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__U.S. RESTAURANT PROPERTIES MASTER L.P.__
5310 HARVEST HILL ROAD, SUITE 270, L.B. 168
DALLAS, TEXAS 75230
(972) 387-1487
(800) 322-9827
Dear Limited Partner:
We are seeking your approval to convert U.S. Restaurant Properties Master
L.P. ("USRP") to a self-advised real estate investment trust ("REIT"). This
conversion will not change either the strategy of the company or the
"flow-through" tax advantages the company currently enjoys. The conversion will
be tax-free, and the shares of the company will continue to be traded on the New
York Stock Exchange ("NYSE") under our current trading symbol, "USV." YOUR VOTE
ON THIS MATTER IS IMPORTANT--NOT VOTING COUNTS AS A NO VOTE, SO PLEASE SEND IN
YOUR PROXY.
WHY CONVERT TO THE REIT STRUCTURE? The answer is to enhance investor value
by employing a structure (I.E. a REIT as opposed to a master limited partnership
("MLP")) that is more widely accepted and endorsed by investors, particularly
institutional investors. Currently, there are only four NYSE-traded MLPs that
invest in real estate, of which USRP is one. On the other hand, there are
approximately 150 NYSE-traded REITs, and a vast majority of those are
"self-advised." As a self-advised REIT, the company should enjoy greater access
to lower-cost debt financing, which should increase profits and the cash
available for dividends. Also, the company believes that it would enjoy more
participation from institutional investors, which should increase the stock
price relative to remaining an MLP. As the company continues to grow and its
financing requirements grow with it, we believe that self-advised REIT status
has become very important to our future.
WHAT IS A "SELF-ADVISED" REIT? In a self-advised REIT, the management is
employed by the REIT, rather than by an external advisor, such as the managing
general partner arrangement the company currently uses. To become self advised,
your managing general partner will convert its property management contract and
convert its aggregate 1.98% partnership interest in exchange for REIT shares (or
equivalent partnership interests), all management fees will cease and the
management team of your managing general partner will become employees of the
REIT. In exchange for their contractual interests, the managing general partner
will receive consideration (consisting of an interest in U.S. Restaurant
Properties Operating L.P., shares of REIT common stock and/or units in USRP)
equal in value to 850,000 REIT shares (the "Initial Shares"), and will be
eligible to receive additional shares in the year 2000 if certain targets are
reached (collectively, the "Acquisition Price"). Following the receipt of the
Initial Shares, all management fees will cease. The assignment and conversion
will increase the cash available for dividends to the stockholders, and will
increase net income above what it would otherwise have been.
The Acquisition Price was approved by a special committee of outside
directors of the managing general partner, and the special committee has
received a fairness opinion with respect to such exchange from the investment
banking firm Morgan Keegan & Company, Inc.
WILL THE REIT CONVERSION INCREASE CASH AVAILABLE FOR DIVIDENDS? Based on all
acquisitions closed through April 30, 1997, by becoming a self-advised REIT, the
cash
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available for dividends per share will increase. On a pro forma basis, giving
effect to all acquisitions completed plus the acquisition of the approximately
$26 million of properties currently under binding contract, the cash available
for dividends per share would have been $2.66 in 1996 if USRP had been a
self-advised REIT on the terms described above and in the attached Proxy
Statement/Prospectus, $.04 per share more on a pro forma basis than in its
present structure as an advised entity. As a frame of reference, the cash
available for distributions per unit was $2.09 for the fiscal year ended
December 31, 1996. In addition, any property acquisitions in excess of the
properties currently under contract will add to the already accretive nature of
the transaction. There can be no assurance that all of such properties will be
acquired or that additional properties will be available at prices acceptable to
the company. Additionally, pro forma results are not necessary indicative of
what the company's financial position would have been had such transactions
occurred on the assumed date.
It has been just 26 months since the limited partners approved amendments to
the partnership agreements which enabled USRP to expand. Since that approval,
the price of the Units on the New York Stock Exchange has risen more than 80%,
and partnership dividends, net income and cash available for distributions have
all increased substantially. Your approval of the conversion is important to
take the company to its next stage of growth and progress.
There are two alternative ways in which the REIT conversion can be completed
on a tax-free basis: the "merger alternative" and "the exchange alternative"
(see the attached Proxy Statement/Prospectus for a detailed description of the
alternatives). The merger alternative is the simpler approach and is preferred
by management, but to ensure that this approach is tax-free we have asked the
Internal Revenue Service to confirm its tax free status. In the event that the
IRS does not provide that confirmation, then the exchange alternative must be
used, and it will provide the same advantages of REIT conversion. TO ENSURE THAT
USRP CONVERTS TO A REIT, YOU MUST VOTE FOR BOTH THE MERGER AND THE EXCHANGE
ALTERNATIVES ON YOUR PROXY CARD.
We encourage you to read the Proxy Statement/Prospectus and then vote your
Units in favor of the conversion by filling out the enclosed proxy card and
returning it to D.F. King & Co. in the enclosed, self-addressed, stamped
envelope. Not voting is the same as voting against the conversion, so we urge
everyone to vote. If you have any questions, please call us toll free at
(800-322-9827). Thank you for your consideration of the conversion.
Best Regards,
Robert Stetson Fred Margolin
Chief Executive Officer Chairman of the Board
Managing General Partner Managing General Partner
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U.S. RESTAURANT PROPERTIES MASTER L.P.
----------------
NOTICE OF A SPECIAL MEETING OF
THE LIMITED PARTNERS ON JUNE 30, 1997
------------------------
To the Limited Partners of
U.S. RESTAURANT PROPERTIES MASTER L.P.:
A special meeting (the "Special Meeting") of the limited partners (the
"Limited Partners") of U.S. Restaurant Properties Master L.P. ("USRP") will be
held at the offices of USRP, at 5310 Harvest Hill Road, Suite 270, Dallas, Texas
on June 30, 1997 at 10:00 a.m., or at any adjournment thereof, to consider and
vote upon two alternative proposals to implement the proposed conversion (the
"Conversion") of USRP into a real estate investment trust ("REIT").
The Conversion will be effected through one of two alternatives (i) the
Merger Alternative or (ii) the Exchange Alternative. The Merger Alternative
would be effected through a tax-free merger (the "Merger") of USRP Acquisition,
L.P., a Delaware limited partnership that is an indirectly wholly-owned
subsidiary of U.S. Restaurant Properties, Inc., a newly formed Maryland
corporation (the "REIT Corporation") which intends to qualify as a REIT under
federal tax laws, with and into USRP and, as a result, USRP will become a
subsidiary of the REIT Corporation. U.S. Restaurant Properties Operating L.P.
(the "Operating Partnership" and, together with USRP, the "Partnerships") will
remain in existence following consummation of the Merger. The result of the
Merger would be that holders of units of beneficial interest of USRP (the
"Units") would become stockholders of the REIT Corporation. Consummation of the
Merger is contingent upon the receipt of a satisfactory ruling from the Internal
Revenue Service as to the tax-free nature of the Merger.
In the event such ruling is not received, the Conversion will be phased in
through the implementation of amendments to the partnership agreement of USRP to
permit holders of Units to exchange their Units for shares of the REIT
Corporation's common stock at any time and to require such an exchange prior to
the transfer of the Units to third parties, all as more fully described in the
accompanying Proxy Statement/ Prospectus (the "Exchange Alternative"). As a
result, following consummation of the Conversion, each Unitholder will
effectively become a stockholder of the REIT Corporation. The Exchange
Alternative will be implemented only if USRP does not receive a favorable ruling
with respect to the tax-free nature of the Merger.
In addition, as part of the Conversion, in order for the REIT Corporation to
become self-advised, QSV Properties, Inc. (formerly U.S. Restaurant Properties,
Inc.), the Managing General Partner of USRP ("QSV"), will withdraw as managing
general partner of USRP and a corporate subsidiary of the REIT Corporation will
be substituted as managing general partner of USRP pursuant to the terms of the
merger agreement. As a result, as part of each of the Merger Alternative and the
Exchange Alternative, the consent of the Limited Partners is being sought for
certain amendments to the partnership agreements of the Partnerships to provide
for the withdrawal of QSV as managing general partner and to provide the
Partnerships with increased flexibility to pursue business opportunities that
compliment their existing business strategy.
As there are two alternative methods proposed to implement the Conversion,
Limited Partners who support the Conversion should vote in favor of both the
Merger Alternative and the Exchange Alternative. The accompanying Proxy
Statement/Prospectus describes the Conversion and the Merger Alternative and the
Exchange Alternative in greater detail.
Only Limited Partners of record as of the close of business on April 30,
1997, are entitled to notice of, and to vote at, the Special Meeting. Such
Limited Partners may vote at the Special Meeting either in person or by proxy.
If you cannot attend the Special Meeting, please complete, sign, date and return
the accompanying proxy card in the enclosed stamped and self-addressed envelope
so that the proxyholders may vote the Units that you hold as a Limited Partner
pursuant to your instructions. If you attend the Special Meeting, you may revoke
your proxy and vote such Units in person.
Very truly yours,
QSV PROPERTIES, INC.,
(FORMERLY U.S. RESTAURANT PROPERTIES,
INC.)
THE MANAGING GENERAL PARTNER
Dallas, Texas
May 12, 1997
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U.S. RESTAURANT PROPERTIES, INC.
U.S. RESTAURANT PROPERTIES MASTER L.P.
PROXY STATEMENT/PROSPECTUS
---------------------
This Proxy Statement/Prospectus relates to the proposed conversion (the
"Conversion") of U.S. Restaurant Properties Master L.P. ("USRP") into a real
estate investment trust ("REIT"). The REIT Corporation (as defined below) will
be self-advised and will continue to expand the property ownership, management,
acquisition and marketing operations of USRP, through U.S. Restaurant Properties
Operating, L.P. (the "Operating Partnership" and, together with USRP, the
"Partnerships"). Upon completion of the Conversion, the Operating Partnership
will become a subsidiary of the REIT Corporation and the units of beneficial
interest of USRP (the "Units") will be eligible for sale on the New York Stock
Exchange (the "NYSE") as shares of common stock, $.001 par value per share (the
"Common Stock"), of the REIT Corporation. This Proxy Statement/Prospectus and
the accompanying form of proxy are first being mailed to the limited partners of
USRP (the "Limited Partners") on or about May 12, 1997.
This Proxy Statement/Prospectus is being furnished to the Limited Partners
in connection with the solicitation of proxies by QSV Properties, Inc. (formerly
U.S. Restaurant Properties, Inc.), in its capacity as the managing general
partner (the "Managing General Partner") of USRP, for use at the special meeting
of Limited Partners to be held on June 30, 1997 (the "Special Meeting"). At the
Special Meeting, the Limited Partners will be asked to approve the two
alternative proposals to effect Conversion of USRP into a REIT: (i) the Merger
Alternative and (ii) the Exchange Alternative.
The Merger Alternative would be effected through the tax-free merger of USRP
with a partnership subsidiary of the REIT Corporation, with USRP being the
surviving entity (the "Merger") and, as a result, becoming a subsidiary of the
REIT Corporation. See "The Conversion--The Merger Alternative." Pursuant to the
Merger, each holder of Units ("Unitholders") will receive one share of Common
Stock for each Unit so held. Consummation of the Merger is contingent upon the
receipt of a satisfactory ruling from the Internal Revenue Service (the "IRS")
as to the tax-free nature of the Merger.
In the event such ruling is not received, the Conversion will be phased in
through the implementation of amendments to the partnership agreement of USRP to
permit Unitholders to exchange their Units for shares of Common Stock at any
time and to require such an exchange prior to the transfer of the Units to third
parties (the "Exchange Alternative"). The Exchange Alternative will be
implemented only if USRP does not receive a favorable ruling with respect to the
tax-free nature of the Merger.
In addition, as part of the Conversion, in order for the REIT Corporation to
become self-advised, the Managing General Partner will withdraw as managing
general partner of the Partnerships (with a corporate subsidiary of the REIT
Corporation being substituted as general partner of both Partnerships). In
conjunction therewith, the Managing General Partner will (i) convert its
interest in (a) its allocable share of income, profits, loss and distributions
of the Operating Partnership as general partner thereof, and (b) fees and
disbursements for the acquisition and management of the Operating Partnership's
properties (together, the "Operating Partnership General Partner Interest"),
payable to it pursuant to the terms of the partnership agreement of the
Operating Partnership or assign such interest to USRP (depending upon how the
Conversion is effected) and (ii) convert its interest in USRP (together with the
conversion described above, the "Termination") for shares of Common Stock, an
interest in the Operating Partnership and/or Units (depending upon how the
Conversion is effected) having in the aggregate a value initially equal to
850,000 shares of Common Stock and will be eligible to receive additional
consideration in the year 2000 (together, the "Acquisition Price"). Following
the Termination, the executive officers and other employees of the Managing
General Partner will become executive officers and employees of the REIT
Corporation and no further management fees will be payable. As a result, the
Company will become self-advised. See "The Conversion--Termination of Operating
Partnership General Partner Interest." As a result, as part of each of the
Merger Alternative and Exchange Alternative, the consent of the Limited Partners
is being sought for certain amendments to the partnership agreements of the
Partnerships to provide for the withdrawal of the Managing General Partner and
to provide the Partnerships with increased flexibility to pursue business
opportunities that compliment their existing business strategy.
SEE "RISK FACTORS," WHICH BEGINS ON PAGE 28, FOR CERTAIN FACTORS RELEVANT TO
THE CONVERSION AND AN INVESTMENT IN THE COMMON STOCK, INCLUDING:
- CONFLICT OF INTEREST OF THE MANAGING GENERAL PARTNER IN ESTABLISHING THE
ACQUISITION PRICE, WHICH WAS MITIGATED BY ESTABLISHING THE SPECIAL
COMMITTEE.
(CONTINUED ON NEXT PAGE)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is May 7, 1997.
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- THE CONVERSION WILL RESULT IN CERTAIN BENEFITS TO THE MANAGING GENERAL
PARTNER AND ITS AFFILIATES. IN PARTICULAR, AS A RESULT OF THE TERMINATION,
THE MANAGING GENERAL PARTNER WILL RECEIVE THE ACQUISITION PRICE, THEREBY
ENABLING IT TO REALIZE THE PRESENT VALUE OF PROJECTED PAYMENTS OTHERWISE
PAYABLE TO IT OVER A PERIOD OF YEARS PURSUANT TO THE OPERATING PARTNERSHIP
GENERAL PARTNER INTEREST. IN ADDITION, ROBERT J. STETSON AND FRED H.
MARGOLIN, EXECUTIVE OFFICERS AND DIRECTORS OF THE MANAGING GENERAL
PARTNER, WILL ENTER INTO EMPLOYMENT CONTRACTS WITH THE REIT CORPORATION.
- CERTAIN MATERIAL DIFFERENCES EXIST BETWEEN THE RIGHTS OF HOLDERS OF UNITS
AND HOLDERS OF SHARES OF COMMON STOCK, PRIMARILY RELATING TO MANAGEMENT,
VOTING RIGHTS AND THE RIGHT TO COMPEL DISSOLUTION.
- ABSENCE OF DISSENTERS' APPRAISAL RIGHTS; ALL UNITHOLDERS WILL BE BOUND BY
THE VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING UNITS.
- NO ASSURANCE THAT THE MARKET PRICE OF THE COMMON STOCK WILL INITIALLY OR
THEREAFTER EQUAL THE MARKET PRICE OF THE UNITS.
- CERTAIN ANTITAKEOVER PROVISIONS EXIST IN THE COMPANY'S AMENDED ARTICLES OF
INCORPORATION THAT MAY HAVE THE EFFECT OF DISCOURAGING A CHANGE IN CONTROL
UNDER CIRCUMSTANCES THAT COULD GIVE HOLDERS OF COMMON STOCK AN OPPORTUNITY
TO REALIZE A PREMIUM OVER THE THEN PREVAILING MARKET PRICES.
- LIMITATION ON PERCENTAGE OWNERSHIP OF SHARES OF COMMON STOCK AND OTHER
TRANSFER RESTRICTIONS.
- TAXATION OF THE REIT CORPORATION AS A CORPORATION IF IT FAILS TO QUALIFY
AS A REIT.
- STOCKHOLDERS WILL EXPERIENCE DILUTION IN THEIR PERCENTAGE INTEREST IN THE
COMPANY UPON FUTURE ISSUANCES OF SHARES OF COMMON STOCK, WHICH GENERALLY
DO NOT REQUIRE STOCKHOLDER APPROVAL.
- ACQUISITION AND EXPANSION RISKS, INCLUDING THE FAILURE TO ACQUIRE
PROPERTIES CURRENTLY UNDER CONTRACT, THE INABILITY TO REFINANCE DEBT AS IT
MATURES AND THE DIFFICULTY OF MANAGING A RAPIDLY EXPANDING PROPERTY
PORTFOLIO.
- THE INVESTMENT AND FINANCING POLICIES OF THE REIT CORPORATION WILL BE
DETERMINED BY ITS BOARD OF DIRECTORS AND CAN BE CHANGED AT ANY TIME
WITHOUT STOCKHOLDER APPROVAL.
A special committee (the "Special Committee"), consisting of the independent
members of the Board of Directors of the Managing General Partner has reviewed
and made recommendations with respect to the Acquisition Price (as hereinafter
defined) to be received by the Managing General Partner in connection with the
Termination. The Special Committee retained independent legal counsel and
retained Morgan Keegan & Company, Inc., as its independent financial advisor,
which has expressed its opinion that the Acquisition Price is fair to the
Unitholders from a financial point of view.
This Proxy Statement/Prospectus also constitutes a prospectus of U.S.
Restaurant Properties, Inc., a Maryland corporation (the "REIT Corporation"),
with respect to up to 7,687,584 shares of Common Stock to be issued by the REIT
Corporation pursuant to either (i) the merger agreement to be entered into
between the REIT Corporation and USRP in the event the Conversion is effected
pursuant to the Merger Alternative, or (ii) the exchange of Units for shares of
Common Stock in accordance with the terms and conditions of USRP's amended
partnership agreement in the event the Conversion is effected pursuant to the
Exchange Alternative.
On May 5, 1997, the last reported sale price of the Units on the NYSE was
$28.25 per Unit.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN OR INCORPORATED BY REFERENCE INTO
THIS PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES
OR THE OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE REIT CORPORATION OR USRP. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE COMMON STOCK OFFERED HEREBY
SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE REIT CORPORATION OR USRP SINCE THE DATE HEREOF OR
THAT THE INFORMATION SET FORTH OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY
SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO
ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN
OFFER OR PROXY SOLICITATION.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES CERTAIN DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. USRP UNDERTAKES TO PROVIDE
COPIES OF SUCH DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE), WITHOUT CHARGE, TO ANY
PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS
IS DELIVERED, UPON WRITTEN OR ORAL REQUEST TO PRESIDENT, QSV PROPERTIES, INC.,
5310 HARVEST HILL ROAD, SUITE 270, DALLAS, TEXAS 75230 (TELEPHONE (972)
387-1487, FAX (972) 490-9119). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, SUCH REQUESTS SHOULD BE RECEIVED BY MAY 30, 1997.
AVAILABLE INFORMATION
USRP is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports and other information with the Securities and Exchange Commission
(the "Commission"). Reports, proxy statements and other information filed by
USRP can be inspected and copied at the public reference facilities maintained
by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at Seven World Trade Center, 13th Floor, New York,
New York 10048 and CitiCorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60621-2511. Copies of such material can be obtained by mail
from the Public Reference Section of the Commission at 450 West Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. Such reports, proxy
statements and other information may also be obtained from the web site that the
Commission maintains at http://www.sec.gov. In addition, reports, proxy
statements and other information concerning USRP may be inspected at the offices
of the NYSE, 20 Broad Street, New York, New York 10005.
Reports, proxy statements and other information concerning USRP may also be
obtained electronically through a variety of databases, including, among others,
the Commission's Electronic Data Gathering and Retrieval ("EDGAR") program,
Knight-Ridder Information Inc., Federal Filing/Dow Jones and Lexis/ Nexis.
The REIT Corporation has filed with the Commission a Registration Statement
on Form S-4 (together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Common Stock to be issued pursuant to the
Conversion. This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which have
been omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement. Any
statements contained herein concerning the provisions of any document filed as
an exhibit to the Registration Statement or otherwise filed with the Commission
are not necessarily complete, and in each instance reference is made to the copy
of such document so filed. Each such statement is qualified in its entirety by
such reference.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by USRP with the Commission
pursuant to the Exchange Act, are incorporated herein by reference:
(1) Annual Report on Form 10-K for the fiscal year ended December 31, 1996,
as amended by the Form 10-K/A filed May 2, 1997;
(2) Current Report on Form 8-K dated December 30, 1996, as amended by the
Form 8-K/A filed January 21, 1997, as further amended by the Form 8-K/A
filed February 11, 1997, and as further amended by the Form 8-K/A filed
April 3, 1997;
(3) Current Report on Form 8-K dated April 14, 1997; and
(4) Registration Statement on Form 8-A dated February 6, 1986 and Amendment
No. 1 to Registration Statement on Form 8-A dated February 20, 1986.
All documents filed by USRP pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Proxy Statement/Prospectus and
prior to the date of the Special Meeting shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement/ Prospectus to the extent that a statement
contained herein or in any other subsequently filed document that also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus, including documents incorporated by
reference, contain forward-looking statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. Forward-looking
statements are inherently subject to risks and uncertainties, many of which
cannot be predicted with accuracy and some of which might not even be
anticipated. Future events and actual results, financial and otherwise, may
differ materially from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed under the captions "Risk Factors" and "Management's Discussion
and Analysis of Results of Operations and Financial Condition." In addition,
factors that could cause actual results of the Company to differ materially from
those contemplated by or projected, forecasted, estimated or budgeted in forward
looking statements relating to the results of operations and business of the
Company following the Conversion include the following possibilities: (i) the
expected cost savings to be realized are not made or unanticipated offsetting
costs are incurred, and (ii) costs or difficulties related to the conversion to
a real estate investment trust are greater than expected. Accordingly, there can
be no assurance that the actual results will conform to the forward-looking
statements contained in this Proxy Statement/Prospectus.
3
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TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION...................................................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ 3
FORWARD-LOOKING STATEMENTS................................................................................. 3
SUMMARY.................................................................................................... 10
Overview of the Conversion............................................................................... 10
The Special Meeting...................................................................................... 10
Risk Factors............................................................................................. 11
Disadvantages of the Conversion.......................................................................... 12
Advantages of the Conversion............................................................................. 13
Advantages to Unitholders.............................................................................. 13
Advantages to the Managing General Partner/Management.................................................. 14
Recommendation of the Managing General Partner........................................................... 15
Conflicts of Interest.................................................................................... 15
The Company.............................................................................................. 16
USRP................................................................................................... 16
The REIT Corporation................................................................................... 16
Business and Acquisition Strategy...................................................................... 17
Mechanics of the Conversion.............................................................................. 17
The Merger Alternative................................................................................. 17
Exchange Alternative................................................................................... 19
Termination of the Operating Partnership General Partner Interest........................................ 19
General................................................................................................ 19
The Fairness Opinion................................................................................... 20
Analysis of Alternatives Considered...................................................................... 20
Continuation of USRP................................................................................... 20
Liquidation of USRP.................................................................................... 21
Allocation of Shares of Common Stock Among Unitholders and the Managing General Partner.................. 21
No Dissenters' Appraisal Rights.......................................................................... 21
Tax Consequences of the Conversion....................................................................... 21
Tax Consequences of the Merger Alternative............................................................. 21
REIT Status............................................................................................ 22
Certain Taxes Imposed on a REIT........................................................................ 23
Distribution Requirements.............................................................................. 23
Tax Consequences of the Exchange Alternative........................................................... 23
Summary of Comparison of Taxation of Stockholders and Unitholders........................................ 24
Taxation of Stockholders............................................................................... 24
Taxation of Unitholders................................................................................ 25
Effects of the Conversion on Rights of Unitholders....................................................... 25
Comparison of Rights of Unitholders and Stockholders..................................................... 27
Market Prices of Units and Distributions................................................................. 26
RISK FACTORS............................................................................................... 28
Conflicts of Interest.................................................................................... 28
Benefits to Managing General Partner/Management.......................................................... 28
Material Differences in Rights of the Units and Common Stock............................................. 28
Absence of Appraisal Rights.............................................................................. 29
Substitution of Trading of Common Stock for Units........................................................ 29
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Effect of Certain Antitakeover Provisions and Ownership Limits on Change in Control...................... 29
Charter Provisions..................................................................................... 29
Staggered Board........................................................................................ 30
Preferred Stock........................................................................................ 30
Meetings of Stockholders............................................................................... 30
Business Combinations.................................................................................. 30
Control Share Acquisitions............................................................................. 30
Restrictions on Transfer................................................................................. 31
Adverse Consequences of Failure to Qualify as a REIT; Other Tax Liabilities.............................. 31
Future Dilution.......................................................................................... 32
Acquisition and Expansion Risks.......................................................................... 32
Failure to Acquire Acquisition Properties.............................................................. 32
Risk of Failure to Refinance Existing Indebtedness..................................................... 32
No Limitation on Incurrence of Debt.................................................................... 32
Risks that the Company May Not Be Able to Manage Expanded Portfolio.................................... 32
No Restrictions on Changes in Investment, Financing and Other Policies................................... 33
Adverse Effect of Increases in Interest Rates............................................................ 33
Possible Adverse Tax Consequences of the Conversion...................................................... 33
Risk that IRS Withdraws Ruling......................................................................... 33
Risk of Loss of Partnership Status..................................................................... 33
Investment Concentration in Single Industry.............................................................. 34
Dependence on Success of Burger King..................................................................... 34
Failure to Renew Leases and Franchise Agreements......................................................... 34
Real Estate Investment Risks............................................................................. 34
General Risks.......................................................................................... 34
Illiquidity of Real Estate May Limit Its Value......................................................... 35
Possible Environmental Liabilities..................................................................... 35
Costs of Compliance with Americans with Disabilities Act............................................... 36
Uninsured and Underinsured Losses Could Result in Loss of Value of Facilities.......................... 36
Dependence on Key Personnel.............................................................................. 36
Impact of Competition on Operations...................................................................... 36
Acquisitions........................................................................................... 36
Operations............................................................................................. 37
Risks Associated with Property Development............................................................... 37
Risks Newly-Constructed Restaurant Properties Do Not Perform as Expected................................. 37
THE COMPANY................................................................................................ 38
History and Structure of USRP............................................................................ 38
The REIT Corporation..................................................................................... 38
Strategy................................................................................................. 39
THE CONVERSION............................................................................................. 41
Background of the Conversion............................................................................. 41
Disadvantages of the Conversion.......................................................................... 41
Possible Disadvantages Resulting from REIT Status...................................................... 41
Loss of Section 754 Benefits........................................................................... 42
Restrictions on Transfer of Shares of Common Stock..................................................... 42
Modification of Investing and Financing Policies....................................................... 42
Advantages of the Conversion............................................................................. 43
Advantages to Unitholders.............................................................................. 43
Advantages to the Managing General Partner/Management.................................................. 44
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The Merger Alternative................................................................................... 45
The Merger Agreement................................................................................... 45
Amendments to the Partnership Agreements............................................................... 47
Exchange Alternative..................................................................................... 49
Termination of the Operating Partnership General Partner Interest........................................ 49
General................................................................................................ 49
Operating Partnership General Partner Interest and USRP Interest....................................... 49
The Acquisition Price.................................................................................. 50
REIT Corporation Officer Compensation.................................................................. 51
Withdrawal Agreement................................................................................... 51
Conflicts of Interest.................................................................................. 52
Analysis of the Special Committee........................................................................ 52
Fairness Opinion......................................................................................... 55
Morgan Keegan Fairness Opinion......................................................................... 55
Experience of Morgan Keegan............................................................................ 56
Summary of Matters Considered.......................................................................... 56
Scope of Opinion....................................................................................... 57
Assumptions............................................................................................ 57
Analysis and Conclusion................................................................................ 57
Compensation and Material Relationships................................................................ 60
Analysis of Alternatives Considered...................................................................... 61
Continuation of USRP................................................................................... 61
Liquidation of USRP.................................................................................... 61
Comparison of Values..................................................................................... 61
Continuation of USRP................................................................................... 61
Liquidation of USRP.................................................................................... 61
Allocation of Shares of Common Stock Among Unitholders and the Managing General Partner.................. 62
Executive Compensation................................................................................... 62
No Dissenters' Appraisal Rights.......................................................................... 63
Costs of the Conversion.................................................................................. 63
Consequences If Conversion Is Not Approved............................................................... 64
Fiduciary Duties......................................................................................... 64
Accounting Treatment..................................................................................... 65
THE SPECIAL MEETING........................................................................................ 66
Eligible Units........................................................................................... 66
Required Legal Opinion................................................................................... 66
Required Vote............................................................................................ 66
Abstentions and Broker Non-Votes......................................................................... 67
Proxies.................................................................................................. 67
Revocation of Proxies.................................................................................... 67
Proxy Solicitor.......................................................................................... 67
Solicitations by the Managing General Partner............................................................ 67
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION AND OTHER DATA..................................... 68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION...................... 70
Overview................................................................................................. 70
Results of Operations.................................................................................... 70
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Cash Flow from Operations Based Upon Taxable Income...................................................... 71
Liquidity and Capital Resources.......................................................................... 71
Inflation................................................................................................ 72
Seasonality.............................................................................................. 72
BUSINESS................................................................................................... 73
General.................................................................................................. 73
Industry................................................................................................. 73
Investment Criteria...................................................................................... 74
Properties............................................................................................... 75
Leases with Restaurant Operators......................................................................... 77
Ownership of Real Estate Interests....................................................................... 78
Use and Other Restrictions on the Operation and Transfer of BURGER KING Restaurant Properties............ 79
Restaurant Alterations and Reconstruction................................................................ 79
Competition.............................................................................................. 79
Regulation............................................................................................... 80
Environmental Regulation............................................................................... 80
Americans With Disabilities Act........................................................................ 80
Land-Use and Safety Regulations........................................................................ 81
Health Regulations..................................................................................... 81
Insurance................................................................................................ 81
Employees................................................................................................ 81
Legal Proceedings........................................................................................ 81
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................................................................ 82
Investment Policies...................................................................................... 82
Investments in Real Estate or Interests in Real Estate................................................. 82
Investments in Real Estate Mortgages................................................................... 82
Securities of or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers.... 82
Periodic Review of Assets.............................................................................. 82
Financing Policies....................................................................................... 83
Affiliate Transaction Policy............................................................................. 84
Certain Other Policies................................................................................... 84
PRICE RANGE OF UNITS AND DISTRIBUTION POLICY............................................................... 85
USE OF PROCEEDS............................................................................................ 86
CAPITALIZATION............................................................................................. 87
MANAGEMENT................................................................................................. 88
Directors and Executive Officers......................................................................... 88
Executive Compensation................................................................................... 89
Employment Agreements.................................................................................... 89
Indemnification Agreements............................................................................... 90
Insurance................................................................................................ 90
Certain Transactions with Related Parties................................................................ 90
PRINCIPAL STOCKHOLDERS..................................................................................... 90
DESCRIPTION OF CAPITAL STOCK............................................................................... 91
Description of Securities................................................................................ 91
General.................................................................................................. 91
Common Stock............................................................................................. 91
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Preferred Stock.......................................................................................... 92
Restrictions on Transfer................................................................................. 92
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE REIT CORPORATION'S ARTICLES AND BYLAWS....................... 94
Classification of the Board of Directors................................................................. 94
Limitation of Liability and Indemnification.............................................................. 95
Business Combinations.................................................................................... 96
Control Share Acquisitions............................................................................... 96
Amendment to the Articles................................................................................ 97
Dissolution of the Company............................................................................... 97
Advance Notice of Director Nominations and New Business.................................................. 97
Meetings of Stockholders................................................................................. 97
COMPARATIVE RIGHTS OF UNITHOLDERS AND STOCKHOLDERS......................................................... 98
General.................................................................................................. 98
Management............................................................................................... 98
Voting Rights............................................................................................ 98
Special Meetings......................................................................................... 99
Amendment of Master Partnership Agreement and Articles of Incorporation.................................. 99
Limited Liability........................................................................................ 100
Dissolution of the Partnership and the REIT Corporation and Termination of REIT Status................... 100
Liquidation Rights....................................................................................... 101
Limitations of Liability of General Partners and Directors............................................... 101
Indemnification.......................................................................................... 101
Derivative Actions....................................................................................... 102
Inspection of Books and Records.......................................................................... 102
Distributions and Dividends.............................................................................. 102
FEDERAL INCOME TAX CONSIDERATIONS.......................................................................... 103
A. The Merger Alternative................................................................................ 103
1. Qualification as Nonrecognition Transaction........................................................ 103
2. Tax Consequences to USRP........................................................................... 104
3. Tax Consequences to Unitholders.................................................................... 105
4. Tax Consequences to the REIT Corporation........................................................... 107
5. Tax Consequences of the REIT Corporation's Qualification as a REIT................................. 107
B. The Exchange Alternative.............................................................................. 116
1. Partnership Status................................................................................. 116
2. Partner Status..................................................................................... 118
3. Tax Consequences of Unit Ownership................................................................. 118
4. Tax Treatment of Operations........................................................................ 120
5. Alternative Minimum Tax............................................................................ 122
6. Tax-Exempt Entities, Regulated Investment Companies and Foreign Investors.......................... 122
7. Uniformity of Units................................................................................ 123
8. Disposition of Units: Exchange for Shares in the REIT Corporation.................................. 123
9. Constructive Termination or Dissolution of Partnership............................................. 125
10. Partnership Income Tax Information Returns and Partnership Audit Procedures........................ 125
11. Information Return Filing Requirements............................................................. 126
12. Nominee Reporting.................................................................................. 126
13. State and Other Taxes.............................................................................. 126
C. Differences between a Partnership and a REIT.......................................................... 127
ERISA CONSIDERATIONS....................................................................................... 128
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Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs.......................................... 128
Status of the Company under ERISA........................................................................ 129
LEGAL MATTERS.............................................................................................. 129
EXPERTS.................................................................................................... 129
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
APPENDIXES
A. Agreement and Plan of Merger.......................................................................... A-1
B. Fairness Opinion...................................................................................... B-1
C. Material Amendments to Master Partnership Agreement................................................... C-1
D. Material Amendments to Operating Partnership Agreement................................................ D-1
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN OR
INCORPORATED BY REFERENCE INTO THIS PROXY STATEMENT/PROSPECTUS AND THE
APPENDICES HERETO. LIMITED PARTNERS ARE URGED TO READ CAREFULLY THIS PROXY
STATEMENT/PROSPECTUS AND THE APPENDICES HERETO IN THEIR ENTIRETY. AS USED IN
THIS PROXY STATEMENT/PROSPECTUS, UNLESS OTHERWISE REQUIRED BY THE CONTEXT, THE
TERM "REIT CORPORATION" MEANS U.S. RESTAURANT PROPERTIES, INC., A MARYLAND
CORPORATION, THE TERM "USRP" MEANS U.S. RESTAURANT PROPERTIES MASTER L.P., THE
TERM "OPERATING PARTNERSHIP" MEANS U.S. RESTAURANT PROPERTIES OPERATING L.P.,
AND THE TERM "MANAGING GENERAL PARTNER" MEANS QSV PROPERTIES, INC. (FORMERLY
U.S. RESTAURANT PROPERTIES, INC., A DELAWARE CORPORATION), IN ITS CAPACITY AS
MANAGING GENERAL PARTNER OF EACH OF THE PARTNERSHIPS. USRP AND THE OPERATING
PARTNERSHIP ARE GENERALLY REFERRED TO TOGETHER HEREIN AS THE "PARTNERSHIPS." ALL
REFERENCES HEREIN TO THE "COMPANY" WHEN USED WITH RESPECT TO THE ACQUISITION,
OWNERSHIP AND OPERATION OF THE PROPERTIES REFER TO THE COMBINED OPERATIONS OF
THE PARTNERSHIPS, PRIOR TO THE CONVERSION, AND THE COMBINED OPERATIONS OF THE
REIT CORPORATION AND THE PARTNERSHIPS, AS APPLICABLE, FOLLOWING THE CONVERSION.
OVERVIEW OF THE CONVERSION
This Proxy Statement/Prospectus relates to a proposal to convert USRP into a
REIT in a tax-free transaction. As it is presently constituted, USRP is a
publicly-traded limited partnership. As a result of the Conversion, the
Operating Partnership will become a subsidiary of the REIT Corporation and the
Units will be eligible for sale on the NYSE as shares of Common Stock. The REIT
Corporation will become
"self-advised" through the conversion by the Managing General Partner of the
Operating Partnership General Partner Interest and the subsequent employment of
the management team of the Managing General Partner by the REIT Corporation. FOR
THE CONVERSION TO BE COMPLETELY APPROVED, THE AFFIRMATIVE VOTE OF THE HOLDERS OF
MORE THAN 50% OF THE TOTAL NUMBER OF OUTSTANDING UNITS IS REQUIRED FOR APPROVAL
OF BOTH THE MERGER ALTERNATIVE AND THE EXCHANGE ALTERNATIVE. ACCORDINGLY,
ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
CONVERSION.
THE SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING. The Special Meeting will be held
on Monday, June 30, 1997, at 10:00 a.m. (Dallas time), at the offices of USRP,
5310 Harvest Hill Road, Suite 270, Dallas, Texas. At the Special Meeting, the
Limited Partners will be asked to approve the Conversion through the approval of
both the Merger Alternative and the Exchange Alternative.
RECORD DATE; LIMITED PARTNERS ENTITLED TO VOTE. The Managing General
Partner has fixed the close of business on April 30, 1997 as the record date
(the "Record Date") for the determination of Limited Partners entitled to notice
of, and to vote at, the Special Meeting and any adjournment thereof. On the
Record Date, USRP had issued and outstanding 7,610,708 Units.
VOTING AND REVOCATION OF PROXIES. To vote by proxy, a Limited Partner must
complete, sign, date and deliver the proxy card to D. F. King & Company before
the Special Meeting. Unless indicated to the contrary on the proxy card, the
directions given on the proxy card will be for all of the Units that such
Limited Partner may vote. If a Limited Partner signs and returns a proxy card
without giving any directions, the proxyholder will vote such Limited Partner's
Units for the approval of both the Merger Alternative and the Exchange
Alternative.
A Limited Partner may revoke its proxy at any time prior to the
proxyholder's voting of the Units to which such proxy applies by: (i) submitting
a later dated proxy to D.F. King & Company or someone else who attends the
Special Meeting, (ii) attending the Special Meeting and delivering a written
notice of revocation of the proxy to the representative of D.F. King & Company
present at the Special Meeting, or (iii) delivering a written notice of
revocation of the proxy to D.F. King & Company at 77 Water Street, New York, New
York 10005, which D.F. King & Company receives on or before June 27, 1997.
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RISK FACTORS
The Conversion and an investment in shares of Common Stock involve certain
risks. Such risks include, among others:
- A majority of the members of the Board of Directors of the Managing
General Partner, by virtue of their ownership interests in and/or
positions or affiliations with the Managing General Partner were subject
to a conflict of interest in determining the Acquisition Price. This risk
has been mitigated by the appointment of the Special Committee consisting
of the two unaffiliated directors.
- The Conversion will result in certain benefits to the Managing General
Partner and its affiliates. In particular, as a result of the Termination,
the Managing General Partner will receive the Acquisition Price, thereby
enabling it to realize the present value of projected payments otherwise
payable to it over a period of years pursuant to the Operating Partnership
General Partner Interest. In addition, Robert J. Stetson and Fred H.
Margolin, executive officers and directors of the Managing General
Partner, will enter into employment contracts with the REIT Corporation.
- Material differences exist between the rights of holders of the Units and
holders of shares of Common Stock, primarily relating to management,
voting rights and the right to compel dissolution.
- Unitholders are afforded no dissenters' appraisal rights or other similar
rights in connection with the Conversion under applicable law or the
Master Partnership Agreement, nor will such rights be voluntarily accorded
to the Unitholders by the Company. Consequently, all Unitholders will be
bound by the vote of Unitholders owning a majority of the outstanding
Units.
- It is possible that the per share prices at which the Common Stock trades
will be less than the per Unit prices at which the Units have traded. As a
result, the value of the stockholders' investment in the REIT Corporation
following the Conversion could be lower than the value of their investment
in USRP prior to the Conversion.
- The potential anti-takeover effect of limiting individual share ownership
to 8.75% of the outstanding Common Stock (with certain exceptions) and
certain other provisions contained in the organizational documents of the
Company, such as the ability to issue shares of preferred stock, the
staggered board of directors and the business combination provision, any
of which may discourage a change in control and may limit any opportunity
for the Company's stockholders to receive a premium for their Common
Stock.
- The ownership limit provided for in the REIT Corporation's Amended
Articles of Incorporation (the "Articles") may restrict the transfer of
Common Stock.
- Taxation of the REIT Corporation as a corporation if it fails to qualify
as a REIT and the REIT Corporation's liability for certain federal, state
and local income taxes in such event.
- Future dilution in the percentage interest of the Company held by holders
of Common Stock as a result of the issuance of additional shares of Common
Stock in connection with any public offering by the REIT Corporation to
raise additional equity capital.
- Risks associated with the acquisition and expansion of the Company
including the failure to acquire properties currently under contract,
uncertainty that the Company will be able to refinance its indebtedness
when due and the risk of higher interest rates or other unfavorable terms
on debt incurred to refinance such indebtedness, and the risk of potential
increases in leverage due to the absence of a provision in the
organizational documents of the Company that limits the amount of debt
that the Company may incur.
- The ability of the REIT Corporation's board of directors (the "REIT
Board") to change the investment, financing and other policies of the
Company at any time without stockholder approval.
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- Increases in market interest rates may lead prospective purchasers of the
Common Stock to demand a higher annual yield from future distributions,
which may adversely affect the market price of the Common Stock.
- The implementation of the Merger Alternative will depend upon the receipt
of a favorable ruling from the IRS, which will be conditioned upon certain
representations and warranties that, if subsequently determined to be
inaccurate, would result in the IRS no longer being bound by the ruling.
- Concentration on fast food and casual dining restaurant properties.
- Dependence on the success of Burger King.
- Possible rent defaults and failure to renew leases and franchise
agreements.
- Real estate investment risks, such as the effect of economic and other
conditions on restaurant property values (including the dependence of the
properties on the economies of the metropolitan areas where they are
located), the ability of the properties to generate revenues sufficient to
meet operating expenses, including future debt service, the illiquidity of
real estate investments, potential liability of the Company for unknown or
future environmental liabilities and costs of compliance with the
Americans with Disabilities Act of 1990 and similar laws, and potential
losses in the event of a casualty or other liability that is uninsurable
or not economically insurable.
- The dependence of the Company on the efforts of its executive officers,
particularly Robert J. Stetson and Fred H. Margolin.
- Competition from other entities and individuals in the acquisition of
triple net leased restaurant properties and from other national and
regional fast food restaurant chains.
- New project development risks, including construction delays or costs that
may exceed budgeted or contracted amounts, new project commencement risks
such as receipt of zoning, occupancy and other required governmental
approvals and permits and the incurrence of development costs in
connection with projects that are not pursued to completion.
- The risk that newly-constructed restaurant properties will not produce
desired revenue levels (and, therefore, lease rentals) once opened.
For a more thorough discussion of each of these risks, see "Risk Factors."
DISADVANTAGES OF THE CONVERSION
The Board of Directors of the Managing General Partner (the "Board of
Directors") believes that the Conversion may have the following disadvantages
which it believes will be substantially outweighed by the advantages discussed
below:
- The REIT Corporation was organized and intends to conduct its operations
so as to qualify for taxation as a REIT under the applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code"). A qualified
REIT may avoid paying federal income tax because it is allowed to deduct
certain dividends or distributions paid to its stockholders in computing
its taxable income. To qualify as a REIT, the REIT Corporation is
required, among other things, to meet certain stock ownership, income,
asset and distribution rules and tests. Under certain circumstances, the
failure of the REIT Corporation to meet the qualification rules and tests
could cause the REIT Corporation to be taxed as a corporation, in which
case dividends paid to the stockholders would not be deductible by the
REIT Corporation in computing its taxable income, subjecting the REIT
Corporation to entity-level taxes to which USRP is not subject.
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- A person who acquires Units is entitled to certain benefits relating to
basis adjustments under Section 754 of the Code upon the sale or exchange
of Units or the death of a Unitholder. There will be no Section 754
adjustments upon the sale or exchange of shares of Common Stock or the
death of a stockholder of the REIT Corporation. The basis adjustments
attributable to Unitholders will
become part of the REIT Corporation's basis for its assets at the time of
the Conversion. Unitholders who would have been entitled to additional
depreciation deductions attributable to such adjustments will no longer be
able to use such deductions to reduce their share of annual income from
distributions from the REIT Corporation. The REIT Corporation's
depreciation deductions will be allocated ratably among the stockholders
of the REIT Corporation in determining the portion of the distributions by
the REIT Corporation that will be taxable by the recipients thereof as
ordinary dividends. As a result, Unitholders with significant Section 754
adjustments (generally those who purchased their Units at higher prices
and on more recent dates) will generally recognize somewhat greater
amounts of taxable income each year following the Conversion then if the
Conversion had not occurred.
- Certain provisions of the Articles may have the effect of discouraging a
third party from making an acquisition proposal for the Company and may
thereby inhibit a change in control of the Company. In addition, the
Articles prohibit ownership either directly or indirectly under applicable
attribution rules of the Code of more than 8.75% of the shares of Common
Stock by any stockholder, subject to certain exceptions. Such ownership
limit may have the effect of preventing an acquisition of control of the
Company without the approval of the REIT Board. Finally, under Maryland
law, certain business combinations between a Maryland corporation and an
"Interested Stockholder" (as hereinafter defined) are prohibited for five
years after the most recent date on which the Interested Stockholder
became an Interested Stockholder. The existence of these contractual and
statutory prohibitions on the transfer of stock and the acquisition of
control may inhibit a change in control of the Company under circumstances
that could give the holders of shares of Common Stock the opportunity to
realize a premium over the then-prevailing market prices. The partnership
agreement of USRP (the "Master Partnership Agreement") does not contain
any such provisions, and USRP, as a Delaware limited partnership, is not
subject to the same statutory prohibitions on business combinations.
- The investment and financing policies of the Company following the
Conversion will be determined by the REIT Board. These policies may be
amended or revised at any time and from time to time at the discretion of
the REIT Board without a vote of the stockholders or partners, if any, of
the Company.
See "Risk Factors" and "The Conversion--Disadvantages of the Conversion."
ADVANTAGES OF THE CONVERSION
ADVANTAGES TO UNITHOLDERS
The Board of Directors is recommending that the Limited Partners vote in
favor of the Conversion by voting in favor of both the Merger Alternative and
the Exchange Alternative because it believes that the Conversion will result in
the following advantages to the Unitholders:
- As part of the Conversion, the Managing General Partner will be
withdrawing as managing general partner of the Partnerships, and as a
result, the REIT Corporation will become self-advised and will, as a
result of the termination of all management fees, have additional cash for
distribution to its stockholders. For the year ended December 31, 1996,
the Managing General Partner was paid $2.5 million with respect to the
Operating Partnership General Partner Interest and its general partner
interest in USRP (the "USRP Interest"). In addition, because the fee which
would be payable to the Managing General Partner pursuant to the Operating
Partnership General Partner Interest increases by at least 1% of the value
of new acquisitions, the savings to the Company from
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the Termination will continue to grow as the Company acquires additional
properties. Based on all acquisitions closed through April 30, 1997, as a
result of the Termination the cash available for distribution on a per
Unit basis will increase. As of April 30, 1997, the Company had
approximately $26 million worth of properties under binding contract.
Accordingly, on a pro forma basis, after giving effect to the Termination
and the acquisition of such additional properties, as of December 31,
1996, the cash available for distribution per Unit for 1996 would have
increased from $2.62 to $2.66. By way of comparison, the cash available
for distribution per Unit was $2.09 for the fiscal year ended December 31,
1996. There can be no assurance that all of such properties will be
acquired or that additional properties will be available at prices
acceptable to the Company. Additionally, pro forma results are not
necessarily indicative of what the Company's financial position would have
been had such transactions occurred on the issuance date. See "Risk
Factors-- Acquisition and Expansion Risks," "Selected Historical and Pro
Forma Financial Information and Other Data" and "Price Range of Units and
Distribution Policy." These initial savings in the first year are
partially offset by the one-time costs of completing the Conversion (all
of which are payable by USRP), currently estimated to be $580,000. See
"The Conversion--Costs of the Conversion."
- The greater number of investors that currently consider investments in
REITs as compared to partnerships may affect the market price per share of
Common Stock versus the market price per Unit, based on comparable levels
of the Company's operating performance, although no assurance can be given
that any increase will occur.
- Management believes that, based upon the large amounts of capital raised
by REITs during the past several years, the higher level of holdings by
institutional investors and the greater number of research analysts and
brokerage firms following and making markets in REITs as compared to real
estate limited partnerships, the Company may have greater access to public
and private sources of debt and equity capital than it now has,
potentially enabling the Company to raise capital on more favorable terms
than are now available. Because the Company's strategy is to continue to
acquire properties to increase earnings and dividends, the ability to
access more, lower cost capital should enable the Company to grow at a
more rapid rate.
- Following the Conversion, the Company will be able to raise additional
capital through the issuance of various classes of securities (including
preferred stock) which may not be dilutive to holders of Common Stock.
- Following the Conversion, the Operating Partnership will remain in
existence. As a result, the REIT Corporation will be an "umbrella
partnership" REIT ("UPREIT"), thereby permitting the Company to continue
to acquire properties in tax-free exchanges with other partnerships.
- The Conversion is expected to ultimately result in cost savings of
approximately $200,000 per year as a result of the elimination of the need
to generate and mail certain tax reporting information to Limited
Partners. Upon receipt of shares of Common Stock, Limited Partners will
also be relieved of having to deal with the burdensome and time consuming
Federal income tax reporting attributable to a publicly-traded
partnership. These initial savings in the first year are partially offset
by the one-time costs of completing the Conversion (all of which are
payable by USRP), currently estimated to be $580,000. See "The
Conversion--Costs of the Conversion."
ADVANTAGES TO THE MANAGING GENERAL PARTNER/MANAGEMENT
In addition to the advantages described above which apply to all Unitholders
(including the Managing General Partner following the Termination), the Managing
General Partner and management thereof will realize the following benefits from
the Conversion:
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- The Managing General Partner will receive an additional benefit from the
Conversion as a result of the receipt of the Acquisition Price (as
hereinafter defined) consisting of shares of Common Stock, Units and/or an
interest in the Operating Partnership as a result of the conversion of its
Operating Partnership General Partner Interest. Receipt of the Acquisition
Price enables the Managing General Partner to immediately realize the
present value of the projected payments otherwise payable to it pursuant
to the Operating Partnership General Partner Interest. The Acquisition
Price consists of (i) the 850,000 Initial Shares (as hereinafter defined),
which would have a value of $24,012,500 assuming the market price of an
Initial Share (which could be a share of Common Stock, a Unit or an
interest in the Operating Partnership) at the time of its issuance is
comparable to the market price of a Unit ($28.25 at May 5, 1997) and (ii)
up to 550,000 Contingent Shares (as hereinafter defined), which would have
a value of up to $15,537,500 assuming the market price of a Contingent
Share (which could be a Unit or an interest in the Operating Partnership)
at the time of its issuance is comparable to the market price of a Unit
($28.25 at May 5, 1997).
- Each of Messrs. Stetson and Margolin, the President and Chief Executive
Officer and Chairman of the Board, Secretary and Treasurer, respectively,
of the Managing General Partner, will be employed by the REIT Corporation
in similar capacities for compensation commencing at $250,000 per year,
subject to increases (up to a maximum annual salary and cash bonus of
$300,000 until the end of the year 2000) at the discretion of the REIT
Board, and will be eligible to receive annual incentive stock options.
See "The Conversion--Advantages of the Conversion." The advantages of the
Conversion should be considered by the Limited Partners in light of the
disadvantages of and the risks associated with the Conversion. See "Risk
Factors" and "The Conversion--Disadvantages of the Conversion."
RECOMMENDATION OF THE MANAGING GENERAL PARTNER
The Board of Directors has approved the Conversion and has determined that
the Conversion and each of the Merger Alternative and the Exchange Alternative
(to be implemented only if a favorable ruling as to the tax-free nature of the
Merger is not received from the Internal Revenue Service) are in the best
interests of, and on terms that are fair to, the Unitholders. The Managing
General Partner recommends approval and adoption of the Conversion by the
Unitholders. The Board of Directors believes that the Conversion will result in
the benefits to the Limited Partners described above under "--Advantages of the
Conversion." The Board of Director's substantive recommendations and conclusions
are based on the analysis of the advantages, the disadvantages and the risks of
converting from partnership to REIT form and making the changes in operating
format described herein. See "Risk Factors," "The Conversion-- Disadvantages of
the Conversion" and "--Advantages of the Conversion."
CONFLICTS OF INTEREST
In considering the recommendation of the Managing General Partner with
respect to the Conversion, the Limited Partners should be aware that a majority
of the members of the Board of Directors, by virtue of their ownership interests
in and/or positions or affiliations with the Managing General Partner, were
subject to conflicts of interest in determining the consideration to be received
by the Managing General Partner with respect to the Termination. Accordingly,
the Board of Directors appointed a special committee (the "Special Committee")
composed of the independent members thereof to negotiate the Acquisition Price
on behalf of the Unitholders. Neither member of the Special Committee is an
affiliate of, or otherwise has any economic interest in, the Managing General
Partner. Morgan Keegan & Company, Inc. ("Morgan Keegan"), the Special
Committee's financial advisor, has rendered an opinion that, as of the date
hereof, the Acquisition Price is fair, from a financial point of view, to the
Unitholders. The Board of Directors does not believe that the intention of the
members of the Special Committee to serve as directors of the REIT Corporation
following the Conversion results in a material conflict of interest.
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THE COMPANY
USRP
USRP acquires, owns and manages income-producing properties that it leases
on a triple net basis to operators of fast food and casual dining restaurants,
primarily BURGER KING-Registered Trademark- (BURGER KING-Registered Trademark-
is a registered trademark of Burger King Brands, Inc.) and other national and
regional brands, including DAIRY QUEEN-Registered Trademark- (DAIRY
QUEEN-Registered Trademark- is a registered trademark of American Dairy Queen
Corporation), HARDEE'S-Registered Trademark- (HARDEE's-Registered Trademark- is
a registered trademark of Hardee's Food Systems, Inc.) and
CHILI'S-Registered Trademark- (CHILI'S-Registered Trademark- is a registered
trademark of Brinker Restaurant Corporation). USRP acquires properties either
from third party lessors or from operators on a sale/leaseback basis. Under a
triple net lease, the tenant is obligated to pay all costs and expenses,
including all real property taxes and assessments, repairs and maintenance and
insurance. Triple net leases do not require substantial reinvestment by the
property owner and, as a result, more cash from operations may be used for
distributions to Unitholders or for acquisitions.
USRP is one of the largest publicly-owned entities in the United States
dedicated to acquiring, owning and managing restaurant properties. At April 30,
1997, USRP's portfolio consisted of 443 restaurant properties in 44 states (the
"Properties"), approximately 99.5% of which were leased. From USRP's initial
public offering in 1986 until March 31, 1995, USRP's portfolio was limited to
approximately 125 restaurant properties, all of which were leased on a triple
net basis to operators of Burger King restaurants. In May 1994, an investor
group led by Robert J. Stetson and Fred H. Margolin acquired the Managing
General Partner. In March 1995, certain amendments to the Partnership Agreements
were proposed by the new management and adopted by the Limited Partners which
amendments authorized USRP to acquire additional properties, including
restaurant properties not affiliated with Burger King Corporation ("BKC"). Since
adoption of the amendments, through April 30, 1997, USRP has acquired 321
properties for an aggregate purchase price of approximately $190 million,
including 305 properties acquired since January 1, 1996, and has entered into
binding agreements to acquire 41 additional restaurant properties (the
"Acquisition Properties") for an aggregate purchase price of approximately $26
million. Upon acquisition of the Acquisition Properties, USRP's portfolio will
consist of an aggregate of 484 properties in 44 states, consisting of 173 BURGER
KING restaurants, 42 DAIRY QUEEN restaurants, 30 GRANDY'S-Registered Trademark-
(GRANDY'S-Registered Trademark- is a registered trademark of Grandy's, Inc.)
restaurants, 31 HARDEE'S restaurants, 22 PIZZA HUT-Registered Trademark- (PIZZA
HUT-Registered Trademark- is a registered trademark of Pizza Hut, Inc.)
restaurants, 12 SCHLOTZSKY'S-Registered Trademark- (SCHLOTZSKY's is a registered
trademark of Schlotzsky's, Inc.) restaurants, eight CHILI'S restaurants, 76
ARBY'S-Registered Trademark- (ARBY'S-Registered Trademark- is a registered
trademark of Triarc Corp.) restaurants, 17 BRUEGGER'S
BAGEL-Registered Trademark- (BRUEGGER'S BAGEL-Registered Trademark- is a
registered trademark of Bruegger's Corporation) restaurants and 73 other
properties, most of which are regional brands.
USRP is a Delaware limited partnership. The principal executive offices of
USRP and the Managing General Partner are located at 5310 Harvest Hill Road,
Suite 270, Dallas, Texas 75230. The telephone number is (972) 387-1487.
THE REIT CORPORATION
The REIT Corporation is a newly-formed Maryland corporation, all of the
stock of which is currently owned by the Managing General Partner, that was
organized to succeed to the operations of USRP pursuant to the Conversion. The
REIT Corporation has not engaged in any activities other than in connection with
its organization and the Conversion. Upon consummation of the Conversion
pursuant to the Merger, the current partners of USRP will become stockholders of
the REIT Corporation and the Operating Partnership will become a subsidiary of
the REIT Corporation. In the event that the Exchange Alternative is used to
effect the Conversion, the REIT Corporation will become a limited partner of the
Operating Partnership and the Unitholders will have the right to exchange their
Units for shares of Common Stock.
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The principal executive offices of the REIT Corporation are located at 5310
Harvest Hill Road, Suite 270, Dallas, Texas 75230. The telephone number is (972)
387-1487.
BUSINESS AND ACQUISITION STRATEGY
After the Conversion, the Company's strategy will be to continue its
operations in substantially the same manner in which it has been operated and to
acquire, develop, own and manage additional properties throughout the United
States and internationally. In conjunction with the Conversion, the Partnership
Agreements are being amended to provide the Company with increased flexibility
to pursue other investment opportunities that arise during the ordinary course
of acquiring and leasing restaurant properties and that compliment its existing
business strategy. As part of its strategy of expanding its restaurant property
portfolio, the Company intends to build-out properties in conjunction with other
food vendors, such as convenience stores, and retail outlets and may, from time
to time, originate loans secured by real estate. See "The Company--Strategy" and
"Business--General."
The Company's primary business objective will be to maximize cash available
for distribution to its stockholders and partners, if any. The Company will seek
to achieve growth in cash available for distribution by aggressively managing
and leasing the Properties and by acquiring other restaurant properties. Cash
available for distribution will also be affected by external factors such as
inflation and changes in general economic conditions. The Company's business
objectives also include protecting the Company's capital and providing the
opportunity to realize capital growth from appreciation in the value of a
diversified portfolio of investments. There can be no assurance that these
objectives will be realized. The Company intends to continue to expand its
portfolio by acquiring triple net leased properties and structuring
sale/leaseback transactions consistent with its existing strategies prior to the
Conversion. Those strategies include focusing primarily on restaurant
properties, investing in major restaurant brands, acquiring existing
restaurants, consolidating smaller portfolios and maintaining a conservative
capital structure.
The Company's investments may be in any form of debt, equity, convertible or
hybrid instrument or combination thereof. Equity investments will generally be
made with the intention of a long-term holding period. Although debt investments
also are expected to be generally long-term in nature, the term of such
instruments is subject to individual circumstances. It is possible the Company's
investments may be subject to existing mortgage financing and other indebtedness
which have priority over the interests of the Company. The Company may pursue
its investment objectives independently and/or with other entities, through
joint ventures or other types of co-ownership, in which the Company may have a
majority or minority position. See "Policies with Respect to Certain
Activities--Investment Policies."
The Company's management team consists of senior executives with extensive
experience in the acquisition, operation and financing of fast food and casual
dining restaurants. As a result, management has an extensive network of contacts
within the franchised fast food and casual dining restaurant industry. See
"Management."
MECHANICS OF THE CONVERSION
THE MERGER ALTERNATIVE
GENERAL. If approved by the Unitholders, the Conversion will be effected by
the Merger Alternative unless the Company does not receive a satisfactory
private letter ruling (the "Ruling") from the Internal Revenue Service (the
"IRS") regarding the tax-free nature of the Merger prior to August 31, 1997, or
such later date as may be agreed to by the Special Committee, in its sole
discretion. If the Ruling is not received, the Conversion will be effected by
the Exchange Alternative. See "--The Exchange Alternative." If the Ruling is
satisfactory to the Managing General Partner, the Conversion would be effected
by the Merger Alternative pursuant to the terms and conditions of the Merger
Agreement. In accordance with the terms of the Merger Agreement, USRP
Acquisition, L.P. (the "REIT Sub"), a Delaware partnership that is an
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indirectly wholly-owned subsidiary of the REIT Corporation, will be merged with
and into USRP with USRP being the surviving entity. The Operating Partnership
will remain in existence following the Merger, with USRP, the REIT Corporation
and one or more of the REIT Corporation's corporate subsidiaries as the sole
partners thereof following consummation of the Merger.
If the Merger Alternative is approved by the Limited Partners and a
satisfactory Ruling is received from the IRS, the Conversion would be effected
by the Merger as follows:
- The Unitholders will receive in exchange for their Units one (1) share of
Common Stock for each Unit held by them prior to the Conversion, or an
aggregate of 7,796,254 shares of Common Stock (99% of all shares of Common
Stock to be outstanding immediately following the Conversion) on account
of the Unitholders' aggregate 99% interest in USRP.
- The Managing General Partner will initially receive 78,750 shares of
Common Stock (1% of all shares of Common Stock to be outstanding
immediately following the Conversion) on account of the Managing General
Partner's 1% interest in USRP.
See "--Allocation of Shares of Common Stock Among Unitholders and the Managing
General Partner."
THE MERGER AGREEMENT. The Merger Alternative will be effected pursuant to
the terms and conditions of the Merger Agreement. A vote in favor of the Merger
Alternative will constitute a vote for approval of the Merger Agreement. The
Merger Agreement, attached as APPENDIX A hereto and incorporated herein by
reference, provides that, subject to the conditions thereof, the REIT
Corporation will indirectly acquire the operations of USRP through the merger of
the REIT Sub into USRP with USRP as the surviving entity and, as a result,
becoming an indirect, wholly-owned subsidiary of the REIT Corporation. As part
of the Conversion, the Managing General Partner will withdraw as managing
general partner of USRP, and pursuant to the terms of the Merger Agreement, a
corporate subsidiary of the REIT Corporation will be substituted as managing
general partner of USRP. The Merger will become effective after all of the
conditions to consummation of the Merger have been satisfied, including the
receipt of a favorable Ruling from the IRS, or on such later date as the parties
may mutually agree, by filing with the Secretary of State of the State of
Delaware a certificate of merger as required by applicable Delaware law. If the
Conversion is approved and effected by the Merger Alternative, it is anticipated
that the Merger will be effective on or prior to September 30, 1997.
The obligations of the parties to effect the Merger are subject to certain
conditions, including (i) the approval and adoption of the Merger Agreement and
the transactions contemplated thereby by the affirmative vote of the holders of
a majority of the outstanding Units as of the Record Date; (ii) no statute, rule
or regulation having been enacted or promulgated by any governmental authority
which prohibits the exchange of Units for Common Stock or consummation of the
Merger; (iii) no order or injunction of a United States or state court of
competent jurisdiction in effect prohibiting the exchange of Units or
consummation of the Merger; (iv) the receipt by USRP of an opinion of counsel to
the effect that the Merger will be treated as part of a transaction described in
Section 351 of the Code; (v) the receipt of a favorable Ruling from the IRS as
to treatment of the Merger as part of a transaction described in Section 351 of
the Code; (vi) the receipt of all permits, qualifications and other governmental
approvals that are required under applicable law in connection with the Merger
and the other transactions contemplated by the Merger Agreement; (vii) the
approval of the Common Stock for listing on the NYSE upon official notice of
issuance; and (viii) the approval of the amendments to the Partnership
Agreements by the affirmative vote of the holders of a majority of the Units
outstanding as of the Record Date. These conditions may not be waived by USRP.
AMENDMENTS TO PARTNERSHIP AGREEMENTS. In order to effect the Conversion,
whether through the Merger Alternative or the Exchange Alternative, and to
provide greater operating flexibility following the Conversion, certain
amendments are proposed to be made to the Master Partnership Agreement and the
partnership agreement of the Operating Partnership (the "Operating Partnership
Agreement" and,
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together with the Master Partnership Agreement, the "Partnership Agreements")
to, among other things, provide for the Termination and to provide the general
partner of the Operating Partnership flexibility to issue different classes of
partnership interests. A vote in favor of either the Merger Alternative or the
Exchange Alternative will constitute a vote in favor of the amendments to the
Partnership Agreements described below. The proposed amendments to the
Partnership Agreements would:
- Establish a price for the conversion of the Operating Partnership General
Partner Interest for an interest in the Operating Partnership and/or Units
(which conversion shall occur at such time as the Managing General Partner
ceases to be the managing general partner of the Partnerships, whether by
transfer of interest, withdrawal or removal (other than for "cause"));
- Permit the admission of new limited partners of the Operating Partnership
at the discretion of the managing general partner;
- Provide a mechanism to permit holders of interests in the Operating
Partnership and/or Units to exchange such interests for shares of Common
Stock;
- Permit the issuance of Operating Partnership interests with terms
comparable to shares of preferred stock which may, from time to time, be
issued by the REIT Corporation; and
- Expand the powers of the Partnerships to enable them to originate loans
secured by real estate and to acquire properties not exclusively used by
restaurants.
EXCHANGE ALTERNATIVE
In the event that the Ruling is not obtained from the IRS, the Conversion,
if approved by the Limited Partners, would be effected through the admission of
the REIT Corporation as a limited partner of the Operating Partnership and the
exchange of Units for shares of Common Stock by the Unitholders from time to
time, at their discretion, pursuant to the exchange right to be provided for in
the amended Master Partnership Agreement. The Exchange Alternative will be
implemented only if USRP does not receive a favorable Ruling from the IRS.
If the Conversion is effected pursuant to the Exchange Alternative, the
Unitholders will not be required to exchange the Units for shares of Common
Stock until such time as they desire to sell their Units, which exchange right
would only become effective at such time as the Common Stock is listed on the
NYSE and would require such an exchange to take place prior to the sale of the
Units to a third party. Additionally, in order to effect the Exchange
Alternative, each of the amendments to the Partnership Agreements described
above under "--The Merger Alternative--Amendments to the Partnership Agreements"
would become effective. A vote in favor of the Exchange Alternative will
constitute a vote in favor of the amendments to the Partnership Agreements
described above.
TERMINATION OF THE OPERATING PARTNERSHIP GENERAL PARTNER INTEREST
GENERAL
As described above, one of the amendments to the Partnership Agreements
being proposed in order to effect the Conversion is the establishment of the
price (the "Acquisition Price") to be paid to the Managing General Partner in
connection with the conversion of the Operating Partnership General Partner
Interest and the conversion of the USRP Interest. If the Conversion is effected
by the Merger Alternative, the Managing General Partner will withdraw as
managing general partner of the Partnerships effective as of August 31, 1997
(unless extended by the Special Committee in its sole discretion) and, pursuant
to the terms of the Merger Agreement, a corporate subsidiary of the REIT
Corporation will be substituted as managing general partner of the Partnerships.
If the Exchange Alternative is adopted, the Managing General Partner will
withdraw as the managing general partner of the Partnerships effective as of
August 31, 1997 (unless extended by the Special Committee in its sole
discretion) and, pursuant to the
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terms of the Partnership Agreements, a corporate subsidiary of the REIT
Corporation would be substituted as managing general partner of the
Partnerships. In conjunction with either such withdrawal, the Managing General
Partner will (i) convert the Operating Partnership General Partner Interest (if
the Conversion is effected through the Merger Alternative) or assign such
interest to USRP (if the Conversion is effected through the Exchange
Alternative) pursuant to the terms of the Partnership Agreements, and (ii)
convert the USRP Interest pursuant to the terms of the Merger Agreement and/or
the Master Partnership Agreement, as applicable, for the Acquisition Price. As a
result of the Termination, the Company will become self-advised.
The Acquisition Price consists of two components: (i) the initial share
consideration (the "Initial Share Consideration") and (ii) the contingent share
consideration (the "Contingent Share Consideration"). The Acquisition Price
consists of two components because of the Special Committee's interest in
protecting the stockholders of the REIT Corporation from being diluted from the
issuance of the Acquisition Shares (as defined below) and to enable the Special
Committee to establish a price to be paid for the Operating Partnership General
Partner Interest and the USRP Interest which cannot be valued with certainty.
The Initial Share Consideration is equal to the value of 850,000 shares of
Common Stock (subject to adjustment in the event of certain dilutive events),
and shall consist of shares of Common Stock, Units and/or an interest in the
Operating Partnership, as applicable, depending upon how the Conversion is
effected (collectively, the "Initial Shares"). The Initial Shares shall be
issued by the REIT Corporation, USRP or the Operating Partnership, as
applicable, as soon as practicable following the date of the Termination, but in
no event later than 30 days thereafter. The Contingent Share Consideration is
equal to the value of up to 550,000 shares of Common Stock (subject to
adjustment in the event of certain dilutive events), and shall consist of Units
and/or an interest in the Operating Partnership, as applicable, depending upon
how the Conversion is effected (collectively, the "Contingent Shares" and,
together with the Initial Shares, the "Acquisition Shares"). The exact number of
Contingent Shares to be issued will be determined by dividing the fees and
distributions (in excess of $3,612,500) which would otherwise have been payable
to the Managing General Partner for fiscal year 2000 pursuant to the Operating
Partnership General Partner Interest and the USRP Interest (less certain
expenses to be incurred by the REIT Corporation following the Termination) by
$4.25. The Managing General Partner will not receive any distributions with
respect to the Contingent Shares, or otherwise have any rights with respect
thereto, until they are issued. The Contingent Shares shall be issued by USRP or
the Operating Partnership, as applicable, as soon as practicable following the
end of the year 2000, but in no event later than March 31, 2001.
THE FAIRNESS OPINION
Morgan Keegan is acting as the financial advisor to the Special Committee in
connection with establishing the Acquisition Price and has rendered its opinion
to the Special Committee that the Acquisition Price is fair, from a financial
point of view, to the Unitholders. USRP appointed the Special Committee to act
on behalf of the Unitholders for purposes of evaluating the Acquisition Price.
The full text of Morgan Keegan's opinion is set forth as APPENDIX B to this
Proxy Statement/Prospectus. See "The Conversion--Fairness Opinion." Morgan
Keegan's opinion does not address the fairness of the Merger Alternative or the
Exchange Alternative. See "The Conversion--Fairness Opinion--Scope of Opinion."
ANALYSIS OF ALTERNATIVES CONSIDERED
CONTINUATION OF USRP
In reaching its decision to recommend the Conversion, the Board of Directors
considered the alternative of continuing USRP in its current form as a master
limited partnership. The Board of Directors determined, however, that, based on
the reasons discussed above under "--Advantages of the Conversion," proceeding
with the Conversion would be more beneficial to the Unitholders than the
alternative of continuing USRP in its existing form. The Managing General
Partner believes these advantages outweigh
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the disadvantages discussed under the caption "--Disadvantages of the
Conversion" above. See "The Conversion--Analysis of Alternatives Considered."
LIQUIDATION OF USRP
With respect to the alternative of liquidating USRP, the Board of Directors
concluded that, based on the estimated liquidation value per Unit ($20.00), such
alternative was less favorable to the Unitholders than the receipt of shares of
Common Stock, assuming the Common Stock trades at a price per share comparable
to the current trading price per Unit ($28.25 at May 5, 1997), although no
assurance can be given that such trading price will result. See "Risk
Factors--Substitution of Trading of Common Stock for Units" and the "The
Conversion--Comparison of Values."
ALLOCATION OF SHARES OF COMMON STOCK AMONG UNITHOLDERS AND THE MANAGING GENERAL
PARTNER
The Board of Directors determined, based on the fact that the REIT
Corporation will initially own the same assets as those held by USRP through its
ownership interest in the Operating Partnership, that it was appropriate for
each of the Unitholders to receive one share of Common Stock for each Unit held
by them immediately prior to the Conversion (or 7,796,254 shares of Common Stock
on account of their 99% percentage interest in USRP). Based on this analysis,
the Board of Directors concluded that the Managing General Partner should
receive 78,750 shares of Common Stock (if the Conversion is effected through the
Merger Alternative) and 1% of the outstanding Units immediately following the
Conversion (if effected through the Exchange Alternative).
In order to determine the number of shares of Common Stock (or the
equivalent interest in the Operating Partnership equivalent number of Units) to
be issued to the Managing General Partner in connection with the conversion of
its Operating Partnership General Partner Interest, the Board of Directors
established the Special Committee to negotiate on behalf of the Unitholders the
Acquisition Price. The Managing General Partner determined that a special
committee was necessary due to the potential conflict of interest between
management of the Managing General Partner and the Unitholders in determining
the Acquisition Price. See "Risk Factors--Conflicts of Interest" and "The
Conversion-- Analysis of the Special Committee."
NO DISSENTERS' APPRAISAL RIGHTS
Unitholders who object to the Conversion will have no dissenters' appraisal
rights (I.E., the right, instead of receiving Common Stock, to seek a judicial
determination of the "fair value" of their Units and to compel USRP to purchase
Units for cash in that amount) under state law or the Master Partnership
Agreement, nor will such rights be voluntarily accorded to the Unitholders by
the Company. Thus, approval of the Conversion by the holders of a majority of
all Units outstanding on the Record Date will bind all Unitholders, and
objecting Unitholders will have no alternative to receipt of Common Stock other
than selling their Units in the market. The Units are currently listed on the
NYSE under the ticker symbol "USV." If the Conversion is effected by the Merger
Alternative, the Common Stock is expected to be listed on the NYSE effective at
the time the Merger is consummated. If the Conversion is effected through the
Exchange Alternative, the Common Stock is expected to be listed on the NYSE
shortly after consummation of the Conversion. See "The Conversion--No
Dissenters' Appraisal Rights."
TAX CONSEQUENCES OF THE CONVERSION
TAX CONSEQUENCES OF THE MERGER ALTERNATIVE
Although pursuant to the Merger, USRP will be the surviving entity (and
become a subsidiary of the REIT Corporation), for federal income tax purposes
USRP will be deemed to have been terminated in the Merger. For federal income
tax purposes, the Merger will generally be tax-free to USRP and the Unitholders
under Sections 351 and 731 of the Code except to the extent (if any) that USRP's
aggregate
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tax basis in its assets is less than the liabilities assumed by the REIT
Corporation in the Merger. It is expected that the USRP's aggregate tax basis in
its assets will exceed the sum of such liabilities, so that USRP itself should
not recognize gain upon the Merger. However, Unitholders whose adjusted basis in
their Units or in partnership property is less than their share of USRP's
nonrecourse indebtedness will recognize gain to the extent of such difference.
It is a condition precedent to consummation of the Merger that the IRS issue
a favorable Ruling as to treatment of the Merger as part of a transaction
described in Section 351 of the Code. The Ruling, however, is conditioned upon
the accuracy of certain factual assumptions and representations. If the IRS
should subsequently determine that the assumptions or representations were
materially inaccurate, the IRS would not be bound by the Ruling and might
challenge the nonrecognition treatment of the Merger in whole or in part. There
can be no assurance that any such challenge could be successfully resisted by
USRP. If the Merger should fail to qualify as tax-free under Section 351, each
Unitholder could be required to recognize gain or loss equal to the difference
between the sum of the value of the Common Stock received by the Unitholder plus
the Unitholder's share of partnership liabilities and the Unitholder's share of
USRP's tax basis in the property at the time of the Merger. Any losses
previously allocated by USRP to a Unitholder that have not been used because of
the at-risk, basis or passive activity limitations can be used to offset gain
recognized on the Merger. Unitholders should consult their own tax advisors to
determine whether they will recognize gain in the Merger. See "Federal Income
Tax Considerations--The Merger Alternative."
REIT STATUS
A qualified REIT is not subject to federal income tax if its dividends paid
to stockholders for each year equal or exceed the sum of the REIT's adjusted
ordinary taxable income plus its capital gains, because the REIT is allowed a
deduction for such dividends paid. The dividends are includable in the income of
a REIT's stockholders. If a REIT should fail to qualify as a REIT for any year,
or should fail to pay sufficient dividends, the REIT could be required to pay
federal income or excise taxes, thereby reducing the cash available for
distribution to its stockholders.
The REIT Corporation intends to operate in a manner that will enable it to
qualify as a REIT under the Code commencing with the taxable year in which the
Merger is consummated. Although the Managing General Partner believes that the
REIT Corporation will be so organized and will so operate and that it initially
will qualify as a REIT, no assurance can be given that the REIT Corporation in
fact will qualify or remain qualified as a REIT. Qualification as a REIT
involves the application of highly technical and complex Code provisions and
Treasury Regulations for which there are only limited judicial or administrative
interpretations. The determination of various factual matters and circumstances
not entirely within the REIT Corporation's control may affect its ability to
qualify as a REIT. Moreover, no assurance can be given that new legislation,
regulations, administrative interpretations or court decisions will not
significantly alter the tax laws regarding qualification as a REIT or the
federal income tax consequences of such qualification. USRP is not aware of any
current facts or circumstances that would generate a change in such tax laws so
as to significantly and adversely affect the REIT Corporation's ability to
qualify or operate as a REIT.
If in any taxable year the REIT Corporation were to fail to qualify as a
REIT, the REIT Corporation would be subject to federal income tax at regular
corporate rates on its taxable income, calculated without any deduction for
dividends paid to stockholders. Moreover, unless entitled to relief under
certain statutory provisions, the REIT Corporation would be disqualified from
treatment as a REIT for the four taxable years following the year in which such
qualification was lost. Even if the REIT Corporation subsequently requalified as
a REIT, it might be required to make distributions at that time equal to any
earnings accumulated during the period of non-REIT status and to pay a full
corporate-level tax on any unrealized gain in its assets as of the date of
requalification ("built-in gain").
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Any taxes payable by the REIT Corporation would reduce the funds available
for distribution to stockholders for each of the years involved. During the
period in which the REIT Corporation had lost its REIT status, the REIT
Corporation would no longer be required by the Code to make any distributions to
stockholders. Although the REIT Corporation currently intends to operate in a
manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause the REIT Board to revoke
the election for the REIT Corporation to qualify as a REIT. See "Federal Income
Tax Considerations--The Merger Alternative--Tax Consequences of the REIT
Corporation's Qualification as a REIT--Failure to Qualify."
CERTAIN TAXES IMPOSED ON A REIT
If the REIT Corporation qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on its net income that is
currently distributed to its stockholders. However, the REIT Corporation will be
subject to federal income or excise taxes at various rates on the following: (i)
undistributed REIT taxable income, including net capital gains; (ii)
"alternative minimum taxable income" (under certain circumstances); (iii) net
income from the sale or other disposition of "foreclosure property," or other
nonqualifying income from "foreclosure property;" (iv) net income from
"prohibited transactions;" (v) net income attributable to the greater of the
amount by which the REIT Corporation fails the 75% or 95% gross income tests if
the REIT Corporation maintains its qualification as a REIT; (vi) the excess of
required distributions over the amounts actually distributed; and (vii)
"built-in gain" recognized on the disposition of an asset during the 10-year
period following acquisition by the REIT Corporation of the asset from a C
corporation in a carryover-basis transaction. See "Federal Income Tax
Considerations--The Merger Alternative--Tax Consequences of the REIT
Corporation's Qualification as a REIT--Taxation of the REIT Corporation as a
REIT."
DISTRIBUTION REQUIREMENTS
In order to obtain the favorable tax treatment associated with REITs
qualifying under the Code, the REIT Corporation generally will be required each
year to distribute to its stockholders at least 95% of its otherwise taxable
income (after certain adjustments). In addition, the REIT Corporation will be
subject to a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any taxable year are less than the sum
of 85% of its ordinary income plus 95% of its capital gain net income for the
taxable year. The REIT Corporation intends to make timely distributions to
stockholders in amounts sufficient to satisfy the annual distribution
requirements in order to qualify as a REIT and to avoid liability for federal
income or excise taxes. The REIT Corporation may experience timing differences
between (i) the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of such expenses in
arriving at REIT taxable income. In addition, the REIT Corporation may recognize
net capital gain in excess of the cash received in connection with the sale of
property subject to indebtedness. In such cases, the REIT Corporation may have
less cash available for distribution than is necessary to meet the annual
distribution requirements, and in order to meet such requirements, the REIT
Corporation may arrange for short-term (or possibly long-term) borrowings or pay
distributions in the form of taxable stock dividends. Furthermore, under certain
circumstances, the REIT Corporation may be able to rectify a failure to meet the
distribution requirements by paying "deficiency dividends" to stockholders in a
later year which would be included in the REIT Corporation's deduction for
dividends paid for the earlier year. See "Federal Income Tax Considerations--The
Merger Alternative--Tax Consequences of the REIT Corporation's Qualification as
a REIT--Taxation of the REIT Corporation as a REIT."
TAX CONSEQUENCES OF THE EXCHANGE ALTERNATIVE
If the Conversion is effected pursuant to the Exchange Alternative, no gain
or loss should be recognized by the Unitholders as a result of the amendments to
the Partnership Agreements and the
23
<PAGE>
admission of the REIT Corporation as a limited partner of the Operating
Partnership. A Unitholder's eventual exchange of Units for shares in the REIT
Corporation will be a taxable event; however, no exchange of Units will be
required if the Conversion is effected pursuant to the Exchange Alternative
until such time as the Unitholder wishes to sell its Units. See "Federal Income
Tax Considerations--The Exchange Alternative--Disposition of Units; Exchange for
Shares in the REIT Corporation." Prior to such exchange, the Unitholders
generally will continue to be taxed in the same manner as they were taxed
preceding the admission of the REIT Corporation into the Operating Partnership.
SUMMARY OF COMPARISON OF TAXATION OF STOCKHOLDERS AND UNITHOLDERS
TAXATION OF STOCKHOLDERS
The following discussion assumes that the REIT Corporation qualifies as a
REIT for federal income tax purposes. See generally "Federal Income Tax
Considerations--The Merger Alternative--Tax Consequences of the REIT
Corporation's Qualification as a REIT--Taxation of Stockholders."
Generally, distributions to stockholders of the REIT Corporation will be
taxable as ordinary income up to the amount of the REIT Corporation's current or
accumulated earnings and profits. Distributions in excess of the REIT
Corporation's current or accumulated earnings and profits will be treated first
as a tax-free return of capital; distributions in excess of a stockholder's tax
basis in its Common Stock will be taxable as gain realized from the sale of such
Common Stock. Dividends that are properly designated by the REIT Corporation as
capital gain dividends will be treated generally as long-term capital gains for
the taxable year (to the extent they do not exceed the REIT Corporation's actual
net capital gain). In contrast with partners in a partnership as described
below, the stockholders will not recognize income in excess of the fair market
value of any property (including money) distributed by the REIT Corporation.
Distributions by a REIT in excess of its taxable income may result in
immediate recognition of taxable gain to a stockholder whose tax basis has been
reduced to zero, whereas any gain attributable to such distributions by USRP may
generally be deferred until the sale of property or the Unitholder's Units.
Stockholders may not deduct on their income tax returns any net operating
losses or net capital losses of the REIT Corporation. Any such losses may,
however, be carried forward by the REIT Corporation and used to reduce the REIT
Corporation's taxable income, capital gains and the amount that the REIT
Corporation will be required to distribute in order to remain qualified as a
REIT.
A transferee Unitholder is entitled to the benefit of certain basis
adjustments under Section 754 of the Code upon a sale or exchange of Units or
the death of a Unitholder. There will be no Section 754 adjustments upon the
sale or exchange of Common Stock or the death of a stockholder of the REIT
Corporation. Basis adjustments attributable to Unitholders will become part of
the REIT Corporation's basis for its assets at the time of the Merger.
Unitholders who would have been entitled to additional depreciation deductions
attributable to such adjustments will no longer be able to utilize such
deductions to reduce their share of annual income from the property. The REIT
Corporation's depreciation deductions (including those attributable to the
special basis adjustments of former Unitholders) will be allocated ratably among
the stockholders in determining the portion of the REIT Corporation's
distributions that will be taxable as ordinary dividends. As a result, for each
year following the Merger, Unitholders with significant positive Section 754
adjustments (generally those who purchased their Units at higher prices and on
more recent dates) will generally recognize somewhat greater amounts of taxable
income than if the Merger had not occurred. Upon a sale of property, the capital
gain will similarly be calculated uniformly by the REIT Corporation, resulting
in greater capital gain dividends for stockholders who had significant positive
Section 754 adjustments and smaller capital gain dividends for stockholders who
had negative or less significant positive Section 754 adjustments (or would have
had such adjustments if the Merger had not been consummated) than if property
were to have been sold by USRP without the Merger. No consideration has been
given to the impact on particular Unitholders described above in arriving at the
number of shares of Common Stock to be received by each Unitholder. See "Federal
24
<PAGE>
Income Tax Considerations--The Exchange Alternative--Tax Treatment of
Operations--Section 754 Election."
The REIT Corporation is required to demand of its stockholders who own of
record 5% or more of the Common Stock (assuming there are more than 2,000
stockholders of record) information respecting the Common Stock actually or
constructively owned by such stockholders. The REIT Corporation is required to
maintain a list of those stockholders who fail to comply, and noncomplying
stockholders are required to include the required information in their tax
returns. See "Federal Income Tax Considerations--The Merger Alternative--Tax
Consequences of the REIT Corporation's Qualification as a REIT-- Share
Ownership; Reporting."
TAXATION OF UNITHOLDERS
The following discussion summarizes the taxation of Unitholders as partners
in USRP. See generally, "Federal Income Tax Considerations--The Exchange
Alternative."
Unitholders are subject to tax based on their distributive share of the
income, gain, loss, deductions and credits of USRP, regardless of whether USRP
distributes any cash or property to the Unitholders during the taxable year. A
Unitholder may, therefore, realize taxable income in excess of cash
distributions. For example, a Unitholder may realize taxable income in excess of
cash distributions if (i) USRP retains cash in excess of depreciation and
original issue discount deductions to repay loans made to USRP or to make other
nondeductible expenditures, (ii) Units are transferred, (iii) property is sold,
or (iv) a Unitholder's share of USRP's indebtedness decreases reducing the
Unitholder's adjusted tax basis in its Units below zero. A Unitholder generally
is entitled to deduct its distributive share of partnership losses, if any, only
to the extent permitted by the basis, at-risk and passive activity loss
limitations.
USRP elected under Section 754 of the Code to adjust the basis of
partnership property upon certain transfers of Units so that the transferee
Unitholder's proportionate share of the adjusted basis of partnership property
equals his basis in his Units. As a result, a transferee Unitholder who
purchases a Unit at a price greater than the transferor's share of USRP's basis
in partnership property will recognize in most circumstances less taxable income
(or more loss) upon the sale of partnership property than if the election were
not in effect. On the other hand, a transferee Unitholder who purchased a Unit
at a cost less than the transferor's share of USRP's basis in its property will
recognize, in most circumstances, more income (or less loss) upon the sale of
partnership property than if the election were not in effect. The election also
has an impact on the amount of depreciation deductions allocated to a transferee
Unitholder. A similar election is not available to a REIT. See "--Taxation of
Stockholders" above.
EFFECTS OF THE CONVERSION ON RIGHTS OF UNITHOLDERS
As a result of the Conversion, Unitholders will become stockholders of the
REIT Corporation. The REIT Corporation is a Maryland corporation, while USRP is
a Delaware limited partnership. For a summary comparison of the material
differences between the corporate law of the State of Maryland and the
partnership law of the State of Delaware, see "Comparative Rights of Unitholders
and Stockholders."
25
<PAGE>
COMPARISON OF RIGHTS OF UNITHOLDERS AND STOCKHOLDERS
The following table summarizes certain rights of Unitholders currently as
compared to the rights of stockholders if the Conversion is approved. For a more
detailed description, see "Comparative Rights of Unitholders and Stockholders."
<TABLE>
<CAPTION>
UNITHOLDERS STOCKHOLDERS
----------------------------------- -----------------------------------
<S> <C> <C>
Right to Elect No right to elect directors of Vote to elect directors.
Management managing general partner.
Right to Remove 80% of Unitholders must vote to Two-thirds vote of stockholders is
Management remove managing general partner required to remove members of the
without cause (a majority with Board of Directors, provided that
cause). cause exists.
General Voting In addition to approval of certain Stockholder approval is required
Rights Regarding fundamental actions, Unitholder for (i) election or removal of
Governance approval is required to amend the directors; (ii) with certain
Partnership Agreements to effect a exceptions, amendment of the
change in the investment policies Articles of Incorporation; (iii)
of USRP and for certain financial termination of the REIT
and investment decisions, including Corporation's existence; (iv)
(i) sale of all or substantially reorganization of the REIT
all of the assets and (ii) merger Corporation; and (v) merger,
or consolidation of USRP or the consolidation or share exchange of
Operating Partnership. the REIT Corporation, or the sale
or disposition of substantially all
of the REIT Corporation's assets.
The REIT Board has the exclusive
authority to alter the investment
policies of the REIT Corporation at
any time.
Dissolution Requires consent of a majority of Requires approval of two-thirds of
all Unitholders. stockholders.
Liquidation Rights Unitholders share ratably in Stockholders share ratably in any
accordance with percentage assets remaining after satisfaction
interests. of obligations to creditors and any
liquidation preferences of
preferred stock.
</TABLE>
These substantive and procedural differences affect the rights of
Unitholders and holders of Common Stock. Specifically, as described in the table
above, the REIT Corporation's policies with respect to investments, financings,
affiliate transactions and certain other activities may be amended or revised
from time to time at the discretion of the REIT Board. As a result, although no
such change is currently contemplated, the investment policies of the REIT
Corporation may be altered so that the Company no longer invests in restaurant
properties. In addition, a two-thirds vote of stockholders is required to remove
members of the Board of Directors, provided that cause exists, whereas a
majority of Unitholders may remove the managing general partner for cause.
Therefore, a greater vote will be required to change management of the Company
following the Conversion.
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<PAGE>
MARKET PRICES OF UNITS AND DISTRIBUTIONS
The Units are listed for trading on the NYSE under the ticker symbol "USV."
The following table sets forth, for the periods indicated, the high and low sale
prices of the Units as reported on the NYSE in such periods and the cash
dividends declared for such periods (and paid in the subsequent period). As of
May 5, 1997, the record number of Unitholders was 1,784.
<TABLE>
<CAPTION>
1994 HIGH LOW DISTRIBUTION
- --------------------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
1st quarter.............................................. $ 163/4 $ 157/8 $ .39
2nd quarter.............................................. 171/4 153/8 .39
3rd quarter.............................................. 171/2 163/4 .41
4th quarter.............................................. 173/8 13 .42
-----------
$ 1.61
-----------
-----------
<CAPTION>
1995
- ---------------------------------------------------------
<S> <C> <C> <C>
1st quarter.............................................. $ 161/2 $ 141/4 $ .42
2nd quarter.............................................. 171/8 153/4 .42
3rd quarter.............................................. 187/8 163/4 .43
4th quarter.............................................. 201/4 18 .44
-----------
$ 1.71
-----------
-----------
<CAPTION>
1996
- ---------------------------------------------------------
<S> <C> <C> <C>
1st quarter.............................................. $ 233/8 $ 191/2 $ .47
2nd quarter.............................................. 25 215/8 .48
3rd quarter.............................................. 253/8 211/2 .485
4th quarter.............................................. 281/4 225/8 .50
-----------
$ 1.935
-----------
-----------
<CAPTION>
1997
- ---------------------------------------------------------
<S> <C> <C> <C>
1st quarter.............................................. $ 303/4 $ 27 $ .50
2nd quarter (through May 5, 1997)........................ $ 281/2 $ 261/2 $ --
</TABLE>
27
<PAGE>
RISK FACTORS
LIMITED PARTNERS SHOULD CAREFULLY CONSIDER, IN ADDITION TO THE OTHER
INFORMATION PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS, THE MATTERS DESCRIBED
BELOW IN DETERMINING WHETHER TO VOTE FOR THE CONVERSION.
CONFLICTS OF INTEREST
The Partnership Agreements require the Operating Partnership to pay fixed
and percentage fees annually to the Managing General Partner relating to the
properties owned and acquired by the Partnership. In connection with the
Termination, the Managing General Partner will be issued the Acquisition Shares
designed to compensate it for the conversion of the Operating Partnership
General Partner Interest and the conversion of the USRP Interest based on the
Acquisition Price. The Limited Partners should be aware that a majority of the
members of the Board of Directors, by virtue of their ownership interests in
and/or positions or affiliations with the Managing General Partner, were subject
to a conflict of interest in determining the Acquisition Price. See "The
Conversion--Termination of the Operating Partnership General Partner Interest."
The Board of Directors appointed the Special Committee to negotiate on
behalf of the Unitholders the Acquisition Price. Neither member of the Special
Committee is an affiliate of, or otherwise has any economic interest in, the
Managing General Partner or its affiliates. The Board of Directors does not
believe that the intention of the members of the Special Committee to serve as
directors of the REIT Corporation following the Conversion resulted in a
material conflict of interest.
In addition, the Special Committee retained Morgan Keegan to review the
Acquisition Price and to provide an opinion that the Acquisition Price is fair,
from a financial point of view, to the Unitholders. Morgan Keegan was selected
to provide this service based upon Morgan Keegan's qualifications, expertise and
reputation as an investment bank and as a professional in the securities
industry. Morgan Keegan delivered an opinion to the Special Committee that as of
the date hereof the Acquisition Price was fair, from a financial point of view,
to the Unitholders. No limitations were placed on Morgan Keegan by the Special
Committee or other parties to the Conversion with respect to the investigations
made or the procedures followed by Morgan Keegan in rendering its opinion. See
"The Conversion--Fairness Opinion."
BENEFITS TO MANAGING GENERAL PARTNER/MANAGEMENT
The Conversion will result in certain benefits to the Managing General
Partner and its affiliates. In particular, as a result of the Termination, the
Managing General Partner will receive the Acquisition Price, consisting of
shares of Common Stock, Units and/or an interest in the Operating Partnership.
Receipt of the Acquisition Price enables the Managing General Partner to
immediately realize the present value of the projected payments otherwise
payable to it over a period of years pursuant to the Operating Partnership
General Partner Interest. The Acquisition Price consists of (i) the 850,000
Initial Shares which would have a value of $24,012,500 assuming the market price
of an Initial Share (which could be a share of Common Stock, a Unit or an
interest in the Operating Partnership) at the time of its issuance is comparable
to the market price of a Unit ($28.25 at May 5, 1997) and (ii) up to 550,000
Contingent Shares which would have a value of up to $15,537,500 assuming the
market price of a Contingent Share (which could be a Unit or an interest in the
Operating Partnership) at the time of its issuance is comparable to the market
price of a Unit ($28.25 at May 5, 1997). Additionally, each of Messrs. Stetson
and Margolin will be employed by the REIT Corporation for compensation
commencing at $250,000 per year and will be eligible to receive annual incentive
bonuses and stock options.
MATERIAL DIFFERENCES IN RIGHTS OF THE UNITS AND COMMON STOCK
There are certain material differences between the rights of holders of the
Units and holders of shares of Common Stock which arise generally because of the
differences between laws governing limited
28
<PAGE>
partnerships and laws governing corporations, as well as from their respective
governing instruments. These differences relate to, among other matters,
management, voting rights and the right to compel dissolution. For instance,
holders of shares of Common Stock have the right to elect the directors of the
REIT Corporation, whereas holders of Units do not elect those persons who manage
USRP. However certain matters that require the approval of the Limited Partners
do not require the approval of stockholders, including, the powers of USRP and
the managing general partner. Specifically, the REIT Corporation's policies with
respect to investments, financings, affiliate transactions and certain other
activities may be amended or revised from time to time at the discretion of the
REIT Board without a vote of the stockholders of the REIT Corporation, while any
such change in investment policy by USRP would necessitate amending the Master
Partnership Agreement requiring a vote of Limited Partners. As a result,
although no such change is currently contemplated, the investment policies of
the REIT Corporation could be altered so that the Company no longer invests in
restaurant properties. In addition, a two-thirds vote of stockholders is
required to remove members of the Board of Directors, provided that cause
exists, whereas a majority of Unitholders may remove the managing general
partner for cause. Therefore, a greater vote will be required to change
management of the Company following the Conversion. See "Comparative Rights of
Unitholders and Stockholders."
ABSENCE OF APPRAISAL RIGHTS
Under applicable law and the Master Partnership Agreement, Unitholders will
have no dissenters' appraisal rights or other similar rights in connection with
the Conversion, nor will such rights be voluntarily accorded to the Unitholders
by the Company. Consequently, all Unitholders will be bound by the vote of
Unitholders owning a majority of the outstanding Units. Unitholders who do not
wish to own Common Stock must either sell their Units prior to the consummation
of the Merger or sell their Common Stock subsequent thereto. See "The
Conversion--No Dissenters' Appraisal Rights."
SUBSTITUTION OF TRADING OF COMMON STOCK FOR UNITS
The Common Stock is expected to be approved for listing on the NYSE. There
can be no assurance given, however, that the market price of the Common Stock
will initially or thereafter equal the market price of the Units. As a result,
the value of the stockholders' investment in the Company following the
Conversion could be lower than the value of their investment in USRP prior to
the Conversion.
EFFECT OF CERTAIN ANTITAKEOVER PROVISIONS AND OWNERSHIP LIMITS ON CHANGE IN
CONTROL
CHARTER PROVISIONS
Certain provisions of the Articles more fully described below may have the
effect of discouraging a third party from making an acquisition proposal for the
Company and may thereby inhibit a change in control of the Company under
circumstances that could give the holders of shares of Common Stock the
opportunity to realize a premium over the then-prevailing market prices.
Furthermore, the ability of the stockholders to effect a change in management
control of the REIT Corporation could be substantially impeded by such
antitakeover provisions. Moreover, in order for the REIT Corporation to maintain
its qualification as a REIT, not more than 50% in value of its outstanding
shares of capital stock may be owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities). For the
purpose of preserving the REIT Corporation's REIT qualification, the Articles
prohibit ownership either directly or under the applicable attribution rules of
the Code of more than 8.75% of the shares of Common Stock by any stockholder,
subject to certain exceptions. Such ownership limit may have the effect of
preventing an acquisition of control of the Company without the approval of the
REIT Board. See "Description of Capital Stock," "Certain Provisions of Maryland
Law and of the REIT Corporation's Articles and Bylaws" and "Federal Income Tax
Considerations."
29
<PAGE>
STAGGERED BOARD
The REIT Board will be divided into three classes. The terms of the first,
second and third classes will expire in 1998, 1999 and 2000, respectively.
Directors of each class will be elected for a three-year term upon the
expiration of the current class's term. The staggered terms for directors may
affect the stockholders' ability to effect a change in control of the REIT
Corporation even if a change in control were in the stockholders' best
interests. See "Certain Provisions of Maryland Law and of the REIT Corporation's
Articles and Bylaws."
PREFERRED STOCK
The Articles authorize the REIT Board to issue up to 10 million shares of
preferred stock, par value $.001 per share (the "Preferred Stock"), and to
establish the preferences and rights, including the right to elect additional
directors under terms specified in the preferred stock preferences, of any such
shares issued. See "Description of Capital Stock--Preferred Stock." The issuance
of Preferred Stock could have the effect of delaying or preventing a change in
control of the Company even if a change in control were in the stockholders'
best interests. The rights, if any, of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances could have the
effect of delaying or preventing a change in control of the Company even if a
change in control were in the stockholders' best interests. No shares of
Preferred Stock will be issued or outstanding upon consummation of the
Conversion.
MEETINGS OF STOCKHOLDERS
Stockholders of the REIT Corporation may call a special meeting only upon
the written request of 25% or more of the outstanding voting stock. The delay or
prevention of a special meeting of stockholders that could result from such a
requirement could have the effect of delaying or preventing a change in control
of the Company even if a change in control were in the stockholders' best
interests.
BUSINESS COMBINATIONS
Under the Maryland General Corporation Law (the "MGCL"), certain business
combinations (including a merger, consolidation, share exchange or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and an "Interested Stockholder" are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. An Interested Stockholder is any
person who beneficially owns 10% or more of the voting power of the
then-outstanding voting stock of the corporation or an affiliate of such person.
Thereafter, such business combination must be recommended by the board of
directors of such corporation and approved by a super-majority vote of the
corporation's stockholders. The business combination provisions of the MGCL do
not apply, however, to business combinations that are approved or exempted by
the board of directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. The Bylaws of the REIT
Corporation contain a provision exempting from these provisions of the MGCL any
business combination involving QSV (or its affiliates) or any person acting in
concert as a group with any of the foregoing persons. See "Certain Provisions of
Maryland Law and of the REIT Corporation's Articles and Bylaws--Business
Combinations."
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquirer, by officers or by directors who
are employees of the corporation. "Control Shares" are voting shares of stock,
which if aggregated with all other shares of common stock previously acquired by
such person, or in respect of which such person is able to exercise or direct
the exercise of voting power, would entitle the acquirer to exercise voting
power
30
<PAGE>
in electing directors within certain ranges of voting power (from one-fifth to a
majority). A "control share acquisition" means the acquisition of control
shares, subject to certain exceptions. A person who has made or proposes to make
a control share acquisition, upon satisfaction of certain conditions, may compel
the board of directors to call a special meeting of stockholders to be held
within 50 days of demand to consider the voting rights of the shares. The
corporation may, subject to certain conditions and limitations, redeem any or
all of the control shares for fair value if voting rights are not approved at
the meeting or if the acquiring person does not deliver an acquiring person
statement as required by the MGCL. If voting rights for control shares are
approved at a stockholders meeting and the acquirer becomes entitled to vote a
majority of the shares entitled to vote, all other stockholders may exercise
appraisal rights. The control share acquisition statute does not apply to shares
acquired in a merger, consolidation or share exchange if the corporation is a
party to the transaction, or to acquisitions approved or exempted by the charter
or bylaws of the corporation. See "Certain Provisions of Maryland Law and of the
REIT Corporation's Articles and Bylaws--Control Share Acquisitions."
RESTRICTIONS ON TRANSFER
The ownership limit provided in the Articles may restrict the transfer of
Common Stock or Preferred Stock. For example, if any purported transfer of
Common Stock or Preferred Stock would (i) result in any person owning, directly
or indirectly, (a) Common Stock in excess of 8.75% of the number of outstanding
shares of Common Stock (except for QSV which initially may own no more than
15.0% of the number of such outstanding shares) or (b) 9.8% of the number of
outstanding shares of Preferred Stock of any series of Preferred Stock, (ii)
result in the Common Stock and Preferred Stock being owned by fewer than 100
persons, (iii) result in the REIT Corporation being "closely held" (as defined
in the Code), or (iv) cause the REIT Corporation to own, directly or
constructively, 10% or more of the ownership interests in a tenant of the REIT
Corporation's or the Operating Partnership's real property, the Common Stock or
Preferred Stock will be designated as "Excess Stock" and transferred
automatically to a trust effective on the day before the purported transfer of
such Common Stock or Preferred Stock. See "Description of Capital
Stock--Restrictions on Transfer."
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
The REIT Corporation intends to operate so as to qualify as a REIT under the
Code. Although the REIT Corporation believes it has been and will continue to be
organized and operated in such a manner, no assurance can be given that the REIT
Corporation will qualify or remain qualified as a REIT. Qualification as a REIT
involves the application of highly technical and complex Code provisions for
which there are only limited judicial or administrative interpretations. The
determination of various factual matters and circumstances not entirely within
the REIT Corporation's control may affect the REIT Corporation's ability to
qualify as a REIT. For example, in order to qualify as a REIT, at least 95% of
the REIT Corporation's gross income in any year must be derived from qualifying
sources and the REIT Corporation must pay dividends to stockholders aggregating
annually at least 95% of its REIT taxable income (excluding net capital gains).
Further, no assurance can be given that new legislation, regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification. The REIT Corporation, however, is not aware
of any pending tax legislation that would adversely affect the REIT
Corporation's ability to operate as a REIT.
If in any taxable year the REIT Corporation were to fail to qualify as a
REIT, the REIT Corporation would not be allowed a deduction for dividends to
stockholders in computing its taxable income and would be subject to federal
income tax (including any applicable alternative minimum tax) on its taxable
income at corporate rates. Unless entitled to relief under certain statutory
provisions, the REIT Corporation also would be disqualified from treatment as a
REIT for the four taxable years following the year during which qualification
was lost. As a result, the funds available for distribution to the REIT
Corporation's
31
<PAGE>
stockholders would be reduced for each of the years involved. In addition,
dividends would no longer be required to be paid. To the extent that dividends
to stockholders would have been paid in anticipation of the REIT Corporation's
qualification as a REIT, the REIT Corporation might be required to borrow funds
or to liquidate certain of its investments to pay the applicable tax. Although
the REIT Corporation currently intends to operate in a manner designed to
qualify as a REIT, it is possible that future economic, market, legal, tax or
other considerations may cause the REIT Board to revoke the REIT election. See
"Federal Income Tax Considerations--The Merger Alternative--Tax Consequences of
the REIT Corporation's Qualification as a REIT."
FUTURE DILUTION
Because the REIT Corporation plans to issue additional shares of Common
Stock after the Conversion to facilitate the Company's ongoing growth strategy,
the holders of Common Stock will experience dilution in their percentage
interest in the Company, generally without any requirement of stockholder
approval. See "Description of Capital Stock."
ACQUISITION AND EXPANSION RISKS
FAILURE TO ACQUIRE ACQUISITION PROPERTIES
As of April 30, 1997, the Company had 41 Acquisition Properties under
binding agreements of acquisition. In connection with the execution of such
agreements, the Company made deposits of approximately $462,334 which may be
non-refundable in whole or in part if the Company elects not to close some or
all of such acquisitions. No assurance can be given that additional properties
meeting the Company's acquisition criteria will be available or, if available,
could be acquired by the Company.
RISK OF FAILURE TO REFINANCE EXISTING INDEBTEDNESS
Currently, the Company's borrowings do not have long-term maturities and as
a result, the Company will be required to refinance such borrowings prior to the
maturities of the lease terms of its properties. Refinancing will depend upon
the creditworthiness of the Company and the availability of financing under
market conditions at the time such refinancing is required. Such refinancing of
the Company's borrowings could result in higher interest costs and adversely
affect results from operations. Payment of the interest on, or amortization of,
any such indebtedness could also decrease the cash distributable to stockholders
and partners, if any, if the financing and other costs of the Company's growth
strategy exceed any incremental revenue generated.
NO LIMITATION ON INCURRENCE OF DEBT
In order to fund the Company's growth strategy, the Company may borrow funds
and grant liens on its properties to secure such indebtedness. If the Company
were unable to repay or otherwise default in respect of any indebtedness, the
Company's properties could become subject to foreclosure. The Company's charter
documents do not restrict the amount of such indebtedness, and the extent of the
Company's indebtedness from time to time may affect its interest costs, results
of operations and its ability to respond to future business adversities and
changing economic conditions. The Company has implemented a non-binding policy
to maintain a ratio of total indebtedness of 50% or less to the greater of total
market capitalization or the original cost of all of the Company's properties as
of the date of such calculation. Because it is anticipated that the Company will
not fix all of its interest costs for the long term, future changes in interest
rates may positively or negatively affect the Company.
RISKS THAT THE COMPANY MAY NOT BE ABLE TO MANAGE EXPANDED PORTFOLIO
At March 31, 1995, the Company owned and managed fewer than 125 Properties.
As of April 30, 1997, the Properties consisted of 443 restaurant properties. As
a result of the rapid growth of the
32
<PAGE>
Company's portfolio and the anticipated additional growth, there can be no
assurance that the Company will be able to adapt its management, administrative,
accounting and operational systems to respond to the growth represented by the
Acquisition Properties or any future growth. In addition, there can be no
assurance that the Company will be able to maintain its current rate of growth
or negotiate and acquire any acceptable properties in the future. A larger
portfolio of properties could entail additional operating expenses that would be
payable by the Company. Such acquisitions may also require loans to prospective
tenants. Making loans to existing or prospective tenants involves credit risks
and could subject the Company to regulation under various federal and state
laws. Any operation of restaurants, even on an interim basis, would also subject
the Company to operating risks (such as uncertainties associated with labor and
food costs), which may be significant.
NO RESTRICTIONS ON CHANGES IN INVESTMENT, FINANCING AND OTHER POLICIES
The investment and financing policies of the Company, and its policies with
respect to all other activities, including its growth, debt, capitalization,
dividends and operating policies, will be determined by the REIT Board. Although
the REIT Board has no present intention to do so, these policies may be amended
or revised at any time and from time to time at the discretion of the REIT Board
without a vote of the stockholders or partners, if any, of the Company. A change
in these policies could adversely affect the Company's financial condition or
results of operations or the market price of the Common Stock. See "Policies
With Respect to Certain Activities."
ADVERSE EFFECT OF INCREASES IN INTEREST RATES
One of the factors that may influence the market price of the Common Stock
is the annual yield from distributions made by the Company on the Common Stock
as compared to yields on certain financial instruments. Thus, a general increase
in market interest rates could result in higher yields on certain financial
instruments which could adversely affect the market price for the Common Stock,
since alternative investment vehicles may be more attractive.
POSSIBLE ADVERSE TAX CONSEQUENCES OF THE CONVERSION
RISK THAT IRS WITHDRAWS RULING
The implementation of the Merger Alternative is conditioned on the issuance
by the IRS of a favorable Ruling as to treatment of the Merger as part of a
transaction described in Section 351 of the Code. The Ruling, however, will be
conditioned upon the accuracy of certain factual assumptions and
representations. If the IRS should subsequently determine that the assumptions
or representations were materially inaccurate, the IRS would not be bound by the
ruling and might challenge the nonrecognition treatment of the Merger in whole
or in part. There can be no assurance that any such challenge could be
successfully resisted by USRP. If the Merger should fail to qualify as tax-free
under Section 351, each Unitholder could be required to recognize gain or loss
equal to the excess, if any, of the sum of the value of the Common Stock
received by the Unitholder plus the Unitholder's share of partnership
liabilities over the Unitholder's share of USRP's tax basis in its assets at the
time of the Merger. Unitholders should consult their own tax advisors to
determine whether they will recognize gain in the Merger. See "Federal Income
Tax Considerations--The Merger Alternative--Qualification as Nonrecognition
Transaction."
RISK OF LOSS OF PARTNERSHIP STATUS
If the Conversion is effected pursuant to the Exchange Alternative, the
continued availability to a Unitholder of the federal income tax benefits of an
investment in USRP depends in large part on the classification of the
Partnerships as partnerships for federal income tax purposes. No ruling from the
IRS as to such status has been or will be requested. If the IRS were to
challenge the federal income tax status of the Partnerships or the amount of a
Unitholder's allocable share of the Partnerships' taxable income, such
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challenge could result in an audit of the Unitholder's entire tax return and in
adjustments to items on that return that are unrelated to the ownership of
Units. In addition, each Unitholder would bear the cost of any expenses incurred
in connection with an examination of his personal tax return. If USRP were to
fail to qualify as a partnership for federal income tax purposes, the REIT
Corporation could fail to qualify as a REIT. See "Federal Income Tax
Considerations--The Merger Alternative--Tax Consequences of the REIT
Corporation's Qualification as a REIT."
If either Partnership were taxable as a corporation or treated as an
association taxable as a corporation in any taxable year, its income, gains,
losses, deductions and credits would be reflected only on its tax return rather
than being passed through to its partners, and its taxable income would be taxed
at corporate rates. In addition, its distributions to each of its partners would
be treated as dividend income (to the extent of its current and accumulated
earnings and profits), and, in the absence of earnings and profits, as a
nontaxable return of capital (to the extent of such partner's tax basis in his
interest therein), or as taxable capital gain (after such partner's tax basis in
his interest therein is reduced to zero). Furthermore, losses realized by such
Partnership would not flow through to the Unitholders. Accordingly, treatment of
either Partnership as a corporation for federal income tax purposes would
probably result in a material reduction in a Unitholder's cash flow and
after-tax return. See "Federal Income Tax Considerations--The Exchange
Alternative--Partnership Status."
INVESTMENT CONCENTRATION IN SINGLE INDUSTRY
The Company's current strategy is to continue to acquire interests in
restaurant properties, specifically fast food and casual dining restaurant
properties. As a result, a downturn in the fast food or casual dining segment
could have a material adverse effect on the Company's total rental revenues and
amounts available for distribution to its stockholders and partners. See
"Business."
DEPENDENCE ON SUCCESS OF BURGER KING
Of the Properties, 173 are occupied by operators of BURGER KING restaurants.
In addition, the Company intends to acquire additional BURGER KING properties.
As a result, the Company is subject to the risks inherent in investments
concentrated in a single franchise brand, such as a reduction in business
following adverse publicity related to the brand or if the BURGER KING
restaurant chain (and its franchisees) were to suffer a system-wide decrease in
sales, the ability of franchisees to pay rents (including percentage rents) to
the Company may be adversely affected. See "Business--Properties."
FAILURE TO RENEW LEASES AND FRANCHISE AGREEMENTS
The Properties are leased to restaurant franchise operators pursuant to
leases with remaining terms varying from one to 28 years at December 31, 1996
and an average remaining term of nine years. No assurance can be given that such
leases will be renewed at the end of the lease terms or that the Company will be
able to renegotiate terms which are acceptable to the Company. The Company has
attempted to extend the terms of certain of its existing leases pursuant to an
"early renewal program," but in connection therewith has had to commit to paying
for certain improvements on such properties. See "Business-- Leases with
Restaurant Operators."
REAL ESTATE INVESTMENT RISKS
GENERAL RISKS
The Company's investments in real estate are subject to varying degrees of
risk inherent in the ownership of real property. The underlying value of the
Company's real estate and the income therefrom and, consequently, the ability of
the Company to make distributions to stockholders and partners, if any, are
dependent upon the operators of the Properties generating income in excess of
operating expenses in order to make rent payments. Income from the Properties
may be adversely affected by changes in national
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economic conditions, changes in local market conditions due to changes in
general or local economic conditions and neighborhood characteristics, changes
in interest rates and the availability, cost and terms of mortgage funds, the
impact of compliance with present or future environmental laws, the ongoing need
for capital improvements, particularly for older restaurants, increases in
operating expenses, adverse changes in governmental rules and fiscal policies,
civil unrest, acts of God (which may result in uninsured losses), acts of war,
adverse changes in zoning laws and other factors beyond the Company's control.
ILLIQUIDITY OF REAL ESTATE MAY LIMIT ITS VALUE
Real estate investments are relatively illiquid. The ability of the Company
to vary its portfolio in response to changes in economic and other conditions
is, therefore, limited. No assurance can be given that the market value of any
of the Company's properties will not decrease in the future. If the Company must
sell an investment, there can be no assurance that the Company will be able to
dispose of it in a desirable time period or that the sales price will recoup or
exceed the amount paid for such investment.
POSSIBLE ENVIRONMENTAL LIABILITIES
The Company's operating costs may be affected by the obligation to pay for
the cost of complying with existing environmental laws, ordinances and
regulations, as well as the cost of compliance with future legislation. Under
current federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
such property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. In addition, the presence of contamination from hazardous or
toxic substances, or the failure to remediate such contaminated property
properly, may adversely affect the ability of the owner of the property to use
such property as collateral for a loan or to sell such property. Environmental
laws also may impose restrictions on the manner in which a property may be used
or transferred or in which businesses may be operated, and may impose remedial
or compliance costs. The costs of defending against claims of liability or
remediating contaminated property and the cost of complying with environmental
laws could materially adversely affect the Company's results of operations and
financial condition.
In connection with the Company's acquisition of a property, a Phase I
environmental assessment is obtained. A Phase I environmental assessment
involves researching historical usages of a property, databases containing
registered underground storage tanks and other matters, including an on-site
inspection, to determine whether an environmental issue exists with respect to
the property which needs to be addressed. If the results of a Phase I
environmental assessment reveal potential issues, a Phase II assessment, which
may include soil testing, ground water monitoring or borings to locate
underground storage tanks, is ordered for further evaluation and, depending upon
the results of such assessment, the transaction is consummated or the
acquisition is terminated. Certain of the Phase I surveys obtained on the
Properties revealed potential environmental concerns and the Company has had
Phase II reports prepared with respect to such Properties.
None of the environmental surveys prepared to date has revealed any
environmental liability or compliance concern at the Properties that the Company
believes would have a material adverse effect on the Company's business, assets,
results of operations or liquidity, nor is the Company aware of any such
liability or concern. Nevertheless, it is possible that Phase I surveys will not
reveal all environmental liabilities or compliance concerns or that there will
be material environmental liabilities or compliance concerns of which the
Company will not be aware. Moreover, no assurances can be given that (i) future
laws, ordinances or regulations will not impose any material environmental
liability or (ii) the current environmental condition of the Company's existing
and future properties will not be affected by the condition of neighboring
properties (such as the presence of leaking underground storage tanks) or by
third parties (whether neighbors such as dry cleaners or others) unrelated to
the Company.
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COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
The Americans with Disabilities Act (the "ADA") generally requires that all
public accommodations, including restaurants, comply with certain federal
requirements relating to physical access and use by persons with physical
disabilities. A determination that the Company or one of the Company's
properties is not in compliance with the ADA could result in the imposition of
fines, injunctive relief, damages or attorney's fees. The Company's leases
contemplate that compliance with the ADA is the responsibility of the operator.
While the Company believes that compliance with the ADA can be accomplished
without undue costs, the costs of compliance may be substantial and may
adversely impact the ability of such lessees to pay rentals to the Company. In
addition, a determination that the Company is not in compliance with the ADA
could result in the imposition of fines or an award of damages to private
litigants.
UNINSURED AND UNDERINSURED LOSSES COULD RESULT IN LOSS OF VALUE OF FACILITIES
The Company requires its lessees to maintain comprehensive insurance on each
of the properties, including liability, fire and extended coverage, and the
Company is an additional named insured under such policies. Management believes
such specific coverage is of the type and amount customarily obtained for or by
an owner on real property assets. The Company intends to require lessees of
subsequently acquired properties, including the Acquisition Properties, to
obtain similar insurance coverage. However, there are certain types of losses,
generally of a catastrophic nature, such as earthquakes and floods, that may be
uninsurable or not economically insurable, as to which the Company's properties
(including the Properties and the Acquisition Properties) are at risk depending
on whether such events occur with any frequency in such areas. In addition,
because of coverage limits and deductibles, insurance coverage in the event of a
substantial loss may not be sufficient to pay the full current market value or
current replacement cost of the Company's investment. Inflation, changes in
building codes and ordinances, environmental considerations and other factors
also might make it unfeasible to use insurance proceeds to replace a facility
after it has been damaged or destroyed. Under such circumstances, the insurance
proceeds received by the Company might not be adequate to restore its economic
position with respect to such property.
DEPENDENCE ON KEY PERSONNEL
Robert J. Stetson, currently President and Chief Executive Officer of the
Managing General Partner, and Fred H. Margolin, currently Chairman of the Board,
Secretary and Treasurer of the Managing General Partner, will, following the
Termination, hold similar positions with the REIT Corporation. The Company's
continued success is dependent upon the efforts and abilities of these and other
of its key executive officers. In particular, the loss of the services of either
Mr. Stetson or Mr. Margolin could have a material adverse effect on the
Company's operations and its ability to effectuate its growth strategy. There
can be no assurance that the Company would be able to recruit or hire any
additional personnel with equivalent experience and contacts. Following the
Termination, the REIT Corporation will enter into employment contracts with each
of Messrs. Stetson and Margolin. See "Management Employment Agreements."
IMPACT OF COMPETITION ON OPERATIONS
ACQUISITIONS
Numerous entities and individuals compete with the Company to acquire triple
net leased restaurant properties, including entities which have substantially
greater financial resources than the Company. These entities and individuals may
be able to accept more risk than the Company is willing to undertake.
Competition generally may reduce the number of suitable investment opportunities
available to the Company and may increase the bargaining power of property
owners seeking to sell. There can be no assurance that the Company will find
attractive triple net leased properties or sale/leaseback transactions in the
future.
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OPERATIONS
The restaurants operated on the Properties are subject to significant
competition (including competition from other national and regional fast food
restaurant chains) including other BURGER KING restaurants, local restaurants,
restaurants owned by BKC or affiliated entities, national and regional
restaurant chains that do not specialize in fast food but appeal to many of the
same customers and other competitors such as convenience stores and supermarkets
that sell prepared and ready-to-eat foods. The success of the Company depends,
in part, on the ability of the restaurants operated on the properties to compete
successfully with such businesses. The Company does not intend to engage
directly in the operation of restaurants. However, the Company would operate
restaurants located on its properties if required to do so in order to protect
the Company's investment. As a result, the Company generally will be dependent
upon the experience and ability of the lessees operating the restaurants located
on the properties.
RISKS ASSOCIATED WITH PROPERTY DEVELOPMENT
The Company may pursue certain restaurant property developments. New project
developments are subject to numerous risks, including construction delays or
costs that may exceed budgeted or contracted amounts, new project commencement
risks such as receipt of zoning, occupancy and other required governmental
approvals and permits and the incurrence of development costs in connection with
projects that are not pursued to completion. In addition, development involves
the risk that developed properties will not produce desired revenue levels once
leased, the risk of competition for suitable development sites from competitors
which may have greater financial resources than the Company and the risk that
debt or equity financing is not available on acceptable terms. There can be no
assurance that development activities might not be curtailed or, if consummated,
will perform in accordance with the Company's expectations and distributions to
stockholders and partners, if any, might be adversely affected.
RISKS NEWLY-CONSTRUCTED RESTAURANT PROPERTIES DO NOT PERFORM AS EXPECTED
The Company may pursue the acquisition of newly-constructed restaurant
properties that do not have operating histories. The acquisition of
newly-constructed restaurant properties involves numerous risks, including the
risk that newly-constructed restaurant properties will not produce desired
revenue levels (and, therefore, lease rentals) once opened.
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THE COMPANY
HISTORY AND STRUCTURE OF USRP
USRP, formerly Burger King Investors Master L.P, was formed in 1985 by BKC
and QSV Properties Inc. ("QSV"), both of which were at that time wholly-owned
subsidiaries of The Pillsbury Company. QSV acted as the managing general partner
of the Partnership. BKC was a special general partner of the Partnership until
its withdrawal on November 30, 1994.
USRP effected an initial public offering in 1986 and the proceeds therefrom
were used to buy the Company's initial portfolio of 128 properties from BKC.
From 1986 through March 1995, the Master Partnership Agreement limited the
activities of the Company to managing the original portfolio of properties.
In May 1994, an investor group led by Messrs. Stetson and Margolin, acquired
QSV and later changed its name to U.S. Restaurant Properties, Inc. (in
connection with the Conversion, the Managing General Partner has changed its
name back to QSV Properties, Inc.). In March 1995, the Managing General Partner
proposed and the Limited Partners adopted certain amendments to the Partnership
Agreements that authorized the Company to acquire additional properties not
affiliated with BKC.
The Company operates through the Operating Partnership, formerly Burger King
Operating Limited Partnership, which holds the interests in most of the
Properties. USRP owns the entire 99.01% limited partnership interest in the
Operating Partnership. The Partnerships are Delaware limited partnerships and
continue in existence until December 31, 2035, unless sooner dissolved or
terminated. In 1996, the Partnerships organized U.S. Restaurant Properties
Business Trust I and U.S. Restaurant Properties Business Trust II, Delaware
business trusts. These trusts were organized to facilitate obtaining mortgage
financing.
The principal executive offices of USRP and the Managing General Partner are
located at 5310 Harvest Hill Road, Suite 270, Dallas, Texas 75230. The telephone
number is (972) 387-1487, FAX (972) 490-9119.
THE REIT CORPORATION
The REIT Corporation is a newly-formed Maryland corporation, all of the
stock of which is currently owned by the Managing General Partner, that was
organized to succeed to the operations of USRP pursuant to the Conversion. The
REIT Corporation was created for the purpose of effecting the Conversion. Prior
to the Conversion, the REIT Corporation will have no substantial assets or
operations. The REIT Corporation has not engaged in any activities other than in
connection with its organization and the Conversion. Upon consummation of the
Conversion pursuant to the Merger Alternative, the REIT Corporation will
indirectly acquire the operations of USRP through the Merger of USRP with a
partnership subsidiary of the REIT Corporation with USRP being the surviving
entity. If the Conversion is effected pursuant to the Exchange Alternative, the
REIT Corporation will be admitted as a limited partner of the Operating
Partnership, and at such time as the Managing General Partner effects the
Termination, a corporate subsidiary of the REIT Corporation will become the
managing general partner of each of the Partnerships.
The members of the initial REIT Board are the same as the members of the
Board of Directors of the Managing General Partner. The executive officers of
the REIT Corporation include Mr. Stetson and Mr. Margolin, the President and
Chief Executive Officer and Chairman of the Board of Directors, Secretary and
Treasurer, respectively, of the Managing General Partner. Mr. Stetson and Mr.
Margolin will hold the same positions with the Company. See "Management."
Upon consummation of the Conversion pursuant to the Merger Alternative, the
current partners of USRP will become the stockholders of the REIT Corporation
and the Operating Partnership will become
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a subsidiary of the REIT Corporation. If the Conversion is effected pursuant to
the Exchange Alternative, the Master Partnership Agreement will be amended to
provide the Unitholders with the right, from time to time at their discretion,
to exchange each Unit for one share of Common Stock but a Unitholder will be
required to make such exchange prior to the transfer of the Units to third
parties. Until such time as all Unitholders exchange their Units for shares of
Common Stock, USRP will remain in existence. After the Conversion, the Company's
business strategy will be to continue the operations of the Company in
substantially the same manner in which it has been operated prior to the
Conversion and to acquire, develop, own and manage additional restaurant
properties throughout the United States and internationally. See "--Strategy"
below. The Company's investment objectives will be to maximize cash available
for distribution to its stockholders and partners, if any, to protect the
Company's capital and to provide the opportunity to realize capital growth from
the appreciation in value of a diversified portfolio of properties.
The principal executive offices of the REIT Corporation are located at 5310
Harvest Hill Road, Suite 270, Dallas, Texas 75230. The telephone number is (972)
387-1487.
STRATEGY
The Company's principal business objective is to expand and diversify its
property portfolio through frequent acquisitions of small to medium-sized
portfolios of fast food and casual dining restaurant properties. In conjunction
with the Conversion, the Partnership Agreements are being amended to provide the
Company with increased flexibility to pursue other investment opportunities that
arise during the ordinary course of acquiring and leasing restaurant properties
and that compliment its existing business strategy. As part of its strategy of
expanding its property portfolio, the Company intends to build-out properties in
conjunction with other food vendors, such as convenience stores, and retail
outlets and may, from time to time, originate loans secured by real estate. See
"Business--General" and "--Investment Criteria." The Company intends to achieve
growth and diversification while maintaining low portfolio investment risk
through adherence to proven acquisition criteria with a conservative capital
structure. The Company intends to continue to expand its portfolio by acquiring
triple net leased properties and structuring sale/leaseback transactions
consistent with the following strategies:
- FOCUS ON RESTAURANT PROPERTIES. The Company will take advantage of senior
management's extensive experience in fast food and casual dining
restaurant operations to identify new investment opportunities and acquire
restaurant properties satisfying the Company's investment criteria.
Management believes, based on its industry knowledge and experience, that
relative to other real estate sectors, restaurant properties provide
numerous acquisition opportunities at attractive valuations. In addition,
the proposed amendments to the Partnership Agreements will give the
Company increased flexibility to pursue other investment opportunities
that arise during the ordinary course of acquiring and leasing restaurant
properties and authorize the Company, through the Operating Partnership,
to originate loans secured by real estate.
- INVEST IN MAJOR RESTAURANT BRANDS. The Company intends to continue to
acquire properties operated as major national and regional restaurant
brands, such as BURGER KING, DAIRY QUEEN, HARDEE'S and CHILI'S by
competent, financially-stable operators. Certain of the Properties are
also operated as ARBY'S, GRANDY'S, PIZZA HUT, and SCHLOTZKSY'S
restaurants. Management believes, based on its industry knowledge and
experience, that successful restaurants operated under these types of
brands will continue to offer stable, consistent income to the Company
with minimal risk of default or non-renewal of the lease and franchise
agreement. As a result of its concentration on major national and regional
brands, in the last three fiscal years, of all rental revenues due, more
than 99.5% has been collected.
- ACQUIRE EXISTING RESTAURANTS. The Company's strategy will continue to
focus primarily on the acquisition of existing fast food and casual dining
chain restaurant properties that have a history of profitable operations
with a remaining term on the current lease of at least five years. The
average
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remaining lease term for the Properties is nine years. Management
believes, based on its industry knowledge and experience, that acquiring
existing restaurant properties provides a higher risk-adjusted rate of
return to the Company than acquiring newly-constructed restaurants.
- CONSOLIDATE SMALLER PORTFOLIOS. Management believes, based on its industry
knowledge and experience, that pursuing multiple transactions involving
smaller portfolios of restaurant properties (generally having an
acquisition price of less than $3 million) results in a more attractive
valuation because the size of such transactions generally does not attract
large institutional property owners. Smaller buyers typically are not well
capitalized and may be unable to compete for such transactions. Larger
transactions involving multiple properties generally attract several
institutional bidders, often resulting in a higher purchase price and
lower investment returns to the purchaser. In certain circumstances,
however, the Company has identified, evaluated and pursued portfolios
valued at up to $50 million that present attractive risk/return ratios.
- MAINTAIN CONSERVATIVE CAPITAL STRUCTURE. The Company anticipates
maintaining its policy of limiting the ratio of total indebtedness to 50%
or less of the greater of (i) the aggregate market value of all issued and
outstanding Units, if any, and Common Stock plus total outstanding
indebtedness or (ii) the original cost of all of the Company's properties
as of the date of such calculation. The Company, however, may from time to
time reevaluate its borrowing policies in light of then-current economic
conditions, relative costs of debt and equity capital, market values of
properties, growth and acquisition opportunities and other factors.
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THE CONVERSION
BACKGROUND OF THE CONVERSION
Management of the Managing General Partner initiated discussions with the
Board of Directors in April 1996 regarding the possibility of converting USRP
into REIT form. Management believed that the market capitalization of USRP did
not properly reflect its underlying asset values. In addition, management was
aware of the increasingly favorable market reaction to REITs as evidenced by
increases in share prices of existing REITs and successful initial public
offerings by newly-formed REITs. From April 1996 until December 1996, management
continued to analyze the advisability of converting to a self-advised REIT
structure. Management made several presentations to the Board of Directors
during this time period regarding the information gathered from its analysis.
The Board of Directors deliberated several times with respect to the Conversion
at which time outside advisors were consulted with respect to both the
advantages of the Conversion and the possible disadvantages, both legal and
financial, to the Unitholders. In order for the Conversion to happen, the
Managing General Partner would need to withdraw as managing general partner of
the Partnerships. Such withdrawal, and the resulting compensation to be paid to
the Managing General Partner, created a conflict of interest for management.
Accordingly, on December 16, 1996, the Board of Directors appointed the Special
Committee to establish the Acquisition Price. The Special Committee was
authorized to negotiate the Acquisition Price on behalf of the Unitholders with
applicable related parties and to retain legal counsel. All expenses of the
Special Committee, including the fee of Morgan Keegan, are payable by USRP. See
"--Analysis of the Special Committee" and "--Costs of the Conversion."
Based on the recommendation of the Special Committee as to the fairness of
the Acquisition Price, the Board of Directors approved the Conversion on
February 5, 1997 and determined that the Conversion is in the best interests of,
and on terms that are fair to, the Unitholders. The Managing General Partner
recommends approval and adoption of the Conversion by the Limited Partners. The
Board of Directors believes that the Conversion will result in the benefits to
the Unitholders described below under "-- Advantages of the Conversion." The
Board of Directors believes that these advantages outweigh the disadvantages of
and risks associated with the Conversion described under "Risk Factors" and "--
Disadvantages of the Conversion." The Board of Director's substantive
recommendations and conclusions are based on the analysis of the advantages and
risks of converting from partnership to REIT form and making the changes in
operating format described herein.
DISADVANTAGES OF THE CONVERSION
The Board of Directors believes that the Conversion may have the following
disadvantages, which it believes are substantially outweighed by the advantages
described below:
POSSIBLE DISADVANTAGES RESULTING FROM REIT STATUS
The REIT Corporation was organized and intends to conduct its operations so
as to qualify for taxation as a REIT under applicable provisions of the Code. A
qualified REIT may avoid paying federal income tax because it is allowed to
deduct certain dividends paid to its stockholders in computing its taxable
income. To qualify as a REIT, the REIT Corporation is required, among other
things, to meet certain stock ownership, income, asset and distribution rules
and tests. Under certain circumstances, the failure of the REIT Corporation to
meet the qualifications rules and tests could cause the REIT Corporation to be
taxed as a corporation, in which case dividends paid to the stockholders would
not be deductible by the REIT Corporation in computing its taxable income,
subjecting the REIT Corporation to entity level taxes to which USRP is not
subject. Furthermore, the REIT Corporation might not be eligible to elect to be
taxed as a REIT for five taxable years (including the year of disqualification).
Under certain other circumstances, if the REIT Corporation failed to meet
certain qualification rules and tests, the REIT Corporation would continue to
qualify as a REIT, but the REIT Corporation could be required to pay
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interest and federal income and/or excise taxes. In order to minimize the
chances that the REIT Corporation will violate stock ownership rules, in certain
circumstances the transfer of shares of Common Stock will be limited or
prohibited. In general, a stockholder of the REIT Corporation would be taxed
only on dividends paid to it by the REIT Corporation, with such dividends being
treated as ordinary income, capital gains, tax-free recovery of its basis in its
shares of Common Stock or as gain from the sale or exchange of property,
depending on the circumstances. Unlike partners of USRP, stockholders of the
REIT Corporation will not be deemed to receive for tax purposes a proportional
interest in the income and expenses of the REIT Corporation.
LOSS OF SECTION 754 BENEFITS
A person who acquires Units is entitled to certain benefits relating to
basis adjustments under Section 754 of the Code upon the sale or exchange of
Units or the death of a Unitholder. There will be no Section 754 adjustments
upon the sale or exchange of shares of Common Stock or the death of a
stockholder of the REIT Corporation. The basis adjustments attributable to
Unitholders will become part of the REIT Corporation's basis for its assets at
the time of the Conversion. Unitholders who would have been entitled to
additional depreciation deductions attributable to such adjustments will no
longer be able to use such deductions to reduce their share of annual income
from distributions from the REIT Corporation. The REIT Corporation's
depreciation deductions will be allocated ratably among the stockholders of the
REIT Corporation in determining the portion of the distributions by the REIT
Corporation that will be taxable by the recipients thereof as ordinary
dividends. As a result, Unitholders with significant Section 754 adjustments
(generally those who purchased their Units at higher prices and on more recent
dates) will generally recognize somewhat greater amounts of taxable income each
year following the Conversion then if the Conversion had not occurred.
RESTRICTIONS ON TRANSFER OF SHARES OF COMMON STOCK
Certain provisions of the Articles may have the effect of discouraging a
third party from making an acquisition proposal for the Company and may thereby
inhibit a change in control of the Company. In addition, the Articles prohibit
ownership, either directly or indirectly, under applicable attribution rules of
the Code, of more than 8.75% of the shares of the Common Stock by any
stockholder, subject to certain exceptions. Such ownership limit may have the
effect of preventing an acquisition of control of the Company without the
approval of the REIT Board. Finally, under the MGCL, certain business
combinations between a Maryland corporation and an "Interested Stockholder" are
prohibited for five years from the most recent date on which the Interested
Stockholder became an Interested Stockholder. The existence of these contractual
and statutory prohibitions on the transfer of stock and the acquisition of
control may inhibit a change in control of the Company under circumstances that
could give the holders of shares of Common Stock the opportunity to realize a
premium over the then-prevailing market prices. The Master Partnership Agreement
does not contain any such provisions, and USRP, as a Delaware limited
partnership, is not subject to the same statutory prohibitions on business
combinations.
MODIFICATION OF INVESTING AND FINANCING POLICIES
The investment and financing policies of the Company following the
Conversion will be determined by the REIT Board. These policies may be amended
or revised at any time and from time to time at the discretion of the REIT Board
without a vote of the stockholders or partners, if any, of the Company. Under
the terms of the Master Partnership Agreement, any changes to the powers of the
managing general partner or changes in the business to be conducted by USRP
require the consent of a majority in interest of the Unitholders.
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ADVANTAGES OF THE CONVERSION
ADVANTAGES TO UNITHOLDERS
The Board of Directors is recommending that the Limited Partners approve the
Conversion by voting in favor of both the Merger Alternative and the Exchange
Alternative because it believes that the Conversion will result in the following
advantages to the Unitholders: (i) the potential for improved market value of
the Common Stock as compared to the Units; (ii) greater access by the Company to
public and private sources of debt and equity capital; (iii) the ability to
issue various classes of securities; (iv) the reduction in the costs of managing
the Properties; (v) the ability to retain the operating partnership structure;
and (vi) savings in administrative costs relating to federal income tax
reporting and administration for the Unitholders. These factors, each of which
is more fully described below, are closely inter-related, and relative weights
were not assigned to them. The Board of Directors believes that none of these
advantages can be fully realized in the current format.
TERMINATION OF OPERATING PARTNERSHIP GENERAL PARTNER INTEREST EXPECTED TO BE
ACCRETIVE TO UNITHOLDERS. As part of the Conversion, the Managing General
Partner will be effecting the Termination. Accordingly, the REIT Corporation
will become self-advised and will, as a result of the termination of all
management fees, have additional cash for distribution to its stockholders. For
the year ended December 31, 1996, the Managing General Partner was paid $2.5
million with respect to the Operating Partnership General Partner Interest and
the USRP Interest. In addition, because the fee which would be payable to the
Managing General Partner pursuant to the Operating Partnership General Partner
Interest increases by at least 1% of the value of new acquisitions, the savings
to the Company from the Termination will continue to grow as the Company
acquires additional properties. Based on all acquisitions closed through April
30, 1997, as a result of the Termination the cash available for distribution on
a per Unit basis will increase. As of April 30, 1997, the Company had
approximately $26 million of properties under binding contract. Accordingly, on
a pro forma basis, after giving effect to the Termination and the acquisition of
such additional properties, as of December 31, 1996, the cash available for
distribution per Unit for 1996 would have increased from $2.62 to $2.66. By way
of comparison, the cash available for distribution per Unit was $2.09 for the
fiscal year ended December 31, 1996. There can be no assurance that all of such
properties will be acquired or that additional properties will be available at
prices acceptable to the Company. Additionally, pro forma results are not
necessarily indicative of what the Company's financial position would have been
had such transactions occurred on the assumed date. See "Risk
Factors--Acquisition and Expansion Risks," "Selected Historical and Pro Forma
Financial Information and Other Data" and "Price Range of Units and Distribution
Policy." These initial savings in the first year are partially offset by the
one-time costs of completing the Conversion (all of which are payable by USRP),
currently estimated to be $580,000. See "--Costs of the Conversion."
THE POTENTIAL FOR IMPROVED MARKET VALUE. The greater number of investors
that currently consider investments in REITs as compared to partnerships may
affect the market price per share of Common Stock versus the market price per
Unit. Management also believes that certain institutional investors in real
estate, such as mutual funds, restrict virtually all of their investments to
REITs and generally do not invest in partnerships. The Conversion may,
therefore, expand the potential investment base of the Company to include
institutional and other investors that do not typically invest in partnership
equity securities because of various tax and administrative reasons. This, in
turn, could result in a more active and diversified trading market for the
Common Stock than currently exists for the Units. In addition, the Board of
Directors anticipates that the Common Stock (as compared to the Units) will
receive increased market interest through expanded review and evaluation by
research analysts.
POTENTIALLY GREATER ACCESS TO EQUITY AND DEBT MARKETS. Because certain
types of investors do not typically invest in limited partnership securities,
the Company, as a REIT, may have greater access to the public and private equity
capital markets than it now has, potentially enabling the Company to raise
capital on more favorable terms than are now available. Management believes that
certain investment bankers will
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only provide financial services to real estate entities that have adopted the
REIT structure. Accordingly, following the Conversion, the Company may be able
to attract greater interest from a larger number of investment bankers thereby
increasing the Company's financing options. Additionally, it is management's
experience that rating agencies look more favorably on real estate entities that
are self-advised. Because the Company's strategy is to continue to acquire
properties to increase earnings, the ability to access more, lower cost capital
should enable the Company to grow at a more rapid rate. No assurance can be
given that the Company will be able to issue additional equity or debt
securities after the Conversion, or that the Conversion will result in any
increase in the Company's investor base or the receipt of any additional
investor interest or a reduction in the cost of capital.
ISSUANCE OF VARIOUS CLASSES OF SECURITIES. Following the Conversion, the
Company will be able to raise additional capital through the issuance of various
classes of securities (including Preferred Stock) which may not be dilutive to
holders of Common Stock.
NEW STRUCTURE RETAINS OPERATING PARTNERSHIP. Following the Conversion, the
Operating Partnership will remain in existence and will continue to own the
Properties. As a result, the REIT Corporation will be an UPREIT, thereby
permitting the Company to continue to be able to effect certain tax-free
property acquisitions through the issuance of Operating Partnership interests to
sellers of such properties that are partnerships. The Company has acquired a
significant portion of the Properties through such exchanges, and management
believes future acquisitions will be similarly structured.
COST SAVINGS RESULTING FROM THE SIMPLIFICATION OF TAX REPORTING. USRP's
organization as a limited partnership makes the preparation of tax returns by
Limited Partners and USRP complex, expensive and burdensome. The Board of
Directors believes that the cost of complying with the partnership reporting
requirements at the USRP level is significantly greater than the cost of
complying with the reporting requirements applicable to the REIT Corporation. In
this regard, the Board of Directors believes that the Company, following the
ultimate completion of the Conversion, will realize annual savings of
administrative costs of approximately $200,000. These initial savings in the
first year are partially offset by the one-time costs of completing the
Conversion (all of which are payable by USRP), currently estimated to be
$580,000. See "--Costs of the Conversion." Further, the ownership of Common
Stock rather than Units will greatly simplify tax reporting with respect to an
investment in the Company for each Limited Partner's individual federal tax
returns in future years.
ADVANTAGES TO THE MANAGING GENERAL PARTNER/MANAGEMENT
In addition to the advantages described above, which apply to all
Unitholders (including the Managing General Partner following the Termination),
the Managing General Partner and management thereof will realize the following
benefits from the Conversion:
RECEIPT OF ACQUISITION PRICE. As a result of the Termination, the Managing
General Partner will receive the Acquisition Price, consisting of shares of
Common Stock, Units and/or an interest in the Operating Partnership. Receipt of
the Acquisition Price enables the Managing General Partner to immediately
realize the present value of the projected payments otherwise payable to it
pursuant to the Operating Partnership General Partner Interest. The Acquisition
Price consists of (i) the 850,000 Initial Shares, which would have a value of
$24,012,500 assuming the market price of an Initial Share (which could be a
share of Common Stock, a Unit or an interest in the Operating Partnership) at
the time of its issuance is comparable to the market price of a Unit ($28.25 at
May 5, 1997) and (ii) up to 550,000 Contingent Shares, which would have a value
of up to $15,537,500 assuming the market price of a Contingent Share (which
could be a Unit or an interest in the Operating Partnership) at the time of its
issuance is comparable to the market price of a Unit ($28.25 at May 5, 1997).
MANAGEMENT EMPLOYMENT ARRANGEMENTS. Each of Messrs. Stetson and Margolin,
the President and Chief Executive Officer and the Chairman of the Board,
Secretary and Treasurer, respectively, of the
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Managing General Partner, will be employed by the REIT Corporation in similar
capacities for compensation commencing at $250,000 per year, subject to increase
(up to a maximum annual salary and cash bonus of $300,000 until the end of the
year 2000) at the discretion of the REIT Board, and will be eligible to receive
annual incentive bonuses and stock options.
The advantages of the Conversion should be considered by the Limited
Partners in light of the disadvantages of and the risks associated with the
Conversion described herein. See "Risk Factors" and "--Disadvantages of the
Conversion."
THE MERGER ALTERNATIVE
If a satisfactory Ruling is received from the IRS, the Conversion, if
approved by the Limited Partners, would be effected by the Merger Alternative.
The Merger Alternative would be implemented through the Merger of USRP with the
REIT Corporation, as described below. The Merger will be effected pursuant to
the terms and conditions of the Merger Agreement. In accordance with the terms
of the Merger Agreement, the REIT Sub would be merged with and into USRP with
USRP being the surviving entity. The Operating Partnership will remain in
existence following the Merger, with USRP, the REIT Corporation and one or more
of the REIT Corporation's corporate subsidiaries as the sole partners thereof
following consummation of the Merger.
Pursuant to the terms of the Merger Agreement, the Unitholders will receive
in exchange for their Units one share of Common Stock for each Unit held by them
prior to the Conversion, or an aggregate of 7,796,254 shares of Common Stock
(99% of all shares of Common Stock to be outstanding following the Conversion)
on account of the Unitholders' aggregate 99% percentage interest in USRP. The
Managing General Partner will initially receive 78,750 shares of Common Stock
(1% of all shares of Common Stock to be outstanding following the Conversion) as
part of the Acquisition Price on account of the Termination. See "--Termination
of Operating Partnership General Partner Interest" and "--Allocation of Shares
of Common Stock Among Unitholders and the Managing General Partner."
THE MERGER AGREEMENT
If the Conversion is effected by the Merger Alternative (I.E., a favorable
Ruling is received), the Merger will be effected pursuant to the terms and
conditions of the Merger Agreement. A vote in favor of the Merger Alternative
will constitute a vote approving the Merger Agreement. The Merger Agreement
provides that, subject to the conditions thereof, the REIT Corporation will
indirectly acquire the operations of USRP through the merger of the REIT Sub
with and into USRP with USRP as the surviving entity and, as a result, becoming
a subsidiary of the REIT Corporation. Concurrently with the Merger, the Managing
General Partner will withdraw as managing general partner of USRP and, pursuant
to the terms of the Merger Agreement, a corporate subsidiary of the REIT
Corporation will be substituted as managing general partner of USRP. The
following is a summary of certain provisions of the Merger Agreement. Such
summary is qualified in its entirety by reference to the Merger Agreement which
is attached hereto as APPENDIX A.
EFFECTIVE TIME. The Merger will become effective after all of the
conditions to consummation of the Merger have been satisfied or on such later
date as the parties may mutually agree (the "Effective Time"), by filing with
the Secretary of State of the State of Delaware a certificate of merger as
required by applicable Delaware law. See "--Conditions to the Merger" below. It
is presently anticipated that the Effective Time of the Merger will be 11:59
p.m. on September 30, 1997.
AGREEMENTS OF THE REIT CORPORATION AND USRP. The Merger Agreement provides,
among other things, that (i) USRP will use its best efforts to obtain the
approval of the Merger Agreement by Limited Partners holding a majority of the
outstanding Units on the Record Date, and (ii) the REIT Corporation will use its
best efforts to obtain approval to list the shares of Common Stock on the NYSE
subject to notice of issuance.
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The Merger Agreement provides that the Company shall indemnify and hold
harmless, and advance expenses to, the Managing General Partner and, as
applicable, each officer, director, partner or other person controlling either
the Managing General Partner or any affiliate of it against any costs or
expenses (including reasonable attorney's fees, judgments, fines, losses,
claims, damages or liabilities) incurred in connection with any claim, action,
suit, proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of or pertaining to the transactions contemplated by
the Merger Agreement, whether asserted or claimed prior to, at or after the
Effective Time, to the fullest extent permitted by law. In addition, the Merger
Agreement provides that the Company shall assume and agree to comply with USRP's
indemnity obligations under the Master Partnership Agreement with respect to
liabilities arising out of actions or omissions occurring prior to the Effective
Time.
CONDITIONS TO THE MERGER. The obligations of each party to effect the
Merger are subject, among other things, to the following conditions: (i) the
approval and adoption of the Merger Agreement and transactions contemplated
thereby by the affirmative vote of the holders of a majority of the outstanding
Units; (ii) no statute, rule or regulation having been enacted or promulgated by
any governmental authority which prohibits the exchange of Units for Common
Stock or consummation of the Merger; (iii) no order or injunction of a United
States or state court of competent jurisdiction in effect prohibiting the
exchange of Units or consummation of the Merger; (iv) the receipt by USRP of an
opinion of counsel to the effect that the Merger will be treated as part of a
transaction described in Section 351 of the Code; (v) the receipt of a favorable
Ruling from the IRS as to treatment of the Merger as part of a transaction
described in Section 351 of the Code; (vi) the receipt of all permits,
qualifications and other governmental approvals as are required under applicable
law in connection with the Merger and other transactions contemplated by the
Merger Agreement; (vii) the approval of the Common Stock for listing on the NYSE
upon official notice of issuance; and (viii) the approval of the amendments to
the Partnership Agreements by the affirmative vote of the holders of a majority
of the Units outstanding as of the Record Date. These conditions may not be
waived by USRP.
REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains
representations and warranties as to (i) the due organization and good standing
of each of the parties thereto; (ii) the authority of each of the parties
thereto to enter into the Merger Agreement and to perform the transactions
contemplated thereby; and (iii) the absence of conflicts with the execution of
the Merger Agreement by each of the parties thereto and the performance by each
of the parties thereto of the transactions contemplated thereby.
TERMINATION AND AMENDMENT. The Merger Agreement may be terminated at any
time prior to the consummation of the Merger by mutual written consent of the
REIT Corporation and USRP. In the event of such termination of the Merger
Agreement, the Merger Agreement will become void and have no effect.
At any time before or after approval and adoption of the Merger Agreement by
the Limited Partners, the Merger Agreement may be amended in any manner (except
the right of Unitholders to receive one share of Common Stock in exchange for
each Unit) as may be determined in the judgment of the REIT Board and the Board
of Directors to be necessary, desirable or expedient in order to clarify the
intention of the parties thereto or to effect or facilitate the purposes and
intent of the Merger Agreement. If any amendment to the Merger Agreement is
material to the Limited Partners' decision to vote for or against its approval
and adoption, the Company will distribute to the Limited Partners information
regarding the amendment prior to the expiration of the solicitation period and
the solicitation period will be extended to the extent necessary to allow
Limited Partners to consider fully the implications of such amendment. A revised
fairness opinion will be obtained from Morgan Keegan if a material amendment to
the Merger Agreement is made.
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AMENDMENTS TO THE PARTNERSHIP AGREEMENTS
In order to effect the Conversion, whether through the Merger Alternative or
the Exchange Alternative, and to provide greater operating flexibility following
the Conversion, certain amendments to the Partnership Agreements are proposed to
be made. The proposed amendments to the Partnership Agreements (i) establish the
Acquisition Price to be paid in connection with the Termination (which shall
occur at such time as the Managing General Partner ceases to be the managing
general partner of the Partnerships, whether by transfer of interest, withdrawal
or removal (other than for "cause")) and the procedure to be followed by both
Partnerships at the time of the Termination; (ii) permit the issuance of
Operating Partnership interests with terms comparable to preferred stock which
may, from time to time, be issued by the REIT Corporation; (iii) expand the
powers of the Partnerships to enable them to originate loans secured by real
estate and to acquire properties not exclusively used by restaurants; (iv)
permit the admission of new limited partners of the Operating Partnership at the
discretion of the managing general partner; and (v) provide a mechanism to
permit holders of interests in the Operating Partnership and/or Units to
exchange such interests for shares of Common Stock. Copies of the material
amended provisions of the Master Partnership Agreement and the Operating
Partnership Agreement are attached hereto as APPENDIX C and APPENDIX D,
respectively, and are incorporated herein by reference. A vote in favor of
either the Merger Alternative or the Exchange Alternative will constitute a vote
approving each of the amendments to the Partnership Agreements described below.
The Master Partnership Agreement requires the Limited Partners to approve by a
majority vote any amendment to the Operating Partnership Agreement if such an
amendment to the corresponding provision of the Master Partnership Agreement
would require a majority vote of the Limited Partners. Each of the proposed
amendments to the Partnership Agreements requires such a vote. If the Conversion
is effected by the Merger Alternative, USRP will be merged into the REIT Sub and
the Master Partnership Agreement would no longer have any force or effect.
The definition of "Other Restaurant Properties" will be amended and a new
definition of "Retail Properties" added in both Partnership Agreements to
provide for the acquisition of properties to be built out or leased to other
food vendors, such as convenience stores, whose revenues are not exclusively
derived from food sales, and retail outlets.
Article III and Section 7.2 of the Partnership Agreements will be amended to
expressly grant to the Partnerships and the managing general partner of the
Partnerships on behalf of the Partnerships, respectively, the power and
authority to originate loans or otherwise provide financing, whether through
guarantees, letters of credit or otherwise, secured by liens on real estate to
borrowers who meet the Partnerships' underwriting criteria, which shall be
established by the managing general partner of the Partnership.
Section 5.2 of the Operating Partnership Agreement will be amended to allow
the issuance of additional interests in the Operating Partnership ("Operating
Partnership Interests"). Such Operating Partnership Interests may be issued in
one or more classes, or one or more series of any such classes, with such
designations, preferences and relative, participating, optional or other special
rights powers and duties, including rights, powers and duties senior to other
Operating Partnership Interests, all as may be determined by the managing
general partner of the Operating Partnership in its sole and absolute
discretion. Additional Operating Partnership Interests may not be issued to USRP
or the REIT Corporation unless either (i) the additional Operating Partnership
Interests are issued in connection with the grant, award or issuance of Units or
shares of capital stock of the REIT Corporation, which Units or shares have
designations, preferences and other rights such that the economic interests
attributable to such Units or shares are substantially similar to the
designations, preferences and other rights of the additional Operating
Partnership Interests issued to USRP or the REIT Corporation and (ii) USRP or
the REIT Corporation shall make a capital contribution to the Operating
Partnership in an amount equal to the proceeds, if any, raised in connection
with the issuance of such Units or shares of capital stock, or the
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additional Operating Partnership Interests are issued to all partners in
proportion to their respective percentage interests in the Operating
Partnership.
Following the date of execution of the amended Operating Partnership
Agreement, neither USRP nor the REIT Corporation may grant, award or issue
additional Units or shares of capital stock, or rights, options, warrants or
convertible or exchangeable securities containing the right to subscribe for or
purchase such Units or shares of capital stock (collectively "New Securities"),
other than to all holders of such Units or shares of capital stock unless (i)
the managing general partner shall cause the Operating Partnership to issue to
USRP or the REIT Corporation Operating Partnership Interests or rights, options,
warrants or convertible or exchangeable securities of the Operating Partnership
having designations, preferences and other rights, all such that the economic
interests are substantially the same as those of the New Securities, and (ii)
USRP or the REIT Corporation makes a capital contribution to the Operating
Partnership of the proceeds from the grant, award or issuance of such New
Securities and from the exercise of rights contained in such New Securities.
A new Section 5.4 will be added to the Operating Partnership Agreement and a
new Section 5.14 will be added to the Master Partnership Agreement to permit the
exchange of interests in the Partnerships for shares of Common Stock based on
the exchange ratio provided therein, which initially will be one Partnership
unit for one share of Common Stock. Both Partnership Agreements will prohibit
the transfer of the units to third parties unless previously exchanged for
shares of Common Stock. The exchange ratio is subject to adjustment, however,
upon the occurrence of certain events such as the declaration of a dividend by
the REIT Corporation in shares of Common Stock, the subdivision of the
outstanding shares of Common Stock or the combination of outstanding shares of
Common Stock into a smaller number of shares. The exchange may only be effected
with respect to a minimum of 1,000 partnership units (in the case of the
Operating Partnership and 100 Units in the case of USRP) or, if the holder holds
fewer than 1,000 units (or 100 Units, as applicable) all such units. In
addition, the exchange right may not be exercised if issuing the shares of
Common Stock in the exchange would be prohibited under the REIT Corporation's
Articles. The Operating Partnership Agreement will permit such exchange to occur
at anytime, and the Master Partnership Agreement will not permit such exchange
to occur until the Common Stock is listed on the NYSE.
Section 9.1 of the Partnership Agreements, relating to the compensation of
the managing general partner of the Partnerships, will be amended to provide for
the conversion of the Operating Partnership General Partner Interest at such
time as the Managing General Partner ceases to be the managing general partner
of the Partnerships, whether as a result of transfer, withdrawal or removal
(other than for cause). Section 9.1 will also be amended to cause the successor
managing general partner to issue to the Managing General Partner the
Acquisition Price (less the value of the number of shares of Common Stock
received as part of the Acquisition Price). See "--Termination of the Operating
Partnership General Partner Interest."
Section 9.3 of the Partnership Agreements will be amended to provide for the
payment of fees to the Managing General Partner (prior to the Termination) for
the origination of mortgage loans on generally the same terms and conditions as
apply to the acquisition of restaurant properties.
A new Section 9.4 will be added to the Partnership Agreements to provide,
following the Termination, that the sole compensation for services rendered by
all subsequent general partners of the Partnerships shall be the reimbursement
by the Partnerships on a monthly basis of expenses incurred by any such general
partner in connection with the applicable Partnership's business or for the
benefit of the applicable Partnership.
Section 13.1 of the Operating Partnership Agreement and Section 14.1 of the
Master Partnership Agreement will be amended to provide that, once the
Termination has been effected, the REIT Corporation, or an affiliate of the REIT
Corporation, shall automatically succeed as managing general partner of the
Partnerships.
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EXCHANGE ALTERNATIVE
If the Ruling is not obtained from the IRS, the Conversion, if approved by
the Limited Partners, would be effected through the admission of the REIT
Corporation as a limited partner of the Operating Partnership and the exchange
of Units for shares of Common Stock by the Unitholders from time to time, at
their discretion, pursuant to the exchange rights to be provided for in the
amended Master Partnership Agreement, as described above. The Exchange
Alternative will be implemented only if USRP does not receive a favorable Ruling
from the IRS.
If the Conversion is effected pursuant to the Exchange Alternative,
Unitholders will not be required to exchange their Units for shares of Common
Stock until such time as they desire to sell their Units, which exchange right
would only become effective at such time as the Common Stock is listed on the
NYSE and would require such an exchange to take place prior to the sale of the
Units to a third party. Additionally, in order to effect the Exchange
Alternative, each of the other amendments proposed to be made to the Master
Partnership Agreement described above under "--The Merger
Alternative--Amendments to the Partnership Agreements" would become effective. A
vote in favor of the Exchange Alternative will constitute a vote approving the
amendments to the Master Partnership Agreement described above.
TERMINATION OF THE OPERATING PARTNERSHIP GENERAL PARTNER INTEREST
GENERAL
As described above, one of the amendments to the Partnership Agreements
being proposed in order to effect the Conversion is the establishment of the
Acquisition Price to be paid to the Managing General Partner for the Operating
Partnership General Partner Interest and the USRP Interest. If the Conversion is
effected by the Merger Alternative, the Managing General Partner will withdraw
as managing general partner of the Partnerships effective as of August 31, 1997
(unless extended by the Special Committee in its sole discretion) and, pursuant
to the terms of the Merger Agreement, a corporate subsidiary of the REIT
Corporation will be substituted as managing general partner of the Partnerships.
If the Exchange Alternative is adopted, the Managing General Partner will
withdraw as the managing general partner of the Partnerships effective as of
August 31, 1997 (unless extended by the Special Committee in its sole
discretion) and, pursuant to the terms of the Partnership Agreements, a
corporate subsidiary of the REIT Corporation would be substituted as managing
general partner of the Partnerships. In conjunction with either such withdrawal,
the Managing General Partner will (i) convert the Operating Partnership General
Partner Interest (if the Conversion is effected through the Merger Alternative)
or assign such interest to USRP (if the Conversion is effected through the
Exchange Alternative) pursuant to the terms of the Partnership Agreements and
(ii) convert the USRP Interest pursuant to the terms of the Merger Agreement
and/or the Master Partnership Agreement, as applicable, for the Acquisition
Price. As a result of the Termination, the Company would become self-advised and
no fees would be payable to a third party manager.
OPERATING PARTNERSHIP GENERAL PARTNER INTEREST AND USRP INTEREST
The Acquisition Price is being paid for the conversion or assignment
(depending upon how the Conversion is effected) of the Operating Partnership
General Partner Interest (consisting of the Managing General Partner's interest
in (i) its allocable share of income, profits, loss and distributions of the
Operating Partnership, as general partner thereof (the "OP Interest") and (ii)
fees and disbursements payable by the Operating Partnership for the acquisition
and management of the Operating Partnership's properties and the conversion of
the USRP Interest. In May 1994, an investor group, led by Messrs. Stetson and
Margolin, acquired all of the outstanding stock of QSV, the managing general
partner of the Partnerships, for $3.0 million, and as a result acquired the
Operating Partnership General Partner Interest and the USRP Interest. The USRP
Interest is a 1% interest in USRP and the OP Interest is a
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.99% interest in the Operating Partnership, which in the aggregate represents a
1.98% interest in the distributions of the Operating Partnership.
PAYMENTS TO THE MANAGING GENERAL PARTNER. The Managing General Partner is
paid 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 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 $1,175,000 for the year ended December
31, 1996. 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 Managing
General Partner is paid 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 1996, the aggregate
one-time acquisition fees equaled $1,043,000 which was capitalized and the
increased annual fee equaled $495,000.
In addition, if the Rate of Return (as defined in the Partnership
Agreements) on USRP'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.
For 1996, the Managing General Partner received fees based on the Rate of Return
of $93,000. However, to the extent the Managing General Partner receives
distributions in excess of those provided by its 1.98% partnership interests,
such distributions will reduce the fee payable with respect to such excess cash
flow from any additional properties. 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 of USRP.
PARTNERSHIP ALLOCATIONS. Net cash flow from operations of USRP 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 Master Partnership Agreement); 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.
USRP 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 Company'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. USRP 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.
THE ACQUISITION PRICE
The Acquisition Price consists of two components: (i) the Initial Share
Consideration and (ii) the Contingent Share Consideration. The Acquisition Price
consists of two components because of the Special Committee's interest in
protecting the stockholders of the REIT Corporation from being diluted from the
issuance of the Acquisition Shares and to enable the Special Committee to
establish a price to be paid for
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the Operating Partnership General Partner Interest and the USRP Interest which
cannot be valued with certainty. The Initial Share Consideration is equal to the
value of 850,000 shares of Common Stock (subject to adjustment in the event of
certain dilutive events, as more fully described below), and shall consist of
shares of Common Stock, Units and/or an interest in the Operating Partnership,
depending upon how the Conversion is effected (collectively, the "Initial
Shares"). The Initial Shares shall be issued by the REIT Corporation, USRP or
the Operating Partnership as applicable, as soon as practicable following the
date of the Termination, but in no event later than 30 days thereafter. At the
time of the Termination, the officers and employees of the Managing General
Partner will become officers and employees of the REIT Corporation, and the
Managing General Partner will have no further obligation to provide any
management services to any of the REIT Corporation, USRP or the Operating
Partnership.
The Contingent Share Consideration is equal to the value of up to a maximum
number of 550,000 shares of Common Stock, and shall consist of Units and/or an
interest in the Operating Partnership, depending upon how the Conversion is
effected (collectively, the "Contingent Shares" and, together with the Initial
Shares, the "Acquisition Shares") (which number or classification shall be
adjusted to give effect to any dividend or distribution of shares of capital
stock, rights or warrants to the holders of Common Stock, any reclassification
or change of the shares of Common Stock, including, without limitation, a stock
split, or any merger or consolidation of the REIT Corporation or USRP or sale of
assets to another corporation, any of which occurs after the date of the
Termination). The exact number of Contingent Shares to be issued will be
determined by dividing the (i) amount by which the MGP Net Income (as defined
below) for fiscal year 2000 of the Operating Partnership exceeds $3,612,500 by
(ii) $4.25, and rounding the resulting number up to the nearest whole number.
"MGP Net Income" means the dollar amount of fees and distributions which would
otherwise have been payable to the Managing General Partner in the year 2000 by
the Operating Partnership and USRP pursuant to the Operating Partnership General
Partner Interest and the USRP Interest had the Managing General Partner operated
the Operating Partnership on a continuous basis from the date of the Termination
through December 31, 2000, less $775,000.
For example, if the MGP Net Income for the year 2000 is $5,100,000
($5,875,000 less $775,000) then the Contingent Share Consideration would be
350,000 Contingent Shares.
The Contingent Shares, if any, shall be issued by USRP or the Operating
Partnership, as applicable, as soon as practicable following the end of fiscal
year 2000, but in no event later than March 31, 2001. The Managing General
Partner will not receive any dividends with respect to the Contingent Shares, or
otherwise have any rights with respect thereto, until they are issued.
REIT CORPORATION OFFICER COMPENSATION
Each of Mr. Stetson and Mr. Margolin shall enter into employment agreements
with the REIT Corporation as of the date of the Termination. These employment
agreements will provide, among other things, that each of them will have the
same positions, responsibilities and authority that each currently holds as an
officer of the Managing General Partner. Additionally, each employment agreement
will specifically provide that prior to December 31, 2000, neither Mr. Stetson
nor Mr. Margolin will receive cash compensation (I.E., excluding the value of
any equity-based compensation, such as stock options or shares of restricted
stock) in excess of $300,000 per year. See "Management--Employment Agreements."
WITHDRAWAL AGREEMENT
The Termination will be effected pursuant to an agreement (the "Withdrawal
Agreement") to be entered into by and among the Managing General Partner, the
REIT Corporation and the Operating Partnership. Pursuant to the Withdrawal
Agreement, the Managing General Partner will agree not to sell the Initial
Shares or the Contingent Shares for a period of two years from the respective
date of receipt thereof. In addition, the terms of the Withdrawal Agreement
shall provide that in the event of a "change in
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control" (as defined in the Withdrawal Agreement) of the REIT Corporation at any
time prior to December 31, 2000 all 550,000 Contingent Shares shall be issued to
the Managing General Partner.
CONFLICTS OF INTEREST
In considering the recommendation of the Managing General Partner with
respect to the Conversion, the Limited Partners should be aware that a majority
of the members of the Board of Directors thereof, by virtue of their ownership
interests in and/or positions or affiliations with the Managing General Partner,
were subject to conflicts of interest in determining the Acquisition Price.
Accordingly, the Special Committee was appointed to negotiate the Acquisition
Price on behalf of the Unitholders.
ANALYSIS OF THE SPECIAL COMMITTEE
At the December 16, 1996 meeting of the Board of Directors, Messrs. Stetson
and Margolin ("Management") indicated that they planned to submit a proposal to
USRP pursuant to which either (i) the Unitholders would become stockholders of a
newly-formed self-advised REIT that would indirectly own the assets currently
owned by the Partnerships, or (ii) the Partnerships would become self-advised.
Management indicated that such proposal would address the consideration that the
Managing General Partner would receive in connection with its withdrawal as
managing general partner of the Partnerships and the conversion of the Operating
Partnership General Partner Interest or the assignment of such interest to USRP
(depending upon how the Conversion is effected) and the conversion of the USRP
Interest. Because of the conflict of interest caused by the fact that four of
the six directors of the Managing General Partner are also stockholders of the
Managing General Partner, the Board of Directors appointed Gerald H. Graham and
Eugene G. Taper (the two directors who are not stockholders of the Managing
General Partner) to serve as members of a special committee (the "Special
Committee") to make a recommendation to the Board of Directors as to whether or
not it considered the Acquisition Price to be fair, from a financial point of
view, to the Limited Partners. The Board of Directors appointed Dr. Graham as
Chairman of the Special Committee, agreed to pay the members of the Special
Committee $5,000 each for serving as members of the Special Committee,
authorized the Special Committee to engage (at USRP's expense) legal counsel to
represent the Special Committee and a financial advisor to advise the Special
Committee, and agreed to reimburse the members of the Special Committee for
expenses that they incurred serving on the Special Committee. The Special
Committee selected and engaged legal counsel.
The Special Committee engaged Morgan Keegan as financial advisor to the
Special Committee. Morgan Keegan is an investment banking firm that regularly
renders valuations of businesses and securities in connection with mergers and
acquisitions, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for various purposes. The
Special Committee interviewed four investment banking firms as candidates to be
the financial advisor to the Special Committee. The Special Committee selected
Morgan Keegan because of its extensive experience with real estate investment
trusts, both as a managing underwriter of public securities offerings by REITs
and acting as a financial advisor in connection with mergers and acquisitions
involving REITs, and because Morgan Keegan was familiar with USRP and the
Managing General Partner, having served as managing underwriter in connection
with USRP's June 1996 public offering and as a financial advisor to USRP in
connection with such offering.
On December 30, 1996, Management submitted a proposal to the Special
Committee that provided for a formula pursuant to which the Managing General
Partner would receive partnership units (i) upon the closing of the transaction
based on the net income of the Managing General Partner prior to the closing and
(ii) for each of the 10 quarters thereafter based on the growth in funds from
operations before interest of USRP for such 10 quarters. Morgan Keegan indicated
to the Special Committee that based on projections provided by Management, the
Managing General Partner would receive approximately 1,700,000 shares under such
proposal if USRP were to meet its projections. The Special Committee rejected
this proposal.
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On January 10, 1997, Management submitted a new proposal to the Special
Committee pursuant to which the Managing General Partner would withdraw as the
managing general partner of the Partnerships and convert the Operating
Partnership General Partner Interest or assign such interest to USRP (depending
upon how the Conversion is effected) and convert the USRP Interest in exchange
for 1,630,000 shares issued over time as follows: 640,000 shares on or before
September 30, 1997, 220,000 shares on or before January 1, 1998 and 110,000
shares for each of the next seven quarters.
The Special Committee held two meetings with its legal counsel and financial
advisor to consider the January 10, 1997 proposal. On January 15, 1997, the
Special Committee rejected that proposal and submitted a proposal to Management
pursuant to which the Managing General Partner would convert the Operating
Partnership General Partner Interest or assign such interest to USRP (depending
upon how the Conversion is effected) and convert the USRP Interest in exchange
for 1,100,000 shares, of which 900,000 shares would be issued at the closing and
200,000 shares would be issued if USRP (or the REIT Corporation) achieved
projected funds from operations per unit for the year ended December 31, 1998.
The offer was made subject to the execution and delivery of documentation that
is satisfactory to the Special Committee to implement the Conversion and to the
condition that satisfactory arrangements are made so that a Unitholder who wants
to sell in the open market after the Conversion will be able to convert his or
her Units to Common Stock and sell such Common Stock with the same speed he or
she can presently sell Units (I.E., the conversion and subsequent sale will be
transparent to the Unitholder).
The Special Committee and Management then met on January 16, 1997 and
negotiated the terms of the proposal. Although the Special Committee and
Management did not agree upon terms at that meeting, they agreed to seek to
negotiate a proposal within the following framework: (i) a certain number of
shares would be issued at closing, and (ii) additional shares (up to a stated
maximum number) would be issued based on what the Managing General Partner would
have received based on the Operating Partnership General Partner Interest. The
discussions ranged between 1,300,000 shares and 1,600,000 shares and varied with
regard to timing, the number of shares that would be guaranteed and the number
of shares that would be contingent and the basis upon which contingent shares
would be issued. The Special Committee also introduced the concept of having the
Managing General Partner agree not to sell the shares received upon the closing
of the Termination for a two-year period after closing and Management's
agreement that their cash compensation as employees of the REIT Corporation
would not exceed a certain level for a certain period of time after the closing.
Management introduced the concept of providing a mechanism for the Managing
General Partner to receive the contingent shares if the REIT Corporation were
acquired prior to the end of the period that would be used to determine the
number of contingent shares to be issued.
The Special Committee and Management continued negotiations for several
days, and on January 22, 1997, Management presented a proposal to the Special
Committee. The Special Committee requested additional detail with regard to
certain issues. On January 27, 1997, Management submitted a more detailed
proposal to the Special Committee and followed up in a telephone conference with
certain additional details (collectively, the "January 27, 1997 Proposal"), the
primary terms of which are as follows:
1. The Managing General Partner would convert the Operating Partnership
General Partner Interest or assign such interest to USRP (depending upon
how the Conversion is effected) and convert the USRP Interest at the
earlier of the effectiveness of the initial public offering by the REIT
Corporation (the "IPO") or August 31, 1997, unless a later date was
agreed upon by the Special Committee and the Managing General Partner.
2. The Managing General Partner would receive 850,000 Units (or such number
of shares of Common Stock as a holder of 850,000 Units would receive in
the Conversion or an interest in the Operating Partnership equal in value
to 850,000 Units that would be convertible into or exchangeable for such
number of shares of Common Stock as a holder of 850,000 Units would
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receive in the Conversion, depending upon how the Conversion is effected)
for the conversion of the Operating Partnership General Partner Interest
and the USRP Interest.
3. The Managing General Partner might also receive additional consideration
equal in value to up to 550,000 Units (or such number of shares of Common
Stock as a holder of 550,000 Units would receive in the Conversion or an
interest in the Operating Partnership equal in value to 550,000 Units
that would be convertible into or exchangeable for such number of shares
of Common Stock as a holder of 550,000 Units would receive in the
Conversion, depending upon how the Conversion is effected) but only if
the management/general partner fees and distributions that the Managing
General Partner would have received if the arrangements that are
currently in place had not been terminated, reaches or exceeds certain
levels in the year ending December 31, 2000. For every $4.25 of
management/general partner fees and distributions which would have been
earned in the year ending December 31, 2000, the Managing General Partner
would receive one Contingent Share (allowing for splits, etc.) less the
Initial Shares already received (850,000) subject to a maximum 550,000
Contingent Shares. For the purposes of this calculation, the
management/general partner fees and distributions will be the
management/general partner revenues which would have been received during
the year ending December 31, 2000 as prescribed by the Partnership
Agreements less $775,000, which are the projected expenses of the
Managing General Partner in the year 2000 which would then be incurred by
the REIT Corporation or USRP. If the REIT Corporation or USRP, as
applicable, is acquired by an unrelated third party prior to December 31,
2000 and pursuant to that acquisition there is a change in control of the
REIT or USRP, as applicable, the entire maximum contingent share
consideration would be issued to the Managing General Partner at the time
of such acquisition.
4. Messrs. Stetson and Margolin would agree not to receive annual cash
compensation as employees of the REIT Corporation or the Partnerships of
more than $300,000 each in each year up to and including the year ending
December 31, 2000.
5. The Managing General Partner would agree not to sell the 850,000 Initial
Shares it receives until at least two years after receipt thereof and not
to sell any of the Contingent Shares until December 31, 2002.
6. The Managing General Partner indicated that the relevant documentation
to evidence the issuance of the Acquisition Shares to the Managing
General Partner would be in a form that was satisfactory to the Special
Committee, and that satisfactory arrangements would be made to ensure
that a Unitholder who wants to sell in the open market after the closing
of the Conversion would be able to convert his or her Units to shares of
Common Stock (if applicable) and sell such shares of Common Stock with
the same speed he or she can presently sell partnership units (I.E., the
conversion and subsequent sale would be transparent to the Unitholder).
On February 5, 1997, the Special Committee met and Morgan Keegan made a
presentation and gave its oral opinion to the Special Committee that the
Acquisition Price set forth in the January 27, 1997 Proposal was fair, from a
financial point of view, to the Unitholders. At that February 5, 1997 meeting,
the Special Committee recommended to the Board of Directors of the Managing
General Partner that it considered the Acquisition Price set forth in the
January 27, 1997 Proposal to be fair, from a financial point of view, to the
Unitholders. The Special Committee conditioned its recommendation on the
issuance by Morgan Keegan of an additional fairness opinion on the date of this
Proxy Statement/Prospectus to the effect that as of the date of the Proxy
Statement/Prospectus the Acquisition Price proposed to be paid to the Managing
General Partner was fair, from a financial point of view, to the Unitholders.
In addition to considering Morgan Keegan's fairness opinion in making its
recommendation, the Special Committee also considered the structure of the
Acquisition Price, in that the Managing General Partner would receive all or a
portion of the Contingent Shares if and only if the MGP Net Income for the year
ending December 31, 2000 reaches or exceeds certain levels. The Special
Committee concurred with
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Morgan Keegan's determination that the most appropriate methodology to determine
the fairness of the Acquisition Price was to determine the present value to the
Partnerships of the fees that it would have to pay to the Managing General
Partner but for the Termination. The Special Committee recognized the difficulty
of determining the present value to the Partnerships of being relieved of their
obligations under the Operating Partnership General Partner Interest and the
USRP Interest because the amounts that would be paid under the Operating
Partnership General Partner Interest and the USRP Interest in the future depend,
in large part, on the future growth and performance of the Company. In
determining the present value to the Partnerships of such fees and
distributions, the Special Committee looked at the historical level of fees and
distributions paid annually by the Partnerships to the Managing General Partner,
as well as management's projections for those fees and distributions. Because of
the uncertainty relating to actual amounts that would be payable in the future
under the Operating Partnership General Partner Interest and the USRP Interest,
the Special Committee considered favorably the fact that Contingent Share
Consideration was based on the fees and distributions that would have been
payable to the Managing General Partner in the year ending December 31, 2000. As
such, the Contingent Share portion of the Acquisition Price provides a mechanism
for the consideration to be paid by the Company to correlate to the obligations
the Company is being relieved of under the Operating Partnership General Partner
Interest and the USRP Interest. The Special Committee also considered favorably
the facts that (i) there is a cap on the maximum number of Contingent Shares
that could be issued, and (ii) the base year for considering the Contingent
Shares is three years from now.
Additionally, the Special Committee considered the fact that the Managing
General Partner was being relieved of its obligation to provide management
services. The Special Committee considered favorably several factors that it
hoped would give Messrs. Stetson and Margolin additional incentive to achieve
superior long-term results for the Company including (i) the Contingent Share
issuance would be based on events occurring in the year 2000 and (ii) the
Managing General Partner agreed not to sell the Initial Shares until at least
two years after receipt thereof and not to sell any of the Contingent Shares
until December 31, 2002. The Special Committee also considered favorably that
each of Messrs. Stetson and Margolin agreed not to receive annual cash
compensation as employees of the REIT Corporation or the Partnerships of more
than $300,000 in each year up to and including the year ending December 31,
2000.
FAIRNESS OPINION
MORGAN KEEGAN FAIRNESS OPINION
The Special Committee retained Morgan Keegan to act as its financial advisor
and to render its opinion concerning the fairness to the Unitholders, from a
financial point of view, of the Termination, the transaction whereby the
Managing General Partner will withdraw as managing general partner of the
Partnerships, and convert its Operating Partnership General Partner Interest and
convert the USRP Interest in exchange for the Acquisition Price pursuant to the
Withdrawal Agreement. Morgan Keegan did not recommend to USRP that any specific
consideration would constitute the appropriate consideration to be paid.
At a meeting of the Special Committee held on February 5, 1997, Morgan
Keegan made a presentation and gave its oral opinion to the Special Committee
that the Acquisition Price is fair, from a financial point of view, to the
Unitholders. In addition, Morgan Keegan confirmed, in a written opinion dated as
of the date of this Proxy Statement/Prospectus that, as of such date, the
Acquisition Price is fair, from a financial point of view, to the Unitholders
(the "Fairness Opinion"). The Fairness Opinion addresses the transaction to
which it relates in the context of the information available on that date.
Events occurring after that date may materially affect the assumptions used in
preparing the Fairness Opinion.
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THE FULL TEXT OF THE WRITTEN OPINION OF MORGAN KEEGAN, WHICH SETS FORTH THE
ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, THE MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN IN ARRIVING AT SUCH OPINION, AND THE LIMITS
OF ITS REVIEW, IS ATTACHED HERETO AS APPENDIX B, AND IS INCORPORATED HEREIN BY
REFERENCE. UNITHOLDERS ARE URGED TO READ SUCH OPINION IN ITS ENTIRETY. MORGAN
KEEGAN'S OPINION IS DIRECTED ONLY TO THE FAIRNESS TO THE UNITHOLDERS, FROM A
FINANCIAL POINT OF VIEW, OF THE ACQUISITION PRICE. THE FAIRNESS OPINION DOES NOT
ADDRESS ANY OTHER ASPECT OF THE TRANSACTION OR RELATED REIT CONVERSION AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY UNITHOLDER AS TO HOW SUCH UNITHOLDER
SHOULD VOTE AT THE SPECIAL MEETING. THE SUMMARY OF THE OPINION OF MORGAN KEEGAN
SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
EXPERIENCE OF MORGAN KEEGAN
Morgan Keegan is a nationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for various
purposes. The Special Committee selected Morgan Keegan as its financial advisor
on the basis of such experience and expertise in transactions similar to the
Termination and Morgan Keegan's familiarity with the real estate and REIT
industries.
SUMMARY OF MATTERS CONSIDERED
In arriving at its opinion, Morgan Keegan reviewed (i) this Proxy
Statement/Prospectus as originally filed with the Commission on February 7,
1997, (ii) the Partnership Agreements (and the proposed amendments thereto),
(iii) an unexecuted draft of the Withdrawal Agreement (which, for purposes of
its analysis, it assumed that any further revisions, including the filling in of
blank spaces and the attachment of final exhibits and appendices, would not
materially alter the terms and provisions of such documents and that such
documents would be executed as finalized), and (iv) certain publicly-available
financial information and internal financial analyses concerning USRP and the
Operating Partnership and internal financial analyses concerning the Managing
General Partner and held discussions with members of senior management of USRP
and the Managing General Partner regarding the business and prospects of the
companies and the business and prospects of the USRP on a self-advised basis. In
addition, Morgan Keegan reviewed the reported price and trading volume of the
Units since the Acquisition Price will be paid in Units (or a proportional
number of shares of Common Stock or a proportionate ownership interest in the
Operating Partnership, depending upon how the Conversion is effected). Although
Morgan Keegan did not undertake a detailed analysis of the reported price and
trading volume of the Units, based on its experience and knowledge of USRP and
comparable companies, it believed that the Units were fairly valued at the time
of its opinion, and that the current price and trading volume supported the
conclusion reached in its opinion. Morgan Keegan also compared certain financial
information of the Managing General Partner with similar information for certain
selected companies engaged in the real estate management industry whose
securities are publicly traded, reviewed the financial terms of selected recent
business combinations, reviewed certain pro forma analyses regarding the
business and prospects of USRP after the Termination and performed such other
studies and analyses as Morgan Keegan considered appropriate. Morgan Keegan was
not asked to consider or provide an opinion, and is not expressing any opinion,
with respect to (i) the fairness of the Conversion, other than the Acquisition
Price, (ii) the fairness of the Acquisition Price from any point of view other
than from a financial point of view, (iii) the fairness of any other alternative
transaction or structures available to USRP or the Operating Partnership with
respect to the acquisition or withdrawal of the Managing General Partner or any
other transaction involving the Managing General
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Partner, or (iv) the effect of federal, state or other tax laws, rules or
regulations on the USRP or any other party to the Conversion arising from the
Termination and Withdrawal Agreement and related transactions.
SCOPE OF OPINION
The scope of Morgan Keegan's opinion was limited to the fairness to the
Unitholders, from a financial point of view, of the Acquisition Price. Morgan
Keegan did not undertake an analysis nor give an opinion with respect to the
fairness to the Unitholders, from a financial point of view, of the Merger
Alternative or the Exchange Alternative.
ASSUMPTIONS
In connection with its review and analysis and in arriving at its opinion,
Morgan Keegan assumed the accuracy, completeness and fairness of any information
provided to or otherwise reviewed by Morgan Keegan, including, without
limitation, this Proxy Statement/Prospectus, and relied upon such information
being complete and accurate in all respects. Morgan Keegan did not independently
verify any of such information. Morgan Keegan also assumed the correctness of
and relied upon the representations and warranties of all parties contained in
the Withdrawal Agreement. Morgan Keegan also relied upon the judgment of the
management of the Managing General Partner as to the reasonableness and
achievability of the financial and operating projections and the assumptions and
bases therefore provided to it, and assumed that such projections reflected the
best currently available estimates and judgment of the management of the
Managing General Partner and that, subject to reasonable discounts attributable
to the likelihood of achieving such results, such projections and forecasts
would be realized in the amounts and time period then estimated by the
management of the Managing General Partner. Morgan Keegan was not engaged to
assess the achievability of such projections or assumptions. Morgan Keegan was
not engaged to, and did not conduct a physical inspection or appraisal of any of
the assets, properties or facilities of either USRP, the Operating Partnership
or the Managing General Partner, nor was it furnished with any such evaluation
or appraisal. Morgan Keegan assumed that the conditions to the Termination and
the Withdrawal Agreement would be satisfied.
ANALYSIS AND CONCLUSION
The following is a summary of the financial and comparative analyses
performed by Morgan Keegan in connection with the preparation of the Fairness
Opinion:
The Termination is structured as the withdrawal of the Managing General
Partner as the managing general partner of the Partnerships and the amendment of
the Partnership Agreements to provide for the conversion of the Operating
Partnership General Partner Interest or the assignment of such interest to USRP
(depending upon how the Conversion is effected) and the conversion of the USRP
Interest. In consideration of the Managing General Partner's agreement to
withdraw as the general partner and to convert the Operating Partnership General
Partner Interest or assign such interest to USRP (depending upon how the
Conversion is effected) and convert the USRP Interest, the Managing General
Partner will initially receive the Initial Share Consideration, consisting of
850,000 Units (or such number of shares of Common Stock as a holder of 850,000
Units would receive in the Conversion or an interest in the Operating
Partnership equal in value to 850,000 Units that would be convertible or
exchangeable for such number of shares of Common Stock as a holder of 850,000
Units would receive in the Conversion, depending upon how the Conversion is
effected). Additionally, the Managing General Partner has the right to receive
the Contingent Share Consideration, consisting of 550,000 Units (or such number
of shares of Common Stock as a holder of 550,000 Units would receive in the
Conversion or an interest in the Operating Partnership equal in value to 550,000
Units that would be convertible or exchangeable for such number of shares of
Common Stock as a holder of 550,000 Units would receive in the Conversion,
depending upon how the Conversion is effected) at December 31, 2000, if certain
cash flow targets are attained. Morgan Keegan estimates the present value of the
Acquisition Price to be between $28 million
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and $34 million, giving effect to the restrictions on transfer applicable to the
units (or shares) being issued, the probability that the cash flow targets
necessary to earn the Contingent Shares will be attained and the fact that no
dividends will be paid on the Contingent Shares until they are earned.
In determining the fairness of the Acquisition Price from a financial point
of view, to the Unitholders, Morgan Keegan endeavored to value the fees that
would be payable by the Partnerships to the Managing General Partner but for the
Termination. Because the Termination does not involve the acquisition of the
Managing General Partner, some of the traditional valuation methodologies were
less appropriate than others.
Morgan Keegan determined that the most appropriate methodology was to
determine the present value to the Partnerships of the fees that it would have
to pay to the Managing General Partner but for the Termination. In determining
the present value to the Partnerships of these fees, Morgan Keegan looked at the
historical level of fees paid annually by the Partnerships to the Managing
General Partner, as well as management's projections for those fees, which are
largely a function of the growth and performance of the Partnerships. In
addition to valuing the management fees payable to the Managing General Partner,
Morgan Keegan analyzed the likely effect on the Partnerships as a result of the
Termination in terms of funds from operations per share.
In performing its analysis, Morgan Keegan considered a variety of valuation
methodologies, including: (i) discounted cash flow analysis, (ii) comparable
company analysis, and (iii) comparable transaction analysis. Morgan Keegan also
analyzed the Termination utilizing a pro forma merger analysis and a
contribution analysis.
DISCOUNTED CASH FLOW ANALYSIS. Morgan Keegan used a discounted cash flow
analysis to value the future stream of fees that would have been payable to the
Managing General Partner had the Termination not occurred. Morgan Keegan
performed a discounted cash flow analysis of the projected cash flow (unlevered
net income) of the Managing General Partner for fiscal years 1997 through 2001,
based on operating projections provided by USRP and the Managing General
Partner. The Company's operating projections indicated projected cash flow of
the Managing General Partner for each of the fiscal years 1997 through 2001, of
approximately $2.3 million, $4.4 million, $6.6 million, $8.3 million and $9.9
million, respectively. In determining these amounts, Morgan Keegan took into
account certain expenses historically paid by the Managing General Partner that
would be paid by the REIT Corporation upon consummation of the Termination,
including salaries and general and administrative expenses. Using this
information, Morgan Keegan calculated a range of equity values for the Managing
General Partner based on the sum of (i) the present value of the free cash flows
of the Managing General Partner and (ii) the present value of the estimated
terminal value for the Managing General Partner assuming that it was sold at the
end of fiscal year 2001. In performing its discounted cash flow analysis, Morgan
Keegan assumed, among other things, discount rates ranging from 10% to 27.5%
(depending on the predictability of the income from various fees under the
Property Management Contract) and terminal multiples of EBIT of 6.0x to 9.0x.
Those discount rates and terminal multiples reflect Morgan Keegan's qualitative
judgments concerning the specific risk associated with such an investment and
the historical and projected operating performance of the Managing General
Partner. This analysis resulted in a range of equity values for the Managing
General Partner of $33.9 million to $56.5 million. Morgan Keegan focused its
analysis on the midpoint of these discount rates and terminal multiples. Such
analysis implied an equity value range for the Managing General Partner of $40.3
million to $47.8 million.
COMPARABLE COMPANY ANALYSIS. Morgan Keegan also analyzed selected
publicly-traded real estate companies engaged primarily as managers and advisors
in the real estate business. Morgan Keegan considered the following companies:
CB Commercial Holdings, Grubb & Ellis Company, Hallwood Realty Partners, Inc.,
Insignia Financial Group, Inc. and NHP, Inc. Morgan Keegan compared the market
value of each, as determined by the closing price recorded for each company's
common stock, with each company's revenue, net income, EBITDA and EBIT. In
addition, Morgan Keegan determined the market value and
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<PAGE>
the adjusted market value of each comparable company and calculated trading
multiples based on revenue, EBITDA, EBIT and net income. Based on the median
multiples of the comparable companies, this analysis resulted in a range of
equity values for the Managing General Partner of $3.4 million to $47.0 million.
Morgan Keegan focused its analysis on EBIT and on EBITDA and determined a range
of $20 million to $50 million. No company used in this group of comparable
companies was similar to the Managing General Partner in terms of the fee
structure and income stream payable under the Operating Partnership General
Partner Interest, and the companies all are larger and more diversified than the
Managing General Partner. Accordingly, these comparable companies did not
provide a meaningful method of valuing the Managing General Partner.
COMPARABLE ACQUISITIONS. Morgan Keegan also compared the Termination with
acquisitions by selected public companies engaged primarily in the real estate
management, development and acquisition business. Under this approach, Morgan
Keegan considered, among others, the acquisitions of Security Management
Corporation, ConCap, O'Donnell Property Services, Allegiance Realty Group,
National Property Investors and Angeles Corporation by Insignia Group, Inc., the
acquisition of BT Venture Corporation by Boddie-Noell Properties, Inc. and the
consolidation of Franchise Finance Corporation of America with existing related
real estate limited partnerships. Morgan Keegan determined the multiples of
market value and adjusted market value to revenue, EBITDA, EBIT and net income
for each of these companies. Morgan Keegan then applied these multiples to the
revenue, EBITDA, EBIT and net income of the Managing General Partner. Morgan
Keegan also considered other financial and other operating characteristics of
these companies in its analysis.
Morgan Keegan also reviewed certain acquisitions of real estate advisory and
management companies by publicly traded REITs. This review included calculating
the multiples obtained by comparing the prices paid to acquire such companies
with the advisory fees earned by the acquired companies during the last full
fiscal year prior to the REIT's becoming self-advised. Under this approach,
Morgan Keegan considered Bradley Real Estate Trust, Boddie-Noell Properties,
Inc., Burnham Pacific Properties, Inc., Meditrust, Health Care REIT, Inc.,
Storage Equities, Inc., Shurgard Storage Centers, Inc., Realty Income
Corporation, Mid-America Apartment Communities, Inc., Summit Properties,
Associated Estates Realty Corporation, Paragon Group, Inc. and Criimi Mae Inc.
Based on the multiples of revenue, EBITDA, EBIT, funds from operations and net
income of the comparable transactions, this analysis resulted in a range of
values for the Managing General Partner of $3.6 million to $70.8 million. Morgan
Keegan focused its analysis on the median range of values which resulted in a
range of values for the Managing General Partner of $15.0 million to $30.0
million. Morgan Keegan also considered other financial and operating
characteristics of these companies in its analysis. No company or transaction
was similar to the Managing General Partner in terms of the fee structure and
income stream payable under the Partnership Agreements. Accordingly, these
comparable companies did not provide a meaningful method of valuing the Managing
General Partner.
PRO FORMA MERGER ANALYSIS. Morgan Keegan also analyzed the effect of the
Termination on the financial projections of the Partnerships based on the
Acquisition Price to be paid to the Managing General Partner pursuant to the
Withdrawal Agreement. USRP's stand alone projections for 1997 through 2000 were
compared with pro forma combined company projections for funds from operations
and other measures of profitability in order to determine the degree of
dilution, if any, to the Unitholders subsequent to the Termination. This
analysis indicated that the Termination should be accretive to pro forma
combined company's funds from operations for each year from 1997 through 2000.
For the purposes of this analysis, funds from operations were calculated in a
manner consistent with the Partnerships' current policy.
CONTRIBUTION ANALYSIS. Morgan Keegan analyzed the contribution of the
Partnerships and the Managing General Partner to the projected 1997 through 2000
operating results of the pro forma combined company. Morgan Keegan calculated
the percentage contribution for each entity relative to total income, EBIT, net
income and funds from operations of the pro forma combined company. Morgan
Keegan then
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<PAGE>
calculated the percentage ownership on a post-transaction basis for both
existing Unitholders and the Managing General Partner. Morgan Keegan concluded
that from the Unitholders' perspective, the Managing General Partner's
percentage contribution to total income, EBIT, net income and funds from
operations compares favorably with its proposed percentage ownership of the pro
forma combined company.
Based on the foregoing, Morgan Keegan concluded that, based on various
assumptions and considerations, the Acquisition Price is fair, from a financial
point of view, to the Unitholders.
The summary set forth above does not purport to be a complete description of
the presentation by Morgan Keegan to the Special Committee or of the analyses
performed by Morgan Keegan. The preparation of a fairness opinion is not
necessarily susceptible to partial analysis or summary description. Morgan
Keegan believes that its analyses and the summary set forth above must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses, or of the above summary, without considering all
factors and analyses, would create an incomplete view of the process underlying
the analyses presented to the Special Committee set forth in Morgan Keegan's
fairness opinion. In addition, Morgan Keegan may have deemed various assumptions
more or less probable than other assumptions, so that the ranges of valuations
resulting from any particular analysis described above should not be taken to
represent the actual value of the payments to the Managing General Partner or
the combined company.
In performing its analyses, Morgan Keegan made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Partnerships or the
Managing General Partner. The analyses performed by Morgan Keegan are not
necessarily indicative of actual values or actual future results, which may be
significantly more or less favorable than suggested by such analyses. Such
analyses were prepared solely as part of Morgan Keegan's analysis of the
fairness, from a financial point of view, of the Acquisition Price and were
discussed with the Special Committee. The analyses do not purport to be
appraisals or to reflect the prices at which a company might actually be sold or
the prices at which any securities may trade at the present time or at any time
in the future. In addition, as described above, Morgan Keegan's presentation to
Special Committee and its Fairness Opinion was one of many factors taken into
consideration by the Special Committee in making its determination to approve
the Acquisition Price.
COMPENSATION AND MATERIAL RELATIONSHIPS
The Special Committee has engaged Morgan Keegan to provide investment
banking advice and services in connection with the Special Committee's review
and analysis of the Termination. USRP agreed to pay Morgan Keegan: (i) a fee of
$50,000 upon execution of an engagement letter, and (ii) a fee of $175,000 at
the time of delivery of the Fairness Opinion.
USRP has also agreed to reimburse Morgan Keegan for reasonable out-of-pocket
expenses, including fees and disbursements of counsel, incurred by Morgan Keegan
in carrying out its duties under the engagement letter, and to indemnify Morgan
Keegan for certain liabilities to which it may be subjected in connection with
its engagement.
In addition to rendering the opinion, Morgan Keegan has in the past provided
investment banking services to USRP, for which it received customary fees. In
June 1996, Morgan Keegan acted as the lead manager of the Partnership's
1,800,000 Unit offering. In addition to the underwriting fees and commissions of
approximately $1.2 million, USRP paid Morgan Keegan a financial advisory fee of
$200,000. In May 1996, an affiliate of Morgan Keegan provided a $20 million
mortgage warehouse facility to USRP in exchange for interest payments on amounts
outstanding thereunder at a rate of 300 basis points over LIBOR. This facility
was paid in full in January 1997. In the ordinary course of its business, Morgan
Keegan may trade the Units for its own account and for the account of its
customers and may at any time hold a short or long position in such securities.
Morgan Keegan has expressed no opinion as to the prices
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<PAGE>
or trading range at which the Units may trade following the date of its opinion
or upon completion of the Termination.
ANALYSIS OF ALTERNATIVES CONSIDERED
CONTINUATION OF USRP
In reaching its decision to recommend the Conversion to the Unitholders, the
Board of Directors considered the alternative of continuing USRP in its current
form as a master limited partnership. The Board of Directors determined,
however, that based on the reasons discussed above under "--Advantages of the
Conversion," proceeding with the Conversion would be more beneficial to the
Unitholders than the alternative of continuing USRP in its existing form. The
Managing General Partner believes these advantages outweigh the disadvantages
discussed under the caption "--Disadvantages of the Conversion." In reaching its
decision to recommend the Conversion, the Managing General Partner did not
consider any other alternative to the Conversion or any other means of
accomplishing the intended result thereof.
LIQUIDATION OF USRP
With respect to the alternative of liquidating USRP, the Board of Directors
concluded that, based on the estimated liquidation value per Unit ($20.00,
determined as set forth below under "--Comparison of Values"), such alternative
was less favorable to the Unitholders than the receipt of shares of Common
Stock, assuming the Common Stock trades at a price per share comparable to the
current trading price per Unit ($28.25 at May 5, 1997), although no assurance
can be given that such a trading price will result. See "Risk
Factors--Substitution of Trading of Common Stock for Units."
COMPARISON OF VALUES
CONTINUATION OF USRP
A comparison of the value that will be received by the Unitholders upon
consummation of the Conversion as opposed to the value of the Units that would
be held if USRP continued as a partnership depends upon the relative market
prices of the Units and the shares of Common Stock. If the market price of the
Units and the shares of Common Stock is similar, then the market value of the
individual Unitholder's investment would be substantially similar if the
Conversion were completed or if USRP continued in its existing format. It is
impossible to determine the market's reaction to the Conversion and no
assurances can be given that the value of an individual Unitholder's investment
will not be materially adversely affected by the Conversion. If the shares of
Common Stock after the Conversion have a market value less than the Units before
the Conversion, then the market value of the Unitholder's investment would be
proportionately reduced. In addition, adverse tax consequences that may be
incurred by certain Unitholders as a result of the Conversion could affect the
calculation of comparative value for such Unitholders.
LIQUIDATION OF USRP
A comparison of the value that will be received by a Unitholder upon
consummation of the Conversion as opposed to the value of what a Unitholder
would receive upon a liquidation of USRP depends primarily upon the market price
of the shares of Common Stock and the net proceeds that could be realized from a
sale of the Company's properties. The value of the shares of Common Stock
received upon completion of the Conversion would be calculated by multiplying
the number of shares of Common Stock held by the market price of such shares.
The resulting amount would be the value received by the Unitholder as a result
of the Conversion. The Company does not regularly obtain appraisals of its
properties; consequently, for purposes of conducting a liquidation analysis, the
Managing General Partner aggregated the acquisition costs of each of the
Company's properties, which totalled $213 million. Based on such total value,
the Managing General Partner estimates that the distribution per Unit from the
sale of
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the Company's properties would equal approximately $20.00, assuming assets,
liabilities and contractual arrangements, as they existed at December 31, 1996.
The actual price at which the properties could be sold, however, cannot be
determined. The actual amount of the distribution per Unit would also depend
upon costs incurred in connection with the sale. The $20.00 per Unit value was
calculated by subtracting estimated transaction costs ($3 million) and debt ($69
million) from the sum of the property costs ($213 million). The resulting amount
was multiplied by 98.02 to reflect the Unitholders' percentage interest in
operational distributions and divided by the number of outstanding Units
(approximately 6.9 million at December 31, 1996). The difference in value
received upon consummation of the Conversion as opposed to liquidation of the
Partnership would be the market price of the shares of Common Stock received as
compared to such liquidation value. Assuming the market price per share of
Common Stock following the Conversion is comparable to the market price per Unit
($28.25 at May 5, 1997), the per Unit distribution of $20.00 upon liquidation
would be less than the value of the shares of Common Stock received in the
Conversion. In addition, if the properties were to be sold, the Unitholders
would not be able to receive further distributions from the properties or any
future real estate investments by the Company.
ALLOCATION OF SHARES OF COMMON STOCK AMONG UNITHOLDERS AND THE MANAGING GENERAL
PARTNER
The Board of Directors determined, based on the fact that the REIT
Corporation will initially own the same assets as those held by USRP through its
ownership interest in the Operating Partnership, that it was appropriate for
each of the Unitholders to receive one share of Common Stock for each Unit held
by them immediately prior to the Conversion (or 7,796,254 shares of Common Stock
on account of their 99% percentage interest in USRP). Based on this analysis,
the Board of Directors concluded that the Managing General Partner should
receive 78,750 shares of Common Stock (if the Conversion is effected through the
Merger Alternative) and 1% of the outstanding Units immediately following the
Conversion (if the Conversion is effected through the Exchange Alternative).
In order to determine the number of shares of Common Stock (or the
equivalent interest in the Operating Partnership or the equivalent number of
Units) to be issued to the Managing General Partner in connection with the
conversion or assignment of its Operating Partnership General Partner Interest,
the Board of Directors established the Special Committee to negotiate on behalf
of the Unitholders the Acquisition Price. The Managing General Partner
determined that a special committee was necessary due to the potential conflict
of interest between management of the Managing General Partner and the
Unitholders in determining the Acquisition Price. See "Risk Factors--Conflict of
Interest" and "The Conversion--Analysis of the Special Committee."
EXECUTIVE COMPENSATION
The compensation of the executive officers of the REIT Corporation is
expected to be as described under "Management Executive Compensation." USRP does
not currently pay compensation to the executive officers of the Managing General
Partner. Instead it pays fees and makes distributions to the Managing General
Partner related to the Operating Partnership General Partner Interest and the
USRP Interest pursuant to the terms of the Partnership Agreements. The following
table sets forth (i) the historical fees and distributions paid to the Managing
General Partner for the fiscal year ended December 31, 1994, 1995 and 1996 and
(ii) the estimated payments which would have been payable to
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management of the Managing General Partner for such years had the Conversion
been effected on January 1, 1994 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
POST-CONVERSION FEES(1)
HISTORICAL
------------------------------- -------------------------------
1994 1995 1996 1994 1995 1996
--------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Total Payments to Managing General Partner....................... $ 690 $ 852 $ 2,537 -- -- --
Post-Conversion management expenses(2)........................... -- -- -- $ 750 $ 750 $ 750
</TABLE>
- ------------------------
(1) Assumes the Conversion was effected as of January 1, 1994.
(2) Includes annual salaries payable to each of Messrs. Stetson and Margolin of
$250. See "Management--Executive Compensation." Does not include
distributions which would have been payable to the Managing General Partner
on account of the Initial Shares, which (assuming the historical
distributions per Unit paid for fiscal years 1994, 1995 and 1996 would have
been the same after giving effect to the issuance of the Initial Shares)
would have equalled $1,369, $1,454, and $1,645 for each of 1994, 1995 and
1996, respectively.
NO DISSENTERS' APPRAISAL RIGHTS
Limited Partners who object to the Conversion will have no dissenters'
appraisal rights (I.E., the right, instead of receiving Common Stock, to seek a
judicial determination of the "fair value" of their Units and to compel USRP to
purchase Units for cash in that amount) under state law or the Master
Partnership Agreement, nor will such rights be voluntarily accorded to the
Unitholders by the Company. Thus, approval of the Conversion by the holders of a
majority of all Units outstanding on the Record Date will bind all Unitholders,
and objecting Unitholders will have no alternative to receipt of Common Stock
other than selling their Units in the market. The Units are currently listed on
the NYSE under the symbol "USV." If the Conversion is effected through the
Merger, the Common Stock is expected to be listed on the NYSE effective at the
time the Merger is consummated. If the Conversion is effected through the
Exchange Alternative, the Common Stock is expected to be listed on the NYSE
shortly after consummation of the Conversion.
COSTS OF THE CONVERSION
The Managing General Partner estimates the total cost and expense of the
Conversion will be approximately $580,000, whether or not completed. Such costs
and expenses include registration fees, legal and accounting fees and expenses,
recording and filing expenses and printing fees and expenses. The costs of the
Conversion, whether or not successfully completed, will be paid by USRP.
Therefore, the Managing General Partner and the Unitholders will ultimately
absorb the costs of the proposal to effect the Conversion, whether or not the
Conversion is approved or completed. The following is a statement of certain
estimated fees and expenses incurred in connection with the Conversion:
<TABLE>
<S> <C> <C>
Securities and Exchange Commission fees................................ $ 69,182
Legal fees and expenses................................................ 100,000
Special Committee fees and expenses (including fees to its financial
and legal advisors).................................................. 245,000
Accounting fees and expenses........................................... 50,000
Printing, engraving and mailing expenses............................... 75,000
Miscellaneous (including solicitation costs)........................... 40,818
-
---------
TOTAL................................................................ $ 580,000
-
-
---------
---------
</TABLE>
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CONSEQUENCES IF CONVERSION IS NOT APPROVED
It is expected that, if the Conversion is not approved by the Limited
Partners, or if the Conversion is not consummated for any reason, the Company
will continue in its current form. No other transaction is currently being
considered by the Company as an alternative to the Conversion.
FIDUCIARY DUTIES
As general partner of a limited partnership, the Managing General Partner
owes the Unitholders, under Delaware law, the fiduciary duties of good faith,
fairness and loyalty in handling the affairs of USRP. This fiduciary duty, to
the extent not modified by the Master Partnership Agreement, may include a duty
to refrain from self-dealing to the advantage of the Managing General Partner at
the expense of USRP. The Master Partnership Agreement generally provides that
the Managing General Partner and its affiliates may enter into transactions with
USRP, provided that the price and terms of such transaction are fair to the
Partnership and are not less favorable to USRP than those generally prevailing
with respect to comparable transactions between unrelated parties. Thus, the
fiduciary duty of the Managing General Partner may be more limited than would
otherwise be the case, absent such provisions. The Managing General Partner
believes that it has satisfied its fiduciary duties to Unitholders in connection
with the proposal of the Conversion and the Termination. It was with due regard
to its fiduciary responsibilities to USRP and the Unitholders that the Managing
General Partner concluded that a Special Committee of the independent directors
of its Board of Directors be formed to represent properly the interests of the
Unitholders in connection with the Termination.
The Managing General Partner may also have obligations under securities and
state corporate laws to disclose all material information concerning USRP's
affairs at certain times. The Managing General Partner believes that through
quarterly and annual filings on Form 10-Q and 10-K, annual tax reporting on Form
K-1 and disclosing the information contained herein, it has satisfied its duties
to disclose all material information to Unitholders.
Following consummation of the Conversion, the directors of the Managing
General Partner will serve as the directors of the REIT Corporation. As a
general matter (and except as modified by agreement), under Maryland law, a
director's fiduciary duties to stockholders of a Maryland corporation are
substantially similar to the fiduciary duties of a general partner of a Delaware
limited partnership to its limited partners. State law applicable to both
limited partnerships and corporations provides that the duties (including
fiduciary duties) and liabilities relating thereto of a general partner to a
limited partnership or its partners or of a director to a corporation or its
stockholders, may be expanded or restricted by provisions in the applicable
partnership agreement or charter instrument. In this regard, the Master
Partnership Agreement provides that the Managing General Partner shall not be
liable to USRP or to the Unitholders for any losses incurred as a result of any
act or omission of the Managing General Partner if the conduct did not
constitute actual fraud, willful misconduct or gross negligence and the Managing
General Partner acted in a manner it believed to be in, or not opposed to, the
interests of USRP. Further, the Master Partnership Agreement provides broad
indemnification rights in favor of the Managing General Partner so long as its
conduct meets the standard referenced in the preceding sentence. With respect to
the REIT Corporation, the Articles provide that a director of the REIT
Corporation shall not be liable for any act or omission in the director's
capacity as a director, except to the extent the director is found liable for
(i) an act or omission involving active and deliberate dishonesty or (ii) a
transaction in which the director received an improper personal benefit. The
directors are broadly indemnified and held harmless so long as the liability
otherwise to be indemnified for does not result from any act or omission of such
director that involves actual fraud or willful misconduct or a transaction from
which such director derived an improper benefit.
The nature of fiduciary duties is an evolving area of law and it is unclear
whether or to what extent there are differences in such fiduciary duties.
However, it is possible the fiduciary duties of a director of the
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REIT Corporation to its stockholders could be less than those of the Managing
General Partner to the Unitholders. Unitholders who have questions concerning
fiduciary duties should consult their legal counsel.
ACCOUNTING TREATMENT
For financial accounting purposes, the Conversion will be treated as a
reorganization of affiliated entities, with the assets and liabilities recorded
at their historical costs, except for the Termination. The cost of converting
the Operating Partnership General Partner Interest payable by the Operating
Partnership or the REIT Corporation, as the case may be, will be charged to
expense at the time of the transaction and the costs of the reorganization will
be expensed as incurred.
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THE SPECIAL MEETING
The Managing General Partner has established the close of business on April
30, 1997, as the Record Date for determining Limited Partners entitled to notice
of, and to vote at, the Special Meeting and at any adjournment thereof. On that
date, USRP had issued and outstanding 7,610,708 Units. No matters other than the
Merger Alternative, the Exchange Alternative and certain procedural matters may
be discussed or voted upon at the Special Meeting.
ELIGIBLE UNITS
The presence, in person or by proxy, of Limited Partners holding more than
50% of the total number of outstanding Units that Limited Partners hold will
constitute a quorum at the Special Meeting. A Limited Partner may hold such
Units as either the recordholder thereof or as the recordholder of a Depositary
Receipt with respect thereto. An assignee of Units that the Managing General
Partner has not admitted to USRP as a Limited Partner, however, will be unable
to vote at the Special Meeting. Such assignee's Units will also not be
considered outstanding for purposes of determining whether a quorum exists at
the Special Meeting or whether the requisite number of Limited Partners approve
the Conversion. Additional Units acquired by a Limited Partner with respect to
which the Managing General Partner has not admitted such Limited Partner to USRP
will also not be considered outstanding for purposes of the Special Meeting and
the Limited Partner will be unable to vote such Units.
If a person beneficially owns Units through a Depositary Receipt issued to a
broker or other nominee holder, such person must instruct such broker or nominee
holder how to vote the Units that such person beneficially owns. If such person
does not give such instructions, the broker or other nominee holder will not
vote such person's Units. Failure to vote any Units on whether to approve the
Conversion will have the same effect as voting against such proposal because its
approval requires a majority of the outstanding eligible Units to vote in its
favor.
The Managing General Partner has admitted to USRP as Limited Partners all
assignees of Units as of April 30, 1997. As of the Record Date, there were
7,610,708 Units held by Limited Partners that were eligible to vote at the
Special Meeting.
REQUIRED LEGAL OPINION
As required under the Partnership Agreements, before the Special Meeting
USRP will obtain an opinion from legal counsel that the proposed amendments to
the Partnership Agreements would not cause: (i) the loss of limited liability of
USRP under the Operating Partnership Agreement or of the Limited Partners under
the existing Master Partnership Agreement, and (ii) USRP or the Operating
Partnership to be treated as an association taxable as a corporation for federal
income tax purposes. The Managing General Partner has requested USRP's legal
counsel to render this opinion. Such legal counsel has indicated that it will be
able to render this opinion, subject to certain qualifications that the Managing
General Partner has determined are reasonable. If for some reason such legal
counsel cannot render the contemplated opinion before the Special Meeting, the
Managing General Partner would adjourn the Special Meeting to a later date or
cancel it.
REQUIRED VOTE
As required under the Partnership Agreements, the Managing General Partner
has proposed the approval of the Merger Alternative and the Exchange Alternative
and approved them in writing. For the Merger Alternative and the Exchange
Alternative to take effect, the Limited Partners must vote more than 50% of the
total number of outstanding Units eligible to be voted in favor of each of the
Merger Alternative and the Exchange Alternative at the Special Meeting.
Limited Partners will possess one vote for each Unit eligible to be voted
that they hold. Limited Partners voting against the Merger Alternative and the
Exchange Alternative will not possess any appraisal rights with respect to their
Units. See "The Conversion--No Dissenters' Appraisal Rights."
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ABSTENTIONS AND BROKER NON-VOTES
The Partnership Agreements provide that with respect to Units that a person
holds for the account of another person, such as Units that a broker holds for
its client, the person holding the Units for the account of the other person
must vote the respective Units pursuant to the instructions of the person on
whose behalf it holds them. Moreover, under the rules of the NYSE, brokers
holding Units on behalf of their clients may not vote the respective Units on
whether to approve the Conversion without their clients' authorization. A broker
therefore will not vote any Units on whether to approve the Merger Alternative
and the Exchange Alternative without receiving instructions on how to vote from
such broker's client. Accordingly, there will be no broker non-votes to consider
at the Special Meeting.
With respect to the Conversion, abstentions, as well as broker non-votes,
will have the same effect as a vote against approval because more than 50% of
the total number of outstanding eligible Units must approve the Merger
Alternative and the Exchange Alternative, rather than just a majority of those
eligible Units present at the Special Meeting.
PROXIES
Proxyholders will vote the eligible Units represented by valid proxies at
the Special Meeting in accordance with the directions given on the Proxy Card
concerning whether to approve the Merger Alternative and the Exchange
Alternative. Moreover, the proxyholders intend to vote such Units on any
procedural matters coming before the Special Meeting in accordance with their
best judgment. Unless indicated to the contrary thereon, the directions given on
a Limited Partner's Proxy Card will be for all of such Limited Partner's
eligible Units.
IF A LIMITED PARTNER SIGNS AND RETURNS A PROXY CARD WITHOUT GIVING ANY
DIRECTIONS ON HOW TO VOTE ON THE CONVERSION, THE PROXYHOLDER WILL VOTE SUCH
LIMITED PARTNER'S ELIGIBLE UNITS FOR THE APPROVAL OF THE MERGER ALTERNATIVE AND
THE EXCHANGE ALTERNATIVE.
REVOCATION OF PROXIES
A Limited Partner may revoke its proxy at any time prior to the
proxyholder's voting of the Units to which such proxy applies by: (i) submitting
a later dated proxy to D.F. King & Company or someone else who attends the
Special Meeting, (ii) attending the Special Meeting and delivering a written
notice of revocation of the proxy to the representative of D.F. King & Company
present at the Special Meeting, or (iii) delivering a written notice of
revocation of the proxy to D.F. King & Company at 77 Water Street, New York, New
York 10005, which D.F. King & Company receives on or before June 27, 1997.
PROXY SOLICITOR
The Partnership has retained D.F. King & Company to distribute the attached
letter from the Managing General Partner, the attached notice of the Special
Meeting, this Proxy Statement/Prospectus and the Proxy Card and to collect
completed Proxy Cards. Pursuant to the requirements of the Partnership
Agreements, D.F. King & Company has mailed these documents to each Limited
Partner as of the Record Date. D.F. King & Company has also distributed them to
various banks, brokerage firms, and other custodians, nominees and fiduciaries
that may hold Depositary Receipts or Units on behalf of someone else
(collectively, the "Nominee Holders"). The Partnership will pay D.F. King &
Company a fee of approximately $20,000 for such services and reimburse it for
its out-of-pocket expenses. The Partnership will also reimburse Nominee Holders
for the reasonable expenses that they incur when forwarding the attached letter
from the Managing General Partner, the attached notice of the Special Meeting,
this Proxy Statement and the Proxy Card to the beneficial owners of the Units.
SOLICITATIONS BY THE MANAGING GENERAL PARTNER
The directors, officers and employees of the Managing General Partner may
solicit proxies in favor of the Conversion by mail, personal interview,
telephone, facsimile transmission or other means. They will receive no
additional compensation therefor.
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SELECTED HISTORICAL AND PRO FORMA FINANCIAL
INFORMATION AND OTHER DATA
(DOLLARS AND UNITS IN THOUSANDS, EXCEPT PER UNIT/SHARE AMOUNTS)
<TABLE>
<CAPTION>
U.S.
RESTAURANT
PROPERTIES,
U.S. RESTAURANT PROPERTIES MASTER L.P. INC.
YEARS ENDED DECEMBER 31,(1) --------------
------------------------------------------------------ PRO FORMA
1992 1993 1994 1995 1996 1996(2)
--------- --------- --------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Statement of Income:
Total revenues............................ $ 8,489 $ 8,332 $ 8,793 $ 9,780 $ 18,324 $ 37,719
EXPENSES:
Rent.................................... 1,187 1,295 1,348 1,405 2,080 2,524
Depreciation and amortization........... 1,473 1,383 1,361 1,541 3,978 9,736
Taxes, general and administrative....... 1,097 1,008 1,144 1,419 2,461 1,935
Interest expense (income), net.......... 60 44 (4) 192 2,364 11,254
Provision for write down or disposition
of properties......................... 2,186 74 11 -- -- --
--------- --------- --------- --------- ---------- --------------
Total expenses.......................... 6,003 3,804 3,860 4,557 10,883 25,449
--------- --------- --------- --------- ---------- --------------
Gain on sale of equipment............... -- -- -- -- 32 32
--------- --------- --------- --------- ---------- --------------
Net income.............................. $ 2,486 $ 4,528 $ 4,933 $ 5,223 $ 7,473 $ 12,302
--------- --------- --------- --------- ---------- --------------
--------- --------- --------- --------- ---------- --------------
Net income allocable to Unitholders..... $ 2,436 $ 4,437 $ 4,834 $ 5,119 $ 7,325 N/A
Weighted average number of Units/ Shares
outstanding........................... 4,635 4,635 4,635 4,638 6,107 8,363
Net income per Unit/Share............... $ 0.53 $ 0.96 $ 1.04 $ 1.10 $ 1.20 $ 1.47
Cash distributions declared per Unit
applicable to respective year......... $ 1.54 $ 1.48(3) $ 1.61 $ 1.71 $ 1.935 N/A
CASH FLOW DATA:
Cash flow from operating activities..... $ 7,366 $ 7,475 $ 6,990 $ 9,288 $ 13,852 $ 23,445
Cash flow from (used in) investing
activities............................ $ -- $ 1,130 $ -- $ (12,039) $ (100,978) $ (179,293)
Cash flow from (used in) financing
activities............................ $ (7,542) $ (8,302) $ (7,569) $ 2,077 $ 87,500 $ 169,871
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996
U.S. RESTAURANT PROPERTIES MASTER L.P. --------------
----------------------------------------------------- U.S.
RESTAURANT
DECEMBER 31,(1) PROPERTIES,
----------------------------------------------------- INC.
1992 1993 1994 1995 1996 PRO FORMA(2)
--------- --------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Net investment in direct financing leases.... $ 24,760 $ 22,910 $ 21,237 $ 19,371 $ 17,105 $ 16,659
Land......................................... 23,816 23,414 23,414 27,493 61,340 81,235
Buildings and leasehold improvements, net.... 1,919 1,734 1,548 7,900 75,339 154,833
Equipment.................................... -- -- -- 224 2,980 2,980
Intangibles, net............................. 17,123 15,503 14,317 13,161 12,263 11,923
Total assets................................. 69,087 65,322 62,889 71,483 177,418 278,584
Line of credit and long term debt............ -- -- -- 10,931 69,486 151,859
Capitalized lease obligations................ 1,138 966 775 563 362 362
General partners' capital.................... 1,429 1,357 1,308 1,241 1,163
Limited partners' capital.................... 66,287 62,757 60,361 58,071 103,120
Stockholders' equity......................... -- -- -- -- -- 122,496
OTHER DATA:
Number of properties......................... 123 123 123 139 322 484
</TABLE>
- --------------------------
(1) The historical information for the years ended December 31, 1992, 1993,
1994, 1995 and 1996 was derived from USRP's audited consolidated financial
statements. USRP's audited consolidated financial statements as of
68
<PAGE>
December 31, 1995 and 1996 and for each the three years in the period ended
December 31, 1996, are included elsewhere in this Proxy
Statement/Prospectus.
(2) The unaudited pro forma consolidated statement of income information for the
year ended December 31, 1996 is presented as if the following had occurred
as of January 1, 1996: (a) the purchase of 305 properties for $178,971,000,
including the value of 725,640 Units valued at $17,232,296, completed since
December 31, 1995, (b) the issuance of 1,800,000 Units in June 1996 for net
proceeds of $40,203,000, (c) the purchase of 16 properties from QSR Income
Properties, Ltd. ("QSR") for 277,131 Units (at $28.50 per Unit), (d) the
purchase of 25 properties from other sellers that as of April 30, 1997 are
under binding contract for $18,229,000, (e) the additional borrowings of
$140,928,000 required to purchase the properties acquired and under
contract, (f) the sale of four properties for $2,892,000 and (g) the
Termination. The unaudited pro forma balance sheet data as of December 31,
1996 represents USRP's December 31, 1996 balance sheet adjusted on a pro
forma basis to reflect as of December 31, 1996: (a) the purchase of 121
properties for $73,790,000 completed since December 31, 1996, including the
value of 340,804 Units of $9,320,000, (b) the purchase of 16 properties from
QSR for 277,131 Units (at $28.50 per Unit), (c) the purchase of 25
properties from other sellers that as of April 30, 1997 are under binding
contracts for $18,229,000, (d) the additional borrowings of $82,373,000
required to purchase the properties acquired and under contract, (e) the
sale of four properties for $2,892,000, (f) the consolidation with the REIT
Corporation and (g) the Termination. The unaudited pro forma income
statement and balance sheet information is not necessarily indicative of
what the actual financial position of the REIT Corporation would have been
at December 31, 1996 or what the actual results of operations of the REIT
Corporation for the year ended December 31, 1996 would have been had all of
these transactions occurred and such information does not purport to
represent the future financial position or results of operations of the REIT
Corporation. See the pro forma balance sheet and statement of income
included elsewhere in this Proxy Statement/Prospectus.
(3) Excludes special capital transaction distributions of $.24 per Unit.
69
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The Company derives its revenue from the leasing of the Company's restaurant
properties to operators on a "triple net" basis, which is a lease that imposes
on the tenant all obligations for real property taxes and assessments, repairs
and maintenance and insurance. To the extent the landlord retains any of these
responsibilities, the lease becomes less than "triple net."
The Company's leases provide for a base rent plus a percentage of the
restaurant's sales in excess of a threshold amount. Total restaurant sales, the
primary determinant of the Company's revenues, are a function of the number of
restaurants in operation and their performance. Sales at individual restaurants
are influenced by local market conditions, by the efforts of specific restaurant
operators, by marketing, by new product programs, support by the franchisor and
by the general state of the economy.
Some of the leases of the Company's properties are treated as direct
financing leases, rather than operating leases, for purposes of generally
accepted accounting principles ("GAAP"); however, the leases do not grant the
lessees thereunder the right to acquire the properties at the expiration of such
leases. As a result, the lease is reflected as an asset on the Company's balance
sheet as net investment in direct financing leases, and the underlying
depreciable real property is not considered an asset of the Partnership for GAAP
purposes. Accordingly, the related depreciation is not reflected on the
Company's income statement; instead, there is a charge for amortization of the
investment in direct financing leases. For tax accounting purposes, however, the
depreciable real property is treated as being owned by the Company (and not a
direct financing lease) and the related charge for depreciation is reflected on
the Company's income statement. Primarily due to this treatment, GAAP revenue
and net income differ from gross rental receipts and net income, as determined
for tax purposes. The reconciliation between the GAAP and tax treatment of these
leases is described in Note 10 to the Company's audited consolidated financial
statements included elsewhere in the Proxy Statement/Prospectus. Management
believes that all acquisitions made by USRP since December 31, 1996, as well as
all future acquisitions and related leases, will qualify as operating leases
according to GAAP and, therefore, were not and will not be recorded as a net
investment in direct financing leases.
The following discussion should be read in conjunction with "Selected
Historical and Pro Forma Financial Information and Other Data" and all of the
financial statements and notes thereto included elsewhere in this
Prospectus/Proxy Statement.
RESULTS OF OPERATIONS
Revenues in 1996 totaled $18,324,000 up 87 percent from the $9,780,000
recorded in 1995 and up 108 percent from the $8,793,000 recorded in 1994.
Revenues in 1995 were up 11 percent from the revenues recorded in 1994. The
increase in revenues is primarily due to the acquisition of 16 restaurant
properties throughout 1995 and 184 restaurant properties throughout 1996. No
additions were made to the portfolio in 1994. In addition, sales increased each
year as indicated below and the straight-lining of escalating rent in 1996
contributed to a 3 percent increase in total revenues. In 1995 and 1994
straight-lining of rents did not apply.
Total comparable sales in the restaurants located on the Company's real
estate were $133,556,000 in 1996, $129,100,000 in 1995, and $120,543,000 in
1994. The comparable store sales relate to the original Burger King portfolio in
which revenues are not only in the form of minimum base rents but also
percentage rents that are paid in relation to actual sales of each restaurant
property.
Taxes, general and administrative expenses totaled $2,461,000, up 73 percent
from the $1,419,000 recorded in 1995 and up 115 percent from the $1,144,000
recorded in 1994. An increase in the management fee of $585,000 and expenses
that directly correspond to the active growth of the Company were the primary
reasons for increased general and administrative expenses for the year ended
December 31, 1996 as compared to December 31, 1995. An increase in expenses that
directly corresponds to the active growth
70
<PAGE>
of the Company was the primary reason for the increase in general and
administrative expenses for the year ended December 31, 1995 as compared to
December 31, 1994.
Depreciation and amortization expenses totaled $3,978,000, up 158 percent
from the $1,541,000 recorded in 1995 and up 192 percent from the $1,361,000
recorded in 1994. These increases directly correlate to the property
acquisitions.
Rent expense totaled $2,080,000, up 48 percent from the $1,405,000 recorded
in 1995 and up 54 percent from the $1,348,000 recorded in 1994. The increase in
rent expense directly correlates to the property acquisitions. Twenty-seven (27)
of the 200 properties purchased in 1995 and 1996 were leasehold properties.
Interest expense, net of interest income, totaled $2,364,000, up from the
$192,000 in 1995 and up from the $(4) in 1994. The increase in interest expense
directly correlates to the additional property debt associated with the
acquisitions. No amounts were borrowed in 1994.
There was no write down of assets and intangible values relating to closed
properties during 1996 and 1995. A write down of $11,000 was made in 1994.
A restaurant property was sold for $825,000 at a gain of $590,000. The sales
price consisted of $82,500 in cash plus a $742,500 note receivable. The note
receivable is due on November 1, 1998. The gain on sale has been deferred and is
being accounted for under the cost recovery method. In addition, equipment
located at a restaurant property was sold for $50,000 and a $32,000 gain was
recognized.
Net income allocable to Unitholders in 1996 was $7,325,000 or $1.20 per
Unit, up 9 percent or $.10 per Unit from $5,119,000 or $1.10 per Unit achieved
in 1995. The 1995 results were up 6 percent or $.06 per Unit from the 1994
results. Excluding provisions for write down or dispositions of properties, net
income allocable to Unitholders was $1.20 in 1996, $1.10 in 1995 and $1.04 in
1994.
Regular cash distributions to the Unitholders for 1996 totaled $1.935 per
Unit with $.47 per Unit paid in the first quarter, $.48 per Unit paid in the
second quarter, $.485 per Unit paid in the third quarter, and $.50 in the fourth
quarter. Total cash distributions to Unitholders in 1995 and 1994 were $1.71 and
$1.61 per Unit, respectively.
CASH FLOW FROM OPERATIONS BASED UPON TAXABLE INCOME
The Company generally considers "cash flow from operations based upon
taxable income" to be an appropriate measure of performance. "Cash flow from
operations based upon taxable income" is calculated as the sum of taxable income
plus charges for depreciation and amortization. All leases are treated as
operating leases for taxable income purposes which results in a reconciling item
from "cash flow from operating activities". In addition, "cash flows from
operations based upon taxable income" does not consider changes in working
capital items; as a result, cash flow from operations based upon taxable income
should not be considered as an alternative to net income determined in
accordance with generally accepted accounting principles as an indication of the
Company's performance or as an alternative to cash flow determined in accordance
with generally accepted accounting principles as a measure of liquidity. The
Company believes that "cash flow from operations based upon taxable income" is
important because taxable income flows through to the partners and it is the
most consistent indication of cash generated by operations and eliminates the
fluctuations of working capital.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of cash to meet its cash requirements is
rental revenues generated by the Company's properties. Cash generated by the
portfolio in excess of operating needs is used to reduce amounts outstanding
under the Company's credit agreements. Cash in excess of distributions is used
to cover payment of quarterly distributions to the Unitholders. Currently, the
Company's primary source of funding for acquisitions is its existing revolving
line of credit. The Company anticipates meeting its future long-term capital
needs through the incurrence of additional debt, the issuance of additional
equity, and a private placement of equity, along with cash generated from
internal operations.
71
<PAGE>
As of March 19, 1997, the Company had approximately $48 million outstanding
under its $95 million line of credit with a syndicate of banks (excluding
$400,000 subject to letters of credit). This line of credit is secured by the
Company's real estate including its leasehold interests. The Company may request
advances under this line of credit to finance the acquisition of restaurant
properties, to repair and update restaurant properties and for working capital.
The banks will also issue standby letters of credit for the account of the
Company under this loan facility. This credit agreement expires on December 28,
1998 and provides that borrowings thereunder bear interest at 180 basis points
over the London Interbank Offered Rate (LIBOR). Interest expense for 1996 and
1995 equaled $2,364,000 and $192,000, respectively. During 1996, the Company
also had a $20 million mortgage warehouse facility from Morgan Keegan Mortgage
Company, Inc., which was secured by certain Company properties. As of March 19,
1997, the balance due to Morgan Keegan Mortgage Company was zero and there were
no available draws. The borrowings thereunder bore interest at the rate of 300
basis points over LIBOR. The proceeds from this facility were used to finance
the acquisition and purposed acquisition of various restaurant properties owned
by the U.S. Properties Business Trust I and II.
Pursuant to the Partnership Agreement, the Managing General Partner is
required to make available to the Company an unsecured, interest-free, revolving
line of credit in the principal amount of $500,000 to provide the Company 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 Company obtains other financing, whether for acquisitions, reinvestment,
working capital or otherwise. The Managing General Partner may make other loans
to the Company. 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 Company 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, 1996.
The Company paid distributions in 1996 of $1.875 per Unit, which represented
90% of cash flow from operations based upon taxable income. The Company paid
distributions for the first quarter of 1997 of $0.50 per Unit. The Company has
historically distributed from 75% to 95% of the estimated cash generated from
operations within the general objective of continued annual growth in the
distributions. In order to qualify as a REIT, the REIT Corporation must make
annual distributions to stockholders of at least 95% of its REIT taxable income.
Future distributions by the REIT Corporation will be at the discretion of the
REIT Board and will depend on actual results of operations, the financial
condition of the Company, capital requirements or other factors management deems
relevant. During 1996, the Company distributed an aggregate of $11,167,000 to
its partners. See "Price Range of Units and Distribution Policy."
INFLATION
Some of the Company's leases are subject to adjustments for increases in the
Consumer Price Index, which reduces the risk to the Company of the adverse
effects of inflation. Additionally, to the extent inflation increases sales
volume, percentage rents may tend to offset the effects of inflation on the
Company. Because triple net leases also require the restaurant operators to pay
for some or all operating expenses, property taxes, property repair and
maintenance costs and insurance, some or all of the inflationary impact of these
expenses will be borne by the restaurant operators and not by the Company.
Operators of restaurants, in general, possess the ability to adjust menu
prices quickly. However, competitive pressures may limit a restaurant operator's
ability to raise prices in the face of inflation.
SEASONALITY
Fast food restaurant operations historically have been seasonal in nature,
reflecting higher unit sales during the second and third quarters due to warmer
weather and increased leisure travel. This seasonality can be expected to cause
fluctuations in the Company's quarterly unit revenue to the extent it receives
percentage rent.
72
<PAGE>
BUSINESS
GENERAL
The Company acquires, owns and manages income-producing properties that it
leases on a triple net basis to operators of fast food and casual dining
restaurants, primarily BURGER KING (the second largest restaurant chain in the
United States in terms of system wide sales), and other national and regional
brands including CHILI'S, DAIRY QUEEN, GRANDY'S, HARDEE'S, KFC, PIZZA HUT,
SCHLOTZSKY'S and TACO BELL. The Company acquires properties either from third
party lessors or from operators on a sale/leaseback basis. Under a triple net
lease, the tenant is obligated to pay all costs and expenses, including all real
property taxes and assessments, repairs and maintenance and insurance. Triple
net leases do not require substantial reinvestments by the property owner, and
as a result more cash from operations may be used for acquisitions and
distributions to the Company's stockholders and partners, if any.
The Company is one of the largest publicly owned entities in the United
States dedicated to acquiring, owning and managing restaurant properties. At
April 30, 1997, the Company's portfolio consisted of 443 restaurant properties
in 44 states, approximately 99% of which were leased. From the Company's initial
public offering in 1986 until March 31, 1995, the Company's portfolio was
limited to approximately 125 restaurant properties, all of which were leased on
a triple net basis to operators of Burger King restaurants. In May 1994, an
investor group led by Robert J. Stetson and Fred H. Margolin acquired the
Managing General Partner. In March 1995, the Managing General Partner proposed
and the Limited Partners adopted certain amendments to the Partnership
Agreements that authorized the Company to acquire additional properties not
affiliated with BKC.
Since adoption of the amendments, the Company has acquired 321 properties
for an aggregate purchase price of approximately $190 million, which includes
the value of 779,804 Units. In addition, the Company has entered into binding
contracts to acquire the 41 Acquisition Properties for an aggregate purchase
price of approximately $26 million. Upon acquisition of the Acquisition
Properties, the Company's portfolio will consist of an aggregate of 484
properties in 44 states consisting of 173 BURGER KING restaurants, eight CHILI'S
restaurants, 42 DAIRY QUEEN restaurants, 30 GRANDY'S restaurants, 31 HARDEE'S
restaurants, 22 PIZZA HUT restaurants, 12 SCHLOTZSKY'S restaurants, 76 ARBY'S
restaurants, 17 BRUEGGER'S BAGEL restaurants and 73 other restaurants, most of
which are regional brands.
In conjunction with the Conversion, the Operating Partnership Agreement is
being amended to provide the Company with increased flexibility to pursue other
investment opportunities that arise during the ordinary course of acquiring and
leasing restaurant properties and that compliment its existing strategy. In
particular, the amendments will permit the Company to acquire properties, build
out properties in conjunction with or lease properties directly to, (i) other
food vendors, such as convenience stores, whose revenues are not exclusively
derived from food sales, and (ii) retail outlets. In addition, the amendments
will permit the Company, from time to time, to make loans for the acquisition of
real estate secured mortgages or other security interests thereon instead of the
acquisition of the properties. Management believes that these amendments
represent a logical extension of the Company's existing business strategy and
should offer increased growth opportunities to the Company. See "--Investment
Criteria."
INDUSTRY
The restaurant industry has grown significantly over the past 20 years as a
result of population growth, the influence of the baby boom generation, the
growth of two-income families and the growth in consumers' disposable income.
Total food service industry sales during 1995 have been estimated at
approximately $277 billion. The fast food segment, which offers value pricing
and convenience, is the largest segment in the restaurant industry with
projected 1996 sales of over $100 billion. In 1995, industry sources estimate
that fast food restaurants accounted for 71% of total restaurant traffic, 52% of
chain restaurant locations and 47% of consumers' restaurant dollars spent.
73
<PAGE>
The growth of the fast food segment has exceeded that of the entire
restaurant industry for over 20 years. According to industry sources, fast food
restaurant sales have grown at a 6.9% compound annual growth rate with 1995
sales up 7.1% over 1994 levels. Fast food restaurant sales are anticipated to
have grown 6.7% in 1996 to over $100 billion.
Industry sources suggest that, in the fast food industry, operators are
increasingly moving toward leasing rather than owning their restaurants.
Currently, approximately two-thirds of fast food restaurant operators lease
their restaurant properties. Leasing enables a restaurant operator to reallocate
funds to the improvement of the restaurant, the acquisition of additional
restaurants or other uses.
Management believes, based on its industry knowledge and experience, that
the Company competes with numerous other publicly-owned entities, some of which
dedicate substantially all of their assets and efforts to acquiring, owning and
managing chain restaurant properties. The Company also competes with numerous
private firms and individuals for the acquisition of restaurant properties. In
addition, there are a number of other publicly owned entities that are dedicated
to acquiring, owning and managing triple net lease properties. The majority of
chain restaurant properties is owned by restaurant operators and real estate
investors. Management believes, based on its industry knowledge and experience,
that this fragmented market provides the Company with substantial acquisition
opportunities. Management also believes that the inability of most small
restaurant owners to obtain funds with which to compete for acquisitions as
timely and inexpensively as the Company provides the Company with a competitive
advantage when seeking to acquire a restaurant property.
In addition to the Company's large number of leases to operators of BURGER
KING restaurants, the Company also leases more than 100 restaurant properties to
operators of DAIRY QUEEN, HARDEE'S, GRANDY'S and PIZZA HUT. Based on
publicly-available information, BURGER KING is the second largest fast food
restaurant system in the world in terms of system wide sales. According to
publicly-available information, there are approximately 6,500 BURGER KING
restaurant units in the United States.
INVESTMENT CRITERIA
Since the previously approved amendments to the Partnership Agreements, the
Company has acquired 321 restaurant properties. The Company intends to continue
acquiring properties, including closing the acquisition of the Acquisition
Properties currently under binding contracts. The Company will target the
acquisition of properties of national and regional fast food or casual dining
restaurant chains, which may include BURGER KING, that satisfy some or all of
the following criteria:
- The rent on such properties has produced cash flow that after deducting
management fees, interest and debt amortization, or equity issuance, would
improve USRP's existing cash flow per Unit.
- The restaurants' annual sales would be in the highest 70% of the
restaurants in that chain.
- The restaurants would have historically generated at least the normal
profit for restaurants in that chain and be projected to continue to
generate a profit even if sales decreased by 10%.
- The properties would be located where the average per capita income was
stable or increasing.
- The restaurants' franchisees would possess significant net worth and
preferably operate multiple restaurants.
- The properties would be in good repair and operating condition.
Management receives acquisition proposals from a number of sources.
Management utilizes seven independent real estate professionals who assist the
Company in examining and analyzing proposed acquisitions. These professionals
are compensated principally upon the Company's closing of an acquisition of
property. There can be no assurance that management will be able to identify
properties that satisfy all or a significant number of the above criteria or
that, if identified, the Company will be able to purchase such restaurant
properties.
74
<PAGE>
The Company believes that it can generate improved operating results as a
result of the acquisition of additional properties and by making loans to
tenants for the renovation and improvement of its properties. The Company also
believes that expansion and diversification of its property portfolio to include
more balance among restaurant brands will decrease its dependence on one chain.
Management anticipates that any loans originated by the Company, following
the adoption of the amendments to the Partnership Agreements described herein,
would be made based on the following general underwriting criteria: (i) all
loans will be used by borrowers to acquire real estate and/or construct
improvements thereon and will be secured by first liens on the real estate, (ii)
in certain circumstances, the loans will be guaranteed by the principals of the
borrowers, and (iii) the property's expected cash flow would be an amount equal
to 140% of the annual payment required to fully amortize the loan over 20 years.
The Company has not identified any potential borrowers at this time and no
assurance can be given that any borrowers will be identified in the future or
that any such borrowers will meet the Company's underwriting criteria.
Management believes that the increased flexibility provided by these amendments
will enable the Company to take advantage of investment opportunities not
currently available to the Company.
PROPERTIES
The Company currently has 443 restaurant properties. Approximately 99.5% of
these properties are leased on a triple net basis to operators of fast food and
casual dining restaurants, primarily BURGER KING and other national and regional
brands, including CHILI'S, DAIRY QUEEN, GRANDY'S, HARDEE'S, ARBY'S, PIZZA HUT,
SCHLOTZSKY'S and BRUEGGER'S BAGELS. In addition, the Company has entered into
binding contracts to acquire an additional 41 restaurant properties. Set forth
below are summary descriptions of the restaurant properties leased to the
operators of various fast food and casual dining restaurants.
BURGER KING. The Company currently owns 173 properties operated as BURGER
KING restaurants. These BURGER KING restaurant properties are operated by more
than 70 operators.
CHILI'S. The Company currently owns eight properties operated as CHILI'S
restaurants. These CHILI'S restaurant properties are operated by two operators.
DAIRY QUEEN. The Company currently owns 41 properties operated as DAIRY
QUEEN restaurants. These DAIRY QUEEN restaurant properties are operated by two
operators, the largest of whom operates 37 DAIRY QUEEN restaurants. In addition,
the Company has entered into a binding contract to acquire one property operated
as DIARY QUEEN restaurant.
GRANDY'S. The Company currently owns 30 properties operated as GRANDY'S
restaurants. These GRANDY'S restaurant properties are operated by one operator.
HARDEE'S. The Company currently owns 26 properties operated as HARDEE'S
restaurants. These HARDEE'S restaurant properties are operated by two operators,
the larger of whom operates 24 HARDEE'S restaurants. In addition, the Company
has entered into binding contracts to acquire five properties operated as
HARDEE'S restaurants.
PIZZA HUT. The Company currently owns 20 properties operated as PIZZA HUT
restaurants. These PIZZA HUT restaurant properties are operated by one operator.
In addition, the Company has entered into binding contracts to acquire two
properties operated as PIZZA HUT restaurants.
SCHLOTZSKY'S. The Company currently owns 12 properties operated as
Schlotzsky's restaurants. These SCHLOTZSKY'S restaurant properties are operated
by two operators.
ARBY'S. The Company currently owns 76 properties operated as ARBY'S
restaurants. These ARBY'S restaurant properties are operated by one operator.
75
<PAGE>
BRUEGGER'S BAGEL. The Company currently owns 16 properties operated as
BRUEGGER'S BAGEL restaurants. These BRUEGGER'S BAGEL restaurant properties are
operated by four operators. In addition, the Company has entered into a binding
contract to acquire one property operated as a BRUEGGER'S BAGEL restaurant.
OTHER PROPERTIES. The Company currently owns an additional 41 restaurant
properties, most of which are operated by franchisees of regional brand names.
In addition, the Company has entered into binding contracts to acquire an
additional 32 restaurant properties operated by franchisees of regional brand
names. From time to time, the Company may acquire restaurant properties operated
by franchisees of brand names of less established national and regional
franchisers. The Company, however, does not intend to acquire a significant
number of such properties.
The Company currently owns 443 properties. The table below sets forth the
aggregate number of properties owned in each state and the franchise affiliation
of such properties.
<TABLE>
<CAPTION>
STATE BURGER KING CHILI'S DAIRY QUEEN GRANDY'S HARDEE'S PIZZA HUT
- --------------------------- ------------ ------ ------ -------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Alabama.................... 1 1 1
Arizona.................... 13 1
Arkansas................... 6 1
California................. 16
Colorado................... 3
Connecticut................ 3
Delaware................... 1
Florida.................... 6
Georgia.................... 7 23 1
Idaho...................... 1
Illinois................... 1 2
Indiana.................... 2
Iowa....................... 2
Kansas..................... 2
Kentucky................... 3
Louisiana.................. 2
Maine...................... 4
Maryland................... 2 1
Massachusetts.............. 3
Michigan................... 4
Minnesota.................. 1
Mississippi................ 2
Missouri................... 3
Montana.................... 1
Nebraska................... 1 1
Nevada..................... 1
New Jersey................. 5
New Mexico................. 1 1 1
New York................... 5 4
North Carolina............. 9
Ohio....................... 9
Oklahoma................... 3 7 1
Oregon..................... 5
Pennsylvania............... 13 1
South Carolina............. 7 2
Tennessee.................. 3 2
Texas...................... 10 2 41 22 2
Utah....................... 1
Vermont.................... 1
Virginia................... 1
Washington................. 7
West Virginia.............. 2 1
Wisconsin.................. 5
Wyoming.................... 1
-- -- -- -- --
---
Total...................... 173 8 41 30 26 20
-- -- -- -- --
-- -- -- -- --
---
---
Percentage................. 39% 2% 9% 7% 6% 4%
-- -- -- -- --
-- -- -- -- --
---
---
<CAPTION>
BRUEGGER'S TOTAL
STATE SCHLOTZSKY'S ARBY'S BAGELS OTHER PROPERTIES
- --------------------------- ----------------- ------ --------------- ------ --------------
<S> <C> <C> <C> <C> <C>
Alabama.................... 3
Arizona.................... 1 15
Arkansas................... 7
California................. 1 17
Colorado................... 1 4
Connecticut................ 3
Delaware................... 1
Florida.................... 10 7 23
Georgia.................... 31
Idaho...................... 1
Illinois................... 4 7
Indiana.................... 1 2 5
Iowa....................... 3 5
Kansas..................... 2
Kentucky................... 3
Louisiana.................. 2
Maine...................... 4
Maryland................... 3
Massachusetts.............. 3
Michigan................... 1 24 29
Minnesota.................. 5 1 7
Mississippi................ 2
Missouri................... 2 5
Montana.................... 1
Nebraska................... 2
Nevada..................... 1
New Jersey................. 5
New Mexico................. 1 4
New York................... 5 4 18
North Carolina............. 4 3 16
Ohio....................... 9
Oklahoma................... 1 12
Oregon..................... 5
Pennsylvania............... 5 19
South Carolina............. 1 10
Tennessee.................. 1 6
Texas...................... 3 36 17 133
Utah....................... 1
Vermont.................... 1
Virginia................... 1 2
Washington................. 7
West Virginia.............. 3
Wisconsin.................. 5
Wyoming.................... 1
-- -- -- --
---
Total...................... 12 76 16 41 443
-- -- -- --
-- -- -- --
---
---
Percentage................. 3% 17% 4% 9% 100%
-- -- -- --
-- -- -- --
---
---
</TABLE>
76
<PAGE>
LEASES WITH RESTAURANT OPERATORS
The Company's strategy is to acquire operating properties rather than
developing new properties, although the Company has begun to acquire newly
constructed properties. Typically, the Company acquires a property that has been
operated as a fast food or casual dining restaurant and that is subject to a
lease with a remaining term of five to 20 years and a co-terminus franchise
agreement. Management believes, based on its experience, that this strategy
reduces the Company's financial risk because the restaurant operated on such
property has a proven operating record that mitigates the risk of default or
non-renewal under the lease. The Company's current properties have remaining
lease terms ranging from one to 28 years.
Substantially all of the Company's existing leases are "triple net," which
means that the tenant is obligated to pay all costs and expenses, including all
real property taxes and assessments, repairs and maintenance and insurance. The
Company's leases provide for a base rent plus a percentage of the restaurant's
sales in excess of a threshold amount. The triple net lease structure is
designed to provide the Company with a consistent stream of income without the
obligation to reinvest in the property. For the year ended December 31, 1996,
base rental revenues and percentage rental revenues represented 67% and 33%,
respectively, of total gross rental revenues. Management intends to renew and
restructure leases to increase the percentage of total rental revenues derived
from base rental revenues and decrease the percentage of total revenues from
percentage rental revenues. In addition, to encourage the early renewal of
existing leases the Company has offered certain lessees remodeling financing. To
date, the Company has renewed 38 leases early under this program. Management
considers the grants to be prudent given the increased sales resulting at the
remodeled restaurants and the lower costs incurred because of the early lease
renewals.
The Company generally acquires properties from third party lessors or from
operators in a sale/ leaseback transaction in which the operator sells the
property to the Company and enters into a long-term lease (typically 20 years).
A sale/leaseback transaction is attractive to the operator because it allows the
operator to realize the value of the real estate while retaining occupancy for
the long term. A sale/ leaseback transaction may also provide specific
accounting, earnings and market value benefits to the selling operator. For
example, the lease on the property may be structured by the tenant as an
off-balance sheet operating lease, consistent with Financial Accounting
Standards Board rules, which may increase the operator's earnings, net worth and
borrowing capacity. The following table sets forth certain information regarding
lease expirations for the Company's current properties.
LEASE EXPIRATION SCHEDULE
<TABLE>
<CAPTION>
NUMBER OF LEASES
YEAR EXPIRING % OF TOTAL
- ---------------------------------------------------------------- --------------------- -------------
<S> <C> <C>
1997............................................................ 2 1
1998............................................................ 9 2
1999............................................................ 24 5
2000............................................................ 33 7
2001-05......................................................... 105 24
2006-10......................................................... 25 6
2011-15......................................................... 28 6
2016-25......................................................... 217 49
--- ---
443 100%
--- ---
--- ---
</TABLE>
77
<PAGE>
OWNERSHIP OF REAL ESTATE INTERESTS
Of the 443 restaurant properties that the Company owns as of April 30, 1997,
the Company owns both the land and the restaurant building in fee simple on 333
of such properties (the "Fee Properties"), the Company owns the land and the
tenant owns the building on 31 of such properties and the Company leases the
land, the building or both from a third-party lessor on 79 of such properties
(the "Leasehold Properties").
Of the 79 Leasehold Properties, 14 are properties on which the Company
leases from a third party both the underlying land and the restaurant building
and the other improvements thereon (the "Primary Leases") and then sublease the
property to the restaurant operator. Under the terms of the remaining 65
Leasehold Properties (the "Ground Leases"), the Company leases 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. The
remaining terms of the Primary Leases and Ground Leases range from one to 21
years. With renewal options exercised, the remaining terms of the Primary Leases
and Ground Leases range from five to 35 years, with the average remaining term
being 21 years.
The terms and conditions of each Primary Lease and each Ground Lease vary
substantially. Each Primary Lease and each Ground Lease, however, have certain
provisions in common, including that: (i) the initial term is 20 years or less,
(ii) the rentals payable are stated amounts that may escalate over the terms of
the Primary Leases and Ground Leases (and/or during renewal terms), but normally
are not based upon a percentage of sales of the restaurants thereon, and (iii)
the Company is required to pay all taxes and operating, maintenance and
insurance expenses for the Leasehold Properties. In addition, under
substantially all of the leases the Company may renew the term one or more times
at its option (although the provisions governing any such renewal vary
significantly and some renewal options are at a fixed rental amount while others
are at fair rental value at the time of renewal). Several Primary Leases and
Ground Leases also give the owner the right to require the Company, upon the
termination or expiration thereof, to remove all improvements situated on the
property.
Although the Company, as lessee under each Primary Lease and Ground Lease,
generally has the right to assign or sublet all of its rights and interests
thereunder without obtaining the landlord's consent, the Company is not
permitted to assign or sublet any of its rights or interests under 22 Primary
Leases and Ground Leases without obtaining the landlord's consent or satisfying
certain other conditions. In addition, approximately 20% of the Primary Leases
and Ground Leases require the Company to use such Leasehold Properties only for
the purpose of operating a Burger King restaurant or another type of restaurant
thereon. In any event, no transfer will release the Company from any of its
obligations under any Primary Lease or Ground Lease, including the obligation to
pay rent.
The Company leases or subleases 158 of its 443 existing restaurant
properties to a BKC franchisee under a lease/sublease, pursuant to which the
franchisee is required to operate a BURGER KING restaurant thereon in accordance
with the lessee's franchise agreement and to make no other use thereof. Upon its
acquisition of such properties, the Company assumed the rights and obligations
of BKC under the leases/subleases.
Although the provisions of BKC's standard form of lease to franchisees have
changed over time, the material provisions of the leases/subleases generally are
substantially similar to BKC's current standard form of lease (except to the
extent that BKC has granted rent reductions or deferrals or made other lease
modifications to alleviate or lessen the impact of business or other economic
problems that a franchisee may have encountered). The leases/subleases generally
provide for a term of 20 years from the date of the opening of the restaurant
and do not grant the lessee any renewal or purchase options. The Company,
however, is required under the Partnership Agreements to renew a lease/sublease
if BKC renews or extends the lessee's franchisee agreement. The Company believes
that BKC's policy generally is to renew a
78
<PAGE>
franchise agreement if BKC determines that economic and other factors justify
renewal or extension and the franchisee has complied with all obligations under
the franchise agreement. The remaining terms of all the leases/subleases
currently range from one to 28 years, with the average remaining term being nine
years.
USE AND OTHER RESTRICTIONS ON THE OPERATION AND TRANSFER OF BURGER KING
RESTAURANT PROPERTIES
The Company was originally formed for the purpose of acquiring all of BKC's
interests in the original portfolio and leasing or subleasing them to BKC
franchisees under the leases/subleases. Accordingly, the Partnership Agreements
contain provisions that state, except as expressly permitted by BKC, that the
Company may not use such properties for any purpose other than to operate a
BURGER KING restaurant. In furtherance thereof, the Partnership Agreements: (i)
require the Company, in certain specified circumstances, to renew or extend a
lease/sublease and enter into a new lease with another franchisee of BKC, to
approve an assignment of a lease/sublease, to permit BKC to assume a lease/
sublease at any time and to renew a Primary Lease, and (ii) impose certain
restrictions and limitations upon the Company's ability to sell, lease or
otherwise transfer any interest in such properties. The Partnership Agreements
require the Company to provide BKC notice of default under a lease/sublease and
an opportunity to cure such default prior to taking any remedial action. The
Partnership Agreements also require the Company under certain circumstances to
provide tenants with assistance with remodeling costs. Such terms with respect
to such properties imposed on the Company by the Partnership Agreements may be
less favorable than those imposed upon other lessors of BURGER KING restaurants.
BKC has advised the Company that it intends to waive or not impose certain of
the restrictive provisions contained in the Partnership Agreements and the
Company is discussing BKC's position with BKC to clarify such provisions.
RESTAURANT ALTERATIONS AND RECONSTRUCTION
The Company believes that improving, expanding, rebuilding or replacing its
restaurant properties from time to time is important. In addition to normal
maintenance and repair requirements, each franchisee is required under BKC's
franchise agreement and lease/sublease, at its own cost and expense, to make
such alterations to a BURGER KING restaurant as may be reasonably required by
BKC from time to time to modify the appearance of the restaurant to reflect the
then current image requirements for Burger King restaurants. Most of the
properties that are operating as BURGER KING restaurants are 15 to 20 years old.
The Company believes that many of these properties require substantial
improvements to maximize sales and that their condition is below BKC's current
image requirements.
To encourage the early renewal of existing leases/subleases, the Company
recently established an "early renewal program" whereby the Company has offered
to certain tenants the right to renew existing leases/subleases for up to an
additional 20 years in consideration for remodeling financing. The purpose of
this program is to extend the term of existing leases/subleases prior to the end
of the lease term and enhance the value of the underlying property to the
Company. As a result of this program, the Company has extended the lease term
for 38 leases/subleases.
COMPETITION
The restaurants operated on the properties are subject to significant
competition, including competition from other national and regional fast food
restaurant chains, including other BURGER KING restaurants, local restaurants,
national and regional restaurant chains that do not specialize in fast food but
appeal to many of the same customers and other competitors such as convenience
stores and supermarkets that sell prepared and ready-to-eat foods. The success
of the Company depends, in part, on the ability of the restaurants operated on
the properties to compete successfully with such businesses. The Company does
not anticipate that it will seek to engage directly in or meet such competition.
Instead, the Company will depend upon the experience and ability of the lessees
operating the restaurants located on the
79
<PAGE>
properties and the particular franchise system generally to compete with these
other restaurants and similar operations. The Company believes that the ability
of its lessees to compete is affected by their compliance with the image
requirements at their restaurants.
Management believes, based on its industry knowledge and experience, that
the Company will compete with numerous other publicly-owned entities, some of
which dedicate substantially all of their assets and efforts to acquiring and
managing properties operated as fast food or casual dining restaurants. In
addition, the Company will compete with numerous private firms and individuals
for the acquisition of restaurant properties. Such investors may have greater
financial resources than the Company.
REGULATION
The Company, through its ownership of interests in and management of real
estate, is subject to various environmental, health, land-use and other
regulation by federal, state and local governments that affects the development
and regulation of restaurant properties. The Company's leases impose the primary
obligation for regulatory compliance on the operators of the restaurant
properties.
ENVIRONMENTAL REGULATION
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real property may become liable for the costs of removal or
remediation of certain hazardous substances released on or within its property.
Such liability may be imposed without regard to whether the owner or operator
knew of, or caused the release of, the hazardous substances. In addition to
liability for cleanup costs, the presence of hazardous substances on a property
could result in the owner or operator incurring liability as a result of a claim
by an employee or another person for personal injury or a claim by an adjacent
property owner for property damage.
In connection with the Company's acquisition of a new property, a Phase I
environmental assessment is obtained. A Phase I environmental assessment
involves researching historical usages of a property, databases containing
registered underground storage tanks, and other matters, including an on-site
inspection to determine whether an environmental issue exists with respect to
the property. If the results of a Phase I environmental assessment reveal
potential issues, a Phase II assessment, which may include soil testing, ground
water monitoring, or borings to locate underground storage tanks, is ordered for
further evaluation. Depending upon the results of such assessment, the
transaction is either consummated or terminated.
The Company is not currently a party to any litigation or administrative
proceeding with respect to any property's compliance with environmental
standards. Furthermore, the Company is unaware of, and does not anticipate, any
such action, or the need to expend any of its funds in the foreseeable future in
connection with its operations or ownership of existing properties that would
have a material adverse effect upon the Company. See "Risk Factors--Real Estate
Investment Risks."
AMERICANS WITH DISABILITIES ACT
Under the ADA, all public accommodations, including restaurants, are
required to meet certain federal requirements relating to physical access and
use by disabled persons. A determination that the Company or a property of the
Company is not in compliance with the ADA could result in the imposition of
fines, injunctive relief, damages, or attorney's fees. The Company's leases
contemplate that compliance with the ADA is the responsibility of the operator.
The Company is not currently a party to any litigation or administrative
proceeding with respect to a claim of violation of the ADA and does not
anticipate any such action or proceeding that would have a material adverse
effect upon the Company.
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<PAGE>
LAND-USE AND SAFETY REGULATIONS
The Company and its restaurant operators are required to operate the
properties in compliance with various laws, land-use regulations, fire and
safety regulations, and building codes as may be applicable or later adopted by
the governmental body or agency having jurisdiction over the property or the
matter being regulated. The Company does not believe that the cost of compliance
with such regulations and laws will have a material adverse effect upon the
Company.
HEALTH REGULATIONS
The restaurant industry is regulated by a variety of state and local
departments and agencies concerned with the health and safety of restaurant
customers. These regulations vary by restaurant location and type (I.E., fast
food or casual dining). The Company's leases provide for compliance by the
restaurant operator with all health regulations and inspections and require the
restaurant operator to obtain insurance to cover liability for violation of such
regulations or the interruption of business due to closure caused by failure to
comply. The Company is not currently a party to any litigation or administrative
proceeding concerning compliance with health regulations and does not anticipate
any such action or proceeding that would have a material adverse effect upon the
Company.
INSURANCE
The Company requires its lessees to maintain adequate comprehensive
liability, fire, flood and extended loss insurance provided by reputable
companies with commercially reasonable and customary deductibles. The Company
also requires that it be named as an additional insured under such policies.
Certain types and amounts of insurance are required to be carried by each
restaurant operator under the leases with the Company, and the Company actively
monitors tenant compliance with this requirement. The Company intends to require
lessees of subsequently acquired properties to obtain similar insurance
coverage. There are, however, certain types of losses generally of a
catastrophic nature, such as earthquakes and floods, that may be either
uninsurable or not economically insurable, as to which the Company's properties
are at risk depending on whether such events occur with any frequency in such
areas. An uninsured loss could result in a loss to the Company of both its
capital investment and anticipated profits from the affected property. In
addition, because of coverage limits and deductibles, insurance coverage in the
event of a substantial loss may not be sufficient to pay the full current market
value or current replacement cost of the Company's investment. Inflation,
changes in building codes and ordinances, environmental considerations and other
factors also might make using insurance proceeds to replace a facility after it
has been damaged or destroyed infeasible. Under such circumstances, the
insurance proceeds received by the Company might be inadequate to restore its
economic position with respect to such property.
EMPLOYEES
As of April 30, 1997, the Company employed 15 individuals on either a full
or part-time basis. In addition, the Company retains, on an independent contract
basis, other parties in connection with the operation of the Company and its
properties, including auditing, legal, property origination and other services.
LEGAL PROCEEDINGS
The Company is not presently involved in any material litigation, nor to its
knowledge is any material litigation threatened against the Company or its
properties, other than routine litigation arising in the ordinary course of
business.
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<PAGE>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the REIT Corporation's policies with
respect to investments, financings, affiliate transactions and certain other
activities. Such policies are a continuation of the policies currently being
employed by USRP. The REIT Corporation's policies with respect to these
activities have been established by management and may be amended or revised
from time to time at the discretion of the REIT Board without a vote of the
stockholders of the REIT Corporation. No assurance can be given that the
Company's investment objectives will be attained or that the value of the
Company will not decrease. As the sole general partner of the Operating
Partnership, the REIT Corporation will also determine the investment policies of
the Operating Partnership.
INVESTMENT POLICIES
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE
The Company's primary business objective is to maximize stockholder value by
maintaining long-term growth in cash available for distribution to its
stockholders. The Company intends to pursue this objective by continuing to
acquire triple net leased properties and structuring sale/leaseback transactions
consistent with its strategies prior to the Conversion. The Company's policy is
to acquire or develop assets where the Company believes that opportunities exist
for acceptable investment returns. See "The Company-- Strategy."
The Company expects to pursue its investment objectives primarily through
the direct ownership of properties. The Company intends to invest in or develop
restaurant properties. As part of its strategy of expanding its restaurant
property portfolio, the Company intends to build-out properties in conjunction
with other food vendors, such as convenience stores, and retail outlets. All of
the Company's properties will be managed directly by the Company.
The Company may also participate with other entities in property ownership,
through joint ventures or other types of common ownership. Equity investments
may be subject to existing mortgage financing and other indebtedness which have
priority over the equity interests of the Company.
INVESTMENTS IN REAL ESTATE MORTGAGES
While the Company intends to emphasize equity real estate investments, it
may, in its discretion, invest in mortgages or other real estate interests
consistent with its qualification as a REIT. The Company may also invest in
participating or convertible mortgages if the REIT Board concludes that the
Company and its stockholders may benefit from the cash flow or any appreciation
in the value of the subject property. Such mortgages are similar to equity
participations. The mortgages in which the Company may invest may be either
first mortgages or junior mortgages and may or may not be insured by a
governmental agency.
SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES AND OTHER ISSUERS
Subject to the percentage of ownership limitations and gross income tests
necessary for REIT qualification, the Company also may invest in securities of
entities engaged in real estate activities or securities of other issuers,
including for the purpose of exercising control over such entities, although it
does not intend to do so. See "--Certain Other Policies" and "Federal Income Tax
Considerations--The Merger Alternative--Taxation of the REIT Corporation as a
REIT."
PERIODIC REVIEW OF ASSETS
The Company has no current intention to dispose of any of its Properties.
Nevertheless, the Company reserves the right to dispose of any of its Properties
or any property that may be acquired in the future if
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<PAGE>
the Company determines that the disposition of such property is in the best
interests of the Company and its stockholders.
FINANCING POLICIES
As a general policy, the Company intends to maintain a ratio of total
indebtedness of 50% or less to the greater of total market capitalization (I.E.,
the market value of issued and outstanding shares of capital stock plus total
consolidated debt) or the original cost of all of the Company's properties as of
the date of such calculation. However, no assurance can be given that the
Company will be able to accomplish this objective. The debt ratio may be based
from time to time upon the stock market value of equity, and accordingly may
fluctuate with changes in the price of the shares.
On a pro forma basis at March 31, 1997, the Company had a ratio of
debt-to-total market capitalization of 32%. See "Capitalization." Assuming no
change in market value of issued and outstanding shares of Common Stock, the
Company would be able to incur approximately $100 million of additional
indebtedness and still maintain a ratio of debt-to-total market capitalization
of less than 100%. The Company, however, may from time to time reevaluate its
debt policy in light of current economic conditions, relative costs of debt and
equity capital, changes in the market capitalization of the Company, acquisition
opportunities and other factors, and may modify its debt financing policy and
may increase or decrease its debt ratio without a vote of its stockholders.
Neither the Articles nor the REIT Corporation's Bylaws contain any limitations
on the amount or percentage of indebtedness the Company may incur.
Indebtedness incurred by the Company may be in the form of bank borrowings,
purchase money obligations to the sellers of properties, publicly or privately
placed debt instruments or financing from institutional investors or other
lenders, any of which indebtedness may be unsecured or may be secured by
mortgages or other interests in properties owned by the Company. The recourse of
the holders of such indebtedness may be to all or any part of the properties of
the Company or may be limited to the particular property to which the
indebtedness relates. Subject to any contractual restrictions, the proceeds from
any borrowings by the Company may be used for the payment of dividends, for
working capital, to refinance existing indebtedness or to finance acquisitions
of new properties.
As another policy, the Company intends to generally not incur variable-rate
mortgage debt other than the indebtedness outstanding under its existing credit
facility. While the organizational documents of the Company do not contain any
prohibition against the use of variable rate mortgage loans, the Company
believes that it is a more prudent and conservative financing strategy to
utilize only fixed rate mortgage loans for all long-term indebtedness.
In the event that the REIT Board determines to raise additional equity
capital, the REIT Board has the authority, without stockholder approval, to
issue additional shares of Common Stock or shares of preferred stock in any
manner (and on such terms and for such consideration) it deems appropriate,
including in exchange for property, subject to the Maryland General Corporation
Law (the "MGCL"). Existing stockholders would have no preemptive right to
purchase such shares in any offering, and any such offering might cause a
dilution of a stockholder's investment in the Company. See "Description of
Capital Stock."
If the REIT Board determines to raise additional equity capital to fund
investments by the Operating Partnership, the Company will contribute such funds
to the Operating Partnership as a contribution to capital and purchase of
additional partnership interests. The Company may issue additional shares of
Common Stock in connection with the acquisition of interests in the Operating
Partnership that have been tendered to the Operating Partnership for redemption.
The REIT Board also has the authority to cause the Operating Partnership to
issue additional partnership interests in any manner (and on such terms and for
such consideration) as it deems appropriate, including in exchange for property.
Any such partnership interests will be redeemable at the
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<PAGE>
option of the holder, which redemption the Company intends to cause to be made
in Common Stock pursuant to the redemption rights.
AFFILIATE TRANSACTION POLICY
The Company has adopted a policy that it will not (i) acquire from or sell
to any director, officer or employee of the Company, or any entity in which a
director, officer or employee of the Company beneficially owns more than a 1%
interest, or, except for any property in which the Company owns an economic
interest, acquire from or sell to any affiliate of any of the foregoing, any
property or other assets of the Company, (ii) make any loan to or borrow from
any of the foregoing persons, or (iii) without the approval of a majority of the
independent directors, engage in any other transaction with any of the foregoing
persons. Currently, the Master Partnership Agreement does not restrict the
ability of the Managing General Partner or its principals from owning and/or
operating restaurants on Company properties or elsewhere.
CERTAIN OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not intend
to (i) invest in the securities of other issuers for the purpose of exercising
control over such issuer, (ii) underwrite securities of other issuers, or (iii)
actively trade in loans or other investments.
The Company may make investments other than as previously described,
although it does not currently intend to do so. The Company has authority to
purchase or otherwise reacquire shares of Common Stock or any of its other
securities in the open market or otherwise and may engage in such activities in
the future. The REIT Board has no present intention of causing the Company to
repurchase any shares of Common Stock, other than pursuant to any dividend
reinvestment plan, and any such action would be taken only in conformity with
applicable Federal and state laws and the requirements for qualifying as a REIT
under the Code.
The Company has previously made loans to third parties, and it may in the
future continue to make loans to third parties, including, without limitation,
loans to joint ventures in which it participates. The Company has not engaged in
trading, underwriting or agency distribution or sale of securities of other
issuers, and the Company does not intend to do so in the future. The Company's
policies with respect to such activities may be reviewed and modified from time
to time by the REIT Board without the vote of the stockholders.
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<PAGE>
PRICE RANGE OF UNITS AND DISTRIBUTION POLICY
The Units are listed for trading on the NYSE under the ticker symbol "USV."
As of May 5, 1997, there were 7,796,254 Units outstanding and the record number
of Unitholders was 1,784. Set forth below are the high and low sale prices for
the Units as reported by the NYSE for the indicated periods and the cash
dividends declared for such periods (and paid in the subsequent period).
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTION
---------- ---------- -----------
<S> <C> <C> <C>
1994
- ---------------------------------------------------------
1st quarter.............................................. $ 163/4 $ 157/8 $ .39
2nd quarter.............................................. 171/4 153/8 .39
3rd quarter.............................................. 171/2 163/4 .41
4th quarter.............................................. 173/8 13 .42
-----------
$ 1.61
-----------
-----------
<CAPTION>
1995
- ---------------------------------------------------------
<S> <C> <C> <C>
1st quarter.............................................. $ 161/2 $ 141/4 $ .42
2nd quarter.............................................. 171/8 153/4 .42
3rd quarter.............................................. 187/8 163/4 .43
4th quarter.............................................. 201/4 18 .44
-----------
$ 1.71
-----------
-----------
<CAPTION>
1996
- ---------------------------------------------------------
<S> <C> <C> <C>
1st quarter.............................................. $ 233/8 $ 191/2 $ .47
2nd quarter.............................................. 25 215/8 .48
3rd quarter.............................................. 253/8 211/2 .485
4th quarter.............................................. 281/4 225/8 .50
-----------
$ 1.935
-----------
-----------
<CAPTION>
1997
- ---------------------------------------------------------
<S> <C> <C> <C>
1st quarter.............................................. $ 303/8 $ 27 $ .50
2nd quarter (through May 5, 1997)........................ $ 281/2 $ 261/2 $ --
</TABLE>
In July 1995, USRP announced its intention to repurchase up to 300,000
units. At that time, management believed that the repurchase of the Units
represented a good investment value for USRP and the Unitholders. Through
December 31, 1996, USRP had purchased 30,000 Units. No further purchases have
been made or are currently contemplated because management currently believes
that a better investment value for the Company and the Unitholders is the
acquisition of additional restaurant properties.
The Company intends to maximize the cash available for distributions and
enhance stockholder value by acquiring or developing additional restaurant
properties that meet its investment criteria. See "The Company--Strategy." In
connection therewith, the Company intends to make regular quarterly
distributions to its stockholders. Currently, on an annualized basis, the
distributions made by the Company to its Unitholders is $2.00 per Unit. The
Company has historically distributed from 75% to 95% of its estimated cash
available for distribution. In order to qualify to be taxed as a REIT, the REIT
Corporation must make annual distributions to stockholders of at least 95% of
its REIT taxable income (determined by excluding any net capital gain). Under
certain circumstances, the REIT Corporation may be required to make
distributions in excess of cash available for distribution in order to meet such
distribution requirements. In
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<PAGE>
such a case, the REIT Corporation may find it necessary to arrange for
short-term (or possibly long-term) borrowings or to raise funds through the
issuance of preferred stock or additional Common Stock.
Future distributions by the REIT Corporation will be at the discretion of
the REIT Board and will depend on the actual results of operation of the REIT
Corporation, its financial condition, capital requirements, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the REIT Board deems relevant. Subject to these restrictions, the
REIT Board intends to continue the distribution policy of USRP.
The Company may in the future implement a dividend reinvestment program
under which the stockholders may elect automatically to reinvest distributions
in shares of Common Stock. The Company may from time to time repurchase shares
of Common Stock in the open market for the purpose of fulfilling its obligations
under the program, if adopted, or may elect to issue additional shares of Common
Stock.
USE OF PROCEEDS
The REIT Corporation will not receive any cash proceeds from the issuance of
the Common Stock offered hereby. In consideration for issuing the Common Stock,
as contemplated in this Proxy Statement/ Prospectus, the REIT Corporation will
receive in exchange Units in like amounts.
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CAPITALIZATION
The following table sets forth the capitalization of USRP as of December 31,
1996, and as adjusted to reflect as of December 31, 1996 (i) the purchase of 121
properties for $73,790,000 completed since December 31, 1996, including the
value of 340,804 Units of $9,320,000, (ii) the purchase of 16 properties from
QSR Income Properties, Ltd. ("QSR") for 277,131 Units (at $28.50 per Unit),
(iii) the purchase of 25 properties from other sellers that as of April 30, 1997
are under binding contracts for $18,229,000, (iv) the additional borrowings of
$82,373,000 required to purchase the properties acquired and under contract, (v)
the sale of four properties for $2,892,000, (vi) the Managing General Partner's
conversion of the Operating Partnership General Partner Interest or the
assignment thereof to USRP (depending upon how the Conversion is effected) and
converting the USRP Interest for 850,000 Initial Shares, with the Initial Shares
valued at the current market price of a Unit (assumed $28.50 per share), and the
related cost of the Conversion aggregating $580,000 as if such transactions had
occurred on such date, and (vii) consolidation with the REIT Corporation. The
information presented below should be read in conjunction with the Pro Forma
Balance Sheet of the Company (and the accompanying note disclosures thereto)
included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
COMPANY ON A
PRO FORMA BASIS
USRP ACTUAL AS ADJUSTED
------------ ---------------
<S> <C> <C>
UNAUDITED
(IN THOUSANDS, EXCEPT
UNIT AND SHARE DATA)
Long Term Debt:
Line of credit and long term debt............................................... $ 69,486 $ 151,859
Obligations under capitalized lease............................................. 362 362
------------ ---------------
Total Long Term Debt.......................................................... 69,848 152,221
Equity of General Partners, Unitholders and Stockholders:
Interest of Managing General Partner............................................ 1,163
Interest of Unitholders:
6,894,003 Units issued and outstanding........................................ 103,120
Shares of capital stock, par value $.001 per share; authorized; 10,000,000
shares of Preferred Stock, 45,000,000 shares of Common Stock, and 5,000,000
shares of Excess Stock; issued and outstanding: 8,363,000 shares of Common
Stock on a pro forma basis(c)................................................. 9(a)
Additional paid in capital...................................................... 146,098(a)
Accumulated deficit............................................................. (23,611)(b)
------------ ---------------
Total Partners' Capital/Stockholders' Equity.................................. 104,283 122,496
------------ ---------------
Total Capitalization.............................................................. $ 174,131 $ 274,717
------------ ---------------
------------ ---------------
Capitalization allocable to unitholders........................................... $ 170,683 N/A
------------
------------
Book Value per Unit/Share......................................................... $ 24.76 $ 32.85
------------ ---------------
------------ ---------------
</TABLE>
- ------------------------
(a) Reflects conversion of the Managing General Partner's and limited partners'
units into shares of common stock of the REIT.
(b) Reflects the costs and fees as follows:
<TABLE>
<S> <C>
Cost of Conversion................................................. $ 580
Cost of property management contract............................... 23,031
---------
$ 23,611
---------
---------
</TABLE>
(c) Excludes 350,000 Units/Shares issuable upon exercise of options held by the
Managing General Partner.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company is currently managed by the Managing General Partner. Upon
consummation of the Conversion, the Company will be managed by members of the
REIT Board initially comprised of the current directors of the Managing General
Partner. It is anticipated that the REIT Board will be expanded in 1997 to
include additional independent directors. The REIT Board is divided into three
classes as nearly equal in number as possible, with the term of office of one
class expiring in each year. The directors will be responsible for electing the
Company's executive officers, who will serve at the discretion of the REIT
Board. Robert J. Stetson, President and Chief Executive Officer of the Managing
General Partner, will serve as the REIT Corporation's President and Chief
Executive Officer and Fred H. Margolin, Chairman of the Board, Secretary and
Treasurer of the Managing General Partner, will serve as Chairman of the REIT
Board. The persons who will be directors, executive officers of the REIT
Corporation following consummation of the Conversion and the Termination are as
follows:
<TABLE>
<CAPTION>
POSITION(S) AND
NAME AGE OFFICES HELD
- ----------------------------------------------- --- -----------------------------------------------
<S> <C> <C>
Robert J. Stetson.............................. 46 Chief Executive Officer, President and Director
Fred H. Margolin............................... 47 Chairman of the Board, Secretary, Treasurer
Gerald H. Graham............................... 59 Director
David K. Rolph................................. 48 Director
Darrel L. Rolph................................ 59 Director
Eugene G. Taper................................ 59 Director
</TABLE>
ROBERT J. STETSON. Mr. Stetson is the President, Chief Executive Officer
and a director of the REIT Corporation. Since 1978, Mr. Stetson has been
primarily engaged in restaurant chain management, including the acquisition and
management of restaurant properties. Prior to 1987, Mr. Stetson served in
several positions with PepsiCo Inc. and its subsidiaries, including Chief
Financial Officer of Pizza Hut. From 1987 until 1992, Mr. Stetson served as a
senior executive in restaurant and retailing subsidiaries of Grand Metropolitan
PLC, the ultimate parent corporation of Burger King. During this period, Mr.
Stetson served as the Chief Financial Officer and later President-Retail
Division of Burger King and Chief Financial Officer and later Chief Executive
Officer of Pearle Vision. As Chief Financial Officer of Burger King, Mr. Stetson
was responsible for managing more than 750 restaurants that Burger King leased
to tenants. Mr. Stetson is also a director of Bayport Restaurant Group, a
publicly-traded restaurant company. Mr. Stetson received a Bachelor of Arts
degree from Harvard College and an M.B.A. from Harvard Business School. Mr.
Stetson is 46 years old.
FRED H. MARGOLIN. Mr. Margolin is the Chairman of the Board, Secretary,
Treasurer and a director of the REIT Corporation. In 1977, Mr. Margolin founded
Intercon General Agency, a national insurance agency specializing in the
development and marketing of insurance products for financial institutions. Mr.
Margolin served as the Chief Executive Officer of Intercon General Agency from
its inception until its sale to a public company in 1982. In 1989, Mr. Margolin
founded and became the President of American Eagle Premium Finance Company, one
of the largest independent premium finance companies in Texas. From 1982 through
1988, Mr. Margolin developed and then leased or sold shopping centers having an
aggregate cost of approximately $50,000,000. Mr. Margolin received a Bachelor of
Science degree from the Wharton School of the University of Pennsylvania and an
M.B.A. from Harvard Business School. Mr. Margolin is 47 years old.
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GERALD H. GRAHAM. Mr. Graham is a director of the REIT Corporation. Mr.
Graham is a professor and the Dean of the Barton School of Business at Wichita
State University. Mr. Graham is 59 years old.
DAVID K. ROLPH. Mr. Rolph is a director of the REIT Corporation. Mr. Rolph
is the President of the Tex-Mex restaurant chain, "Carlos O'Kellys" and the Vice
President of Sasnak Management Corp., a restaurant management company, positions
he has held for the past five years. Mr. Rolph is 48 years old.
DARREL L. ROLPH. Mr. Rolph is a director of the REIT Corporation. Mr. Rolph
is the Secretary of "Carlos O'Kellys" and the President of the Sasnak Management
Corp., a restaurant management company, positions he has held for the past five
years. Mr. Rolph is 59 years old.
EUGENE G. TAPER. Mr. Taper is a director of the REIT Corporation. Mr. Taper
is a certified public accountant and a business consultant, since 1993. Prior to
1993, Mr. Taper was a partner of Deloitte & Touche LLP, an international public
accounting firm. Mr. Taper is 59 years old.
EXECUTIVE COMPENSATION
The REIT Corporation was incorporated in January 1997. Accordingly, the REIT
Corporation did not pay any cash compensation to its executive officers for the
year ended December 31, 1996. The following table sets forth the estimated
annualized base salary expected to be paid to each of the REIT Corporation's
executive officers for the 1997 fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------------
NAME AND OTHER ANNUAL
PRINCIPAL POSITION SALARY BONUS (1) COMPENSATION (1)
- -------------------------------------------------------------- ---------- ----------- ----------------
<S> <C> <C> <C>
Robert J. Stetson
President and Chief Executive Officer....................... $ 250,000 -- --
Fred H. Margolin
Chairman of the Board of Directors and Secretary............ $ 250,000 -- --
</TABLE>
- ------------------------
(1) Any bonuses or other annual compensation paid to the REIT Corporation's
executive officers will be at the discretion of the REIT Board and will be
payable following the conclusion of the fiscal year.
EMPLOYMENT AGREEMENTS
Each of Messrs. Stetson and Margolin will enter into an employment agreement
(the "Employment Agreements") with the REIT Corporation on the date of the
Termination. Each of the Employment Agreements will expire on the third
anniversary of the date thereof. Pursuant to the Employment Agreements, Mr.
Stetson will serve as President and Chief Executive Officer of the REIT
Corporation and will be paid an annual base salary of $250,000 and Mr. Margolin
will serve as Chairman of the Board, Secretary and Treasurer of the REIT
Corporation and will be paid an annual base salary of $250,000. The Employment
Agreements provide for salary raises at the discretion of the REIT Board,
provided that, prior to December 31, 2000, neither Mr. Stetson nor Mr. Margolin
will receive cash compensation (I.E., excluding the value of any equity-based
compensation, such as stock options or shares of restricted stock) in excess of
$300,000.
Under the terms of the respective Employment Agreements, if the covered
executive's employment with the REIT Corporation is terminated by the REIT
Corporation other than for "cause" (as defined in the Employment Agreement) or
by "constructive discharge" (as defined in the Employment Agreement), the
terminated executive will be entitled to receive an amount equal to two times
the highest annualized rate of salary prior to the date of termination. The
Employment Agreements also provide that the covered
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<PAGE>
executive may terminate his employment for any reason upon six months' prior
written notice. In the event of such a termination, the REIT Corporation will be
obligated to pay the executive the compensation due him up to the effective date
of termination. The Employment Agreements also provide for the payment of
severance compensation in an amount equal to 2.99 times the covered executive's
compensation, which includes both salary and any cash bonus), in the event such
covered executive's employment is terminated without cause or by constructive
discharge within three years following a "change in control" (as defined in the
Employment Agreement).
INDEMNIFICATION AGREEMENTS
The REIT Corporation will enter into indemnification agreements requiring
the REIT Corporation to indemnify its officers and directors, and advance
expenses, to the maximum extent permitted by Maryland law. See "Certain
Provisions of Maryland Law and of the REIT Corporation's Articles and Bylaws--
Limitation of Liability and Indemnification."
INSURANCE
The REIT Corporation will have directors' and officers' liability insurance
in the aggregate amount of $2 million. Directors' and officers' liability
insurance generally insures (i) the directors and officers of the REIT
Corporation from any claim arising out of an alleged wrongful act by the
directors and officers in their respective capacities as directors and officers
and (ii) the REIT Corporation to the extent that it has indemnified a director
or officer for such loss.
CERTAIN TRANSACTIONS WITH RELATED PARTIES
In connection with the Termination, the Managing General Partner will
withdraw as the managing general partner of the Partnerships and convert the
Operating Partnership General Partner Interest or assign such interest to USRP
(depending upon the Conversion is effected) and convert the USRP Interest for
the Acquisition Shares. See "The Conversion--Termination of Property Management
Contract and Partnership Interests."
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock by (i) each person who is expected to be a
stockholder of the REIT Corporation holding more than 5% of the outstanding
shares of Common Stock, (ii) each director and each executive officer and (iii)
all directors and executive officers of the REIT Corporation as a group. Except
as otherwise indicated, each person named in the table has sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by such person after completion of the Conversion and the
Termination, assuming the Conversion is effected through the Merger.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENTAGE OF
BENEFICIAL OWNER(1) OWNED ALL SHARES
- ---------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Robert J. Stetson..................................................... 479,785(2)(3) 6.4%
Fred H. Margolin...................................................... 493,750(2)(3) 6.6%
David K. Rolph........................................................ 458,285(2) 6.1%
Darrel L. Rolph....................................................... 459,285(2) 6.1%
Eugene G. Taper....................................................... 540 *
QSV Properties, Inc................................................... 455,285(4) 6.0%
All directors and executive officers as a group (6 persons)........... 525,790(2) 7.0
</TABLE>
- ------------------------
* Less than 1%.
90
<PAGE>
(1) The address of each of these persons and entities is 5310 Harvest Hill Road,
Suite 270, Dallas, Texas 75230.
(2) Includes 455,285 shares beneficially owned by QSV Properties, Inc., of which
Messrs. Stetson, Margolin, David Rolph and Darrel Rolph are the stockholders
and directors.
(3) Includes 10,000 shares issuable upon the exercise of an option which is
immediately exercisable.
(4) Includes 75,285 shares to be issued as part of the Acquisition Price and
330,000 shares issuable upon the exercise of an option which is immediately
exercisable.
DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF SECURITIES
The summary of the terms of the REIT Corporation's capital stock set forth
below does not purport to be complete and is subject to, and qualified in its
entirety by, reference to the Articles and the REIT Corporation's Bylaws, copies
of which have been filed as exhibits to the Registration Statement of which this
Proxy Statement/Prospectus constitutes a part. See "Available Information."
GENERAL
The Articles authorize the REIT Corporation to issue up to 45 million shares
of Common Stock, par value $.001 per share, 10 million shares of Preferred
Stock, par value $.001 per share, and five million shares of excess stock, par
value $.001 per share (the "Excess Stock"). Upon completion of the Conversion,
assuming the Merger Alternative is used, 7,875,004 shares of Common Stock will
be issued and outstanding. Under the MGCL, stockholders generally are not liable
for the corporation's debts or obligations.
COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully
paid and nonassessable. Subject to the preferential rights of the Preferred
Stock and any other shares or series of stock hereinafter designated by the REIT
Board, holders of shares of Common Stock will be entitled to receive dividends
on the stock if, as and when authorized and declared by the board of directors
of the REIT Corporation out of assets legally available therefor and to share
ratably in the assets of the REIT Corporation legally available for distribution
to its stockholders in the event of its liquidation, dissolution or winding-up
after payment of, or adequate provision for payment of, all known debts and
liabilities of the REIT Corporation. The REIT Corporation intends to pay regular
quarterly dividends.
Each outstanding share of Common Stock entitles the holder thereof to one
vote on all matters submitted to a vote of stockholders, including the election
of directors and, except as otherwise required by law or except as provided with
respect to any other class or series of stock, the holders of shares of Common
Stock will possess the exclusive voting power. There is no cumulative voting in
the election of directors, which means that the holders of a majority of the
outstanding shares of Common Stock can elect all of the directors then standing
for election and the holders of the remaining shares will not be able to elect
any directors. Holders of shares of Common Stock have no conversion, sinking
fund, redemption rights or preemptive rights to subscribe for any securities of
the REIT Corporation.
Shares of Common Stock will have equal dividend, distribution, liquidation
and other rights and will have no preference or exchange rights.
Pursuant to the MGCL, a corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions unless approved by the holders of at
least two-thirds of the shares of stock entitled to vote on the matter unless a
lesser percentage (but not less than a majority of all of the votes to be cast
on the matter) is set forth in the corporation's charter. The Articles provide
for the vote of the holders of a majority of the shares of stock
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<PAGE>
outstanding and entitled to vote on the matter to approve any of such actions,
except for amendments to the Articles relating to the number of directors and
the classification of the board of directors of the REIT Corporation which
require approval of holders of at least two-thirds of the shares of stock
entitled to vote on the matter.
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
PREFERRED STOCK
Shares of Preferred Stock may be issued from time to time, in one or more
series, as authorized by the REIT Board. Prior to issuance of shares of each
series, the REIT Board is required by the MGCL and the Articles to fix for each
such series the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms or conditions of redemption, as are permitted by the MGCL. The REIT
Board could authorize the issuance of shares of Preferred Stock with terms and
conditions which could have the effect of discouraging a takeover or other
transaction in which holders of some, or a majority of, shares of Common Stock
might receive a premium for their shares of Common Stock over the
then-prevailing market price of those shares of Common Stock. No shares of
Preferred Stock are outstanding and the REIT Corporation has no present plans to
issue any Preferred Stock.
RESTRICTIONS ON TRANSFER
For the REIT Corporation to qualify as a REIT under the Code, it must meet
certain requirements concerning the ownership of its outstanding shares of
capital stock. Specifically, not more than 50% in value of the issued and
outstanding shares of capital stock of the REIT Corporation may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of a taxable year, and the REIT
Corporation must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year.
Because the REIT Board believes it is essential for the REIT Corporation to
continue to qualify as a REIT, the Articles, subject to certain exceptions
described below, provide that no person may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than (i) 8.75% of the number of
outstanding shares of Common Stock, except for QSV which may own initially no
more than 15.0% of the number of such outstanding shares, or (ii) 9.8% of the
number of outstanding shares of Preferred Stock of any series of Preferred Stock
(together, the "Ownership Limitation"). The Ownership Limitation with respect to
the shares of Common Stock will be increased, to a maximum of 9.8%, and the
ownership limit applicable to QSV will be decreased, subject to a minimum
percentage equal to the Ownership Limitation in proportion to any reduction in
QSV's direct or indirect percentage ownership of the REIT Corporation as a
result of additional issuances or dispositions of securities of the REIT
Corporation.
Any transfer of Common Stock or Preferred Stock that would (a) result in any
person (other than QSV with respect to shares of Common Stock) owning, directly
or indirectly, Common Stock or Preferred Stock in excess of the Ownership
Limitation, (b) result in QSV owning, directly or indirectly, in excess of 15.0%
of the number of outstanding shares of Common Stock (or the decreased percentage
that may be applicable), (c) result in the Common Stock and Preferred Stock
being owned by fewer than 100 persons (determined without reference to any rules
of attribution), (iv) result in the REIT Corporation being "closely held" within
the meaning of Section 856(h) of the Code, or (v) cause the REIT Corporation to
own, directly or constructively, 10% or more of the ownership interests in a
tenant of the REIT Corporation's or the Operating Partnership's real property,
within the meaning of Section 856(d)(2)(B) of the Code, shall be null and void,
and the intended transferee will acquire no rights in such shares of Common
Stock or Preferred Stock. Such Common Stock or Preferred Stock will be
designated as "Excess Stock" and transferred automatically to a trust (the
"Trust") effective on the day before the purported
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<PAGE>
transfer of such Common Stock or Preferred Stock. The record holder of the
shares of Common Stock or Preferred Stock that are designated as Excess Stock
(the "Prohibited Owner") will be required to submit such number of shares of
Common Stock or Preferred Stock to the REIT Corporation for registration in the
name of the Trust. The Trustee of the Trust will be designated by the REIT
Corporation, but will not be affiliated with the REIT Corporation. The
beneficiary of the Trust (the "Beneficiary") will be one or more charitable
organizations that are named by the REIT Corporation.
Excess Stock will remain issued and outstanding shares of Common Stock or
Preferred Stock and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Trust will receive all dividends
and distributions on the Excess Stock and will hold such dividends and
distributions in trust for the benefit of the Beneficiary. The Trustee will vote
all Excess Stock. The Trustee will designate a permitted transferee of the
Excess Stock, provided that the permitted transferee (i) purchases such Excess
Stock for valuable consideration and (ii) acquires such Excess Stock without
such acquisition resulting in a transfer to another Trust and resulting in the
redesignation of such shares of Common Stock or Preferred Stock as Excess Stock.
The Prohibited Owner with respect to Excess Stock will be required to repay
the Trust the amount of any dividends or distributions received by the
Prohibited Owner (i) that are attributable to any Excess Stock and (ii) the
record date for which was on or after the date that such shares became Excess
Stock. The Prohibited Owner generally will receive from the Trustee the lesser
of (a) the price per share such Prohibited Owner paid for the shares of Common
Stock or Preferred Stock that were designated as Excess Stock (or, in the case
of a gift or devise, the Market Price (as defined below) per share on the date
of such transfer) and (b) the price per share received by the Trustee from the
sale of such Excess Stock. Any amounts received by the Trustee in excess of the
amounts to be paid to the Prohibited Owner will be distributed to the
Beneficiary.
The Excess Stock will be deemed to have been offered for sale to the REIT
Corporation, or its designee, at a price per share equal to the lesser of (i)
the price per share in the transaction that created such Excess Stock (or, in
the case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the REIT
Corporation, or its designee, accepts such offer. The REIT Corporation will have
the right to accept such offer for a period of 90 days after the later of (i)
the date of the purported transfer which resulted in such Excess Stock and (ii)
the date the Company determines in good faith that a transfer resulting in such
Excess Stock occurred.
"Market Price" means the average of the Closing Price for the ten
consecutive trading days immediately preceding the relevant date. "Closing
Price" on any day shall mean the last sale price, regular way on such day, or,
if no such sale takes place on that day, the average of the closing bid and
asked prices, regular way, in either case as reported on the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the NYSE, or if the affected class or series of capital
stock is not so listed or admitted to trading, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange (including the National Market System
of the National Association of Securities Dealers, Inc. Automated Quotation
System) on which the affected class or series of capital stock is listed or
admitted to trading or, if the affected class or series of capital stock is not
so listed or admitted to trading, the last quoted price or, if not quoted, the
average of the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer in use, the principal automated
quotation system then in use or, if the affected class or series of capital
stock is not so quoted by any such system, the average of the closing bid and
asked prices as furnished by a professional market maker selected by the REIT
Board making a market in the affected class or series of capital stock, or, if
there is no such market maker or such closing prices otherwise are not
available, the fair market value of the affected class or series of capital
stock as of such day, as determined by the REIT Board in its discretion.
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<PAGE>
Any person who acquires or attempts to acquire shares of Common Stock or
Preferred Stock in violation of the foregoing restrictions, or any person who
owned shares of Common Stock or Preferred Stock that were transferred to a
Trust, will be required (i) to give immediate written notice to the REIT
Corporation of such event and (ii) to provide to the REIT Corporation such other
information as the REIT Corporation may request in order to determine the
effect, if any, of such transfer on the REIT Corporation's status as a REIT.
The Articles require all persons who own, directly or indirectly, more than
5% (or such lower percentages as required pursuant to regulations under the
Code) of the outstanding shares of Common Stock and Preferred Stock, within 30
days after January 1 of each year, to provide to the REIT Corporation a written
statement or affidavit stating the name and address of such direct or indirect
owner, the number of shares of Common Stock and Preferred Stock owned directly
or indirectly, and a description of how such shares are held. In addition, each
direct or indirect shareholder shall provide to the REIT Corporation such
additional information as the REIT Corporation may request in order to determine
the effect, if any, of such ownership on the REIT Corporation's status as a REIT
and to ensure compliance with the Ownership Limitation.
The Ownership Limitation generally will not apply to the acquisition of
shares of Common Stock or Preferred Stock by an underwriter that participates in
a public offering of such shares. In addition, the REIT Board, upon receipt of a
ruling from the IRS or an opinion of counsel and upon such other conditions as
the REIT Board may direct, may exempt a person from the Ownership Limitation
under certain circumstances. However, the REIT Board may not grant an exemption
from the Ownership Limit to any proposed transferee whose ownership, direct or
indirect, of shares of beneficial interest of the REIT Corporation in excess of
the Ownership Limit would result in the termination of the REIT Corporation's
status as a REIT. The foregoing restrictions will continue to apply until (i)
the REIT Board determines that it is no longer in the best interests of the REIT
Corporation to attempt to qualify, or to continue to qualify, as a REIT and (ii)
there is an affirmative vote of a majority of the votes entitled to be cast on
such matter at a regular or special meeting of the stockholders of the Company.
All certificates representing shares of Common Stock or Preferred Stock will
bear a legend referring to the restrictions described above.
The Ownership Limitation could have the effect of discouraging a takeover or
other transaction in which holders of some, or a majority, of shares of Common
Stock might receive a premium for their shares over the then-prevailing market
price or which these holders might believe to be otherwise in their best
interest.
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE REIT CORPORATION'S ARTICLES AND BYLAWS
The following discussion summarizes certain provisions of the MGCL and the
Articles and the REIT Corporation's Bylaws. This summary does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Articles and the REIT Corporation's Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus constitutes a
part. See "Available Information."
CLASSIFICATION OF THE BOARD OF DIRECTORS
The Bylaws provide that the number of directors of the REIT Corporation
shall be as set forth in the Articles or as may be established by the REIT Board
but may not be fewer than the minimum number required by Maryland law (currently
three) nor more than 15. Any vacancy will be filled, at any regular meeting or
at any special meeting called for that purpose, by a majority of the directors
then in office. The stockholders may elect a director to fill a vacancy on the
REIT Board which results from the removal of a director. Pursuant to the terms
of the Articles, following the IPO, the directors will be divided into three
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classes. One class will hold office initially for a term expiring at the annual
meeting of stockholders to be held in 1998, another class will hold office
initially for a term expiring at the annual meeting of stockholders to be held
in 1999 and another class will hold office initially for a term expiring at the
annual meeting of stockholders to be held in 2000. As the term of each class
expires, directors in that class will be elected for a term of three years. The
REIT Corporation believes that classification of the REIT Board will help to
assure the continuity and stability of the REIT Corporation's business
strategies and policies as determined by the REIT Board.
The classified director provision could have the effect of making the
removal of incumbent directors more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the REIT Corporation, even though such an attempt might be
beneficial to the REIT Corporation and its stockholders. At least two annual
meetings of stockholders, instead of one, will generally be required to effect a
change in a majority of the REIT Board. Thus, the classified board provision
could increase the likelihood that incumbent directors will retain their
positions. Further, holders of shares of Common Stock will have no right to
cumulative voting for the election of directors. Consequently, at each annual
meeting of stockholders, the holders of a majority of shares of Common Stock
will be able to elect all of the successors of the class of directors whose term
expires at that meeting.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Articles limit the liability of the REIT Corporation's directors and
officers to the REIT Corporation and its stockholders to the fullest extent
permitted from time to time by the MGCL. The MGCL presently permits the
liability of directors and officers to a corporation or its stockholders for
money damages to be limited, except (i) to the extent that it is proved that the
director or officer actually received an improper benefit or profit or (ii) to
the extent that a judgment or other final adjudication is entered adverse to the
director or officer in a proceeding based on a finding that the director's or
officer's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. This provision does not limit the ability of the REIT Corporation or
its stockholders to obtain other relief, such as an injunction or rescission.
The Articles require the REIT Corporation to indemnify its directors,
officers and certain other parties to the fullest extent permitted from time to
time by the MGCL. The MGCL permits a corporation, subject to certain exceptions,
to indemnify its directors, officers and certain other parties against
judgments, penalties, fines, settlements and reasonable expenses, including
attorneys' fees, actually incurred by them in connection with any proceeding to
which they may be made a party by reason of their service to or at the request
of the corporation, unless it is established that (i) the act or omission of the
indemnified party was material to the matter giving rise to the proceeding and
was committed in bad faith or was the result of active and deliberate
dishonesty, (ii) the indemnified party actually received an improper personal
benefit, or (iii) in the case of any criminal proceeding, the indemnified party
had reasonable cause to believe that the act or omission was unlawful.
Indemnification may be made against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by the director or officer in connection
with the proceeding; provided, however, that if the proceeding is one by or in
the right of the corporation, indemnification may not be made with respect to
any proceeding in which the director or officer has been adjudged to be liable
to the corporation. In addition, a director or officer may not be indemnified
with respect to any proceeding charging improper personal benefit to the
director or officer in which the director or officer was adjudged to be liable
on the basis that personal benefit was improperly received. The termination of
any proceeding by conviction, or upon a plea of nolo contendere or its
equivalent, or an entry of any order of probation prior to judgment, creates a
rebuttable presumption that the director or officer did not meet the requisite
standard of conduct required for indemnification to be permitted. It is the
position of the Commission that indemnification of directors and officers for
liabilities arising under the Securities Act is against public policy and is
unenforceable pursuant to Section 14 of the Securities Act.
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BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting power
of the corporation's shares or an affiliate or associate of the corporation who,
at any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate
thereof, are prohibited for five years after the most recent date on which the
Interested Stockholder became an Interested Stockholder. Thereafter, any such
business combination must be recommended by the board of directors of such
corporation and approved by the affirmative vote of at least (i) 80% of the
votes entitled to be cast by holders of outstanding voting shares of the
corporation voting together as a single voting group and (ii) two-thirds of the
votes entitled to be cast by holders of outstanding voting shares of the
corporation other than shares held by the Interested Stockholder with whom the
business combination is to be effected, unless, among other things, the
corporation's stockholders receive a minimum price (as defined in the MGCL) for
their shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These provisions
of the MGCL do not apply, however, to business combinations that are approved or
exempted by the board of directors of the corporation prior to the time that the
Interested Stockholder becomes an Interested Stockholder. The Bylaws of the REIT
Corporation contain a provision exempting from these provisions of the MGCL any
business combination involving QSV (or its affiliates) or any other person
acting in concert as a group with any of the foregoing persons.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquirer, by officers or by directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
such person, or in respect of which such person is able to exercise or direct
the exercise of voting power, would entitle the acquirer to exercise voting
power in electing directors within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority, or (iii) a majority. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors to call a special meeting of stockholders to
be held within 50 days of demand to consider the voting rights of the shares. If
no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the MGCL, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for control shares, as of the date of the last control share
acquisition or of any meeting of stockholders at which the voting rights of such
shares are considered and not approved. If voting rights for control shares are
approved at a stockholders meeting and the acquirer becomes entitled to vote a
majority of the shares entitled to vote, all other stockholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid by
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the acquiring person in the control share acquisition, and certain limitations
and restrictions otherwise applicable to the exercise of dissenters' rights do
not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws of
the corporation.
AMENDMENT TO THE ARTICLES
The Articles may be amended by the affirmative vote of the holders of a
majority of all shares entitled to be voted on the matter, except for the
provision relating to the classification of the REIT Board which may be amended
only by the affirmative vote of the holders of not less than two-thirds of all
shares entitled to be voted on the matter.
DISSOLUTION OF THE COMPANY
The Articles permit the dissolution of the REIT Corporation by (i) the
affirmation or vote of a majority of the entire REIT Board declaring such
dissolution to be advisable and directing that the proposed dissolution be
submitted for consideration at an annual or special meeting of stockholders and
(ii) upon proper notice, stockholder approval by the affirmative vote of the
holders of not less than a majority of all of the votes entitled to be cast on
the matter or the written consent of all the votes entitled to be cast on this
matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The REIT Corporation's Bylaws provide that with respect to an annual meeting
of stockholders, nominations of persons for election to the REIT Board and the
proposal of business to be considered by stockholders may be made only (i) by,
or at the direction of, a majority of the REIT Board or (ii) by a stockholder
who is entitled to vote at the meeting and has complied with the advance notice
procedures set forth in the REIT Corporation's Bylaws.
The provisions in the Articles on classification of the REIT Board, the
business combination and control share acquisition provisions of the MGCL and
the advance notice provisions of the REIT Corporation's Bylaws could have the
effect of discouraging a takeover or other transaction in which holders of some,
or a majority, of the shares of Common Stock might receive a premium for their
shares of Common Stock over the then prevailing market price or which such
holders might believe to be otherwise in their best interests.
MEETINGS OF STOCKHOLDERS
Beginning in 1998, an annual meeting of the stockholders for the election of
directors and the transaction of any business within the powers of the REIT
Corporation shall be held on the last Thursday in April or such date within 30
days of such day as set by the REIT Board.
Subject to the rights, if any, of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, special
meetings of the stockholders may be called by the Chairman of the REIT Board, by
the Chief Executive Officer of the REIT Corporation, by the President of the
REIT Corporation, by the REIT Board pursuant to a resolution adopted by a
majority of all directors or by the Secretary of the REIT Corporation upon the
written request of the holders of 25% or more of the outstanding voting stock.
Such request shall state the purpose or purposes of such meeting and the matters
proposed to be acted upon at such meeting.
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COMPARATIVE RIGHTS OF UNITHOLDERS AND STOCKHOLDERS
GENERAL
USRP is organized as a Delaware limited partnership and the REIT Corporation
is organized as a corporation under the laws of the State of Maryland. As a
Delaware limited partnership, USRP is subject to the Delaware Revised Uniform
Limited Partnership Act (the "Delaware RULPA"). As a Maryland corporation, the
REIT Corporation is subject to the MGCL.
The discussion of the comparative rights of Unitholders of the Partnership
and stockholders of the REIT Corporation set forth below does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Delaware RULPA and the MGCL and also to the Master Partnership Agreement of USRP
and the Articles and Bylaws of the REIT Corporation.
The REIT Corporation has been organized under the MGCL pursuant to Articles
of Incorporation filed January 29, 1997.
MANAGEMENT
The Master Partnership Agreement of USRP provides that, with certain limited
exceptions, the Managing General Partner has exclusive discretion to manage and
control the business and affairs of the Partnership. The Managing General
Partner may be removed for cause upon the affirmative vote of more than fifty
percent (50%) of the total number of all outstanding Units held by all Limited
Partners of record. "Cause," for purposes of the Master Partnership Agreement,
means actual fraud, gross negligence, or willful or wanton misconduct. The
Managing General Partner may be removed without cause upon the affirmative vote
of more than eighty percent (80%) of the total number of all outstanding Units
held by all Limited Partners of record. The directors of the Managing General
Partner are elected by the stockholders of the Managing General Partner.
Pursuant to the MGCL, the business and affairs of a corporation are managed
by or under the direction of its board of directors. The MGCL further provides
that the board of directors may be divided into classes. In accordance with this
authority, the Articles provides for three classes of directors. The Articles
provide that the number of directors of the REIT Corporation cannot be less than
three (3) nor more than fifteen (15). Under the Articles, the directors are
divided in three classes, as nearly equal in number as possible, with the term
of one class expiring at each annual meeting of stockholders. At each annual
meeting of stockholders, one class of directors will be elected for a term of
three years and the directors in the other two classes will continue in office.
Under the Articles, a director may be removed, for cause only, at a meeting of
stockholders called for that purpose, by the holders of not less than two-thirds
of the outstanding Common Stock entitled to vote in the election of directors.
As a result, a greater vote will be required to change management of the Company
following the Conversion. See "Risk Factors-- Comparative Rights of the Units
and Common Stock." "Cause," for purposes of the Articles, means acts or
omissions constituting active and deliberate dishonesty established by a final
judgment or actual receipt of an improper benefit or profit in money, property
or services. Any vacancy (including a vacancy created by an increase in the
number of directors) will be filled, at any regular meeting or any special
meeting of the directors called for that purpose, by a majority of the REIT
Board.
VOTING RIGHTS
Under the Master Partnership Agreement, Limited Partners have voting rights
with respect to (i) the removal and replacement of the General Partners; (ii)
the merger of USRP; (iii) the sale of substantially all of USRP's assets; (iv)
the dissolution of USRP or the Operating Partnership; and (v) material
amendments to the Partnership Agreements. Each Unit entitles the Limited Partner
to cast one vote on all matters presented to the Limited Partners. Generally,
approval of matters submitted to the Limited Partners requires the affirmative
vote of Limited Partners owning more than 50% of the Units then
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outstanding. Certain limited matters require the approval of a specified
super-majority of the Units then outstanding.
The Articles provide that the stockholders of the REIT Corporation shall be
entitled to vote only on the following matters: (i) election or removal of
directors; (ii) amendment of the Articles (except as described below under
"--Amendment of Master Partnership Agreement and Articles of Incorporation");
(iii) termination of the REIT Corporation's existence; (iv) reorganization of
the REIT Corporation; and (v) merger, consolidation or share exchange of the
REIT Corporation, or the sale or disposition of substantially all of the REIT
Corporation's assets. Generally, matters submitted to the stockholders require
the affirmative vote of stockholders holding a majority of the outstanding
Common Stock present in person or by proxy entitled to vote thereon at a duly
convened meeting of stockholders.
The Bylaws of the REIT Corporation require notice at least 60 days and not
more than 90 days before the anniversary of the prior annual meeting of
stockholders in order for a stockholder (a) to nominate a director or (b) to
propose new business other than pursuant to notice of the meeting. The Bylaws
contain a similar notice requirement in connection with the nomination of
directors at a special meeting of stockholders called for the purpose of
electing one or more directors. Accordingly, failure to act in compliance with
the notice provisions will make stockholders unable to nominate directors or
propose new business. There is no similar provision in the Master Partnership
Agreement.
SPECIAL MEETINGS
Special meetings of Limited Partners may be called by the Managing General
Partner or by Limited Partners owning at least 20% of the outstanding Units.
Subject to the rights, if any, of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, special
meetings of the stockholders may be called by the Chairman of the REIT Board, by
the Chief Executive Officer of the REIT Corporation, by the President of the
REIT Corporation, by the REIT Board pursuant to a resolution adopted by a
majority of all directors or by the Secretary of the REIT Corporation upon the
written request of the holders of 25% or more of the outstanding voting stock.
Such request shall state the purpose or purposes of such meeting and the matters
proposed to be acted upon at such meeting.
AMENDMENT OF MASTER PARTNERSHIP AGREEMENT AND ARTICLES OF INCORPORATION
The Master Partnership Agreement may be amended solely by action of the
Managing General Partner to reflect: (i) a change in the name of USRP or the
location of the principal place of business of USRP; (ii) the admission,
substitution, termination or withdrawal of partners in accordance with the
Master Partnership Agreement; (iii) a change that is necessary to qualify USRP
as a limited partnership or a partnership in which the Limited Partners have
limited liability under the laws of any state or that is necessary or advisable
in the opinion of the Managing General Partner to ensure that USRP will not be
treated as an association taxable as a corporation for federal income tax
purposes; (iv) a change that is (a) of an inconsequential nature and does not
adversely affect the Limited Partners in any material respect; (b) necessary or
desirable to cure any ambiguity, to correct or supplement any provision of the
Master Partnership Agreement that would be inconsistent with any other provision
of the Master Partnership Agreement or to make any other provision with respect
to matters or questions arising under the Master Partnership Agreement that will
not be inconsistent with the provisions of the Master Partnership Agreement; (c)
necessary or desirable to satisfy any requirements, conditions or guidelines
contained in any opinion, directive, order, ruling or regulation of any Federal,
state or local agency or contained in any Federal, state or local law; (d)
necessary or desirable to facilitate the trading of the Units or comply with any
rule, regulation, guideline or requirement of any securities exchange on which
the Units are or will be listed for trading, compliance with any of which the
Managing General Partner deems to be in the interests of USRP and the Limited
Partners; or (e) required or contemplated by the Master Partnership Agreement;
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(v) a change in any provision of the Master Partnership Agreement which requires
any action to be taken by or on behalf of the Managing General Partner or USRP
pursuant to the requirements of applicable Delaware law if the provisions of
applicable Delaware law are amended, modified or revoked so that the taking of
such action is no longer required; or (vi) any other amendments similar to the
foregoing. In all other cases, an amendment to the Master Partnership Agreement
must generally be approved by Limited Partners holding a majority of the Units
then outstanding. In certain limited circumstances, a proposed amendment to the
Master Partnership Agreement may only be effected by a specified super-majority
vote of the Limited Partners. Even in cases where Limited Partner approval is
required, no amendment may be effected without the approval of the Managing
General Partner.
An amendment to the Articles (other than the provision relating to the
classification of the REIT Board) requires the recommendation of the REIT Board
and the affirmative vote of a majority of the outstanding Common Stock present
in person or by proxy entitled to vote at a duly convened meeting of
stockholders. An amendment to the provision of the Articles relating to the
classification of the REIT Board requires the recommendation of the REIT Board
and the affirmative vote of two-thirds of all shares of Common Stock entitled to
be voted on the matter.
As a result of these differences with respect to voting rights and
procedures to amend the charter documents of USRP and the REIT Corporation, the
REIT Corporation's policies with respect to investments, financings, affiliate
transactions and certain other activities may be amended or revised from time to
time at the discretion of the REIT Board without a vote of the stockholders of
the REIT Corporation, while any such change in investment policy by USRP would
necessitate amending the Master Partnership Agreement requiring a vote of
Limited Partners. Therefore, although it has no current intention to do so, the
REIT Board could alter the investment policies of the Company so that it no
longer invests in restaurant properties.
LIMITED LIABILITY
Pursuant to the Delaware RULPA, Limited Partners are not liable for the
obligations of USRP unless they are also a general partner or, in addition to
the exercise of rights and powers as a Limited Partner, they participate in the
control of USRP. However, if a Limited Partner does participate in the control
of USRP, he is liable only to persons who transact business with USRP reasonably
believing, based upon the Limited Partner's conduct, that the Limited Partner is
a general partner.
Pursuant to the MGCL and the Articles, the personal liability of the
stockholders of the REIT Corporation is limited to the fullest extent permitted
from time to time by the MGCL.
While Delaware law and Maryland law, respectively, afford Limited Partners
in USRP and stockholders in the REIT Corporation protection against personal
liability for obligations of USRP and the REIT Corporation, certain
jurisdictions may not recognize limitations on personal liability to the extent
such claims are not satisfied by USRP or the REIT Corporation. The Board of
Directors believes that any risk of personal liability would generally be
limited to situations in which USRP's or the REIT Corporation's public liability
insurance coverage would be insufficient to satisfy claims.
DISSOLUTION OF THE PARTNERSHIP AND THE REIT CORPORATION AND TERMINATION OF REIT
STATUS
Under the terms of the Master Partnership Agreement, the Limited Partners
may compel the dissolution of USRP prior to the expiration of its term on
December 31, 2035 by the affirmative vote of more than fifty percent (50%) of
the total number of all outstanding Units held by all Limited Partners of
record. USRP is subject to dissolution upon a sale of all or substantially all
of USRP's properties, which sale may be made with the approval of the Managing
General Partner and a majority in interest of the Limited Partners.
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The MGCL permits the voluntary dissolution of the REIT Corporation by the
affirmative vote of the holders of not less than two-thirds of the outstanding
Common Stock at a meeting of stockholders called for that purpose. A merger,
consolidation or sale of substantially all of the assets of the REIT Corporation
must be approved by the affirmative vote of the holders of not less than a
majority of the outstanding Common Stock at a meeting of stockholders called for
that purpose.
The Articles permit the REIT Board to terminate the status of the REIT
Corporation as a REIT under the Code at any time. Consequently, although both
Limited Partners and stockholders have voting rights with regard to the
dissolution of USRP and of the REIT Corporation, respectively, such voting
rights differ in limited respects.
LIQUIDATION RIGHTS
In the event of liquidation of USRP, holders of all Units and the Managing
General Partner would be entitled to share ratably, in accordance with their
percentage interests, in any assets remaining after the satisfaction of
obligations to creditors.
In the event of liquidation of the REIT Corporation, the holders of Common
Stock would be entitled to share ratably in any assets remaining after
satisfaction of obligations to creditors and any liquidation preferences on any
series of Preferred Stock that may then be outstanding.
LIMITATIONS OF LIABILITY OF GENERAL PARTNERS AND DIRECTORS
The Master Partnership Agreement provides that the Managing General Partner,
its affiliates and all officers, directors, employees and agents of the Managing
General Partner and its affiliates shall not be liable to USRP or the Limited
Partners for losses sustained or liabilities incurred as a result of any acts or
omissions of the Managing General Partner or such other persons if the conduct
of the applicable person did not constitute acts of actual fraud, gross
negligence, or willful or wanton misconduct and the applicable person acted in
good faith and in a manner it believed to be in, or not opposed to, the
interests of the Partnership.
The Articles contain a provision eliminating the personal liability of a
director to the REIT Corporation or its stockholders for monetary damages to the
fullest extent permitted by Maryland statutory or decisional law, as amended or
interpreted.
INDEMNIFICATION
The Master Partnership Agreement provides that USRP shall indemnify and hold
harmless the Managing General Partner, its affiliates and all officers,
directors, employees and agents of the Managing General Partner and its
affiliates to the maximum extent permitted by law provided that the indemnitee's
conduct did not constitute actual fraud, gross negligence, or willful or wanton
misconduct and provided further that the indemnitee acted in good faith and in a
manner it believed to be in, or not opposed to, the interests of USRP, and, with
respect to any original proceeding, had no reasonable cause to believe its
conduct was unlawful.
The Articles provide that the REIT Corporation shall provide any
indemnification permitted by the laws of the State of Maryland and shall
indemnify directors, officers, agents and employees as follows: (i) the REIT
Corporation shall indemnify its directors and officers, whether serving the REIT
Corporation or at its request and any other entity, to the full extent required
or permitted by the General Laws of the State of Maryland now or hereafter in
force, including the advance of expenses under the procedures and to the full
extent permitted by law and (ii) the REIT Corporation shall indemnify other
employees and agents, whether serving the REIT Corporation or at its request any
other entity, to such extent as shall be authorized by the REIT Board or the
REIT Corporation's Bylaws and be permitted by law. The foregoing
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rights of indemnification shall not be exclusive of any other rights to which
those seeking indemnification may be entitled.
DERIVATIVE ACTIONS
The Delaware RULPA allows a Limited Partner to institute legal action on
behalf of USRP (a derivative action) to recover damages from a third party or
from a general partner where the general partner has failed to institute the
action. In addition, a Limited Partner may institute legal action on behalf of
himself and other similarly situated Limited Partners (a class action) to
recover damages from a General Partner for violations of his fiduciary duties to
the Limited Partners. Limited Partners may also have rights to bring actions in
Federal court to enforce Federal rights.
Under the MGCL, a stockholder may bring an action on behalf of the REIT
Corporation to recover a judgment in its favor (a derivative action) where the
directors have failed to institute the action. The provisions of the MGCL
relating to derivative actions are substantially similar to the provisions of
the Delaware RULPA relating to such actions.
INSPECTION OF BOOKS AND RECORDS
Upon twenty (20) days prior written notice, at his own expense and for a
valid business purpose related to the conduct of USRP's business, a Limited
Partner may have access to non-confidential, non-proprietary information
regarding USRP, including tax returns, a current list of the name and last known
business, residence or mailing address of each partner, a copy of USRP's
governing instruments, and certain other information regarding the affairs of
USRP. The foregoing is subject to the Managing General Partner's right to keep
confidential from Limited Partners, for such period of time as the Managing
General Partner deems reasonable, any information which the Managing General
Partner reasonably believes to be in the nature of trade secrets or other
information the disclosure of which the Managing General Partner in good faith
believes is not in the best interests of USRP or could damage USRP or its
business.
Similarly, upon written request, at a stockholder's own expense and for a
proper purpose reasonably related to that stockholder's interest as a
stockholder in the REIT Corporation, any person who is a stockholder of record
of the REIT Corporation will be granted the right to examine and copy relevant
books, minutes and stock transfer records, including a list of stockholders of
the REIT Corporation.
DISTRIBUTIONS AND DIVIDENDS
Distributions and dividends on the Units and the Common Stock may be paid
if, as and when declared by the Managing General Partner or the REIT Board, as
applicable, in its discretion.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax considerations
affecting the Unitholders as a result of the Conversion. This discussion is
directed principally at Unitholders who are United States citizens or residents
or domestic corporations, and does not address in all material respects
considerations that might adversely affect the treatment of Unitholders who are
subject to special treatment under the tax laws (such as insurance companies,
cooperatives, financial institutions, broker-dealers, tax exempt organizations
or foreign investors). The discussion in this section is based on existing
provisions of the Code, existing and proposed Treasury Regulations (the
"Regulations"), existing court decisions and existing rulings and other
administrative interpretations. There can be no assurance that future Code
provisions or other legal authorities will not alter significantly the tax
consequences described below. Except for the Ruling requested in connection with
the Merger Alternative as described elsewhere in this Proxy
Statement/Prospectus, no rulings have been, or will be, obtained from the IRS
concerning any of the matters discussed in this section. Because the following
represents only a summary, it is qualified in its entirety by the applicable
provisions of the Code and regulations, court decisions and IRS rulings and
other IRS pronouncements. Winstead Sechrest & Minick P.C., tax counsel to the
Company, is of the opinion that, except for statements of fact or as otherwise
specifically noted, all information contained under this caption "Federal Income
Tax Considerations" is correct in all material respects. Unlike a tax ruling
(which will not be sought, except as otherwise described herein), an opinion of
counsel, which is based on counsel's review and analysis of existing law, is not
binding on the IRS. Accordingly, no assurance can be given that the IRS would
not successfully challenge the opinions set forth herein.
Each Unitholder is advised to consult his own tax advisor about the federal,
state, local, foreign and other tax consequences relating to the Conversion.
A. THE MERGER ALTERNATIVE
1. QUALIFICATION AS NONRECOGNITION TRANSACTION
It is a condition precedent to the consummation of the Merger that the
Managing General Partner shall have received a favorable ruling from the IRS and
an opinion of Winstead Sechrest & Minick P.C., as tax counsel, to the effect
that the Merger will be treated as part of a "tax-free" transaction described in
Section 351 of the Code. Section 351 (a) of the Code sets forth the general rule
that no gain or loss will be recognized by one or more persons transferring
assets to a corporation solely in exchange for the corporation's stock if,
immediately after the exchange, the transferors are "in control" of the
transferee corporation. "Control" is defined as the ownership of stock
possessing at least 80 percent of the total combined voting power of all classes
of stock entitled to vote and at least 80 percent of the total number of shares
of all other classes of stock of the corporation. For purposes of the ruling
request and its tax opinion, tax counsel will assume that not more than 20% of
the Common Stock transferred to the Unitholders and the Managing General Partner
pursuant to the Merger will subsequently be sold pursuant to plans or
arrangements entered into prior to the Merger. Neither USRP nor the Managing
General Partner is aware of any plans or arrangements that have been or will be
entered into prior to the Merger which would make this assumption incorrect. The
IRS has taken the position in a revenue ruling that the distribution by a
partnership of the stock received in a Section 351 exchange to its partners in
liquidation of the partnership will not violate the control requirement.
There are two alternative approaches by which the IRS may rule that the
Merger qualifies as a transaction described in Section 351 of the Code. Tax
counsel cannot opine as to which alternative approach the IRS might select.
Nevertheless, the tax consequences of the two alternatives are similar, but not
exactly the same. Under one alternative construction (the "Transfer of
Partnership Interests Approach"), the IRS would treat the Merger as if each of
the Unitholders had transferred Units to the Reit Corporation in exchange for
Common Stock. Under the second alternative (the "Transfer of Assets Approach"),
the Merger will be treated as if USRP transferred its assets and liabilities to
the REIT
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Corporation in exchange for Common Stock followed by a distribution of the
Common Stock by USRP to the Unitholders and the Managing General Partner in
liquidation of USRP.
Even in the case of a qualified Section 351 exchange, gain will be
recognized by the transferor if and to the extent that the amount of the
liabilities assumed and taken subject to by the transferee exceeds the aggregate
adjusted basis of the property transferred in the exchange. Gain recognized, if
any, must be reported as ordinary income, long-term capital gain, or short-term
capital gain according to the nature and the holding period of the transferred
property.
Section 351(a) does not apply to transfers of property to an investment
company. A REIT is an investment company if the transfer results, directly or
indirectly, in "diversification" of the transferors' interests. The purpose of
this restriction is to prevent the tax-free pooling of investment assets by more
than one transferor. The Ruling from the IRS and the opinion of tax counsel will
assume the accuracy of the Managing General Partner's representations that at
the time of the Merger there will not be an existing plan or arrangement (i) to
achieve diversification of USRP's (or the Unitholders') interests in one or more
additional nonrecognition transactions, (ii) to issue additional Common Stock
except pursuant to the Company's dividend reinvestment plan, if any, and
pursuant to compensatory stock options that may be granted by the REIT
Corporation to key service providers, or (iii) to acquire any additional
specific property.
If the REIT Corporation were to be treated as an investment company or for
some other reason Section 351 did not apply to the Merger, USRP would recognize
taxable gain or loss in an amount equal to the difference between the total
value of the consideration received (the amount of liabilities assumed and taken
subject to by the REIT Corporation in the Merger plus the fair market value of
the Common Stock received in the exchange) and the adjusted basis in the assets
transferred to the REIT Corporation. See "--The Merger Alternative--Tax
Consequences to Unitholders--Potential Gain Recognition." Neither USRP nor the
Unitholders would recognize gain or loss upon the deemed distribution of the
Common Stock.
2. TAX CONSEQUENCES TO USRP
NONRECOGNITION AND TERMINATION. If the Merger is treated as a
nonrecognition transaction under Section 351, (a) USRP will not recognize gain
under the Transfer of Partnership Interests Approach and (b) USRP will not
recognize gain under the Transfer of Assets Approach except to the extent (if
any) that the liabilities to which the transferred property is subject plus the
liabilities assumed by the REIT Corporation in connection with the Merger exceed
the total adjusted basis of the property transferred. It is expected that USRP's
aggregate adjusted basis in its assets will exceed the sum of such liabilities
at the time of the Merger. USRP elected pursuant to Section 754 of the Code to
adjust the basis of partnership property with respect to transferee partners in
the case of a sale or exchange or a transfer upon the death of a partner of a
partnership interest. See "--The Exchange Alternative--Tax Treatment of
Operations-- Section 754 Election." Although there is some uncertainty as to the
impact of these basis adjustments at the USRP level, USRP will treat these
amounts as part of USRP's aggregate adjusted basis in its assets for purposes of
determining whether gain is recognized upon the Merger. USRP can only estimate
the amount of these adjustments because of the imprecise information available
concerning transfers of Units in the context of a publicly-traded partnership.
It is estimated, however, that such adjustments in the aggregate are substantial
and that if the adjustments are excluded from USRP's adjusted basis in its
assets, there is a risk that USRP would recognize gain in the Merger. See "--The
Merger Alternative--Tax Consequences to Unitholders--Potential Gain Recognition"
and "--The Merger Alternative--Tax Consequences to USRP." It is likely that any
gain recognized by USRP would be treated as long term capital gain.
For federal income tax purposes, under the Transfer of Assets Approach USRP
will be deemed to have received the Common Stock and distributed it to its
partners pursuant to a liquidation of USRP. USRP will not recognize gain or loss
in the deemed liquidation and will terminate upon the distribution of the Common
Stock pursuant to the Merger.
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PRE-MERGER TAX TERMINATION OF THE PARTNERSHIP. Section 708 of the Code
provides that if 50% or more of the capital and profits interests in a
partnership are sold or exchanged within a single twelve-month period, the
partnership will be deemed to terminate for tax purposes. It is possible that
Units representing 50% or more of the capital and profits interests in USRP have
been or might be sold or exchanged within a single twelve-month period prior to
the Merger. The foregoing discussion of tax consequences to USRP of the Merger
assumes that no such termination has occurred or will occur prior to the Merger.
Upon a termination of USRP for tax purposes, it would be deemed to have
distributed its assets on the date of such termination to the Managing General
Partner and the Unitholders who would then be deemed to have contributed such
assets to a new partnership. The new partnership would have a new basis in its
assets (other than money) equal to the aggregate basis of the Managing General
Partner and the Unitholders in their interests in USRP, less any cash deemed
distributed to such persons in connection with the termination. Accordingly, if
the total basis of the Managing General Partner and Unitholders in their
interests in USRP were greater or less than USRP's aggregate basis in its assets
immediately prior to the termination, the new partnership's basis in its assets
after the termination would be increased or reduced correspondingly. Moreover,
the new partnership's basis in its assets following the termination might have
to be reallocated among the various assets to reflect the relative fair market
values of those assets at the time of termination, which may be less favorable
than the previous allocation of basis made in connection with USRP's original
acquisition of such assets. A termination of USRP could also cause USRP or its
assets to become subject to unfavorable changes in the Federal income tax law
made prior to the termination (E.G., a lengthening of the period over which
assets are depreciated) but previously not applicable to USRP or its assets
because of protective transition rules. Elections made by the terminated
partnership would not be applicable to the reconstituted partnership, including
the election made by USRP under Section 754 of the Code. USRP would incur
additional accounting and administrative costs with respect to the filing of a
tax return for the year ending on the date of a technical termination. See
"--The Exchange Alternative--Tax Treatment of Operations."
3. TAX CONSEQUENCES TO UNITHOLDERS
GENERAL NONRECOGNITION. It is a condition precedent to consummation of the
Merger that the IRS issue a favorable ruling as to treatment of the Merger as
part of a transaction described in Section 351 of the Code. As a result of the
treatment of the Merger as a nonrecognition transaction under Section 351, the
Merger will generally be tax-free to the Unitholders except as described below.
See "--Potential Gain Recognition." The Unitholders will not recognize gain or
loss upon the receipt of Common Stock in the Merger.
POTENTIAL GAIN RECOGNITION. If the Merger qualifies for nonrecognition
treatment under Section 351, under the Transfer of Assets Approach, any gain
recognized by USRP would be allocated to the Unitholders and the Managing
General Partner. See "--The Merger Alternative--Qualification as Nonrecognition
Transaction" and "--The Merger Alternative--Tax Consequences to USRP." Certain
Unitholders may recognize gain on the Merger under either the Transfer of
Partnership Interests Approach or the Transfer of Assets Approach (even if USRP
does not recognize any gain), as follows:
(a) Upon the Merger, Unitholders will be deemed to receive a cash
distribution equal to their share of USRP's nonrecourse indebtedness, which
generally will be offset by the inclusion of that share of indebtedness in
their adjusted basis in their Units. Any Unitholder, however, whose adjusted
basis in his Units at the time of the Merger is less than his share of such
indebtedness (I.E., a Unitholder who has a deficit capital account for tax
purposes after reflecting any basis adjustments under Section 754 of the
Code) will recognize gain to the extent of this difference.
(b) USRP has elected pursuant to Section 754 of the Code to adjust the
basis of partnership property with respect to transferee partners upon the
sale or exchange or transfer upon death of a partner of a partnership
interest. If as a result of such adjustments, a Unitholder's share of USRP's
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liabilities assumed by the REIT Corporation exceeds his tax basis in his
share of USRP's assets, the Unitholder will recognize gain to the extent of
the excess. This result is unlikely for most Unitholders of USRP, although
tax counsel cannot opine as to this factual outcome for each Unitholder. See
"--The Exchange Alternative--Tax Consequences of Unit Ownership."
If for any reason the Merger did not qualify for nonrecognition treatment
under Section 351, (a) under the Transfer of Partnership Interests Approach, the
Unitholders and Managing General Partner would recognize gain or loss as if they
had sold their interests in USRP to the Reit Corporation for an amount equal to
the value of the Common Stock received by the Unitholders and Managing General
Partner in the Merger plus their share of the amount of liabilities assumed or
taken subject to by the Reit Corporation in the Merger; and (b) under the
Transfer of Assets Approach, USRP would recognize gain or loss on the transfer
of its assets to the REIT Corporation as if USRP had sold the assets for an
amount equal to the value of the Common Stock received by the Unitholders and
Managing General Partner in the Merger, plus the amount of liabilities assumed
or taken subject to by the REIT Corporation in the Merger. Such gain recognized
would be allocated among the Unitholders and the Managing General Partner. Each
Unitholder's basis in the Common Stock received would be increased (or reduced)
by the gain (or loss) recognized. Each Unitholder's holding period in the Common
Stock received would begin on the day after the Merger.
ALLOCATION OF GAIN RECOGNIZED. If any gain were to be recognized by USRP in
the Merger, the gain (determined without regard to Section 754 adjustments)
generally would be allocated among the partners until their capital accounts
were equal to the fair market value of the Common Stock to be received in the
Merger.
SUSPENDED DEDUCTIONS. Any loss previously allocated to a Unitholder in
prior years or during the tax year of the Merger that has not been used because
of the at-risk or basis limitations can be used only to the extent of any income
or gain recognized on the Merger. Generally, Unitholders subject to the passive
activity loss limitations would be able to utilize suspended passive losses from
USRP to offset gain that they might be required to recognize on the Merger. Any
passive losses not so used may not be available until the Unitholder disposes of
his entire interest in the REIT Corporation.
TAX BASIS IN COMMON STOCK. A Unitholder's aggregate tax basis in all Common
Stock received in the Merger will equal his aggregate basis in Units minus his
share of partnership liabilities, after adjustment for operations during the
taxable year of the Merger and any gain or loss recognized on the Merger, but in
any case not less than zero. This basis will be prorated among all Common Stock
received by the Unitholder.
HOLDING PERIOD IN COMMON STOCK. The holding period required for long-term
capital gains treatment is more than one year. For holding period purposes, each
share of Common Stock will be divided into two parts. Generally, one part will
be the portion of the value of the Common Stock that is attributable to any
ordinary income assets transferred by USRP in the Merger; its holding period
will begin on the day following the Merger. The remaining part will be the
portion of the value of the Common Stock that is attributable to capital assets
or Section 1231 property (generally property used in a trade or business which
has been held for more than one year and is subject to an allowance for
depreciation or is real property, other than inventory or property held
primarily for sale to customers in the ordinary course of the taxpayer's trade
or business) transferred in the Conversion; such part will have a holding period
which will include (a) under the Transfer of Partnership Interests Approach, the
holding period of the Unitholder in his Units and (b) under the Transfer of
Assets Approach, the holding period of USRP in the Common Stock distributed.
USRP's holding period in the Common Stock will include the period the assets
transferred were held by USRP, provided the assets were capital assets or
Section 1231 property on the date of the exchange. Thus, a portion of each share
of Common Stock distributed to a Unitholder will have a holding period in the
hands of the Unitholder which will include the holding period of USRP in certain
assets transferred to the REIT Corporation, while another portion of each such
share of Common Stock in
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the hands of the Unitholder will have a holding period which will commence with
the date following the Merger. As a result, a sale or disposition of any such
Common Stock by the Unitholder within one year and one day after the date of the
Merger will generate both long-term and short-term capital gain or loss, as the
case may be, to the Unitholder.
4. TAX CONSEQUENCES TO THE REIT CORPORATION
NONRECOGNITION. The REIT Corporation will not recognize gain or loss on its
receipt of USRP's assets in exchange for the Common Stock. Following the Merger,
substantially all the assets and liabilities formerly owned by USRP will be
owned by the REIT Corporation through the Operating Partnership.
TAX BASIS AND HOLDING PERIOD IN ASSETS. The aggregate tax basis of the REIT
Corporation in its assets following the Merger should equal (a) under the
Transfer of Partnership Interests Approach, the Unitholders' and Managing
General Partner's aggregate tax basis in their interests in USRP on the date of
the Merger increased by any gain recognized by them on the Merger or (b) under
the Transfer of Assets Approach, USRP's aggregate tax basis in its assets on the
date of the Merger increased by any gain recognized by USRP on the Merger. The
REIT Corporation's holding period in the assets will include USRP's holding
period.
DEPRECIATION DEDUCTIONS. The Merger will cause USRP to terminate for tax
purposes under Section 708(b)(1)(B) of the Code. Consequently, the REIT
Corporation will depreciate the transferred assets over longer lives than USRP
utilized. The REIT Corporation's basis in its assets will generate future tax
deductions to the REIT Corporation. Although Unitholders with relatively higher
bases in their Units may be viewed (through USRP's Section 754 election) as
having a greater share of such basis than other Unitholders, no consideration
has been given to the expected future tax benefits or detriments in arriving at
the number of shares of Common Stock to be received by each Unitholder.
REPORTING REQUIREMENTS
Pursuant to Section 1.351-3(a) of the Regulations, either (a) each
Unitholder under the Transfer of Partnership Interests Approach or (b) USRP
under the Transfer of Assets Approach will be required to file with its income
tax return for the tax year of the Merger, a statement which includes a
description of (i) the assets transferred, (ii) the Common Stock received in the
exchange, and (iii) any liabilities (or share of liabilities) of USRP assumed by
the REIT Corporation pursuant to the Merger.
5. TAX CONSEQUENCES OF THE REIT CORPORATION'S QUALIFICATION AS A REIT
The REIT Corporation will elect to be treated as a REIT for federal income
tax purposes for its taxable year ending December 31, 1997, and for each
subsequent taxable year. Based on certain assumptions and representations that
are summarized below, Winstead Sechrest & Minick P.C., counsel to the Company,
is of the opinion that the REIT Corporation has been organized in conformity
with the requirements for qualification as a REIT beginning with its taxable
year ending December 31, 1997 and that its proposed method of operations
described in this Proxy Statement/Prospectus will enable it to satisfy the
requirements for such qualification. The rules governing REITs are highly
technical and require ongoing compliance with a variety of tests that depend,
among other things, on future operating results. Winstead Sechrest & Minick P.C.
will not monitor the REIT Corporation's compliance with these requirements.
While the REIT Corporation expects to satisfy these tests, and will use its best
efforts to do so, no assurance can be given that the REIT Corporation will
qualify as a REIT for any particular year, or that the applicable law will not
change and adversely affect the REIT Corporation and its stockholders. See
"--Failure to Qualify as a REIT." The following is a summary of the material
federal income tax considerations affecting the REIT Corporation as a REIT and
the Unitholders as its stockholders:
REIT QUALIFICATION. Entities like the REIT Corporation that invest
principally in real estate and that otherwise would be taxed as regular
corporations may elect to be treated as REITs when they satisfy
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certain detailed requirements imposed by the Code. If the REIT Corporation
qualifies for taxation as a REIT, it generally will not be subject to corporate
income tax to the extent the REIT Corporation currently distributes its REIT
taxable income to its stockholders. This treatment effectively eliminates the
"double taxation" (I.E., taxation at both the corporate and stockholder levels)
imposed on investments in most regular corporations. A qualifying REIT, however,
may be subject to certain excise and other taxes, as well as to normal corporate
tax on taxable income that is not currently distributed to its stockholders. See
"--Taxation of the REIT Corporation as a REIT." In addition, if the REIT
Corporation fails to qualify as a REIT in any taxable year, it will be subject
to federal income tax at regular corporate rates on all of its taxable income.
The current maximum federal tax rate for corporations is 35%, but that rate may
increase.
GENERAL QUALIFICATION REQUIREMENTS. The REIT Corporation must be organized
as an entity that would, if it does not maintain its REIT status, be taxable as
a regular corporation. It cannot be a financial institution or an insurance
company. The REIT Corporation must be managed by one or more directors. The REIT
Corporation expects to meet, each of these requirements. The REIT Corporation
also expects to satisfy the requirements that are separately described below
concerning share ownership and reporting, the nature and amounts of the REIT
Corporation's income and assets and the levels of required annual distributions.
SHARE OWNERSHIP; REPORTING. Beneficial ownership of the REIT Corporation
must be and is evidenced by transferable shares. The REIT Corporation's capital
stock must be held by at least 100 persons for approximately 92% of the days in
each taxable year. Not more than 50% of the value of the shares of capital stock
may be held, directly or indirectly, applying certain constructive ownership
rules, by five or fewer individuals at any time during the last half of each of
the REIT Corporation's taxable years. The REIT Corporation is not required to
satisfy these 100 person and 50% tests until its second taxable year for which
an election is made to be taxed as a REIT. The REIT Corporation believes that
its shares of Common Stock will be owned by a sufficient number of investors and
in appropriate proportions to permit it to continue satisfying these
requirements. To protect against violations of these requirements, the Articles
will provide that no person is permitted to own (applying certain constructive
ownership tests) more than 8.75% of the outstanding Common Stock (except for QSV
which can initially own up to 15% of the outstanding Common Stock, subject to
reduction under certain circumstances) or 9.8% of the outstanding Preferred
Stock. In addition, the Articles will contain restrictions on transfers of
capital stock, as well as provisions that automatically convert shares of stock
into nonvoting, non-dividend paying Excess Stock to the extent that the
ownership otherwise might jeopardize the REIT Corporation's REIT status. Special
rules for determining share ownership apply to certain qualified pension and
profit sharing trusts. See "--Taxation of Tax Exempt Entities."
To monitor the REIT Corporation's compliance with the share ownership
requirements, the REIT Corporation is required to maintain records disclosing
the actual ownership of common shares. To do so, the REIT Corporation must
demand written statements each year from the record holders of certain
percentages of shares in which the record holders are to disclose the actual
owners of the shares (I.E., the persons required to include in gross income the
REIT dividends). A list of those persons failing or refusing to comply with this
demand must be maintained as part of the REIT Corporation's records.
Stockholders who fail or refuse to comply with the demand must submit a
statement with their tax returns disclosing the actual ownership of the shares
and certain other information.
SOURCES OF GROSS INCOME. In order to qualify as a REIT for a particular
year, the REIT Corporation also must meet three tests governing the sources of
its income. These tests are designed to ensure that a REIT derives its income
principally from passive real estate investments. In evaluating a REIT's income,
the REIT will be treated as receiving its proportionate share of the income
produced by any partnership in which the REIT invests, and any such income will
retain the character that it has in the hands of the partnership. The Code
allows the REIT Corporation to own and operate a number of its properties
through wholly-owned subsidiaries which are "qualified REIT subsidiaries." The
Code provides that a
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qualified REIT subsidiary is not treated as a separate corporation, and all of
its assets, liabilities and items of income, deduction and credit are treated as
assets, liabilities and such items of the REIT.
75% GROSS INCOME TEST. At least 75% of a REIT's gross income for each
taxable year must be derived from specified classes of income that principally
are real estate related. The permitted categories of principal importance to the
REIT Corporation are: (i) rents from real property; (ii) interest on loans
secured by real property; (iii) gain from the sale of real property or loans
secured by real property (excluding gain from the sale of property held
primarily for sale to customers in the ordinary course of the REIT Corporation's
trade or business, referred to below as "dealer property"); (iv) income from the
operation and gain from the sale of certain property acquired in connection with
the foreclosure of a mortgage securing that property ("foreclosure property");
(v) distributions on, or gain from the sale of, shares of other qualifying
REITs; (vi) abatements and refunds of real property taxes; and (vii) "qualified
temporary investment income" (described below). In evaluating the REIT
Corporation's compliance with the 75% income test (as well as the 95% income
test described below), gross income does not include gross income from
"prohibited transactions." A prohibited transaction is one involving a sale of
dealer property, not including foreclosure property and certain dealer property
held by the REIT Corporation for at least four years.
The REIT Corporation expects that substantially all of its operating gross
income will be considered rent from real property. Rent from real property is
qualifying income for purposes of the 75% income test only if certain conditions
are satisfied. Rent from real property includes charges for services customarily
rendered to tenants, and rent attributable to personal property leased together
with the real property so long as the personal property rent is less than 15% of
the total rent. The REIT Corporation does not expect to earn material amounts in
these categories. Rent from real property generally does not include rent based
on the income or profits derived from the property. The REIT Corporation does
not intend to lease property and receive rentals based on the tenant's net
income or profit. However, rent based on a percentage of gross income is
permitted as rent from real property and the REIT Corporation will have leases
where rent is based on a percentage of gross income. Also excluded is rent
received from a person or corporation in which the REIT Corporation (or any of
its 10% or greater owners) directly or indirectly through the constructive
ownership rules contained in Section 318 of the Code, owns a 10% or greater
interest. USRP, through such attribution rules, owns greater than a 10% interest
in one tenant which leases three (3) Burger King restaurant properties from the
Operating Partnership. However, such non-qualifying income is less than 3.5% of
total gross income of the Operating Partnership. A third exclusion covers
amounts received with respect to real property if the REIT Corporation furnishes
services to the tenants or manages or operates the property, other than through
an "independent contractor" from whom the REIT Corporation does not derive any
income. The obligation to operate through an independent contractor generally
does not apply, however, if any services provided by the REIT Corporation are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not considered rendered primarily for the convenience of
the tenant (applying standards that govern in evaluating whether rent from real
property would be unrelated business taxable income when received by a tax
exempt owner of the property).
The REIT Corporation will, in most instances, directly operate and manage
its assets without using an "independent contractor." The REIT Corporation
believes that the only material services to be provided to tenants will be those
usually or customarily rendered in connection with the rental of space for
occupancy only. The REIT Corporation will not provide services that might be
considered rendered primarily for the convenience of the tenants, such as hotel,
health care or extensive recreational or social services. Consequently, the REIT
Corporation believes that substantially all of its rental income will be
qualifying income under the 75% income test, and that the REIT Corporation's
provision of services will not cause the rental income to fail to be included
under that test.
Upon the REIT Corporation's ultimate sale of properties, any gains realized
also are expected to constitute qualifying income, as gain from the sale of real
property (not involving a prohibited transaction).
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95% GROSS INCOME TEST. In addition to earning 75% of its gross income from
the sources listed above, at least an additional 20% of the REIT Corporation's
gross income for each taxable year must come either from those sources, or from
dividends, interest or gains from the sale or other disposition of stock or
other securities that do not constitute dealer property. This test permits a
REIT to earn a significant portion of its income from traditional "passive"
investment sources that are not necessarily real estate related. The term
"interest" (under both the 75% and 95% tests) does not include amounts that are
based on the income or profits of any person, unless the computation is based
only on a fixed percentage of receipts or sales.
FAILING THE 75% OR 95% TESTS; REASONABLE CAUSE. As a result of the 75% and
95% tests, REITs generally are not permitted to earn more than 5% of their gross
income from active sources (such as brokerage commissions or other fees for
services rendered). This type of income will not qualify for the 75% test or 95%
test but is not expected to be significant and such income and other
nonqualifying income are expected to be at all times less than 5% of the REIT
Corporation's annual gross income. While the REIT Corporation does not
anticipate that it will earn substantial amounts of nonqualifying income, if
nonqualifying income exceeds 5% of the REIT Corporation's gross income, the REIT
Corporation could lose its status as a REIT. The REIT Corporation may establish
non-qualified REIT subsidiaries to hold assets generating non-qualifying income.
The gross income generated by these subsidiaries is not included in the REIT
Corporation's gross income. However, dividends from such subsidiaries to the
REIT Corporation are included in the REIT Corporation's gross income and qualify
for the 95% income test.
If the REIT Corporation fails to meet either the 75% or 95% income tests
during a taxable year, it may still qualify as a REIT for that year if (i) it
reports the source and nature of each item of its gross income in its Federal
income tax return for that year; (ii) the inclusion of any incorrect information
in its return is not due to fraud with intent to evade tax; and (iii) the
failure to meet the tests is due to reasonable cause and not to willful neglect.
However, in that case the REIT Corporation would be subject to a 100% tax based
on the greater of the amount by which it fails either the 75% or 95% income
tests for such year. See "--Taxation of the REIT Corporation as a REIT."
30% INCOME TEST. The REIT Corporation also must earn less than 30% of its
gross income from the sale or other disposition of: (i) real property and loans
secured by real property held for less than four years (other than foreclosure
property and involuntarily conversions), (ii) stock or securities held by the
REIT Corporation for less than one year and (iii) property in a prohibited
transaction. The 30% income test does not have a reasonable cause exception as
do the 75% and 95% income tests. Consequently, a failure to meet the 30% income
test would terminate the REIT Corporation's status as a REIT automatically.
Because the REIT Corporation expects to hold its assets for long-term investment
and does not anticipate selling them within four years, the REIT Corporation
expects to comply with this requirement.
CHARACTER OF ASSETS OWNED. On the last day of each calendar quarter, the
REIT Corporation also must meet two tests concerning the nature of its
investments. First, at least 75% of the value of the total assets of the REIT
Corporation generally must consist of real estate assets, cash, cash items
(including receivables) and government securities. For this purpose, "real
estate assets" include interests in real property, interests in loans secured by
mortgages on real property or by certain interests in real property, shares in
other REITs and certain options, but exclude mineral, oil or gas royalty
interests. The temporary investment of new capital in debt instruments also
qualifies under this 75% asset test, but only for the one-year period beginning
on the date the REIT Corporation receives the new capital. Second, although the
balance of the REIT Corporation's assets generally may be invested without
restriction, the REIT Corporation will not be permitted to own (i) securities of
any one non-governmental issuer that represent more than 5% of the value of the
REIT Corporation's total assets or (ii) more than 10% of the outstanding voting
securities of any single issuer. A REIT, however, may own 100% of the stock of a
qualified REIT subsidiary, in which case the assets, liabilities and items of
income, deduction and credit of the subsidiary
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are treated as those of the REIT. In evaluating a REIT's assets, if the REIT
invests in a partnership, it is deemed to own its proportionate share of the
assets of the partnership.
The REIT Corporation anticipates that it will comply with these asset tests.
While some portion of its assets initially may be invested in qualifying
temporary debt investments, substantially all of the REIT Corporation's
investments will be in properties which should represent qualifying real estate
assets.
ANNUAL DISTRIBUTIONS TO STOCKHOLDERS. To maintain REIT status, the REIT
Corporation generally must distribute to its stockholders in each taxable year
at least 95% of its net ordinary income (capital gain is not required to be
distributed). More precisely, the REIT Corporation must distribute an amount
equal to (i) 95% of the sum of (a) its "REIT Taxable Income" before deduction of
dividends paid and excluding any net capital gain and (b) any net income from
foreclosure property less the tax on such income, minus (ii) certain limited
categories of "excess noncash income." REIT Taxable Income is defined to be the
taxable income of the REIT, computed as if it were an ordinary corporation, with
certain modifications. For example, the deduction for dividends paid is allowed,
but neither net income from foreclosure property, nor net income from prohibited
transactions, is included. In addition, the REIT may carry over, but not carry
back, a net operating loss for 15 years following the year in which it was
incurred.
A REIT may satisfy the 95% distribution test with dividends paid during the
taxable year and with certain dividends paid after the end of the taxable year.
Dividends paid in January that were declared during the last calendar quarter of
the prior year and were payable to stockholders of record on a date during the
last calendar quarter of that prior year are treated as paid on December 31 of
the prior year (for both the REIT Corporation and its stockholders). Other
dividends declared before the due date of the REIT Corporation's tax return for
the taxable year (including extensions) also will be treated as paid in the
prior year for the REIT Corporation if they are paid (i) within 12 months of the
end of such taxable year and (ii) no later than the REIT Corporation's next
regular distribution payment. Dividends that are paid after the close of a
taxable year and do not qualify under the rule governing payments made in
January that is described above will be taxable to the shareholders in the year
paid, even though they may be taken into account by the REIT Corporation for a
prior year. A nondeductible excise tax equal to 4% will be imposed on the REIT
Corporation for each calendar year to the extent that dividends declared and
distributed or deemed distributed before December 31 are less than the sum of
(a) 85% of the REIT Corporation's "ordinary income" plus (b) 95% of the REIT
Corporation's capital gain net income plus (c) income not distributed in earlier
years minus (d) distributions in excess of income in earlier years and (e) any
amount of REIT taxable income for such year.
The REIT Corporation will be taxed at regular corporate rates to the extent
that it retains any portion of its taxable income (E.G., if the REIT Corporation
distributes only the required 95% of its taxable income, it would be taxed on
the retained 5%). Under certain circumstances the REIT Corporation may not have
sufficient cash or other liquid assets to meet the distribution requirement.
This could arise because of competing demands for the REIT Corporation's funds,
or due to timing differences between tax reporting and cash receipts and
disbursements (I.E., income may have to be reported before cash is received, or
expenses may have to be paid before a deduction is allowed). Although the REIT
Corporation does not anticipate any difficulty in meeting this requirement, no
assurance can be given that necessary funds will be available.
If the REIT Corporation fails to meet the 95% distribution requirement
because of an adjustment to the REIT Corporation's taxable income by the IRS,
the REIT Corporation may be able to cure the failure retroactively by paying a
"deficiency dividend" (as well as applicable interest and penalties) within a
specified period.
TAXATION OF THE REIT CORPORATION AS A REIT. The REIT Corporation will adopt
the calendar year for Federal income tax purposes, and will use the accrual
method of accounting. For each taxable year in which the REIT Corporation
qualifies as a REIT, it generally will be taxed only on the portion of its
taxable income that it retains (which will include undistributed net capital
gain), because the REIT
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Corporation will be entitled to a deduction for its dividends paid to
shareholders during the taxable year. A dividends paid deduction is not
available for dividends that are considered preferential within any given class
of shares or as between classes except to the extent such class is entitled to
such preference. The REIT Corporation does not anticipate that it will pay any
such preferential dividends. The Articles provide for the automatic exchange of
outstanding shares for Excess Stock in circumstances in which the REIT
Corporation's REIT status might otherwise be put into jeopardy (I.E., if a
person attempts to acquire a block of shares that would be sufficient to cause
the REIT Corporation to fail the requirement that five or fewer individuals may
not own more than 50% of the value of the outstanding shares). Because Excess
Stock will represent a separate class of outstanding shares, the fact that those
shares will not be entitled to dividends should not adversely affect the REIT
Corporation's ability to deduct its dividend payments.
The REIT Corporation would be subject to tax on any income or gain from
foreclosure property at the highest corporate rate (currently 35%). A
confiscatory tax of 100% applies to any net income from prohibited transactions.
In addition, if the REIT Corporation fails to meet either the 75% or 95% source
of income tests described above, but still qualifies for REIT status under the
reasonable cause exception to those tests, a 100% tax would be imposed equal to
the amount obtained by multiplying (i) the greater of the amount, if any, by
which it failed either the 75% income test or the 95% income test, times (ii)
the ratio of the REIT Corporation's REIT Taxable Income to the REIT
Corporation's gross income (excluding capital gain and certain other items). The
REIT Corporation also will be subject to the minimum tax on items of tax
preference (excluding items specifically allocable to the REIT Corporation's
stockholders). Finally, under regulations that are to be promulgated, the REIT
Corporation also may be taxed at the highest regular corporate tax rate on any
built-in gain (I.E., the excess of value over adjusted tax basis) attributable
to assets that the REIT Corporation acquires in certain tax-free corporate
transactions, to the extent the gain is recognized during the first ten years
after the REIT Corporation acquires such assets.
FAILURE TO QUALIFY AS A REIT. For any taxable year in which the REIT
Corporation fails to qualify as a REIT, it would be taxed at the usual corporate
rates on all of its taxable income. Distributions to its stockholders would not
be deductible in computing that taxable income, and distributions would no
longer be required. Any corporate level taxes generally would reduce the amount
of cash available to the REIT Corporation for distribution to its stockholders
and, because the stockholders would continue to be taxed on the distributions
they receive, the net after tax yield to the shareholders from their investment
in the REIT Corporation likely would be reduced substantially. As a result, the
REIT Corporation's failure to qualify as a REIT during any taxable year could
have a material adverse effect upon the REIT Corporation and its stockholders.
If the REIT Corporation loses its REIT status, unless certain relief provisions
apply, the REIT Corporation will not be eligible to elect REIT status again
until the fifth taxable year which begins after the first year for which the
REIT Corporation's election was terminated.
If, after forfeiting its REIT status, the REIT Corporation later qualifies
and elects to be taxed as a REIT again, the REIT Corporation may face
significant adverse tax consequences. Prior to the end of the year in which the
REIT Corporation sought to qualify again as a REIT, the REIT Corporation would
be required to make distributions sufficient to eliminate any earnings and
profits accumulated during its period of non-REIT status. Moreover, immediately
prior to the effectiveness of the election to return to REIT status, the REIT
Corporation would be treated as having disposed of all of its assets in a
taxable transaction, triggering taxable gain with respect to the REIT
Corporation's appreciated assets. In that event, however, the REIT Corporation
would be permitted to elect an alternative treatment under which those gains
would be taken into account only as and when they actually are recognized upon
sales of the appreciated property occurring within a ten-year period. The REIT
Corporation would be required to distribute at least 95% of any such recognized
gains, but it would not receive the benefit of a dividends paid deduction to
reduce those taxable gains. Thus, any such gains on appreciated assets would be
subject to double taxation (I.E., at the corporate level as well as the
stockholder level).
TAXATION OF STOCKHOLDERS. Distributions generally will be taxable to
stockholders as ordinary income to the extent of the REIT Corporation's earning
and profits. Dividends declared during the last quarter of
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a calendar year and actually paid during January of the immediately following
calendar year are generally treated as if received by the stockholders on
December 31 of the calendar year during which they were declared. Distributions
paid to stockholders will not constitute passive activity income, and as a
result generally cannot be offset by losses from passive activities of a
stockholder who is subject to the passive activity rules. Distributions
designated by the REIT Corporation as capital gains dividends generally will be
taxed as long term capital gains to stockholders to the extent that the
distributions do not exceed the REIT Corporation's actual net capital gain for
the taxable year. Corporate stockholders may be required to treat up to 20% of
any such capital gains dividends as ordinary income. Distributions by the REIT
Corporation, whether characterized as ordinary income or as capital gains, are
not eligible for the 70% dividends received deduction for corporations.
Stockholders are not permitted to deduct losses or loss carry-forwards of the
REIT Corporation. Future regulations may require that the stockholders take into
account, for purposes of computing their individual alternative minimum tax
liability, certain tax preference items of the REIT Corporation.
The REIT Corporation may generate cash in excess of its net earnings. If the
REIT Corporation distributes cash to stockholders in excess of the REIT
Corporation's current and accumulated earnings and profits (other than as a
capital gain dividend), the excess cash will be deemed to be a return of capital
to each stockholder to the extent of the adjusted tax basis of the shareholder's
shares. Distributions in excess of the adjusted tax basis will be treated as
gain from the sale or exchange of the shares of stock. A stockholder who has
received a distribution in excess of current and accumulated earnings and
profits of the REIT Corporation may, upon the sale of the shares, realize a
higher taxable gain or a smaller loss because the basis of the shares as reduced
will be used for purposes of computing the amount of the gain or loss.
Generally, gain or loss realized by a stockholder upon the sale of Common
Stock will be reportable as capital gain or loss. If a stockholder receives a
long-term capital gain dividend from the REIT Corporation and has held the
shares of stock for six months or less, any loss incurred on the sale or
exchange of the shares is treated as a long-term capital loss, to the extent of
the corresponding long-term capital gain dividend received.
In any year in which the REIT Corporation fails to qualify as a REIT, the
stockholders generally will continue to be treated in the same fashion described
above, except that no the REIT Corporation dividends will be eligible for
treatment as capital gains dividends, corporate stockholders will qualify for
the dividends received deduction and the stockholders will not be required to
report any share of the REIT Corporation's tax preference items.
BACKUP WITHHOLDING. The REIT Corporation will report to its stockholders
and the IRS the amount of dividends paid during each calendar year and the
amount of tax withheld, if any. If a stockholder is subject to backup
withholding, the REIT Corporation will be required to deduct and withhold from
any dividends payable to that stockholder a tax of 31%. These rules may apply
(i) when a stockholder fails to supply a correct taxpayer identification number,
(ii) when the IRS notifies the REIT Corporation that the stockholder is subject
to the rules or has furnished an incorrect taxpayer identification number, or
(iii) in the case of corporations or others within certain exempt categories,
when they fail to demonstrate that fact when required. A stockholder that does
not provide a correct taxpayer identification number may also be subject to
penalties imposed by the IRS. Any amount withheld as backup withholding may be
credited against the stockholder's federal income tax liability. The REIT
Corporation also may be required to withhold a portion of capital gain
distributions made to stockholders who fail to certify their non-foreign status
to the REIT Corporation.
TAXATION OF TAX EXEMPT ENTITIES. In general, a tax exempt entity that is a
stockholder of the REIT Corporation will not be subject to tax on distributions
from the REIT Corporation or gain realized on the sale of shares. In Revenue
Ruling 66-106, the IRS specifically confirmed that a REIT's distributions to a
tax exempt employees' pension trust did not constitute unrelated business
taxable income. A tax exempt
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entity may be subject to tax, however, to the extent that it has financed the
acquisition of its shares with "acquisition indebtedness" within the meaning of
the Code. The Revenue Reconciliation Act of 1993 has modified the rules for tax
exempt employees' pension and profit sharing trusts which qualify under Section
401(a) of the Code and are exempt from tax under Section 501(a) of the Code
("qualified trusts") for tax years beginning after December 31, 1993. Under the
new rules, in determining the number of stockholders a REIT has for purposes of
the "50% test" described above under "--REIT Qualification--Share Ownership;
Reporting," generally, any stock held by a qualified trust will be treated as
held directly by its beneficiaries in proportion to their actuarial interests in
such trust and will not be treated as held by such trust. (This general rule
will not apply if certain persons related to the qualified trust ("disqualified
persons") hold in the aggregate more than 5% of the value of the REIT and the
REIT has accumulated earnings and profits attributable to any period for which
it did not qualify as a REIT; this exception is not expected to apply to the
REIT Corporation.)
A qualified trust owning more than 10% of a REIT must treat a percentage of
dividends from the REIT as unrelated business taxable income. The percentage is
determined by dividing the REIT's gross income (less direct expenses related
thereto) derived from an unrelated trade or business for the year by the gross
income of the REIT for the year in which the dividends are paid. However, if
this percentage is less than 5%, dividends are not treated as unrelated business
taxable income. These unrelated business taxable income rules apply only if the
REIT qualifies as a REIT because of the change in the 50% test discussed above
and if the trust is "predominantly held" by qualified trusts. A REIT is
predominantly held by qualified trusts if at least one pension trust owns more
than 25% of the value of the REIT or a group of pension trusts individually
holding more than 10% of the value of the REIT collectively owns more than 50%
of the value of the REIT.
For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans exempt from
federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of
the Code, respectively, income from an investment in the REIT Corporation will
constitute unrelated business taxable income unless the organization is able to
deduct an amount properly set aside or placed in reserve for certain purposes so
as to offset the unrelated business taxable income generated by the investment
in the REIT Corporation. These prospective investors should consult their own
tax advisors concerning the "set aside" and reserve requirements.
TAXATION OF FOREIGN INVESTORS. The rules governing federal income taxation
of nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign stockholders (collectively, "Non-U.S. Stockholders") are complex
and no attempt will be made herein to provide more than a summary of such rules.
Prospective Non-U.S. Stockholders should consult with their own tax advisors to
determine the impact of federal, state and local income tax laws with regard to
an investment in shares of Common Stock, including any reporting requirements,
as well as the tax treatment of such an investment under the laws of their home
country.
Dividends that are not attributable to gain from sales or exchanges by the
REIT Corporation of United States real property interests and not designated by
the REIT Corporation as capital gain dividends will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of the REIT Corporation. Such dividends ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the dividend
unless an applicable tax treaty reduces or eliminates that tax. However, if
income from the investment in the Common Stock is treated as effectively
connected with the Non-U.S. Stockholder's conduct of a United States trade or
business, the Non-U.S. Stockholder generally will be subject to a tax at
graduated rates, in the same manner as U.S. stockholders are taxed with respect
to such dividends (and may also be subject to the 30% branch profits tax in the
case of a stockholder that is a foreign corporation). The REIT Corporation
expects to withhold United States income tax at the rate of 30% on the gross
amount of any such dividends paid to a Non-U.S. Stockholder unless (i) the
Non-U.S. Stockholder files on IRS Form 1001 claiming that a lower treaty rate
applies or (ii) the Non-U.S. Stockholder files an IRS Form 4224 with the REIT
Corporation claiming that the
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dividend is effectively connected income. Dividends in excess of current and
accumulated earnings and profits of the REIT Corporation will not be taxable to
a stockholder to the extent that they do not exceed the adjusted basis of the
stockholder's shares, but rather will reduce the adjusted basis of such shares.
To the extent that such dividends exceed the adjusted basis of a Non-U.S.
Stockholder's shares of stock, they will give rise to tax liability if the
Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale
or disposition of his shares, as described below. If it cannot be determined at
the time a dividend is paid whether or not such dividend will be in excess of
current and accumulated earnings and profits, the dividends will be subject to
such withholding. The REIT Corporation does not intend to make quarterly
estimates of that portion of the dividends that are in excess of earnings and
profits, and as a result, all dividends will be subject to such withholding.
However, the Non-U.S. Stockholder may seek a refund of such amounts from the
IRS.
For any year in which the REIT Corporation qualifies as a REIT, dividends
that are attributable to gain from sales or exchanges by the REIT Corporation of
United States real property interests will be taxed to a Non-U.S. Stockholder
under the provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, those dividends are taxed to a Non-U.S. Stockholder as
if such gain were effectively connected with a United States business. Non-U.S.
Stockholders would thus be taxed at the normal capital gain rates applicable to
U.S. stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
dividends subject to FIRPTA may be subject to a 30% branch profits tax in the
hands of a foreign corporate shareholder not entitled to treaty exemption. The
REIT Corporation is required by the Code and applicable Treasury Regulations to
withhold 35% of any dividend that could be designated by the REIT Corporation as
a capital gain dividend. This amount is creditable against the Non-U.S.
Stockholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of shares generally
will not be taxed under FIRPTA if the REIT Corporation is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the shares was held directly
or indirectly by foreign persons. It is currently anticipated that the REIT
Corporation will be a "domestically controlled REIT," and therefore the sale of
shares will not be subject to taxation under FIRPTA. Because the shares of
Common Stock will be publicly traded, however, no assurance can be given that
the REIT Corporation will remain a "domestically controlled REIT." However, gain
not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if (i)
investment in the shares of Common Stock is effectively connected with the
Non-U.S. Stockholder's United States trade or business, in which case the
Non-U.S. Stockholder will be subject to the same treatment as U.S. stockholders
with respect to such gain (and may also be subject to the 30% branch profits tax
in the case of a stockholder that is a foreign corporation), or (ii) the
Non-U.S. Stockholder is a nonresident alien individual who was present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains. If the gain on the sale
of shares were to be subject to taxation under FIRPTA, the Non-U.S. Stockholder
will be subject to the same treatment as U.S. stockholders with respect to such
gain (subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of nonresident alien individuals and may also be subject
to the 30% branch profits tax in the case of a stockholder that is a foreign
corporation).
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Upon the death of a foreign individual stockholder, the investor's shares
will be treated as part of the investor's U.S. estate for purposes of the U.S.
estate tax, except as may be otherwise provided in an applicable estate tax
treaty.
STATE AND LOCAL TAXES. The REIT Corporation and its stockholders may be
subject to state or local taxation in various state or local jurisdictions,
including those in which it or they transact business or reside. Consequently,
prospective stockholders should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in the REIT Corporation.
B. THE EXCHANGE ALTERNATIVE
Except for the Ruling requested in connection with the Merger Alternative as
described elsewhere in this Proxy Statement/Prospectus, no rulings have been, or
will be, obtained from the IRS concerning the matters set forth in this section.
If the Conversion is effected pursuant to the Exchange Alternative, no gain or
loss should be recognized by the Unitholders as a result of the amendments to
the Partnership Agreements and the admission of the REIT Corporation as a
partner in the Operating Partnership. A Unitholder's eventual exchange of Units
for shares of Common Stock will be a taxable event. See "--The Exchange
Alternative--Disposition of Units: Exchange for Shares in the REIT Corporation."
Prior to such exchange, the Unitholders generally will continue to be taxed in
the same manner as they were taxed preceding the admission of the REIT
Corporation as a limited partner of the Operating Partnership, summarized as
follows:
1. PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Each partner is required to take into account in computing his
federal income tax liability his allocable share of income, gains, losses,
deductions and credits of the partnership, regardless of whether cash
distributions are made. Distributions by a partnership to a partner are
generally not taxable unless the distribution is in excess of the partner's tax
basis in his partnership interest.
Section 7704 of the Code provides that publicly-traded partnerships shall,
as a general rule, be taxed as corporations despite the fact that they are not
classified as associations taxable as corporations under Section 7701. USRP
probably will continue to be a "publicly traded partnership" for purposes of
Section 7704 of the Code after the Units are no longer listed on the NYSE.
Section 7704 of the Code provides an exception to this general rule (the "Real
Property Rent Exception") for a publicly traded partnership if 90% or more of
its gross income for every taxable year consists of "qualifying income."
"Qualifying income" includes real property rental income and gain from the sale
or other disposition of real property and gains from the sale or other
disposition of capital assets held for the production of income that otherwise
constitutes "qualifying income."
Real property rent is defined, under Section 7704 of the Code, as amounts
which would qualify as rent from real property under Section 856(d) of the Code
(the provisions of the Code dealing with REITs). Although substantially all of
the income of USRP consists of qualifying rental income, USRP currently engages
in activities that give rise to non-qualifying rental income and may enter into
other such transactions in the future. Rental income of USRP may not qualify as
real property rent pursuant to Section 856 of the Code if USRP, directly or
indirectly through the constructive ownership rules contained in Section 318 of
the Code, owns more than 10% of the capital or profits interest in any tenant
leasing real property from USRP. USRP, through such attribution rules, owns
greater than a 10% interest in one tenant which leases three (3) Burger King
restaurant properties from the Operating Partnership. However, such
non-qualifying income is less than 3.5% of total gross income. With respect to
other transactions in which the Managing General Partner has or may acquire an
ownership interest in any tenant, the Managing General Partner has represented
that it and its affiliates will not acquire, or allow any Unitholder owning more
than 5% of total Units outstanding to acquire, greater than a 10% ownership
interest in such tenant.
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Additionally, USRP has purchased items of personalty and equipment and
leased such items to tenants in conjunction with real property leases. To the
extent that the rental income attributable to such equipment exceeds 15% of
total rental income for the real property and equipment, such rental income
would not qualify as real property rent. USRP generally separately allocates
rental income between equipment and real property, and the equipment component
of such rental income is generally less than 15% of the total rental income.
Assuming that such allocation is valid, no portion of the rental income
attributable to equipment and personal property should constitute non-qualifying
income.
USRP estimates that a total of 3.5% of its gross income for taxable year
1997 will not constitute qualifying income, and estimates that less than 3.5% of
its gross income for each subsequent taxable year will not constitute qualifying
income.
Winstead Sechrest & Minick P.C. is of the opinion that under current law,
and subject to the conditions and qualifications set forth below, each of USRP
and the Operating Partnership will be treated as a partnership for federal
income tax purposes. However, such opinion is not binding on the IRS.
In rendering its opinion that neither Partnership will be treated as a
corporation for federal income tax purposes, counsel has relied on the following
factual representations by the Managing General Partner as to the Partnerships:
1. Each Partnership will be operated in accordance with applicable
state partnership statutes, its partnership agreement and the statements and
representations made in this Proxy Statement/ Prospectus.
2. For each taxable year, less than 10% of each Partnership's gross
income will be derived from sources other than (i) real property rental
income and gain from the sale or other disposition of real property, or (ii)
other items of "qualifying income" within the meaning of Section 7704(d) of
the Code.
If USRP fails to meet the Real Property Rent Exception to the general rule
of Section 7704 of the Code (other than a failure determined by the IRS to be
inadvertent which is cured within a reasonable time after discovery), USRP will
be treated as if it had transferred all of its assets (subject to liabilities)
to a newly-formed corporation (on the first day of the year in which it fails to
meet the Real Property Rent Exception) in return for stock in such corporation,
and then distributed such stock to the Unitholders in liquidation of their
interest in USRP.
If either Partnership were taxable as a corporation or treated as an
association taxable as a corporation in any taxable year, its income, gains,
losses, deductions and credits would be reflected only on its tax return rather
than being passed through to its partners and its taxable income would be taxed
at corporate rates. In addition, its distributions to each of its partners would
be treated as either dividend income (to the extent of its current or
accumulated earnings and profits), and, in the absence of earnings and profits,
as a nontaxable return of capital (to the extent of such partner's tax basis in
his interest therein) or taxable capital gain (after such partner's tax basis in
his interest therein is reduced to zero). Furthermore, losses realized by such
Partnership would not flow through to the Unitholders. Accordingly, treatment of
either Partnership as a corporation for federal income tax purposes would
probably result in a material reduction in a Unitholder's cash flow and
after-tax return. In addition, if USRP were to fail to qualify as a partnership
for federal income tax purposes, the REIT Corporation could fail to qualify as a
REIT.
The discussion below is based on the assumption that each Partnership will
be classified as a partnership for federal income tax purposes. If that
assumption proves to be erroneous, most, if not all, of the tax consequences
described below would not be applicable to Unitholders.
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2. PARTNER STATUS
Unitholders who have become limited partners of USRP pursuant to the
provisions of the Master Partnership Agreement will be treated as partners of
USRP for federal income tax purposes.
The IRS has ruled that assignees of partnership interests who have not been
admitted to a partnership as partners, but who have the capacity to exercise
substantial dominion and control over the assigned partnership interests, will
be treated as partners for federal income tax purposes. On the basis of such
ruling, except as otherwise described herein, (i) assignees who have executed
and delivered transfer applications, and are awaiting admission as limited
partners of the Partnership, and (ii) Unitholders whose Units are held in street
name or by another nominee will be treated as partners for federal income tax
purposes. As such ruling does not extend, on its facts, to assignees of Units
who are entitled to execute and deliver transfer applications and thereby become
entitled to direct the exercise of attendant rights, but who fail to execute and
deliver transfer applications, the tax status of such Unitholders is unclear.
Such Unitholders should consult their own tax advisors with respect to their
status as partners in USRP for federal income tax purposes. A purchaser or other
transferee of Units who does not execute and deliver a transfer application may
not receive certain federal income tax information or reports furnished to
record holders of Units unless the Units are held in a nominee or street name
account and the nominee or broker has executed and delivered a transfer
application with respect to such Units.
A beneficial owner of Units whose Units have been transferred to a short
seller to complete a short sale would appear to lose his status as a partner
with respect to such Units for federal income tax purposes. See "--The Exchange
Alternative--Treatment of Short Sales."
3. TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME. USRP's income, gains, losses, deductions
and credits will consist of its allocable share of the income, gains, losses,
deductions and credits of the Operating Partnership and dividends from its
corporate subsidiaries. Because USRP is not a taxable entity and incurs no
federal income tax liability, each Unitholder will be required to take into
account his allocable share of income, gain, loss and deductions of the
Operating Partnership (through USRP) without regard to whether corresponding
cash distributions are received by Unitholders. Consequently, a Unitholder may
be allocated income from USRP although he has not received a cash distribution
in respect of such income.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS. Under Section 731 of the Code,
distributions by USRP to a Unitholder generally will not be taxable to such
Unitholder for federal income tax purposes to the extent of his tax basis in his
Units immediately before the distribution. Cash distributions (and, in certain
circumstances, distributions of marketable securities) in excess of such basis
generally will be considered to be gain from the sale or exchange of the Units,
taxable in accordance with the rules described under
"--The Exchange Alternative--Disposition of Units." The right to exchange Units
for Common Stock of the REIT Corporation may be treated as a marketable
security, in which event the distribution of such rights to the Unitholders
would be treated as if the Unitholders received cash equal to the fair market
value of such rights received. Any reduction in a Unitholder's share of USRP's
liabilities included in his tax basis in his Units will be treated as a
distribution of cash to such Unitholder. See "--The Exchange Alternative
Tax--Basis of Units." A decrease in a Unitholder's percentage interest in USRP
because of a partnership offering of additional Units such as upon the admission
of the REIT Corporation, will decrease such Unitholder's share of nonrecourse
liabilities and, thus, will result in a corresponding deemed distribution of
cash.
A non-pro rata distribution of money or property may result in ordinary
income to a Unitholder, regardless of his tax basis in his Units, if such
distribution reduces the Unitholder's share of USRP's "unrealized receivables"
(including depreciation recapture) and/or substantially appreciated "inventory
items" (both as defined in Section 751 of the Code) (collectively, "Section 751
Assets"). To that extent, the Unitholder will be treated as having received his
proportionate share of the Section 751 Assets and having
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exchanged such assets with USRP in return for the non-pro rata portion of the
actual distribution made to him. This latter deemed exchange will generally
result in the Unitholder's realization of ordinary income under Section 751(b)
of the Code. Such income will equal the excess of (i) the non-pro rata portion
of such distribution over (ii) the Unitholder's tax basis for the share of such
Section 751 Assets deemed relinquished in the exchange.
TAX BASIS OF UNITS. In general, a Unitholder's tax basis for his Units
initially will be equal to the price of such Units to him. A Unitholder's tax
basis will generally be increased by (i) his share of partnership taxable income
and (ii) his share of partnership liabilities that are without recourse to any
partner ("nonrecourse liabilities"), if any. Generally, a Unitholder's tax basis
in his interest will be decreased (but not below zero) by (a) his share of
partnership distributions, (b) his share of decreases in nonrecourse liabilities
of the partnership, (c) his share of losses of the partnership, and (d) his
share of nondeductible expenditures of the partnership that are not chargeable
to capital. A Unitholder's share of nonrecourse liabilities will generally be
based on his share of the partnership's profits. Accordingly, at the time that a
Unitholder makes the adjustment to his share of partnership properties pursuant
to Section 743(b) of the Code, the Unitholder will not be permitted to include
the recourse debt financing of the partnership but may be entitled to include a
portion of the partnership's nonrecourse financing, in such adjustment. See
"--The Exchange Alternative--Tax Treatment of Operations--Section 754 Election."
LIMITATIONS ON DEDUCTIBILITY OF LOSSES. The passive loss limitations
contained in Section 469 of the Code generally provide that individuals,
estates, trusts and certain closely-held corporations and personal service
corporations can deduct losses from passive activities (generally, activities in
which the taxpayer does not materially participate) only to the extent of the
taxpayer's income from such passive activities or investments. The passive loss
limitations are to be applied separately with respect to publicly-traded
partnerships. Consequently, losses generated by USRP, if any, will be available
to offset only future income generated by USRP and will not be available to
offset income from other passive activities or investments (including other
publicly traded partnerships) or salary or active business income. Passive
losses that are not deductible because they exceed the Unitholder's income
generated by USRP may be deducted in full when the Unitholder disposes of his
entire investment in USRP to an unrelated party in a fully taxable transaction.
A Unitholder's share of net income from USRP may be offset by any suspended
passive losses from USRP, but may not be offset by any other current or
carryover losses from other passive activities, including those attributable to
other publicly traded partnerships. According to an IRS announcement,
Regulations will be issued which characterize net passive income from a publicly
traded partnership as investment income for purposes of deducting investment
interest.
In addition to the foregoing limitations, a Unitholder may not deduct from
taxable income his share of partnership losses, if any, to the extent that such
losses exceed the lesser of (i) the tax basis of his Units at the end of the
partnership's taxable year in which the loss occurs and (ii) the amount for
which the Unitholder is considered "at risk" under Section 465 of the Code at
the end of that year. In general, a Unitholder will initially be "at risk" to
the extent of the purchase price of his Units. A Unitholder's "at risk" amount
increases or decreases as his tax basis in his Units increases or decreases,
except that nonrecourse liabilities (or increases or decreases in such
liabilities) of USRP generally do not affect his "at risk" amount. Losses
disallowed to a Unitholder as a result of these rules can be carried forward and
will be allowable to the Unitholder to the extent that his tax basis or "at
risk" amount (whichever was the limiting factor) is increased in a subsequent
year. The "at risk" rules apply to an individual Unitholder, a shareholder of a
corporate Unitholder that is an S corporation and a corporate Unitholder if 50%
or more of the value of such stock is owned directly or indirectly by five or
fewer individuals.
ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION. The Master
Partnership Agreement requires that a capital account be maintained for each
partner in accordance with the tax accounting
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principles set forth in applicable Treasury Regulations under Section 704 of the
Code. Distributions upon liquidation of USRP are to be made in accordance with
positive capital account balances.
In general, if USRP has a net profit, items of income, gain, loss and
deduction will be allocated among the general partner and the Unitholders in
accordance with their respective interests in USRP. Notwithstanding the above,
as required by Section 704(c) of the Code, certain items of partnership income,
gain, loss and deduction will be allocated to account for the difference between
the tax basis and fair market value of certain property held by USRP
("Contributed Property"). Transactions which result in a required Section 704(c)
allocation with respect to Contributed Property may arise if (i) a Unitholder
contributes appreciated or depreciated property, rather than cash, to USRP, or
(ii) additional Units are issued for cash, and at the time of such issuance, the
capital account of the existing partners are restated to account for the
difference between the tax basis and fair market value of partnership property.
USRP has previously participated in several transactions described in clause (i)
above. Upon the admission of the REIT Corporation, the capital accounts of the
existing partners will be restated as described in clause (ii) above.
Accordingly, with respect to each such transaction, USRP will be required to
make Section 704(c) allocations.
In addition, certain items of recapture income will be allocated to the
extent possible to the partner allocated the deduction giving rise to the
treatment of such gain as recapture income in order to minimize the recognition
of ordinary income by some Unitholders, but these allocations may not be
respected. If these allocations of recapture income are not respected, the
amount of the income or gain allocated to a Unitholder will not change, but a
change in the character of the income allocated to a Unitholder would result.
Finally, although USRP does not expect that its operations will result in the
creation of negative capital accounts, if negative capital accounts nevertheless
result, items of partnership income and gain will be allocated in an amount and
manner sufficient to eliminate the negative balances as quickly as possible.
Under Section 704(c) of the Code, the partners in a partnership cannot be
allocated more depreciation, gain or loss than the total amount of any such item
recognized by that partnership in a particular taxable period (the "ceiling
limitation"). To the extent the ceiling limitation is or becomes applicable, the
Partnership Agreements will require that certain items of income and deduction
be allocated in a way designed to effectively "cure" this problem and eliminate
the impact of the ceiling limitation. Such allocations will not have substantial
economic effect because they will not be reflected in the capital accounts of
the Unitholders. Regulations under Section 704(c) of the Code permit a
partnership to make reasonable curative allocations to reduce or eliminate
disparities between the tax basis and value attributable to Contributed
Properties.
Counsel is of the opinion that, allocations under the Master Partnership
Agreement will be given substantial effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction. There are, however, uncertainties in the Regulations relating to
allocations of partnership income.
4. TAX TREATMENT OF OPERATIONS.
INCOME AND DEDUCTIONS IN GENERAL. No federal income tax will be paid by
USRP. Instead, each Unitholder will be required to report on his income tax
return his allocable share of income, gains, losses and deductions of USRP. Such
items must be included on the Unitholder's federal income tax return without
regard to whether USRP makes a distribution of cash to the Unitholder. A
Unitholder is generally entitled to offset his allocable share of USRP's passive
income with his allocable share of losses generated by USRP, if any. See "--The
Exchange Alternative--Tax Consequences of Unit Ownership Limitations on
Deductibility of Losses."
USRP has adopted a convention with respect to transferring Unitholders which
generally allocates the net income or net loss of USRP proportionately to each
day of the year, and treats any Unitholder owning a Unit as of the last day of
the month as owning the Unit for the entire month.
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ACCOUNTING METHOD AND TAXABLE YEAR. USRP utilizes the calendar year as its
taxable year and adopted the accrual method of accounting for federal income tax
purposes.
DEPRECIATION METHOD. USRP elected to use the straight-line depreciation
method with respect to its real property assets. Property subsequently acquired
or constructed by USRP may be depreciated using accelerated depreciation methods
permitted by Section 168 of the Code.
SECTION 754 ELECTION. Each Partnership has made the election permitted by
Section 754 of the Code effective for Partnership taxable year 1996. Such
election generally permits a purchaser of Units to adjust his share of the tax
basis in USRP's properties pursuant to Section 743(b) of the Code. Such
elections are irrevocable without the consent of the IRS. The Section 743(b)
adjustment is attributed solely to a purchaser of Units and is not added to the
tax basis of USRP's assets associated with all of the Unitholders (the "Common
Bases"). The amount of the adjustment under Section 743(b) is the difference
between the Unitholder's tax basis in his Units and the Unitholder's
proportionate share of the Common Bases attributable to the Units pursuant to
Section 743. The aggregate amount of the adjustment computed under Section
743(b) is then allocated among the various assets of USRP pursuant to the rules
of Section 755. The Section 743(b) adjustment acts in concert with the Section
704(c) allocations (including the curative allocations, if respected) in
providing the purchaser of Units with the equivalent of a tax basis in his share
of USRP's properties equal to the fair market value of such share. See "--The
Exchange Alternative--Tax Consequences of Unit Ownership--Allocation of
Partnership Income, Gain, Loss and Deduction" and "--The Exchange
Alternative--Uniformity of Units."
Proposed Regulation Section 1.168-2(n) generally requires the Section 743(b)
adjustment attributable to recovery property to be depreciated as if the total
amount of such adjustment were attributable to newly-acquired recovery property
placed in service when the transfer occurs. The legislative history of Section
197 of the Code indicates that the Section 743(b) adjustment attributable to an
amortizable Section 197 intangible should be similarly treated. Under Regulation
Section 1.167(c)-l(a)(6), a Section 743(b) adjustment attributable to property
subject to depreciation under Section 167 of the Code rather than cost recovery
deductions under Section 168 is generally required to be depreciated using
either the straight-line method or the 150% declining balance method. USRP
utilizes the straight line method on such property. The depreciation and
amortization methods and useful lives associated with the Section 743(b)
adjustment, therefore, may differ from the methods and useful lives generally
used to depreciate the Common Bases in such properties. The managing general
partner of USRP is authorized to adopt a convention to preserve the uniformity
of Units despite its inconsistency with Proposed Regulation Section 1.168-2(n)
and Regulation Section 1.167(c)-l(a)(6). See "--The Exchange
Alternative--Uniformity of Units."
USRP intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property (to
the extent of any unamortized disparity between the tax basis and value
attributable to Contributed Property) using a rate of depreciation or
amortization derived from the depreciation or amortization method and useful
life applied to the Common Bases of such property, despite its inconsistency
with Proposed Regulation Section 1.168-2(n), Regulation Section 1.167(c)-l(a)(6)
or the legislative history of Section 197 of the Code. If USRP determines that
such position cannot reasonably be taken, USRP may adopt a depreciation or
amortization convention under which all purchasers acquiring Units in the same
month would receive depreciation or amortization, whether attributable to Common
Bases or Section 743(b) basis, based upon the same applicable rate as if they
had purchased a direct interest in USRP's property. Such an aggregate approach
may result in lower annual depreciation or amortization deductions than would
otherwise be allowable to certain Unitholders. See "--Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the principles of Section 1060 of the Code. Based on these principles, the
IRS may seek to reallocate some or all of any
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Section 743(b) adjustment not so allocated by USRP to goodwill which, as an
intangible asset, would be amortizable over a longer period of time than certain
of USRP's tangible assets.
A Section 754 election is advantageous when the transferee's tax basis in
such Units is higher than such Units' share of the aggregate tax basis in USRP's
assets immediately prior to the transfer. In such case, pursuant to the
election, the transferee will take a new and higher tax basis in his share of
USRP's assets for purposes of calculating, among other items, his depreciation
deductions and his share of any gain or loss on a sale of USRP's assets.
Conversely, a Section 754 election would be disadvantageous if the transferee's
tax basis in such Units is lower than such Units' share of the aggregate tax
basis in USRP's assets immediately prior to the transfer. Thus, the amounts that
a Unitholder would be able to obtain on a sale or other disposition of his Units
may be affected favorably or adversely by the elections under Section 754.
ESTIMATES OF RELATIVE FAIR MARKET VALUES AND BASIS OF PROPERTIES. The
consequences of the acquisition, ownership and disposition of Units will depend
in part on estimates by the managing general partner of the relative fair market
values and determinations of the tax basis of the assets of USRP. The federal
income tax consequences of such estimates and determinations of tax basis may be
subject to challenge and will not be binding on the IRS or the courts. If the
estimates of fair market value or determinations of tax basis were found to be
incorrect, the character and amount of items of income, gain, loss, deduction or
credit previously reported by Unitholders might change, and Unitholders might be
required to amend their previously filed tax returns or to file claims for
refund.
5. ALTERNATIVE MINIMUM TAX
Each Unitholder will be required to take into account his share of any items
of partnership income, gain or loss for purposes of the alternative minimum tax.
A portion of USRP's depreciation deductions may be treated as an item of tax
preference for this purpose. A Unitholder's alternative minimum taxable income
derived from USRP may be higher than his share of partnership net income because
USRP may use more accelerated methods of depreciation for purposes of computing
federal taxable income or loss.
6. TAX-EXEMPT ENTITIES, REGULATED INVESTMENT COMPANIES AND FOREIGN
INVESTORS
Employee benefit plans and most other organizations exempt from federal
income tax (including individual retirement accounts ("IRAs") and other
retirement plans) are subject to federal income tax on unrelated business
taxable income ("UBIT"). Substantially all of the income of USRP is rental
income from real property which is excluded from the definition of UBIT.
However, to the extent that any rental income is attributable to debt-financed
property, as defined in Section 514 of the Code, such income will not satisfy
the rental income exclusion and will be taxable to a tax-exempt Unitholder as an
item of UBIT. Although USRP currently has only a small amount of debt-financed
property (as defined under Section 514 of the Code), the Managing General
Partner expects such proportion of debt-financed properties to increase as USRP
continues its acquisition program. Accordingly, a larger percentage of USRP's
total income may become UBIT.
Regulated investment companies are required to derive 90% or more of their
gross income from interest, dividends, gains from the sale of stocks or
securities or foreign currency or certain related sources. It is not anticipated
that any significant amount of USRP's gross income will be qualifying income.
Nonresident aliens and foreign corporations, trusts or estates that own
Units are considered to be engaged in business in the United States on account
of ownership of such Units and as a consequence are required to file federal tax
returns in respect of their distributive shares of partnership income, gain,
loss, deduction or credit and pay federal income tax at regular rates (net of
credits, including withholding) on such income. Generally, a partnership is
required by Section 1446 of the Code to pay a withholding tax on the portion of
the partnership's income that is effectively connected with the conduct of a
United States trade or business and that is allocable to the foreign partners,
regardless of whether any actual distributions have been made to such partners.
However, under rules applicable to publicly-traded partnerships,
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USRP will withhold (currently at the rate of 39.6%) on actual cash distributions
made quarterly to foreign Unitholders. Each foreign Unitholder must obtain a
taxpayer identification number from the IRS and submit that number to the
transfer agent of USRP on a Form W-8 in order to obtain credit for the taxes
withheld. Subsequent adoption of Regulations or the issuance of other
administrative pronouncements may require USRP to change these procedures.
Because a foreign corporation that owns Units is treated as engaged in a
United States trade or business, such a Unitholder is subject to United States
branch profits tax at a rate of 30%, in addition to regular federal income tax,
on its allocable share of USRP's earnings and profits (as adjusted for changes
in the foreign corporation's "U.S. net equity") that are effectively connected
with the conduct of a United States trade or business. Such a tax may be reduced
or eliminated by an income tax treaty between the United States and the country
with respect to which the foreign corporate Unitholder is a "qualified
resident." In addition, such a Unitholder is subject to special information
reporting requirements under Section 6038C of the Code.
A foreign Unitholder who sells or otherwise disposes of a Unit will be
subject to federal income tax on gain realized on the disposition of such Unit
to the extent that such gain is effectively connected with a United States trade
or business of the foreign Unitholder. The IRS has issued a ruling under which
all or a portion of any gain that is recognized on a sale of a Unit by a foreign
Unitholder will be subject to tax under the rule of the preceding sentence. USRP
does not expect that any material portion of any such gain will avoid United
States taxation. If less than all of any such gain is so taxable, then Section
897 of the Code may increase the portion of any gain that is recognized by a
foreign Unitholder that is subject to United States income tax and withholding
of 10% of the amount realized on the disposition of a Unit may apply if that
foreign Unitholder has held more than 5% in value of the Units during the
five-year period ending on the date of the disposition or if the Units are not
regularly traded on an established securities market at the time of the
disposition.
7. UNIFORMITY OF UNITS
There can arise a lack of uniformity in the intrinsic tax characteristics of
Units sold after the date hereof and Units outstanding as of the date hereof.
Without such uniformity, compliance with several federal income tax
requirements, both statutory and regulatory, could be substantially diminished.
In addition, such non-uniformity could have a negative impact on the ability of
a Unitholder to dispose of his interest in USRP. Such lack of uniformity can
result from the application of Proposed Regulation Section 1.168-2(n) and
Regulation Section 1.167(c)-l(a)(6) or the application of certain "ceiling"
limitations on USRP's ability to make allocations to eliminate disparities
between the tax basis and value attributable to partnership properties.
Depreciation conventions may be adopted or items of income and deduction may
be specially allocated in a manner that is intended to preserve the uniformity
of intrinsic tax characteristics among all Units, despite the application of
either Proposed Regulation Section 1.168-2(n) and Regulation Section
1.167(c)-l(a)(6) or the "ceiling" limitations to partnership properties. Any
such special allocation will be made solely for federal income tax purposes. In
the event the IRS disallows the use of such conventions, some or all of the
adverse consequences described in the preceding paragraph could result. See
"--The Exchange Alternative--Allocation of Partnership Income, Gain, Loss and
Deduction" and "--The Exchange Alternative--Tax Treatment of Operations--Section
754 Election."
8. DISPOSITION OF UNITS: EXCHANGE FOR SHARES IN THE REIT CORPORATION
GAIN OR LOSS IN GENERAL. If a Unit is transferred to the REIT Corporation
in exchange for shares in the REIT Corporation, or is sold or otherwise disposed
of, the determination of gain or loss from the exchange, sale or other
disposition will be based on the difference between the amount realized and the
tax basis for such Unit. See "--The Exchange Alternative--Tax Consequences of
Unit Ownership--Basis of Units." Upon the exchange, sale or other disposition of
Units, a Unitholder's "amount realized" will be
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measured by the sum of the cash or fair market value of other property received
plus the portion of USRP's nonrecourse liabilities allocated to the Units sold.
Similarly, upon a gift of his Units, a Unitholder will be deemed to have
realized gain with respect to the portion of USRP's nonrecourse liabilities
allocable to such Units. To the extent that the amount of cash or property
received plus the allocable share of USRP's nonrecourse liabilities exceeds the
Unitholder's tax basis for the Units disposed of (in the case of a charitable
gift, only a portion of such tax basis may be offset against the nonrecourse
debt), the Unitholder will recognize gain. The tax liability resulting from such
gain could exceed the amount of cash received upon the disposition of such
Units.
The IRS has ruled that a partner must maintain an aggregate tax basis for
his interests in a single partnership (consisting of all interests acquired in
separate transactions). On a sale of a portion of such aggregate interest, such
partner would be required to allocate his aggregate tax basis between the
interest sold and the interest retained by some equitable apportionment method.
If applicable, the aggregation of tax basis of a Unitholder effectively
prohibits a Unitholder from choosing among Units with varying amounts of
inherent gain or loss to control the timing of the recognition of such inherent
gain or loss as would be possible in a stock transaction. Thus, the IRS ruling
may result in an acceleration of gain or deferral of loss on a sale of a portion
of a Unitholder's Units. It is not clear whether such ruling applies to publicly
traded partnerships, such as USRP, the interests in which are evidenced by
separate registered certificates, providing a verifiable means of identifying
each separate interest and tracing the purchase price of such interest. A
Unitholder considering the purchase of additional Units or a sale of Units
purchased at differing prices should consult his tax advisor as to the possible
consequences of that IRS ruling.
To the extent that a portion of the gain upon the sale of a Unit is
attributable to a Unitholder's share of "substantially appreciated inventory
items" and "unrealized receivables" of USRP, as those terms are defined in
Section 751 of the Code, such portion will be treated as ordinary income.
Unrealized receivables include (i) to the extent not previously includable in
partnership income, any rights to pay for services rendered or to be rendered
and (ii) amounts that would be subject to recapture as ordinary income if USRP
had sold its assets at their fair market value at the time of the transfer of a
Unit.
Gain from the sale or other disposition of a Unit may constitute investment
income under Section 163(d) of the Code. A Unitholder must report to the
transfer agent of USRP (on behalf of USRP) any transfer of Units. See "--The
Exchange Alternative--Information Return Filing Requirements."
The treatment of distributions received after a Unitholder has disposed of
his Units is unclear. Such a distribution may be fully taxable as ordinary
income or may reduce a Unitholder's tax basis for the Units disposed of,
resulting in a larger gain or smaller loss from such disposition.
TRANSFEROR/TRANSFEREE ALLOCATIONS. In general, USRP's taxable income and
losses are determined annually and are prorated on a monthly basis and
subsequently apportioned among the Unitholders in proportion to the number of
Units owned by them. However, extraordinary gain or loss realized on a
Terminating Capital Transaction is allocated among the Unitholders of record as
of the date such Terminating Capital Transaction occurs. As a result of this
monthly allocation, a Unitholder transferring Units may be allocated income,
gain, loss, deduction and credit accrued after the transfer.
The use of the monthly conventions discussed above may not be permitted by
existing Regulations and, accordingly, counsel is unable to opine on the
validity of the method of allocating income and deductions between the
transferors and transferees of Units. If the IRS treats transfers of Units as
occurring throughout each month and a monthly convention is not allowed by the
regulations (or only applies to transfers of less than all of a partner's
interest), the IRS may contend that taxable income or losses of USRP must be
reallocated among its partners. If any such contention were sustained, certain
Unitholders' respective tax liabilities would be adjusted to the possible
detriment of other Unitholders. The managing general partner is authorized to
revise USRP's method of allocation between transferors
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and transferees (as well as among partners whose interests otherwise vary during
a taxable period) to comply with any future regulations.
9. CONSTRUCTIVE TERMINATION OR DISSOLUTION OF PARTNERSHIP
Under Section 708(b)(1)(B) of the Code, a partnership will be considered to
have been terminated if within a twelve-month period there is a sale or exchange
of 50% or more of the interests in partnership capital and profits. A
termination results in a closing of the partnership's taxable year for all
partners, and the partnership's assets are treated as having been distributed to
the partners and reconveyed to the partnership, which is then treated as a new
partnership. A constructive termination of USRP will cause a termination of the
Operating Partnership. In the case of a Unitholder reporting on a fiscal year
other than a calendar year, the closing of a tax year of USRP may result in more
than twelve months' taxable income or loss of USRP being includable in his
taxable income for the year of termination. In addition, each Unitholder will
realize taxable gain to the extent that any money distributed or deemed
distributed to him (including any net reduction in his share of USRP's
nonrecourse liabilities) exceeds the tax basis of his Units.
A termination of either Partnership under Section 708(b)(1)(B) could result
in adverse tax consequences to Unitholders because it could result in a change
in the tax basis for USRP's properties and would require that new tax elections
be made by the reconstituted partnerships. In addition, such a termination could
result in a deferral of partnership depreciation deductions. Further, such a
termination may either accelerate the application of (or subject the
reconstituted partnerships to the application of) any change in law effective as
of a date after the termination.
USRP may not have the ability to determine when a constructive termination
occurs as a result of transfers of Units because the Units are currently freely
transferable under "street name" ownership. Thus, USRP may be subject to penalty
for failure to file a tax return and may fail to make certain partnership
elections in a timely manner, including the Section 754 Election.
10. PARTNERSHIP INCOME TAX INFORMATION RETURNS AND PARTNERSHIP AUDIT
PROCEDURES
USRP will use all reasonable efforts to furnish Unitholders with tax
information within 75 days after the close of each partnership taxable year.
Specifically, USRP intends to furnish to each Unitholder a Schedule K-1 which
sets forth his allocable share of USRP's income, gains, losses, deductions and
credits, if any. In preparing such information, the managing general partner
will necessarily use various accounting and reporting conventions to determine
each Unitholder's allocable share of income, gains, losses, deductions and
credits. There is no assurance that any such conventions will yield a result
that conforms to the requirements of the Code, the Regulations or the
administrative pronouncements of the IRS. The managing general partner cannot
assure Unitholders that the IRS will not contend that such accounting and
reporting conventions are impermissible. Contesting any such allegations could
result in substantial expense to USRP. In addition, if the IRS were to prevail,
Unitholders may incur substantial liabilities for taxes and interest.
The federal income tax information returns filed by USRP may be audited by
the IRS. The Code contains partnership audit procedures that significantly
simplify the manner in which IRS audit adjustments of partnership items are
resolved. Adjustments (if any) resulting from such an audit may require each
Unitholder to file an amended tax return, and possibly may result in an audit of
the Unitholder's return. Any audit of a Unitholder's return could result in
adjustments of non-partnership as well as partnership items.
Under Sections 6221 through 6233 of the Code, partnerships generally are
treated as separate entities for purposes of federal tax audits, judicial review
of administrative adjustments by the IRS and tax settlement proceedings. The tax
treatment of partnership items of income, gain, loss, deduction and credit is
determined at the partnership level in a unified partnership proceeding rather
than in separate proceedings with the partners. The Code provides for one
partner to be designated as the "Tax Matters
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Partner" for these purposes. The Master Partnership Agreement appoints the
managing general partner as the Tax Matters Partner for USRP.
The Tax Matters Partner is entitled to make certain elections on behalf of
USRP and Unitholders and can extend the statute of limitations for assessment of
tax deficiencies against Unitholders with respect to partnership items. In
connection with adjustments to partnership tax returns proposed by the IRS, the
Tax Matters Partner may bind any Unitholder with less than a 1% profits interest
in USRP to a settlement with the IRS unless the Unitholder elects, by filing a
statement with the IRS, not to give such authority to the Tax Matters Partner.
The Tax Matters Partner may seek judicial review (to which all the Unitholders
are bound) of a final partnership administrative adjustment and, if the Tax
Matters Partner fails to seek judicial review, such review may be sought by any
Unitholder having at least a 1% profit interest in USRP and by Unitholders
having, in the aggregate, at least a 5% profits interest. Only one judicial
proceeding will go forward, however, and each Unitholder with an interest in the
outcome may participate.
The Unitholders will generally be required to treat partnership items on
their federal income tax returns in a manner consistent with the treatment of
the items on the USRP information return. In general, that consistency
requirement is waived if the Unitholder files a statement with the IRS
identifying the inconsistency. Failure to satisfy the consistency requirement,
if not waived, will result in an adjustment to conform the treatment of the item
by the Unitholder to the treatment on USRP return. Even if the consistency
requirement is waived, adjustments to the Unitholder's tax liability with
respect to partnership items may result from an audit of USRP's or the
Unitholder's tax return. Intentional or negligent disregard of the consistency
requirement may subject a Unitholder to substantial penalties.
11. INFORMATION RETURN FILING REQUIREMENTS
A Unitholder who sells or exchanges Units is required by Section 6050K of
the Code to notify USRP in writing of such sale or exchange, and USRP is
required to notify the IRS of such transaction and to furnish certain
information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects such sale through a broker. In
addition, a transferor and a transferee of a Unit will be required to furnish to
the IRS the amount of the consideration received for such Unit that is allocated
to goodwill or going concern value of USRP. Failure to satisfy such reporting
obligations may lead to the imposition of substantial penalties.
12. NOMINEE REPORTING
Under Section 6031(c) of the Code, persons who hold an interest in USRP as a
nominee for another person must report certain information to USRP. Temporary
Treasury Regulations provide that such information should include (i) the name,
address and taxpayer identification number of the beneficial owners and the
nominee; (ii) whether the beneficial owner is (a) a person that is not a United
States person, (b) a foreign government, an international organization or any
wholly owned agency or instrumentality of either of the foregoing, or (c) a
tax-exempt entity; (iii) the amount and description of Units held, acquired or
transferred for the beneficial owners; and (iv) certain information including
the dates of acquisitions and transfers, means of acquisitions and transfers,
and acquisition cost for purchases, as well as the amount of net proceeds from
sales. Brokers and financial institutions are required to furnish additional
information, including whether they are a United States person and certain
information on Units they acquire, hold or transfer for their own account. A
penalty of $50 per failure (up to a maximum of $100,000 per calendar year) is
imposed for failure to report such information to USRP. The nominee is required
to supply the beneficial owner of the Units with the information furnished to
USRP.
13. STATE AND OTHER TAXES
In addition to federal income taxes, Unitholders may be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which the partners reside or in which either Partnership does
business or owns property. Although an analysis of those various taxes cannot be
presented here, each
126
<PAGE>
prospective Unitholder should consider the potential impact of such taxes on his
investment in USRP. The Operating Partnership owns property and does business in
44 states. A Unitholder will likely be required to file state income tax returns
in such states (other than states such as Texas and Florida not having a state
income tax or states in which USRP is required or has elected to withhold and
pay taxes on behalf of the Unitholders) and may be subject to penalties for
failure to comply with such requirements. In addition, an obligation to file tax
returns or to pay taxes may arise in other states. Moreover, in certain states,
tax losses may not produce a tax benefit in the year incurred (if, for example,
the partner has no income from sources within that state) and also may not be
available to offset income in subsequent taxable years.
It is the responsibility of each prospective Unitholder to investigate the
legal and tax consequences, under the laws of pertinent states or localities, of
his investment in USRP. Accordingly, each prospective Unitholder should consult,
and must depend upon, his own tax counsel or other advisor with regard to those
matters. Further, it is the responsibility of each Unitholder to file all state
and local, as well as federal, tax returns that may be required of such
Unitholder.
C. DIFFERENCES BETWEEN A PARTNERSHIP AND A REIT
The following is a summary of the material differences, as more specifically
described above under "The Merger Alternative" and "The Exchange Alternative,"
between the federal tax consequences applicable to a partnership and its
partners versus those applicable to a REIT and its stockholders.
TAXATION OF ENTITY. A partnership is not a taxable entity. A
partnership's partners recognize their allocable share of the partnership's
taxable income or loss. A REIT is a taxable entity and must pay tax at the
corporate rates on its taxable income, but it is allowed a deduction for
distributions to its stockholders. Consequently, a REIT may avoid federal
income taxation. The Code contains several special provisions that may apply
to a REIT to cause it to pay certain taxes.
FLOW THROUGH OF LOSS. A partnership's taxable loss is allocated to its
partners, who may utilize such losses subject to various limitations. Losses
of a REIT do not flow through to its stockholders.
CHARACTER OF INCOME OR LOSS. Each item of income or loss of a
partnership (E.G., as rent, interest, dividends, capital gain, etc.) retains
its character as it is allocated to the partners. This may be relevant for
various provisions of the Code including the limitation on passive activity
losses, alternative minimum tax, limitations on itemized deductions, etc. As
described above under "--The Merger Alternative--Tax Consequences of the
REIT Corporation's Qualification as a REIT--Taxation of Stockholders,"
taxable distributions from a REIT are treated as dividends except to the
extent that such distributions are designated as capital gain distributions.
BASIS. A partner's basis in a partnership is increased by the
partnership's income and such partner's share of partnership indebtedness,
and is decreased by losses, distributions and reductions in his share of
partnership indebtedness. The basis of a REIT stockholder is not affected by
the REIT's income or loss or the REIT's indebtedness, but is reduced to the
extent the shareholder receives non-taxable distributions.
REQUIREMENTS FOR QUALIFICATION. As described above under "--The Merger
Alternative--Tax Consequences of the REIT Corporation's Qualification as a
REIT--REIT Qualification," in order to remain qualified as a REIT, a REIT
must satisfy various income, asset, distribution, shareholder and record
keeping requirements. A publicly traded partnership has certain income
characterization requirements, but is otherwise not subject to the same
requirements as a REIT in order to retain its classification as a
partnership for tax purposes.
BASIS ADJUSTMENTS. A transferee Unitholder is entitled to the benefit
of certain basis adjustments under Section 754 of the Code upon a sale or
exchange of Units or the death of a Unitholder. See
"--The Exchange Alternative--Tax Treatment of Operations--Section 754
Election." There will be
127
<PAGE>
no Section 754 adjustments upon the sale or exchange of Common Stock or the
death of a stockholder of the REIT Corporation.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act ("ERISA") and the prohibited transaction
provisions of Section 4975 of the Code that may be relevant to a Unitholder
(including, with respect to the discussion contained in "Status of the Company
under ERISA," to a Unitholder that is not an employee benefit plan, another
tax-qualified retirement plan, or an individual retirement account ("IRA")).
This discussion does not purport to deal with all aspects of ERISA or Section
4975 of the Code or, to the extent not preempted, state law that may be relevant
to particular employee benefit plan shareholders (including plans subject to
Title I of ERISA, other retirement plans and IRAs subject to the prohibited
transaction provisions of Section 4975 of the Code and governmental plans or
church plans that are exempt from ERISA and Section 4975 of the Code but that
may be subject to state law requirements) in light of their particular
circumstances.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON STOCK ON BEHALF OF A
UNITHOLDER WHICH IS AN ERISA PLAN, A TAX-QUALIFIED RETIREMENT PLAN OR AN IRA OR
OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR
REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE
CODE AND (TO THE EXTENT NOT PREEMPTED) STATE LAW WITH RESPECT TO THE PURCHASE,
OWNERSHIP OR SALE OF THE COMMON STOCK BY SUCH PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of a pension, profit-sharing or other employee benefit plan
subject to Title I of ERISA (an "ERISA Plan") should carefully consider whether
an investment in the Common Stock is consistent with his fiduciary
responsibilities under ERISA. In particular, the fiduciary requirements of Part
4 of Title I of ERISA require that an ERISA Plan's investments be (i) prudent
and in the best interests of the ERISA Plan, its participants and beneficiaries,
(ii) diversified in order to reduce the risk of large losses, unless it is
clearly prudent not to do so, and (iii) authorized under the terms of the
governing documents of the ERISA Plan. In determining whether any investment in
the Common Stock is prudent for purposes of ERISA, the appropriate fiduciary of
an ERISA Plan should consider all of the facts and circumstances, including
whether the investment is reasonably designed, as a part of the ERISA Plan's
portfolio for which the fiduciary has investment responsibility, to meet the
objectives of the ERISA Plan, taking into consideration the risk of loss and
opportunity for gain (or other return) from the investment, the diversification,
cash flow and funding requirements of the ERISA Plan, and the liquidity and
current return of the ERISA Plan's portfolio. A fiduciary should also take into
account the nature of the Company's business and other matters described under
"Risk Factors."
Fiduciaries of ERISA Plans, as well as fiduciaries of IRAs, retirement plans
for self-employed individuals ("Keogh Plans") and other plans subject to Section
4975 of the Code (IRAs, Keogh Plans and such other plans are referred to herein
as "IRC Plans") should also consider the application of the prohibited
transaction provisions of Section 406 of ERISA and Section 4975 of the Code in
making their investment decision. A "party in interest" or "disqualified person"
with respect to an ERISA Plan or IRC Plan is subject to (i) an initial 10%
excise tax on the amount involved in any prohibited transaction involving the
assets of the plan and (ii) an excise tax equal to 100% of the amount involved
if any prohibited transaction is not corrected. If the disqualified person who
engages in the transaction is the individual on behalf of whom an IRA is
maintained (or his beneficiary), the IRA may lose its tax-exempt status and its
assets may be deemed to have been distributed to such individual in a taxable
distribution on account of the prohibited transaction. In addition, a fiduciary
who permits an ERISA Plan to engage in a transaction that the fiduciary knows or
should know is a prohibited transaction may be liable to the ERISA
128
<PAGE>
Plan for any loss the ERISA Plan incurs as a result of the transaction and for
any profits earned by the fiduciary in the transactions.
In addition to liability for ERISA Plan losses, ERISA imposes a civil
penalty against fiduciaries of ERISA Plans who breach the prudence and other
fiduciary standards of ERISA, and against non-fiduciaries who knowingly
participate in the transaction giving rise to the breach. A prohibited
transaction by an ERISA Plan fiduciary generally would constitute a breach of
the ERISA fiduciary standards. The civil penalty is equal to 20% of the amount
recovered from a fiduciary or non-fiduciary with respect to such breach or
knowing participation pursuant to a settlement agreement with the United States
Secretary of Labor or a court order resulting from a proceeding instituted by
the Secretary. The penalty may be waived and, in any event, would be offset to
the extent of the responsible party's liability for excise tax under the Code.
STATUS OF THE COMPANY UNDER ERISA
In determining whether the fiduciary requirements of ERISA and the
prohibited transaction provisions of ERISA and the Code apply to an entity's
operations because one or more investors in the entity's equity interest is an
ERISA Plan or an IRC Plan, it is necessary to determine whether the underlying
assets of such entity are considered "plan assets" for purposes of ERISA and the
Code. The U.S. Department of Labor has issued regulations defining "plan assets"
for this purpose (the "DOL Regulation"). An ERISA Plan fiduciary should also
consider the relevance of these principles to ERISA's prohibition on improper
delegation of responsibility for the management of plan assets, and ERISA's
imposition of co-fiduciary liability on a fiduciary who participates in, permits
(by action or inaction) the occurrence of, or fails to remedy, a known breach by
another fiduciary. In general, the DOL Regulation provides that if an ERISA Plan
or IRC Plan acquires "publicly offered securities" of an entity, which are sold
pursuant to an effective registration statement under the Securities Act and
subsequently registered under Section 12(b) or 12(g) of the Securities Exchange
Act of 1934, which are "widely held" (I.E., held by at least 100 holders
independent of the issuer and each other), and freely transferable, the assets
of such entity will not be considered "plan assets" solely by reason of such
plan's investment in the entity.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock being offered
hereby will be passed upon for the REIT Corporation by Winstead Sechrest &
Minick P.C., Dallas, Texas. The federal income tax consequences in connection
with the Conversion will be passed upon for USRP by Winstead Sechrest & Minick
P.C., Dallas, Texas.
EXPERTS
The consolidated financial statements of USRP as of December 31, 1996 and
1995, the related consolidated statements of income, partners' capital and cash
flows for each of the three years in the period ended December 31, 1996 and the
balance sheet of U.S. Restaurant Properties, Inc. as of February 4, 1997,
included in this Proxy Statement/Prospectus, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports which are included
and incorporated by reference herein, and have been so included and incorporated
in reliance upon the reports of such firm given upon their authority as an
expert in accounting and auditing.
129
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRO FORMA FINANCIAL INFORMATION (Unaudited)
Consolidated Balance Sheet as of December 31, 1996................................. F-4
Condensed Consolidated Statement of Income for the year ended December 31, 1996.... F-6
U.S. RESTAURANT PROPERTIES, INC.
Independent Auditors' Report....................................................... F-8
Balance Sheet as of February 4, 1997............................................... F-9
Notes to Balance Sheet............................................................. F-10
U.S. RESTAURANT PROPERTIES MASTER L.P.
Independent Auditors' Report....................................................... F-11
Consolidated Balance Sheets at December 31, 1995 and 1996.......................... F-12
Consolidated Statements of Income for the years ended December 31, 1994, 1995 and
1996............................................................................. F-13
Consolidated Statements of Partners' Capital for the years ended December 31, 1994,
1995 and 1996.................................................................... F-14
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996......................................................................... F-15
Notes to Consolidated Financial Statements for the years ended December 31, 1994,
1995 and 1996.................................................................... F-16
</TABLE>
F-1
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following pro forma consolidated financial statements of U.S. Restaurant
Properties, Inc. (the "REIT Corporation") should be read in conjunction with the
consolidated financial statements of U.S. Restaurant Properties Master L.P.
("USRP") and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained elsewhere in this Proxy Statement/Prospectus.
The pro forma consolidated financial statements are not necessarily indicative
of what the REIT Corporation's financial position or results of operations would
have been had the transactions described below occurred on the assumed dates.
Such financial statements also do not purport to represent the future financial
position or results of operations of the REIT Corporation.
The attached pro forma consolidated financial statements have been prepared
based upon the REIT Corporation consolidating the operations of USRP including
U.S. Restaurant Properties Operating L.P. and other majority owned entities
(USRP and other majority owned entities collectively, the "Partnerships"). The
basis for the consolidation is because the REIT Corporation, or a wholly-owned
subsidiary thereof, will be the managing general partner of the Partnerships and
management of the REIT Corporation will have complete control over the
Partnerships through its right to make major decisions such as the acquisition,
sale, financing or refinancing of principal partnership assets, issuance of debt
or equity securities, declaration and payment of dividends or distributions and
all other business matters.
The pro forma consolidated balance sheet of the REIT Corporation as of
December 31, 1996 is based upon USRP's December 31, 1996 audited balance sheet
adjusted to reflect as of December 31, 1996 (i) the purchase of 121 properties
for $73,790,000 completed since December 31, 1996, including the value of
340,804 Units of $9,320,000, (ii) the purchase of 16 properties from QSR Income
Properties, Ltd. ("QSR") for 277,131 Units (at $28.50 per Unit), (iii) the
purchase of 25 properties from other sellers that as of April 30, 1997 are under
binding contracts for $18,229,000, (iv) the additional borrowings of $82,372,000
required to purchase the properties acquired and under contract, (v) the sale of
four properties for $2,892,000, (vi) the Managing General Partner's conversion
of its property management contract rights (the "Property Management Contract")
or the assignment thereof to USRP (depending upon how the Conversion is
effected) and converting its aggregate 1.98% partnership interest in the
Partnerships (the "Partnership Interests") into 850,000 shares of Common Stock
or its equivalent in a limited partner interest in the Operating Partnership or
Units (depending upon how the Conversion is effected) with the common stock
valued at the current market price (assumed $28.50 per share) and the related
cost of this transaction aggregating $580,000 and (vii) consolidation with the
REIT Corporation. The property acquisitions will be accounted for as purchases
and the assignment of the Property Management Contract and the cost of the
transaction will be expensed as nonrecurring items.
The pro forma condensed consolidated statement of income of the REIT
Corporation for the year ended December 31, 1996 is based upon USRP's audited
statement of income for the year ended December 31, 1996, adjusted to reflect as
of January 1, 1996; (i) the purchase of 305 properties for $178,971,000,
including the value of 725,640 Units of $17,232,296 completed since December 31,
1995, (ii) the issuance of 1,800,000 Units issued in June 1996 having net
proceeds of $40,203,000, (iii) the purchase of 16 properties from QSR for
277,131 Units (at $28.50 per Unit), (iv) the purchase of 25 properties from
other sellers that as of April 30, 1997 are under binding contracts for
$18,229,000, (v) the additional borrowings of $140,927,000 required to purchase
the properties acquired and under contract, (vi) the sale of four properties for
$2,892,000, and (vii) the Managing General Partner's assignment of its Property
Management Contract to the Operating Partnership or USRP (depending upon how the
Conversion is effected) and converting its aggregate 1.98% partnership interest
in the Partnerships (the "Partnership Interests") into 850,000 shares of Common
Stock or its equivalent in a limited partner interest in the Operating
Partnership or Units (depending upon how the Conversion is effected) with the
F-2
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
common stock valued at the current market price (assumed $28.50 per share). The
termination of the Property Management Contract and the REIT organization costs
are being treated as nonrecurring expenses of $23,031,000 and $580,000,
respectively, and are not reflected in the pro forma condensed consolidated
statement of income. However, they will be expensed when incurred.
When determining the number of Units that USRP will issue to QSR in exchange
for the QSR's assets, USRP has assumed that the adjusted purchase price for
QSR's assets equaled $7,721,234 plus the current principal balance of the
promissory notes of $177,000 that QSR will sell to the Partnerships and that the
average closing price for a Unit for the five trading days immediately preceding
the closing date equaled $28.50. If the average trading price of the Units
increases before the closing date, USRP could issue significantly fewer Units to
QSR or if the trading price decreases before the closing date, USRP could issue
significantly more Units to QSR.
F-3
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. RESTAURANT PROPERTIES MASTER L.P.
---------------------------------------------------------------------------------
OTHER PROPERTIES PROPERTY
QSR'S UNDER CONTRACT UNDER CONTRACT
HISTORICAL PURCHASES (A) PROPERTIES (B) TO PURCHASE (C) FOR SALE (D)
----------- ------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash................................... $ 381 $ $ 169 $ $ 2,892
Receivables, net....................... 2,117
Purchase deposits...................... 908 (280) (350) (122)
Prepaid expenses....................... 403
Deferred rent receivable............... 536
Notes receivable....................... 4,046 76 177
Net investment in direct financing
leases............................... 17,105 (446)
Land................................... 61,340 14,758 1,580 3,898 (341)
Buildings and leasehold improvements,
net.................................. 75,339 59,032 6,322 14,331 (191)
Machinery and equipment, net........... 2,980
Intangibles, net....................... 12,263 (340)
----------- ------------- ------ ------- ------
$ 177,418 $ 73,586 $ 7,898 $ 18,107 $ 1,574
----------- ------------- ------ ------- ------
----------- ------------- ------ ------- ------
LIABILITIES AND PARTNERS' CAPITAL/STOCKHOLDERS' EQUITY
Accounts payable....................... $ 2,697 $ $ $ $
Deferred gain.......................... 590
Line of credit and other long term
debt................................. 69,486 64,266 18,107
Capitalized lease obligations.......... 362
General Partners' capital.............. 1,163 31
Limited Partners' capital.............. 103,120 9,320 7,898 1,543
Stockholders' equity...................
----------- ------------- ------ ------- ------
$ 177,418 $ 73,586 $ 7,898 $ 18,107 $ 1,574
----------- ------------- ------ ------- ------
----------- ------------- ------ ------- ------
<CAPTION>
REIT COMPANY
CONVERSION PRO FORMA
----------- -----------
<S> <C> <C>
ASSETS
Cash................................... $ 1(e) $ 3,443
Receivables, net....................... 2,117
Purchase deposits...................... 156
Prepaid expenses....................... 403
Deferred rent receivable............... 536
Notes receivable....................... 4,299
Net investment in direct financing
leases............................... 16,659
Land................................... 81,235
Buildings and leasehold improvements,
net.................................. 154,833
Machinery and equipment, net........... 2,980
Intangibles, net....................... 11,923
----------- -----------
$ 1 $ 278,584
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL/STOCK
Accounts payable....................... $ 580(f) $ 3,277
Deferred gain.......................... 590
Line of credit and other long term
debt................................. 151,859
Capitalized lease obligations.......... 362
General Partners' capital.............. (1,194)(g)
Limited Partners' capital.............. (121,881)(g)
Stockholders' equity................... 122,496(h) 122,496
----------- -----------
$ 1 $ 278,584
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(a) Reflects pro forma adjustments for 1997 acquisitions completed since
December 31, 1996 which consist of the purchase of 121 properties as
follows:
<TABLE>
<S> <C> <C>
Arby's................................................................................. 76 $ 45,472
Bruegger's Bagels...................................................................... 16 11,010
Chi Chi's.............................................................................. 1 1,419
Old Chicago Pizza...................................................................... 1 909
Pizza Hut.............................................................................. 8 4,633
Schlotzsky's........................................................................... 6 4,916
Other.................................................................................. 13 5,431
--- ---------
121 $ 73,790
--- ---------
--- ---------
Total of land, buildings and leasehold improvements and machinery and equipment........ $ 73,790
Note receivable........................................................................ 76
Less purchase deposit previously paid.................................................. (280)
Less 340,804 Units issued.............................................................. (9,320)
---------
Increase in line of credit and other long term debt.................................... $ 64,266
---------
---------
</TABLE>
The respective purchase price for the properties has been allocated between
land ($14,758) and buildings and leasehold improvements ($59,032) on a
preliminary basis. Final determination of the proper allocation between
these accounts will be made prior to finalizing the financial statements for
the year ended December 31, 1997. Management does not expect material
adjustments to occur.
F-4
<PAGE>
(b) Reflects the pro forma adjustments for QSR's properties which are comprised
of 16 properties. The total purchase price plus appropriate capitalized
costs are as follows:
<TABLE>
<S> <C> <C>
16 properties........................................................................ $ 7,721
Acquisition costs.................................................................... 181
---------
Total land, buildings and leasehold improvements..................................... 7,902
Notes receivable..................................................................... 177
---------
8,079
Less purchase deposit previously paid................................................ (350)
Less 277,131 Units issued............................................................ (7,898)
---------
Cash excess (deposit return less acquisition costs).................................. $ 169
---------
---------
</TABLE>
The respective purchase price for the properties has been allocated between
land ($1,580) and buildings and leasehold improvements ($6,322) on a
preliminary basis. Final determination of the property allocation between
these accounts will be made prior to finalizing the financial statements for
the year ended December 31, 1997. Management does not expect material
adjustments to occur.
(c) Reflects the pro forma adjustments for the properties under binding
contracts as of April 30, 1997 which are comprised of 25 properties as
follows:
<TABLE>
<CAPTION>
NUMBER OF PROPERTIES PURCHASE PRICE
------------------------- --------------
<S> <C> <C>
Bruegger's Bagels........................................................... 1 $ 752
Dairy Queen................................................................. 1 472
Hardees..................................................................... 3 1,376
Other....................................................................... 20 15,629
--
-------
25 18,229
--
--
Less purchase deposits previously paid...................................... (122)
-------
Increase in line of credit and other long-term debt......................... $ 18,107
-------
-------
</TABLE>
The respective purchase price for the properties has been allocated between
land ($3,898) and buildings and leasehold improvements ($14,331) on a
preliminary basis. Final determination of the property allocation between
these accounts will be made prior to finalizing the financial statements for
the year ended December 31, 1997. Management does not expect material
adjustments to occur.
(d) Reflects the pro forma adjustments for four properties which are for sale
under a binding contract.
(e) Reflects pro forma adjustment for the contribution of $1 by QSV Properties
to capitalize the REIT Corporation.
(f) Reflects the costs associated with the REIT conversion including legal,
filing, printing, fairness opinion and related costs.
(g) Reflects pro forma adjustments to convert the General Partner's and limited
partners' capital accounts into stockholders' equity. It is assumed that the
Units owned by the limited partners will immediately be converted to the
REIT Corporation's shares.
(h) Reflects the following pro forma adjustment to stockholders' equity relating
to the Managing General Partner's conversion of its Property Management
Contract or the assignment thereof to USRP (depending upon how the
Conversion is effected) and converting its aggregate 1.98% Partnership
Interests into 850,000 shares of Common Stock or its equivalent in a limited
partner interest in the Operating Partnership or Units (depending upon how
the Conversion is effected) with the common stock valued at the current
market price (assumed $28.50 per share):
<TABLE>
<S> <C>
Value of 850,000 Initial Shares of Common Stock or its equivalent in interests in the
Partnerships (at $28.50 per share current market value) issued to the Managing General
Partner.................................................................................... $ 24,225
Cost of property management contract to be expensed......................................... (23,031)
REIT organization costs to be expensed...................................................... (580)
Equity related to Limited Partners upon Conversion.......................................... 121,881
REIT Corporation equity..................................................................... 1
---------
$ 122,496
---------
---------
</TABLE>
F-5
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS AND UNITS/SHARES IN THOUSANDS,
EXCEPT FOR PER UNIT AND SHARE DATA)
<TABLE>
<CAPTION>
U.S. RESTAURANT PROPERTIES MASTER L.P.
--------------------------------------------------------------
OTHER PROPERTIES
QSR'S UNDER CONTRACT
HISTORICAL PURCHASES(A) PROPERTIES(B) TO PURCHASE(C)
----------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
Total Revenues..................................... $ 18,324 $ 16,186 $ 1,327 $ 2,162
Expenses:
Rent............................................. 2,080 329 115
Depreciation and amortization.................... 3,978 4,914(e) 337(e) 637(g)
Taxes, general and administrative................ 2,461 1,433(g) 45(g) 227(g)
Interest expense (income), net................... 2,364 7,410(i) 19(i) 1,462(i)
----------- ------------- ------ ------
Total expenses................................... 10,883 14,086 516 2,326
----------- ------------- ------ ------
Gain on sale of equipment.......................... 32
----------- ------------- ------ ------
Net income......................................... $ 7,473 $ 2,100 $ 811 $ (164)
----------- ------------- ------ ------
----------- ------------- ------ ------
Net income allocable to unitholders................ $ 7,325
Average number of units/shares outstanding......... 6,107 341 277(j)
Net income per unit/share.......................... $ 1.20
<CAPTION>
PROPERTY
UNDER CONTRACT REIT COMPANY
FOR SALE(L) CONVERSION(D) PRO FORMA
----------------- --------------- -----------
<S> <C> <C> <C>
Total Revenues..................................... $ (280) $ $ 37,719
Expenses:
Rent............................................. 2,524
Depreciation and amortization.................... (43) (87)(f) 9,736
Taxes, general and administrative................ (2,232)(h) 1,935
Interest expense (income), net................... 11,254
----- ------- -----------
Total expenses................................... (43) (2,319) 25,449
----- ------- -----------
Gain on sale of equipment.......................... 32
----- ------- -----------
Net income......................................... $ (237) $ 2,319 $ 12,302
----- ------- -----------
----- ------- -----------
Net income allocable to unitholders................
Average number of units/shares outstanding......... 851(k) 8,363
Net income per unit/share.......................... $ 1.47
</TABLE>
- ------------------------------
(a) Reflects pro forma adjustments to operations for the 1996 acquisitions,
comprised of 184 properties acquired on various dates from January 1, 1996
through December 31, 1996 and the 1997 acquisitions comprised of 121
properties acquired on various dates from January 1, 1997 through April 30,
1997.
(b) Reflects pro forma adjustments for QSR's 16 properties based on historical
information.
(c) Reflects the pro forma adjustments for 25 properties under binding contracts
as of April 30, 1997 with other sellers based on historical information.
(d) Reflects pro forma adjustments relating to the effects of the Managing
General Partner's assignment of its Property Management Contract to the
Operating Partnership or USRP (depending upon how the Conversion is
effected).
No adjustment is shown for the cost of terminating the Managing General
Partner's property management contract estimated to be $23,031 or for the
legal, filing, printing, fairness opinion and related costs of completing
the REIT conversion estimated to be $580 since both of these amounts are
considered to be nonrecurring expenses. Costs related to the reorganization
will be charged to expense in the period incurred and the cost related to
the property management contract will be expensed at the time the contract
is terminated.
(e) Reflects pro forma increase in depreciation expense related to the purchase
of the respective properties and the related capitalization of fees and
commissions including fees paid or payable to the Managing General Partner.
Depreciation is computed using the straight line method and estimated useful
lives of buildings and leasehold improvements and machinery and equipment of
10 to 20 years.
(f) Reflects pro forma adjustment to depreciation and amortization expense. The
reduction in expense is due to a decrease in fees paid to the Managing
General Partner assuming the Property Management Contract is terminated.
Such fees consist of 1% of the contracted purchase price for the respective
properties which is capitalized as part of the purchase price.
(g) Reflects pro forma increase in general and administrative expenses
attributable to the increase in fees due to the Managing General Partner.
Such increase is comprised of 1% of the contracted purchase price for the
respective properties and 25% of the cash flow received with respect to such
additional properties in excess of the cash flow representing a 12% annual
rate of return.
(h) Pro forma adjustments to general and administrative expense are comprised of
the following:
<TABLE>
<S> <C>
Decrease in management fees................................................................................ $ (2,982)
Increase in payroll expenses (currently being paid by the Managing General Partner)........................ 750
---------
Net decrease............................................................................................... $ (2,232)
---------
---------
</TABLE>
All other general and administrative expenses are not expected to increase
as a result of the conversion to a REIT since the Partnership is already a
public entity exempt from federal income taxes.
F-6
<PAGE>
(i) Reflects the pro forma adjustment to interest expense as a result of the
purchase of the respective properties. Pro forma interest expense is based
on the increase in debt outstanding and borrowings for payment of
distributions on units issued on a pro forma basis using interest rates
based on the Partnership's credit arrangements which are as follows:
<TABLE>
<CAPTION>
PRINCIPAL
-----------
<S> <C>
Series A Senior Secured Guaranteed Notes...................................................................... $ 12,500
Series B Senior Secured Guaranteed Notes...................................................................... 27,500
Line of credit................................................................................................ 95,000
<CAPTION>
INTEREST
RATE
-----------
<S> <C>
Series A Senior Secured Guaranteed Notes...................................................................... 8.00%
Series B Senior Secured Guaranteed Notes...................................................................... 8.30%
Line of credit................................................................................................ 7.18%
</TABLE>
Additional borrowings are estimated at a rate of 8.5% based upon the
additional debt agreements the Company is in the process of negotiating.
(j) Reflects pro forma adjustments for Partnership Units to be issued to QSR in
exchange for QSR's 16 properties established as follows:
<TABLE>
<S> <C>
Purchase price............................................................................................ $ 7,898
Market value of shares at January 6, 1997................................................................. $ 28.50
Partnership Units to be issued............................................................................ 277,131
</TABLE>
(k) Pro forma adjustment reflects the 850 Initial shares of Common Stock or its
equivalent in interests in the Partnerships to be issued to the Managing
General Partner for its interests in the Partnerships and termination of its
property management contract and shares of Common Stock issued by the REIT
Corporation to the Managing General Partner upon formation of the REIT
Corporation at $1 per share.
(l) Reflects the pro forma adjustments relating to a property which is for sale
under a binding contract.
F-7
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholder of
U.S. Restaurant Properties, Inc.
We have audited the accompanying balance sheet of U.S. Restaurant Properties,
Inc. as of February 4, 1997. This balance sheet is the responsibility of the
management of U.S. Restaurant Properties, Inc. Our responsibility is to express
an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of U.S. Restaurant Properties, Inc. at February 4, 1997,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 5, 1997
F-8
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
BALANCE SHEET
FEBRUARY 4, 1997
ASSETS
<TABLE>
<S> <C>
Cash........................................................................ $ 1,000
---------
---------
STOCKHOLDER'S EQUITY
Preferred stock, $.001 par value per share; 10,000,000 shares authorized, no
shares issued.............................................................
Common Stock, $.001 par value per share; 45,000,000 shares authorized; 1,000
shares issued and outstanding............................................. $ 1
Excess Stock, $.001 par value per share; 5,000,000 shares authorized, no
shares
issued....................................................................
Additional paid-in capital.................................................. 999
---------
$ 1,000
---------
---------
</TABLE>
See Notes to Balance Sheet.
F-9
<PAGE>
U.S. RESTAURANT PROPERTIES, INC.
NOTES TO BALANCE SHEET
FEBRUARY 4, 1997
1. ORGANIZATION
U.S. Restaurant Properties, Inc. (the "Company") is a newly-organized
Maryland corporation formed to continue the restaurant property management
operations of U.S. Restaurant Properties Master, L.P. (collectively, with its
subsidiaries, "USRP"). The Company is authorized to issue up to 45,000,000
shares of common stock, par value $.001 per share (the "Common Stock"),
10,000,000 shares of Preferred Stock, par value $.001 per share (the "Preferred
Stock") and 5,000,000 shares of Excess Stock, par value $.001 per share.
Pursuant to the Company's Articles of Incorporation (the "Articles"), any
purported transfer of shares of Common Stock or Preferred Stock that would
result in a person owning shares of Common Stock or Preferred Stock in excess of
certain limits set out in Articles will result in the shares subject to such
purported transfer being automatically exchanged for an equal number of shares
of Excess Stock.
The Company was capitalized upon the sale of 1,000 shares of Common Stock
for $1,000 to QSV Properties, Inc. ("QSV"). The Company will be a self-advised
real estate investment trust ("REIT") formed to continue the restaurant property
management, acquisition and development operations, related business objectives
and strategies of USRP. The consolidated financial statements of U.S. Restaurant
Properties, Inc. will include the operations of USRP. The Company intends to
qualify as a REIT as defined under the Internal Revenue Code of 1986, as
amended.
2. BUSINESS
The Company shall invest in U.S. Restaurant Properties Operating, L.P. (the
"Operating Partnership" and, together with USRP, the "Partnerships"), which will
include and continue all operations of USRP. The purpose of this investment is
to facilitate the conversion of USRP's ownership structure from a master limited
partnership to a REIT. The Company was formed on February 4, 1997 and will not
have any operations until the Conversion is effected.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company shall succeed to the operations of USRP, and accordingly, will
follow all accounting principles established by USRP in addition to the
following:
INCOME TAXES - Provisions for income taxes will be made in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109").
4. SUBSEQUENT EVENTS
QSV has agreed to convert the Operating Partnership General Partnership
Interest and QSV's general partner interest in USRP in exchange for 850,000
shares or its equivalent in interests in the Partnerships. An additional 550,000
shares or its equivalent in interests in the Partnerships may be issued to QSV
if certain earnings targets are met by the year 2000. QSV is an entity that is
primarily owned by Mr. Robert J. Stetson and Mr. Fred H. Margolin.
The Company intends to enter into employment agreements with Messrs. Stetson
and Margolin. The agreements will be for three years, beginning with the closing
of the Acquisition. Pursuant to the Employment Agreements, Mr. Stetson will
serve as President and Chief Executive Officer of the Company and Mr. Margolin
will serve as Chairman of the Board, Secretary and Treasurer of the Company for
compensation commencing at $250,000 per year, subject to increases (up to a
maximum annual salary and cash bonus of $300,000 until the end of the year
2000).
F-10
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
INDEPENDENT AUDITORS' REPORT
The Partners
U.S. Restaurant Properties Master L.P.
We have audited the accompanying consolidated balance sheets of U.S.
Restaurant Properties Master L.P. (the Partnership) as of December 31, 1996 and
1995, and the related consolidated statements of income, partners' capital, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of U.S. Restaurant Properties
Master L.P. as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 1997
F-11
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Cash and equivalents....................................................................... $ 7 $ 381
Receivables, net (includes $188 in 1996 from related parties).............................. 951 2,117
Deferred rent receivable................................................................... -- 536
Purchase deposits.......................................................................... 1,792 908
Prepaid expenses........................................................................... 315 403
Notes receivable........................................................................... -- 1,308
Notes receivable--related parties.......................................................... 269 2,738
Net investment in direct financing leases.................................................. 19,371 17,105
Land....................................................................................... 27,493 61,340
Buildings and leasehold improvements, net.................................................. 7,900 75,339
Machinery and equipment, net............................................................... 224 2,980
Intangibles, net........................................................................... 13,161 12,263
--------- ----------
$ 71,483 $ 177,418
--------- ----------
--------- ----------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable (includes $416 and $187 due to the Managing General Partner).............. $ 677 $ 2,642
Deferred rent payable...................................................................... -- 55
Deferred gain on sale of property.......................................................... -- 590
Lines of credit............................................................................ 10,931 69,486
Capitalized lease obligations.............................................................. 563 362
Commitments (Notes 8 and 9)................................................................
General Partners' capital.................................................................. 1,241 1,163
Limited Partners' capital.................................................................. 58,071 103,120
--------- ----------
$ 71,483 $ 177,418
--------- ----------
--------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER-UNIT DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES FROM LEASED PROPERTIES
Rental income..................................................................... $ 6,340 $ 7,540 $ 16,346
Amortization of unearned income on direct financing leases........................ 2,453 2,240 1,978
--------- --------- ---------
Total Revenues.................................................................... 8,793 9,780 18,324
EXPENSES
Rent.............................................................................. 1,348 1,405 2,080
Depreciation and amortization..................................................... 1,361 1,541 3,978
Taxes, general and administrative (includes $542, $164 and $1,268 in 1994, 1995
and 1996, respectively, for services of the Managing General Partner)........... 1,144 1,419 2,461
Interest expense (income), net.................................................... (4) 192 2,364
Provision for write-down or disposition of properties............................. 11 -- --
--------- --------- ---------
Total Expenses.................................................................... 3,860 4,557 10,883
Gain on sale of equipment........................................................... -- -- 32
--------- --------- ---------
Net income.......................................................................... $ 4,933 $ 5,223 $ 7,473
--------- --------- ---------
--------- --------- ---------
Net income allocable to unitholders................................................. $ 4,834 $ 5,119 $ 7,325
--------- --------- ---------
--------- --------- ---------
Average number of outstanding units................................................. 4,635 4,638 6,107
--------- --------- ---------
--------- --------- ---------
Net income per unit................................................................. $ 1.04 $ 1.10 $ 1.20
--------- --------- ---------
--------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL LIMITED
UNITS PARTNERS PARTNERS TOTAL
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1994............................................. 4,635 $ 1,357 $ 62,757 $ 64,114
Net income............................................................. -- 99 4,834 4,933
Cash distributions..................................................... -- (148) (7,230) (7,378)
--------- ----------- ---------- ----------
Balance at December 31, 1994........................................... 4,635 1,308 60,361 61,669
--------- ----------- ---------- ----------
Special general partner interest transfer.............................. -- (13) (3) (16)
Net income............................................................. -- 104 5,119 5,223
Purchase of partnership units.......................................... (30) -- (547) (547)
Units issued for property.............................................. 54 -- 985 985
Cash distributions..................................................... -- (158) (7,844) (8,002)
--------- ----------- ---------- ----------
Balance at December 31, 1995........................................... 4,659 1,241 58,071 59,312
--------- ----------- ---------- ----------
Net income............................................................. -- 148 7,325 7,473
Units issued for property.............................................. 385 -- 7,912 7,912
Proceeds from units issued in public offering.......................... 1,800 -- 40,203 40,203
Proceeds from exercised unit options................................... 50 -- 775 775
Cash distributions..................................................... -- (226) (11,166) (11,392)
--------- ----------- ---------- ----------
Balance at December 31, 1996........................................... 6,894 $ 1,163 $ 103,120 $ 104,283
--------- ----------- ---------- ----------
--------- ----------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-14
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................................................... $ 4,933 $ 5,223 $ 7,473
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization................................................... 1,361 1,541 3,978
Amortization of deferred financing costs........................................ -- -- 162
Other, net...................................................................... (843) 854 (32)
Increase in receivables, net.................................................... (301) (236) (1,166)
Increase in prepaid expenses.................................................... (36) (192) (88)
Increase in deferred rent receivable............................................ -- -- (536)
Reduction in net investment in direct financing leases.......................... 1,673 1,866 2,041
Increase in accounts payable.................................................... 203 232 1,965
Increase in deferred rent payable............................................... -- -- 55
--------- --------- ----------
2,057 4,065 6,379
--------- --------- ----------
Cash provided by operating activities........................................... 6,990 9,288 13,852
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.................................... -- -- 122
Purchase of property............................................................ -- (9,746) (95,918)
Purchase of machinery and equipment............................................. -- (232) (3,032)
Purchase deposits (paid) used................................................... -- (1,792) 884
Increase in notes receivable.................................................... -- (269) (3,034)
--------- --------- ----------
Cash used in investing activities............................................... -- (12,039) (100,978)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Loan origination costs and other intangibles.................................... -- (77) (440)
Payments on capitalized lease obligations....................................... (191) (212) (201)
Proceeds from line of credit.................................................... -- 12,453 104,805
Payments on line of credit...................................................... -- (1,522) (46,250)
Cash distributions.............................................................. (7,378) (8,002) (11,392)
Purchase of partnership units................................................... -- (547) --
Purchase of special general partner interest.................................... -- (16) --
Proceeds from issuance of units................................................. -- -- 40,978
--------- --------- ----------
Cash provided by (used in) financing activities................................. (7,569) 2,077 87,500
--------- --------- ----------
Increase (decrease) in cash and equivalents..................................... (579) (674) 374
Cash and equivalents at beginning of year....................................... 1,260 681 7
--------- --------- ----------
Cash and equivalents at end of year............................................. $ 681 $ 7 $ 381
--------- --------- ----------
--------- --------- ----------
SUPPLEMENTAL DISCLOSURE:
Interest paid during the year................................................... $ 90 $ 256 $ 2,431
--------- --------- ----------
--------- --------- ----------
NONCASH INVESTING ACTIVITIES
Units issued for property....................................................... $ -- $ 985 $ 7,912
--------- --------- ----------
--------- --------- ----------
Deferred gain on sale of property............................................... $ -- $ -- $ 590
--------- --------- ----------
--------- --------- ----------
Note received on sale of property............................................... $ -- $ -- $ 743
--------- --------- ----------
--------- --------- ----------
Sale of property on direct financing lease...................................... $ -- $ -- $ 225
--------- --------- ----------
--------- --------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-15
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER-UNIT AMOUNTS)
1. ORGANIZATION
U.S. Restaurant Properties Master L.P (Partnership), formerly Burger King
Investors Master L.P, a Delaware limited partnership, was formed on December 10,
1985. The Partnership, through its 99.01% limited partnership interest in U.S.
Restaurant Properties Operating L.P. (Operating Partnership), also a Delaware
limited partnership, acquired from Burger King Corporation (BKC) in February
1986 for $94,592 an interest in 128 restaurant properties owned or leased by BKC
and leased or subleased on a net lease basis to BKC franchisees. The Partnership
is the sole limited partner of the Operating Partnership, and they are referred
to collectively as the "Partnerships" or the "Partnership." QSV Properties,
Inc., (QSV), formerly U.S. Restaurant Properties, Inc., the managing general
partner, and BKC, the special general partner, were both indirect wholly-owned
subsidiaries of Grand Metropolitan PLC prior to May 17, 1994, at which time QSV
was sold to the current owners. On January 20, 1995, the Partnership paid Burger
King Corporation $16 for its 0.02% interest in the Operating and Master Limited
Partnership.
In 1996, the Partnership established certain other wholly owned operating
entities consisting of U.S. Restaurant Properties Business Trust I, U.S.
Restaurant Properties Business Trust II, Restaurant Acquisition Corporation,
Restaurant Renovation Partners L.P., U.S. Restaurant Properties West Virginia
Partners L.P., U.S. Restaurant Properties Carolina LTD., U.S. Restaurant
Properties Lincoln LTD., and U.S. Restaurant Properties Norman LTD.
Collectively, these entities in addition to the Partnerships are referred to as
the "Company." All of these entities are included in the consolidated financial
statements.
The Partnership may issue an unlimited number of units. The units
outstanding as of December 31, 1995 and 1996, totaled 4,659,167 and 6,894,003,
respectively.
QSV Properties, Inc. (formerly named U.S. Restaurant Properties, Inc.) is
the Managing General Partner of the Partnership.
2. ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles; however, this will not be the basis
for reporting taxable income to unitholders (see Note 10 for a reconciliation of
financial reporting income to taxable income). The consolidated financial
statements reflect the accounts of the Company after elimination of significant
inter-entity transactions.
Cash and equivalents include short-term, highly liquid investments with
maturities at the date of purchase of three months or less.
An intangible asset was recorded for the excess of cost over the net
investment in direct financing leases in 1986. This intangible asset represents
the acquired value of future contingent rent receipts (based on a percentage of
each restaurant's sales) and is being amortized on a straight-line basis over 40
years. The Company's management routinely reviews the carrying amount of
intangibles based on projected cash flows. Based on the Company's policy for
evaluating impairment of intangibles, no valuation allowance was recorded as of
December 31, 1995 and 1996.
Rent revenues and expenses under operating leases are recognized on a
straight-line basis.
DEPRECIATION
Depreciation is computed using the straight-line method over estimated
useful lives of 6 to 20 years for financial reporting purposes. Accelerated and
straight-line methods are used for tax purposes.
F-16
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect reported amounts of certain assets, liabilities,
revenues and expenses as of and for the reporting periods. Actual results may
differ from such estimates.
LONG-LIVED ASSETS
Long-lived assets include real estate, direct financing leases and
intangibles which are evaluated on an individual property basis. The
Partnership's management routinely reviews its investments for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Based on the Company's policy for reviewing
impairment of long-lived assets, no valuation allowance was recorded as of
December 31, 1995 and 1996.
INCOME TAXES
No federal or, in most cases, state income taxes are reflected in the
consolidated financial statements because the Partnerships are not taxable
entities. The partners must report their allocable shares of taxable income or
loss in their individual income tax returns.
EQUITY-BASED COMPENSATION
In 1995, Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123), was issued, effective for fiscal years
beginning after December 15, 1995. This Statement requires companies to use
recognized option pricing models to estimate the fair value of equity-based
compensation, including options. This Statement also applies to transactions in
which an entity issues its equity instruments to acquire goods or services from
non-employees. Those transactions must be accounted for based on the fair value
of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. The Company has elected not to
recognize compensation expense for employee equity-based compensation as
calculated under SFAS 123, but will recognize any related expense in accordance
with the provisions of APB Opinion No. 25. Disclosure of amounts required by
SFAS 123 is included in Note 6.
ENVIRONMENTAL REMEDIATION COSTS
The Company accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Accruals for
estimated losses from environmental remediation obligations generally are
recognized no later than completion of the remediation feasibility study. Such
accruals are adjusted as further information develops or circumstances change.
Recoveries of environmental remediation costs from other parties are recorded as
assets when their receipt is deemed probable. Company management is not aware of
any environmental remediation obligations which would materially affect the
operations, financial position or cash flows of the Company.
In 1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1, "Environmental Remediation Liabilities" (SOP 96-1),
which provides guidance for the recognition, measurement, display and disclosure
of environmental remediation liabilities. The Company will adopt the provisions
of SOP 96-1 in 1997, as required, and does not expect such adoption to have a
material impact on its results of operations, financial position or cash flows.
F-17
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
3. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value was determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is necessary to interpret market
data and develop the related estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that could be
realized upon disposition of the financial instruments. The use of different
market assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
Cash and equivalents, receivables (including deferred rent receivable),
accounts payable (including deferred rent payable), and the line of credit are
carried at amounts that approximate their fair value.
The fair value of notes receivable totaling $269 and $4,046 as of December
31, 1995 and 1996, respectively, have a fair value of $269 and $3,672,
respectively, as based upon interest rates for notes with similar terms and
remaining maturities.
The fair value estimates presented herein are based on information available
to management as of December 31, 1995 and 1996. Although management is not aware
of any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date, and current estimates of fair value may
differ significantly from the amounts presented herein.
4. OTHER BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1995 1996
---------- ----------
<S> <C> <C>
RECEIVABLES, NET
Receivables........................................... $ 1,068 $ 2,234
Less allowance for doubtful accounts.................. (117) (117)
---------- ----------
$ 951 $ 2,117
---------- ----------
---------- ----------
BUILDINGS AND LEASEHOLD IMPROVEMENTS, NET
Buildings and leasehold improvements.................... $ 10,545 $ 80,528
Less accumulated depreciation........................... (2,645) (5,189)
---------- ----------
$ 7,900 $ 75,339
---------- ----------
---------- ----------
MACHINERY AND EQUIPMENT, NET
Machinery and equipment................................. $ 232 $ 3,244
Less accumulated depreciation........................... (8) (264)
---------- ----------
$ 224 $ 2,980
---------- ----------
---------- ----------
INTANGIBLES, NET
Intangibles........................................... $ 26,515 $ 27,003
Less accumulated amortization......................... (13,354) (14,740)
---------- ----------
$ 13,161 $ 12,263
---------- ----------
---------- ----------
</TABLE>
F-18
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. OTHER BALANCE SHEET INFORMATION (CONTINUED)
Total purchase deposits of $1,792 and $908 at December 31, 1995 and 1996,
respectively, included $1,075 and $167 of nonrefundable deposits, respectively.
5. PROPERTY ACQUISITIONS AND DISPOSITIONS
In March 1995, the Partnership agreement was amended to expand the purpose
of the Partnership and allow for the diversification of the Partnership's
restaurant property portfolio through the acquisition of additional fast-food
and casual dining restaurant properties. Since the amendment in March 1995, the
Partnership has acquired 200 restaurant properties.
During 1996, the Company completed the purchase of 184 restaurant properties
for an aggregate purchase price of $105,336 including the value of 384,836
Partnership Units issued as part of the aggregate purchase price. Three
restaurant properties were purchased with only Partnership Units; five
restaurant properties were purchased with a combination of cash and Partnership
Units; and 166 restaurant properties were purchased with only cash. The 184
restaurant properties include 45 Burger King restaurants, 40 Dairy Queen
restaurants, 30 Grandy's restaurants, 25 Hardee's restaurants, 12 Pizza Hut
restaurants, two KFC restaurants, six Schlotzsky's restaurants, six Chili's
restaurants and 18 regional brand restaurants. The 384,836 Partnership Units
issued in four of these transactions have guaranteed Partnership Unit values
(see Note 6).
During 1995, the Partnership completed the purchase of 16 restaurant
properties for an aggregate purchase price of $10,731, including the value of
54,167 Partnership Units issued. The 16 restaurant properties include 9 Burger
King restaurant properties, two Chili's restaurant properties and five regional
brand restaurant properties. The 54,167 Partnership Units issued include
provisions for guaranteed Partnership Unit values in the future (see Note 6).
During 1996, the Company sold one restaurant property for $815. The Company
received cash of $72 and a note from the buyer of $743. In accordance with
Statement of Financial Accounting Standards No. 66, "Accounting for Real Estate
Sales," the Company recorded a deferred gain on the sale of $590.
On December 31, 1996, the Company owned land at 243 restaurant properties
and leased the land at 79 restaurant properties from third-party lessors under
operating leases. The Company in turn leased or subleased the land primarily to
fast-food and casual dining restaurant operators under operating leases.
On December 31, 1996, the Company owned the buildings on 277 restaurant
properties and leased the buildings on 14 restaurant properties from third-party
lessors under leases accounted for as capital leases. The Company owns 31
restaurant properties in which only the land is owned and leased. The Company
leased 183 buildings to franchisees under operating leases. These 183 buildings
are stated at cost, net of accumulated depreciation, on the balance sheet. A
total of 108 buildings are leased primarily to franchisees under direct
financing leases. The net investment in the direct financing leases represents
the present value of the future minimum lease receipts for these 108 buildings.
One restaurant property was sold during 1996.
On December 31, 1995 and 1996, there were 138 and 321 Company restaurant
sites respectively, in operation, and there was one closed site. The Company
continues to seek a suitable tenant for the remaining site. The write-down of
the closed site was $11 in 1994. No write-downs were recorded in 1995 or 1996.
F-19
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY ACQUISITIONS AND DISPOSITIONS (CONTINUED)
In the normal course of business, the Company may sign purchase agreements
to acquire restaurant properties. Such agreements become binding obligations
upon the completion of a due diligence period ranging usually from 15-30 days.
On December 31, 1996, earnest money purchase deposits amounting to $908 were
on deposit for the purchase of six Pizza Hut restaurants, four Schlotzsky's
restaurants, three Wendy's restaurants, two Arby's restaurants, two Hardee's
restaurants, one Taco Bell restaurant, one Kentucky Fried Chicken restaurant and
19 other regional chain restaurants.
6. PARTNERSHIP UNIT OPTIONS AND GUARANTEED STOCK PRICE
Three restaurant properties were acquired on October 10, 1995, with a
combination of cash and 54,167 Units. The Units are guaranteed to have a value
of $24 per unit three years from the transaction date. The unit price on the
date issued was $18.375. Any difference between the guaranteed value and the
actual value of the units at the end of the three-year period is to be paid in
cash. These properties were recorded at the guaranteed value of the Units
discounted to reflect the present value on the date the Units were issued.
During 1996, 384,836 Partnership Units were used to purchase 18 of the 184
properties in four separate transactions. Of the 384,836 Partnership Units
issued, 324,575 Partnership Units are guaranteed to have a market value of $24
per unit two years from the transaction date, 28,261 Partnership Units are
guaranteed to have a market value of $23 per unit three years from the
transaction date and 32,000 Partnership Units are guaranteed to have a value of
$25 per unit two years from the transaction date. The accounting described in
the paragraph above was used to record these transactions.
The Partnership has one fixed option plan. Under this plan, the Limited
Partners on March 17, 1995 granted the Managing General Partner options to
acquire up to 400,000 Partnership Units, subject to certain adjustments under
antidilution provisions. The exercise price of each option is $15.50 which is
the average closing price of the depository receipts for the Partnership Units
on the New York Stock Exchange for the five trading days immediately after the
date of grant. The options are nontransferable except by operation of law and
vest and became exercisable in March 1996. The term of the options expires in
March 2005. As of December 31, 1996, the Managing General Partner had exercised
50,000 Partnership Units at the option price of $15.50 for a total purchase
price of $775.
In accordance with SFAS 123, the fair value of each option is estimated on
the date of the grant using the binomial option-pricing model with the following
weighted-average assumptions: dividend yield of 7.3% for all years; expected
volatility of 17.8%, risk free interest rate of 5.7% for the options; and
expected lives of 4 years for the plan options.
As of March 17, 1995, the 400,000 options which are described above had a
fair value as of the grant date of $724 representing a value per option of
$1.81.
Under the fixed option plan, if these options were considered as
compensation, net income would have been $4,680 and $7,292 as of December 31,
1995 and 1996, respectively. Net income per unit would have been $0.99 and $1.17
as of December 31, 1995 and 1996, respectively.
F-20
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LINES OF CREDIT
On December 31, 1995 and 1996, $10,931 and $65,396, respectively, had been
drawn on the Company's primary line of credit. The Company's line of credit was
increased to $95,000 in December 1996 and matures on December 23, 1998.
Substantially all properties are included as collateral on this line of credit.
The interest rate on this debt floats at 180 basis percentage points above
LIBOR. The effective interest rate at December 31, 1996, was 7.3625%. There is
an unused line of credit fee of .25% per annum of the average daily excess of
the commitment amount over the aggregate unpaid balance on the revolving loan
which is charged and is payable on a quarterly basis. The line of credit
requires the Company to maintain a combined tangible net worth, as defined in
the loan document, in excess of $85,000; maintain a combined GAAP Partners'
Capital, as defined in the loan document, of not less than $100,000; maintain a
cash flow coverage ratio of not less than .95 to 1 based upon a pro forma
five-year bank debt amortization; and maintain certain other financial covenants
as defined in the loan agreement. The Company's management believes it is in
compliance with all loan provision requirements as of December 31, 1996. On
December 31, 1996, the balance available on the line of credit equaled $29,600
(considers $400 subject to outstanding letter of credit).
A revolving credit facility of $20,000 was established with a national
mortgage company on April 29, 1996. The interest rate on this credit facility
was LIBOR plus 300 basis points which resulted in an interest rate of 8.5625% at
December 31, 1996. This revolving credit facility is secured by approximately 63
properties. On December 31, 1996, the total amount due equaled $4,090. This
revolving credit facility was paid in full in January 1997 and no additional
draws are available.
8. INVESTMENTS AND COMMITMENTS AS LESSOR
The Company leases land and buildings to a variety of national and regional
fast-food chain and casual dining restaurants. The building portions on 108 of
these properties, which are leased by BKC franchisees, are accounted for as
direct financing leases while the land portions are operating leases. The leases
generally provide for a term of 20 years from the opening of the related
restaurant, and do not contain renewal options. The Partnerships, however, have
agreed to renew a franchise lease if BKC or any of their other franchise chains
renews or extends the lessee's franchise agreement.
As of December 31, 1996, the remaining lease terms of all leases described
in the above paragraph and in Note 5 ranged from 1 to 28 years and include
various renewal options. The leases provide for minimum rents and contingent
rents based on a percentage of each restaurant's sales and require the
franchisee to pay executory costs.
<TABLE>
<CAPTION>
DIRECT
FINANCING OPERATING
LEASES LEASES
----------- ----------
<S> <C> <C>
MINIMUM FUTURE LEASE RECEIPTS FOR YEARS ENDING DECEMBER 31:
1997................................................................ $ 4,071 $ 17,060
1998................................................................ 3,759 17,209
1999................................................................ 2,978 16,944
2000................................................................ 2,036 16,203
2001................................................................ 1,331 15,216
Later............................................................... 1,274 165,798
----------- ----------
$ 15,449 $ 248,430
----------- ----------
----------- ----------
</TABLE>
F-21
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS AND COMMITMENTS AS LESSOR (CONTINUED)
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
NET INVESTMENT IN DIRECT FINANCING LEASES AT DECEMBER 31:
Minimum future lease receipts....................................... $ 19,778 $ 15,449
Estimated unguaranteed residual values.............................. 7,562 7,437
Unearned amount representing interest............................... (7,969) (5,781)
----------- ----------
$ 19,371 $ 17,105
----------- ----------
----------- ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
RENTAL INCOME:
Minimum rental income......................................... $ 3,062 $ 3,584 $ 11,022
Contingent rental income...................................... 3,278 3,956 5,324
--------- --------- ---------
$ 6,340 $ 7,540 $ 16,346
--------- --------- ---------
--------- --------- ---------
</TABLE>
If Burger King properties are not adequately maintained during the term of
the tenant leases, of which there are 173, such properties may have to be
rebuilt before the leases can be renewed, either by the Company as it considers
necessary or pursuant to Burger King's successor policy. The successor policy,
which is subject to change from time to time in Burger King's discretion, is
intended to encourage the reconstruction, expansion or other improvement of
older Burger King restaurants and generally affects properties that are more
than ten years old or are the subject of a franchise agreement that will expire
within five years.
Under the current operating partnership agreement, Burger King can require
that a restaurant property be rebuilt. If the tenant does not elect to undertake
the rebuilding, the Partnership would be required to make the required
improvement itself. However, as a condition to requiring the Partnership to
rebuild, Burger King would be required to pay the Partnership its percentage
share ("Burger King's Percentage Share") of the rebuilding costs. Such
percentage share would be equal to (i) the average franchise royalty fee
percentage rate payable to Burger King with respect to such restaurant, divided
by (ii) the aggregate of such average franchise royalty fee percentage rate and
the average percentage rate payable to the Partnership with respect to such
restaurant property. The Managing General Partner believes that Burger King's
Percentage Share would typically be 29% for a restaurant property.
The Managing General Partner believes it is unlikely that any material
amount of rebuilding of Burger King restaurant properties will be required in
the next several years, if ever.
The Company believes that improving, expanding, rebuilding or replacing its
restaurant properties from time to time is important. In addition to normal
maintenance and repair requirements, each franchisee is required under BKC's
franchise agreement and lease/sublease, at its own cost and expense, to make
such alterations to a Burger King restaurant as may be reasonably required by
BKC from time to time to modify the appearance of the restaurant to reflect the
then current image requirements for Burger King restaurants. Most of the
properties that are operating as Burger King restaurants are 15 to 20 years old.
The Company believes that many of these properties require substantial
improvements to maximize sales and that their condition is below BKC's current
image requirements.
F-22
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENTS AND COMMITMENTS AS LESSOR (CONTINUED)
To encourage the early renewal of existing leases/subleases, the Company
recently established an "early renewal program" whereby the Company has offered
to certain tenants the right to renew existing leases/subleases for up to an
additional 20 years in consideration for remodeling financing. The purpose of
this program is to extend the term of existing leases/subleases prior to the end
of the lease term and enhance the value of the underlying property to the
Company. As a result of this program, the Company has extended the lease term
for 31 leases/subleases as a result of remodel grants and lease riders. Two
leases were renewed with loans. During 1996, the Company paid remodeling costs
of $1,118 in conjunction with this program.
9. COMMITMENTS
The land at 79 restaurant properties and the land and buildings at 14
restaurant properties are leased by the Company from third party lessors. The
building portions of the leases are generally capital leases while the land
portions are operating leases. These leases provide for an original term of 20
years and most are renewable at the Company's option. As of December 31, 1996,
the remaining lease terms (excluding renewal option terms) ranged from 1 to 15
years. If all renewal options are taken into account, the terms ranged from 5 to
35 years. Rents payable may escalate during the original lease and renewal
terms. For nine properties, the leases provide for contingent rent based on each
restaurant's sales.
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
MINIMUM FUTURE LEASE OBLIGATIONS FOR YEARS ENDING DECEMBER 31:
1997................................................................... $ 199 $ 2,103
1998................................................................... 140 2,145
1999................................................................... 60 1,930
2000................................................................... 4 1,675
2001................................................................... 1 1,248
Later.................................................................. -- 3,530
----- -----------
Total minimum obligations (a)............................................ 404 $ 12,631
-----------
-----------
Amount representing interest............................................. (42)
-----
Present value of minimum obligations..................................... $ 362
-----
-----
</TABLE>
- ------------------------
(a) Minimum Lease Obligations have not been reduced by minimum sublease rentals.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
RENTAL EXPENSE
Minimum rental expense......................................... $ 1,246 $ 1,304 $ 1,992
Contingent rental expense...................................... 102 101 88
--------- --------- ---------
$ 1,348 $ 1,405 $ 2,080
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-23
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS (CONTINUED)
On July 21, 1995, the Managing General Partner authorized the Partnership to
repurchase up to 300,000 of its units in the open market. Through December 31,
1996, the Partnership repurchased 30,000 Units for $547,000. No further
repurchases have been made or are contemplated.
During 1996, the Company agreed to make available to USRP Development
Company a revolving line of credit in the principal amount of $5,000, to be used
solely for paying for the acquisition and development of restaurant properties
which will be purchased by the Company upon completion of the development. The
line of credit is secured by certain development properties and bears interest
at an annual rate of 9%. The line of credit is payable in monthly installments
beginning July 1997 and matures in October 2001. At December 31, 1996, the
outstanding balance was $1,414 and is included in Notes Receivable--related
parties.
10. RECONCILIATION OF FINANCIAL REPORTING INCOME TO TAXABLE INCOME
Financial reporting income differs from taxable income primarily because
generally accepted accounting principles reflect the building portion of leases
from the Company to franchisees as a net investment in direct financing leases.
For tax purposes, these leases are treated as operating leases. In addition,
differences exist in depreciation methods and asset lives, and in the accounting
for escalating rents.
<TABLE>
<CAPTION>
FINANCIAL
REPORTING RECONCILING TAXABLE
INCOME DIFFERENCES INCOME
----------- ----------- ---------
<S> <C> <C> <C>
REVENUES FROM LEASED PROPERTIES:
Rental income............................................ $ 16,346 $ 3,485 $ 19,831
Amortization of unearned income on direct financing
leases................................................. 1,978 (1,978) --
----------- ----------- ---------
18,324 1,507 19,831
----------- ----------- ---------
EXPENSES:
Rent..................................................... 2,080 192 2,272
Depreciation and amortization............................ 3,978 1,242 5,220
General and administrative............................... 2,461 2,461
Interest expense (income), net........................... 2,364 (47) 2,317
----------- ----------- ---------
10,883 1,387 12,270
Gain on sale of properties and equipment................. 32 28 60
----------- ----------- ---------
Net income............................................... $ 7,473 $ 148 $ 7,621
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
11. RELATED PARTY TRANSACTIONS
The Managing General Partner is responsible for managing the business and
affairs of the Company. The Company pays the Managing General Partner a
non-accountable annual allowance (adjusted annually to reflect increases in the
Consumer Price Index and additions to the property portfolio), plus
reimbursement of out-of-pocket costs incurred to other parties for services
rendered to the Partnerships. The allowance for the years ended December 31,
1994, 1995 and 1996, was $542, $585 and $1,175, respectively. The Partnerships'
accounts payable balance includes $136, $187 and $416 for this allowance as of
December 31, 1994, 1995 and 1996, respectively. The Managing General Partner
paid no out-of-pocket costs to other parties on behalf of the Partnerships
during 1994, 1995, and 1996.
F-24
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RELATED PARTY TRANSACTIONS (CONTINUED)
To compensate the Managing General Partner for its efforts and increased
internal expenses with respect to additional properties, the Partnership pays
the Managing General Partner, with respect to each additional property purchased
(i) a one-time acquisition fee equal to one percent of the purchase price for
such property and (ii) an annual fee equal to one percent of the purchase price
for such property, adjusted for increases in the Consumer Price Index. For 1995
and 1996, the one-time acquisition fee equaled $109 and $1,043, respectively,
which was capitalized, and the increase in the non-accountable annual fee
equaled $29 and $495, respectively. In addition, if the Rate of Return (as
defined) 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. For 1996 this additional fee equaled $93 and there was no fee
paid in 1994 and 1995. However, to the extent such distributions are ultimately
received by the Managing General Partner in excess of those provided by its
1.98% Partnership interest, they will reduce the fee payable with respect to
such excess cash flow from any additional properties.
In 1994, the Partnerships with the consent and financial participation of
BKC, continued rent relief for three properties.
The Managing General Partner has agreed to make available to the Partnership
an unsecured, interest-free, revolving line of credit in the principal amount of
$500 to provide the Company with the necessary working capital to minimize or
avoid seasonal fluctuation in the amount of quarterly cash distributions. No
loans were made or were outstanding at any time during the years ended December
31, 1994, 1995 and 1996.
A note receivable of $255 and $267 is due from Arkansas Restaurants #10 L.P.
(Arkansas) at December 31, 1995 and 1996, respectively. The note receivable is
due on September 1, 1997, and has an interest rate of 9.0% per annum. At
December 31, 1996, tenant and other receivables from Arkansas were $63. In
addition, during 1996 the Company paid remodel costs of $443 on behalf of
Arkansas for three restaurants operated by Arkansas under the Company's
early-renewal program (see Note 8). The Managing General Partner of Arkansas
Restaurants #10 L.P. is owned by an officer of the Partnership's Managing
General Partner but receives no compensation for its services.
As of December 31, 1996, notes receivable of $920 are due from Southeast
Fast Food Partners, L.P. (SFF). The notes receivable are due on July 1, 1997
($57) and July 1, 1999 ($863) and have an interest rate of 9.0% per annum. As of
December 31, 1996, a note receivable of $136 is due from the owners of SFF. This
note receivables is due on July 1, 1999 and has an interest rate of 9.0% per
annum. At December 31, 1996, tenant and other receivables from SFF were $125. In
addition, during 1996, the Company incurred remodeling costs of $180 on behalf
of SFF for restaurants operated by SFF under the Company's early renewal program
(See Note 8). These remodeling costs are included in accounts payable at
December 31, 1996. The Managing General Partner of Southeast Fast Food Partners,
L.P. is owned by an officer of the Partnership's Managing General Partner.
On July 30, 1996, the Company completed a sale/leaseback transaction with
Carlos O'Kelly's, Inc. Carlos O'Kelly's, Inc. is owned by a director of the
Managing General Partner.
12. DISTRIBUTIONS AND ALLOCATIONS
Under the amended partnership agreements, cash flow from operations of the
Partnerships each year will be distributed 98.02% to the unitholders and 1.98%
to the general partners until the unitholders have
F-25
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. DISTRIBUTIONS AND ALLOCATIONS (CONTINUED)
received a 12% simple (noncumulative) annual return for such year on the
unrecovered capital per unit ($20.00 per unit, reduced by any prior
distributions of net proceeds of capital transactions); then any cash flow for
such year will be distributed 75.25% to the unitholders and 24.75% to the
general partners until the unitholders have received a total simple
(noncumulative) annual return for such year of 17.5% on the unrecovered capital
per unit; and then any excess cash flow for such year will be distributed 60.40%
to the unitholders and 39.60% to the general partners. The unitholders received
98.02% of all cash flow distributions for 1996 and 1995 and 98% for 1994.
Under the amended partnership agreements, net proceeds from capital
transactions (for example, disposition of the Properties) will be distributed
98.02% to the unitholders and 1.98% to the general partners until the
unitholders have received an amount equal to the unrecovered capital per unit
plus 12.0% cumulative, simple return on the unrecovered capital per unit
outstanding from time to time (to the extent not previously received from
distribution of cash flow or proceeds of prior capital transactions); then such
proceeds will be distributed 75.25% to the unitholders and 24.75% to the general
partners until the unitholders have received the total cumulative, simple return
of 17.5% on the unrecovered capital per unit; and then such proceeds will be
distributed 60.40% to the unitholders and 39.60% to the general partners. There
were no capital transactions in 1995 or 1994. The deferred gain on disposition
of property recorded in 1996 will be distributed upon the recognition of the
gain by the Company.
All operating income and loss of the Partnership for each year generally
will be allocated among the partners in the same aggregate ratio as cash flow is
distributed for that year. Gain and loss from a capital transaction generally
will be allocated among the partners in the same aggregate ratio as proceeds of
the capital transactions are distributed except to the extent necessary to
reflect capital account adjustments.
F-26
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUMMARY BY QUARTER (UNAUDITED)
<TABLE>
<CAPTION>
PER UNIT
----------------------------
ALLOCABLE CASH RELATED
REVENUES NET INCOME NET INCOME DISTRIBUTIONS
--------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
1994
First quarter................................................ $ 1,984 $ 1,100 $ 0.23 $ 0.39
Second quarter............................................... 2,297 1,341 0.28 0.39
Third quarter................................................ 2,330 1,392 0.29 0.41
Fourth quarter............................................... 2,182 1,100 0.24 0.42
--------- ----------- ----- ------
Annual....................................................... $ 8,793 $ 4,933 $ 1.04 $ 1.61
--------- ----------- ----- ------
--------- ----------- ----- ------
1995
First quarter................................................ $ 2,123 $ 1,090 $ 0.23 $ 0.42
Second quarter............................................... 2,495 1,407 0.30 0.42
Third quarter................................................ 2,592 1,496 0.32 0.43
Fourth quarter............................................... 2,570 1,230 0.25 0.44
--------- ----------- ----- ------
Annual....................................................... $ 9,780 $ 5,223 $ 1.10 $ 1.71
--------- ----------- ----- ------
--------- ----------- ----- ------
1996
First quarter................................................ $ 2,955 $ 1,323 $ 0.26 $ 0.47
Second quarter............................................... 4,309 1,862 0.33 0.48
Third quarter................................................ 5,748 2,590 0.36 0.485
Fourth quarter............................................... 5,312 1,698 0.25 0.50
--------- ----------- ----- ------
Annual....................................................... $ 18,324 $ 7,473 $ 1.20 $ 1.94
--------- ----------- ----- ------
--------- ----------- ----- ------
</TABLE>
- ------------------------
* Represents amounts declared and paid in the following quarter.
14. PRO FORMA (UNAUDITED)
The following pro forma information was prepared by adjusting the actual
consolidated results of the Company for the years ended December 31, 1995 and
1996 for the effects of:
a. the purchase of 184 restaurant properties on various dates during 1996
for an aggregate purchase price of $105,336 including the value of
384,836 Partnership Units issued to sellers and other related financing
transactions including the sale of 1,800,000 Partnership Units in June
1996; and
b. the purchase of 16 restaurant properties on various dates from March
1995 through December 1995 for an aggregate purchase price of $10,963
including the value of 54,167 Partnership Units issued to sellers and
other related financing transactions as if all such transactions had
occurred as of January 1, 1995. Interest expense for pro forma purposes
was calculated assuming interest rates of 7.5% and 7.2% per annum for
1995 and 1996, respectively, which approximates the rates the Company
paid during such periods.
F-27
<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. PRO FORMA (UNAUDITED) (CONTINUED)
These proforma operating results are not necessarily indicative of what the
actual results of operations of the Company would have been assuming all of the
restaurant properties were acquired as of January 1, 1995 and they do not
purport to represent the results of operations for future periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Revenues from leased properties................................................... $ 25,439 $ 25,685
Net income........................................................................ 9,533 9,610
--------- ---------
--------- ---------
Net income allocable to unitholders............................................... 9,344 9,419
--------- ---------
--------- ---------
Average number of outstanding units............................................... 6,973 6,898
--------- ---------
--------- ---------
Net income per unit............................................................... $ 1.34 $ 1.37
--------- ---------
--------- ---------
</TABLE>
15. SUBSEQUENT EVENTS (UNAUDITED)
On January 29, 1997, a distribution of $0.50 per Partnership Unit was
declared. The record date was March 6, 1997, and the distribution date was March
13, 1997.
On February 7, 1997, a proxy statement for an exchange offer and
registration statement was filed with the Securities and Exchange Commission.
This filing pertains to an exchange of restaurant properties for Partnership
Units. This exchange is currently valued at $7,898.
On February 26, 1997, the Company issued $40,000 in debt which consist of
$12,500 Series A Senior Secured Guaranteed Notes with an 8.06% interest rate and
a due date of January 31, 2000; and $27,500 Series B Senior Secured Guaranteed
Notes with an 8.30% interest rate and due date of January 31, 2002. The proceeds
were primarily utilized to reduce the amount outstanding under the line of
credit and to improve the Company's cash position. The debt and the lines of
credit are collateralized by substantially all the assets of the Company.
Through April 30, 1997, the Company has acquired 121 properties. The total
purchase price approximated $73,790 which included 340,804 Partnership Units.
The 121 properties included eight Pizza Hut restaurant properties, six
Schlotzsky's restaurant properties, 76 Arby's restaurant properties, 16
Bruegger's Bagel restaurant properties and 15 other restaurant properties.
On April 30, 1997, the Company had 41 restaurant properties under contract
for acquisition. Such properties represent 13 separate transactions in various
stages of negotiation and due diligence. These acquisitions represent an
aggregate consideration of approximately $26,131. These properties include one
Dairy Queen restaurant property, five Hardee's restaurant properties, two Pizza
Hut restaurant properties, one Bruegger's Bagel restaurant property and 32 other
restaurant properties.
In April and May 1997, the Partnership issued 561,450 Partnership Units in
three transactions for net proceeds of $14,250. The issuances were to a single
investor with a private placement agreement to purchase $19,000 in Partnership
Units over a one year period.
On May 1, 1997, a distribution of $0.50 per Partnership Unit was declared.
The record date for such distribution is June 11, 1997 and the distribution date
is June 18, 1997.
On May 7, 1997, a proxy and registration statement, Form S-4, was declared
effective by the Securities and Exchange Commission regarding the conversion of
U.S. Restaurant Properties Master L.P. to a real estate investment trust entity.
F-28
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of , 1997 (the
"Agreement"), by and among U.S. RESTAURANT PROPERTIES MASTER L.P., a Delaware
limited partnership (the "Partnership"); U.S. RESTAURANT PROPERTIES, INC., a
Maryland corporation (the "Company"); USRP ACQUISITION, L.P., a Delaware
partnership and an indirectly wholly-owned subsidiary of the Company (the
"Acquisition Subsidiary"); USRP MANAGING, INC., a Delaware corporation and
wholly-owned subsidiary to the Company and general partner of the Acquisition
Subsidiary (the "General Partner") and QSV PROPERTIES, INC., a Delaware
corporation and the managing general partner of the Partnership ("QSV").
RECITALS
WHEREAS, Boards of Directors of QSV and of the Company have determined that
it is in the best interests of the Partnership and the Company, respectively, to
effect the merger provided for herein (the "Merger") upon the terms and subject
to the conditions set forth herein;
WHEREAS, the Company will have ownership rights in the assets of the
Partnership pursuant to this Agreement, and in accordance therewith, the Company
has caused to be formed and organized the General Partner and the Acquisition
Subsidiary; and
WHEREAS, all partnership and corporate action, as applicable, on the part of
the parties hereto necessary to authorize the execution of this Agreement has
been duly taken.
NOW, THEREFORE, in consideration of the foregoing premises, the
representations, warranties, covenants and agreements contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound hereby, agree as
follows:
1. THE MERGER; EFFECTIVE TIME
1.1 THE MERGER. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.2 hereof), in order to effect the
Merger, the Acquisition Subsidiary shall be merged with and into the Partnership
and the separate existence of the Acquisition Subsidiary shall thereupon cease.
The Partnership shall be the surviving entity in the Merger (sometimes
hereinafter referred to as the "Surviving Entity"), the General Partner will be
substituted as managing general partner of the Partnership and, as a result, the
Partnership shall become an indirectly wholly-owned subsidiary of the Company
and shall continue to be governed by the laws of the State of Delaware. The
separate existence of the Partnership with all its rights, privileges,
immunities, powers and franchises shall continue unaffected by the Merger. The
Merger shall be pursuant to the provisions of and shall have the effect provided
in the Delaware Revised Uniform Limited Partnership Act (the "Delaware RULPA").
1.2 EFFECTIVE TIME. Provided that this Agreement has not been terminated
or abandoned pursuant to Section 9 hereof, on the first business day following
the date on which the last to be fulfilled or waived of the conditions set forth
in Section 8 hereof shall be fulfilled or waived, or on such later date as the
Partnership and the Company may agree, a certificate of merger (the "Certificate
of Merger") with respect to the transactions contemplated hereby shall be
executed, acknowledged and filed with the Secretary of State of the State of
Delaware as provided in Section 211 of the Delaware RULPA and the Merger
provided for herein shall become effective at 11:59 p.m. on the date of such
filing or such other time and date as is set forth in the Certificate of Merger
(the "Effective Time").
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2. PARTNERSHIP AGREEMENT OF THE SURVIVING ENTITY
The partnership agreement of the Partnership in effect at the Effective Time
shall be the partnership agreement of the Surviving Entity, until duly amended
in accordance with the terms thereof and the Delaware RULPA.
3. EFFECT OF THE MERGER ON PARTNERSHIP INTERESTS
3.1 EFFECT ON PARTNERSHIP INTERESTS. At the Effective Time, by virtue of
the Merger and without any action on the part of the holder of any partnership
interest in the Partnership or the Acquiring Subsidiary:
(a) Each unit representing an assignment of limited partnership interest
in the Partnership (the "Units") issued and outstanding immediately prior to
the Effective Time (an aggregate of 7,012,585 Units) shall be exchanged for
and converted into one validly issued, fully paid and nonassessable share of
common stock, par value $.01 per share, of the Company (the "Common Stock")
(or an aggregate of 7,610,708 shares). Each certificate representing any
such Units (the "Certificates") outstanding immediately prior to the
Effective Date shall thereafter represent the right to receive a certificate
representing a like number of shares of Common Stock. All Units shall no
longer be outstanding and shall be cancelled and returned and shall cease to
exist;
(b) QSV's 1% Percentage Interest, as defined in the Third Amended and
Restated Agreement of Limited Partnership of the Partnership dated as of
, 1997 (the "Partnership Agreement"), shall be exchanged for and
converted into 76,876 shares of Common Stock and the right to receive a
certificate representing such Common Stock.
3.2 EXCHANGE OF UNITS FOR COMPANY SHARES.
(a) EXCHANGE AGENT. As of the Effective Time, the Company shall
deposit with American Stock Transfer & Trust Company (the "Exchange Agent"),
for the benefit of holders of Units ("Unitholders"), for exchange in
accordance with this Section 3, certificates representing the shares of
Common Stock to be issued pursuant to Section 3.1 in exchange for
outstanding Units.
(b) EXCHANGE PROCEDURES. Promptly after the Effective Time, the
Surviving Entity shall cause the Exchange Agent to mail to each Unitholder
of record (i) a letter of transmittal, which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Exchange Agent, in such
form and including such other provisions as the Company may specify and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing Company Shares. Upon surrender of a
Certificate for cancellation to the Exchange Agent together with such letter
of transmittal, duly executed, the holder of such Certificate shall be
entitled to receive in exchange therefor a certificate representing a number
of shares of Common Stock equal to the number of Units represented by the
Certificate, the Certificate, and the Certificate so surrendered shall
forthwith be cancelled. Declared but unpaid distributions on Units and
partnership interests outstanding as of the applicable record date shall be
the obligation of the Company and the Company hereby agrees to pay such
distributions on the payment date specified in the resolutions of QSV
authorizing such distributions. No interest will be paid or accrued on
unpaid distributions, if any, payable to holders of Certificates. In the
event of a transfer of ownership of Units which is not registered in the
transfer records of the Partnership, a certificate representing the proper
number of shares of Common Stock may be issued to the transferee if the
Certificate representing such Units is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer
and to evidence that any applicable transfer taxes have been paid. If any
certificate for shares of Common Stock is to be issued in a name other than
that in which the Certificate surrendered in exchange therefor is
registered, it shall be a condition to such exchange that the person
requesting such exchange (i) pay any transfer or other taxes required by
reason of the exchange of certificates of shares of Common Stock in a name
other than that of the registered holder
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of the Certificate surrendered or (ii) establish to the satisfaction of the
Company that such taxes have been paid or are not applicable.
(c) TRANSFERS. After the Effective Time, there shall be no transfers
on the transfer books of the Partnership of the Units which were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Company for transfer, they shall be
cancelled and exchanged for the number of shares of Common Stock deliverable
in respect thereof pursuant to this Agreement in accordance with the
procedures set forth in this Section 3.
(d) NO LIABILITY. In the event any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen or destroyed and, if
required by the Company, the posting by such person of a bond in such amount
as the Company may direct as indemnity against any claim that may be made
against it with respect to such Certificate, the Exchange Agent will issue
in exchange for such lost, stolen or destroyed Certificate, a certificate
representing the shares of Common Stock deliverable in respect thereof
pursuant to this Agreement.
4. EFFECT OF MERGER ON PARTNERSHIP INTERESTS IN ACQUIRING SUBSIDIARY
OUTSTANDING PRIOR TO THE EFFECTIVE TIME
At the Effective Time, by virtue of the Merger, all partnership interests in
the Acquiring Subsidiary outstanding immediately prior thereto (all of which,
immediately prior to the Effective time, shall have been owned by the Company
and the General Partner shall continue to be outstanding as interests in the
Partnership.
5. REPRESENTATIONS AND WARRANTIES
5.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY, THE GENERAL PARTNER AND
THE ACQUISITION SUBSIDIARY. The Company, the General Partner and the Acquisition
Subsidiary hereby represent and warrant to the Partnership as follows:
(a) The Company and the General Partner are corporations and the
Acquisition Subsidiary is a partnership duly formed, validly existing and in
good standing under the applicable laws of its state of organization.
(b) All action on the part of the Company, the General Partner and the
Acquisition Subsidiary and their respective officers, trustees, directors,
stockholders and partners, as applicable, necessary for the authorization,
execution and delivery of this Agreement, the performance of all obligations
of the Company, the General Partner and the Acquisition Subsidiary hereunder
and, in the case of the Company, the authorization, issuance and delivery of
the shares of Common Stock has been taken or will be taken prior to the
Effective Date, and this Agreement constitutes the valid and legally binding
obligation of each of the Company, the General Partner and the Acquisition
Subsidiary, enforceable against it in accordance with its terms, except (i)
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditor's rights generally and (ii) as enforceability may be
limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies.
(c) Neither the Company, the General Partner nor the Acquisition
Subsidiary is in violation of or default under any provisions of its
articles or certificate of incorporation, bylaws or partnership agreement,
as applicable, or of any instrument, judgment, order, writ, decree or
contract to which, it is a party or by which it is bound or, in any material
respect, of any provision of any federal or state statute, rule or
regulation applicable to it. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby will
not result in any such violation or be in conflict with or constitute, with
or without the passage of time or the giving of notice, either a
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default under any such provision, instrument, judgment, order, writ, decree
or contract or an event which results in the creation of any lien, charge or
encumbrance upon any assets of the Company, the General Partner or the
Acquisition Subsidiary.
5.2 REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP. The Partnership
hereby represents and warrants to the Company as follows:
(a) The Partnership is a limited partnership duly formed, validly
existing and in good standing under the laws of the State of Delaware.
(b) All action on the part of the Partnership and its partners necessary
for the authorization, execution and delivery of this Agreement and the
performance of all obligations of the Partnership hereunder has been taken
or, subject to obtaining the approval of Unitholders holding a majority of
the outstanding Units, will be taken prior to the Effective Date, and this
Agreement constitutes the valid and legally binding obligation of the
Partnership, enforceable against it in accordance with its terms, except (i)
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditor's rights generally and (ii) as enforceability may be
limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies.
(c) The Partnership is not in violation of or in default under any
provision of the Partnership Agreement or of any instrument, judgment,
order, writ, decree or contract to which it is a party or by which it is
bound or, in any material respect, of any provision of any Federal or state
statute, rule or regulation applicable to the Partnership. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby will not result in any such violation or be
in conflict with or constitute, with or without the passage of time or the
giving of notice, either a default under any such provision, instrument,
judgment, order, writ, decree or contract or an event which results in the
creation of any lien, charge or encumbrance upon any of the assets of the
Partnership.
6. COVENANTS
6.1 STOCK EXCHANGE LISTING. The Company shall use its best efforts to
obtain an approval to list on the New York Stock Exchange, Inc. ("NYSE") the
Common Stock to be issued in the Merger, subject to official notice of issuance,
prior to the Effective Time.
6.2 UNITHOLDER APPROVAL. The Partnership shall use its best efforts to
obtain the approval of this Agreement by Unitholders holding a majority of the
outstanding Units.
6.3 INDEMNIFICATION. Form and after the Effective Time, the Company agrees
that it will indemnify and hold harmless, and advance expenses to, QSV and, as
applicable, each officer, director, partner or other person controlling the QSV,
and any affiliate of it, against any costs or expenses (including reasonable
attorneys' fees), judgment, fines, losses, claims, damages or liabilities
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of or pertaining to the transactions contemplated hereby, whether asserted
or claimed prior to, at or after the Effective Time, to the fullest extent
permitted by law. In addition, the Company hereby assumes the Partnership's
indemnity obligations under the Partnership Agreement with respect to
liabilities to the foregoing individuals and entities arising out of actions or
omissions occurring prior to the Effective Time.
7. CONDITIONS
7.1 CONDITIONS TO THE PARTNERSHIP'S OBLIGATION TO EFFECT THE MERGER. The
obligation of the Partnership to consummate the Merger is subject to
satisfaction of each of the following conditions:
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(a) This Agreement shall have been duly approved by Unitholders holding
a majority of the Units outstanding as of April 30, 1997 (the "Record Date")
in accordance with applicable law and the Partnership Agreement;
(b) No statute, rule or regulation shall have been enacted or
promulgated by any governmental authority, nor shall there be any order or
injunction of a United States or state court of competent jurisdiction in
effect, which prohibits the exchange of Units for shares of Common Stock or
the consummation of the Merger;
(c) The Partnership shall have received an opinion of counsel to the
effect that the Merger will be treated as part of a transaction described in
Section 351 of the Internal Revenue Code of 1986, as amended (the "Code");
(d) The Partnership shall have received a favorable letter ruling from
the Internal Revenue Service as to treatment of the Merger as part of a
transaction described in Section 351 of the Code;
(e) The shares of Common Stock issuable to the Unitholders pursuant to
this Agreement shall have been approved for listing on the NYSE upon
official notice of issuance; and
(f) Amendments to the Partnership Agreement to permit, among other
things, the withdrawal of QSV as managing general partner of the
Partnership, shall have been duly approved by Unitholders holding a majority
of the Units outstanding as of the Record Date in accordance with applicable
law and the Partnership Agreement, and a certificate of amendment effecting
such amendments shall have been duly filed with the Secretary of State of
the State of Delaware.
7.2 CONDITIONS TO THE COMPANY'S OBLIGATION TO EFFECT THE MERGER. The
obligation of the Company to consummate the Merger is subject to satisfaction of
the following conditions:
(a) No statute, rule or regulation shall have been enacted or
promulgated by any governmental authority, nor shall there be any order or
injunction of a United States or state court of competent jurisdiction in
effect, which prohibits the exchange of the Units for Common Stock or
consummation of the Merger; and
(b) The contribution of the management compensation rights of QSV under
the terms of the Partnership Agreement and the partnership agreement of the
Operating Partnership to the Operating Partnership shall have been effected.
8. TERMINATION
8.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after approval by the Unitholders, by mutual written consent of the Company and
the Partnership.
8.2 EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Section 8, no
party hereto (or any of its directors, trustees, officers or partners, or
persons otherwise controlling or affiliated with any of the parties hereto or
any of their directors, officers or partners) shall have any liability or
further obligation to any other party to this Agreement.
9. MISCELLANEOUS AND GENERAL
9.1 MODIFICATION OR AMENDMENT. Subject to the applicable provisions of the
Maryland General Corporation Law and the Delaware RULPA, at any time prior to
the Effective Time, the parties hereto may modify or amend this Agreement by
mutual written consent.
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9.2 COUNTERPARTS. For the convenience of the parties hereto, this
Agreement may be executed in any number of counterparts, each such counterpart
being deemed to be an original instrument, and all such counterparts shall
together constitute the same Agreement.
9.3 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
9.4 NO THIRD PARTY BENEFICIARIES. Except as provided in Section 6.3, this
Agreement is not intended to confer upon any person other than the parties
hereto any rights or remedies hereunder.
9.5 CAPTIONS. The section and paragraph captions herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
9.6 NO LIABILITY. No trustee, beneficiary or stockholder of the Company
shall have any personal liability for any obligations of the Company under this
Agreement.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the parties hereto as of the date first hereinabove written.
U.S. RESTAURANT PROPERTIES, INC.
By: __________________________________
Name: ______________________________
Title: _____________________________
USRP MANAGING, INC.
By: __________________________________
Name: ______________________________
Title: _____________________________
USRP ACQUISITION, L.P.
By: USRP Managing Inc., the General
Partner
By: __________________________________
Name: ______________________________
Title: _____________________________
U.S. RESTAURANT PROPERTIES MASTER L.P.
By: U.S. Restaurant Properties, Inc.,
the Managing General Partner
By: __________________________________
Name: ______________________________
Title: _____________________________
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U.S. RESTAURANT PROPERTIES, INC.
By: __________________________________
Name: ______________________________
Title: _____________________________
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MORGAN KEEGAN
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Morgan Keegan & Company, Inc.
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
901/524-4100 Telex 69-74324
WATS 800/366-7426
Members New York Stock Exchange, Inc.
May 7, 1997
Special Committee of the Board of Directors of
QSV Properties, Inc.
5310 Harvest Hill Road #270
Dallas, Texas 75230
Attn:Gerald H. Graham
Eugene G. Taper
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the unitholders of U.S. Restaurant Properties Master L.P. (the
"Partnership") of the consideration to be paid to QSV Properties, Inc. (the
"Management Company"), the managing general partner of the Partnership and U.S.
Restaurant Properties Operating L.P. (the "Operating Partnership"), in
connection with the withdrawal by the Management Company as the managing general
partner of the Partnerships and the amendment of the Partnership Agreements to
terminate the fees payable to the Management Company (the "Transaction").
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to them in the Withdrawal Agreement.
Morgan Keegan & Company, Inc. ("Morgan Keegan"), as part of its investment
banking business, is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for various purposes. We have been retained by the Special
Committee of the Board of Directors of QSV Properties, Inc. in its capacity as
the managing general partner of the Partnership (the "Special Committee") for
the purpose of, and will receive a fee for, rendering this opinion. We have not
advised any party in connection with the Transaction other than the Special
Committee.
In arriving at our opinion, we reviewed (i) the Partnership's Proxy
Statement/Prospectus as originally filed with Commission on February 7, 1997,
(ii) the Partnership Agreements (and the proposed amendments thereto) and (iii)
an unexecuted draft of the Withdrawal Agreement (which, for purposes of our
analysis, we assumed that any further revisions, including the filling in of
blank spaces and the attachment of final exhibits and appendices, would not
materially alter the terms and provisions of such documents, and that such
documents would be executed as finalized) and certain publicly-available
financial information and internal financial analyses concerning the Partnership
and the Operating Partnership and internal financial analyses concerning the
Management Company and held discussions with members of senior management of the
Partnership and the Management Company regarding the business and prospects of
the companies and the business and prospects of the Partnership on a
self-advised basis. In addition, Morgan Keegan reviewed the reported price and
trading volume of the Partnership's Units (the "Units") since the Acquisition
Price will be paid in Units (or a proportional number of shares of Common Stock
or a proportionate ownership interest in the Operating Partnership, depending
upon how the Conversion is effected). Athough Morgan Keegan did not undertake a
detailed analysis of the reported price and trading volume of the Units, based
on our experience and knowledge of the Partnership and comparable
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companies, we believed that the Units were fairly valued at the time of our
opinion, and that the current price and trading volume supported the conclusion
reached in our opinion. Morgan Keegan also compared certain financial
information of the Managing General Partner with similar information for certain
selected companies engaged in the real estate management industry whose
securities are publicly traded, reviewed the financial terms of selected recent
business combinations, reviewed certain pro forma analyses regarding the
business and prospects of the Partnership after the Transaction and performed
such other studies and analyses as Morgan Keegan considered appropriate. Morgan
Keegan was not asked to consider or provide an opinion, and is not expressing
any opinion, with respect to (i) the fairness of the Conversion, other than the
Acquisition Price, (ii) the fairness of the Acquisition Price from any point of
view other than from a financial point of view, (iii) the fairness of any other
alternative transaction or structures available to the Partnership or the
Operating Partnership with respect to the acquisition or withdrawal of the
Management Company or any other transaction involving the Management Company, or
(iv) the effect of federal, state or other tax laws, rules or regulations on the
Partnership or any other party to the Conversion arising from the Transaction
and Withdrawal Agreement and related transactions.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information publicly available or provided to us by the Partnerships and the
Management Company. We have not been engaged, and have not independently
attempted, to verify any of such information. We have also relied upon the
management of the Management Company as to the reasonableness and achievability
of the financial and operating projections and the assumptions and bases
therefor provided to us, and we have assumed that such projections reflect the
best currently available estimates and judgment of management of the Management
Company and that, subject to reasonable discounts attributable to the likelihood
of achieving such results, such projections and forecasts would be realized in
the amounts and time periods currently estimated by the management of the
Management Company. We have not been engaged to assess the achievability of such
projections or the assumptions on which they were based and express no view as
to such projections or assumptions. In addition, we have not conducted a
physical inspection or appraisal of any of the assets, properties or facilities
of either the Partnership or the Management Company nor have we been furnished
with any such evaluation or appraisal. We have also assumed that the conditions
to the Transaction as set forth in the Withdrawal Agreement would be satisfied,
and that the Transaction will be consummated on a timely basis and in the manner
contemplated in the Withdrawal Agreement. Our opinion is based upon analyses of
the foregoing factors in light of our assessment of general economic, financial
and market conditions as they exist and can be evaluated by us as of the date
hereof. We express no opinion as to the advisability of the Conversion; the
price or trading range at which the Partnership's units will trade following the
date hereof, or upon completion of the Transaction, or upon completion of the
Conversion to a real estate investment trust.
In addition to rendering this opinion, Morgan Keegan has in the past
provided investment banking services to the Partnership, for which it received
customary fees. In June 1996, Morgan Keegan acted as the lead manager of the
Partnership's 1,800,000 Unit offering. In addition to the underwriting fees and
commissions of approximately $1.2 million, the Partnership paid Morgan Keegan a
financial advisory fee of $200,000. In May 1996 an affiliate of Morgan Keegan
provided a $20 million mortgage warehouse facility to the Partnership in
exchange for interest payments on amounts outstanding thereunder at a rate of
300 basis points over LIBOR. This facility was paid in full in January 1997. In
the ordinary course of our business, we may trade the Partnership's units for
our own account and the accounts of our customers. Accordingly, we may at any
time hold long or short positions in the Partnership's units.
It is understood that this opinion is not to be quoted or referred to, in
whole or in part (including excerpts or summaries), in any filing, report,
document, release or other communication used in connection with the Transaction
(unless required to be quoted or referred to by applicable regulatory
requirements), nor shall this opinion be used for any other purposes, without
our prior written consent, which
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consent shall not be unreasonably withheld. Furthermore, our opinion is directed
to the Special Committee, and does not constitute a recommendation to any
unitholder of the Partnership as to how such unitholder should vote at the
special meeting held in connection with the Transaction.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that, as of the date hereof, the
consideration paid to the Management Company pursuant to the Transaction is
fair, from a financial point of view, to the unitholders of the Partnership.
Yours very truly,
MORGAN KEEGAN & COMPANY, INC.
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APPENDIX C
MATERIAL AMENDMENTS
TO MASTER PARTNERSHIP AGREEMENT
OTHER RESTAURANT PROPERTIES: Those certain properties for which food sales
account for 10% or more of the gross revenues generated by the improvements on
such properties (a) properties (regardless of use) acquired adjacent to such
properties or acquired in conjunction with the use or ownership of such
properties, (b) properties that were formerly such type of properties which are
not currently being used for any purpose, and (c) any unimproved land which is
adjacent to such a property or on which such a property is reasonably expected
to be constructed within one (1) year following the date of acquisition of such
land, in any case in which the Partnership, the REIT or any Affiliate or either
of them has acquired or acquires an interest, whether consisting of land to be
held in fee simple or as a leasehold and any improvements thereon (including all
real property and certain personal property associated therewith), together with
(i) any other properties acquired pursuant to Section 7.2(v) with respect to
such properties, (ii) any properties adjacent to such properties, (iii) any
buildings, improvements or other structures situated on such properties, and
(iv) any further right, title or interest acquired in such properties. "Other
Restaurant Property" means any one of the Other Restaurant Properties.
RETAIL PROPERTIES: Those certain properties, other than Other Restaurant
Properties and Restricted Restaurant Properties, for which the sales of goods or
services to the public account for substantially all of the gross revenues
generated by the improvements on such properties and (a) properties (regardless
of use) acquired adjacent to such properties or acquired in conjunction with the
use or ownership of such properties, (b) properties that were formerly such type
of properties which are not currently being used for any purpose, and (c) any
unimproved land which is adjacent to such a property or on which such a property
is reasonably expected to be constructed within one (1) year following the date
of acquisition of such land, in any case in which the Partnership, the REIT or
any Affiliate of either of them has acquired or acquires an interest, whether
consisting of land to be held in fee simple or as a leasehold and any
improvements thereon (including all real property and certain personal property
associated therewith), together with (i) any other properties acquired pursuant
to Section 7.2(v) with respect to such properties, (ii) any properties adjacent
to such properties, (iii) any buildings, improvements or other structures
situated on such properties, and (iv) any further right, title or interest
acquired in such properties. "Retail Property" means any one of the Retail
Properties.
3.1 PURPOSES AND BUSINESS.
The purposes of the Partnership shall be (a) to invest in, acquire, own,
hold a leasehold interest in, manage, maintain, operate, lease, sublease,
improve, finance, reconstruct, sell, exchange, franchise and otherwise dispose
of Partnership Properties and Ancillary Property, whether through the Operating
Partnership, other Persons or otherwise; (b) originate loans secured by liens on
real estate; (c) in connection therewith, to exercise all of the rights and
powers conferred upon the Partnership as the limited partner in the Operating
Partnership pursuant to the Operating Partnership Agreement; and (d) to enter
into any lawful transaction and engage in any lawful activities in furtherance
of the foregoing purposes. The Partnership shall not engage in any business or
activity except as set forth above without the written consent of the General
Partner and a Majority Vote of the Limited Partners.
3.2 POWERS.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to, or convenient for the
furtherance and accomplishment of the purposes and business described herein and
for the protection and benefit of the Partnership, including, without
limitation, the following:
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(h) To originate loans secured by liens on real estate.
5.14 EXCHANGE OF UNITS.
(a) Subject to Section 5.14(b), on or after the date on which the Units are
no longer listed for trading on a National Securities Exchange (the "Delisted
Date"), each Limited Partner shall have the right (the "Exchange Right") to
require the REIT to acquire all or a portion of the Units held by such Limited
Partner in exchange for the REIT Stock Amount. The Exchange Right shall be
exercised pursuant to a Notice of Exchange delivered to the REIT (with a copy to
the Partnership) by the Limited Partner who is exercising the Exchange Right
(the "Exchanging Partner"). Notwithstanding anything herein to the contrary, no
Unit may be sold, pledged, hypothecated or otherwise transferred to any Person
(other than an Immediate Family member) unless, prior to such transfer, such
Unit is exchanged for shares of Common Stock pursuant to the terms of this
Section 5.14. A Limited Partner may not exercise the Exchange Right for fewer
than one hundred (100) Units or, if such Limited Partner holds fewer than one
hundred (100) Units, all of the Units held by such Partner. The Exchanging
Partner shall have no right, with respect to any Partnership Units so exchanged,
to receive any distributions paid with respect to the Partnership Units on or
after the date of the Notice of Exchange. The Assignee of any Limited Partner
may exercise the rights of such Limited Partner pursuant to this Section
5.14(a), and such Limited Partner shall be deemed to have assigned such rights
to such Assignee and shall be bound by the exercise of such rights by such
Assignee. In connection with any exercise of such rights by an Assignee on
behalf of a Limited Partner, the REIT Stock Amount shall be paid by the REIT
directly to such Assignee and not to such Limited Partner.
(b) Notwithstanding the provisions of Section 5.14(a), a Partner shall not
be entitled to exercise the Exchange Right pursuant to Section 5.14(a) if the
delivery of shares of Common Stock to such Partner by the REIT pursuant to
Section 5.14(a) would be prohibited under the Amended Articles of Incorporation
of the REIT.
7.2 POWERS OF MANAGING GENERAL PARTNER.
Subject to the limitation of Section 7.3, which vests certain voting rights
in the Limited Partners, and to the limitations and restrictions set forth in
Article VIII, the Managing General Partner (acting on behalf of the Partnership
and the Operating Partnership) shall have the right, power, and authority, in
the management of the business and affairs of the Partnership and Operating
Partnership, to do or cause to be done any and all acts, at the expense of the
Partnership or Operating Partnership, as the case may be, deemed by the Managing
General Partner to be necessary or appropriate to effectuate the business,
purposes, and objectives of the Partnership and the Operating Partnership. The
power and authority of the Managing General Partner pursuant to this Agreement
and the Operating Partnership Agreement shall be liberally construed to
encompass all acts and activities in which a partnership may engage under the
Delaware RULPA. The power and authority of the Managing General Partner shall
include, without limitation, the power and authority on behalf of the
Partnership and the Operating Partnership:
- - -
(n) To originate loans or otherwise provide financing, whether through
guarantees, letters of credit or otherwise, secured by liens on real estate to
borrowers who meet the Partnership's underwriting criteria, which shall be
established by the Managing General Partner.
9.1 COMPENSATION TO GENERAL PARTNERS.
Except as permitted under Section 5.5 or expressly provided in Section 9.3
or 9.4, no General Partner shall receive any compensation from the Partnership
or the Operating Partnership for services rendered in its capacity as a general
partner of the Partnership or the Operating Partnership. Notwithstanding
anything herein to the contrary, at such time as QSV ceases to be the Managing
General Partner or the managing
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general partner of the Operating Partnership, whether as a result of the
transfer of QSV's Partnership Interest pursuant to Section 12.2 (or Section 11.2
of the Operating Partnership Agreement) or the withdrawal or removal of QSV
pursuant to Section 14.1 or 14.2 (or Section 13.1 of the Operating Partnership
Agreement) (other than removal for "cause"), then QSV shall have the option, in
its sole discretion, to convert its Partnership Interest and its partnership
interest in the Operating Partnership and to either assign to the Partnership or
convert its rights (the "Rights") under the provisions of Section 9.3 (and
Section 9.3 of the Operating Partnership Agreement) (collectively, the
"Conversion") for the Acquisition Price (as defined below), effective as of the
date of such transfer, withdrawal or removal, and upon such Conversion, the
successor Managing General Partner shall cause the Partnership to issue to QSV
Units, and the Partnership shall cause the Operating Partnership to issue
interests therein, in the aggregate amounts provided for below.
In exchange for the Conversion of the Rights, as provided for above, and the
conversion of QSV's partnership interest in the Operating Partnership, in the
event QSV elects to effect the Conversion, QSV will receive the "Acquisition
Price," consisting of (a) the Initial Unit Consideration and (b) the Contingent
Unit Consideration. The Initial Unit Consideration consists of 850,000 Units
and/or interests in the Operating Partnership (which number or classification
shall be adjusted to give effect to any reclassification or change of the Units,
including, without limitation, a split, or any merger or consolidation of the
Partnership, except the merger of the Partnership with the REIT or a subsidiary
thereof, or sale of assets to another entity, occurring after March 31, 1997),
which number of Units or interests in the Operating Partnership shall be reduced
(on a one-for-one basis) by the number of Units received by QSV in connection
with the conversion of its Partnership Interest pursuant to the provisions of
this Section 9.1. In connection with the Conversion, QSV's Partnership Interest
shall be converted into such number of Units as at such time represents 1% of
the then outstanding Units, after giving effect to the conversion of QSV's
Partnership Interest. The Initial Unit Consideration, including the number of
Units issuable upon the conversion of QSV's Partnership Interest, shall be
issued by the Partnership, and the Partnership shall cause the Operating
Partnership to issue its interests, as soon as practicable following the date of
the Conversion, but in no event no later than 30 days thereafter.
The Contingent Share Consideration consists of up to a maximum number of
550,000 Units and/or interests in the Operating Partnership (which number or
classification shall be adjusted to give effect to any reclassification or
change in the Common Stock or the Units, including, without limitation, a split,
or any merger or consolidation of the REIT or the Partnership, except the merger
of the Partnership with the REIT or any subsidiary thereof, or sale of assets to
another entity, occurring after March 31, 1997). The type and number of
securities issuable as the Contingent Share Consideration (subject to the next
sentence) shall be at the sole discretion of QSV. The exact number of Units
and/or interests in the Operating Partnership to be issued will be determined by
the dividing (i) the amount by which the MGP Net Income (as defined below) for
the 2000 Fiscal Year exceeds $3,612,500 by (ii) $4.25 and rounding the resulting
number up to the nearest whole number. "MGP Net Income" means the dollar amount
which would have been payable to QSV, as Managing General Partner and as
managing general partner of the Operating Partnership, by the Partnership and
Operating Partnership for the 2000 Fiscal Year, pursuant to the Rights, had QSV
operated the Partnership and the Operating Partnership on a continuous basis
from the date of the Conversion to December 31, 2000 plus the amounts that have
been payable to QSV pursuant to its aggregate 1.98% general partnership interest
in the Partnership and the Operating Partnership, less $775,000.
For example, if the MGP Net Income for the 2000 Fiscal Year would have been
$5,100,000 ($5,875,000 of revenues less $775,000) then the Contingent Unit
Consideration would be an additional 350,000 Units and/or interests in the
Operating Partnership.
The Contingent Unit Consideration, if any, shall be issued by the
Partnership, and the Partnership shall cause the Operating Partnership to so
issue any such consideration, as soon as practicable following the end of the
2000 Fiscal Year, but in no event later than March 31, 2001.
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9.3 OPERATIONAL EXPENSES.
In addition to any reimbursement pursuant to the indemnification set forth
in Section 7.10, the Partnership shall cause the Operating Partnership, pursuant
to Section 9.3 of the Operating Partnership Agreement, to pay the following:
(a) With respect to (i) the Partnership Properties held as of March 17,
1995 and (ii) the Partnership Properties and Ancillary Property related
thereto acquired thereafter with respect to the Partnership Properties
referred to in clause (i) above whether pursuant to Section 8.12 or
otherwise, the Partnership shall cause to be paid to the Managing General
Partner with respect to each Fiscal Year an aggregate amount equal to Four
Hundred Thousand Dollars ($400,000) adjusted annually as set forth in
Section 9.3(c), which amount shall be in lieu of any reimbursement for
expenses related to the management of the business affairs of the
Partnership and the Operating Partnership (other than expenses described in
clause (c) hereof) that are incurred by the Managing General Partner or its
Affiliates with respect to such Partnership Properties, which amount shall
be payable in equal quarterly installments within sixty (60) days after the
end of each fiscal quarter.
(b) With respect to any Partnership Property and Ancillary Property
related thereto acquired after March 17, 1995 (other than those referred to
in clause (a) above) and mortgage loans, if any, originated by the
Partnership or the Operating Partnership, (i) the Partnership shall cause to
be paid to the Managing General Partner (A) fee equal to 1% of the purchase
price paid by the Partnership or the Operating Partnership for such
Partnership Property and Ancillary Property related thereto, payable on the
date of acquisition or origination, as applicable, and (B) with respect to
each Fiscal Year, an amount, adjusted annually as set forth in the next
paragraph below, accruing while such property is held at the rate of 1% per
annum (applied using the simple interest method on the basis of a
365/366-day year and the actual number of days elapsed) on the purchase
price paid by the Partnership or the Operating Partnership for such
Partnership Property and Ancillary Property related thereto, and (ii) if the
Rate of Return attributable to all Partnership Properties and Ancillary
Property related thereto acquired after March 17, 1995 (other than those
referred to in clause (a) above) in respect of any Fiscal Year shall exceed
12% per annum, the Partnership shall cause to be paid to the Managing
General Partner an amount equal to 25% of the amount of cash received by the
Operating Partnership representing such excess, which amounts shall be in
lieu of any reimbursement of expenses related to the management of the
business affairs of the Partnership and the Operating Partnership (other
than expenses described in clause (c) hereof) that are incurred by the
Managing General Partner or its Affiliates with respect to such Partnership
Properties and (except as provided in clause (i)(A) of this clause (b))
shall be payable in quarterly installments within sixty (60) days after the
end of each fiscal quarter (which may be estimated in the case of the first
three fiscal quarters); provided that there shall be credited against the
amounts, if any, payable pursuant to clause (ii) of this clause (b) in
respect of any Fiscal Year amounts payable to the Managing General Partner
in respect of its First Tier Residual Interest or Second-Tier Residual
Interest pursuant to Sections 6.5 and 6.6 in respect of such Fiscal Year.
For purposes of the calculations provided for in this Section 9.3, in the
event of a mortgage loan origination, the term "Partnership Properties"
shall be deemed to include any originated mortgage loans and the "purchase
price" of such mortgage loans will be the principal balances thereof at the
beginning of any Fiscal Year.
(c) The Partnership shall either cause to be paid to the Managing
General Partner on a monthly basis, or cause the Managing General Partner to
be reimbursed for the payment of, all amounts payable to any Person for
providing goods or performing services (including, without limitation,
legal, accounting, auditing, record keeping, reporting, depositary, transfer
agent, printing, appraisal, servicing and consulting services) for or on
behalf of the Partnership or the Operating Partnership; provided, however,
that the Operating Partnership shall not cause to be paid to the Managing
General Partner, or cause the Managing General Partner to be reimbursed, for
the payment of any amount to an Affiliate or an officer, director, or
employee of an Affiliate for legal, accounting, managerial, or
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consulting services; and provided further, that the Operating Partnership
shall cause to be paid to, or shall cause the Managing General Partner to be
reimbursed for a payment to, an Affiliate or an officer, director, or
employee of an Affiliate for goods or other services only if the price and
the terms upon which such goods or services are provided to the Partnership
or the Operating Partnership are fair to the Partnership or the Operating
Partnership, as the case may be, and are not less favorable to the
Partnership or the Operating Partnership, as the case may be, than would be
incurred if the Partnership or the Operating Partnership were to obtain such
goods or services from an unrelated third party or were to engage employees
to provide such goods or services directly.
For 1987 and for each Fiscal Year thereafter, the amount payable pursuant to
Section 9.3(a) shall be increased by an amount equal to the product of Four
Hundred Thousand Dollars ($400,000) multiplied by the percentage increase in the
Price Index from January 1, 1986, through the last day of the immediately
preceding Fiscal Year. For each year after the year in which a Partnership
Property is acquired, the amount otherwise payable pursuant to Section
9.3(b)(i)(B) (the "Clause (b)(i)(B) Amount") shall be increased by an amount
equal to the product of the Clause (b)(i)(B) Amount multiplied by the percentage
increase in the Price Index from the first day of the immediately preceding
Fiscal Year or, in the case of the first year after the year in which the
Partnership Property is acquired, the first day of the month in which the
acquisition occurred through the last day of the Fiscal Year immediately
preceding such year or, if earlier, the last day of the month in which such
Partnership Property was disposed of. The percentage increase in the Price Index
through the last day of a particular period shall be determined by calculating
the increase, if any, in the Price Index for the last time period during such
period (the "Price Index Determination Period") with respect to which the Price
Index is published (currently a monthly period) over the Price Index for the
time period immediately preceding the first day of the Price Index Determination
Period, and expressing the amount of such increase as a percentage of the Price
Index for said time period immediately preceding the first day of the Price
Index Determination Period.
"RATE OF RETURN" in respect of any period shall mean and refer to the
quotient obtained by dividing (1) the aggregate revenues (calculated in
accordance with generally accepted accounting principles and before amortization
of unearned income on direct financing leases) received by the Partnership or
the Operating Partnership from the Partnership Properties and Ancillary Property
referred to in Section 9.3(b) above for such period, whether through operations,
sale or other disposition, less (without duplication) (i) the aggregate fees
payable pursuant to Section 9.3(b)(i)(B) for such period in respect of such
properties, (ii) the aggregate expenses of the Partnership (other than interest
expense, depreciation, amortization and other non-cash expenses and charges, and
expenses described in Sections 9.3(b) and (c) directly attributable to such
property and interest expense on any debt allocated thereto for such period,
(iii) the general and administrative expenses of the Partnership (other than
non-cash expenses and charges and expenses described in clauses (a) and (b)
above) for such period allocated to such properties (based on the ratio of
Average Partnership Equity in such property to the aggregate Average Partnership
Equity in all Partnership Properties) and (iv) the principal amount of debt
allocated to such properties repaid during such period and, if applicable, the
cash costs and expenses of any Kind or nature incurred in respect of the sale or
other disposition thereof, by (2) the Average Partnership Equity in such
property during such period. "AVERAGE PARTNERSHIP EQUITY" shall mean and refer
to (A) the average of the sums of the aggregate purchase prices therefor, the
aggregate fees paid pursuant to Section 9.3(b)(i)(A) above in respect thereof
and all other cash costs and expenses of any kind or nature incurred in
connection with the acquisitions thereof ("Property Costs") as of the last day
of each calendar month occurring during the period of determination, less (B)
the average outstanding principal amount of debt of the Partnership outstanding
as of the last day of each calendar month during such period and allocated to
such properties. The Rate of Return for any outstanding mortgage loans will be
evaluated separately with the mortgage loans constituting a separate pool of
"properties" for such calculation. The general and administrative expenses
allocable to such mortgage loans shall be equal to the total amount of such
expenses for any Fiscal Year multiplied by a fraction, the numerator of which
shall be the aggregate principal amount of all
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mortgage loans outstanding at the beginning of such Fiscal Year and the
denominator of which shall be the total of all Property Costs and such aggregate
principal amount.
For the purposes of the foregoing, debt of the Partnership shall be
allocated among the Partnership Properties as follows: (1) non-recourse debt
shall be allocated to the property secured thereby and, if such debt is secured
by more than one property, such debt shall be allocated among the properties
secured thereby based on the relative Property Costs thereof-, and (2) recourse
debt shall be allocated to all of the Partnership Properties based on the
relative Property Costs thereof (reduced for this purpose by the amounts of
non-recourse debt allocated thereto in accordance with clause (1) above).
9.4 REIMBURSEMENT OF THE GENERAL PARTNERS.
In the event that the provisions of Section 9.3 are terminated in accordance
with the terms of Section 9.1, the following compensation provisions shall
apply, to be effective upon the date of such termination.
(a) The General Partners shall not be compensated for their services as
general partner of the Partnership except as provided in elsewhere in this
Agreement (including the provisions of Article VI regarding distributions,
payments and allocations to which it may be entitled in its capacity as the
General Partner).
(b) Subject to Section 9.4(c), the Partnership shall be liable for, and
shall reimburse the General Partners on a monthly basis, or such other basis as
the General Partners may determine in their sole and absolute discretion, for
all sums expended in connection with the Partnership's business or for the
benefit of the Partnership, including, without limitation, (i) expenses relating
to the ownership of interests in, and management and operation of, or for the
benefit of, the Partnership, (ii) compensation of officers and employees,
including, without limitation, payments under future employee benefit plans of
any General Partner, (iii) director fees and expenses, and (iv) all costs and
expenses of any General Partner being a public company, including costs of
filings with the Commission, reports and other distributions to its
stockholders.
(c) To the extent practicable, Partnership expenses shall be billed directly
to and paid by the Partnership reimbursements to the General Partner of any of
their Affiliates by the Partnership pursuant to this Section 9.4 shall be
treated as "guaranteed payments" within the meaning of Section 707(c) of the
Code.
14.1 WITHDRAWAL OF GENERAL PARTNERS.
(a) The Managing General Partner shall not withdraw from the Partnership
unless (i) the Managing General Partner shall have transferred all of its
Partnership Interest as a General Partner in accordance with Section 12.2; or
(ii) such withdrawal shall have been approved by a Majority Vote of the Limited
Partners; provided, however, that if QSV withdraws or is removed as the Managing
General Partner, and in either case, elects to convert its Partnership Interest
for the Acquisition Price, as provided for in Section 9.1, the REIT or an
Affiliate of the REIT, as designated by the REIT shall automatically succeed QSV
and shall be admitted to the Partnership pursuant to Section 13.3.
(b) Upon the occurrence of any one of the foregoing conditions, a General
Partner may withdraw from the Partnership' effective on at least thirty (30)
days' advance written notice to the Limited Partners, such withdrawal to take
effect on the date specified in such notice. The withdrawal of a General Partner
pursuant to this Section 14.1 also shall constitute the withdrawal of such
General Partner as a general partner of the Operating Partnership. The General
Partners shall have no liability to the Partnership or the Partners and
Assignees on account of any withdrawal in accordance with the terms of this
Section 14.1. If a General Partner shall give a notice of withdrawal pursuant to
this Section 14.1, then a Majority Vote of the Limited Partners, with the
separate written concurrence of any remaining General Partner, may elect a
successor General Partner. If no successor General Partner shall be elected in
accordance with this Section 14.1 and there shall be no remaining General
Partner, then the Partnership shall be dissolved pursuant to Article XV.
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APPENDIX D
MATERIAL AMENDMENTS
TO OPERATING PARTNERSHIP AGREEMENT
OTHER RESTAURANT PROPERTIES: Those certain properties for which food sales
account for 10% or more of the gross revenues generated by the improvements on
such properties and (a) properties (regardless of use) acquired adjacent to such
properties or acquired in conjunction with the use or ownership of such
properties, (b) properties that were formerly such type of properties which are
not currently being used for any purpose, and (c) any unimproved land which is
adjacent to such a property or on which such a property is reasonably expected
to be constructed within one (1) year following the date of acquisition of such
land, in any case in which the Partnership, the REIT or any Affiliate or either
of them has acquired or acquires an interest, whether consisting of land to be
held in fee simple or as a leasehold and any improvements thereon (including all
real property and certain personal property associated therewith), together with
(i) any other properties acquired pursuant to Section 7.2(v) with respect to
such properties, (ii) any properties adjacent to such properties, (iii) any
buildings, improvements, or other structures situated on such properties, and
(iv) any further right, title or interest acquired in such properties. "Other
Restaurant Property" means any one of the Other Restaurant Properties.
RETAIL PROPERTIES: Those certain properties, other than Other Restaurant
Properties and Restricted Restaurant Properties, for which the sales of goods or
services to the public account for substantially all of the gross revenues
generated by the improvements on such properties and (a) properties (regardless
of use) acquired adjacent to such properties or acquired in conjunction with the
use or ownership of such properties, (b) properties that were formerly such type
of properties which are not currently being used for any purpose, and (c) any
unimproved land which is adjacent to such a property or on which such a property
is reasonably expected to be constructed within one (1) year following the date
of acquisition of such land, in any case in which the Partnership, the REIT or
any Affiliate of either of them has acquired or acquires an interest, whether
consisting of land to be held in fee simple or as a leasehold and any
improvements thereon (including all real property and certain personal property
associated therewith), together with (i) any other properties acquired pursuant
to Section 7.2(v) with respect to such properties, (ii) any properties adjacent
to such properties, (iii) any buildings, improvements or other structures
situated on such properties, and (iv) any further right, title or interest
acquired in such properties. "Retail Property" means any one of the Retail
Properties.
3.1. PURPOSES AND BUSINESS.
The purposes of the Partnership shall be (a) to invest in, acquire, own,
hold a leasehold interest in, manage, maintain, operate, lease, sublease,
improve, finance, reconstruct, sell, exchange, franchise and otherwise dispose
of Partnership Properties and Ancillary Property, whether itself, through other
Persons or otherwise; (b) to originate loans secured by liens on real estate;
and (c) to enter into any lawful transaction and engage in any lawful activities
in furtherance of the foregoing purposes; provided, however, that such business
arrangements and interests may be limited to and conducted in such a manner so
as to permit any REIT Partner at all times to be classified as a real estate
investment trust under the Code.
3.2. POWERS.
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to, or convenient for the
furtherance and accomplishment of the purposes and business described herein and
for the protection and benefit of the Partnership, including, without
limitation, the following:
- - -
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(h) To originate loans secured by liens on real estate.
5.2. ADDITIONAL ISSUANCES OF PARTNERSHIP INTERESTS AND CAPITAL CONTRIBUTIONS.
(a) The Managing General Partner is hereby authorized to cause the
Partnership from time to time to issue to Partners (including the Managing
General Partner) or other persons (including, without limitation, in connection
with the contribution of property to the Partnership) additional Partnership
Interests in one or more classes, or one or more series of any of such classes,
with such designations, preferences and relative, participating, optional or
other special rights, powers and duties, including rights, powers and duties
senior to Limited Partner Partnership Interests, all as shall be determined by
the Managing General Partner in its sole and absolute discretion subject to
Delaware law, including, without limitation, (i) the allocations of items of
Partnership income, gain, loss, deduction and credit to each such class or
series of Partnership Interests; (ii) the right of each such class or series of
Partnership Interests to share in Partnership distributions; and (iii) the
rights of each such class or series of Partnership Interests upon dissolution
and liquidation of the Partnership; provided that no such additional Partnership
Interests shall be issued to the MLP or the REIT unless either (A)(1) the
additional Partnership Interests are issued in connection with the grant, award
or issuance of Units or shares of capital stock of the REIT, which Units or
shares have designations, preferences and other rights such that the economic
interests attributable to such Units or shares are substantially similar to the
designations, preferences and other rights of the additional Partnership
Interests issued to the MLP or the REIT in accordance with this Section 5.4(a)
and (2) the MLP or the REIT shall make a Capital Contribution to the Partnership
in an amount equal to the proceeds, if any, raised in connection with the
issuance of such Units or shares of capital stock, or (B) the additional
Partnership Interests are issued to all Partners in proportion to their
respective Percentage Interests (as defined in Article VI).
(b) After the Effective Date, neither the MLP nor the REIT shall grant,
award or issue any additional Units or shares of capital stock, or rights,
options, warrants or convertible or exchangeable securities containing the right
to subscribe for or purchase such Units or shares of capital stock (collectively
"New Securities"), other than to all holders of such Units or shares of capital
stock unless (i) the Managing General Partner shall cause the Partnership to
issue to the MLP or the REIT Partnership Interests or rights, options, warrants
or convertible or exchangeable securities of the Partnership having
designations, preferences and other rights, all such that the economic interests
are substantially the same as those of the New Securities, and (ii) the MLP or
the REIT makes a Capital Contribution to the Partnership of the proceeds from
the grant, award or issuance of such New Securities and from the exercise of
rights contained in such New Securities. Without limiting the foregoing, the MLP
and the REIT are expressly authorized to issue New Securities for less than fair
market value, and the Managing General Partner is expressly authorized to cause
the Partnership to issue to the MLP and the REIT corresponding Partnership
Interests, so long as (A) the Managing General Partner concludes in good faith
that such issuance is in the interests of the Managing General Partner and the
Partnership (for example, and not by way of limitation, the issuance of shares
of Common Stock and corresponding Partnership Units pursuant to an employee
stock purchase plan providing for employee purchases of shares of Common Stock
at a discount from fair market value or employee stock options that have an
exercise price that is less than the fair market value of the Common Stock,
either at the time of issuance or at the time of exercise), and (B) the MLP and
the REIT makes a Capital Contribution to the Partnership of all proceeds from
such issuance and exercise.
5.3. CONTRIBUTION OF PROCEEDS OF ISSUANCE OF COMMON STOCK.
In connection with the initial public offering of Common Stock by the REIT
and any other issuance of Common Stock or New Securities pursuant to Section
5.2, the REIT shall contribute to the Partnership any proceeds (or a portion
thereof) raised in connection with such issuance; provided that if the proceeds
actually received by the REIT are less than the gross proceeds of such issuance
as a result of any
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underwriter's discount or other expenses paid or incurred in connection with
such issuance, then the REIT shall be deemed to have made a Capital Contribution
to the Partnership in the amount equal to the sum of the net proceeds of such
issuance plus the amount of such underwriter's discount and other expenses paid
by the Company (which discount and expense shall be treated as an expense for
the benefit of the Partnership for purposes of Section 9.4). In the case of
employee purchases of New Securities at a discount from fair market value, the
amount of such discount representing compensation to the employee, as determined
by the Managing General Partner, shall be treated as an expense of the issuance
of such New Securities.
5.4. EXCHANGE OF UNITS.
(a) Subject to Section 5.4(b), on or after the date hereof, each Limited
Partner (other than the REIT) shall have the right (the "Exchange Right") to
require the REIT to acquire all or a portion of the Partnership Units held by
such Limited Partner in exchange for the REIT Stock Amount. The Exchange Right
shall be exercised pursuant to a Notice of Exchange delivered to the REIT (with
a copy to the Partnership) by the Limited Partner who is exercising the Exchange
Right (the "Exchanging Partner"). A Limited Partner may not exercise the
Exchange Right for fewer than one thousand (1,000) Partnership Units or, if such
Limited Partner holds fewer than one thousand (1,000) Partnership Units, all of
the Partnership Units held by such Partner. The Exchanging Partner shall have no
right, with respect to any Partnership Units so exchanged, to receive any
distributions paid with respect to the Partnership Units on or after the date of
the Notice of Exchange. The Assignee of any Limited Partner may exercise the
rights of such Limited Partner pursuant to this Section 5.4(a), and such Limited
Partner shall be deemed to have assigned such rights to such Assignee and shall
be bound by the exercise of such rights by such Assignee. In connection with any
exercise of such rights by an Assignee on behalf of a Limited Partner, the REIT
Stock Amount shall be paid by the REIT directly to such Assignee and not to such
Limited Partner.
(b) Notwithstanding the provisions of Section 5.4(a), a Partner shall not be
entitled to exercise the Exchange Right pursuant to Section 5.4(a) if the
delivery of shares of Common Stock to such Partner by the REIT pursuant to
Section 5.4(a) would be prohibited under the Amended Articles of Incorporation
of the REIT.
7.2. POWERS OF MANAGING GENERAL PARTNER.
Subject to the limitation of Section 7.3, which vests certain approval
rights in the Limited Partners, and to the limitations and restrictions set
forth in Article VIII, the Managing General Partner (acting on behalf of the
Partnership) shall have the right, power, and authority, in the management of
the business and affairs of the Partnership, to do or cause to be done any and
all acts, at the expense of the Partnership, deemed by the Managing General
Partner to be necessary or appropriate to effectuate the business, purposes, and
objectives of the Partnership. The power and authority of the Managing General
Partner pursuant to this Agreement shall be liberally construed to encompass all
acts and activities in which a partnership may engage under the Delaware RULPA.
The power and authority of the Managing General Partner shall include, without
limitation, the power and authority on behalf of the Partnership:
- - -
(l) To originate loans or otherwise provide financing, whether through
guarantees, letters of credit or otherwise, secured by liens on real estate to
borrowers who meet the Partnership's underwriting criteria, which shall be
established by the Managing General Partner.
9.1. COMPENSATION TO GENERAL PARTNERS.
Except as expressly provided in Section 9.3 or 9.4, no General Partner shall
receive any compensation from the Partnership for services rendered in its
capacity as a general partner of the Partnership or the MLP. Notwithstanding
anything herein to the contrary, at such time as QSV ceases to be the Managing
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General Partner or the managing general partner of the MLP, whether as a result
of the transfer of QSV's Partnership Interest pursuant to Section 11.2 (or
Section 12.2 of the Investors Partnership Agreement) or the withdrawal or
removal of QSV pursuant to Section 13.1 (or Section 14.1 or 14.2 of the
Investors Partnership Agreement) (other than removal for "cause," as defined in
the Investors Partnership Agreement), then QSV shall have the option, in its
sole discretion, to convert its Partnership Interest and its partnership
interest in the MLP and to either assign to the MLP or convert its rights (the
"Rights") under the provisions of Section 9.3 (and Section 9.3 of the Investors
Partnership Agreement) (collectively, the "Conversion") for the Acquisition
Price (as defined below), effective as of the date of such transfer, withdrawal
or removal, and upon such Conversion the successor Managing General Partner
shall cause the Partnership to issue to QSV Partnership Units in the amounts
provided for below.
In exchange for the Conversion of the Rights, as provided for above, and the
conversion of the QSV's Partnership Interest, in the event QSV elects to effect
the Conversion, QSV will receive the "Acquisition Price," consisting of (a) the
Initial Unit Consideration and (b) the Contingent Unit Consideration. The
Initial Unit Consideration consists of 850,000 Partnership Units (which number
or classification shall be adjusted to give effect to any reclassification or
change of the shares of Common Stock or Units, including, without limitation, a
split, or any merger or consolidation of the REIT or the MLP, except the merger
of the MLP with the REIT or a subsidiary thereof, or sale of assets to another
entity, occurring after March 31, 1997), with the number of Partnership Units
issuable hereunder being reduced (on a one-for-one basis) by the number of Units
or shares of Common Stock otherwise received by QSV in connection with the
Conversion. The portion of the Initial Unit Consideration consisting of
Partnership Units shall be issued by the Partnership as soon as practicable
following the date of the Conversion, but in no event later than 30 days
thereafter.
The Contingent Share Consideration consists of up to a maximum number of
550,000 Partnership Units (which number or classification shall be adjusted to
give effect to any reclassification or change of the Common Stock or Units,
including, without limitation, a split, or any merger or consolidation of the
REIT or the MLP, except the merger of the MLP with the REIT or any subsidiary
thereof, or sale of assets to another entity, occurring after March 31, 1997).
The type and number of securities issuable as the Contingent Share Consideration
(subject to the next sentence) shall be at the sole discretion of QSV. The exact
number of Partnership Units to be issued (which number shall be reduced on a
one-for-one basis by the number of Units otherwise received by QSV as part of
the Contingent Share Consideration) will be determined by dividing the (i)
amount by which the MGP Net Income (as defined below) for the 2000 Fiscal Year
exceeds $3,612,500 by (ii) $4.25, and rounding the resulting number up to the
nearest whole number. "MGP Net Income" means the dollar amount of fees and
distributions which would have been payable to QSV, as Managing General Partner,
by the Partnership for the 2000 Fiscal Year, pursuant to the provisions of
Section 9.3, had QSV operated the Partnership on a continuous basis from the
date of the Conversion through December 31, 2000 plus the amounts that would
have been payable to QSV pursuant to its aggregate 1.98% general partnership
interests in the Partnership and the MLP, less $775,000.
For example, if the MGP Net Income for the 2000 Fiscal Year would have been
$5,100,000 ($5,875,000 revenues less $775,000) then the Contingent Unit
Consideration would be an additional 350,000 Partnership Units.
The Contingent Unit Consideration, if any, shall be issued by the
Partnership as soon as practicable following the end of the 2000 Fiscal Year,
but in no event later than March 31, 2001.
9.3. OPERATIONAL EXPENSES.
In addition to any reimbursement pursuant to the indemnification set forth
in Section 7.10, the Partnership, pursuant to this Section 9.3 and Section 9.3
of the Investors Partnership Agreement, shall:
(a) With respect to (i) the Partnership Properties held as of March 17, 1995
and (ii) the Partnership Properties and Ancillary Property related thereto
acquired thereafter with respect to the Partnership
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Properties referred to in clause (i) above whether pursuant to Section 8.12 or
otherwise, the Partnership shall cause to be paid to the Managing General
Partner with respect to each Fiscal Year an aggregate amount equal to Four
Hundred Thousand Dollars ($400,000) adjusted annually as set forth in Section
9.3(c), which amount shall be in lieu of any reimbursement for expenses related
to the management of the business affairs of the Partnership and the Limited
Partner (other than expenses described in Section 9.3 (c)) that are incurred by
the Managing General Partner or its Affiliates with respect to such Partnership
Properties, which amount shall be payable in equal quarterly installments within
sixty (60) days after the end of each fiscal quarter.
(b) With respect to any Partnership Property and Ancillary Property related
thereto acquired after March 17, 1995 (other than those referred to in Section
9.3 (a)) and mortgage loans, if any, originated by the Partnership or the MLP,
(i) the Partnership shall pay to the Managing General Partner (A) an acquisition
fee equal to 1% of the purchase price paid by the Partnership or the Limited
Partner for such Partnership Property and Ancillary Property related thereto,
payable on the date of acquisition or origination, as applicable, and (B) with
respect to each Fiscal Year, an amount, adjusted annually as set forth in
Section 9.3(c), accruing while such property is held at the rate of 1% per annum
(applied using the simple interest method on the basis of a 365/366-day year and
the actual number of days elapsed) on the purchase price paid by the Partnership
or any of the Limited Partners for such Partnership Property and Ancillary
Property related thereto, and (ii) if the Rate of Return attributable to all
Partnership Properties and Ancillary Property related thereto acquired after
March 17, 1995 (other than those referred to in Section 9.3(a)) in respect of
any Fiscal Year shall exceed 12% per annum, the Partnership shall pay to the
Managing General Partner an amount equal to 25% of the amount of cash received
by the Partnership representing such excess, which amounts shall be in lieu of
any reimbursement of expenses related to the management of the business affairs
of the Partnership and the Limited Partners (other than expenses described in
Section 9.3(c)) that are incurred by the Managing General Partner or its
Affiliates with respect to such Partnership Properties and (except as provided
in clause (i)(A) of this Section 9.3(b)) shall be payable in quarterly
installments within sixty (60) days after the end of each fiscal quarter (which
may be estimated in the case of the first three fiscal quarters); provided that
there shall be credited against the amounts, if any, payable pursuant to clause
(ii) of this Section 9.3(b) in respect of any Fiscal Year amounts payable to the
Managing General Partner in respect of its First-Tier Residual Interest or
Second-Tier Residual Interest pursuant to Sections 6.5 and 6.6 of the Investors
Partnership Agreement in respect of such Fiscal Year. For purposes of the
calculations provided for in this Section 9.3 in the event of a mortgage loan
origination, the term "Partnership Properties" shall be deemed to include any
originated mortgage loans and the "purchase price" of such mortgage loans will
be the principal balances thereof at the beginning of any Fiscal Year.
(c) The Partnership shall either pay, or reimburse the Managing General
Partner on a monthly basis for the payment of, all amounts payable to any Person
for providing goods or performing services (including, without limitation,
legal, accounting, auditing, recordkeeping, reporting, depositary, transfer
agent, printing, appraisal, servicing and consulting services) for or on behalf
of the Partnership or the Limited Partners; provided, however, that the
Partnership shall not pay, or reimburse the Managing General Partner for, the
payment of any amount to an Affiliate or an officer, director, or employee of an
Affiliate for legal, accounting, managerial, or consulting services; and
provided further, that the Partnership shall pay, or shall reimburse the
Managing General Partner for, a payment to an Affiliate or an officer, director,
or employee of an Affiliate for goods or other services only if the price and
the terms upon which such goods or services are provided to the Partnership or
the Limited Partners are fair to the Partnership or the Limited Partners, as the
case may be, and are not less favorable to the Partnership or the Limited
Partners, as the case may be, than would be incurred if the Partnership or the
Limited Partners were to obtain such goods or services from an unrelated third
party or were to engage employees to provide such goods or services directly.
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<PAGE>
For 1987 and for each Fiscal Year thereafter, the amount payable pursuant to
Section 9.3(a) shall be increased by an amount equal to the product of Four
Hundred Thousand Dollars ($400,000) multiplied by the percentage increase in the
Price Index from January 1, 1986, through the last day of the immediately
preceding Fiscal Year. For each year after the year in which a Partnership
Property is acquired, the amount otherwise payable pursuant to Section 9.3
(b)(i)(B) (the "Section 9.3(b)(i)(B) Amount") shall be increased by an amount
equal to the product of the Section 9.3(b)(i)(B) Amount multiplied by the
percentage increase in the Price Index from the first day of the immediately
preceding Fiscal Year or, in the case of the first year after the year in which
the Partnership Property is acquired, the first day of the month in which the
acquisition occurred through the last day of the Fiscal Year immediately
preceding such year or, if earlier, the last day of the month in which such
Partnership Property was disposed of. The percentage increase in the Price Index
through the last day of a particular period shall be determined by calculating
the increase, if any, in the Price Index for the last time period during such
period (the "Price Index Determination Period") with respect to which the Price
Index is published (currently a monthly period) over the Price Index for the
time period immediately preceding the first day of the Price Index Determination
Period, and expressing the amount of such increase as a percentage of the Price
Index for said time period immediately preceding the first day of the Price
Index Determination Period.
"RATE OF RETURN" in respect of any period shall mean and refer to the
quotient obtained by dividing (1) the aggregate revenues (calculated in
accordance with generally accepted accounting principles and before amortization
of unearned income on direct financing leases) received by the Partnership or
the Limited Partners from the Partnership Properties and Ancillary Property
referred to in Section 9.3(b) for such period, whether through operations, sale
or other disposition, less (without duplication) (i) the aggregate fees payable
pursuant to Section 9.3(b)(i)(B) for such period in respect of such properties,
(ii) the aggregate expenses of the Partnership (other than interest expense,
depreciation, amortization and other non-cash expenses and charges, and expenses
described in Sections 9.3(b) and (c)) directly attributable to such property and
interest expense on any debt or distributions with respect to any interests (the
"Preferred Interests") of the Partnership issued to the REIT in exchange for the
proceeds from the issuance by the REIT of equity securities ranking senior to
the Common Stock with respect to the payment of dividends by the REIT allocated
thereto for such period, (iii) the general and administrative expenses of the
Partnership (other than non-cash expenses and charges and expenses described in
Sections 9.3 (a) and (b)) for such period allocated to such properties (based on
the ratio of Average Partnership Equity in such properties to the aggregate
Average Partnership Equity in all Partnership Properties), and (iv) the
principal amount of debt and dollar amount of Preferred Interests allocated to
any such property properties repaid during such period and, if applicable, the
cash costs and expenses of any kind or nature incurred in respect of the sale or
other disposition thereof, by (2) the Average Partnership Equity in such
properties during such period. "AVERAGE PARTNERSHIP EQUITY" shall mean and refer
to (A) the average of the sums of the aggregate purchase prices therefor, the
aggregate fees paid pursuant to (b)(i)(A) above Section 9.3(b)(i)(A) in respect
thereof and all other cash costs and expenses of any kind or nature incurred in
connection with the acquisitions thereof ("Property Costs") as of the last day
of each calendar month occurring during the period of determination, less (B)
the average outstanding principal amount of debt of the Partnership and the
aggregate dollar value of the Preferred Interests outstanding as of the last day
of each calendar month during such period and allocated to such properties. The
Rate of Return for any outstanding mortgage loans will be evaluated separately
with the mortgage loans constituting a separate pool of "properties" for such
calculation. The general and administrative expenses allocable to such mortgage
loans shall be equal to the total amount of such expenses for any Fiscal Year
multiplied by a fraction, the numerator of which shall be the aggregate
principal amount of all mortgage loans outstanding at the beginning of such
Fiscal Year and the denominator of which shall be the total of all Property
Costs and such aggregate principal amount.
For the purposes of the foregoing, debt of the Partnership and the Preferred
Interests shall be allocated among the Partnership Properties as follows: (1)
non-recourse debt shall be allocated to the property secured thereby and, if
such debt is secured by more than one property, such debt shall be
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<PAGE>
allocated among the properties secured thereby based on the relative Property
Costs thereof; and (2) recourse debt and the Preferred Interests shall be
allocated to all of the Partnership Properties based on the relative Property
Costs thereof (reduced for this purpose by the amounts of non-recourse debt
allocated thereto in accordance with clause (1) above).
9.4. REIMBURSEMENT OF THE GENERAL PARTNERS.
In the event that the provisions of Section 9.3 are terminated in accordance
with the terms of Section 9.1, the following compensation provisions shall
apply, to be effective upon the date of such termination.
(a) The General Partners shall not be compensated for their services as
general partner of the Partnership except as provided in elsewhere in this
Agreement (including the provisions of Article VI regarding distributions,
payments and allocations to which it may be entitled in its capacity as the
General Partner).
(b) Subject to Sections 9.4(c) and 16.9, the Partnership shall be liable
for, and shall reimburse the General Partners on a monthly basis, or such other
basis as the General Partners may determine in their sole and absolute
discretion, for all sums expended in connection with the Partnership's business
or for the benefit of the Partnership, including, without limitation, (i)
expenses relating to the ownership of interests in, and management and operation
of, or for the benefit of, the Partnership, (ii) compensation of officers and
employees, including, without limitation, payments under future employee benefit
plans of any General Partner, (iii) director fees and expenses, and (iv) all
costs and expenses of any General Partner being a public company, including
costs of filings with the Commission, reports and other distributions to its
stockholders.
(c) To the extent practicable, Partnership expenses shall be billed directly
to and paid by the Partnership, subject to Section 16.9, reimbursements to the
General Partner of any of their Affiliates by the Partnership pursuant to this
Section 9.4 shall be treated as "guaranteed payments" within the meaning of
Section 707(c) of the Code.
13.1. WITHDRAWAL OR REMOVAL OF GENERAL PARTNERS.
A General Partner may withdraw from the Partnership or be removed as a
General Partner without withdrawing as, or being removed as, a general partner
of the MLP. A General Partner shall withdraw from the Partnership or be removed
as a General Partner if the General Partner withdraws as, or is removed as, a
general partner of the MLP. Such withdrawal or removal shall be effective at the
time the Departing General Partner notifies the other General Partners of such
withdrawal or the Departing General Partner is notified by the Partnership of
such removal or at the same time as is the General Partner's withdrawal or
removal as a general partner of the MLP, as applicable. Except as provided
below, the Managing General Partner shall not withdraw from the Partnership
unless (i) the Managing General Partner shall have transferred all of its
Partnership Interest as a General Partner in accordance with Section 11.2; or
(ii) such withdrawal shall have been approved by a Majority Vote of the Limited
Partners. In the event QSV withdraws or is removed as a General Partner or as a
general partner of the MLP, and, in either case, elects to convert its
Partnership Interest for the Acquisition Price as provided in Section 9.1, the
REIT or an Affiliate of the REIT, as designated by the REIT, shall automatically
succeed the Departing Managing General Partner, provided that if the REIT or any
Affiliate thereof shall decline to serve as a successor General Partner then a
successor General Partner shall be selected upon the affirmative vote of all
Limited Partners. If no such successor General Partner is selected by the
Limited Partners and the Partnership has no remaining General Partner, then the
Partnership shall be dissolved pursuant to Section 14.2.
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<PAGE>
U.S. RESTAURANT PROPERTIES MASTER L.P.
5310 Harvest Hill Road, Suite 270
Dallas, Texas 75230
PROXY FOR SPECIAL MEETING OF LIMITED PARTNERS
June 30, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE MANAGING GENERAL PARTNER
The undersigned Limited Partner hereby appoints Robert J. Stetson
and Fred H. Margolin, or either of them, as proxies, each with full
powers of substitution, and hereby authorizes them to represent and to
vote, as designated on the reverse, all units of beneficial interest of
U.S. Restaurant Properties Master L.P. ("USRP"), held of record by the
undersigned on the Record Date (as defined in the accompanying Proxy
Statement/Prospectus) at the Special Meeting (as defined in the
accompanying Proxy Statement/Prospectus), and at any adjournment or
postponement thereof and hereby revokes any prior proxy granted with
respect thereto.
This proxy, when properly executed and returned in a timely manner,
will be voted at the Special Meeting and any adjournment or postponement
thereof in the manner described herein. If proxy card is signed and no
contrary indication is made, this proxy will be voted FOR the merger
alternative (as hereinafter defined), FOR the exchange alternative (as
hereinafter defined) and in accordance with the judgment of the persons
named as proxies herein.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE MANAGING
GENERAL PARTNER. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE
FOR THE MERGER ALTERNATIVE AND FOR THE EXCHANGE ALTERNATIVE.
TO ENSURE CONVERSION TO A SELF-ADVISED REIT, YOU MUST VOTE FOR BOTH THE
EXCHANGE AND THE MERGER ALTERNATIVE. THE CONVERSION IS TAX FREE. PLEASE SEE
THE PROXY DOCUMENT FOR FURTHER DETAIL.
1. With respect to the proposed merger (the "Merger Alternative") of
USRP Acquisition, L.P., a Delaware limited partnership that is an
indirectly wholly-owned subsidiary of U.S. Restaurant Properties,
Inc., a newly formed Maryland corporation (the "REIT Corporation"),
with and into USRP, as described in the accompanying Proxy
Statement/Prospectus:
FOR AGAINST ABSTAIN
2. With respect to the proposed amendment to the partnership agreement
of USRP to permit holders of units to exchange (the "Exchange
Alternative") their units for shares of the REIT Corporation's
common stock at any time and require such an exchange prior to the
transfer of the units to third parties, as described in the
accompanying Proxy Statement/Prospectus:
FOR AGAINST ABSTAIN
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE>
Each of the above named proxies present at the Special Meeting, either in
person or by substitute, shall have and exercise all the powers of said proxies
hereunder. This proxy will be voted in accordance with the choice specified by
the undersigned on this proxy. In their discretion, each of the above-named
proxies is authorized to vote upon such other business incident to the conduct
of the Special Meeting as may properly come before the Special Meeting or any
postponements or adjournments thereof.
The undersigned acknowledges receipt of a copy of the Notice of Special
Meeting of Limited Partners and the Proxy Statement/Prospectus relating to the
Special Meeting.
SIGNATURE DATE
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