHEET INFORMATION (CONTINUED)
On December 31, 1995, there were 138 Partnership restaurant
sites in operation, and there was one closed site. The
Partnerships continue to seek a suitable tenant for the remaining
site. The write-down of the closed site was $11 and $74 in 1994
and 1993, respectively.
4. PROPERTY PURCHASES IN 1996
During the first three quarters of 1996, the Partnership
completed the purchase of 131 properties for an aggregate
purchase price of $73,567, including the value of 384,836 units
issued as part of the aggregate purchase price. Three properties
were purchased with units only; 15 properties were purchased with
a combination of cash and units; and 113 properties were
purchased with cash only. The 131 properties include 43 Burger
King restaurants, 40 Dairy Queen restaurants, 25 Hardees
restaurants, eleven Pizza Hut restaurants, two KFC restaurants,
two Schlotzsky's restaurants and eight regional brand
restaurants.
The 384,836 units were used to purchase 18 of the 131
properties in four separate transactions. Of the 384,836 units
issued, 324,575 units are guaranteed to have a market value of
$24 per unit two years from the transaction date, 28,261 units
are guaranteed to have a market value of $23 per unit three years
from the transaction date and 32,000 units are guaranteed to have
a value of $25 per unit two years from the transaction date. The
allocation of the cost of the properties purchased is done on a
preliminary basis during the year and will be finalized at year
end.
In the normal course of business, the Partnership 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 September 30, 1996, earnest money purchase deposits
amounting to $551 were on deposit for the purchase of three
Schlotzsky's restaurants, three Pizza Hut restaurants, one KFC
restaurant, two Hardees restaurants, one Taco Bell restaurant,
one Wendy's restaurant, and 17 other regional chain restaurants
for an aggregate purchase price of approximately $12,874.
F-25
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. GUARANTEED STOCK PRICE
Three properties were acquired on October 10, 1995, with a
combination of cash and 54,167 partnership units. The
partnership units are guaranteed to have a value of $24 per unit
three years from the transaction date. The unit price on the
date issued was $18.125. 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 units discounted to
reflect the present value on the date the units were issued
(estimated fair value). As a result, the market price of the
units at the date of issuance was used to record this
transaction. If a cash payment is required as a result of the
guarantee, an adjustment will be made to reduce partnership
capital for the amount of cash paid.
During the three quarters ended September 1996, the
Partnership issued 384,836 units for the acquisition of
properties. Of these units, 28,261 units are guaranteed to have
a market value of $23 three years from the transaction date,
324,575 units are guaranteed to have a market value of $24 two
years from the transaction date and 32,000 units are guaranteed
to have a market price of $25 two years from the transaction
date. The accounting described in the paragraph above was used
to record these transactions. They were recorded using current
market prices at the date of issuance of approximately $20 per
unit.
6. LINES OF CREDIT
On December 31, 1995 and September 30, 1996, $10,931 and
$23,124, respectively, had been drawn on the Company's primary
line of credit. The line of credit was increased in February
1996 to $40,000 with substantially all properties included as
collateral on this line of credit. The interest rate is the
lower of LIBOR plus 180 basis points or the prime rate which was
8.25% on September 30, 1996. 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 LIBOR rate at December 31, 1995, was 5.375%. The line
of credit also requires the Partnerships to maintain a tangible
net worth in excess of $40,500, a debt to tangible net worth
ratio of not more than 0.5 to 1, and a cash flow coverage ratio
of not less than 2 to 1 based upon a pro forma five year bank
debt amortization. The $40 million line of credit matures on
June 27, 1998.
A revolving credit facility of $20,000, was established with
Morgan Keegan Mortgage Company, Inc. on April 29, 1996. This
revolving credit facility was paid in full in January 1997. The
interest rate was LIBOR plus 300 basis points which resulted in
an interest rate of 8.66% at September 30, 1996. This revolving
credit facility is secured by approximately 63 properties. On
September 30, 1996, the total amount due equaled $12,981. No
additional draws are available.
F-26
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENTS AND COMMITMENTS AS LESSOR
The Partnerships lease land and buildings primarily to BKC
franchisees. The building portions of most of the leases are
direct financing leases while the land portions are operating
leases. The leases 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 renews or extends the lessee's franchise
agreement. As of December 31, 1995, the remaining lease terms
ranged from 1 to 28 years. 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>
Direct
Financing Operating
Leases Leases
------------ ---------------
<S> <C> <C>
MINIMUM FUTURE LEASE RECEIPTS FOR
YEARS ENDING DECEMBER 31:
1996............................................. $ 4,173 $ 4,957
1997............................................. 4,116 4,943
1998............................................. 3,811 4,887
1999............................................. 3,019 4,599
2000............................................. 2,057 3,798
Later............................................ 2,602 19,087
------------ ------------
$ 19,778 $ 42,271
============ ============
</TABLE>
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
NET INVESTMENT IN DIRECT FINANCING
LEASES AT DECEMBER 31:
Minimum future lease receipts................... $ 23,950 $ 19,778
Estimated unguaranteed
residual values.................................. 7,562 7,562
------------ ------------
Unearned amount representing interest............ $ (10,275) (7,969)
$ 21,237 $ 19,371
============ ============
</TABLE>
<TABLE>
<CAPTION>
Nine Month
Year Ended December 31, Ended September 30,
--------------------------------- -------------------
1993 1994 1995 1995 1996
-------- -------- ------- -------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
RENTAL INCOME:
Minimum rental income................ $ 3,030 $ 3,062 $ 3,584 $ 2,508 $ 7,621
Contingent rental income............. 2,636 3,278 3,956 2,998 8,879
-------- -------- -------- -------- -------
$ 5,666 $ 6,340 $ 7,540 $ 5,506 $11,500
======== ======== ======== ======== =======
</TABLE>
F-27
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENTS AND COMMITMENTS AS LESSOR (CONTINUED)
If the restaurant properties are not adequately maintained
during the term of the tenant leases, such properties may have to
be rebuilt before the leases can be renewed, either by the
Partnership 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 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.
8. COMMITMENTS
At December 31, 1995, the land at 46 Properties and the land
and buildings at 14 Properties are leased by the Partnerships
from third party lessors. The building portions of the leases
are generally capital leases while the land portions are
operating leases. Commitment leases provide for an original term
of 20 years and most are renewable at the Partnership's option.
As of December 31, 1995, the remaining lease terms (excluding
renewal option terms) ranged from 1 to 11 years. If all renewal
options are taken into account, the terms ranged from 8 to 33
years. Rents payable may escalate during the original lease and
renewal terms. For six properties, the leases provide for
contingent rent based on each restaurant's sales.
F-28
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS (CONTINUED)
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
----------- ----------
<S> <C> <C>
MINIMUM FUTURE LEASE OBLIGATIONS FOR
YEARS ENDING DECEMBER 31:
1996................................................. $ 248 $ 1,357
1997................................................. 199 1,387
1998................................................. 140 1,349
1999................................................. 60 1,174
2000................................................. 4 939
Later................................................. 1 3,290
---------- --------
Total minimum obligations (a)......................... 652 $ 9,496
========
Amount representing interest.......................... (89)
----------
Present value of minimum obligations.................. $ 563
==========
<FN>
____________________
(a) Minimum Lease Obligations have not been reduced by minimum
sublease rentals.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Nine Month
Year Ended December 31, Ended September 30,
--------------------------------- -------------------
1993 1994 1995 1995 1996
-------- -------- ------- -------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
RENTAL EXPENSE
Minimum rental expense............... $ 1,214 $ 1,246 $ 1,303 $ 951 $ 1,384
Contingent rental expense............ 81 102 102 71 62
-------- -------- ------- -------- -------
$ 1,295 $ 1,348 $ 1,405 $ 1,022 $ 1,446
======== ======== ======= ======== =======
</TABLE>
On July 21, 1995, the managing general partners authorized
the Partnership to repurchase up to 300,000 of its units in the
open market. Through September 30, 1996, 30,000 units were
repurchased by the Partnership.
F-29
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. 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 Partnerships 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.
<TABLE>
<CAPTION>
1995
Financial
Reporting Reconciling Taxable
Income Differences Income
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES FROM LEASED PROPERTIES:
Rental income............................................. $ 7,540 $ 4,107 $ 11,647
Amortization of unearned income on
direct financing leases................................ 2,240 (2,240) -
----------- ----------- ------------
$ 9,780 $ 1,867 $ 11,647
=========== =========== ============
EXPENSES:
Rent...................................................... $ 1,405 $ 281 $ 1,686
Depreciation and amortization............................. 1,541 1,397 2,938
General and administrative................................ 1,419 - 1,419
Interest expense (income), net............................ 192 (68) 124
----------- ----------- ------------
4,557 1,610 6,167
----------- ----------- ------------
Net income................................................ $ 5,223 $ 257 $ 5,480
=========== =========== ============
</TABLE>
10. RELATED PARTY TRANSACTIONS
The managing general partner is responsible for managing the
business and affairs of the Partnerships. The Partnerships pay
the managing general partner a non-accountable annual allowance
(adjusted annually to reflect increases in the Consumer Price
Index), 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, 1993, 1994, and 1995,
and September 30, 1995 and 1996 was $528, $542, $585, $853 and
$428, respectively. The Partnerships' accounts payable balance
includes $187 and $136 for this allowance as of December 31, 1995
and 1994, respectively The managing general partner paid no
out-of-pocket costs to other parties on behalf of the
Partnerships during 1993, 1994, and 1995.
F-30
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
To compensate the Managing General Partner for its efforts
and increased internal expenses with respect to additional
properties, the Partnership will pay 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 1995 and three
quarters ended September 30, 1996, the one-time acquisition fee
equaled $109 and $716, respectively, which was capitalized, and
the increase in the non-accountable annual fee for 1995 equaled
$29. In addition, if the Rate of Return (as defined) on the
Partnership's equity in all additional properties exceeds 12
percent per annum for any fiscal year, the Managing General
Partner will be paid an additional fee 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. However, to the extent such distributions are
ultimately received by the Managing General Partner in excess of
those provided by its 1.98% Partnership interest, they will
reduce the fee payable with respect to such excess flow from any
additional properties.
In 1994, the Partnerships with the consent and financial
participation of BKC, continued rent relief for three properties.
In 1993, the Partnerships sold two non-operating properties
at slightly less than their book values to BKC. At that time,
BKC was the special general partner and had an ownership interest
of 0.02% in the Partnerships.
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 to provide the
Partnerships 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, 1993, 1994, and 1995.
A note receivable of $255 and $310 is due from Arkansas
Restaurants #10 L.P. at December 31, 1995 and September 30, 1996,
respectively. The note receivable is due on September 1, 1997,
and has an interest rate of 9.0% per annum. As of December 31,
1995 and September 30, 1996, the managing general partner of
Arkansas Restaurants #10 L.P. is owned by an officer of the
Managing General Partner.
As of September 30, 1996, a note receivable of $920 is due
from Southeast Fast Food Partners, L.P. The note receivable is
due on July 1, 1999 and has an interest rate of 9.0% per annum.
The managing general partner of Southeast Fast Food Partners,
L.P., Bulldog Management, Inc. is owned by an officer of the
Managing General Partner.
F-31
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
On March 17, 1995 the limited partners granted the managing
general partner options to acquire up to 400,000 units, subject
to certain adjustments under anti-dilution provisions. The
initial exercise price of each option is $15.50 which is the
average closing price of the depositary receipts for the 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 become exercisable on the first
anniversary of the date as of which the exercise price is
determined, subject to earlier vesting and exercisability if the
managing general partner is removed as general partner. The term
of the options expires on the tenth anniversary of the date as of
which the exercise price is determined.
11. DISTRIBUTIONS AND ALLOCATIONS
Under the amended partnership agreements, 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
per unit, 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 1995 and 98% for 1994 and
1993.
Under the amended partnership agreements, 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
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 1995 or
1994.
F-32
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. DISTRIBUTIONS AND ALLOCATIONS (CONTINUED)
During 1993 two non-operating properties were sold at
slightly less than their book values. Both dispositions were
capital transactions and resulted in the special distributions to
unitholders of 11 cents and 13 cents per unit on September 13,
and December 13, 1993, respectively.
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.
12. SUMMARY BY QUARTER (UNAUDITED)
<TABLE>
<CAPTION>
Per Unit
--------------------------
Allocable Related Cash
Revenues Net Income Net Income Distributions
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
1993
First quarter................................... $ 1,871 $ 926 $ 0.20 $ 0.37
Second quarter.................................. 2,117 1,146 0.24 0.48**
Third quarter................................... 2,249 1,305 0.28 0.50**
Fourth quarter.................................. 2,095 1,151 0.24 0.37
------------ ---------- ---------- ---------
Annual.......................................... $ 8,332 $ 4,528 $ 0.96 $ 1.72**
============ ========== ========== =========
1994
First quarter................................... $ 1,984 $ 1,100 $ 0.23 $ 0.39
Second quarter.................................. 2,297 1,341 0.28 0.39
Third quarter................................... 2,330 1,392 0.29 0.41
Fourth quarter.................................. 2,182 1,100 0.24 0.42
------------ ---------- ---------- ---------
Annual.......................................... $ 8,793 $ 4,933 $ 1.04 $ 1.61
============ ========== ========== =========
1995
First quarter................................... $ 2,123 $ 1,090 $ 0.23 $ 0.42
Second quarter.................................. 2,495 1,407 0.30 0.42
Third quarter................................... 2,592 1,496 0.32 0.43
Fourth quarter.................................. 2,570 1,230 0.25 0.44
------------ ---------- ---------- ---------
Annual.......................................... $ 9,780 $ 5,223 $ 1.10 $ 1.71
============ ========== ========== =========
1996
First quarter................................... $ 2,955 $ 1,323 $ 0.26 $ 0.47
Second quarter.................................. 4,309 1,862 0.33 0.48
Third quarter................................... 5,748 2,590 0.36 0.485
<FN>
____________________
* Represents amounts declared and paid in the following
quarter.
** Includes special cash distributions of $0.11 per unit for
the second quarter and $0.13 per unit for the third quarter.
</FN>
</TABLE>
F-33
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. PRO FORMA (UNAUDITED)
The 1995 acquisitions consisted of 16 properties for an
aggregate purchase price of $10,731 based upon the purchase
method of accounting. These properties were acquired on various
dates from March 1995 through December 1995. Three of the
properties were acquired with a combination of cash and 54,167
partnership units. The 54,167 partnership units are guaranteed
to have a market value of $24 three years from the transaction
date and have certain registration rights.
The following pro forma information for the years ended
December 31, 1994 and 1995 was prepared by adjusting the actual
consolidated results of the Partnership for the years ended
December 31, 1994 and 1995 for the effects of the 1995
acquisitions as if all such acquisitions and related financing
transactions including the issuance of 54,167 units had occurred
on January 1, 1994. Interest expense for pro forma purposes was
calculated assuming a 7.7% interest rate for both years
presented, which approximates the interest rate the Partnership
paid during 1995.
During the first nine months of 1996, the Partnership
acquired 131 properties for an aggregate purchase price of
$73,567 including the value of 384,836 units. The proforma
revenues, net income, and net income per unit assuming these
properties were purchased as of January 1, 1996 and 1995,
respectively, are as follows.
The pro forma information for the nine month period ended
September 31, 1995 and 1996 are prepared by adjusting the actual
consolidated results of the Partnership for the nine months ended
September 31, 1995 and 1996, respectively, for the effects of the
1995 and 1996 acquisitions as if all acquisitions and related
financing transactions had occurred on January 1, 1995 and 1996,
respectively.
These pro forma operating results are not necessarily
indicative of what the actual results of operations of the
Partnership would have been assuming all of the properties were
acquired as of January 1, 1994, 1995 and 1996, and they do not
purport to represent the results of operations for future
periods.
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months
----------------------------- Ended September 30,
------------------------
1994 1995 1995 1996
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues from leased properties................. $ 10,503 $ 11,060 $ 17,102 $ 17,312
Net income...................................... $ 5,049 $ 5,288 $ 8,382 $ 8,065
============ =========== ========== ==========
Net income allocable to unitholders............. $ 4,948 $ 5,183 $ 8,216 $ 7,905
============ =========== ========== ==========
Average number of outstanding units............. 4,689 4,680 6,986 6,983
============ =========== ========== ==========
Net income per unit............................. $ 1.06 $ 1.11 $ 1.18 $ 1.13
============ =========== ========== ==========
</TABLE>
F-34
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS (UNAUDITED)
On October 23, 1996 two promissory notes were purchased. A
$200 promissory note and $100 promissory note were purchased for
a combined purchase price of $200. Both promissory notes have
the same payee and stated interest rate of 7.69% per annum. The
current principle balance of the $200 promissory note is $200.
The current principle balance of the $100 promissory note is
$100. The $100 note is payable in full by September 1, 2001.
The $200 note is payable in full by September 1, 2006.
In the fourth quarter of 1996, the Partnership purchased 53
properties for $31,769. These properties included 30 Grandy's
restaurants, four Schlotzsky's restaurants, two Burger King
restaurants, a Pizza Hut restaurant, six Chili's restaurants and
ten other regional brands. The Partnership also entered into
binding contracts to acquire 54 additional properties for an
aggregate purchase price of $30,249 including the value of
530,622 units.
The Partnership's line of credit was increased to $95
million in December 1996 and matures on December 23, 1998.
During the quarter ended December 31, 1996, the Managing
General Partner exercised 50,000 Units of limited partner
interest relating to its option to purchase units at $15.50 per
unit.
F-35
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of _______________,
1997 (the "Agreement"), by and among U.S. RESTAURANT PROPERTIES
MASTER L.P., a Delaware limited partnership (the "Partnership");
U.S. RESTAURANT PROPERTIES, INC., a Maryland corporation (the
"Company"); USRP ACQUISITION, L.P., a Delaware partnership and an
indirectly wholly-owned subsidiary of the Company (the
"Acquisition Subsidiary"); USRP MANAGING, INC., a Delaware
corporation and wholly-owned subsidiary to the Company and
general partner of the Acquisition Subsidiary (the "General
Partner") and QSV PROPERTIES, INC., a Delaware corporation and
the managing general partner of the Partnership ("QSV").
RECITALS
WHEREAS, Boards of Directors of QSV and of the Company have
determined that it is in the best interests of the Partnership
and the Company, respectively, to effect the merger provided for
herein (the "Merger") upon the terms and subject to the
conditions set forth herein;
WHEREAS, the Company will have ownership rights in the
assets of the Partnership pursuant to this Agreement, and in
accordance therewith, the Company has caused to be formed and
organized the General Partner and the Acquisition Subsidiary; and
WHEREAS, all partnership and corporate action, as
applicable, on the part of the parties hereto necessary to
authorize the execution of this Agreement has been duly taken.
NOW, THEREFORE, in consideration of the foregoing premises,
the representations, warranties, covenants and agreements
contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound hereby, agree as
follows:
1. THE MERGER; EFFECTIVE TIME
1.1 THE MERGER. Subject to the terms and conditions of
this Agreement, at the Effective Time (as defined in Section 1.2
hereof), in order to effect the Merger, the Acquisition
Subsidiary shall be merged with and into the Partnership and the
separate existence of the Acquisition Subsidiary shall thereupon
cease. The Partnership shall be the surviving entity in the
Merger (sometimes hereinafter referred to as the "Surviving
Entity"), the General Partner will be substituted as managing
general partner of the Partnership and, as a result, the
Partnership shall become an indirectly wholly-owned subsidiary of
the Company and shall continue to be governed by the laws of the
State of Delaware. The separate existence of the Partnership
with all its rights, privileges, immunities, powers and
franchises shall continue unaffected by the Merger. The Merger
shall be pursuant to the provisions of and shall have the effect
provided in the Delaware Revised Uniform Limited Partnership Act
(the "Delaware RULPA").
A-1
<PAGE>
1.2 EFFECTIVE TIME. Provided that this Agreement has not
been terminated or abandoned pursuant to Section 9 hereof, on the
first business day following the date on which the last to be
fulfilled or waived of the conditions set forth in Section 8
hereof shall be fulfilled or waived, or on such later date as the
Partnership and the Company may agree, a certificate of merger
(the "Certificate of Merger") with respect to the transactions
contemplated hereby shall be executed, acknowledged and filed
with the Secretary of State of the State of Delaware as provided
in Section 211 of the Delaware RULPA and the Merger provided for
herein shall become effective at 11:59 p.m. on the date of such
filing or such other time and date as is set forth in the
Certificate of Merger (the "Effective Time").
2. PARTNERSHIP AGREEMENT OF THE SURVIVING ENTITY
The partnership agreement of the Partnership in effect at
the Effective Time shall be the partnership agreement of the
Surviving Entity, until duly amended in accordance with the terms
thereof and the Delaware RULPA.
3. EFFECT OF THE MERGER ON PARTNERSHIP INTERESTS
3.1 EFFECT ON PARTNERSHIP INTERESTS. At the Effective
Time, by virtue of the Merger and without any action on the part
of the holder of any partnership interest in the Partnership or
the Acquiring Subsidiary:
(a) Each unit representing an assignment of limited
partnership interest in the Partnership (the "Units") issued
and outstanding immediately prior to the Effective Time (an
aggregate of 6,894,003 Units) shall be exchanged for and
converted into one validly issued, fully paid and
nonassessable share of common stock, par value $.01 per
share, of the Company (the "Common Stock") (or an aggregate
of 6,894,003 shares). Each certificate representing any
such Units (the "Certificates") outstanding immediately
prior to the Effective Date shall thereafter represent the
right to receive a certificate representing a like number of
shares of Common Stock. All Units shall no longer be
outstanding and shall be cancelled and returned and shall
cease to exist;
(b) QSV's 1% Percentage Interest, as defined in the
Third Amended and Restated Agreement of Limited Partnership
of the Partnership dated as of __________________, 1997 (the
"Partnership Agreement"), shall be exchanged for and
converted into 69,637 shares of Common Stock and the right
to receive a certificate representing such Common Stock.
3.2 EXCHANGE OF UNITS FOR COMPANY SHARES.
(a) EXCHANGE AGENT. As of the Effective Time, the
Company shall deposit with American Stock Transfer & Trust
Company (the "Exchange Agent"), for the benefit of holders
of Units ("Unitholders"), for exchange in accordance with
this Section 3, certificates representing the shares of
Common Stock to be issued pursuant to Section 3.1 in
exchange for outstanding Units.
A-2
<PAGE>
(b) EXCHANGE PROCEDURES. Promptly after the Effective
Time, the Surviving Entity shall cause the Exchange Agent to
mail to each Unitholder of record (i) a letter of
transmittal, which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the
Exchange Agent, in such form and including such other
provisions as the Company may specify and (ii) instructions
for use in effecting the surrender of the Certificates in
exchange for certificates representing Company Shares. Upon
surrender of a Certificate for cancellation to the Exchange
Agent together with such letter of transmittal, duly
executed, the holder of such Certificate shall be entitled
to receive in exchange therefor a certificate representing a
number of shares of Common Stock equal to the number of
Units represented by the Certificate, the Certificate, and
the Certificate so surrendered shall forthwith be cancelled.
Declared but unpaid distributions on Units and partnership
interests outstanding as of the applicable record date shall
be the obligation of the Company and the Company hereby
agrees to pay such distributions on the payment date
specified in the resolutions of QSV authorizing such
distributions. No interest will be paid or accrued on
unpaid distributions, if any, payable to holders of
Certificates. In the event of a transfer of ownership of
Units which is not registered in the transfer records of the
Partnership, a certificate representing the proper number of
shares of Common Stock may be issued to the transferee if
the Certificate representing such Units is presented to the
Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and to evidence that any
applicable transfer taxes have been paid. If any
certificate for shares of Common Stock is to be issued in a
name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition to
such exchange that the person requesting such exchange (i)
pay any transfer or other taxes required by reason of the
exchange of certificates of shares of Common Stock in a name
other than that of the registered holder of the Certificate
surrendered or (ii) establish to the satisfaction of the
Company that such taxes have been paid or are not
applicable.
(c) TRANSFERS. After the Effective Time, there shall
be no transfers on the transfer books of the Partnership of
the Units which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates
are presented to the Company for transfer, they shall be
cancelled and exchanged for the number of shares of Common
Stock deliverable in respect thereof pursuant to this
Agreement in accordance with the procedures set forth in
this Section 3.
(d) NO LIABILITY. In the event any Certificate shall
have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required
by the Company, the posting by such person of a bond in such
amount as the Company may direct as indemnity against any
claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for
such lost, stolen or destroyed Certificate, a certificate
representing the shares of Common Stock deliverable in
respect thereof pursuant to this Agreement.
A-3
<PAGE>
4. EFFECT OF MERGER ON PARTNERSHIP INTERESTS IN ACQUIRING
SUBSIDIARY OUTSTANDING PRIOR TO THE EFFECTIVE TIME
At the Effective Time, by virtue of the Merger, all
partnership interests in the Acquiring Subsidiary outstanding
immediately prior thereto (all of which, immediately prior to the
Effective time, shall have been owned by the Company and the
General Partner shall continue to be outstanding as interests in
the Partnership.
5. REPRESENTATIONS AND WARRANTIES
5.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY, THE
GENERAL PARTNER AND THE ACQUISITION SUBSIDIARY. The Company, the
General Partner and the Acquisition Subsidiary hereby represent
and warrant to the Partnership as follows:
(a) The Company and the General Partner are
corporations and the Acquisition Subsidiary is a partnership
duly formed, validly existing and in good standing under the
applicable laws of its state of organization.
(b) All action on the part of the Company, the General
Partner and the Acquisition Subsidiary and their respective
officers, trustees, directors, stockholders and partners, as
applicable, necessary for the authorization, execution and
delivery of this Agreement, the performance of all
obligations of the Company, the General Partner and the
Acquisition Subsidiary hereunder and, in the case of the
Company, the authorization, issuance and delivery of the
shares of Common Stock has been taken or will be taken prior
to the Effective Date, and this Agreement constitutes the
valid and legally binding obligation of each of the Company,
the General Partner and the Acquisition Subsidiary,
enforceable against it in accordance with its terms, except
(i) as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting enforcement of
creditor's rights generally and (ii) as enforceability may
be limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies.
(c) Neither the Company, the General Partner nor the
Acquisition Subsidiary is in violation of or default under
any provisions of its articles or certificate of
incorporation, bylaws or partnership agreement, as
applicable, or of any instrument, judgment, order, writ,
decree or contract to which, it is a party or by which it is
bound or, in any material respect, of any provision of any
federal or state statute, rule or regulation applicable to
it. The execution, delivery and performance of this
Agreement and the consummation of the transactions
contemplated hereby will not result in any such violation or
be in conflict with or constitute, with or without the
passage of time or the giving of notice, either a default
under any such provision, instrument, judgment, order, writ,
decree or contract or an event which results in the creation
of any lien, charge or encumbrance upon any assets of the
Company, the General Partner or the Acquisition Subsidiary.
A-4
<PAGE>
5.2 REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP. The
Partnership hereby represents and warrants to the Company as
follows:
(a) The Partnership is a limited partnership duly
formed, validly existing and in good standing under the laws
of the State of Delaware.
(b) All action on the part of the Partnership and its
partners necessary for the authorization, execution and
delivery of this Agreement and the performance of all
obligations of the Partnership hereunder has been taken or,
subject to obtaining the approval of Unitholders holding a
majority of the outstanding Units, will be taken prior to
the Effective Date, and this Agreement constitutes the valid
and legally binding obligation of the Partnership,
enforceable against it in accordance with its terms, except
(i) as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting enforcement of
creditor's rights generally and (ii) as enforceability may
be limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies.
(c) The Partnership is not in violation of or in
default under any provision of the Partnership Agreement or
of any instrument, judgment, order, writ, decree or contract
to which it is a party or by which it is bound or, in any
material respect, of any provision of any Federal or state
statute, rule or regulation applicable to the Partnership.
The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby
will not result in any such violation or be in conflict with
or constitute, with or without the passage of time or the
giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an
event which results in the creation of any lien, charge or
encumbrance upon any of the assets of the Partnership.
6. COVENANTS
6.1 STOCK EXCHANGE LISTING. The Company shall use its best
efforts to obtain an approval to list on the New York Stock
Exchange, Inc. ("NYSE") the Common Stock to be issued in the
Merger, subject to official notice of issuance, prior to the
Effective Time.
6.2 UNITHOLDER APPROVAL. The Partnership shall use its
best efforts to obtain the approval of this Agreement by
Unitholders holding a majority of the outstanding Units.
6.3 INDEMNIFICATION. Form and after the Effective Time,
the Company agrees that it will indemnify and hold harmless, and
advance expenses to, QSV and, as applicable, each officer,
director, partner or other person controlling the QSV, and any
affiliate of it, against any costs or expenses (including
reasonable attorneys' fees), judgment, fines, losses, claims,
damages or liabilities incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil,
criminal, administrative or investigative, arising out of or
pertaining to the transactions contemplated hereby, whether
asserted or claimed prior to, at or after the Effective Time, to
the fullest extent permitted by law. In addition, the Company
hereby assumes the Partnership's
A-5
<PAGE>
indemnity obligations under the Partnership Agreement with respect
to liabilities to the foregoing individuals and entities arising out
of actions or omissions occurring prior to the Effective Time.
7. CONDITIONS
7.1 CONDITIONS TO THE PARTNERSHIP'S OBLIGATION TO EFFECT
THE MERGER. The obligation of the Partnership to consummate the
Merger is subject to satisfaction of each of the following
conditions:
(a) This Agreement shall have been duly approved by
Unitholders holding a majority of the Units outstanding as
of _________________, 1997 (the "Record Date") in accordance
with applicable law and the Partnership Agreement;
(b) No statute, rule or regulation shall have been
enacted or promulgated by any governmental authority, nor
shall there be any order or injunction of a United States or
state court of competent jurisdiction in effect, which
prohibits the exchange of Units for shares of Common Stock
or the consummation of the Merger;
(c) The Partnership shall have received an opinion of
counsel to the effect that the Merger will be treated as
part of a transaction described in Section 351 of the
Internal Revenue Code of 1986, as amended (the "Code");
(d) The Partnership shall have received a favorable
letter ruling from the Internal Revenue Service as to
treatment of the Merger as part of a transaction described
in Section 351 of the Code;
(e) The shares of Common Stock issuable to the
Unitholders pursuant to this Agreement shall have been
approved for listing on the NYSE upon official notice of
issuance; and
(f) Amendments to the Partnership Agreement to permit,
among other things, the withdrawal of QSV as managing
general partner of the Partnership, shall have been duly
approved by Unitholders holding a majority of the Units
outstanding as of the Record Date in accordance with
applicable law and the Partnership Agreement, and a
certificate of amendment effecting such amendments shall
have been duly filed with the Secretary of State of the
State of Delaware.
7.2 CONDITIONS TO THE COMPANY'S OBLIGATION TO EFFECT THE
MERGER. The obligation of the Company to consummate the Merger
is subject to satisfaction of the following conditions:
(a) No statute, rule or regulation shall have been
enacted or promulgated by any governmental authority, nor
shall there be any order or injunction of a United States or
state court of competent jurisdiction in effect, which
prohibits the exchange of the Units for Common Stock or
consummation of the Merger; and
A-6
<PAGE>
(b) The contribution of the management compensation
rights of QSV under the terms of the Partnership Agreement
and the partnership agreement of the Operating Partnership
to the Operating Partnership shall have been effected.
8. TERMINATION
8.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be
terminated and the Merger may be abandoned at any time prior to
the Effective Time, before or after approval by the Unitholders,
by mutual written consent of the Company and the Partnership.
8.2 EFFECT OF TERMINATION AND ABANDONMENT. In the event of
termination of this Agreement and abandonment of the Merger
pursuant to this Section 8, no party hereto (or any of its
directors, trustees, officers or partners, or persons otherwise
controlling or affiliated with any of the parties hereto or any
of their directors, officers or partners) shall have any
liability or further obligation to any other party to this
Agreement.
9. MISCELLANEOUS AND GENERAL
9.1 MODIFICATION OR AMENDMENt. Subject to the applicable
provisions of the Maryland General Corporation Law and the
Delaware RULPA, at any time prior to the Effective Time, the
parties hereto may modify or amend this Agreement by mutual
written consent.
9.2 COUNTERPARTS. For the convenience of the parties
hereto, this Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an
original instrument, and all such counterparts shall together
constitute the same Agreement.
9.3 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware.
9.4 NO THIRD PARTY BENEFICIARIES. Except as provided in
Section 6.3, this Agreement is not intended to confer upon any
person other than the parties hereto any rights or remedies
hereunder.
9.5 CAPTIONS. The section and paragraph captions herein
are for convenience of reference only, do not constitute part of
this Agreement and shall not be deemed to limit or otherwise
affect any of the provisions hereof.
9.6 NO LIABILITY. No trustee, beneficiary or stockholder
of the Company shall have any personal liability for any
obligations of the Company under this Agreement.
A-7
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed
and delivered by the parties hereto as of the date first
hereinabove written.
U.S. RESTAURANT PROPERTIES, INC.
By:____________________________
Name:____________________
Title: _________________
USRP MANAGING, INC.
By:____________________________
Name:____________________
Title: _________________
USRP ACQUISITION, L.P.
By: USRP Managing Inc., the
General Partner
By:___________________________
Name:___________________
Title: ________________
U.S. RESTAURANT PROPERTIES
MASTER L.P.
By: U.S. Restaurant Properties,Inc.,
the Managing General Partner
By:___________________________
Name:___________________
Title: ________________
U.S. RESTAURANT PROPERTIES, INC.
By:___________________________
Name:___________________
Title: ________________
A-9
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Incorporation, as amended or
supplemented (the "Articles of Incorporation"), provide certain
limitations on the liability of the Registrant's directors and
officers for monetary damages to the Registrant. The Articles of
Incorporation obligate the Registrant to indemnify its directors
and officers, and permit the Registrant to indemnify its
employees and other agents, against certain liabilities incurred
in connection with their service in such capacities. These
provisions could reduce the legal remedies available to the
Registrant and the stockholders against these individuals. See
"Certain Provisions of Maryland Law and of the REIT Corporation's
Articles and Bylaws--Limitation of Liability and
Indemnification."
The Registrant's Articles of Incorporation require it to
indemnify (a) the Registrant's directors and officers (whether
serving the Registrant or, at its request, any other entity) who
have been successful, on the merits or otherwise, in the defense
of a proceeding to which he was made a party by reason of his
service in that capacity, against reasonable expenses incurred by
him in connection with the proceeding unless it is established
that (i) his act or omission 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) he actually
received an improper personal benefit in money, property or
services or (iii) in the case of a criminal proceeding, he had
reasonable cause to believe that his act or omission was unlawful
and (b) other employees and agents of the Registrant to such
extent as shall be authorized by the Board of Directors or the
Registrant's Bylaws and be permitted by law. In addition, the
Registrant's Articles of Incorporation require the Registrant to
pay or reimburse, in advance of the final disposition of a
proceeding, reasonable expenses incurred by a director or officer
who is a party to a proceeding under procedures provided for
under the Maryland General Corporation Law (the "MGCL"). The
Registrant's Bylaws also permit the Registrant to provide such
other and further indemnification or payment or reimbursement of
expenses as the Board of Directors deems to be in the interest of
the Registrant and as may be permitted by the MGCL for directors,
officers and employees of Maryland corporations.
The Registrant has entered into indemnification agreements
with each of the Registrant's officers and directors. The
indemnification agreements require, among other things, that the
Registrant indemnify its officers and directors to the fullest
extent permitted by law and advance to the officers and directors
all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted.
The Registrant must also indemnify and advance all expenses
incurred by officers and directors seeking to enforce their
rights under the indemnification agreements and cover officers
and directors under the Registrant's directors' and officers'
liability insurance. Although the indemnification agreements
offer substantially the same scope of coverage afforded by law,
such agreements provide assurance to directors and officers that
indemnification will be available because such contracts cannot
be modified unilaterally in the future by the Board of Directors
or the stockholders to eliminate the rights they provide.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
EXHIBIT
NO. EXHIBIT
-------- -------
2.1 Merger Agreement Included as Appendix A to the
Prospectus/Proxy constituting a portion of the
Registration Statement
3.1 Amended Articles of Incorporation of the
Registrant
3.2* Bylaws of the Registrant
4.1* Specimen Common Stock Certificate
5.1* Opinion of Winstead Sechrest & Minick P.C.
regarding legality of the Common Stock
8.1* Opinion of Winstead Sechrest & Minick P.C.
regarding tax matters
10.1* Third Amended and Restated Agreement of Limited
Partnership of U.S. Restaurant Properties Master
L.P. ("USRP")
10.2* Third Amended and Restated Agreement of Limited
Partnership of U.S. Restaurant Properties
Operating L.P. (the "Operating Partnership")
10.3* Withdrawal Agreement dated _________________,
1997 by and among the Registrant, USRP, the
Operating Partnership, Robert J. Stetson and
Fred H. Margolin
10.4* Employment Agreement dated ___________________,
1997 by and between the Registrant and Robert J.
Stetson
10.5* Employment Agreement dated _________________,
1997 by and between the Registrant and Fred H.
Margolin
23.1 Consent of Deloitte & Touche LLP
23.2* Consent of Winstead Sechrest & Minick P.C.
(included in Exhibit 5.1)
99.1 Form of Proxy Card
________________
*To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules are omitted because the required information
is included in the Consolidated Financial Statements or the Notes
thereto or is otherwise inapplicable.
(c) REPORTS, OPINIONS OR APPRAISALS.
Opinion of Morgan Keegan & Company, Inc. - Included as
Appendix B to the Prospectus/Proxy Statement constituting a
portion of the Registration Statement.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
II-2
<PAGE>
(1) To file, during any period in which offers or sales are
being made, a post effective amendment to this Registration
Statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
Registration Statement (or the most recent
post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in
the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with
respect to the plan of distribution not previously
disclosed in the Registration Statement or any material
change to such information in the Registration
Statement;
provided, however, that paragraphs (i) and (ii) do not apply if
the Registration Statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed with
or furnished to the Commission by the Registrant pursuant to
Section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) That, for purposes of determining any liability under
the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(5) That prior to any public reoffering of the securities
registered hereunder through the use of a prospectus which is a
part of this Registration Statement, by any person or party who
is deemed to be an underwriter within the meaning of Rule 145(c),
the Registrant undertakes that
II-3
<PAGE>
such reoffering prospectus will contain the information called
for by Form S-4 with respect to reofferings by persons who may
be deemed underwriters, in addition to the information called for
by the other items of Form S-4.
(6) That every prospectus (i) that is filed pursuant to
paragraph (5) immediately preceding, or (ii) that purports to
meet the requirements of Section 10(a)(3) of the Act and is used
in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(7) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant pursuant to
the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(8) To respond to requests for information that is
incorporated by reference into the prospectus pursuant to Items
4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of
responding to the request.
(9) To supply by means of post-effective amendment all
information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form
S-4 and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in
the City of Dallas, State of Texas, on the 6th day of February,
1997.
U.S. RESTAURANT PROPERTIES, INC.
By: /s/ Robert J. Stetson
----------------------------
Name: Robert J. Stetson
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert J. Stetson President and Chief February 6, 1997
- ----------------------- Executive Officer and
Robert J. Stetson Director (Principal
Executive Officer and
Principal Financial Officer)
/s/ Fred H. Margolin Chairman of the February 6, 1997
- ---------------------- Board of Directors,
Fred H. Margolin Secretary and Treasurer
S-1
EXHIBIT 3.1
AMENDED
ARTICLES OF INCORPORATION
OF
U.S. RESTAURANT PROPERTIES, INC.
ARTICLE I
The undersigned, Dawn M. Douthit, whose mailing address is
1201 Elm St., Suite 5400, Dallas, Texas 75270, being at least
eighteen (18) years of age, acting as incorporator, does hereby
form a corporation under the general laws of the State of
Maryland.
ARTICLE II
NAME
The name of the Corporation (which is hereinafter called the
"Corporation") is:
U.S. Restaurant Properties, Inc.
ARTICLE III
PURPOSES AND POWERS
The purposes for which the Corporation is formed and the
business and objects to be carried on and promoted by it are (i)
to engage in any lawful act or activity (including, without
limitation or obligation, engaging in business as a real estate
investment trust under the Internal Revenue Code of 1986, as
amended, or any successor statute (the "Code")) for which
corporations may be organized under the laws of the State of
Maryland as now or hereafter in force and (ii) to engage in any
one or more businesses or transactions, or to acquire all or any
portion of any entity engaged in any one or more businesses or
transactions, which the Board of Directors may from time to time
authorize or approve, whether or not related to the business
described elsewhere in this Article or to any other business at
the time or theretofore engaged in by the Corporation. For
purposes of these Articles, "REIT" means a real estate investment
trust qualifying under Section 856 through 860 of the Code.
The foregoing enumerated purposes and objects shall be in no
way limited or restricted by reference to, or inference from, the
terms of any other clause of this or any other Article of the
charter of the Corporation, and each shall be regarded as
independent; and they are intended to be and shall be construed
as powers as well as purposes and objects of the Corporation and
shall be in addition to and not in limitation of the general
powers of corporations under the General Laws of the State of
Maryland.
<PAGE>
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
The post office address of the principal office of the Cor-
poration in the State of Maryland is 11 East Chase Street,
Baltimore, Maryland 21202. The name and address of the resident
agent of the Corporation in the State of Maryland is The
Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202. Said resident agent is a Maryland corporation.
ARTICLE V
AUTHORIZED STOCK
SECTION 5.1 TOTAL CAPITALIZATION. The total number of
shares of all classes of capital stock that the Corporation has
authority to issue is Sixty Million (60,000,000) shares,
consisting of (i) Ten Million (10,000,000) shares of preferred
stock, par value $0.001 per share (the "Preferred Stock"); (ii)
Forty Five Million (45,000,000) shares of common stock, par value
$0.001 per share (the "Common Stock") and (iii) Five Million
(5,000,000) shares of excess stock, par value $0.001 per share
(the "Excess Stock"). The aggregate par value of all of the
authorized shares of all classes of capital stock having par
value is Sixty Thousand Dollars ($60,000). The Board of
Directors may classify and reclassify any unissued shares of
capital stock by setting or changing in any one or more respects
the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption of such shares of stock.
SECTION 5.2 PREFERRED STOCK. The Preferred Stock may be
issued from time to time in one or more series as authorized by
the Board of Directors. Prior to the issuance of shares of each
such series, the Board of Directors, by resolution and set forth
in articles supplementary for such series or otherwise in the
Corporation's charter, shall fix the number of shares to be in-
cluded in each series, and the terms, rights, restrictions and
qualifications of the shares of each series. The authority of
the Board of Directors with respect to each series shall include,
but not be limited to, determination of the following:
(i) The designation of the series, which may be by
distinguishing number, letter or title.
(ii) The dividend rate on the shares of the series, if any,
whether any dividends shall be cumulative and, if so,
from which date or dates, and the relative rights of
priority, if any, of payment of dividends on shares of
the series.
-2-
<PAGE>
(iii) The redemption rights, including conditions and
the price or prices, if any, for shares of the
series.
(iv) The terms and amounts of any sinking fund for the
purchase or redemption of shares of the series.
(v) The rights of the shares of the series in the event of
any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Corporation, and
the relative rights of priority, if any, of payment of
shares of the series.
(vi) Whether the shares of the series shall be convertible
into shares of any other class or series, or any other
security, of the Corporation or any other corporation
or other entity, and, if so, the specification of such
other class or series of such other security, the
conversion price or prices or rate or rates, any
adjustments thereof, the date or dates on which such
shares shall be convertible and all other terms and
conditions upon which such conversion may be made.
(vii) Restrictions on the issuance of shares of the same
series or of any other class or series.
(viii) The voting rights, if any, of the holders of
shares of the series.
(ix) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualification of
shares of such class or series, not inconsistent with
law and the charter of the Corporation.
Subject to the express provisions of any other series of
Preferred Stock then outstanding, and notwithstanding any other
provision of this charter, the Board of Directors may increase or
decrease (but not below the number of shares of such series then
outstanding) the number of shares, or alter the designation or
classify or reclassify any unissued shares of a particular series
of Preferred Stock, by fixing or altering, in one or more re-
spects, from time to time before issuing the shares, the terms,
rights, restrictions and qualifications of the shares of any such
series of Preferred Stock.
SECTION 5.3 COMMON STOCK.
(A) COMMON STOCK SUBJECT TO TERMS OF PREFERRED STOCK. The
Common Stock shall be subject to the express terms of any series
of Preferred Stock.
(B) DIVIDEND RIGHTS. Subject to the provisions of law and
any preferences of any series of Preferred Stock, the holders of
shares of Common Stock shall be entitled to receive such
-3-
<PAGE>
dividends as may be declared by the Board of Directors of the
Corporation out of funds legally available therefor.
(C) RIGHTS UPON LIQUIDATION. In the event of any voluntary
or involuntary liquidation, dissolution or winding up of the
Corporation, the aggregate assets available for distribution to
holders of shares of the Common Stock shall be determined in
accordance with applicable law. Except as provided below as a
consequence of the limitations on distributions to holders of
shares of Excess Stock, each holder of shares of Common Stock
shall be entitled to receive, ratably with (i) each other holder
of shares of Common Stock and (ii) each holder of Excess Stock
resulting from the exchange of Common Stock (pursuant to Article
VIII hereof), that portion of such aggregate assets available for
distribution as the number of shares of the outstanding Common
Stock held by such holder bears to the total number of shares of
outstanding Common Stock and Excess Stock resulting from the
exchange of Common Stock (pursuant to Article VIII hereof) then
outstanding. Anything herein to the contrary notwithstanding, in
no event shall the amount payable to a holder of shares of Excess
Stock exceed (i) the price per share such holder paid for the
Common Stock in the purported Transfer or Acquisition (as those
terms are defined in Section 8.1 hereof) or change in capital
structure or other transaction or event that resulted in the
Excess Stock or (ii) if the holder did not give full value for
such Excess Stock (as through a gift, a devise or other event or
transaction) a price per share equal to the Market Price (as that
term is defined in Section 8.1 hereof) for the shares of the
Common Stock on the date of the purported Transfer, Acquisition,
change in capital structure or other transaction or event that
resulted in such Excess Stock. Any amount available for
distribution in excess of the foregoing limitations shall be paid
ratably to the holders of shares of Common Stock and other
holders of Excess Stock resulting from the exchange of Common
Stock to the extent permitted by the foregoing limitations.
(D) VOTING RIGHTS. Except as may be provided in this
charter, and subject to the express terms of any series of
Preferred Stock, the holders of shares of the Common Stock shall
have the exclusive right to vote on all matters (as to which a
common stockholder shall be entitled to vote pursuant to
applicable law) at all meetings of the stockholders of the
Corporation, and shall be entitled to one (1) vote for each share
of the Common Stock entitled to vote at such meeting. Shares of
Common Stock shall not have cumulative voting rights.
(E) CONVERSION TO EXCESS STOCK. Each share of Common Stock
is convertible into Excess Stock as provided in Article VIII
hereof.
SECTION 5.4 EXCESS STOCK. A description of the
preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and
terms and conditions of redemption of the Excess Stock of the
Corporation is set forth in Article VIII hereof and Section
5.3(C) hereof.
-4-
<PAGE>
SECTION 5.5 RANK OF FUTURE SERIES OF CAPITAL STOCK. For
the purposes hereof and of any articles supplementary to the
charter providing for the classification or reclassification of
any shares of capital stock or of any other charter document of
the Corporation (unless otherwise provided in any such articles
or document), any class or series of stock of the Corporation
shall be deemed to rank:
(A) prior to another class or series either as to dividends
or upon liquidation, if the holders of such class or series shall
be entitled to the receipt of dividends or of amounts
distributable on liquidation, dissolution or winding up, as the
case may be, in preference or priority to holders of such other
class or series;
(B) on a parity with another class or series either as to
dividends or upon liquidation, whether or not the dividend rates,
divided payment dates or redemption or liquidation price per
share thereof be different from those of such others, if the
holders of such class or series of stock shall be entitled to
receipt of dividends or amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in proportion to
their respective dividend rates or redemption or liquidation
prices, without preference or priority over the holders of such
other class or series; and
(C) junior to another class or series either as to
dividends or upon liquidation, if the rights of the holders of
such class or series shall be subject or subordinate to the
rights of the holders of such other class or series in respect of
the receipt of dividends or the amounts distributable upon
liquidation, dissolution or winding up, as the case may be.
SECTION 5.6 ISSUANCE OF RIGHTS TO PURCHASE SECURITIES AND
OTHER PROPERTY. Subject to the rights of the holders of any
series of Preferred Stock, the Board of Directors is hereby
authorized to create and to authorize and direct the issuance (on
either a pro rata or non-pro rata basis) by the Corporation of
rights, options or warrants for the purchase of shares of Equity
Stock (as that term is defined in Section 8.1 hereof) of the
Corporation, other securities of the Corporation or shares or
other securities of any successor in interest of the Corporation
(a "Successor"), at such times, in such amounts, to such persons,
for such consideration (if any),with such form and content (in-
cluding without limitation the consideration for which any shares
of Equity Stock of the Corporation, other securities of the Cor-
poration, or shares or other securities of any Successor are to
be issued) and upon such terms and conditions as it may, from
time to time, determine, subject only to the restrictions, limi-
tations, conditions and requirements imposed by the terms of the
Maryland General Corporation Law as in effect from time to time
or any successor statute thereto (the "MGCL"), other applicable
laws and this charter. Without limiting the generality of the
foregoing, the authority granted hereby includes the authority to
adopt a "rights plan" or similar plan that treats stockholders in
a discriminatory or non-pro rata manner, based upon the number of
shares owned thereby or otherwise.
-5-
<PAGE>
ARTICLE VI
BOARD OF DIRECTORS
SECTION 6.1 GENERAL. The business and affairs of the
Corporation shall be managed under the direction of the Board of
Directors.
SECTION 6.2 NUMBER OF DIRECTORS. The number of directors
shall initially be two (2), which number may be increased or
decreased pursuant to the Bylaws of the Corporation, but shall
not be less than the number required by the MGCL. Subject to the
foregoing and to the express rights of the holders of any series
of Preferred Stock to elect additional directors under specified
circumstances, the number of directors of the Corporation shall
be fixed by the Bylaws of the Corporation and may be increased or
decreased from time to time in such a manner as may be prescribed
by the Bylaws, but shall never be less than the minimum number
permitted by the MGCL now or hereafter in force. The following
persons shall act as directors of the Corporation until the first
annual meeting of the stockholders of the Corporation and until
their successors are duly elected and qualified:
Robert J. Stetson
Fred H. Margolin
SECTION 6.3 CLASSIFICATION OF BOARD OF DIRECTORS.
Immediately after the Initial Public Offering (as that term is
defined in Section 8.1 hereof), the directors, other than those
who may be elected by the holders of any series of Preferred
Stock, shall be divided into three classes, as nearly equal in
number as possible. One class of directors initially shall have
a term expiring at the annual meeting of stockholders to be held
in 1998, another class initially shall have a term expiring at
the annual meeting of stockholders to be held in 1999, and
another class initially shall have a term expiring at the annual
meeting of stockholders to be held in 2000. Members of each
class shall hold office until their respective successors are
elected and qualified. At each succeeding annual meeting of the
stockholders of the Corporation, the successors of the class of
directors whose term expires at that meeting shall be elected by
a plurality vote of all votes cast at such meeting, to hold
office for a term expiring at the annual meeting of stockholders
held in the third year following the year of their election.
SECTION 6.4 VACANCIES. Subject to the rights of the
holders of any class of Preferred Stock then outstanding, newly
created directorships resulting from any increase in the
authorized number of directors or any vacancies on the Board of
Directors resulting from death, resignation, retirement,
disqualification, removal from office, or other cause shall be
filled by a majority vote of the stockholders or the directors
then in office. A director so chosen by the stockholders shall
hold office for the balance of the term then remaining. A
director so chosen by the remaining directors shall hold office
until the next annual meeting of stockholders, at which time the
-6-
<PAGE>
stockholders shall elect a director to hold office for the
balance of the term then remaining. No decrease in the number of
directors constituting the Board of Directors shall affect the
tenure of office of any director.
ARTICLE VII
MATTERS RELATING TO THE POWERS OF THE
CORPORATION AND ITS DIRECTORS AND STOCKHOLDERS
The following provisions are hereby adopted for the purpose
of defining, limiting and regulating the powers of the Corpora-
tion and of the directors and stockholders thereof:
SECTION 7.1 AUTHORITY AS TO BYLAWS. Except as otherwise
provided herein, in furtherance and not in limitation of the
powers conferred by statute, the Board of Directors is expressly
authorized to make, alter, amend or repeal the Bylaws of the
Corporation and the Corporation may, in its Bylaws, confer powers
on the Board of Directors in addition to those contained herein
or conferred by applicable law. Notwithstanding any other
provision of this charter or the Bylaws of the Corporation (and
notwithstanding the fact that some lesser percentage may be
specified by law), the Bylaws shall not be made, repealed,
amended or rescinded by the stockholders of the Corporation
except by the vote of the holders of not less than two-thirds of
the outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of
the stockholders for that purpose (provided that such notice of
such proposed adoption, repeal, alteration, amendment or
rescission is included in the notice of such meeting), or, as set
forth above, by the Board of Directors.
SECTION 7.2 AUTHORITY AS TO STOCK ISSUANCES. The Board of
Directors may authorize the issuance, from time to time, of
shares of its stock of any class or series, whether now or
hereafter authorized, or securities convertible into shares now
or hereafter authorized, for such consideration as the Board of
Directors may deem advisable, and without any action by the
stockholders, subject to such restrictions or limitations, if
any, as may be set forth in this charter or the Bylaws of the
Corporation or in the laws of the State of Maryland.
SECTION 7.3 MANNER OF ELECTION. Unless and except to the
extent that the Bylaws of the Corporation shall so require, the
election of directors of the Corporation need not be by written
ballot.
SECTION 7.4 REMOVAL OF DIRECTORS. Subject to the rights of
the holders of any series of Preferred Stock to elect additional
directors (or remove such additional directors, once elected)
under specified circumstances, any director may be removed from
office only for cause and only by the affirmative vote of the
holders of two-thirds of the then-outstanding shares of Equity
Stock
-7-
<PAGE>
entitled to vote generally in the election of directors
(the "Voting Stock"), voting together as a single class.
"Cause," for purposes of this charter, shall mean acts or
omissions constituting active and deliberate dishonesty
established by a final judgment or actual receipt of an improper
benefit or profit in money, property or services.
SECTION 7.5 DETERMINATIONS BY BOARD. The determination as
to any of the following matters, made in good faith by or
pursuant to the direction of the Board of Directors consistent
with the charter of the Corporation and in the absence of actual
receipt of an improper benefit in money, property or services or
active and deliberate dishonesty established by a court, shall be
final and conclusive and shall be binding upon the Corporation
and every holder of shares of its stock: (i) the amount of the
net income of the Corporation for any period and the amount of
assets at any time legally available for the payment of
dividends, redemption of its stock or the payment of other
distributions on its stock; (ii) the amount of paid-in surplus,
net assets, other surplus, annual or other net profit, net assets
in excess of capital, undivided profits or excess of profits over
losses on sales of assets; (iii) the amount, purpose, time of
creation, increase or decrease, alteration or cancellation of any
reserves or charges and the propriety thereof (whether or not any
obligation or liability for which such reserves shall have been
created shall have been paid or discharged); (iv) the fair value,
or any sale, bid or asked priced to be applied in determining the
fair value, of any asset owned or held by the Corporation;
(v) any matters relating to the acquisition, holding and
disposition of any assets by the Corporation; and (vi) whether
and to what extent and what times and places and under what
conditions and regulations the books, accounts and documents of
the Corporation, or any of them, shall be open to the inspection
of stockholders, except as otherwise provided by statute or by
the Bylaws, and, except as so provided, no stockholder shall have
any right to inspect any book, account or document of the
Corporation unless authorized so to do by resolution of the Board
of Directors.
SECTION 7.6 RESERVED POWERS OF BOARD. The enumeration and
definition of particular powers of the Board of Directors
included in this Article VII shall in no way be limited or
restricted by reference to or inference from the terms of any
other clause of this or any other provision of the charter of the
Corporation, or construed or deemed by inference or otherwise in
any manner to exclude or limit the powers conferred upon the
Board of Directors under the laws of the State of Maryland as now
or hereafter in force.
SECTION 7.7 REIT QUALIFICATION. The Board of Directors
shall use its best efforts to cause the Corporation and its
stockholders to qualify for U.S. federal income tax treatment in
accordance with the provisions of the Code applicable to a REIT.
In furtherance of the foregoing, the Board of Directors shall use
its best efforts to take such actions as are necessary, and may
take such actions as it deems desirable (in its sole discretion)
to preserve the status of the Corporation as a REIT; provided,
however, that in the event that the Board of Directors
determines, in its sole discretion, that it is no longer in the
best interests of the Corporation to qualify as a REIT, the Board
of Directors may revoke or otherwise terminate the Corporation's
REIT election pursuant to Section 856(g) of the Code.
-8-
<PAGE>
SECTION 7.8 ADVISOR AGREEMENTS. Subject to such approval
of stockholders and other conditions, if any, as may be required
by any applicable statute, rule or regulation, the Board of
Directors may authorize the execution and performance by the
Corporation of one or more agreements with any person,
corporation, association, company, trust, partnership (limited or
general) or other organization whereby, subject to the
supervision and control of the Board of Directors, any such other
person, corporation, association, company, trust, partnership
(limited or general) or other organization shall render or make
available to the Corporation managerial, investment, advisory
and/or related services, office space and other services and
facilities (including, if deemed advisable by the Board of
Directors, the management or supervision of the investments of
the Corporation) upon such terms and conditions as may be
provided in such agreement or agreements (including, if deemed
fair and equitable by the Board of Directors, the compensation
payable thereunder by the Corporation).
SECTION 7.9 RELATED PARTY TRANSACTIONS. Without limiting
any other procedures available by law or otherwise to the
Corporation, the Board of Directors may authorize any agreement
of the character described in this Section 7.9 or other
transaction with any person, corporation, association, company,
trust, partnership (limited or general) or other organization,
although one or more of the directors or officers of the
Corporation may be a party to any such agreement or an officer,
director, stockholder or member of such other party, and no such
agreement or transaction shall be invalidated or rendered void or
voidable solely by reason of the existence of any such
relationship if the existence is disclosed or known to (i) the
Board of Directors, and the contract or transaction is approved
by the affirmative vote of a majority of the disinterested
directors, even if they constitute less than a quorum of the
Board; or (ii) the stockholders entitled to vote, and the
contract or transaction is approved or ratified by the
affirmative vote of a majority of the Voting Stock other than the
votes of shares owned of record or beneficially by the interested
officer, director or corporation, firm or other entity. Any
director of the Corporation who is also a director, officer,
stockholder or member of such other entity may be counted in
determining the existence of a quorum at any meeting of the Board
of Directors considering such matter.
SECTION 7.10 NO CUMULATIVE RIGHTS. Except as may be
expressly provided with respect to any class or series of
Preferred Stock, stockholders of the Corporation shall not have
cumulative voting rights in the election of directors.
SECTION 7.11 NO PREEMPTIVE RIGHTS. Except as may be
expressly provided with respect to any class or series of
Preferred Stock, no holders of stock of the Corporation, of
whatever class or series, shall have any preemptive right to
subscribe for the purchase of any shares of stock of any class or
series or for the purchase of any securities convertible into
shares of stock of any class or series of the Corporation other
than such rights, if any, as the Board of Directors, in its sole
discretion, may determine, and for such consideration as the
Board of Directors, in its sole discretion, may fix; and except
as may be expressly provided with respect to any class or series
of Preferred Stock, any shares of stock of any class or series of
convertible
-9-
<PAGE>
securities which the Board of Directors may determine
to offer for subscription to the holders of stock may, as the
Board of Directors shall determine in its sole discretion, be
offered to holders of any then-existing class, classes or series
of stock or other securities to the exclusion of holders of any
or all other then-existing classes or series of securities.
SECTION 7.12 CONSIDERATION OF ALL RELEVANT FACTORS. The
Board of Directors shall, in connection with the exercise of its
business judgment involving a Business Combination (as defined in
Section 3-601 of the Corporations and Associations Article of the
Annotated Code of Maryland) or any actual or proposed transaction
which would or may involve a change in control of the Corporation
(whether by purchases of shares of stock or any other securities
of the Corporation in the open market, or otherwise, tender
offer, merger, consolidation, dissolution, liquidation, sale of
all or substantially all of the assets of the Corporation, proxy
solicitation or otherwise), in determining what is in the best
interests of the Corporation and its stockholders and in making
any recommendation to its stockholders, give due consideration to
all relevant factors, including, but not limited to (A) the
economic effect, both immediate and long-term, upon the
Corporation's stockholders, including stockholders, if any, who
do not participate in the transaction; (B) the social and
economic effect on the employees, customers of, and others
dealing with, the Corporation and its subsidiaries and on the
communities in which the Corporation and its subsidiaries operate
or are located; (C) whether the proposal is acceptable based on
the historical and current operating results or financial
condition of the Corporation; (D) whether a more favorable price
could be obtained for the Corporation's stock or other securities
in the future; (E) the reputation and business practices of the
offeror and its management and affiliates as they would affect
the employees of the Corporation and its subsidiaries; (F) the
future value of the stock or any other securities of the
Corporation; (G) any antitrust or other legal and regulatory
issues that are raised by the proposal; and (H) the business and
financial condition and earnings prospects of the acquiring
person or entity, including, but not limited to, debt service and
other existing financial obligations, financial obligations to be
incurred in connection with the acquisition, and other likely
financial obligations of the acquiring person or entity. If the
Board of Directors determines that any proposed Business
Combination (as defined in Section 3-601 of the Corporations and
Associations Article of the Annotated Code of Maryland) or
actual or proposed transaction which would or may involve a
change in control of the Corporation should be rejected, it may
take any lawful action to defeat such transaction, including, but
not limited to, any or all of the following: advising
stockholders not to accept the proposal; instituting litigation
against the party making the proposal; filing complaints with
governmental and regulatory authorities; acquiring the stock or
any of the securities of the Corporation; selling or otherwise
issuing authorized but unissued stock, other securities or
granting options or rights with respect thereto; acquiring a
company to create an antitrust or other regulatory problem for
the party making the proposal; and obtaining a more favorable
offer from another individual or entity.
SECTION 7.13 STOCKHOLDER PROPOSALS. For any stockholder
proposal to be presented in connection with an annual meeting of
stockholders of the Corporation, including any proposal
-10-
<PAGE>
relating to the nomination of a director to be elected to the Board
of Directors of the Corporation, the stockholders must have given
timely written notice thereof in writing to the Secretary of the
Corporation in the manner and containing the information required
by the Bylaws. Stockholder proposals to be presented in
connection with a special meeting of stockholders will be
presented by the Corporation only to the extent required by
Section 2-502 of the Corporations and Associations Article of the
Annotated Code of Maryland.
SECTION 7.14 REQUIRED VOTE. Notwithstanding any provision
of law requiring the authorization of any action by a greater
proportion than a majority of the total number of shares of all
classes of capital stock or of the total number of shares of any
class of capital stock, such action shall be valid and effective
if authorized by the affirmative vote of the holders of a
majority of the total number of shares of all classes outstanding
and entitled to vote thereon, except as otherwise provided in
this charter.
ARTICLE VIII
RESTRICTIONS ON OWNERSHIP, TRANSFER, ACQUISITION AND
REDEMPTION OF SHARES
SECTION 8.1 DEFINITIONS. For purposes of this charter, the
following terms shall have the following meanings:
"Acquire" shall mean the acquisition of Beneficial
Ownership or Constructive Ownership of shares of Equity Stock by
any means, including, without limitation, the exercise of any
rights under any option, warrant, convertible security, pledge or
other security interest or similar right to acquire shares, but
shall not include the acquisition of any such rights unless, as a
result, the acquirer would be considered a Beneficial Owner or
Constructive Owner. The terms "Acquires" and "Acquisition" shall
have correlative meanings.
"Beneficial Ownership" shall mean ownership of shares
of Equity Stock by an individual who would be treated as an owner
of such shares under Section 542(a)(2) of the Code, either di-
rectly or constructively through the application of Section 544
of the Code, as modified by Section 856(h)(1)(B) of the Code.
For purposes of this definition, the term "individual" also shall
include any organization, trust or other entity that is treated
as an individual for purposes of Section 542(a)(2) of the Code.
The terms "Beneficial Owner," "Beneficially Own," "Beneficially
Owns" and "Beneficially Owned" shall have correlative meanings.
"Beneficiary" shall mean, with respect to any Trust,
one or more organizations described in each of Section
170(b)(1)(A) (other than clauses (vii) or (viii) thereof) and
Section 170(c)(2) of the Code that are named by the Corporation
as the beneficiary or beneficiaries of such Trust, in accordance
with the provisions of Section 8.2(G) hereof.
-11-
<PAGE>
"Board of Directors" shall mean the Board of Directors
of the Corporation.
"Bylaws" shall mean the Bylaws of the Corporation, as
the same are in effect from time to time.
"Closing Price" on any day shall mean 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 New York Stock
Exchange, or if the affected class or series of Equity Stock is
not so listed or admitted to trading, as reported in the princi-
pal 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 Equity Stock is listed or admit-
ted to trading or, if the affected class or series of Equity
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 af-
fected class or series of Equity 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 of
Directors making a market in the affected class or series of Eq-
uity 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 Equity Stock as of such day, as de-
termined by the Board of Directors in its discretion.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, or any successor statute thereto.
Reference to any provision of the Code shall mean such provision
as in effect from time to time, as the same may be amended, and
any successor provision thereto, as interpreted by any applicable
regulations as in effect from time to time.
"Common Stock Ownership Limit" shall mean 8.75% of the
outstanding shares of Common Stock of the Corporation, subject to
adjustment pursuant to Section 8.10 hereof.
"Constructive Ownership" shall mean ownership of shares
of Equity Stock by a Person who would be treated as an owner of
such shares, either actually or constructively, directly or
indirectly, through the application of Section 318 of the Code,
as modified by Section 856(d)(5) thereof. The terms "Con-
structive Owner," "Constructively Own," "Constructively Owns" and
"Constructively Owned" shall have correlative meanings.
"Equity Stock" shall mean collectively stock of the
Corporation that is either Common Stock or Preferred Stock.
-12-
<PAGE>
"Excess Stock" shall mean shares of Equity Stock
Beneficially Owned by any Person in excess of the Ownership Limit
or in violation of any of the restrictions described in
paragraphs (B), (C), (D) and (E) of Section 8.2 hereof.
"Existing Holder" shall mean QSV Properties, Inc., a
Delaware corporation, and its successors and assigns.
"Existing Holder Limit" shall mean 15% of the
outstanding Common Stock of the Corporation, subject to
adjustment pursuant to Section 8.9 hereof and to the limitations
contained in Section 8.11 hereof. For purposes of the
application of the Existing Holder Limit, the Existing Holder
shall be deemed to own the sum of (A) the Common Stock
Beneficially Owned or Constructively Owned by the Existing Holder
and (B) the Common Stock the Existing Holder would Beneficially
Own or Constructively Own upon exercise of any conversion right,
option or other right (without regard to any temporal or other
restrictions on the exercise thereof) to directly or indirectly
Acquire Beneficial Ownership or Constructive Ownership of Common
Stock. For purposes of determining the Existing Holder Limit,
the shares of Common Stock outstanding shall be deemed to include
the maximum number of shares that the Existing Holder may
Beneficially Own and Constructively Own pursuant to any
conversion right, option or other right (without regard to any
temporal or other restrictions on the exercise thereof). From
the date of the Initial Public Offering and prior to the
Restriction Termination Date, the Secretary of the Corporation,
or such other person as shall be designated by the Board of
Directors, shall maintain and, upon request, make available to
the Existing Holder or the Board of Directors, a schedule which
sets forth the then-current Existing Holder Limit.
"Initial Public Offering" shall mean the closing of the
sale of shares of Common Stock pursuant to the Corporation's
first effective registration statement for such Common Stock,
filed under the Securities Act of 1933, as amended.
"Market Price" on any day shall mean the average of the
Closing Prices for the ten (10) consecutive Trading Days
immediately preceding such day (or those days during such 10-day
period for which Closing Prices are available).
"Non-Transfer Event" shall mean an event (other than a
purported Transfer) that would cause (A) any Person (other than
the Existing Holder with respect to Common Stock) to Beneficially
Own or Constructively Own Equity Stock in excess of the Ownership
Limit or (B) the Existing Holder to Beneficially Own or
Constructively Own Common Stock in excess of the Existing Holder
Limit, including, but not limited to, the granting of any option
or entering into any agreement for the Transfer or other
disposition of Equity Stock or the Transfer or other disposition
of any securities or rights convertible into or exchangeable for
Equity Stock.
"Ownership Limit" shall mean the Common Stock Ownership
Limit or the Preferred Stock Ownership Limit, or both, as the
context may require.
-13-
<PAGE>
"Permitted Transferee" shall mean any Person designated
as a Permitted Transferee in accordance with the provisions of
Section 8.13 hereof.
"Person" shall mean an individual, corporation, part-
nership, estate, trust (including a trust qualified under Section
401(a) or 501(c)(17) of the Code), a portion of a trust perma-
nently set aside for or to be used exclusively for the purposes
described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code,
joint stock company or other entity, or a group as that term is
used for purposes of Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended.
"Preferred Stock Ownership Limit" shall mean 9.8% of
the outstanding shares of a particular series of Preferred Stock
of the Corporation, subject to adjustment pursuant to
Section 8.10 hereof.
"Prohibited Owner" shall mean, with respect to any
purported Transfer or Non-Transfer Event, any Person who, but for
the provisions of Section 8.2(B), (C), (D) or (E) hereof would
own record title to the shares of Equity Stock.
"Restriction Termination Date" shall mean the first day
after the date of the Initial Public Offering on which the Board
of Directors determines that it is no longer in the best
interests of the Corporation to attempt, or continue, to qualify
as a REIT.
"Trading Day" shall mean a day on which the principal
national securities exchange on which the affected class or se-
ries of Equity Stock is listed or admitted to trading is open for
the transaction of business or, if the affected class or series
of Equity Stock is not listed or admitted to trading, shall mean
any day other than a Saturday, Sunday or other day on which
banking institutions in the State of Texas are authorized or
obligated by law or executive order to close.
"Transfer" shall mean any sale, transfer, gift, hy-
pothecation, assignment, devise or other disposition of a direct
or indirect interest in Equity Stock or the right to vote or re-
ceive dividends on Equity Stock (including (A) the granting of
any option (including any option to acquire an option or any se-
ries of such options) or entering into any agreement for the
sale, transfer or other disposition of Equity Stock or the right
to vote or receive dividends on Equity Stock or (B) the sale,
transfer, assignment or other disposition of any securities or
rights convertible into or exchangeable for Equity Stock
(including the exchange rights ("Exchange Rights"), if any,
granted under each of the Third Amended and Restated Agreement of
Limited Partnership of U.S. Restaurant Properties Master L.P., as
the same may be amended or restated from time to time, and the
Third Amended and Restated Agreement of Limited Partnership of
U.S. Restaurant Properties Operating L.P., as the same may be
amended or restated from time to time (collectively, the
"Partnership Agreements"), to the limited partners thereunder, to
acquire Common Stock), whether voluntary or involuntary, of
record, constructively or beneficially, and
-14-
<PAGE>
whether by operation of law or otherwise. The terms "Transfers,"
"Transferred" and "Transferable" shall have correlative meanings.
"Trust" shall mean the trust created pursuant to
Section 8.2(G).
SECTION 8.2 OWNERSHIP AND TRANSFER LIMITATIONS.
(A) Except as provided in Sections 8.8 and 8.17
hereof, from the date of the Initial Public Offering and prior to
the Restriction Termination Date, (i) no Person (other than the
Existing Holder) shall Beneficially Own or Constructively Own
shares of Common Stock in excess of the Common Stock Ownership
Limit; (ii) the Existing Holder shall not Beneficially or
Constructively Own shares of Common Stock in excess of the
Existing Holder Limit; and (ii) no Person shall Beneficially Own
or Constructively Own shares of any series of Preferred Stock in
excess of the Preferred Stock Ownership Limit.
(B) Except as provided in Sections 8.8 and 8.17
hereof, from the date of the Initial Public Offering and prior to
the Restriction Termination Date, any Transfer, Acquisition,
change in the capital structure of the Corporation or other
purported change in Beneficial Ownership or Constructive
Ownership of Equity Stock or other event or transaction that, if
effective, would result in (i) any Person (other than the
Existing Holder with respect to Common Stock) Beneficially Owning
or Constructively Owning Equity Stock in excess of the applicable
Ownership Limit or (ii) the Existing Holder Beneficially Owning
or Constructively Owning Common Stock in excess of the Existing
Holder Limit shall be void ab initio as to the Transfer,
Acquisition, change in the capital structure of the Corporation
or other purported change in Beneficial Ownership or Constructive
Ownership or other event or transaction with respect to that
number of shares of Equity Stock which would otherwise be
Beneficially Owned or Constructively Owned by such Person in
excess of the applicable Ownership Limit, and the intended
transferee, shall acquire no rights in such number of shares of
Equity Stock.
(C) Except as provided in Sections 8.8 and 8.17
hereof, from the date of the Initial Public Offering and prior to
the Restriction Termination Date, any Transfer, Acquisition,
change in the capital structure of the Corporation or other
purported change in Beneficial Ownership or Constructive
Ownership (including actual ownership) of shares of Equity Stock
or other event or transaction that, if effective, would result in
the Equity Stock being actually owned by fewer than 100 Persons
(determined without reference to any rules of attribution) shall
be void ab initio as to the Transfer, Acquisition, change in the
capital structure of the Corporation or other purported change in
Beneficial Ownership or Constructive Ownership (including actual
ownership) or other event or transaction with respect to that
number of shares of Equity Stock which otherwise would be owned
by the transferee, and the intended transferee or subsequent
owner (including a Beneficial Owner or Constructive Owner) shall
acquire no rights in such number of shares of Equity Stock.
-15-
<PAGE>
(D) Except as provided in Sections 8.8 and 8.17
hereof, from the date of the Initial Public Offering and prior to
the Restriction Termination Date, any Transfer, Acquisition,
change in the capital structure of the Corporation or other
purported change in Beneficial Ownership or Constructive
Ownership of shares of Equity Stock or other event or transaction
that, if effective, would cause the Corporation to fail to
qualify as a REIT by reason of being "closely held" within the
meaning of Section 856(h) of the Code or otherwise, directly or
indirectly, would cause the Corporation to fail to qualify as a
REIT shall be void ab initio as to the Transfer, Acquisition,
change in the capital structure of the Corporation or other
purported change in Beneficial Ownership or Constructive
Ownership or other event or transaction with respect to that
number of shares of Equity Stock which would cause the
Corporation to be "closely held" within the meaning of Section
856(h) of the Code or otherwise, directly or indirectly, would
cause the Corporation to fail to qualify as a REIT, and the
intended transferee shall acquire no rights in such number of
shares of Equity Stock.
(E) Except as provided in Sections 8.8 and 8.17
hereof, from the date of the Initial Public Offering and prior to
the Restriction Termination Date, any Transfer, Acquisition,
change in capital structure of the Corporation or other purported
change in Beneficial Ownership or Constructive Ownership of
shares of Equity Stock or other event or transaction that, if
effective, would (i) cause the Corporation to own (directly or
Constructively) 10% or more of the ownership interests in a
tenant of the Corporation's real property, within the meaning of
Section 856(d)(2)(B) of the Code and (ii) cause the Corporation
to fail to satisfy any of the gross income requirements of
Section 856(c) of the Code, shall be void ab initio as to the
Transfer, Acquisition, change in capital Structure of the
Corporation or other purported change in Beneficial Ownership or
Constructive Ownership or other event or transaction with respect
to that number of shares of Equity Stock which would cause the
Corporation to own (directly or Constructively) 10% or more of
the ownership interests in a tenant of the Corporation's real
property, within the meaning of Section 856(d)(2)(B) of the Code,
and the intended transferee shall acquire any no rights in such
number of shares of Equity Stock.
(F) It is expressly intended that the restrictions on
ownership and transfer described in this Section 8.2 shall apply
to the Exchange Rights. Notwithstanding any of the provisions of
the Partnership Agreements to the contrary, a partner of U.S.
Restaurant Properties Master L.P. or U.S. Restaurant Properties
Operating L.P. shall not be entitled to effect an exchange of an
interest in U.S. Restaurant Properties Master L.P. or U.S.
Restaurant Properties Operating L.P. into shares of Common Stock
if the Beneficial Ownership or Constructive Ownership of such
shares of Common Stock would be prohibited under the provisions
of this Section 8.2.
(G) (i) If, notwithstanding the other provisions
contained in this Article VIII, from the date of the
Initial Public Offering and prior to the Restriction
Termination Date, there is a purported Transfer,
Acquisition, change in capital structure of the
Corporation, other purported change in Beneficial
-16-
<PAGE>
Ownership or Constructive Ownership of shares of Equity
Stock or other event or transaction such that (a) any
Person (other than the Existing Holder with respect to
Common Stock) would either Beneficially Own or
Constructively Own Equity Stock in excess of the
Ownership Limit or (b) the Existing Holder would
Beneficially Own or Constructively Own Common Stock in
excess of the Existing Holder Limit, then, (x) except
as otherwise provided in Sections 8.8 and 8.17 hereof,
the purported transferee shall acquire no right or
interest (or, in the case of a Non-Transfer Event, the
person holding record title to the Equity Stock
Beneficially Owned or Constructively Owned by such
Beneficial Owner or Constructive Owner, shall cease to
own any right or interest) in such number of shares of
Equity Stock which would cause such Beneficial Owner or
Constructive Owner to Beneficially Own or
Constructively Own shares of Equity Stock in excess of
the Ownership Limit or the Existing Holder Limit, as
applicable, (y) such number of shares of Equity Stock
in excess of the Ownership Limit or the Existing Holder
Limit, as applicable (rounded up to the nearest whole
share), shall be designated as Excess Stock and, in
accordance with the provisions of Section 8.13 hereof,
transferred automatically and by operation of law to a
trustee (the "Trustee") in its capacity as Trustee of a
trust (the "Trust") for the benefit of one or more
Beneficiaries to be held in accordance with that
Section 8.13 and (z) the Prohibited Owner shall submit
such number of shares of Equity Stock to the
Corporation for registration into the name of the
Trust. Such transfer to a Trust and the designation of
shares as Excess Stock shall be effective as of the
close of business on the business day prior to the date
of the Transfer or Non-Transfer Event, as the case may
be.
(ii) If, notwithstanding the other provisions
contained in this Section 8.2, at any time after the
date of the Initial Public Offering and prior to the
Restriction Termination Date, there is a purported
Transfer or Non-Transfer Event that, if effective,
would (a) result in the shares of Equity Stock being
Beneficially Owned (directly or Constructively) by
fewer than 100 Persons (determined without reference to
any rules of attribution), (b) result in the
Corporation being "closely held" within the meaning of
Section 856(h) of the Code or (c) cause the Corporation
to own (directly or Constructively) 10% or more of the
ownership interests in a tenant of the Corporation's
real property, within the meaning of Section
856(d)(2)(B) of the Code, then (x) the purported
transferee shall acquire no right or interest (or, in
the case of a Non-Transfer Event, the person holding
record title of the Equity Stock with respect to which
such Non-Transfer Event occurred, shall cease to own
any right or interest) in such number of shares of
Equity Stock, the ownership of which by such purported
transferee or record holder would (1) result in the
shares of Equity Stock being beneficially owned by
fewer than 100 Persons (determined without reference to
any rules of attribution), (2) result in the
Corporation being "closely held" within
-17-
<PAGE>
the meaning of Section 856(h) of the Code or (3) cause
the Corporation to own (directly or Constructively) 10%
or more of the ownership interests in a tenant of the
Corporation's real property, within the meaning of Section
856(d)(2)(B) of the Code, (y) such number of shares of
Equity Stock (rounded up to the nearest whole share)
shall be designated as Excess Stock and, in accordance
with the provisions of Section 8.13 hereof, transferred
automatically and by operation of law to the Trust to
be held in accordance with that Section 8.13 and (z)
the Prohibited Owner shall submit such number of shares
of Equity Stock to the Corporation for registration
into the name of the Trust. Such transfer to a Trust
and the designation of shares as Excess Stock shall be
effective as of the close of business on the business
day prior to the date of the Transfer or Non-Transfer
Event.
(iii) The Trustee shall be appointed by
the Corporation and shall be a Person unaffiliated with
either the Corporation or any Prohibited Owner. The
Trustee may be an individual or a bank company duly
licensed to conduct a trust business.
(iv) By written notice to the Trustee, the
Corporation shall, within two days of the discovery of
Excess Stock, designate one or more nonprofit
organizations to be the Beneficiary of the interest in
the Trust relating to such Excess Stock if the shares
of Equity Stock held in the Trust would not violate the
Ownership Limit in the hands of such Beneficiary.
(H) A Transfer of a share of Equity Stock that is null
and void under Section 8.2(B), (C), (D) or (E) hereof because it
could, if effective, result in (i) any Person (other than the
Existing Holder with respect to Common Stock) Beneficially Owning
or Constructively Owning Equity Stock in excess of the Ownership
Limit, (ii) the Existing Holder either Beneficially Owning or
Constructively Owning shares of Common Stock in excess of the
Existing Holder Limit, (iii) the shares of Equity Stock being
Beneficially Owned by fewer than 100 Persons (determined without
reference to any rules of attribution), (iv) the Corporation
being "closely held" within the meaning of Section 856(h) of the
Code or (v) the Corporation otherwise failing to qualify as a
REIT, shall not adversely affect the validity of the Transfer of
any other share of Equity Stock in the same or any other related
transaction.
SECTION 8.3 REMEDIES FOR BREACH. If the Board of Directors
or its designee shall at any time determine in good faith that a
Transfer, Acquisition, or change in the capital structure of the
Corporation or other purported change in Beneficial Ownership or
Constructive Ownership or other event or transaction has taken
place in violation of Section 8.2 hereof or that a Person intends
to Acquire or has attempted to Acquire Beneficial Ownership or
Constructive Ownership of any shares of Equity Stock in violation
of Section 8.2 hereof, the Board of Directors or its designee
shall take such action as it deems advisable to refuse to give
effect to or to prevent such Transfer, Acquisition, or change in
the capital structure of the Corporation or other attempt to
-18-
<PAGE>
Acquire Beneficial Ownership or Constructive Ownership of any
shares of Equity Stock or other event or transaction, including,
but not limited to, refusing to give effect thereto on the books
of the Corporation or instituting injunctive proceedings with
respect thereto; provided that any Transfers, Acquisitions,
events or actions in violation of Section 8.2 hereof shall be
void ab inito and automatically result in the conversion
described in Section 8.2(G) hereof, irrespective of any action
(or non-action) by the Board of Directors or its designees.
SECTION 8.4 NOTICE OF RESTRICTED TRANSFER. Any Person who
Acquires or attempts to Acquire Beneficial Ownership or
Constructive Ownership of shares of Equity Stock in violation of
Section 8.2 hereof and any Person who Beneficially Owns or
Constructively Owns Excess Stock immediately shall give written
notice to the Corporation, or, in the event of a proposed or
attempted Transfer or Acquisition or purported change in
Beneficial Ownership or Constructive Ownership, shall give at
least fifteen (15) days prior written notice to the Corporation,
of such event and shall promptly provide to the Corporation such
other information as the Corporation, in its sole discretion, may
request in order to determine the effect, if any, of such
Transfer, attempted Transfer, Acquisition, attempted Acquisition
or other purported change in Beneficial Ownership or Constructive
Ownership on the Corporation's status as a REIT.
SECTION 8.5 OWNERS REQUIRED TO PROVIDE INFORMATION. From
the date of the Initial Public Offering and prior to the
Restriction Termination Date:
(A) Every Beneficial Owner or Constructive Owner of
more than 5%, or such lower percentage or percentages as
determined pursuant to regulations under the Code or as may be
requested by the Board of Directors in its sole discretion, of
the outstanding shares of any class or series of Equity Stock of
the Corporation annually shall, no later than January 31 of each
calendar year, give written notice to the Corporation stating (i)
the name and address of such Beneficial Owner or Constructive
Owner; (ii) the number of shares of each class or series of
Equity Stock Beneficially Owned or Constructively Owned; and
(iii) a description of how such shares are held. Each such
Beneficial Owner or Constructive Owner promptly shall provide to
the Corporation such additional information as the Corporation,
in its sole discretion, may request in order to determine the
effect, if any, of such Beneficial Ownership or Constructive
Ownership on the Corporation's status as a REIT and to ensure
compliance with the applicable Ownership Limit or the Existing
Holder Limit and other restrictions set forth herein.
(B) Each Person who is a Beneficial Owner or
Constructive Owner of Equity Stock and each Person (including the
stockholder of record) who is holding Equity Stock for a
Beneficial Owner or Constructive Owner promptly shall provide to
the Corporation such information as the Corporation, in its sole
discretion, may request in order to determine the Corporation's
status as a REIT, to comply with the requirements of any taxing
authority or other governmental agency, to determine any such
compliance or to ensure compliance with the applicable Ownership
Limit or the Existing Holder Limit and other restrictions set
forth herein.
-19-
<PAGE>
SECTION 8.6 REMEDIES NOT LIMITED. Nothing contained in
this Article VIII except Section 8.16 hereof shall limit the
scope or application of the provisions of this Article VIII, the
ability of the Corporation to implement or enforce compliance
with the terms hereof or the authority of the Board of Directors
to take any such other action or actions as it may deem necessary
or advisable to protect the Corporation and the interests of its
stockholders by preservation of the Corporation's status as a
REIT and to ensure compliance with the applicable Ownership Limit
or the Existing Holder Limit and other restrictions set forth
herein, including, without limitation, refusal to give effect to
a transaction on the books of the Corporation.
SECTION 8.7 AMBIGUITY. In the case of ambiguity in the
application of any of the provisions of this Article VIII,
including any definition contained in Section 8.1 hereof, the
Board of Directors shall have the power and authority, in its
sole discretion, to determine the application of the provisions
of this Article VIII with respect to any situation, based on the
facts known to it.
SECTION 8.8 EXCEPTIONS. The Ownership Limit shall not
apply to the acquisition of shares of Equity Stock by an
underwriter that participates in a public offering of such shares
for a period of 180 days following the purchase by such
underwriter of such shares, provided that the restrictions
contained in Sections 8.2(B), (C), (D) and (E) hereof will not be
violated following the distribution by such underwriter of such
shares. In addition, the Board of Directors, upon receipt of a
ruling from the Internal Revenue Service, an opinion of counsel
or other evidence satisfactory to the Board of Directors, in its
sole discretion, in each case to the effect that the restrictions
contained in Sections 8.2(B), (C), (D) and (E) hereof will not be
violated, may waive or change, in whole or in part, the
application of the applicable Ownership Limit with respect to any
Person that is not an individual, as such term is defined in
Section 542(a)(2) of the Code. In connection with any such
waiver or change, the Board of Directors may require such
representations and undertakings from such Person or affiliates
and may impose such other conditions, as the Board of Directors
deems necessary, advisable or prudent, in its sole discretion, to
determine the effect, if any, of the proposed transaction or
ownership of Equity Stock on the Corporation's status as a REIT.
SECTION 8.9 REDUCTION OF EXISTING HOLDER LIMIT. The Board
of Directors may reduce the Existing Holder Limit, with the
written consent of the Existing Holder, after (A) any Transfer
permitted in this Article VIII by the Existing Holder or (B)
whenever there is a change in the number of shares of Common
Stock outstanding.
SECTION 8.10 INCREASE IN OWNERSHIP LIMIT. Subject to the
limitations contained in Section 8.11 hereof, the Board of
Directors may from time to time increase the Ownership Limit.
-20-
<PAGE>
SECTION 8.11 LIMITATIONS ON MODIFICATIONS.
(A) The Ownership Limit for a class or series of
Equity Stock may not be increased and no additional ownership
limitations may be created if, after giving effect to such
increase or creation the Corporation would be "closely held"
within the meaning of Section 856(h) of the Code (assuming
ownership of shares of Equity Stock by all Persons equal to the
greatest of (i) the actual ownership, (ii) the Beneficial
Ownership of Equity Stock by each Person or (iii) the applicable
Ownership Limit with respect to such Person, and assuming the
ownership by the Existing Holder of shares of Common Stock equal
to the Existing Holder Limit and shares of any series of
Preferred Stock equal to the Preferred Stock Ownership Limit).
(B) Prior to any modification of the Ownership Limit
or the Existing Holder Limit with respect to any Person, the
Board of Directors may require such opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary,
advisable or prudent, in its sole discretion, in order to
determine or ensure the Corporation's status as a REIT.
(C) The Existing Holder Limit may not be increased.
SECTION 8.12 LEGEND. Each certificate for shares of Equity
Stock shall bear substantially the following legend:
"The securities represented by this
certificate are subject to restrictions on
transfer and ownership for the purpose of
maintenance of the Corporation's status as a
real estate investment trust (a "REIT") under
Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the
"Code"). Except as otherwise provided
pursuant to the Charter of the Corporation,
no Person may (i) Beneficially Own or
Constructively Own shares of Common Stock of
the Corporation in excess of 8.75% (or such
greater percent as may be determined by the
Board of Directors of the Corporation) of the
outstanding shares of such Common Stock
(except in such circumstances as the Existing
Holder Limit shall apply); (ii) Beneficially
Own or Constructively Own shares of any
series of Preferred Stock of the Corporation
in excess of 9.8% (or such greater percent as
may be determined by the Board of Directors
of the Corporation) of the outstanding shares
of such series of Preferred Stock; or (iii)
Beneficially Own or Constructively Own shares
of Equity Stock (of any class or series)
which would result in the shares of Equity
Stock being Beneficially Owned by fewer than
100 Persons, the Corporation being "closely
held" under Section 856(h) of the Code or in
the Corporation owning (directly or
Constructively) 10% or more of the ownership
-21-
<PAGE>
interests in a tenant of the Corporation's
real property, within the meaning of Section
856(d)(2)(B) of the Code. Any Person who has
Beneficial Ownership or Constructive
Ownership, or who Acquires or attempts to
Acquire Beneficial Ownership or Constructive
Ownership of Common Stock and/or Preferred
Stock in excess of the above limitations and
any Person who Beneficially Owns or
Constructively Owns Excess Stock as a
transferee of shares of Common Stock or
Preferred Stock resulting in an exchange for
Excess Stock (as described below) immediately
must notify the Corporation in writing or, in
the event of a proposed or attempted Transfer
or Acquisition or purported change in the
Beneficial Ownership or Constructive
Ownership, must give written notice to the
Corporation at least fifteen (15) days prior
to the proposed or attempted transfer,
transaction or other event. Any Transfer or
Acquisition of shares of Common Stock and/or
Preferred Stock or other event which results
in violation of the ownership or transfer
limitations set forth in the Corporation's
Charter shall be void ab initio and the
intended transferee shall not have or Acquire
any rights in such shares of Common Stock
and/or Preferred Stock. If the transfer and
ownership limitations referred to herein are
violated, the shares of Common Stock or
Preferred Stock represented hereby
automatically will be designated as shares of
Excess Stock to the extent of violation of
such limitations, and such shares of Excess
Stock will be held in trust, all as provided
by the Corporation's Charter. All
capitalized terms used in this legend have
the meanings identified in the Corporation's
Charter, as the same may be amended from time
to time, a copy of which, including the
restrictions on transfer, will be sent
without charge to each stockholder who so
requests."
SECTION 8.13 OWNERSHIP IN TRUST.
(A) Any shares of Equity Stock transferred to a Trust
and designated as Excess Stock pursuant to Section 8.2(G) hereof
shall be held for the exclusive benefit of the Beneficiary. Any
transfer to a Trust, and subsequent designation of shares of
Equity Stock as Excess Stock pursuant to Section 8.2(G) hereof,
shall be effective as of the close of business on the business
day prior to the date of the Transfer or Non-Transfer Event that
results in the transfer to the Trust. Excess Stock shall remain
issued and outstanding shares of Equity Stock of the Corporation
and shall be entitled to the same rights and privileges on
identical terms and conditions as all other issued and
outstanding shares of Equity Stock of the same class and series.
When transferred to a Permitted Transferee in accordance with the
provisions of Section 8.13(E) hereof, such Excess Stock shall
cease to be designated as Excess Stock.
-22-
<PAGE>
(B) The Trust, as record holder of Excess Stock, shall
be entitled to receive all dividends and distributions as may be
declared by the Board of Directors on such shares of Equity Stock
and shall hold such dividends or distributions in trust for the
benefit of the Beneficiary. The Prohibited Owner with respect to
Excess Stock shall repay to the Trust the amount of any dividends
or distributions received by it that (i) are attributable to any
shares of Equity Stock designated as Excess Stock and (ii) the
record date for which was on or after the date that such shares
became Excess Stock. The Corporation shall take all measures
that it determines reasonably necessary to recover the amount of
any such dividend or distribution paid to a Prohibited Owner,
including, if necessary, withholding any portion of future
dividends or distributions payable on shares of Equity Stock
Beneficially Owned or Constructively Owned by the Person who, but
for the provisions of Section 8.2 hereof, would Constructively
Own or Beneficially Own the Excess Stock; and, as soon as
reasonably practicable following the Corporation's receipt or
withholding thereof, shall pay over to the Trust for the benefit
of the Beneficiary the dividends or distributions so received or
withheld, as the case may be.
(C) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of, or any distribution of
the assets of, the Corporation, each holder of Excess Stock shall
be entitled to receive, ratably with each other holder of shares
of Equity Stock of the same class or series, that portion of the
assets of the Corporation which is available for distribution to
the holders of such class or series of Equity Stock. The Trust
shall distribute to the Prohibited Owner the amounts received
upon such liquidation, dissolution or winding up, or
distribution; provided, however, that the Prohibited Owner shall
not be entitled to receive amounts pursuant to this
Section 8.13(C) in excess of, (i) in the case of a purported
Transfer in which the Prohibited Owner gave value for the shares
of Equity Stock and which Transfer resulted in the transfer of
the shares to the Trust, the price per share, if any, such
Prohibited Owner paid for the shares of Equity Stock and, (ii) in
the case of a Non-Transfer Event or Transfer in which the
Prohibited Owner did not give value for such shares (e.g., if the
shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in
the transfer of shares to the Trust, the price per share equal to
the Market Price on the date of such Non-Transfer Event or
Transfer. Any remaining amount in such Trust shall be
distributed to the Beneficiary.
(D) The Trustee shall be entitled to vote all Excess
Stock. Any vote by a Prohibited Owner as a holder of shares of
Equity Stock prior to the discovery by the Corporation that the
shares of Equity Stock are Excess Stock shall, subject to
applicable law be rescinded and shall be void ab initio with
respect to such Excess Stock and the Prohibited Owner shall be
deemed to have given, as of the close of business on the business
day prior to the date of the purported Transfer or Non-Transfer
Event that results in the transfer to the Trust of shares of
Equity Stock under Section 8.2(G) hereof, an irrevocable proxy to
the Trustee to vote the Excess Stock in the manner in which the
Trustee, in its sole and absolute discretion, desires.
-23-
<PAGE>
(E) The Trustee shall have the exclusive and absolute
right to designate a Permitted Transferee of any and all Excess
Stock. In an orderly fashion so as not to materially adversely
affect the Market Price of the Excess Stock, the Trustee shall
designate any Person as a Permitted Transferee; provided,
however, that (i) the Permitted Transferee so designated
purchases for valuable consideration (whether in a public or
private sale), at a price as set forth in Section 8.15 hereof,
the Excess Stock and (ii) the Permitted Transferee so designated
may acquire such Excess Stock without such acquisition resulting
in a transfer to a Trust and the redesignation of such shares of
Equity Stock so acquired as Excess Stock under Section 8.2(G)
hereof. Upon the designation by the Trustee of a Permitted
Transferee in accordance with the provisions of this
Section 8.13(E), the Trustee shall (a) cause to be transferred to
the Permitted Transferee that number of shares of Excess Stock
acquired by the Permitted Transferee, (b) cause to be recorded on
the books of the Corporation that the Permitted Transferee is the
holder of record of such number of shares of Equity Stock, (c)
cause the shares of Excess Stock to be cancelled and (d)
distribute to the Beneficiary any and all amounts held with
respect to the shares of Excess Stock after making the payment to
the Prohibited Owner pursuant to Section 8.13(F) hereof.
(F) Any Prohibited Owner shall be entitled (following
discovery of the Excess Stock and subsequent designation of the
Permitted Transferee in accordance with Section 8.13(E) hereof or
following the acceptance of the offer to purchase such shares in
accordance with Section 8.15 hereof) to receive from the Trustee
following the sale or other disposition of such Excess Stock the
lesser of (i) in the case of (a) a purported Transfer in which
the Prohibited Owner gave value for shares of Equity Stock and
which Transfer resulted in the transfer of the shares to the
Trust, the price per share, if any, such Prohibited Owner paid
for the shares of Equity Stock, or (b) a Non-Transfer Event or
Transfer in which the Prohibited Owner did not give value for
such shares (e.g., if the shares were received through a gift or
devise) and which Non-Transfer Event or Transfer, as the case may
be, resulted in the transfer of shares to the Trust, the price
per share equal to the Market Price on the date of such
Non-Transfer Event or Transfer and (ii) the price per share
received by the Trustee from the sale or other disposition of
such Excess Stock in accordance with Section 8.13(E) hereof. Any
amounts received by the Trustee in respect of such Excess Stock
and in excess of such amounts to be paid the Prohibited Owner
pursuant to this Section 8.13(F) shall be distributed to the
Beneficiary in accordance with the provisions of Section 8.13(E)
hereof. Each Beneficiary and Prohibited Owner waive any and all
claims that they may have against the Trustee and the Trust
arising out of the disposition of Excess Stock, except for claims
arising out of the gross negligence or willful misconduct of, or
any failure to make payments in accordance with this
Section 8.13, by such Trustee or the Corporation.
(G) If any of the Transfer restrictions set forth in
this Section 8.13 or any application thereof is determined to be
void, invalid or unenforceable by any court having jurisdiction
over the issue, the Prohibited Owner may be deemed, at the option
of the Corporation, to have acted as the agent of the Corporation
in acquiring the Excess Stock as to
-24-
<PAGE>
which such restrictions would otherwise, by their terms, apply
and to hold such Excess Stock on behalf of the Corporation.
SECTION 8.14 RIGHTS IN EXCESS STOCK. Excess Stock held or
purported to be held by any Person or Persons shall,
automatically and without the necessity of any action by the
Board of Directors or otherwise, (A) be voted in accordance with
the provisions of Section 8.13 hereof, (B) have any dividends and
distributions in respect of such Excess Stock placed in the Trust
at the time of the payment thereof for payment in accordance with
the provisions of Section 8.13 hereof, (C) be subject to
repurchase or resale on behalf of the holder as set forth in
Section 8.15 hereof and (D) be considered held in Trust by the
Trustee in accordance with the provision of Section 8.13 hereof.
SECTION 8.15 PURCHASE RIGHT IN EXCESS STOCK. Shares of
Excess Stock shall be deemed to have been offered for sale to the
Corporation or its designee at a price per share equal to the
lesser of (A) the price per share in the transaction that created
such Excess Stock (or, in the case of a devise, gift or
Non-Transfer Event, the Market Price at the time of such devise,
gift or Non-Transfer Event) or (B) the Market Price of the Equity
Stock exchanged for such Excess Stock on the date the Corporation
or its designee accepts such offer. Subject to the satisfaction
of any applicable requirements of the General Laws of the State
of Maryland, the Corporation and its assignees shall have the
right to accept such offer for a period of ninety (90) days after
the later of (i) the date of the purported Transfer, Acquisition,
change in capital structure of the Corporation or purported
change in Beneficial Ownership or Constructive Ownership or other
event or transaction which resulted in such Excess Stock and (ii)
the date on which the Board of Directors determines in good faith
that a Transfer, Acquisition, change in capital structure of the
Corporation or purported change in Beneficial Ownership or
Constructive Ownership or other event or transaction resulting in
Excess Stock has occurred, if the Corporation does not receive a
notice pursuant to Section 8.4 hereof.
SECTION 8.16 SETTLEMENTS. Notwithstanding any provision
contained herein to the contrary, nothing in this charter shall
preclude the settlement of any transaction entered into through
the facilities of the New York Stock Exchange.
SECTION 8.17 WAIVER. The Corporation shall have authority
at any time to waive the requirements that Excess Stock be issued
or be deemed outstanding in accordance with the provisions of
this Article VIII if the Corporation determines, based on an
opinion of tax counsel, that the issuance of such Excess Stock or
the fact that such Excess Stock is deemed to be outstanding would
jeopardize the status of the Corporation as a REIT.
SECTION 8.18 SEVERABILITY. If any provision of this
Article VIII or any application of any such provision is
determined in a final and unappealable judgment to be void,
invalid or unenforceable by any Federal or state court having
jurisdiction over the issue, the validity and enforceability of
the remaining provisions shall not be affected and other
applications of such
-25-
<PAGE>
provision shall be affected only to the extent necessary to
comply with the determination of such court.
ARTICLE IX
DIRECTORS' AND OFFICERS' LIABILITY
To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, no director or officer
of the Corporation shall be personally liable to the Corporation
or to its stockholders for money damages. No amendment of the
charter of the Corporation or repeal of any of its provisions,
nor the adoption or amendment of any provision of the Bylaws of
the Corporation inconsistent with this Article IX, shall apply
to, affect, limit or eliminate in any respect the benefits
provided to directors and officers under this provision with
respect to any act or failure to act which occurred prior to such
amendment, repeal or adoption.
ARTICLE X
INDEMNIFICATION
The Corporation shall provide any indemnification permitted
by the laws of the State of Maryland and shall indemnify
directors, officers, agents and employees as follows: (A) the
Corporation shall indemnify its directors and officers, whether
serving the Corporation or at its request and any other entity,
to the full extent required or permitted by the General Laws of
the State of Maryland now or hereafter in force, including the
advance of expenses under the procedures and to the full extent
permitted by law and (B) the Corporation shall indemnify other
employees and agents, whether serving the Corporation or at its
request any other entity, to such extent as shall be authorized
by the Board of Directors or the Bylaws and be permitted by law.
The foregoing rights of indemnification shall not be exclusive of
any other rights to which those seeking indemnification may be
entitled. The Board of Directors may take such action as is
necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to time
such bylaws, resolutions or contracts implementing such
provisions or such further indemnification arrangements as may be
permitted by law. No amendment of the charter of the Corporation
or repeal of any of its provisions shall limit or eliminate the
right to indemnification provided hereunder with respect to acts
or omissions occurring prior to such amendment or repeal or shall
limit or eliminate the rights granted under indemnification
agreements entered into by the Corporation and its directors,
officers, agents and employees.
-26-
<PAGE>
ARTICLE XI
AMENDMENT
The Corporation reserves the right from time to time to make
any amendments of its charter which may now or hereafter be
authorized by law, including any amendments changing the terms or
contract rights, as expressly set forth in its charter, of any of
its outstanding stock by classification, reclassification or
otherwise, but no such amendment which changes such terms or
contract rights of any of its outstanding stock shall be valid
unless such amendment shall have been authorized by not less than
a majority of the aggregate number of the votes entitled to be
cast thereon, by a vote at a meeting or in writing with or
without a meeting; provided, however, that any amendment to,
repeal of or adoption of any provision inconsistent with Articles
VI, VII and VIII hereof shall have been authorized by not less
than two-thirds of the aggregate votes entitled to be cast
thereon (considered for this purpose as a single class), by vote
at a meeting or in writing with or without a meeting and provided
further that any amendment or repeal of Articles IX or X hereof
or this Article XI shall not adversely affect any right or
protection existing hereunder immediately prior to such amendment
or repeal.
ARTICLE XII
SPECIAL VOTING REQUIREMENTS
Pursuant to Section 3-603(e)(1)(iii) of the MGCL, the
Corporation expressly elects not to be governed by the provisions
of Section 3-602 of the MGCL with respect to any business
combination (as defined in Section 3-601 of the MGCL) involving
QSV Properties, Inc., a Delaware corporation ("QSV"), or any
present or future affiliates, associates or any other person or
persons acting in concert or as a group with such entity or any
present or future affiliates or associates (as such terms are
defined in Section 3-601 of the MGCL) of QSV, or any other person
acting in concert or as a group with it.
The provisions of Title 3, Subtitle 7 of the MGCL shall not apply
to the voting rights of Stock presently or in the future owned or
acquired by QSV or any present or future affiliates associated or
other person acting in concert or as a group with such person or
any present or future affiliates or associates (as such terms are
defined in Section 3-601 of the MGCL) of QSV, or other person
acting in concert or as a group with it.
-27-
<PAGE>
ARTICLE XIII
MISCELLANEOUS
SECTION 13.1 DURATION. The duration of the Corporation
shall be perpetual.
SECTION 13.2 SEVERABILITY. If any provision of this
charter or any application of any such provision is determined to
be void, invalid or unenforceable by any court having
jurisdiction over the issue, the validity and enforceability of
the remainder of this charter shall not be affected and other
applications of such provision shall be affected only to the
extent necessary to comply with the determination of such court.
[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK.]
-28-
<PAGE>
IN WITNESSS WHEREOF, Dawn M. Douthit has caused these Amended
Articles of Incorporation to be signed on this 31st day of
January, 1997, acknowledges that these Articles are my act and,
to the best of my knowledge, information and belief, and under
penalties for perjury, all matters and facts contained in these
Articles are true in all material respects.
/S/ Dawn M. Douthit
----------------------------
Dawn M. Douthit
Incorporator
-29-
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of U.S.
Restaurant Properties Master L.P. on Form S-4 of our report dated
February 17, 1996, appearing in and incorporated by reference in
this Registration Statement, related to U.S. Restaurant
Properties Master L.P. and to the use in this Registration
Statement of our report dated February 5, 1997 related to U.S.
Restaurant Properties, Inc. We also consent to the reference to
us under the heading "Experts" in such Registration Statement.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 5, 1997
EXHIBIT 99.1
U.S. RESTAURANT PROPERTIES MASTER L.P.
5310 Harvest Hill Road, Suite 270, L.B. 168
Dallas, Texas 75230
PROXY FOR SPECIAL MEETING OF LIMITED PARTNERS
May 15, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE MANAGING GENERAL PARTNER
The undersigned Limited Partner hereby appoints ___________
and ___________, or either of them, as proxies, each with full
powers of substitution, and hereby authorizes them to represent
and to vote, as designated below, all units of beneficial
interest of U.S. Restaurant Properties Master L.P. ("USRP"), held
of record by the undersigned on the Record Date (as defined in
the accompanying Proxy Statement/Prospectus) at the Special
Meeting (as defined in the accompanying Proxy
Statement/Prospectus), and at any adjournment or postponement
thereof and hereby revokes any prior proxy granted with respect
thereto.
This proxy, when properly executed and returned in a timely
manner, will be voted at the Special Meeting and any adjournment
or postponement thereof in the manner described herein. IF NO
CONTRARY INDICATION IS MADE, THIS PROXY WILL BE VOTED FOR THE
CONVERSION (AS HEREINAFTER DEFINED) AND IN ACCORDANCE WITH THE
JUDGMENT OF THE PERSONS NAMED AS PROXIES HEREIN.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
THE MANAGING GENERAL PARTNER. THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR THE CONVERSION.
With respect to the proposed conversion (the
"Conversion") of USRP into a real estate investment
trust in a tax-free transaction, as described in the
accompanying Proxy Statement/Prospectus:
FOR AGAINST ABSTAIN
(Continued and to be signed on the reverse side)
<PAGE>
Each of the above named proxies present at the Special
Meeting, either in person or by substitute, shall have an
exercise all the powers of said proxies hereunder. This proxy
will be voted in accordance with the choice specified by the
undersigned on this proxy. In their discretion, each of the
above-named proxies is authorized to vote upon such other
business incident to the conduct of the Special Meeting as may
properly come before the Special Meeting or any postponements or
adjournments thereof.
The undersigned acknowledges receipt of a copy of the Notice
of Special Meeting of Limited Partners and the Proxy
Statement/Prospectus relating to the Special Meeting.
______________________________
<PAGE>
