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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995.
Commission File Number 1-9079
U.S. RESTAURANT PROPERTIES MASTER L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1541631
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5310 Harvest Hill Rd., Suite 270, LB 168, Dallas, Texas 75230
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
214-387-1487
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Units Representing Limited Partnership New York Stock Exchange
Interests and Evidenced by Depository Receipts
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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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. X
-----
The aggregate market value of the Units (based upon the closing price of
the Units on February 29, 1996, on the New York Stock Exchange) held by
non-affiliates of the Registrant was $111,176,855.
As of February 29, 1996, there were 4,987,003 Units outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Parts I, II and III of the Annual Report
is incorporated by reference from the Registrant's Registration Statement on
Form S-3 (Registration No. 333-02675).
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PART I
ITEM 1. BUSINESS
Reference is made to the information set forth under the caption
entitled "Business and Properties" located at pages 28-39 in Amendment No. 2
to the Registration Statement on Form S-3 (Registration No. 333-02675) filed
by U.S. Restaurant Properties Master L.P. (the "Partnership") with the
Securities and Exchange Commission (the "Commission") pursuant to the
Securities Act of 1933, as amended, which is incorporated herein by reference.
Reference is made to the information set forth under the caption "Risk
Factors - Conflicts of Interest" located at page 10 in Amendment No. 2 to the
Registration Statement on Form S-3 (Registration No. 333-02675) filed by U.S.
Restaurant Properties Master L.P. (the "Partnership") with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Act of
1933, as amended, which is incorporated herein by reference.
ITEM 2. PROPERTIES
Reference is made to the information set forth under the caption
entitled "Business and Properties" located at pages 28-39 in Amendment No. 2
to the Registration Statement on Form S-3 (Registration No. 333-02675) filed
by the Partnership with the Commission pursuant to the Securities Act of
1933, as amended, which is incorporated herein by reference.
Reference is made to the information set forth under the caption "Risk
Factors - Conflicts of Interest" located at page 10 in Amendment No. 2 to the
Registration Statement on Form S-3 (Registration No. 333-02675) filed by the
Partnership with the Commission pursuant to the Securities Act of 1933, as
amended, which is incorporated herein by reference.
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Reference is made to the information set forth under the captions
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview," "- Comparison of Year Ended December 31,
1995 to Year Ended December 31, 1994," "- Comparison of Year Ended December
31, 1994 to Year Ended December 31, 1993," and "- Liquidity and Capital
Resources" located at pages 24-27 in Amendment No. 2 to the Registration
Statement on Form S-3 (Registration No. 333-02675) filed by the Partnership
with the Commission pursuant to the Securities Act of 1933, as amended, which
is incorporated herein by reference.
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ITEM 11. EXECUTIVE COMPENSATION
The Partnership pays the Managing General Partner a non-accountable (no
support is required for payment) annual allowance designed to cover the costs
that the Managing General Partner incurs in connection with the management of
the Partnership and the Properties (other than reimbursements for
out-of-pocket expenses paid to third parties). The allowance is adjusted
annually to reflect any cumulative increases in the Consumer Price Index
occurring after January 1, 1986, and was $585,445 for the year ended December
31, 1995. The allowance is paid quarterly, in arrears.
In addition, to compensate the Managing General Partner for its efforts
and increased internal expenses resulting from 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 1% of
the purchase price for such property and (ii) an annual fee equal to 1% of
the purchase price for such property, adjusted for increases in the Consumer
Price Index. For 1995, the one-time acquisition fee equaled $109,238 which
was capitalized and the increased annual fee equaled $29,375. In addition, if
the Rate of Return (as defined in the Partnership Agreement) on the
Partnership's equity in all additional properties exceeds 12% per annum for
any fiscal year, the Managing General Partner will be paid an additional fee
equal to 25% of the cash flow received with respect to such additional
properties in excess of the cash flow representing a 12% rate of return
thereon. However, to the extent the Managing General Partner receives
distributions in excess of those provided by its 1.98% Partnership interest,
such distributions will reduce the fee payable with respect to such excess
cash flow from any additional properties. See "Partnership Allocations" under
"Item 1. Business." Except as provided above, such payments are in addition
to distributions made by the Partnership to the Managing General Partner in
its capacity as a partner in the Partnership. The Partnership may pay or
reimburse the Managing General Partner for payments to affiliates for goods
or other services if the price and the terms for providing such goods or
services are fair to the Partnership and not less favorable to the
Partnership than would be the case if such goods or services were obtained
from or provided by an unrelated third party.
Reference is made to the information set forth under the caption "Risk
Factors - Conflicts of Interest" located at page 10 in Amendment No. 2 to the
Registraaton Statement on Form S-3 (Registration No. 333-02675) filed by the
Partnership with the Commission pursuant to the Securities Act of 1933, as
amended, which is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: June 11, 1996 U.S. RESTAURANT PROPERTIES MASTER L.P.
By: U.S. RESTAURANT PROPERTIES, INC.,
its Managing General Partner
By: s/Robert J. Stetson
-------------------
Robert J. Stetson
President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Managing General Partner of the Partnership and in the capacities and on the
dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
s/Robert J. Stetson Director of U.S. Restaurant June 11, 1996
- ------------------- Properties, Inc. (Principal
Robert J. Stetson Executive Officer, Chief Financial
Officer and Principal Accounting
Officer)
s/Fred H. Margolin Director of U.S. Restaurant June 11, 1996
- ------------------ Properties, Inc.
Fred H. Margolin
s/Eugene G. Taper Director of U.S. Restaurant June 11, 1996
- ----------------- Properties, Inc.
Eugene G. Taper
s/Gerald H. Graham Director of U.S. Restaurant June 11, 1996
- ------------------ Properties, Inc.
Gerald H. Graham
s/Darrel Rolph Director of U.S. Restaurant June 11, 1996
- -------------- Properties, Inc.
Darrel Rolph
s/David Rolph Director of U.S. Restaurant June 11, 1996
- ------------- Properties, Inc.
David Rolph
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EXHIBIT INDEX
2.1 Amended and Restated Purchase and Sale Agreement dated as of February
3, 1986. (Incorporated by reference to Exhibit 10(a) to Amendment No. 2
to the Registration Statement).
3.1 The original Certificate of Limited Partnership of U.S. Restaurant
Properties Master L.P. (Incorporated by reference to Exhibit 4.3 to
the Registration Statement). Amendments filed on July 1, 1994,
November 7, 1994 and November 30, 1994. (Incorporated by reference to
Exhibit 3.1 to the Registrant's 10-K Annual Report for the year ended
December 31, 1994.)
3.2 Second Amended and Restated Agreement of Limited Partnership of U.S.
Restaurant Properties Master L.P. dated as of March 17, 1995.
(Incorporated by reference to Exhibit 3.2 to the Registrant's 10-K
Annual Report for the year ended December 31, 1994.)
3.3 Certificate of Limited Partnership of U.S. Restaurant Properties
Operating L.P. (Incorporated by reference to Exhibit 4.4 to the
Registrant Statement.) Amendments filed on July 26, 1994 and November
30, 1994. (Incorporated by reference to Exhibit 3.3 to the Registrant's
10-K Annual Report for the year ended December 31, 1994.)
3.4 Second Amended and Restated Agreement of Limited Partnership of U.S.
Restaurant Properties Operating L.P. dated as of March 17, 1995.
(Incorporated by reference to Exhibit 3.4 to the Registrant's 10-K
Annual Report for the year ended December 31, 1994.)
4.1 Deposit Agreement and Form of Depositary Receipt and Application for
Transfer of Depositary Units. (Incorporated by reference to Exhibit
4.5 to Amendment No. 3 to the Registration Statement.) First Amendment
to Deposit Agreement. (Incorporated by reference to Exhibit (4)A to
Registrant's 8-K Current Report dated September 30, 1987.)
10.1 Amendment No. 91 - Burger King Corporation Withdrawal as Special General
Partner and Name Change (Incorporated by reference to Exhibit 10.1 to
the Registrant's 10-Q Report for the period ended September 30, 1994.)
10.2 Consulting Agreement dated April 30, 1987. (Incorporated by reference
to Exhibit 10.2 to the Registrant's 10-K Annual Report for the year
ended December 31, 1987.)
#10.3 Option Agreement, dated as of March 24, 1995, between U.S. Restaurant
Properties Master L.P. and QSV Properties Inc. (Incorporated by
reference to Exhibit 10.3 to the Registrant's 10-K Annual Report for the
year ended December 31, 1994.)
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#10.4 Agreement between BKC and Robert J. Stetson regarding sale of QSV
Properties Inc. (Incorporated by reference to Exhibit 10.1 to the
Registrant's 10-Q Report for the period ended June 30, 1994.)
10.5 Letter re change of Registrar and Stock Transfer Agent. (Incorporated by
reference to Exhibit 10.2 to the Registrant's 10-Q Report for the
period ended September 30, 1994.)
10.6 Amended and Restated Secured Loan Agreement dated as of February 15,
1996 between Registrant and various banks. (Incorporated by reference
to Exhibit 10.6 to the Registrant's 10-K Annual Report for the year
ended December 31, 1995.)
10.7 Demand Promissory Note dated as of August 15, 1995, executed by
Arkansas Restaurants #10 L.P. for the benefit of U.S. Restaurant
Properties Operating L.P. (Incorporated by reference to Exhibit 10.7
to the Registrant's Registration Statement on Form S-3, Registration
No. 333-02675.)
10.8 Mortgage Warehouse Facility dated as of May 1996 between the
Registrant and Morgan Keegan Mortgage Company, Inc. (Incorporated by
reference to Exhibit 10.8 to the Registrant's Registration Statement
on Form S-3, Registration No. 333-02675.)
12.1 Subsidiaries of the Registrant. (Incorporated by reference to Exhibit
22.1 to the Registrant's 10-K Annual Report for the year ended December
31, 1994.)
27.1 Financial Data Schedule
99.1 Certain pages from Amendment No. 2 to the Registrant's Registration
Statement on Form S-3 (Registration No. 333-02675.)
__________________
# Management compensatory document.
5
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subject the Partnership to regulation under various federal and state laws. Any
operation of restaurants, even on an interim basis, would also subject the
Partnership to operating risks (such as uncertainties associated with labor and
food costs), which may be significant. See "Business and Properties."
CONFLICTS OF INTEREST
The Partnership Agreement provides that the Partnership pays one-time and
continuing fees to the Managing General Partner with respect to additional
properties purchased regardless of whether the Partnership receives the
contemplated revenue from such additional properties or whether the Partnership
makes any cash distributions to the Unitholders after such properties are
purchased. This creates an incentive for the Managing General Partner to cause
the Partnership to purchase more properties, pay higher prices, and sell
existing properties or use more leverage to make such purchases. The sale of any
of the restaurant properties acquired from BKC in 1986 (122 at June 11, 1996)
would not reduce the management fee for existing properties, while new fees
would benefit the Managing General Partner incrementally with each purchase. The
Managing General Partner, however, does not presently intend to cause the
Partnership to sell a significant number of its Current Properties. In addition,
the Partnership Agreement provides the Managing General Partner with a fee
providing a percentage participation above a threshold in the cash flow from
newly-purchased properties. Moreover, the Managing General Partner is not
restricted from acquiring for its own account properties of the type to be
purchased by the Partnership. See "Business and Properties -- Payments to the
Managing General Partner."
In addition, the Partnership Agreement does not restrict the ability of the
Managing General Partner or its principals from owning and/or operating
restaurants on Partnership properties or elsewhere. At June 11, 1996, the
Managing General Partner owned 90% of Arkansas Restaurants #10 L.P., the
operator of three Burger King franchises on properties leased from the
Partnership. The Managing General Partner or its principals may acquire future
operating restaurants on Partnership properties, including in connection with
the Acquisition Properties. Financing may also be provided on an arm's length
basis by the Partnership to consummate the acquisition of operating restaurants
by the Managing General Partner, its principals or others.
INVESTMENT CONCENTRATION IN SINGLE INDUSTRY
The Partnership's current strategy is 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 Partnership's total rental revenues and amounts
available for distribution to its Unitholders. See "Business and Properties --
The Properties."
DEPENDENCE ON SUCCESS OF BURGER KING
Of the Partnership's Current Properties, 170 are occupied by operators of
Burger King restaurants. In addition, the Partnership intends to acquire
additional Burger King properties. As a result, the Partnership 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 Partnership may be adversely affected. See
"Business and Properties -- Strategy" and "Business and Properties -- The
Properties."
POSSIBLE RENT DEFAULTS AND FAILURE TO RENEW LEASES AND FRANCHISE AGREEMENTS
The Partnership's Current Properties are leased to restaurant franchise
operators pursuant to leases with remaining terms varying from one to 28 years
at June 11, 1996 and an average remaining term of ten years. No assurance can be
given that such leases will be renewed at the end of the lease
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The Partnership derives its revenue from the leasing of the Partnership'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 Partnership'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 Partnership'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 Partnership'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 Partnership'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
Partnership'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 Partnership (and
not a direct financing lease) and the related charge for depreciation is
reflected on the Partnership'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 Partnership's
audited Consolidated Financial Statements. Management believes that most if not
all acquisitions made by the Partnership since March 1995, as well as all future
acquisitions and related leases, will qualify as operating leases according to
GAAP and, therefore, were not recorded as a net investment in direct financing
leases.
The following discussion should be read in conjunction with "Selected
Financial Information" and all of the financial statements and notes thereto
included elsewhere in this Prospectus.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 TO THREE MONTHS ENDED MARCH 31,
1995
For the quarter ended March 31, 1996, rental revenues increased 39% over the
same period for the previous year. Comparable store sales growth (the increase
in sales at those restaurants open for the entire reporting period in both the
current period and the same period for the prior year) was 4%. Management
believes the growth reflects improvements in the overall performance of the
Burger King system and efforts by BKC with selected tenants to improve their
restaurant's sales.
General and administrative expenses in 1996 remained constant, as compared
to the same quarter in 1995. An increase in the management fee of $59,663 for
the quarter and expenses that directly correspond to the active growth of the
Partnership in the first quarter of 1996 were offset by non-recurring costs
relating to the proxy in the first quarter of 1995. Depreciation expense
increased 59% which related to the property acquisitions as well as the 22%
increase in ground lease expense. There was an increase in interest expense of
$314,131 due to the financing of acquisitions.
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
Partnership real estate in 1995 was $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.
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The Partnership'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 Partnership and related financing
costs.
Ground rent expense increased 4.3% to $1,405,380, compared to $1,347,748 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% to $1,540,900
compared to $1,361,136 for 1994. This was primarily due to the increase in the
number of restaurant properties owned by the Partnership.
Taxes and general and administrative expenses increased 24% to $1,419,279,
compared to $1,143,956 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 Partnership.
Interest expense (income), net increased to $192,142 compared to ($3,515)
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 Partnership's business. However, store
closings do occur periodically in retail businesses, including the
Partnership's. Management does not believe that there is an established trend in
its business with respect to store closings because virtually all of the
restaurants included within the Current 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.
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 Partnership real estate in 1994 was $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 Partnership's total revenues in 1994 increased 5.5% to $8,793,000
compared to $8,332,000 recorded in 1993. The Partnership 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 $73,739. Write downs are not a
normal part of the Partnership's business. However, store closings do occur
periodically in retail businesses, including the Partnership's. Management does
not believe that there is an established trend in its business with respect to
store closings because virtually all of the restaurants included within the
Current Properties are currently performing on their leases and are not in
default.
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.
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LIQUIDITY AND CAPITAL RESOURCES
The Partnership's principal source of cash to meet its cash requirements is
rental revenues generated by the Partnership's properties. Cash generated by the
portfolio in excess of operating needs is used to reduce amounts outstanding
under the Partnership's credit agreements. As a result, amounts are drawn under
the Partnership's credit agreements to cover payment of quarterly distributions
to the Unitholders. Currently, the Partnership's primary source of funding for
acquisitions is its existing revolving line of credit and its Morgan Keegan
Mortgage Company, Inc. mortgage warehouse facility. The Partnership anticipates
meeting its future long-term capital needs through the incurrence of additional
debt or the issuance of additional Units, along with cash generated from
internal operations.
The Partnership currently has approximately $36.5 million outstanding under
its $40 million line of credit with a syndicate of banks. After application of
the net proceeds from the Offering, approximately $ million will be available
for borrowings under the line of credit. This line of credit is secured by the
Partnership's real estate including its leasehold interests. The Partnership 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 Partnership 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. The Partnership also has a $20 million mortgage
warehouse facility from Morgan Keegan Mortgage Company, Inc., which is secured
by certain of the Partnership's Current Properties. As of June 11, 1996,
approximately $4.2 million remained available for borrowings. This facility
expires on November 30, 1996, and borrowings thereunder bear interest at the
rate of 300 basis points over LIBOR. The proceeds from this facility were used
to finance the acquisition and proposed acquisition of various restaurant
properties owned by the Business Trust. See "History and Structure of the
Partnership." The Partnership intends to repay borrowings under this facility
using any availability under its existing line of credit after application of
the net proceeds of this Offering or additional borrowings which may be
subsequently incurred.
Pursuant to the Partnership Agreement, the Managing General Partner is
required to make available to the Partnership an unsecured, interest-free,
revolving line of credit in the principal amount of $500,000 to provide the
Partnership with necessary working capital to minimize or avoid seasonal
fluctuation in the amount of quarterly cash distributions. The Managing General
Partner is not required, however, to make financing available under this line of
credit before the Partnership obtains other financing, whether for acquisitions,
reinvestment, working capital or otherwise. The Managing General Partner may
make other loans to the Partnership. Each loan must bear interest at a rate not
to exceed the Morgan Guaranty Trust Company of New York prime rate plus 1% or
the highest lawful rate (whichever is less), and in no event may any such loan
be made on terms and conditions less favorable to the Partnership than it could
obtain from unaffiliated third parties or banks for the same purpose. To
management's knowledge, no loans have ever been made pursuant to these
arrangements and no loans were made or outstanding at any time during each of
the three years ended December 31, 1995.
The Partnership paid distributions in 1995 of $1.69 per Unit, which
represented 95% of cash flow from operations based upon taxable income. The
Partnership paid distributions for the first quarter of 1996 of $.44 per Unit.
Management intends to distribute from 75% to 95% of the estimated cash generated
from operations within the general objective of continued annual growth in the
distributions. The Partnership expects to maintain such distribution rate for
the foreseeable future based upon actual results of operations, the financial
condition of the Partnership, capital or other factors management deems
relevant. During 1995, the Partnership distributed an aggregate of $8,002,000 to
its partners.
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INFLATION
Some of the Partnership's leases are subject to adjustments for increases in
the Consumer Price Index, which reduces the risk to the Partnership 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 Partnership. 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 Partnership.
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 Partnership's quarterly unit revenue to the extent it
receives percentage rent.
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BUSINESS AND PROPERTIES
GENERAL
The Partnership 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 Dairy Queen, Hardee's and Chili's. The Partnership 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 distributions to Unitholders or for acquisitions.
The Partnership is one of the largest publicly-owned entities in the United
States dedicated to acquiring, owning and managing restaurant properties. At
June 11, 1996, the Partnership's portfolio consisted of 231 restaurant
properties in 39 states (the "Current Properties"), approximately 99% of which
were leased. From the Partnership's initial public offering in 1986 until March
31, 1995, the Partnership's properties were 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 Agreement were proposed by the
new management and approved by the Unitholders, which authorized the Partnership
to acquire additional restaurant properties not affiliated with BKC. Since
adoption of the amendments, the Partnership has acquired 109 properties for an
aggregate purchase price of approximately $57 million including 93 properties
acquired since January 1, 1996, and has entered into binding agreements to
acquire 39 additional properties (the "Acquisition Properties") for an aggregate
purchase price of approximately $27 million. Upon acquisition of the Acquisition
Properties, the Partnership's portfolio will consist of an aggregate of 270
properties in 40 states consisting of 170 Burger King restaurants, 40 Dairy
Queen restaurants, 27 Hardee's restaurants, 11 Pizza Hut restaurants, five
Schlotzsky's restaurants, two Chili's restaurants and 15 other properties, most
of which are regional brands.
The Partnership's management team consists of senior executives with
extensive experience in the acquisition, operation and financing of fast food
and casual dining restaurants. Mr. Stetson, the President - Chief Executive
Officer of the Managing General Partner is the former President of the Retail
Division and Chief Financial Officer of BKC, as well as the former Chief
Financial Officer of Pizza Hut, Inc. As a result, management has an extensive
network of contacts within the franchised fast food and casual dining restaurant
industry. Based on management's assessment of market conditions and its industry
knowledge and experience, the Partnership believes that substantial
opportunities exist for it to acquire additional properties on advantageous
terms.
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.
The total food service industry sales during 1995 have been estimated at
approximately $277 billion. The fast food segment, which offers value pricing
and convenience, is the largest segment in the restaurant industry with
projected 1996 sales of $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 segments 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, and fast food restaurant sales are anticipated
to grow 6.7% in 1996 to over $100 billion. Additionally, industry sources
suggest that in the fast food industry, operators are increasingly moving toward
leasing rather than owning their
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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 current restaurants, the
acquisition of additional restaurants or other uses.
Management believes, based on its industry knowledge and experience, that
the Partnership 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 Partnership also competes
with numerous private firms and private 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. A majority of chain restaurant properties are owned by restaurant
operators and real estate investors. Management believes, based on its industry
knowledge and experiences that this fragmented market provides the Partnership
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 Partnership provides the
Partnership with a competitive advantage when seeking to acquire a restaurant
property.
In addition to the Partnership's large number of leases to operators of
Burger King restaurants, the Partnership also leases multiple restaurant
properties to operators of Pizza Hut, Taco Bell, Hardee's and Dairy Queen brand
names, substantially all of which, according to industry sources, rank in the
top 15 with respect to restaurant sales in 1995. 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. With respect to the Burger King restaurants in the Partnership's
portfolio, for the year-ended December 31, 1995, same-store sales increased 7%
over the prior year.
STRATEGY
Since the adoption of the amendments to the Partnership Agreement in March
1995, the Partnership's principal business objective has been to expand and
diversify the Partnership's portfolio through frequent acquisitions of small to
medium-sized portfolios of fast food and casual dining restaurant properties.
The Partnership intends to achieve growth and diversification while maintaining
low portfolio investment risk through adherence to proven acquisition criteria
with a conservative capital structure. The Partnership has and 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 Partnership takes 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 Partnership's investment criteria. Management
believes, based on its industry knowledge and experience, that relative to
other real estate sectors, restaurant properties provide numerous
acquisition opportunities at attractive yields.
-INVEST IN MAJOR RESTAURANT BRANDS. The Partnership 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 franchisees. Certain of the Partnership's
Current Properties are also operated as Pizza Hut, KFC and Taco Bell
restaurants. Management believes, based on its industry knowledge and
experience, that successful restaurants operated under these brands offer
stable, consistent income to the Partnership 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 Partnership's strategy is to focus
primarily on the acquisition of existing fast food and casual dining chain
restaurants that have a history of profitable
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operations with a remaining term on the current lease of at least five
years. The average remaining lease term for the Current Properties is nine
years. Management believes, based on its industry knowledge and experience,
that acquiring existing restaurants provides a higher risk-adjusted rate of
return to the Partnership 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) result in a more attractive
valuation because the size of such transactions generally does not attract
large institutional property owners and smaller buyers typically are not
well capitalized and may be unable to complete a transaction. 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
Partnership has identified, evaluated and pursued portfolios valued at up
to $50 million that present attractive risk/return ratios and recently
closed a transaction of approximately $18 million.
-MAINTAIN CONSERVATIVE CAPITAL STRUCTURE. The Partnership intends to
maintain a ratio of total indebtedness of 50% or less to the greater of (i)
the market value of all issued and outstanding Units plus total outstanding
indebtedness ("Total Market Capitalization") or (ii) the original cost of
all of the Partnership's properties as of the date of such calculation. The
Partnership's ratio of total indebtedness to Total Market Capitalization
was approximately 30% at June 11, 1996. See "Capitalization." The
Partnership, however, may from time to time reevaluate its borrowing
policies in light of then-current economic conditions, relative costs of
debt and equity capital, market values of properties, growth and
acquisition opportunities and other factors.
INVESTMENT CRITERIA
The Partnership has recently acquired 93 restaurant properties and intends
to acquire additional restaurant 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:
-The rent on such restaurant properties has produced cash flow that, after
deducting management fees and interest and debt amortization or Unit
issuance, would improve the Partnership'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 restaurant 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 restaurant properties would be in good repair and operating condition.
The Managing General Partner receives acquisition proposals from a number of
sources. The Managing General Partner utilizes two independent real estate
professionals who assist the Partnership in examining and analyzing proposed
acquisitions of property. These professionals are compensated principally upon
the Partnership's closing of an acquisition of property. There can be no
assurance that the Managing General Partner will be able to identify restaurant
properties that satisfy all or a significant number of such criteria, or that if
identified, the Partnership will be able to purchase such restaurant properties.
The Partnership believes that the Partnership can generate improved
operating results as a result of the acquisition of additional restaurant
properties and by making loans to tenants for
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renovation and improvement of the Current Properties. The Partnership also
believes that expansion and diversification of the Partnership's restaurant
property portfolio to include more balance among restaurant brands decreases the
Partnership's dependence on one chain.
THE PROPERTIES
At June 11, 1996, the Current Properties consisted of 231 properties, 99% of
which were leased by operators of fast food and casual dining restaurants. In
addition, at such date the Acquisition Properties (totaling 39) were subject to
binding agreements of acquisition. Set forth below are summary descriptions of
the Current Properties and Acquisition Properties.
BURGER KING PROPERTIES. At June 11, 1996, the Partnership owned 170
properties operated as Burger King restaurants. The Burger King restaurant
properties that are part of the Current Properties are operated by more than 80
operators, the largest of which operates five Burger King restaurants.
HARDEE'S PROPERTIES. At June 11, 1996, the Partnership owned two properties
in Georgia and has entered into agreements to acquire 25 additional properties
in Georgia and South Carolina operated as Hardee's restaurants. The Hardee's
restaurant properties that are part of the Current Properties are operated by
two operators, the larger of which operates 23 Hardee's restaurants.
DAIRY QUEEN PROPERTIES. At June 11, 1996, the Partnership owned 40
properties operated as Dairy Queen restaurants, all in Texas. The Dairy Queen
restaurant properties are operated by two operators.
CHILI'S PROPERTIES. At June 11, 1996, the Partnership owned two properties
in Texas which are operated by a single operator.
OTHER PROPERTIES. At June 11, 1996, the Partnership owned 31 additional
properties, most of which were operated under other major national and regional
brand names, including, but not limited to, Pizza Hut, KFC and Taco Bell. The
Partnership may, from time to time, acquire restaurant properties operated under
brand names less-established than major national and regional brands. The
Partnership does not intend to acquire a significant number of such properties.
BURGER KING-Registered Trademark- IS A REGISTERED TRADEMARK OF BURGER KING
BRANDS, INC., SCHLOTZSKY'S-Registered Trademark- IS A REGISTERED TRADEMARK OF
SCHLOTZSKY'S, INC., DAIRY QUEEN-Registered Trademark- IS A REGISTERED TRADEMARK
OF AMERICAN DAIRY QUEEN CORPORATION, PIZZA HUT IS A REGISTERED TRADEMARK OF
PIZZA HUT, INC., HARDEE'S-Registered Trademark- IS A REGISTERED TRADEMARK OF
HARDEE'S FOOD SYSTEMS, INC., CHILI'S-Registered Trademark- IS A REGISTERED
TRADEMARK OF BRINKER RESTAURANT CORPORATION, KFC-Registered Trademark- IS A
REGISTERED TRADEMARK OF KFC CORPORATION AND TACO BELL-Registered Trademark- IS A
REGISTERED TRADEMARK OF TACO BELL CORP. THE FOREGOING ENTITIES HAVE NOT ENDORSED
OR APPROVED THE PARTNERSHIP OR THE OFFERING MADE HEREBY.
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The Partnership's Current Properties consist of 231 properties. The table
below sets forth, as of June 11, 1996, the number of properties in each state
and the franchise affiliation of such properties assuming the consummation of
the Acquisition Properties.
<TABLE>
<CAPTION>
TOTAL BURGER DAIRY PIZZA
STATE PROPERTIES KING QUEEN HARDEE'S HUT CHILI'S OTHER
- ------------------------------------------------------------ ---------- ------ ----- -------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Alabama..................................................... 2 1 1
Arizona..................................................... 15 13 1 1
Arkansas.................................................... 6 6
California.................................................. 17 15 2
Colorado.................................................... 3 3
Connecticut................................................. 3 3
Delaware.................................................... 1 1
Florida..................................................... 8 6 2
Georgia..................................................... 32 7 24 1
Illinois.................................................... 1 1
Indiana..................................................... 3 2 1
Iowa........................................................ 2 2
Kansas...................................................... 2 2
Kentucky.................................................... 3 3
Louisiana................................................... 4 4
Maine....................................................... 4 4
Maryland.................................................... 3 2 1
Massachusetts............................................... 3 3
Michigan.................................................... 4 4
Minnesota................................................... 1 1
Mississippi................................................. 2 2
Missouri.................................................... 3 3
Montana..................................................... 1 1
Nebraska.................................................... 1 1
Nevada...................................................... 1 1
New Jersey.................................................. 5 5
New Mexico.................................................. 1 1
New York.................................................... 5 5
North Carolina.............................................. 9 8 1
Ohio........................................................ 9 9
Oklahoma.................................................... 5 3 1 1
Oregon...................................................... 5 5
Pennsylvania................................................ 13 13
South Carolina.............................................. 9 6 2 1
Tennessee................................................... 5 3 2
Texas....................................................... 64 9 40 1 2 12
Vermont..................................................... 1 1
Washington.................................................. 7 7
West Virginia............................................... 2 2
Wisconsin................................................... 5 5
-- --
---------- ------ ----- ----- -----
Total....................................................... 270(1) 169 40 27 11 2 21
-- --
-- --
---------- ------ ----- ----- -----
---------- ------ ----- ----- -----
% Total................................................... 100% 63% 15% 10% 4% 1% 7%
-- --
-- --
---------- ------ ----- ----- -----
---------- ------ ----- ----- -----
</TABLE>
- ------------------------
(1) Includes one vacant restaurant property.
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<PAGE>
LEASES WITH RESTAURANT OPERATORS
The Partnership's strategy is to acquire operating restaurant properties
rather than developing new properties. Typically, the Partnership acquires a
property that has been operated as a fast food or casual dining restaurant and
which is subject to a lease with a remaining term of five-20 years and a
co-terminous franchise agreement. Management believes, based on its experience,
that this strategy reduces the Partnership's financial risk since the restaurant
operated on such property has a proven operating record which mitigates the risk
of default or non-renewal under the lease. At June 11, 1996, the Current
Properties have remaining lease terms ranging from one to 28 years.
Substantially all of the Partnership'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 Partnership'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 Partnership 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, consequently,
decrease the percentage of total revenues from percentage rental revenues. In
addition, in order to encourage the early renewal of existing leases, the
Partnership has offered certain lessees remodeling grants of up to $30,000. To
date, the Partnership has renewed 18 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 Partnership generally acquires properties from third party lessors or
from operators in a sale/ leaseback transaction in which the operator sells the
property to the Partnership 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 a 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 Current Properties and Acquisition Properties.
LEASE EXPIRATION SCHEDULE
<TABLE>
<CAPTION>
NUMBER OF LEASES NET RENTAL
YEAR EXPIRING % OF TOTAL INCOME (1) % OF TOTAL
- ------------------------------------------ ----------------- ----- ----------- -----
<S> <C> <C> <C> <C>
1996...................................... 0 0 $ 0 0
1997...................................... 7 3 367 2
1998...................................... 9 4 675 3
1999...................................... 22 8 1,731 9
2000...................................... 35 13 2,108 10
2001-05................................... 87 32 6,892 34
2006-10................................... 11 4 806 4
2011-15................................... 12 4 1,214 6
2016-25................................... 86 32 6,487 32
--- --- ----------- ---
269(2) 100% $ 20,280 100%
--- --- ----------- ---
--- --- ----------- ---
</TABLE>
- ------------------------
(1) Net Rental Income equals the higher of (i) 1995 rentals (including any
percentage rents based upon sales in 1995), or (ii) the base rent in the
last year of the lease, less (iii) ground rents in the last year of the
lease.
(2) Excludes one vacant restaurant property.
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<PAGE>
OWNERSHIP OF REAL ESTATE INTERESTS
The Partnership's Current Properties and Acquisition Properties consist of
190 properties where the Partnership owns both the land and the restaurant
building in fee simple (the "Fee Properties"), one property where the
Partnership owns only the land and the building is owned by the tenant and 79
properties where the Partnership leases the land, the building or both (the
"Leasehold Properties") under leases from third-party lessors.
Of the 79 Leasehold Properties, 14 are Primary Leases, whereby the
Partnership leases from a third party both the underlying land and the
restaurant building and the other improvements thereon and then subleases the
property to the restaurant operator. Under the terms of the remaining 65
Leasehold Properties (the "Ground Leases"), the Partnership leases the
underlying land from a third party and owns 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. At
June 11, 1996, the remaining terms of the Primary Leases and Ground Leases
ranged from one to 21 years. With renewal options exercised, the remaining terms
of the Primary Leases and Ground Leases ranged from approximately five to 35
years and the average remaining term was 21 years.
The terms and conditions of each Primary Lease and each Ground Lease vary
substantially. However, each Primary Lease and each Ground Lease 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
(although not always) are not based upon a percentage of sales of the
restaurants thereon, and (iii) the Partnership 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 Partnership may renew the
term one or more times at its option (although the provisions governing any such
renewal vary significantly in that, for example, 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 Partnership, upon the termination or expiration thereof, to
remove all improvements situated on the property.
Although the Partnership, 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 Partnership
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 Partnership 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
Partnership from any of its obligations under the Primary Lease or Ground Lease,
including the obligation to pay rent.
Of the Current Properties, 70 are leased or subleased 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 Partnership assumed the rights and obligations of BKC under the
Leases/Subleases. Five properties are leased to BKC on substantially the same
terms and conditions as those contained in the Lease/Sublease with the prior
lessees.
Although the provisions of BKC's standard form of lease to franchisees have
changed over time, the material provisions of the Lease/Subleases generally are
substantially similar to BKC's current standard form of lease (except to the
extent BKC has granted rent reductions or deferrals or made other lease
modifications in order 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 opening of the
Restaurant and do not grant the lessee any renewal options or purchase options.
The Partnership, however, is required under the Partnership Agreement to
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<PAGE>
renew a Lease/Sublease if BKC renews or extends the lessee's Franchisee
Agreement. The Partnership believes BKC's policy generally is to renew a
Franchise Agreement if BKC determines, in its sole discretion, that economic and
other factors justify renewal or extension and if the franchisee has complied
with all obligations under the Franchise Agreement. At June 11, 1996, the
remaining terms of all the Leases/Subleases ranged from approximately one to 25
years, and the average remaining term was nine years.
USE AND OTHER RESTRICTIONS ON THE OPERATION AND TRANSFER OF BURGER KING
RESTAURANT PROPERTIES
The Partnership 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 Agreement
contains provisions that state, except as expressly permitted by BKC, that the
Partnership may not use such properties for any purpose other than to operate a
Burger King restaurant. In furtherance thereof, the Partnership Agreement (i)
requires the Partnership, 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) imposes
certain restrictions and limitations upon the Partnership's ability to sell,
lease, or otherwise transfer any interest in such properties. The Partnership
Agreement requires the Partnership to provide BKC notice of default under a
Lease/Sublease and an opportunity to cure such defaults prior to taking any
remedial action. The Partnership Agreement also requires the Partnership under
certain circumstances to provide tenants with assistance with remodeling costs.
Such terms with respect to such properties imposed on the Partnership by the
Partnership Agreement may be less favorable than those imposed upon other
lessors of Burger King restaurants. BKC has advised the Partnership that it
intends to waive or not impose certain of the restrictive provisions contained
in the Partnership Agreement and the Partnership is discussing BKC's position
with BKC to clarify such provisions.
RESTAURANT ALTERATIONS AND RECONSTRUCTION
It is important that the Current Properties be improved, expanded, rebuilt,
or replaced from time to time. 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 in
order to modify the appearance of the restaurant to reflect the then current
image requirements for Burger King restaurants. Most of the Current Properties
that are operating as Burger Kings are 15 to 20 years old, and the Partnership
believes that many of these properties require substantial improvements to
maximize sales, and the condition of many of these properties is below BKC's
current image requirements.
Recently, in order to encourage the early renewal of existing
Leases/Subleases, the Partnership has established an "Early Renewal Program"
whereby the Partnership has offered to certain tenants the right to renew
existing Leases/Subleases for up to an additional 20 years in consideration for
remodeling grants for the properties of up to $30,000. As a result of this
Program, to date, the Partnership has extended the lease term for 18
Leases/Subleases. The purpose of this Program is to extend the term of existing
Leases/Subleases prior to the end of the lease term and to enhance the value of
the underlying property to the Partnership.
COMPETITION
The restaurants operated on the properties are subject to significant
competition (including competition from other national and regional fast food
restaurant chains, including 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
Partnership depends, in part, on the ability of the restaurants operated on the
properties to compete successfully with such businesses. The Partnership does
not anticipate that it will seek to engage directly in or meet such competition.
Instead, the Partnership will be dependent
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<PAGE>
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 Partnership 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 Partnership competes 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 Partnership competes with numerous private firms and private
individuals, for the acquisition of restaurant properties. Such investors may
have greater financial resources than the Partnership.
REGULATION
The Partnership, 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 Partnership'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 Partnership'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 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.
The Partnership is not currently a party to any litigation or administrative
proceeding with respect to any property's compliance with environmental
standards. Furthermore, the Partnership is not aware of nor does it 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
which would have a material adverse effect upon the Company.
AMERICANS WITH DISABILITIES ACT ("ADA"). 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 Partnership or a property of the Partnership is not in
compliance with the ADA could result in the imposition of fines, injunctive
relief, damages or attorney's fees. The Partnership's leases contemplate that
compliance with the ADA is the responsibility of the operator. The Partnership
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
Partnership.
LAND-USE; FIRE AND SAFETY REGULATIONS. In addition, the Partnership and its
restaurant operators are required to operate the properties in compliance with
various laws, land-use regulations, fire and safety regulations and building
codes as may be applicable or later adopted by the governmental
36
<PAGE>
body or agency having jurisdiction over the location or the property or the
matter being regulated. The Partnership does not believe that the cost of
compliance with such regulations and laws will have a material adverse effect
upon the Partnership.
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 Partnership's leases provide for
compliance by the restaurant operator with all health regulations and
inspections and require that the restaurant operator obtain insurance to cover
liability for violation of such regulations or the interruption of business due
to closure caused by failure to comply with such regulations. The Partnership is
not currently a party to any litigation or administrative proceeding with
respect to the compliance with health regulations of any property it finances,
and does not anticipate any such action or proceeding that would have a material
adverse effect upon the Partnership.
INSURANCE
The Partnership requires its lessees to maintain adequate comprehensive
liability, fire, flood and extended loss insurance provided by reputable
companies with commercially reasonable and customary deductibles and limits and
the Partnership is an additional named insured under such policies. Certain
types and amounts of insurance are required to be carried by each restaurant
operator under the leases with the Partnership and the Partnership actively
monitors tenant compliance with this requirement. The Partnership intends to
require lessees of subsequently acquired property, including the Acquisition
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 Partnership's properties (including the Current Properties and the
Acquisition 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
Partnership 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
Partnership's investment. Inflation, changes in building codes and ordinances,
environmental considerations, and other factors also might make it infeasible to
use insurance proceeds to replace a facility after it has been damaged or
destroyed. Under such circumstances, the insurance proceeds received by the
Partnership might not be adequate to restore its economic position with respect
to such property.
PAYMENTS TO THE MANAGING GENERAL PARTNER
The Partnership pays the Managing General Partner a non-accountable (no
support is required for payment) annual allowance designed to cover the costs
that the Managing General Partner incurs in connection with the management of
the Partnership and the Properties (other than reimbursements for out-of-pocket
expenses paid to third parties). The allowance is adjusted annually to reflect
any cumulative increases in the Consumer Price Index occurring after January 1,
1986, and was $585,445 for the year ended December 31, 1995. The allowance is
paid quarterly, in arrears.
In addition, to compensate the Managing General Partner for its efforts and
increased internal expenses resulting from 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 1% of the
purchase price for such property and (ii) an annual fee equal to 1% of the
purchase price for such property, adjusted for increases in the Consumer Price
Index. For 1995, the one-time acquisition fee equaled $109,238 which was
capitalized and the increased annual fee equaled $29,375. This creates an
incentive for the Managing General Partner to cause the Partnership to purchase
more properties, to pay higher prices therefor, and to sell existing properties
or to use more leverage to make such purchases. See "Risk Factors -- Conflicts
of Interest."
In addition, if the Rate of Return (as defined in the Partnership Agreement)
on the Partnership's equity in all additional properties exceeds 12% per annum
for any fiscal year, the Managing General Partner will be paid an additional fee
equal to 25% of the cash flow received with respect to such
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additional properties in excess of the cash flow representing a 12% rate of
return thereon. However, to the extent the Managing General Partner receives
distributions in excess of those provided by its 1.98% Partnership interest,
such distributions will reduce the fee payable with respect to such excess cash
flow from any additional properties. See "Partnership Allocations" below. Except
as provided above, such payments are in addition to distributions made by the
Partnership to the Managing General Partner in its capacity as a partner in the
Partnership. The Partnership may pay or reimburse the Managing General Partner
for payments to affiliates for goods or other services if the price and the
terms for providing such goods or services are fair to the Partnership and not
less favorable to the Partnership than would be the case if such goods or
services were obtained from or provided by an unrelated third party.
PARTNERSHIP ALLOCATIONS
Net cash flow from operations of the Partnership that is distributed is
allocated 98.02% to the Unitholders and 1.98% to the Managing General Partner
until the Unitholders have received a simple (non-cumulative) annual return for
such year equal to 12% of the Unrecovered Capital per Unit (as defined in the
Partnership Agreement; such Unrecovered Capital is currently $19.68 per Unit and
will be adjusted to give effect to the issuance of the Units hereunder in order
to make the Unrecovered Capital uniform for all outstanding Units) reduced by
any prior distributions of net proceeds of capital transactions); then any
distributed cash flow for such year is allocated 75.25% to the Unitholders and
24.75% to the Managing General Partner until the Unitholders have received a
total simple (non-cumulative) annual return for such year equal to 17.5% of the
Unrecovered Capital Per Unit; and then any excess distributed cash flow for such
year is allocated 60.4% to the Unitholders and 39.6% to the Managing General
Partner. The Partnership may retain otherwise distributable cash flow to the
extent the Managing General Partner deems appropriate.
Net proceeds from financing and sales or other dispositions of the
Partnership's properties are allocated 98.02% to the Unitholders and 1.98% to
the Managing General Partner until the Unitholders have received an amount equal
to the Unrecovered Capital Per Unit plus a cumulative, simple return equal to
12% of the balance of their Unrecovered Capital Per Unit outstanding from time
to time (to the extent not previously received from distributions of prior
capital transactions); then such proceeds are allocated 75.25% to the
Unitholders and 24.75% to the Managing General Partner until the Unitholders
have received a total cumulative, simple return equal to 17.5% of the
Unrecovered Capital per Unit; and then such proceeds are allocated 60.4% to the
Unitholders and 39.6% to the Managing General Partner. The Partnership may
retain otherwise distributable net proceeds from financing and sales or other
dispositions of the Partnership's properties to the extent the Managing General
Partner deems appropriate.
Operating income and loss of the Partnership for each year generally is
allocated between the Managing General Partner and the Unitholders in the same
aggregate ratio as cash flow is distributed or distributable for that year. Gain
and loss from a capital transaction generally is allocated among the Managing
General Partner and the Unitholders in the same aggregate ratio as net proceeds
of the capital transaction are distributed or distributable except to the extent
necessary to reflect capital account adjustments. In the case of both operating
income or loss and gain or loss from capital transactions, however, the amount
of such income, gain or loss allocated to the Managing General Partner and the
Unitholders for the year will not necessarily equal the total cash distributed
to the Managing General Partner and the Unitholders for such year. Upon transfer
of a Unit, tax items allocable thereto generally will be allocated among the
transferor and the transferee based on the period during the year that each
owned the Unit, with each Unitholder on the last day of the month being treated
as a Unitholder for the entire month.
REIT CONVERSION
The Partnership, together with its legal and financial advisors, is
currently evaluating the merits of converting to a self-advised, self-managed
REIT. A conversion to a REIT involves numerous complex legal, financial and tax
issues that must be analyzed fully before determining whether
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converting to a REIT is in the best interests of the Partnership and the
Unitholders. Moreover, any such conversion must be approved by the limited
partners in accordance with the terms of the Partnership Agreement.
The Partnership anticipates that the necessary analysis will be completed in
the fourth quarter of 1996. If the Partnership determines that converting to a
REIT is in the best interests of the Partnership and the Unitholders, the
conversion process is anticipated to be commenced prior to December 31, 1996,
and should be completed as soon as possible thereafter, which the Partnership
anticipates being prior to December 31, 1997.
A REIT is not subject to federal income tax provided that certain
restrictions are complied with. These restrictions are extensive and affect the
structure and operations of REITs.
A REIT is structured as a corporation, trust or association which is managed
by one or more trustees or directors. A self-advised, self-managed REIT is a
REIT that is managed by the officers of the REIT and not by a third party. The
Partnership has indicated that even if it does not convert to a REIT that it may
become self-advised and self-managed, subject to the approval of the limited
partners. This would entail the officers of the Managing General Partner
becoming officers of the Partnership and being compensated by the Partnership.
Currently, the Partnership compensates the Managing General Partner for managing
the Partnership and acquiring properties, which in turn compensates its officers
and employees.
EMPLOYEES
The Partnership and the Managing General Partner each currently employ five
individuals on either a full or part-time basis. In addition, the Managing
General Partner retains, at the expense of the Partnership on an independent
contract basis, other parties in connection with the operation of the
Partnership and the Current Properties, including auditing, legal, property
origination and other services.
LEGAL PROCEEDINGS
The Partnership is not presently involved in any material litigation nor, to
its knowledge, is any material litigation threatened against the Partnership or
its properties, other than routine litigation arising in the ordinary course of
business.
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