UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1998
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to __________________
Commission File Number 1-13089
U.S. RESTAURANT PROPERTIES, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Maryland 75-2687420
- - ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5310 Harvest Hill Rd., Ste. 270, LB 168, Dallas, Texas 75230
------------------------------------------------------------
(Address principal executive offices, including zip code)
972 / 387-1487
----------------------------------------------------
(Registrant's telephone number, including area code)
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
As of August 10, 1998, there were 13,021,838 shares of Common Stock $.001 par
value outstanding.
Page 1 of 16
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998
(Unaudited)and December 31, 1997................................. 3
Condensed Consolidated Statements of Income for the Three
months and Six months Ended June 30, 1998 and 1997 (Unaudited)... 4
Condensed Consolidated Statements of Stockholders' Equity
for the Six months ended June 30, 1998 (Unaudited)............... 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997 (Unaudited).................. 6
Notes to Condensed Consolidated Financial Statements (Unaudited)... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................15
Item 2. Changes in Securities.............................................15
Item 3. Defaults upon Senior Securities...................................15
Item 4. Submission of Matters to Vote of Security Holders.................15
Item 5. Other Information.................................................15
Item 6. Exhibits and Reports on Form 8-K..................................15
Page 2 of 16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. RESTAURANT PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, expect per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Property, net
Land $ 145,829 $ 109,515
Building and leasehold improvements 256,773 211,200
Machinery and equipment 5,599 4,813
---------------- ---------------
408,201 325,528
Less: Accumulated depreciation (20,025) (13,438)
---------------- ---------------
388,176 312,090
Cash and cash equivalents 8,781 1,104
Restricted cash 1,332 --
Rent and other receivables, net
(includes $878 and $523 from related parties) 6,480 4,791
Prepaid expenses and purchase deposits 2,237 1,967
Notes receivable
(includes $5,577 and $5,406 from related parties) 10,000 8,518
Mortgage loan receivable 6,307 5,947
Net investment in direct financing leases 12,416 13,764
Intangibles and other assets, net 11,923 10,968
---------------- ---------------
TOTAL ASSETS $ 447,652 $ 359,149
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities
(includes $0 and $121 due to related parties) $ 5,294 $ 4,193
Unearned contingent rent 468 --
Deferred gain on sale of property 555 642
Lines of credit 67,000 89,196
Notes payable 150,593 40,000
Capitalized lease obligations 118 170
---------------- ---------------
TOTAL LIABILITIES 224,028 134,201
Minority interest in operating partnership 19,172 19,536
Stockholders' Equity
Preferred stock, $.001 par value per share;
50,000 shares authorized, Series A - 3,680
shares issued and outstanding as of
June 30, 1998 and December 31, 1997
(aggregate liquidation value $92,000) 4 4
Common stock, $.001 par value per share;
100,000 shares authorized, 13,022 and 12,698
shares issued and outstanding as of June 30,
1998 and December 31, 1997, respectively 13 13
Additional paid in capital 229,860 226,140
Excess stock, $.001 par value per share,
15,000 shares authorized, no shares issued -- --
Distributions in excess of net income (25,425) (20,745)
---------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 204,452 205,412
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 447,652 $ 359,149
================ ===============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
Page 3 of 16
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Rental Income $ 13,180 $ 7,978 $ 25,488 $ 13,687
Interest Income 732 166 1,328 278
Amortization of unearned
income on direct financing leases 283 413 600 857
------------ ------------ ------------ -------------
Total revenues 14,195 8,557 27,416 14,822
Expenses:
Rent 726 600 1,468 1,189
Depreciation and amortization 3,690 1,800 7,060 3,366
Taxes, general and administrative 1,178 1,137 2,198 1,843
Interest expense 3,871 2,395 7,132 3,847
------------ ------------ ------------ -------------
Total expenses 9,465 5,932 17,858 10,245
------------ ------------ ------------ -------------
Income before gain on sale of
property, unusual items and other 4,730 2,625 9,558 4,577
Gain on sale of property 457 266 457 266
Equity in net income (loss)
of affiliates (56) -- (56) --
REIT conversion costs -- (744) -- (744)
------------ ------------ ------------ -------------
Income before minority interest
and extraordinary item 5,131 2,147 9,959 4,099
Minority interest in operating
partnership (269) -- (503) --
------------ ------------ ------------ -------------
Income before extraordinary item 4,862 2,147 9,456 4,099
Loss on early extinguishment of debt -- -- (190) --
------------ ------------ ------------ -------------
Net income 4,862 2,147 9,266 4,099
Dividends on Preferred Stock/
General Partner's interest (1,776) (42) (3,551) (81)
------------ ------------ ------------ -------------
Net income allocable to Common
Stockholders $ 3,086 $ 2,105 $ 5,715 $ 4,018
============ ============ ============ =============
Weighted average shares outstanding
Basic 13,022 11,435 12,938 10,906
Diluted 13,229 11,661 13,124 11,142
Net income per share
Basic $ 0.24 $ 0.18 $ 0.44 $ 0.36
Diluted $ 0.23 $ 0.18 $ 0.44 $ 0.36
</TABLE>
See Note 1 for Pro Forma effect of change in Accounting Principle.
See Notes to Condensed Consolidated Financial Statements
Page 4 of 16
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
For the Six months ended June 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- -------------------- Additional Paid Distributions in
Shares Par Value Shares Par Value In Capital Excess of Net Income Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 3,680 $ 4 12,698 $ 13 $ 226,140 $ (20,745) $ 205,412
Proceeds from exercised
stock options 300 3,099 3,099
Stock issued for purchase
of ownership interest
in another entity 24 621 621
Net income 9,266 9,266
Dividends on preferred
stock (4,123) (4,123)
Dividends on common
stock (9,823) (9,823)
------- --------- --------- --------- -------------- --------------------- -------------
Balance June 30, 1998 3,680 $ 4 13,022 $ 13 $ 229,860 $ (25,425) $ 204,452
======= ========= ========= ========= ============== ===================== =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
Page 5 of 16
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------------
1998 1997
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,266 $ 4,099
Adjustments to reconcile net income to net
cash from operating activities
Depreciation and amortization 7,060 3,366
Amortization of deferred financing costs 269 145
Amortization of discount on notes payable 17 --
Gain on sale of property (457) (266)
Equity in loss of affiliates 56 --
Minority interest in operating partnership 503 --
Loss on early extinguishment of debt 190 --
Increase in restricted cash (1,332) --
Increase in rent and other receivables, net (1,908) (824)
Increase in prepaid expenses (502) (521)
Reduction in net investment in direct
financing leases 1,175 1,130
Increase in accounts payable and
accrued liabilities 1,101 564
Increase in unearned contingent rent 468 --
------------ -------------
6,640 3,594
------------ -------------
Cash provided by operating activities 15,906 7,693
Cash flows used in investing activities:
Proceeds from sale of property 632 1,171
Purchase of property (70,505) (81,005)
Purchase of machines and equipment (786) (981)
Purchase deposits (paid) used 232 (182)
Increase in mortgage loan receivable (360) --
Increase in notes receivable (12,629) (686)
------------ -------------
Cash used in investing activities (83,416) (81,683)
Cash flows from financing activities:
Loan origination costs and other intangibles (1,427) (728)
Payments on capitalized lease obligations (52) (99)
Proceeds from line of credit 167,786 62,467
Payments on line of credit (189,982) (39,640)
Proceeds from notes payable 110,576 40,000
Proceeds from issuance of common stock 3,099 21,025
Preferred stock dividends paid (4,123) --
Cash distributions to stockholders/partners (9,823) (7,639)
Distributions to minority interest (867) --
------------ -------------
Cash flows provided by financing activities 75,187 75,386
------------ -------------
Increase in cash and cash equivalents 7,677 1,396
Cash and cash equivalents at beginning of period 1,104 381
------------ -------------
Cash and cash equivalents at end of period $ 8,781 $ 1,777
============ =============
Supplemental disclosure:
Interest paid during the period $ 5,786 $ 3,267
Non-cash investing activities:
Fair value of stock issued for ownership
interest in another entity $ 621 $ --
Fair value of stock/units issued for property $ -- $ 3,320
Deferred gain on sale of property $ 85 $ --
Notes received on sale of property $ 675 $ --
Property purchased for note receivable $ 11,822 $ --
Property purchased for accounts receivable $ 219 $ --
</TABLE>
See Notes to Condensed Consolidated Financial Statements
Page 6 of 16
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM UNAUDITED FINANCIAL INFORMATION
U.S. Restaurant Properties, Inc. (the "Company") is a self-administered and
self-managed real estate investment trust ("REIT"), as defined under the
Internal Revenue Code of 1986, as amended. As noted in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, the Company became the
successor entity to U.S. Restaurant Properties Master L.P. (collectively with
its subsidiaries, "USRP"). The business and operations of the Company are
conducted primarily through U.S. Restaurant Properties Operating L.P. ("OP"). At
June 30, 1998, the Company owns 91.98% of and controls the OP. As of June 30,
1998, the Company owned 682 restaurant and other properties in 47 states.
The accompanying condensed consolidated financial statements should be read in
conjunction with the condensed consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, which was filed with the Securities and Exchange Commission
("SEC"). The results of operations for the six months ended June 30, 1998, are
not necessarily indicative of the results to be expected for the year ending
December 31, 1998. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this report on Form 10-Q
pursuant to the Rules and Regulations of the SEC. In the opinion of management,
the disclosures contained in this report are adequate to make the information
presented not misleading.
The accompanying condensed consolidated balance sheet as of June 30, 1998 and
the other condensed consolidated financial information for the six months ended
June 30, 1998, and 1997, are unaudited, but management of the Company believes
that all adjustments (consisting only of normal recurring accruals) necessary
for a fair presentation of the Company's condensed consolidated financial
statements for the periods presented have been included therein.
The Company had 13,021,838 and 12,698,113 shares of Common Stock outstanding as
of June 30, 1998 and December 31, 1997 respectively.
In May 1998, the Financial Accounting Standards Board's Emerging Issues Task
Force issued EITF 98-9, "Accounting for Contingent Rent in Interim Financial
Periods," (EITF 98-9), which provides guidance on recognition of rental income
during interim periods for leases which provide for contingent rents (commonly
referred to as "percentage rents"). Under EITF 98-9, the Company revised its
method of accounting for contingent rent on a prospective basis. Using the
historical basis of accounting net income before extraordinary item, net income
and basic and diluted per share amounts would have been $5,292,000, $5,292,000,
$0.27 and $0.27, respectively, for the three month period ended June 30, 1998
and $9,886,000, $9,696,000, $0.48, and $0.47, respectively for the six month
period ended June 30, 1998.
This pro forma information was prepared based on management's estimate for the
effects of EITF 98-9. Management of the Company believes that the estimate is
not materially different from what actual results would have been under EITF
98-9. Following is pro forma information for the three months and six months
ended June 30, 1997 as if the EITF 98-9 were in effect as of January 1, 1997:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------------------------
(In thousands, except per share amounts) 1998 1997 1998 1997
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Income before extraordinary item as reported $ 4,862 $ 2,147 $ 9,456 $ 4,099
Add: Adjustment for change in accounting
policy on recognition of contingent
lease rent 478 85 561 374
---------- --------- ---------- ---------
Income before extraordinary item as adjusted $ 5,340 $ 2,232 $ 10,017 $ 4,473
========== ========= ========== =========
Net income as adjusted $ 5,340 $ 2,232 $ 9,827 $ 4,473
========== ========= ========== =========
Net income available to common stockholders
as adjusted $ 3,564 $ 2,187 $ 6,276 $ 4,384
========== ========= ========== =========
Income per share - Basic:
Before extraordinary item, less dividends
on Preferred Stock/General Partner's
interest as reported $ 0.24 $ 0.18 $ 0.46 $ 0.36
Adjustment for effect of change in
accounting policy 0.03 0.01 0.04 0.04
---------- --------- ---------- ---------
Income before extraordinary item, less
dividends on Preferred Stock/General
Partner's interest as reported $ 0.27 $ 0.19 $ 0.50 $ 0.40
========== ========= ========== =========
Net income available to common
stockholders as reported $ 0.24 $ 0.18 $ 0.44 $ 0.36
Adjustment for effect of change in
accounting policy 0.03 0.01 0.04 0.04
---------- --------- ---------- ---------
Net income available to common
stockholders as adjusted $ 0.27 $ 0.19 $ 0.48 $ 0.40
========== ========= ========== =========
Income per share - Diluted:
Before extraordinary item, less dividends
on Preferred Stock/General Partner's
interest as reported $ 0.23 $ 0.18 $ 0.45 $ 0.36
Adjustment for effect of change in
accounting policy 0.03 0.01 0.04 0.03
---------- --------- ---------- ---------
Income before extraordinary item, less
dividends on Preferred Stock/General
Partner's interest as reported $ 0.26 $ 0.19 $ 0.49 $ 0.39
========== ========= ========== =========
Net income available to common
stockholders as reported $ 0.23 $ 0.18 $ 0.44 $ 0.36
Adjustment for effect of change in
accounting policy 0.03 0.01 0.04 0.03
---------- --------- ---------- ---------
Net income available to common
stockholders as adjusted $ 0.26 $ 0.19 $ 0.48 $ 0.39
========== ========= ========== =========
</TABLE>
Page 7 of 16
<PAGE>
2. NET INCOME PER SHARE OF COMMON STOCK
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128; Earnings per share (SFAS No. 128). Earnings per
share amounts presented for the three and six months period ended June 30, 1997
have been restated to comply with the provisions of SFAS No. 128.
The following table reflects the calculation of basic and diluted earnings per
share for the three and six months period ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------------------------------
(In thousands, except per share amounts) 1998 1997 1998 1997
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income before extraordinary item $ 4,862 $ 2,147 $ 9,456 $ 4,099
Loss on early extinguishment of debt -- -- (190) --
------------ ----------- ----------- -----------
Net income 4,862 2,147 9,266 4,099
Dividends on preferred stock/General
partner interest (1,776) (42) (3,551) (81)
------------ ----------- ----------- -----------
Net income allocable to shareholders $ 3,086 $ 2,105 $ 5,715 $ 4,018
============ =========== =========== ===========
Net income per share - Basic
Before extraordinary item less
preferred stock dividends/general
partner interest $ 0.24 $ 0.18 $ 0.45 $ 0.36
Extraordinary loss on extinguishment
of debt -- -- (0.01) --
------------ ----------- ----------- -----------
Net income allocable to common stockholders $ 0.24 $ 0.18 $ 0.44 $ 0.36
============ =========== =========== ===========
Net income per share - Diluted
Before extraordinary item, less
preferred stock dividends/general
partner interest $ 0.23 $ 0.18 $ 0.45 $ 0.36
Extraordinary loss on extinguishment
of debt -- -- (0.01) --
------------ ----------- ----------- -----------
Net income allocable to common stockholders $ 0.23 $ 0.18 $ 0.44 $ 0.36
============ =========== =========== ===========
Weighted average shares outstanding (a)
Basic 13,022 11,435 12,938 10,906
Dilutive effect of outstanding options 207 226 186 236
Dilutive effect of guaranteed stock -- -- -- --
------------ ----------- ----------- -----------
Diluted 13,229 11,661 13,124 11,142
============ =========== =========== ===========
</TABLE>
(a) Excludes 3,680,000 shares of convertible preferred stock, 913,563
shares of guaranteed stock and 1,148,418 OP units, which are
anti-dilutive at June 30, 1998.
Comprehensive income is the same as net income for the three and six months
ended June 30, 1998 and 1997.
3. PROPERTY ACQUISITIONS AND DISPOSITIONS
During the three months ended June 30, 1998, the Company completed the purchase
of 49 restaurant, gas station and other properties for an aggregate purchase
price of $38,374,000.
During the three months ended March 31, 1998, the Company completed the purchase
of 44 restaurant properties for an aggregate purchase price of $44,160,000.
During the three months ended June 30, 1998, two restaurant properties were sold
for cash of $632,000, net of closing costs resulting in a gain of $284,000. The
Company received a note receivable of $675,000 which bears interest at 8.50%
with interest and principal due monthly through July 2012 in connection with the
sale of one of the properties. In accordance with Statement of Accounting
Standards No. 66 "Accounting for Real Estate Sales" the Company recorded a
deferred gain of $85,000 as a result of the sale. In addition, a previous
deferred gain on sale of $173,000 was recognized.
In the normal course of business, the Company may sign purchase agreements and
deposit earnest money to acquire restaurant properties. Such agreements become
binding obligations upon the completion of a due diligence period ranging
usually from 15 - 30 days.
On June 30, 1998, earnest money purchase deposits amounting to $289,000 were on
deposit for the purchase of one Arby's, one TGIF Friday's, one Wendy's, one
Kentucky Fried Chicken and 17 other restaurant and gas station properties.
Page 8 of 16
<PAGE>
4. REVOLVING CREDIT FACILITIES
On January 17, 1998 the Company entered into a credit agreement with a syndicate
of banks for an unsecured revolving credit line of $175 million. This credit
agreement replaced the Company's then existing line of credit. As of June 30,
1998, the Company has approximately $108 million available under the new credit
agreement. The Company may request advances under this credit agreement 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 credit agreement.
This credit agreement expires on January 15, 2001 and provides that borrowings
thereunder bear interest at the then current LIBOR plus a margin spread of
either 1.05%, 1.20% or 1.35%, dependent on a leverage ratio formula. As of June
30, 1998, the margin spread was 1.05%. There is an unused line of credit fee of
0.25% per annum on the unused portion of the credit agreement.
On January 17, 1998, the Company's previous secured revolving credit facility
was terminated and the related unamortized costs were expensed and the
outstanding balance thereunder of $63,782,000 was repaid with funds from the new
unsecured credit agreement.
On August 15, 1997, a wholly owned subsidiary of the Company entered into a
short term borrowing facility (the "Pacific Mutual Facility") of $30 million.
This revolving credit facility was repaid in full during the six month period
ending June 30, 1998 and the borrowing facility was terminated.
5. NOTES PAYABLE
On February 26, 1997, the Company issued $40,000,000 in privately placed debt
which consists of $12,500,000 Series A Senior Secured Guaranteed Notes with a
8.06% interest rate and due date of January 31, 2000; and $27,500,000 Series B
Senior Secured Guaranteed Notes with a 8.30% interest rate and due date of
January 31, 2002. In January 1998 the note holders agreed to release the
collateral for these notes.
On May 12, 1998 the Company issued $111 million of 7 year fixed rate senior
unsecured notes payable in a private placement. The notes bear interest at the
rate of 7.15% per annum and are due May 1, 2005. The net proceeds of the notes
were used to repay a portion of the revolving credit agreement and for general
corporate purposes.
6. RELATED PARTY TRANSACTIONS
Prior to October 15, 1997, QSV Properties, Inc, the Managing General Partner of
USRP ("QSV") was responsible for managing the business and affairs of USRP. USRP
paid QSV a non-accountable annual allowance (adjusted annually to reflect
increases in the Consumer Price Index and additions to the property portfolio),
plus reimbursement of out-of-pocket costs incurred to other parties for services
rendered to USRP. The allowance for the three months and six months ended June
30, 1997 was $593,000 and $973,000, respectively. The Company's accounts payable
balance includes $121,000 for this allowance as of December 31, 1997. In
addition QSV was paid a one-time acquisition fee equal to one percent of the
purchase price for additional property purchases which amounted to $621,000 and
$820,000 for the three months and six months ended June 30, 1997, respectively.
This contract was terminated in conjunction with the Company's conversion to a
REIT on October 15, 1997.
A note receivable of $394,000 and $261,000 is due from Arkansas Restaurants #10
L.P. ("ARLP") at June 30, 1998 and December 31, 1997, respectively. The note
receivable is due on September 1, 1998, and has an interest rate of 9.0% per
annum. At June 30, 1998 and December 31, 1997, tenant and other receivables from
ARLP were $353,000 and $158,000, respectively. The managing general partner of
ARLP is owned by an officer of the Company, who receives no compensation for
this role.
As of June 30, 1998 and December 31, 1997, notes receivable of $1,070,000 were
due from Southeast Fast Food Partners, L.P. ("SFF"). The notes receivable are
due on July 1, 1998 ($207,000) and July 1, 1999 ($863,000) and have an interest
rate of 9.0% per annum. At June 30, 1998 and December 31, 1997 a note receivable
of $136,000 is due from the owners of SFF. This note is due on July 1, 1999, and
has an interest rate of 9.0% per annum. As of June 30, 1998 and December 31,
1997, tenant and other receivables from SFF were $327,000 and $362,000,
respectively. The Managing General Partner of SFF is owned by an officer of the
Company, who receives no compensation for this role.
During 1996, the Company agreed to make available to USRP Development Company a
revolving line of credit in the principal amount of $5,000,000, to be used
solely for paying for the acquisition and development of restaurant properties,
which will be purchased by the Company upon completion of development. The line
of credit is secured by certain development properties and bears interest at an
annual rate of 9.0%. In April 1998, the line of credit was increased to
$15,000,000 with interest only payments due on November 1, 1998, and on each
anniversary thereof throughout the term of the note with all outstanding
principal and accrued but unpaid interest due on October 31, 2001, when it
matures. At June 30, 1998, the outstanding balance was $3,957,000.
As of the April 29, 1998, two affiliates of the Company , U.S. Restaurant
Lending GP, Inc. (the "General Partner") and U.S. Restaurant Lending LP, Inc.
(the "Limited Partner") entered into joint venture and limited partnership
agreements with MLQ Investors, L.P., an affiliate of Goldman, Sachs & Co., to
form two limited partnerships. The two limited partnerships will engage in
lending activities to owners and operators of quick service franchises and gas
station/convenience store outlets. The Company has indirect ownership interests
(through the General Partner and Limited Partner) of 71.25% and 47.5%,
respectively, in these two partnerships. As of June 30, 1998, the Company had
other receivables from the two lending partnerships of $198,000 and a note
receivable of $20,000 from the General Partner and Limited Partner.
Page 9 of 16
<PAGE>
7. STOCKHOLDERS' EQUITY AND MINORITY INTEREST
COMMON STOCK
As reported in the Company's Annual Report on Form 10-K as of December 31, 1997,
the Company effected the conversion of USRP into a self-administered and
self-managed REIT on October 15, 1997. As a result of the Merger, USRP became a
subsidiary of the Company and, at the effective time of the Merger, all holders
of units of beneficial interest of USRP became stockholders of the Company.
Accordingly, information contained in these condensed consolidated financial
statements related to the equity ownership of USRP following October 15, 1997 is
presented as ownership of shares of Common Stock of the Company. On October 30,
1997, the Company effected a three-for-two stock split. All of the historical
Units and per unit information has been restated to reflect this stock split and
conversion of the units to Common Stock.
The Company announced on August 5, 1998 that the Board of Directors have
authorized the Company to repurchase up to 500,000 shares of the Company's
Common Stock and Convertible Preferred Stock. Any purchases made under the
program will be made from time to time in open market or privately negotiated
transactions. The repurchase program will continue until the Company acquires
500,000 shares, or until such time as the Board of Directors terminates the
program.
MINORITY INTEREST
As reported in the Company's Annual Report on Form 10-K as of December 31, 1997,
the management contract between QSV and USRP was terminated. The contract
termination and QSV's partnership interests in USRP were converted to 126,582
shares of Common Stock of the Company and 1,148,418 units of the OP. The OP
units represent a minority interest in the OP of the REIT. Each OP unit
participates in any income (loss) of the OP based on the percent ownership in
the OP and the OP units held by QSV receive a cash dividend in an amount
equivalent to a share of Common Stock. Each OP unit held by QSV may be exchanged
for one share of Common Stock of the Company. With each exchange of outstanding
OP units for Common Stock, the Company's percentage ownership interest in the
OP, directly or indirectly, will increase. An additional 825,000 shares of
Common Stock of the Company or its equivalent in OP units may be issued to QSV
if certain earnings targets are met by the Company by the year 2000.
As of June 30, 1998 these earnings targets have not been met.
Minority interest in the OP consists of the following (in thousands):
Balance December 31, 1997 $ 19,536
Distributions (867)
Income allocated to minority interest 503
-------------
Balance at June 30, 1998 $ 19,172
=============
Page 10 of 16
<PAGE>
8. PRO FORMA (UNAUDITED)
The following pro forma information was prepared by adjusting the actual
condensed consolidated results of the Company for the six month periods ended
June 30, 1998 and 1997 for the effects of:
a. the purchase of 93 properties on various dates from January 1,
1998 through June 30, 1998 for an aggregate purchase price of
$82,534,000, the sale of two restaurant properties for
$1,313,000 and related financing transactions; and
b. the purchase of 277 restaurant properties on various dates
during 1997 for an aggregate purchase price of $182,396,000
including the value of 680,696 shares of Common Stock issued
to sellers; the sale of eight restaurant properties for
$5,822,000; the Preferred Stock dividends required and the
reduction of interest expense as a result of the Preferred
Stock offering proceeds used to reduce the total debt
outstanding by $87,622,000; the three-for-two stock split on
October 30, 1997; and other related financing transactions,
including the sale of 1,434,831 shares of Common Stock for
$25,000,000.
These pro forma operating results are based on the historical basis of
accounting and are not necessarily indicative of what the actual results of
operations of the Company would have been assuming all of the properties were
acquired as of January 1, 1997 and do not purport to represent the results of
operations for future periods.
Six months ended June 30,
---------------------------
(In thousands, except per share amounts) 1998 1997
------------ ------------
Total Revenues $ 28,944 $ 27,445
============ ============
Net Income 9,452 7,504
Dividends on Preferred Stock (3,551) (3,551)
------------ ------------
Net income allocable to Common Shareholders $ 5,901 $ 3,953
============ ============
Weighted average shares outstanding
Basic 12,947 12,607
Diluted 13,178 12,951
Net income per share
Basic $0.46 $0.31
Diluted $0.45 $0.31
Page 11 of 16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS.
The Company derives its revenue from the leasing of its Properties to operators
(primarily restaurant) on a "triple net" basis. Triple net leases typically
require the tenants to be responsible for property operating costs, including
property taxes, insurance and maintenance. A majority of the Company's leases
provide for a base rent plus a percentage of the restaurant's sales in excess of
a threshold amount. As a result, a portion of the Company's revenues is a
function of the number of restaurants in operation and their level of sales.
Sales at individual restaurants are influenced by local market conditions, by
the efforts of specific restaurant operators, by marketing, by new product
programs, support by the franchisor and by the general state of the economy.
On October 15, 1997 the Company changed its form of business from a master
limited partnership to a REIT. U. S. Restaurant Properties, Inc. became the
successor entity to U.S. Restaurant Properties Master L.P. The results of
operations for the three and six months ended June 30, 1998 are presented as the
continuation of the operations of the predecessor entity.
Certain statements in the analysis of financial condition and results of
operations constitute "forward-looking statements" and involve risks,
uncertainties and other factors which may cause the actual performance of U.S.
Restaurant Properties, Inc. to be materially different from the performance
expressed or implied by such statements. These risks include interest rates and
other general economic conditions, income fluctuations in U.S. households and
the general health of the fast food and casual dining industry segments.
The results of operations of the Company, together with its predecessors, for
the periods discussed below have been affected by the growth in the total number
of Properties owned by the Company, as well as by increases in rental income
across the portfolio, over such time periods. The following discussion considers
the specific impact of such factors on the results of operations of the Company
for the following periods.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 TO THE SIX MONTHS ENDED JUNE
30, 1997.
The Company owned 322 properties prior to January 1, 1997. The Company acquired
277 properties and sold 8 properties from January 1, 1997 to December 31, 1997
and the Company acquired 93 properties and sold two properties, from January 1,
1998 to June 30, 1998, the operations of which are included in the periods
presented from their respective dates of acquisition.
Revenues for the six months ended June 30, 1998 totaled $27,416,000 up 85
percent from the $14,822,000 recorded for the six months ended June 30, 1997.
The increase in revenues is primarily due to increases in the number of
properties owned during the period as compared to the same period in 1997.
Through June 30, 1998, approximately 12% of the Company's rental revenues
resulted from percentage rents (rents determined as a percentage of tenant
sales), down from 20% for the six months ended June 30, 1997. As a result, the
impact of restaurant sales had a diminishing impact on total rental revenues. In
addition, the company deferred percentage rent of approximately $468,000 under
the provisions of EITF 98-9 for the six months ended June 30, 1998. Also
included in revenues is interest income relating primarily to secured notes and
mortgage receivable from tenants and related parties. Interest income was
$1,328,000 for the six months ended June 30, 1998 compared with $278,000 for the
six months ended June 30, 1997.
Rent expense for the six months ended June 30, 1998 totaled $1,468,000 an
increase of 23% when compared to the six months ended June 30, 1998.
Depreciation and amortization expenses in the six months ended June 30, 1998
totaled $7,060,000; an increase of 110% when compared to the six months ended
June 30, 1997. The increase in rent expense and depreciation and amortization
expenses directly relates to the property acquisitions.
Taxes, general and administrative expenses for the six months ended June 30,
1998 totaled $2,198,000 an increase of 19% when compared to the six months ended
June 30, 1997. The increase was a result of the costs of the increased
infrastructure, including additional employees, required by the Company to
manage and maintain the Company's rate of growth.
Interest expense for the six months ended June 30, 1998 totaled $7,132,000, an
increase of 85%, when compared to the six months ended June 30, 1997. The
increase in interest expense directly relates to the additional debt associated
with the acquisitions.
Minority interest in net income of the OP of $503,000 for the six months ended
June 30, 1998 related to OP units held by QSV.
Loss on debt extinguishment of $190,000 for the six months ended June 30, 1998
related to the termination of the Company's previous line of credit.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 TO THE THREE MONTHS ENDED
JUNE 30, 1997.
Revenues for the three months ended June 30, 1998 totaled $14,195,000 up 66 %
from the $8,557,000 recorded for the three months ended June 30, 1997. The
increase in revenues is primarily due to increases in the number of properties
owned during the period as compared to the same period in 1997. Also included in
revenues is interest income relating primarily to secured notes and mortgage
receivable from tenants and related parties. Interest income was $732,000 for
the three months ended June 30, 1998 compared with $166,000 for the three months
ended June 30, 1997.
Rent expense for the three months ended June 30, 1998 totaled $726,000 an
increase of 21% when compared to the three months ended June 30, 1997.
Depreciation and amortization expenses in the three months ended June 30, 1998
totaled $3,690,000; an increase of 105% when compared to the three months ended
June 30, 1997. The increase in rent expense and depreciation and amortization
expenses directly relates to the property acquisitions.
Taxes, general and administrative expenses for the three months ended June 30,
1998 totaled $1,178,000 an increase of 4% when compared to the three months
ended June 30, 1997. The increase was a result of the costs of the increased
infrastructure, including additional employees, required by the Company to
manage and maintain the Company's rate of growth.
Page 12 of 16
<PAGE>
Interest expense for the three months ended June 30, 1998 totaled $3,871,000, an
increase of 62%, when compared to the three months ended June 30, 1997. The
increase in interest expense directly relates to the additional debt associated
with the acquisitions.
Minority interest in net income of the OP of $269,000 for the three months ended
June 30, 1998 related to OP units held by QSV.
LIQUIDITY OF CAPITAL RESOURCES.
The Company's principal source of cash to meet its short term 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. 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
issuance of additional debt or equity, including the issuance of additional OP
units, along with cash generated from internal operations. During the six months
ended June 30, 1998 the Company paid dividends of $0.755 per share, or an
aggregate of $10,690,000 to common stockholders and minority interests. In
addition, the Company paid dividends of $1.1205 per share, or an aggregate
$4,123,000 to preferred stockholders covering the period November 17, 1997 to
June 15, 1998.
On January 17, 1998 the Company entered into a credit agreement with a syndicate
of banks for an unsecured revolving credit line of $175 million. This credit
agreement replaced the Company's then existing line of credit. As of June 30,
1998, the Company has approximately $108 million available under the new credit
agreement. The Company may request advances under this credit agreement to
finance the acquisition of restaurant properties, to repair and update
restaurant properties and for working capital. This credit agreement provides
that borrowings thereunder bear interest at LIBOR plus a margin spread which was
1.05% per annum at June 30.
On May 12, 1998 the Company issued $111 million of 7 year fixed rate senior
unsecured notes payable in a private placement. The notes bear interest at the
rate of 7.15% per annum and are due May 1, 2005. The net proceeds of the notes
were used to repay a portion of the revolving credit agreement and for general
corporate purposes.
Management believes that the existing debt facilities, along with the Company's
ability to raise additional equity, including the issuance of OP units in
exchange for properties, will provide the Company with sufficient liquidity to
meet operating and growth requirements.
YEAR 2000 ISSUE
The Company has recognized the need to ensure that its data processing systems
and operations will not be adversely affected by the change to the calendar year
2000. The Company has taken steps to identify potential areas of risk, and has
begun to address these risk factors in its planning, purchasing and daily
operations. The cost of converting all internal systems and operations is not
expected to be material. Estimated costs relating to the failure of third party
service providers and vendors to prepare for the year 2000 is not available.
However, the Company is attempting to identify those risks, and is requiring
third party service providers and vendors to provide evidence of their systems
ability to incorporate the change to the year 2000.
FUNDS FROM OPERATIONS (FFO)
FFO is computed as net income (loss) available to common stockholders (computed
in accordance with GAAP), excluding the effects of direct financing leases,
minority interest, unusual charges and gains (or losses) from debt restructuring
and sales of property, plus real estate related depreciation and amortization.
The Company believes FFO is helpful to investors as a measure of the performance
of an equity REIT because, along with cash flows from operating, financing and
investing activities, it provides investors with an understanding of the ability
of the Company to incur and service debt and make capital expenditures. The
Company believes that it computes FFO in accordance with the standards
established by the National Association of Real Estate Investment Trusts
("NAREIT"), which may differ from the methodology for calculating FFO utilized
by other equity REITs, and, accordingly, may not be comparable to such other
REITs. Further, FFO does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties. FFO should not be
considered as an alternative to net income (determined in accordance with GAAP)
as an indication of the Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make distributions.
The following table sets forth, for the six months ended June 30, 1998 and 1997,
the calculation of FFO:
Page 13 of 16
<PAGE>
(in thousands) Six months ended
June 30,
-------------------------
Funds From Operations 1998 1997
---------- ----------
Net income allocable to common stockholders $ 5,715 $ 4,018
Direct financing lease payments 1,175 1,130
Capital lease principal payments (52) (99)
Depreciation and amortization 7,023 3,366
Gain on sale of property (457) (266)
REIT conversion costs -- 744
Income allocable to minority interest 503 --
Income allocable to general partner -- 81
Distributions to general partner -- (151)
Loss on early extinguishment of debt 190 --
---------- ----------
EITF 98-9 adjusted Funds from operations (FFO) 14,097 8,823
Effect of EITF 98-9 468 --
---------- ----------
FFO on a basis comparable with prior periods $ 14,565 $ 8,823
========== ==========
Total shares applicable to FFO 14,272 11,142
========== ==========
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 operator 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 operator 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 increase leisure travel. This seasonality can be expected to cause
fluctuations in the Company's quarterly revenue to the extent it receives
percentage rent.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
Page 14 of 16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) An annual meeting of stockholders was held on June 2, 1998.
b) (1) The election of six directors to hold office for terms expiring
at the next annual meeting of stockholders
Votes Against
Nominees Votes For or Withheld Abstentions
-------- ------------- ------------- -----------
Robert J. Stetson 11,576,920 40,596 0
Fred H. Margolin 11,585,667 31,849 0
Gerald H. Graham 11,583,764 33,752 0
Darrel L. Rolph 11,583,464 34,052 0
David K. Rolph 11,584,501 33,015 0
Eugene G. Taper 11,585,301 32,215 0
(2) To approve the U.S. Restaurant Properties, Inc. Flexible
Incentive Plan.
Votes Against
Votes For or Withheld Abstentions
--------- ------------- -----------
10,611,053 825,746 180,717
(3) To ratify Deloitte & Touche LLP as the Company's
independent auditors.
Votes Against
Votes For or Withheld Abstentions
--------- ------------- -----------
11,321,746 248,140 47,630
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
1) Exhibit 27 - Financial data schedule
b) Reports on Form 8-K
None
Page 15 of 16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. RESTAURANT PROPERTIES, INC.
Dated: August 14, 1998 By /s/ Robert J. Stetson
--------------------------------------
Robert J. Stetson
President and Chief Executive Officer
By /s/ Michael D. Warren
--------------------------------------
Michael D. Warren
Director of Finance
Page 16 of 16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,781
<SECURITIES> 0
<RECEIVABLES> 6,939
<ALLOWANCES> 459
<INVENTORY> 0
<CURRENT-ASSETS> 18,830
<PP&E> 408,201
<DEPRECIATION> 20,025
<TOTAL-ASSETS> 447,652
<CURRENT-LIABILITIES> 5,762
<BONDS> 150,593
0
4
<COMMON> 13
<OTHER-SE> 204,435
<TOTAL-LIABILITY-AND-EQUITY> 447,652
<SALES> 0
<TOTAL-REVENUES> 27,416
<CGS> 0
<TOTAL-COSTS> 1,468
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,132
<INCOME-PRETAX> 9,456
<INCOME-TAX> 0
<INCOME-CONTINUING> 9,456
<DISCONTINUED> 0
<EXTRAORDINARY> 190
<CHANGES> 0
<NET-INCOME> 9,266
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
