**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **ý**                                                                                                                                                                                                                                                                                                                      |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                            |   |                                                                                          |   |   |
| **For  the quarterly period ended March 31, 2003**                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                                                                                                            |   |                                                                                          |   |   |
| **OR**                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                            |   |                                                                                          |   |   |
| **o**                                                                                                                                                                                                                                                                                                                           |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                            |   |                                                                                          |   |   |
| **For  the transition period from                           to                         ** |
|                                                                                                                                                                                                                                                                                                                            |   |                                                                                          |   |   |
| **Commission  file number 1-13089**                                                                                                                                                                                                                                                                                             |

 

| **U.S. Restaurant Properties,  Inc.**                           |
|-----------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)          |
|                                                            |   |   |
| **Maryland**                                                    |   | **75-2687420** |
| (State or other jurisdiction of incorporation  or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |   |
| **12240 Inwood Rd., Suite 300, Dallas, Texas 75244**            |
| (Address of principal executive offices)                        |
| (Zip Code)                                                      |
|                                                            |   |   |
| **(972) 387-1487**                                              |
| (Registrant’s telephone number, including area code)       |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes  o                   No  ý

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).  Yes ý  No o

 

As of May 6, 2003, U.S.Restaurant Properties, Inc. had 19,859,689 shares of common stock $.001 parvalue outstanding.

 

 

----

 

U.S. RESTAURANTPROPERTIES, INC.

 

 
| PART I.  |   | FINANCIAL INFORMATION                                                                                                          |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                           |
| Item 1.  |   | Financial Statements                                                                                                           |
|     |   |                                                                                                                           |
|     |   | Condensed Consolidated  Balance Sheets as of March 31, 2003 (Unaudited) and December 31, 2002                                  |
|     |   |                                                                                                                           |
|     |   | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2003 and 2002 (Unaudited)               |
|     |   |                                                                                                                           |
|     |   | Condensed  Consolidated Statements of Comprehensive Operations for the three months  ended March 31, 2003 and 2002 (Unaudited) |
|     |   |                                                                                                                           |
|     |   | Condensed  Consolidated Statement of Stockholders’ Equity for the three months ended  March 31, 2003 (Unaudited)          |
|     |   |                                                                                                                           |
|     |   | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2003 and 2002 (Unaudited)               |
|     |   |                                                                                                                           |
|     |   | Notes  to Condensed Consolidated Financial Statements (Unaudited)                                                              |
|     |   |                                                                                                                           |
| Item 2.  |   | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                    |
|     |   |                                                                                                                           |
| Item 3.  |   | Quantitative and Qualitative  Disclosures About Market Risk                                                                    |
|     |   |                                                                                                                           |
| Item 4.  |   | Controls and  Procedures                                                                                                       |
|     |   |                                                                                                                           |
| PART II. |   | OTHER INFORMATION                                                                                                              |
|     |   |                                                                                                                           |
| Item 1.  |   | Legal Proceedings                                                                                                              |
|     |   |                                                                                                                           |
| Item  2. |   | Changes  in Securities and Use of Proceeds                                                                                     |
|     |   |                                                                                                                           |
| Item 3.  |   | Defaults upon  Senior Securities                                                                                               |
|     |   |                                                                                                                           |
| Item  4. |   | Submission  of Matters to a Vote of Security Holders                                                                           |
|     |   |                                                                                                                           |
| Item 5.  |   | Other Information                                                                                                              |
|     |   |                                                                                                                           |
| Item 6.  |   | Exhibits and  Reports on Form 8-K                                                                                              |

 

2

----

 

**PARTI. FINANCIAL INFORMATION**

 

**Item1.    Financial Statements**

 

**U.S. RestaurantProperties, Inc.**

**CondensedConsolidated Balance Sheets**

**(In thousands,except per share data)**

** **
|                                                                                                                                                                        |   | **March 31,  2003** |    | **December 31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                                                                                                                                                        |   | **(Unaudited)**     |    |                   |   |
| **Assets**                                                                                                                                                                  |   |                |    |                   |   |
|                                                                                                                                                                        |   |                |    |                   |   |
| Property, net                                                                                                                                                               |   |                |    |                   |   |
| Land                                                                                                                                                                        |   | $                   | 201,528 |                   | $      | 202,404 |   |
| Building and leasehold improvements                                                                                                                                         |   | 373,456             |    | 376,506                |   |
| Machinery and equipment                                                                                                                                                     |   | 13,315              |    | 11,868                 |   |
|                                                                                                                                                                        |   | 588,299             |    | 590,778                |   |
| Less:  accumulated  depreciation                                                                                                                                       |   | (103,513            | )       | (100,571               | )      |
|                                                                                                                                                                        |   | 484,786             |    | 490,207                |   |
|                                                                                                                                                                        |   |                |    |                   |   |
| Construction in progress                                                                                                                                                    |   | 242                 |    | 256                    |   |
| Cash and cash equivalents                                                                                                                                                   |   | 1,492               |    | 4,392                  |   |
| Restricted cash and marketable securities                                                                                                                                   |   | 1,983               |    | 2,211                  |   |
| Rent and other receivables,  net (includes $1,588 and $2,531 allowance for doubtful accounts at March 31,  2003 and December 31, 2002, respectively)                        |   | 4,994               |    | 7,299                  |   |
| Straight line rent, net  (includes $461 and $484 allowance for doubtful accounts at March 31, 2003 and  December 31, 2002, respectively)                                    |   | 11,665              |    | 11,854                 |   |
| Prepaid expenses and other assets                                                                                                                                           |   | 4,505               |    | 3,354                  |   |
| Inventories                                                                                                                                                                 |   | 4,141               |    | 1,289                  |   |
| Investments                                                                                                                                                                 |   | 2,974               |    | 3,025                  |   |
| Notes receivable, net  (includes $13 due from related parties and $3,372 and $3,636 allowance for  doubtful accounts at March 31, 2003 and December 31, 2002, respectively) |   | 8,904               |    | 9,805                  |   |
| Mortgage loans receivable, net  (includes $266 and $583 allowance for doubtful accounts at March 31, 2003 and  December 31, 2002, respectively)                             |   | 33,374              |    | 34,932                 |   |
| Net investment in direct financing leases                                                                                                                                   |   | 466                 |    | 518                    |   |
| Deferred financing costs and intangibles, net                                                                                                                               |   | 9,175               |    | 9,935                  |   |
| **Total assets**                                                                                                                                                            |   | $                   | 568,701 |                   | $      | 579,077 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

3

----

 

**U.S. RestaurantProperties, Inc.**

**CondensedConsolidated Balance Sheets (continued)**

**(In thousands,except per share data)**

 
|                                                                                                                                                                                                    |   | **March 31,  2003** |    | **December 31,  2002** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|------------|
|                                                                                                                                                                                                    |   | **(Unaudited)**     |    |                   | ** ** |
| **Liabilities and stockholders’ equity**                                                                                                                                                           |   |                |    |                   |       |
|                                                                                                                                                                                                    |   |                |    |                   |       |
| Accounts payable and accrued liabilities                                                                                                                                                                |   | $                   | 16,174  |                   | $          | 18,142 |   |
| Accrued dividends and distributions                                                                                                                                                                     |   | 2,182               |    | 2,181                  |       |
| Unearned contingent rent                                                                                                                                                                                |   | 698                 |    | 826                    |       |
| Deferred gain on sale of property                                                                                                                                                                       |   | 923                 |    | 926                    |       |
| Line of credit                                                                                                                                                                                          |   | 24,450              |    | 25,000                 |       |
| Interest rate derivatives at fair value                                                                                                                                                                 |   | 4,214               |    | 4,536                  |       |
| Notes payable                                                                                                                                                                                           |   | 324,769             |    | 327,428                |       |
| Mortgage note payable                                                                                                                                                                                   |   | 937                 |    | 946                    |       |
| **Total liabilities**                                                                                                                                                                                   |   | 374,347             |    | 379,985                |       |
|                                                                                                                                                                                                    |   |                |    |                   |       |
| **Commitments and contingencies**                                                                                                                                                                       |   |                |    |                   |       |
|                                                                                                                                                                                                    |   |                |    |                   |       |
| **Minority interest in operating venture**                                                                                                                                                              |   | 52,845              |    | 52,845                 |       |
|                                                                                                                                                                                                    |   |                |    |                   |       |
| **Stockholders’ equity**                                                                                                                                                                           |   |                |    |                   |       |
|                                                                                                                                                                                                    |   |                |    |                   |       |
| Preferred stock, $.001 par  value per share; 50,000 shares authorized, Series A - 3,680 shares issued and outstanding at  March 31, 2003 and December 31, 2002 (aggregate liquidation value of $92,000) |   | 4                   |    | 4                      |       |
| Common stock, $.001 par value  per share; 100,000 shares authorized, 19,848 and 19,832 shares issued and  outstanding at March 31, 2003 and December 31, 2002, respectively                             |   | 20                  |    | 20                     |       |
| Additional paid-in capital                                                                                                                                                                              |   | 327,932             |    | 327,756                |       |
| Excess stock, $.001 par value  per share 15,000 shares authorized, no shares issued                                                                                                                     |   | —              |    | —                 |       |
| Accumulated other comprehensive loss                                                                                                                                                                    |   | (4,189              | )       | (4,411                 | )          |
| Loans to stockholders for common stock                                                                                                                                                                  |   | (299                | )       | (299                   | )          |
| Distributions in excess of net income                                                                                                                                                                   |   | (181,959            | )       | (176,823               | )          |
| **Total stockholders’ equity**                                                                                                                                                                     |   | 141,509             |    | 146,247                |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                     |   | $                   | 568,701 |                   | $          | 579,077 |   |

 

*See Notes to Condensed ConsolidatedFinancial Statements*

 

4

----

 

**U.S. RestaurantProperties, Inc.**

**CondensedConsolidated Statements of Operations**

**(In thousands,except per share data)**

**(Unaudited)**

 
|                                                                                                                      |   | **Three Months Ended  March 31,** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                      |   | **2003**                          |   | **2002** |   |
|                                                                                                                      |   |                              |   |   | ** ** |
| **Real Estate**                                                                                                           |   |                              |   |   |   |
| Revenues:                                                                                                                 |   |                              |   |   |   |
| Rental                                                                                                                    |   | $                                 | 15,808 |   | $ | 16,078 |   |
| Operating expense reimbursements                                                                                          |   | 864                               |   | 935 |   |
| Interest on notes and mortgage loans receivable                                                                           |   | 842                               |   | 563 |   |
| Amortization of unearned income on direct financing  leases                                                               |   | 66                                |   | 60 |   |
| Lease termination                                                                                                         |   | 1,715                             |   | — |   |
| Total revenues                                                                                                            |   | 19,295                            |   | 17,636 |   |
| Expenses:                                                                                                                 |   |                              |   |   |   |
| Ground rent                                                                                                               |   | 1,036                             |   | 1,006 |   |
| Property taxes                                                                                                            |   | 234                               |   | 314 |   |
| Other property                                                                                                            |   | 113                               |   | 19 |   |
| Legal                                                                                                                     |   | 317                               |   | 386 |   |
| Depreciation and amortization                                                                                             |   | 5,686                             |   | 5,109 |   |
| General and administrative                                                                                                |   | 1,331                             |   | 1,510 |   |
| Provision for doubtful accounts                                                                                           |   | (37                               | )      | 86 |   |
| Interest                                                                                                                  |   | 4,217                             |   | 4,286 |   |
| Amortization of deferred financing costs                                                                                  |   | 616                               |   | 423 |   |
| Derivative settlement payments                                                                                            |   | 896                               |   | 984 |   |
| Impairment of long-lived assets                                                                                           |   | 1,595                             |   | 176 |   |
| Fair value adjustment for interest rate derivatives                                                                       |   | (100                              | )      | (172 | ) |
| Total expenses                                                                                                            |   | 15,904                            |   | 14,127 |   |
| Income from real estate operations                                                                                        |   | 3,391                             |   | 3,509 |   |
| **Retail Operations**                                                                                                     |   |                              |   |   |   |
| Operating revenue                                                                                                         |   | 13,442                            |   | 7,216 |   |
| Operating general and administrative expenses                                                                             |   | (2,003                            | )      | (1,109 | ) |
| Depreciation and amortization                                                                                             |   | (77                               | )      | (10 | ) |
| Cost of sales                                                                                                             |   | (11,767                           | )      | (5,930 | ) |
| Income (loss) from retail operations                                                                                      |   | (405                              | )      | 167 |   |
| Income from continuing operations                                                                                         |   | 2,986                             |   | 3,676 |   |
| Non-operating income (expense)                                                                                            |   | (7                                | )      | 476 |   |
| Minority interests                                                                                                        |   | (1,169                            | )      | (1,133 | ) |
| Income from continuing operations before discontinued  operations and cumulative effect of change in accounting principle |   | 1,810                             |   | 3,019 |   |
| Income from discontinued operations                                                                                       |   | 1,646                             |   | 931 |   |
| Cumulative effect of change in accounting principle                                                                       |   | (270                              | )      | — |   |
| Net income                                                                                                                |   | 3,186                             |   | 3,950 |   |
| Dividends on preferred stock                                                                                              |   | (1,776                            | )      | (1,776 | ) |
| Net income allocable to common stockholders                                                                               |   | $                                 | 1,410  |   | $ | 2,174 |   |
|                                                                                                                      |   |                              |   |   |   |
| Basic and diluted net income (loss) per share:                                                                            |   |                              |   |   |   |
| Income from continuing operations allocable to common  stockholders                                                       |   | $                                 | — |   | $ | 0.06 |   |
| Income from discontinued operations                                                                                       |   | 0.08                              |   | 0.05 |   |
| Cumulative effect of change in accounting principle                                                                       |   | (0.01                             | )      | — |   |
| Net income per share                                                                                                      |   | $                                 | 0.07   |   | $ | 0.11 |   |
|                                                                                                                      |   |                              |   |   |   |
| Weighted average shares outstanding                                                                                       |   |                              |   |   |   |
| Basic                                                                                                                     |   | 19,837                            |   | 19,518 |   |
| Diluted                                                                                                                   |   | 19,864                            |   | 19,784 |   |

 

*See Notes to Condensed ConsolidatedFinancial Statements.*

 

5

----

 

**U.S. RestaurantProperties, Inc.**

**CondensedConsolidated Statements of Comprehensive Operations**

**(In thousands)**

**(Unaudited)**

 
|                                              |   | **Three Months Ended March 31,** |   |
|---------------------------------------------------|--------|----------------------------------|--------|
|                                              |   | **2003**                         |   | **2002** | ** ** |
|                                              |   |                             |   |   |   |
| Net income                                        |   | $                                | 3,186  |   | $ | 3,950 |   |
| Other comprehensive income (loss)-                |   |                             |   |   |   |
| change in unrealized loss on derivative valuation |   | 222                              |   | 1,147 |   |
| change in unrealized loss on investments          |   | —                           |   | (51 | ) |
| Comprehensive income                              |   | $                                | 3,408  |   | $ | 5,046 |   |

* *

*See Notes to Condensed Consolidated Financial Statements.*

 

6

----

 

**U.S. RestaurantProperties, Inc.**

**CondensedConsolidated Statement of Stockholders’ Equity**

**For the ThreeMonths Ended March 31, 2003**

**(In thousands)**

**(Unaudited)**

 
|                                               |   |                |   |             |    |       |   |          |   |                             |   | **Accumulated  Other  Comprehensive  Gain (Loss)** |                        |      |                                              |         |   |   |       |
|----------------------------------------------------|--------|---------------------|--------|------------------|---------|------------|--------|---------------|--------|----------------------------------|--------|----------------------------------------------------|-----------------------------|-----------|---------------------------------------------------|--------------|--------|--------|------------|
|                                               |   |                |   |             |    |       |   |          |   | **Additional  Paid-in  Capital** |   |                                               | **Loans  To  Shareholders** |      | **Distributions****In  Excess of****Net  Income** |         |   |   |
|                                               |   | **Preferred Stock** |   | **Common Stock** |    |       |   |          |   |                             |   |
|                                               |   | **Shares**          |   | **Par Value**    |    | **Shares** |   | **Par Value** |   |                             |   |                                               |                        | **Total** |                                              |
|                                               |   |                |   |             |    |       |   |          |   |                             |   |                                               |                        |      |                                              |         |   |   |       |
| Balance at January 1, 2003                         |   | 3,680               |   | $                |  4 |       | 19,832 |          | $      |  20                         |   | $                                                  |  327,756               |      | $                                                 |  (4,411 | )      | $      |  (299 | ) | $ |  (176,823 | ) | $ | 146,247 |   |
| Net income                                         |   |                |   |             |    |       |   |          |   |                             |   |                                               |                        |      |                                              | 3,186        |   | 3,186  |       |
| Proceeds from exercised  stock options             |   |                |   |             |    | 16         |   |          |   | 176                              |   |                                               |                        |      |                                              |         |   | 176    |       |
| Other comprehensive income  (loss) -               |   |                |   |             |    |       |   |          |   |                             |   |                                               |                        |      |                                              |         |   |   |       |
| Change in unrealized loss on  derivative valuation |   |                |   |             |    |       |   |          |   |                             |   | 222                                                |                        |      |                                              |         |   | 222    |       |
| Distributions declared on  common stock            |   |                |   |             |    |       |   |          |   |                             |   |                                               |                        |      |                                              | (6,546       | )      | (6,546 | )          |
| Distributions declared on  preferred stock         |   |                |   |             |    |       |   |          |   |                             |   |                                               |                        |      |                                              | (1,776       | )      | (1,776 | )          |
| Balance at March 31, 2003                          |   | 3,680               |   | $                |  4 |       | 19,848 |          | $      |  20                         |   | $                                                  |  327,932               |      | $                                                 |  (4,189 | )      | $      |  (299 | ) | $ |    (181,959 | ) | $ |  141,509 |   |

 

*See Notes to Condensed ConsolidatedFinancial Statements.*

 

7

----

 

**U.S. RestaurantProperties, Inc.**

**CondensedConsolidated Statements of Cash Flows**

**(In thousands)**

**(Unaudited)**

 
|                                                                              |   | **Three Months Ended  March 31,** |       |
|-----------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                              |   | **2003**                          |       | **2002** | ** ** |
|                                                                              |   |                              | ** ** |   | ** ** |
| **Cash flows from operating activities:**                                         |   |                              |       |   |   |
|                                                                              |   |                              |       |   |   |
| Net income                                                                        |   | $                                 | 3,186      |   | $ | 3,950 |   |
| Adjustments to reconcile net income to net cash flows  from operating activities: |   |                              |       |   |   |
| Depreciation and amortization                                                     |   | 5,780                             |       | 5,346 |   |
| Cumulative effect of change in accounting principle                               |   | 270                               |       | — |   |
| Amortization of deferred financing costs and discounts                            |   | 547                               |       | 436 |   |
| Impairment of long-lived assets                                                   |   | 1,595                             |       | 809 |   |
| Provision for doubtful accounts                                                   |   | (37                               | )          | 86 |   |
| Stock-based compensation                                                          |   | —                            |       | 62 |   |
| Accretion of interest income                                                      |   | —                            |       | (168 | ) |
| Fair value adjustment for interest rate derivatives                               |   | (100                              | )          | (172 | ) |
| Minority interests                                                                |   | 1,169                             |       | 1,133 |   |
| Gain on sale of property                                                          |   | (1,619                            | )          | (1,480 | ) |
| Gain on sale of investments                                                       |   | —                            |       | (255 | ) |
| Decrease (increase) in rent and other receivables, net                            |   | 2,488                             |       | (464 | ) |
| Increase in straight line rent, net                                               |   | (573                              | )          | (519 | ) |
| Decrease (increase) in prepaid expenses                                           |   | (1,146                            | )          | 338 |   |
| Increase in inventories                                                           |   | (2,897                            | )          | (1,589 | ) |
| Reduction in net investment in direct financing leases                            |   | 32                                |       | 169 |   |
| Decrease in accounts payable and accrued liabilities                              |   | (1,528                            | )          | (3,595 | ) |
| Decrease in unearned contingent rent                                              |   | (128                              | )          | (124 | ) |
| Cash flows from operating activities                                              |   | 7,039                             |       | 3,963 |   |
|                                                                              |   |                              |       |   |   |
| **Cash flows from investing activities:**                                         |   |                              |       |   |   |
|                                                                              |   |                              |       |   |   |
| Proceeds from sale of property and equipment                                      |   | 2,946                             |       | 6,246 |   |
| Purchase of property                                                              |   | (260                              | )          | — |   |
| Purchase of machinery and equipment                                               |   | (2,465                            | )          | (29 | ) |
| Purchase of investments                                                           |   | —                            |       | (1,073 | ) |
| Proceeds from sale of investments                                                 |   | —                            |       | 3,408 |   |
| Distributions received from investments                                           |   | 51                                |       | 24 |   |
| Decrease in restricted cash                                                       |   | 228                               |       | 2,570 |   |
| Mortgage notes receivable acquired                                                |   | —                            |       | (84 | ) |
| Mortgage loans receivable principal payments                                      |   | 1,875                             |       | 1,303 |   |
| Notes receivable issued                                                           |   | —                            |       | (6,500 | ) |
| Lease acquisition premiums paid                                                   |   | (56                               | )          | (6 | ) |
| Notes receivable principal payments                                               |   | 209                               |       | 184 |   |
| Cash flows from investing activities                                              |   | 2,528                             |       | 6,043 |   |
|                                                                              |   |                              |       |   |   |
| **Cash flows from financing activities:**                                         |   |                              |       |   |   |
|                                                                              |   |                              |       |   |   |
| Proceeds from line of credit                                                      |   | $                                 | 7,200      |   | $ | — |   |
| Payments on line of credit                                                        |   | (7,750                            | )          | — |   |
| Distributions to minority interest shareholders                                   |   | (1,169                            | )          | (1,198 | ) |
| Cash distributions to stockholders                                                |   | (6,546                            | )          | (6,449 | ) |
| Payment of preferred stock dividends                                              |   | (1,776                            | )          | (1,776 | ) |
| Proceeds from sale of stock and exercised stock  options                          |   | 176                               |       | 976 |   |
| Payments on notes/mortgage payable                                                |   | (2,602                            | )          | (2,914 | ) |
| Cash flows from financing activities                                              |   | (12,467                           | )          | (11,361 | ) |
|                                                                              |   |                              |       |   |   |
| Decrease in cash and cash equivalents                                             |   | (2,900                            | )          | (1,355 | ) |
| Cash and cash equivalents at beginning of period                                  |   | 4,392                             |       | 10,346 |   |
| Cash and cash equivalents at end of period                                        |   | $                                 | 1,492      |   | $ | 8,991 |   |
|                                                                              |   |                              |       |   |   |
| **Supplemental disclosure:**                                                      |   |                              |       |   |   |
| Interest paid during the period                                                   |   | $                                 | 3,224      |   | $ | 3,421 |   |
|                                                                              |   |                              |       |   |   |
| **Non-cash investing and financing activities:**                                  |   |                              |       |   |   |
| Security deposit and note receivable written off                                  |   | $                                 | 1,037      |   | $ | — |   |
| Decrease in common and preferred stock dividends  accrued                         |   | —                            |       | 3,925 |   |

* *

*See Notes toCondensed Consolidated Financial Statements.*

 

8

----

**U.S. Restaurant Properties, Inc.**

**Notes to Condensed ConsolidatedFinancial Statements**

**(Unaudited)**

 

**1.             Interim UnauditedFinancial Information**

 

U.S. RestaurantProperties, Inc. (the “Company”), through its subsidiaries, including FuelSupply, Inc. (“FSI”), is a fully integrated, self-administered and self-managedreal estate investment trust (“REIT”), as defined under the Internal RevenueCode of 1986, as amended. As noted in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2002, the Company became the successor entityto U.S. Restaurant Properties Master L.P. (collectively with its subsidiaries,“USRP”) in October 1997.  The businessand operations of the Company are conducted primarily through U.S. RestaurantProperties Operating L.P. (“OP”). The Company owns, manages and acquiresrestaurant, service station and other service retail properties.  Through FSI, its taxable REITsubsidiary,  the Company alsotemporarily operates various retail businesses on its properties in order totransition the operations from one tenant to another.  At March 31, 2003, the Company owned 100% of and controlled theOP.  As of March 31, 2003, the Companyowned 816 properties in 48 states.

 

The accompanyingcondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K, as amended, for the year ended December31, 2002, which was filed with the Securities and Exchange Commission(“SEC”).  The results of operations forthe three months ended March 31, 2003 are not necessarily indicative of the resultsto be expected for the year ending December 31, 2003.  Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted in this report on Form 10-Q pursuant to the Rules and Regulations ofthe SEC.  In the opinion of management,the disclosures contained in this report are adequate to make the informationpresented not misleading.

 

Accounting measurementsat interim dates inherently involve greater reliance on estimates than at yearend and the results of operations for the interim periods shown in this reportare not necessarily indicative of results to be expected for the fiscal year.  In the opinion of management, theaccompanying unaudited condensed consolidated financial statements include alladjustments (of a normal recurring nature) necessary to present fairly theconsolidated financial position of the Company as of March 31, 2003, and the consolidatedresults of its operations, comprehensive operations, stockholders’ equity andcash flows for the three months ended March 31, 2003 and 2002.

 

The Company derives itsreal estate revenue primarily from the leasing of its properties to operators (primarilyrestaurants) on a “triple net” basis. Triple net leases typically require the tenants to be responsible forproperty operating costs, including property taxes, insurance, maintenance and,in most cases, the ground rents where applicable.  Accordingly, the accompanying condensed consolidated financialstatements do not reflect property taxes and insurance costs or reimbursementswhen the tenant has legally assumed responsibility for these liabilities.  As the Company remains legally responsiblefor ground rents under its ground leases and receives payment from its tenantsfor these costs, amounts reimbursed from tenants for ground rents are recordedas rent revenue.  The treatment of ground rents has changed from the2002 interim period due to the adoption of EITF No. 01-14, “Income StatementCharacterization of Reimbursements Received for “Out-of-Pocket” ExpensesIncurred” after March 31, 2002.  Inaccordance with this consensus, the 2002 prior period presented has also beenreclassified.  Rent revenues andground rent expense under operating leases are recognized on a straight-linebasis, unless significant collection problems occur with the lessee, at whichtime rents are recognized on a cash basis. Contingent rent is recognized as revenue after the related lease salestargets are achieved.

 

The Company derives itsretail revenues from the sale of gasoline, car washes, convenience storemerchandise, and food sales at properties operated by the Company.  Revenue is recognized upon the sale of gasoline,merchandise or the delivery of services.

 

The preparation ofconsolidated financial statements, in conformity with accounting principlesgenerally accepted in the United States of America, requires management to makeestimates and assumptions that affect reported amounts of certain assets,liabilities, contingent assets and liabilities, revenues and expenses as of andfor the reporting periods.  Actualresults may differ from such estimates. Any differences from those estimates are recorded in the period in whichthey are identified.

 

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Basic income per share iscomputed based upon the weighted average number of shares of common stockoutstanding.  Diluted income per sharetypically reflects the dilutive effect of stock options, OP units, OP units andshares on which the price is guaranteed (“guaranteed stock”) and convertiblepreferred stock.  A reconciliation ofthe basic and diluted weighted average shares is as follows (in thousands,except per share data):

 
|                                                                                                                           |   | **Three months ended March 31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
| **(In thousands, except per share  amounts)**                                                                                  |   | **2003**                         |   | **2002** |   |
|                                                                                                                           |   |                             |   |   |   |
| Net income from continuing operations before  discontinued operations and cumulative effect of change in accounting  principle |   | $                                | 1,810  |   | $ | 3,019 |   |
| Dividends on preferred stock                                                                                                   |   | (1,776                           | )      | (1,776 | ) |
| Net income from continuing operations allocable to  common stockholders                                                        |   | 34                               |   | 1,243 |   |
| Income from discontinued operations                                                                                            |   | 1,646                            |   | 931 |   |
| Cumulative effect of change in accounting principle                                                                            |   | (270                             | )      | — |   |
| Net income allocable to common stockholders                                                                                    |   | $                                | 1,410  |   | $ | 2,174 |   |
|                                                                                                                           |   |                             |   |   |   |
| Basic and diluted net income (loss) per share:                                                                                 |   |                             |   |   |   |
| Income from continuing operations allocable to common  stockholders                                                            |   | $                                | — |   | $ | 0.06 |   |
| Income from discontinued operations                                                                                            |   | 0.08                             |   | 0.05 |   |
| Cumulative effect of change in accounting principle                                                                            |   | (0.01                            | )      | — |   |
| Net income per share                                                                                                           |   | $                                | 0.07   |   | $ | 0.11 |   |
|                                                                                                                           |   |                             |   |   |   |
| Weighted average shares outstanding:                                                                                           |   |                             |   |   |   |
| Basic                                                                                                                          |   | 19,837                           |   | 19,518 |   |
| Dilutive effect of OP units                                                                                                    |   | —                           |   | 132 |   |
| Dilutive effect of stock options                                                                                               |   | 27                               |   | 40 |   |
| Dilutive effect of guaranteed stock                                                                                            |   | —                           |   | 94 |   |
| Diluted                                                                                                                        |   | 19,864                           |   | 19,784 |   |
|                                                                                                                           |   |                             |   |   |   |
| Antidilutive securities:                                                                                                       |   |                             |   |   |   |
| Stock options                                                                                                                  |   | 61                               |   | 46 |   |
| Convertible preferred stock                                                                                                    |   | 3,453                            |   | 3,453 |   |

 

Amounts in previousperiods have been reclassified to conform to current period presentation.

 

Investments in equitysecurities with readily determinable fair values and debt securities areclassified as either available-for-sale or trading, based on the Company’sintent with respect to those securities. Such investments are classified as trading securities if thosesecurities are held principally for the purpose of selling them in the nearterm.  All other such investments areclassified as available-for-sale.  Theseinvestments are recorded at fair value on the balance sheet.  Changes in fair value during the period arerecorded in earnings for trading securities and in other comprehensiveoperations for available-for-sale securities. Investments in equity securities that do not have readily determinablefair values are recorded using the cost method since the Company does not havethe ability to exercise significant influence over the investees.  The Company disposed of all of its tradingand available-for-sale securities in 2002.

 

All derivative financialinstruments are recognized as either assets or liabilities on the balance sheetat fair value.  If the derivative isdesignated as a fair-value hedge, the changes in the fair value of thederivative and the hedged item are recognized currently in earnings.  If the derivative is designated as a cashflow hedge, the effective portion of the

 

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changes in fair value ofthe derivative is recorded in other comprehensive income and is reclassified toearnings when the hedged item affects earnings.  For a derivative that does not qualify or is not designated as ahedge, changes in fair value are recognized currently in earnings.

 

SFAS No. 143, “Accountingfor Asset Retirement Obligations” was issued in June 2001, and was adopted bythe Company on January 1, 2003.  ThisStatement addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  (See Note 8)

 

Long-lived assets includereal estate, direct financing leases, and intangibles which are evaluated on anindividual asset basis.  Intangibleassets were recorded for the excess of cost over the net investment in directfinancing leases in 1986.  These intangibleassets are being amortized and evaluated in accordance with the requirements ofSFAS No. 142, “Goodwill and Other Intangible Assets”.  The Company’s management routinely reviews its investments forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable.  Indicators of possible impairment include default of lease terms,non-payment or late payment of rents, decreases in tenant’s sales levels andgeneral declines in the success of the operating brand names of itstenants.  When these indicators arepresent, the Company reviews the circumstances of the indicator and, if animpairment is required because estimated undiscounted cash flows are less thanthe carrying amount of the asset, secures an estimate of fair market value ofthe property affected.  On January 1, 2002, the Company adopted SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.  This statement requires current andhistorical results of operations for disposed properties and assets classifiedas held for sale that occur subsequent to January 1, 2002 to be reclassifiedand presented separately as discontinued operations. The operating results ofproperties disposed of subsequent to January 1, 2002, as well as the net gainon disposal are included in the Condensed Consolidated Statement of Operationsunder the caption “Income from discontinued operations.”

 

SFAS No. 145, “Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections” was issued in April 2002 and was adopted by the Companyon January 1, 2003.  Portions of theStatement that are applicable to the Company include the rescission of FASBStatement No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, andan amendment to FASB Statement No. 13, “Accounting for Leases”, to eliminate aninconsistency between the required accounting for sale-leaseback transactionsand the required accounting for certain lease modifications that have economiceffects that are similar to sale-leaseback transactions. Future gain or lossfrom the extinguishment of debt will be included in income from continuingoperations, rather than as an extraordinary item.  In addition, gains and losses from extinguishment of debt thatoccurred in prior periods will be reclassified from extraordinary items intocontinuing operations.

 

SFAS No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities” was issued in June 2002and was adopted by the Company on January 1, 2003.  During the quarter ended March 31, 2003, no activities qualifiedas exit or disposal activities, and the Company anticipates no material impacton its financial statements in the near future.

 

SFAS No. 148, “Accountingfor Stock-Based Compensation —Transition and Disclosure, an amendment of FASBStatement No. 123,” was issued in December 2002 and provides new transitionmethods if an entity adopts the fair value based method of valuing stock-basedcompensation suggested in SFAS No. 123 “Accounting for Stock-BasedCompensation,” as well as requiring additional disclosures in interim andannual financial statements.  At thistime, the Company intends to continue to utilize the intrinsic value model ofaccounting for options, which results in compensation costs equal to the excessof the fair value of the stock above the stock price being recognized at themeasurement date.  Pro-forma disclosuresare as follows (in thousands, except per share data):

 

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|                                                                              |   | **Three months ended March 31,** |   |
|-----------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                              |   | **2003**                         |   | **2002** |   |
| Net income allocable to common stockholders before  stock-based compensation cost |   | $                                | 1,410  |   | $ | 2,236 |   |
| Stock-based compensation recognized                                               |   | —                           |   | (62 | ) |
| Net income allocable to common stockholders, as reported                          |   | 1,410                            |   | 2,174 |   |
| Pro-forma stock-based compensation                                                |   | (6                               | )      | (40 | ) |
| Pro-forma net income allocable to common stockholders                             |   | $                                | 1,404  |   | $ | 2,134 |   |
|                                                                              |   |                             |   |   |   |
| Basic and diluted income per share:                                               |   |                             |   |   |   |
| As reported -  basic and diluted                                                  |   | $                                | 0.07   |   | $ | 0.11 |   |
| Pro-forma -  basic                                                                |   | $                                | 0.07   |   | $ | 0.11 |   |
| Pro-forma -  diluted                                                              |   | $                                | 0.07   |   | $ | 0.11 |   |
|                                                                              |   |                             |   |   |   |
| Stock options:                                                                    |   |                             |   |   |   |
| Pro-forma estimated compensation value per options  granted                       |   | $                                | 2.20   |   | $ | 1.51 |   |

 

FASB Interpretation(“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others,” requiresdisclosures beginning with financial statements ending after December 15, 2002,and requires liability recognition beginning January 1, 2003.  The adoption of this standard had no impacton the Company’s financial statements.

 

FIN No. 46,“Consolidation of Variable Interest Entities” was issued in January 2003.  This interpretation of Accounting ResearchBulletin No. 51, “Consolidated Financial Statements,” applies immediately tovariable interest entities created after January 31, 2003, and applies to thefirst interim period beginning after June 15, 2003 to entities acquired beforeFebruary 1, 2003.  This FIN does notaffect the Company at this time, as it has no interests that would requireconsolidation under this Interpretation.

 

**2.****                                      Property**

 

Thecurrent and historical results of operations for disposed properties and assetsclassified as held for sale are presented separately as discontinuedoperations.  Results of discontinuedoperations relate to the sale or disposal of 46 properties during the twelvemonths ended December 31, 2002 and seven properties during the three monthsended March 31, 2003.  The operatingresults of these properties as well as the net gain on disposal are included inthe Condensed Consolidated Statements of Operations under the caption “Incomefrom discontinued operations” as follows (in thousands):

 
|                                |   | **Three months ended March 31,** |   |
|-------------------------------------|--------|----------------------------------|--------|
|                                |   | **2003**                         |   | **2002** |   |
|                                |   |                             |   |   |   |
| Revenues                            |   | $                                | 91     |   | $ | 591 |   |
| Depreciation and amortization       |   | (17                              | )      | (227 | ) |
| Impairment of long-lived assets     |   | —                           |   | (633 | ) |
| Other expenses                      |   | (47                              | )      | (280 | ) |
|                                |   | 27                               |   | (549 | ) |
| Gain on sale of property            |   | 1,619                            |   | 1,480 |   |
| Income from discontinued operations |   | $                                | 1,646  |   | $ | 931 |   |

 

During the three monthsended March 31, 2003, the Company completed the sale or disposal of sevenproperties for cash proceeds of $2,946,000, net of closing costs.  During the three months ended March 31,2003, leases for seven

 

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properties in which theCompany had a leasehold interest were terminated, and the Company assumedresponsibility as the primary tenant.

 

During the first quarterof 2003, as a result of the Company’s regular analysis of its investments todetermine if circumstances indicate that the carrying amount of an asset maynot be recoverable, impairment charges of $1,595,000 were recorded from therevaluing of 20 assets to their estimated fair value.

** **

**3.****                                      Linesof Credit, Bridge Loan and Notes Payable**

 

The Company’s debt issummarized as follows (in thousands):

 
|                                                                |   |               |   |               |   | **As of**           |    |
|---------------------------------------------------------------------|--------|--------------------|--------|--------------------|--------|---------------------|---------|
|                                                                |   | **Maturity  Date** |   | **Interest  Rate** |   | **March 31,  2003** |    | **December 31,  2002** | ** ** |
|                                                                |   |               |   |               |   |                |    |   |   |
| Lines of Credit                                                     |   | May 2004           |   | LIBOR + 3.0        | %      | $                   | 24,450  |   | $ | 25,000 |   |
|                                                                |   |               |   |               |   |                |    |   |   |
|                                                                |   |               |   |               |   |                |    |   |   |
| Notes Payable                                                       |   |               |   |               |   |                |    |   |   |   |   |
| Senior unsecured notes, interest-only payments  semiannually        |   | May 2005           |   | 7.15               | %      | $                   | 111,000 |   | $ | 111,000 |   |
| Variable rate Certificates, principal and interest  payable monthly |   | August 2006        |   | LIBOR + 0.48       | %      | 165,627             |    | 168,220 |   |
| Senior unsecured notes, interest-only payments  semiannually        |   | August 2003        |   | 8.22               | %      | 47,500              |    | 47,500 |   |
| Debt premium, net                                                   |   |               |   |               |   | 642                 |    | 708 |   |
| Total notes payable                                                 |   |               |   |               |   | $                   | 324,769 |   | $ | 327,428 |   |
|                                                                |   |               |   |               |   |                |    |   |   |
| Mortgage note payable                                               |   | June 2007          |   | 8.00               | %      | $                   | 937     |   | $ | 946 |   |

 

In May 2002, the Companyentered into a Credit Agreement with Bank of America (“the Credit Agreement”),through its subsidiary USRP Funding 2002-A, L.P., for a secured revolvingcredit facility of $35,000,000, which is subject to a Derivative ExposureReserve and a Borrowing Base, as defined. Borrowings under this facility are being used primarily to acquirecertain Shoney’s and Captain D’s properties in sale/leaseback transactions.This facility is secured by the 173 properties owned by USRP Funding 2002-A,L.P. with a net book value of $95,944,000 as of March 31, 2003.  The Credit Agreement has a term of up to twoyears and allows for Base Rate Loans, Eurodollar Loans or a combination of thetwo.  Base Rate Loans bear interest at3.0% plus the higher of the Federal Funds Rate plus 0.5% or the PrimeRate.  Eurodollar Loans bear interest at3.0% plus LIBOR.  The Credit Agreementalso provides that up to $10,000,000 of the facility may be used for letters ofcredit.  There is a 3% fee per annum onoutstanding letters of credit as well as a 3% Derivative Exposure Usage Feeunder this facility.  As of March 31,2003, the Company had letters of credit outstanding and drawn on Bank ofAmerica in the amount of $3,645,000.  InMay 2003, the Company exercised its option to extend the maturity date on theCredit Agreement by one year to May 2004 with a maximum borrowing of$20,000,000 effective May 31, 2003.

 

In December 2002, alimited and temporary waiver and amendment was executed under the CreditAgreement which allowed the Company to borrow funds under this facility topartially finance the purchase of mortgage notes issued by Captain D’s with aface value of $12,000,000 on December 18, 2002.  The amount of this investment, without the waiver, would haveviolated the limitations on investments under this facility.  The initial waiver period ends June 18,2003, with extensions of the waiver possible through September 16, 2003.  The Captain D’s mortgage notes bear interestat 12.5% per annum. The Company intends to use these notes as partialconsideration on the future acquisition of certain Captain D’s properties priorto the expiration of the waiver.

 

In August 2001, theCompany completed a $180,000,000 offering of Triple Net Lease MortgageCertificates (the “Certificates”) through its subsidiary USRP Funding 2001-A,L.P.  The Certificates have an assumedamortization over 15 years and are secured by 275 properties with a net bookvalue of $193,659,000. Under the Property Management Agreement associated withthese properties, certain covenants and ratios must be maintained.  The

 

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Company received a waiverdated December 31, 2002 on certain covenants in the Amended and RestatedProperty Management Agreement.  ThroughJune 30, 2003, the waiver allows Unsecured Indebtedness, as defined, to excludethe $12,000,000 of Captain D’s mortgage notes purchased in December 2002.

 

On November 13, 1998, theCompany issued $47,500,000 in senior notes in a private placement and are dueAugust 1, 2003.  In anticipation of thismaturity, the Company is currently discussing various financing alternativeswith its creditors and lenders.

 

Afterreceiving the waivers discussed above, the Company is in compliance with allcovenants associated with its debt and credit facilities as of March 31, 2003.

 

**4.****                                      DerivativeInstruments**

 

The Company’s derivativeinstruments as of March 31, 2003 are summarized as follows (in thousands):

 
|                   |   |                   |   |         |   |                 |   | **Fixed Swap  Rate  Paid** |            |   |          |   |                | **Liability as of** |                   |
|------------------------|--------|------------------------|--------|--------------|--------|----------------------|--------|----------------------------|-----------------|--------|---------------|--------|---------------------|---------------------|------------------------|
| **Type**               |   | **Settlement  Period** |   | **Maturity** |   | **Notional  Amount** |   |                       | **Floor  Rate** |   | **Cap  Rate** |   | **March 31,  2003** |                | **December 31,  2002** | ** ** |
| Interest rate swap (a) |   | Quarterly              |   | May 2003     |   | $                    | 15,000 |                       | 7.05            | %      |          |   |                |                | $                      | 125 |   | $ | 325 |   |
| Interest rate collar   |   | Monthly                |   | August 2005  |   | 67,574               |   |                       |            | 4.42   | %             | 6.00   | %                   | 3,584               |                   | 3,678 |   |
| Interest rate swap     |   | Monthly                |   | June 2004    |   | 25,000               |   | 2.42                       | %               |   |          |   |                | 343                 |                   | 315 |   |
| Interest rate swap     |   | Monthly                |   | August 2003  |   | 50,000               |   | 1.9975                     | %               |   |          |   |                | 162                 |                   | 218 |   |
|                   |   |                   |   |         |   |                 |   |                       |            |   |          |   |                | $                   | 4,214                  |   | $ | 4,536 |   |
|                        |        |                        |        |              |        |                      |        |                            |                 |        |               |        |                     |                     |                        |  |  |  |  |  |

 

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(a)In April 2003, the Company paid $225,000, including accrued interest, toterminate the Interest rate swap agreement.

 

Derivative financialinstruments are utilized by the Company to manage its exposure to market risksfrom changes in interest rates.  TheCompany’s derivative financial instruments include interest rate swaps andinterest rate collars, in which the Company receives variable payments based onan appropriate LIBOR index.

 

The Company terminatedthe fixed to floating interest rate swap with Bank of America in September2002.  Proceeds from the termination of$1,105,000 were collected in October 2002. The gain resulting from the termination of approximately $860,000 wasrecorded as a basis adjustment to notes payable on the balance sheet and isbeing amortized over the original term of the derivative, through May2005.  As of March 31, 2003, theunamortized basis adjustment was $693,000.

 

**5.             RelatedParty Transactions**

 

In March 2000, theCompany advanced $400,000 to Mr. Stetson, the Company’s Chief ExecutiveOfficer, for the purchase of the common stock of the Company.  The promissory note provides for an interestrate of 7.0% per annum and quarterly payments of interest only through December2005, with a final payment of principal and interest due in March 2006.  This note is classified as “Loans tostockholders for common stock” on the balance sheet.  During the third quarter of 2002, this promissory note was paiddown by $125,000.  At March 31, 2003,there was a balance of $275,000 due on this note.

 

Pursuant to an agreementbetween Harry O. Davis, the Company’s Chief Operating Officer, and the Board ofDirectors, in January 2002, the Company advanced Mr. Davis $24,000 for thepurpose of acquiring shares of the Company’s Common Stock.  The promissory note provides for an interestrate of 6.0% per annum and quarterly payments of interest only beginning inApril 2002 through December 2006, with a final payment of principal and allunpaid interest in January 2007.  Thisnote is classified as a “Loan to stockholders for common stock” on the balancesheet.

 

On January 24, 2002, LoneStar U.S. Acquisitions LLC (an affiliate of the Lone Star Holders described inNote 6 below), the OP, LSF 4 Acquisition, LLC and Shoney’s Inc. entered into anAgreement and Plan of Merger pursuant to which LSF 4 Acquisition, LLC wouldmerge into Shoney’s, with Shoney’s being the surviving entity.  Pursuant to the terms of the merger, whichwas consummated on April 10, 2002, all of the outstanding shares of commonstock

 

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of Shoney’s werecancelled and converted into the right to receive $0.36 in cash and eachoutstanding membership interest in LSF 4 Acquisition, LLC (owned 90.1% by LoneStar U.S. Acquisitions and 9.9% by the OP) would be converted into andexchanged for 100 shares of common stock of Shoney’s, as the surviving entityin the merger.  Under  the terms of the limited liability companyagreement, Lone Star Acquisitions contributed 90.1% of the initial capital andthe OP contributed 9.9% of the initial capital to LSF 4 Acquisition, LLC.  Pursuant to the terms of financingarrangements entered into in conjunction with the merger, the OP now owns 7.5%of the equity of the sole shareholder of Shoney’s.  In addition, the OP has no obligation to fund any capitalrequirements of the entity, other than its initial capital contribution.  However, in December 2002, the OP didcontribute an additional $892,000 in order to preserve its 7.5% equitystake.  In the event there is anothercapital call by Shoney’s and the Company chooses not to participate, nopenalties will be incurred by the Company, but the Company’s percentageownership in Shoney’s will be diluted. Since the merger, the Company has completed the purchase of 51properties from Shoney’s and intends to acquire additional properties in thenear future.  The Company’s investmentsin Shoney’s as of March 31, 2003 consisted of an investment in common stock of$2,384,000, mortgage loans receivable of $16,781,000 and a net book value ofreal estate purchased and leased back to Shoney’s of approximately $36,817,000.

 

**6.             Stockholders’Equity and Minority Interests**

 

Two stockholders of theCompany (LSF3 Investments I, LLC, a Delaware limited liability company, andLSF3 Investments II, LLC, a Delaware limited liability company (the “Lone StarHolders”)) owned approximately 19% of the outstanding Common Stock as of March31, 2003.

 

The Company had19,847,689 and 19,831,689 shares of common stock outstanding as of March 31,2003 and December 31, 2002, respectively.

 

**Distributions to Common and Preferred Stockholders**

 

During the three monthsended March 31, 2003, the Company declared distributions of $6,546,000 to itscommon stockholders (or $0.33 per share of Common Stock) and $1,776,000 to itspreferred stockholders (or $0.4825 per share of Preferred Stock). During thethree months ended March 31, 2002, the Company changed its declaration date forits dividends from the last working day of the previous period to the first ofevery period.  During the three monthsended March 31, 2002, the Company declared distributions of $4,300,000 to itscommon stockholders (or $0.22 per share of Common Stock) and $-0- to itspreferred stockholders.

 

**MinorityInterests**

 

During1999, the Company issued $55,000,000 of 8.5% preferred interest in USRP/HCIPartnership 1, L.P. (“HJV”) to a third partyfor net proceeds of $52,793,000.  Underthe terms of this transaction, the preferred interest holder receives annualdistributions equal to $4,675,000 payable monthly from the cash flows of HJV.  Income is allocated to the preferredinterest holder equal to their distribution. The Company may elect from time to time to exchange properties that donot meet specified criteria as defined in the partnership agreement.During 2001, the HJV preferred interest holder contributed $52,000 to theOP.  This interest held by the thirdparty is reflected as minority interest on the balance sheet.

 

**7.             SegmentInformation**

 

Effective April 2001,with the formation of FSI, a wholly-owned subsidiary of the Company, and the commencementof retail operations, the Company began operating two segments, real estate andretail.  Operating segments are definedas components of an enterprise for which separate financial information isavailable that is evaluated by the chief operating decision maker(s) indeciding how to allocate resources and in assessing performance.

 

*Real Estate.*  Real estate activities are comprised of property management,acquisition and development operations and related business objectives.  The Company derives its revenues primarilyfrom rental income received on its 816 restaurant and service stationproperties located throughout 48 states.

 

*Retail*. Revenues from this segment aregenerated from the sale of gasoline and convenience store merchandise, and foodsales at restaurants operated by the Company. At March 31, 2003, FSI operated twenty-eight service stations in Texas(including 25 Fina stations which were taken over in February 2003), eight inHawaii and one in Illinois.  In

 

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January 2002, FSIcommenced utilizing a fuel terminal in Hawaii to store fuel distributed to itsHawaii service stations.  At March 31,2003, in addition to the service stations currently operated, FSI sold fuel to sevenservice stations in Hawaii, five in Texas and two in Illinois.  FSI also operates two restaurants, onelocated in Texas and one located in Kansas.

 

*Intersegment Charges. *Intersegment charges are eliminated in consolidationand include the costs of rent and interest. The Retail segment pays rent to the Real Estate segment for lease of theproperties that it operates.  Interestis also paid by the Retail segment to the Real Estate segment.  Interest is charged at an annual rate of9.5% on intercompany balances as well as on a note established on January 1,2002 for the sale of the Hawaii fuel terminal to FSI.  Intercompany balances represent primarily the cash advances madeby the Real Estate segment to the Retail segment to fund its operations.  Intersegment rent and interest eliminated inconsolidation for the three months ended March 31, 2003 were $518,000 and$324,000, respectively, and $211,000 and $-0-, respectively, for the threemonths ended March 31, 2003.

 

The following representsthe Company’s reportable amounts by segment as of and for the three monthsended March 31, 2003 and 2002 (in thousands):

 
| **As of March 31, 2003**                                                                                                          |   | **Real Estate** |    | **Retail** |   | **Intercompany** |   | **Consolidated** |    |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|---------|------------|--------|------------------|--------|------------------|---------|
| Rental revenue                                                                                                                    |   | $               | 16,326  |       | $      | —           |   | $                | (518    | ) | $ | 15,808 |   |
| Operating income                                                                                                                  |   | —          |    | 13,442     |   | —           |   | 13,442           |    |
| Interest income, amortization of direct financing  leases and operating expense reimbursements                                    |   | 2,096           |    | —     |   | (324             | )      | 1,772            |    |
| Termination fee income                                                                                                            |   | 1,715           |    | —     |   | —           |   | 1,715            |    |
| Total revenues                                                                                                                    |   | 20,137          |    | 13,442     |   | (842             | )      | 32,737           |    |
| Interest expense                                                                                                                  |   | (4,217          | )       | (324       | )      | 324              |   | (4,217           | )       |
| Depreciation and amortization                                                                                                     |   | (5,686          | )       | (77        | )      | —           |   | (5,763           | )       |
| Other expenses, net                                                                                                               |   | (7,177          | )       | (14,288    | )      | 518              |   | (20,947          | )       |
| Income (loss) from continuing operations before  discontinued operations and cumulative effect of change in accounting  principle |   | 3,057           |    | (1,247     | )      | —           |   | 1,810            |    |
| Income from discontinued operations                                                                                               |   | 1,646           |    | —     |   | —           |   | 1,646            |    |
| Cumulative effect of change in accounting principle                                                                               |   | (270            | )       | —     |   | —           |   | (270             | )       |
| Net income (loss)                                                                                                                 |   | $               | 4,433   |       | $      | (1,247           | )      | $                | —  |   | $ | 3,186 |   |
|                                                                                                                              |   |            |    |       |   |             |   |             |    |
| Identifiable assets                                                                                                               |   | $               | 568,601 |       | $      | 14,369           |   | $                | (15,761 | ) | $ | 567,209 |   |
| Cash allocable with segment                                                                                                       |   | 854             |    | 638        |   | —           |   | 1,492            |    |
| Total assets                                                                                                                      |   | $               | 569,455 |       | $      | 15,007           |   | $                | (15,761 | ) | $ | 568,701 |   |

 

 

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| **As of March 31, 2002**                                                                       |   | **Real Estate** |    | **Retail** |   | **Intercompany** |   | **Consolidated** |   |
|------------------------------------------------------------------------------------------------|--------|-----------------|---------|------------|--------|------------------|--------|------------------|--------|
| Rental revenue                                                                                 |   | $               | 16,289  |       | $      | —           |   | $                | (211   | ) | $ | 16,078 |   |
| Operating income                                                                               |   | —          |    | 7,216      |   | —           |   | 7,216            |   |
| Interest income, amortization of direct financing  leases and operating expense reimbursements |   | 1,558           |    | —     |   | —           |   | 1,558            |   |
| Total revenues                                                                                 |   | 17,847          |    | 7,216      |   | (211             | )      | 24,852           |   |
| Interest expense                                                                               |   | (4,286          | )       | —     |   | —           |   | (4,286           | )      |
| Depreciation and amortization                                                                  |   | (5,109          | )       | (10        | )      | —           |   | (5,119           | )      |
| Other expenses, net                                                                            |   | (5,389          | )       | (7,250     | )      | 211              |   | (12,428          | )      |
| Income (loss) from continuing operations before  discontinued operations                       |   | 3,063           |    | (44        | )      | —           |   | 3,019            |   |
| Income from discontinued operations                                                            |   | 931             |    | —     |   | —           |   | 931              |   |
| Net income (loss)                                                                              |   | $               | 3,994   |       | $      | (44              | )      | $                | — |   | $ | 3,950 |   |
|                                                                                           |   |            |    |       |   |             |   |             |   |
| Identifiable assets                                                                            |   | $               | 560,967 |       | $      | 5,278            |   | $                | (8,274 | ) | $ | 557,971 |   |
| Cash allocable with segment                                                                    |   | 8,802           |    | 189        |   | —           |   | 8,991            |   |
| Total assets                                                                                   |   | $               | 569,769 |       | $      | 5,467            |   | $                | (8,274 | ) | $ | 566,962 |   |
|                                                                                                |        |                 |         |            |        |                  |        |                  |        |  |  |  |  |  |

 

**8.             Changein Accounting Principle**

 

On January 1, 2003, theCompany adopted SFAS No. 143, “Accounting for Asset Retirement Obligations”.  This Statement addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  As a result of adopting SFAS No. 143, theCompany capitalized net asset retirement costs of $325,000, recorded assetretirement obligations of $595,000 and recorded a cumulative effect of changein accounting principle of $270,000 on January 1, 2003.  The retirement obligations recorded relateto the estimated future costs for the removal of tanks, fuel lines and otherrequired modifications to the Company’s gas stations.  The Company recognized $10,000 in accretion expense for theproperties with asset retirement obligations related to the quarter ended March31, 2003.

 

**9.             SignificantTenant Negotiations and Legal Proceedings**

 

In February 2002, theleasehold lender of 51 Fina stations in the Dallas/Ft. Worth area stepped intothe lease and took over operations from the bankrupt tenant.  Since the lease assumption, all post-assumptionrent has been collected by the Company. As of December 31, 2002, there was $2,564,000 owed to the Company underthe leases, representing pre-assumption property taxes, for which the Companyhad reserved $792,000. Effective in February 2003, the Company entered into alease termination agreement and received a lease termination fee of $3,400,000,which was applied to outstanding receivable balances, with the remaining$1,715,000 being recorded as revenue. The Company also, through its subsidiary FSI, purchased equipment forapproximately $2,200,000, gas and convenience store inventory from the tenantat estimated cost, and took over the operation of 25 of these Finastations.  The remaining 26 properties weretemporarily closed.  As of April 30, 2003,25 stations (13 operated by the Company and 12 others) had been re-leased andfive other stations (two being operated by the Company and three others) hadbeen sold.  The other 26 servicestations are vacant. During the three months ended March 31, 2003, impairmentcharges of $973,000 were recorded from the revaluing of 14 Fina stations totheir estimated fair value.

 

At March 31, 2003, theCompany had $6,072,000 of mortgage notes receivable due from Lyon’s ofCalifornia, Inc. (“Lyons”).  These notesare secured by certain Lyons restaurant properties and are partially guaranteedby ICH Corporation (“ICH”), the former owner of Lyon’s.  Sybra, Inc. (“Sybra”), a former wholly ownedsubsidiary of ICH, is the lessee of 59 of the Company’s Arby’s restaurants,making it the Company’s largest tenant. In addition, the Company holds an unsecured note receivable of $567,000from ICH at March 31, 2003.

 

Due to the Lyon’s and ICHbankruptcy filings, the Company recorded an allowance for doubtful accounts of$2,500,000 and $275,000 on the balances due from Lyons and ICH, respectively,during the year ended December 31, 2001. Interest income associated with these notes has not been recognizedsince September 2001.  All of these

 

18

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notes are valued based on the estimated fair value of the collateral,as collateral disposal is the only means through which the Company will collectany proceeds.  Through March 31, 2003,the Company has received several million dollars in proceeds from theliquidation of this collateral, and during April 2003, the Company received$3,066,000 in cash associated with the ICH guarantee.  As a result of these events, the fair value of the collateralsupporting these notes has become more certain.  The allowance on the Lyon’s notes was reduced from $2,500,000 to$583,000 during the year ended December 31, 2002.  The Company further reduced the allowance on the Lyon’s notes by$317,000 as a credit to the provision for doubtful accounts during the quarterended March 31, 2003.  The allowanceassociated with the ICH note has remained at $275,000.

 

During 2002, asignificant tenant/mortgagee, Embers, experienced financial difficulty and theCompany executed a workout agreement whereby the tenant would sell all of itsreal estate (including those fee properties owned by the Company that wereleased to the tenant) and remit all net proceeds to the Company until 100% ofall notes, accrued interest, real estate, rent receivables, late fees and othercosts had been recovered.  Interestincome associated with these notes has not been recognized since December2002.  During 2002, the Company receivedapproximately $1.5 million of cash from these transactions to partially repayits mortgage notes.  During 2003, theCompany received $1.1 million in cash from the sale of one of its fee ownedproperties, and recognized a gain on sale of $664,000.  Each quarter, the Company individuallyevaluates all of its mortgage notes and real estate associated with this tenantto determine if any asset has been impaired. As a result of this evaluation, a $200,000 impairment was recorded ontwo fee-owned properties during 2003. At March 31, 2003, the Company had mortgage notes receivable of$2,565,000, net book value of real estate and equipment of $1,927,000 and rentreceivables and other assets of $226,000.

 

During the three monthsended March 31, 2003, the Company filed a lawsuit against Alon USA, L.P.(“Alon”).  Alon is the original owner ofthe 51 Fina service stations that the Company took back through release of thetenant from its lease with the Company. Alon has counter-claimed against the Company, alleging that these gasstations must be continuously operated selling Fina branded gasoline pursuantto a Branding Assurance Agreement it allegedly entered into with theCompany.  The Company disputes thisposition and has not reopened several of the stations, has sold one station andcontemplates selling other stations for possible uses other than as Finabranded gasoline stations.  If Alon’sposition is upheld, the Company’s ability to sell or lease these gas stationscould be impaired and the Company could be liable for damages.  It is not possible to predict the outcome ofthe litigation or to estimate the possibility of damages at this time.

 

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**Item 2****.    Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

Management’s discussionand analysis of financial condition and results of operations are based uponthe Company’s consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires management of the Company to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities.  On a regular basis, the Company evaluatesthese estimates, including asset impairment and provision for doubtfulaccounts.  These estimates are based onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances. Actual results may differ from these estimates.

 

**Results ofOperations**

** **

TheCompany derives its real estate revenue primarily from the leasing of itsproperties (primarily restaurants) to operators on a “triple net” basis.  Triple net leases typically require thetenants to be responsible for property operating costs, including propertytaxes, insurance, maintenance, and in most cases, the ground rents whereapplicable.  Approximately 45% of theCompany’s leases provide for a base rent plus a percentage of the sales inexcess of a threshold amount.  As aresult, portions of the Company’s revenues are a function of the number ofproperties in operation and their level of sales.  Sales at individual properties are influenced by local marketconditions, the efforts of specific operators, marketing, new product programs,support of the franchisor and the general state of the economy.

 

Thefollowing discussion considers the specific impact of such factors on theresults of operations of the Company for the following periods.

 

***Comparison of the three months endedMarch 31, 2003 to the three months ended March 31, 2002***

 

Revenues from real estateoperations, including income earned on direct financing leases, in the threemonths ended March 31, 2003 totaled $19,295,000, up 9.4% from the $17,636,000recorded for the three months ended March 31, 2002.  The increase in revenues is primarily due to the higher number ofproperties owned during 2003, a net lease termination fee of $1,715,000 and anincrease in interest income, partially offset by a 27-property increase in thenumber of vacant non-billable properties as of March 31, 2003 to 89, ascompared to 62 at March 31, 2002.  InFebruary 2003, the Company entered into an early lease termination agreementwith the leasehold lender of 51 Fina gas stations.  The Company received a termination fee of $3,400,000, which wasoffset by outstanding receivables balances, reserves and writedowns for a netamount of $1,715,000 included as lease termination revenue.  For the three months ended March 31, 2003,approximately 4.1% of the Company’s rental revenues resulted from percentagerents (rents determined as a percentage of tenant sales), compared with 5.6%for the three months ended March 31, 2002. The ratio of percent rent to totalrental revenues will continue to decline in the coming years as the Company’scurrent policy is predominantly to exclude this provision from any new leasecontracts or renewals of current leases and instead increase the base rentrates. The increase in interest income from $563,000 at March 31, 2002 to$842,000 at March 31, 2003 is due to the higher balances of notes and mortgagesreceivable.

 

During the three monthsended March 31, 2003, the Company experienced a 7.0% overall decrease in groundrent, property taxes and legal costs compared to the three months ended March31, 2002.  This was primarily due tolower legal proceedings involved with the vacant non-billable properties during2003, offset by slightly higher non-reimbursed ground rent due to the highernumber of vacant non-billable properties as of March 31, 2003 compared to March31, 2002.

 

Other property costsincreased from $19,000 for the three months ended March 31, 2002 to $113,000for the three months ended March 31, 2003, primarily due to the reclass of 2002costs on properties sold or disposed to discontinued operations.  Depreciation and amortization expensesduring the three months ended March 31, 2003 totaled $5,686,000, an increase of11.3% when compared to the three months ended March 31, 2002.  This increase is primarily due to the higherdepreciation expense on higher average properties owned during 2003 as comparedto 2002.

 

General andadministrative expenses for the three months ended March 31, 2003 totaled$1,331,000, a decrease of $179,000 when compared to the three months endedMarch 31, 2002.  During the three monthsended March 31,

 

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2003, the Company incurred lower salary costs partially offset byhigher insurance costs when compared to the three months ended March 31, 2002.

 

Provision for doubtfulaccounts for the three months ended March 31, 2003 totaled $(37,000) comparedto $86,000 for the three months ended March 31, 2002.  Several of the Company’s tenants have experienced financial difficultyand/or bankruptcy.  See “Status ofFinancially Troubled Tenants” below for detailed discussion.

 

The Company performsregular analysis of its investments to determine if circumstances indicate thatthe carrying amount of an asset may not be recoverable.  Indicators of possible impairment includedefault of lease terms, non-payment or late payment of rents, contracts orletters of intent at lower net value than what the Company has the assetrecorded, decreases in tenant’s sales levels and general declines in thesuccess of the operating brand names of its tenants.  During the three months ended March 31, 2003, as the Companysigned contracts or letters of intent at amounts lower than the net values ofthe assets, a charge of $1,595,000 was recorded from the revaluing of 20 assetsto their estimated fair value.  Duringthe three months ended March 31, 2002, the Company recorded an asset impairmentcharge of $809,000, of which $633,000 is reflected in income from discontinuedoperations.

 

Derivative financialinstruments are utilized by the Company to manage its exposure to market risksfrom changes in interest rates.  TheCompany’s derivative financial instruments include interest rate swaps andinterest rate collars, and all are designated as cash flow hedges as of March31, 2003.  All of the derivatives,except one, are perfectly effective and therefore changes in fair value of thederivatives are recorded in other comprehensive income, and are recognized inthe Statement of Operations when the hedged item (variable-rate interestpayments) affects earnings.  Derivativesettlement payments decreased from $984,000 in 2002 to $896,000 in 2003, as aresult of lower balances outstanding on notes payable.  During the three months ended March 31,2003, the Company recognized $100,000 of income related to the ineffectiveportion of the interest rate swap that is not perfectly effective, as comparedto $172,000 of income during the three months ended March 31, 2002.

 

The Company derives itsretail revenues from the sale of gasoline, car washes, convenience storemerchandise, and food sales at properties operated by the Company.  Revenue is recognized upon the sale ofgasoline, merchandise or the delivery of services.  Retail revenue was $13,442,000 for the three months ended March31, 2003, compared to $7,216,000 for the three months ended March 31,2002.  Cost of sales associated withthis revenue totaled $11,767,000 and general and administrative costsassociated with this revenue totaled $2,003,000 for the three months endedMarch 31, 2003, compared to $5,930,000 and $1,109,000, respectively, for thethree months ended March 31, 2002.  Thenumber of properties being operated by the Company increased from 30 propertiesat March 31, 2002 to 53 at March 31, 2003. The increase in the number of operating properties in 2003 was primarilydue to the addition of 25 Fina stations in February 2003.  Retail operations reside in FSI, a fullytaxable subsidiary of the Company that is subject to paying income taxes.  FSI has incurred net operating losses(“NOLs”) since inception.  The Companyhas not recognized any deferred tax benefits associated with these NOLs asmanagement believes it is more likely than not that FSI will not be able toutilize these NOLs.

 

Gain on sale of propertyfor the three months ended March 31, 2003 was $1,619,000, compared to a gain onsale of $1,480,000 for the three months ended March 31, 2002, both of which arereflected in income from discontinued operations in accordance with SFAS No.144 (as described below).

 

Minority interests in earningswere $1,169,000 for the three months ended March 31, 2003, compared to$1,133,000 for the three months ended March 31, 2002, and relate primarily tothe Company’s minority interest in HJV, which was formed in October 1999.

 

Income from discontinuedoperations was $1,646,000 for the three months ended March 31, 2003, comparedto $931,000 for the three months ended March 31, 2002.  In accordance with SFAS No. 144, which theCompany adopted on January 1, 2002, discontinued operations represent the operationsof properties disposed of subsequent to January 1, 2002, as well as any gain orloss recognized in their disposition. The operating results relate to thesale or disposal of 46 properties during the twelve months ended December 31,2002 and seven properties during the three months ended March 31, 2003, and arereflected as income from discontinued operations for the three months endedMarch 31, 2003 and all prior periods.

 

Non-operating income(expense) was $(7,000) for the three months ended March 31, 2003, compared to$476,000 for the three months ended March 31, 2002.  The decrease in income in 2003 is primarily due to lower interest

 

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income, as the Companyliquidated its trading securities during 2002, as well as a loss on sale ofinvestments of $14,000 during 2003.

 

Change in accountingprinciple for the three months ended March 31, 2003 was $270,000.  On January 1, 2003, the Company adopted SFASNo. 143, “Accounting for Asset Retirement Obligations”.  This Statement addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs.  As a result of adopting SFAS No. 143, theCompany recorded a cumulative effect of change in accounting principle onJanuary 1, 2003.  The retirementobligations recorded relate to the estimated future costs for the removal oftanks, fuel lines and other required modifications to the Company’s gasstations.

 

**Liquidity and Capital Resources**

 

*Summary of Sources and Uses of Cash*

 

The Company’s principalsource of cash to meet its working capital and dividend requirements is rentalrevenues generated by the Company’s properties, as well as operating revenuesfrom the Company’s retail segment.  Cashgenerated in excess of operating requirements and dividend payments isgenerally used to reduce amounts outstanding under the Company’s creditagreements or to acquire additional properties.  The Company’s cash and cash equivalents were $1,492,000 at March31, 2003.

 

The Company generated$7,039,000 of cash from operations and $2,528,000 from investing during thequarter ended March 31, 2003.  During2003, the Company used $2,725,000 of cash for the purchase of property, machineryand equipment.  The terms of theCompany’s triple net leases generally require that the tenant is responsiblefor maintenance and improvements to the property under lease.  Therefore, the Company is generally notrequired to expend funds for remodels and renovations.  However, the Company did spend $30,000during the first quarter of 2003, and expects to spend approximately $590,000during the remainder of 2003 to renovate and remodel currently ownedproperties.  During the quarter endedMarch 31, 2003, the Company received $2,946,000 in cash proceeds from the saleof seven properties.  In addition, theCompany received $228,000 in previously restricted cash and $1,875,000 ofprincipal payments on mortgage loans receivable.

 

Cash flow used infinancing activities was $12,467,000 for the quarter ended March 31, 2003. Themost significant uses of cash were to fund Common and Preferred Stock dividendsand paydowns on the Company’s line of credit. During the three months ended March 31, 2003, the Company declared andpaid distributions of $6,546,000 to its common stockholders and $1,776,000 toits preferred stockholders.  The Companyalso used cash to make payments on its line of credit of $7,750,000 and to paynotes and mortgage notes payable of $2,602,000.  Distributions of $1,169,000 were also made to minority interestshareholders.  The primary source ofcash from financing activities was $7,200,000 of borrowings under the Company’sline of credit.  In May 2003, theCompany exercised its one-year option to extend the maturity date on the lineof credit by one year to May 2004, with a maximum borrowing of $20,000,000effective May 31, 2003.  All other termsof the agreement remain the same.  Also,the Company is currently discussing various financing alternatives with itscreditors and other lenders regarding its $47,500,000 senior notes, which aredue August 1, 2003.  Alternatives thatthe Company is pursuing include a secured loan on certain Hawaii assets, aplacement of additional unsecured notes, and a small preferred equitytransaction.  Although there is nocertainty surrounding interest rates, given the current favorable interest rateenvironment, the Company anticipates the financing solution will bear an annualinterest rate that is lower than the existing 8.22% on the expiring seniornotes.

 

*Status of FinanciallyTroubled Tenants*

 

During June 2001, theCompany was notified that one of its tenants had filed for protection underChapter 11 of the Bankruptcy Code of the United States (the “BankruptcyCode”).  Gant Acquisition LLC (“Gant”),which leased 27****service stations in North Carolina under a Master Lease withthe Company, filed for Chapter 11 bankruptcy on May 21, 2001.  Annual rent from all 27 properties isapproximately $1,288,000.  At March 31,2003, there was approximately $198,000 of receivables due from this tenant onall 27 properties and the Company had reserved $31,000 for these amounts.****TheBankruptcy Court has severed the Master Lease between Gant and the Company,permitting Gant to reject 12 of the properties subject to the Master Leasewhile continuing to pay rent on the remaining 15 properties.  The Company appealed this ruling in May2002.  The appeal was upheld by theDistrict Court in March 2003.  TheCompany is now appealing this ruling to the Third Circuit Court ofAppeals.  Depending on the outcome ofthis appeal, which is anticipated to be ruled upon in the latter part of 2003,the remaining 12

 

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properties will either besold, with all proceeds payable to the Company, or Gant will be responsible forall back rent due. Gant continues to pay rent on 15 of the 27 properties.

 

During 2001, one of theCompany’s mortgagees, Lyons, filed for protection under Chapter 11 of thebankruptcy code.  The mortgage noteswere secured by certain Lyons restaurant properties and were partiallyguaranteed by ICH, the former owner of Lyons. During 2001, the Company recorded a provision for doubtful accounts of$2,775,000 related to these notes. Interest income associated with the Lyons notes has not been recognizedsince September 2001.

 

During 2002, Lyonsemerged from Chapter 11 Bankruptcy and, according to the terms of the Plan ofReorganization approved by the United States Bankruptcy Court, certain Lyonsrestaurants would be sold in order to compensate its creditors.  As the properties have been sold, theCompany has received its proportionate share of the proceeds.  In addition, the Plan of Reorganizationprovides for the payment of franchise royalties and cash payments from the cashflow of the Lyons restaurant in Sacramento, CA, of which the Company will mostlikely be one of the recipients.  Thetiming and exact amounts to be collected by the Company from the proceeds onsales of and cash flows from Lyons properties is estimated and thereforesubject to change.

 

During 2002, the Companywas notified that ICH, the guarantor on the Lyons notes, had filed forprotection under Chapter 11 of the bankruptcy code, along with its wholly-ownedsubsidiary, Sybra.  At the time offiling, Sybra was the Company’s largest tenant, leasing 59 of the Company’sArby’s restaurants.  Subsequent to thefiling, all post-bankruptcy rent continued to be paid by Sybra.

 

In December 2002,pursuant to a Plan of Reorganization approved by the United States BankruptcyCourt, Sybra was acquired by Triarc Companies, Inc. (“Triarc”).  Triarc assumed all of the Company’s Sybraleases and is now the Company’s largest tenant.  The Bankruptcy Court, in accepting Triarc’s purchase of Sybra,required that the proceeds from the purchase be placed in escrow with the Courtfor the benefit of the unsecured creditors. At December 31, 2002, funds were placed in escrow, and all prepetitionamounts due have been paid.  In April2003, the Company received $3,066,000 from this escrow and anticipates a finaldisbursement of up to $450,000 in the next 60 days.

 

Due to the relationshipamong ICH, Lyons and Sybra, the proceeds received by the Company related to thePlan of Reorganization of ICH and Sybra are considered in the collateral valueanalysis of the Lyons mortgage notes. Although the amount of recoverability on the Lyons notes is an estimateand is subject to change, the Company expects to recover substantially more ofthe original principal balance than originally estimated because the fair valueof the collateral has become more certain over time.  Taking this into consideration, for the three months ended March31, 2003, the Company reduced the allowance on the Lyons notes by $317,000 as acredit to the provision for doubtful accounts, leaving an allowance of$541,000. As of March 31, 2003, there was approximately $6,639,000 due on thenotes receivable from Lyons and ICH combined.

 

In February 2002, theleasehold lender of 51 Fina stations in the Dallas/Ft. Worth area stepped intothe lease and took over operations from the bankrupt tenant.  Since the lease assumption, allpost-assumption rent has been collected by the Company.  As of December 31, 2002, there was$2,564,000 owed to the Company under the leases, representing pre-assumptionproperty taxes, for which the Company had reserved $792,000. Effective inFebruary 2003, the Company entered into a lease termination agreement andreceived a lease termination fee of $3,400,000, which was applied tooutstanding receivable balances, with the remaining $1,715,000 being recordedas revenue.  The Company also, throughits subsidiary FSI, purchased equipment for approximately $2,200,000, gas andconvenience store inventory from the tenant at estimated cost, and took overthe operation of 25 of these Fina stations. The remaining 26 properties were temporarily closed.  As of April 30, 2003, 25 stations (13operated by the Company and 12 others) had been re-leased and five otherstations (two being operated by the Company and three others) had beensold.  The other 26 service stations arevacant. During the three months ended March 31, 2003, impairment charges of$973,000 were recorded from the revaluing of 14 Fina stations to theirestimated fair value.

 

In December 2002, theCompany was notified that one of its tenants, Ameriking, which leases 12 BurgerKing properties, had filed for protection under Chapter 11 of the BankruptcyCode.  As of March 31, 2003, Amerikingowed the Company approximately $156,000 for which a reserve of $24,000 has beenestablished.  The 12 properties have anet book value of approximately $5,900,000 and the annual rent on theseproperties is approximately $1,000,000. Ameriking has rejected 4 of the 12 leases.  In April 2003, one of the properties was sold, and

 

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Ameriking continues topay post-petition rent on the remaining seven properties.  The outcome of the Ameriking bankruptcy andthe effects on the Company are uncertain at this time.

 

During 2002, asignificant tenant/mortgagee, Embers, experienced financial difficulty and theCompany, after numerous discussions and negotiations, initiated foreclosureproceedings in March 2002.  In September2002, the Company executed a workout agreement with the tenant and its lender,Medallion Capital.  In exchange for theCompany agreeing to stay its eviction and foreclosure proceedings, the Companywould receive 100 percent of the net proceeds of each sale of property untilthe Company received a sum equal to the entirety of its mortgage balances withall accrued interest, an agreed upon sale price of the fee propertiesrepresenting approximately 119 percent of the Company’s original cost in theproperties, and all the Company’s legal fees and costs of collection, as wellas all rent and mortgage payment obligations going forward.  Embers agreed that these payments would bemade in full within 24 months of the agreement.  At the time of payment in full, the Company would agree torelease any remaining mortgages and deed over any remaining properties toEmbers.  Interest income associated withthe mortgage notes has not been recognized since December 2002.

 

*Company Debt andDerivatives*

 

The Company’s debt issummarized as follows (in thousands):

 
|                                                                |   |               |   |               |   | **As of**           |    |
|---------------------------------------------------------------------|--------|--------------------|--------|--------------------|--------|---------------------|---------|
|                                                                |   | **Maturity  Date** |   | **Interest  Rate** |   | **March 31,  2003** |    | **December 31,  2002** |   |
|                                                                |   |               |   |               |   |                |    |   |   |
| Lines of Credit                                                     |   | May 2004           |   | LIBOR + 3.0        | %      | $                   | 24,450  |   | $ | 25,000 |   |
|                                                                |   |               |   |               |   |                |    |   |   |
| Notes Payable                                                       |   |               |   |               |   |                |    |   |   |   |   |
| Senior unsecured notes, interest-only payments semiannually         |   | May 2005           |   | 7.15               | %      | $                   | 111,000 |   | $ | 111,000 |   |
| Variable rate Certificates, principle and interest  payable monthly |   | August 2006        |   | LIBOR + 0.48       | %      | 165,627             |    | 168,220 |   |
| Senior unsecured notes, interest-only payments  semiannually        |   | August 2003        |   | 8.22               | %      | 47,500              |    | 47,500 |   |
| Debt premium, net                                                   |   |               |   |               |   | 642                 |    | 708 |   |
| Total notes payable                                                 |   |               |   |               |   | $                   | 324,769 |   | $ | 327,428 |   |
|                                                                |   |               |   |               |   |                |    |   |   |
| Mortgage note payable                                               |   | June 2007          |   | 8.00               | %      | $                   | 937     |   | $ | 946 |   |

 

In May 2002, the Companyentered into a Credit Agreement with Bank of America (“the Credit Agreement”),through its subsidiary USRP Funding 2002-A, L.P., for a secured revolvingcredit facility of $35,000,000, which is subject to a Derivative ExposureReserve and a Borrowing Base, as defined. Borrowings under this facility are being used primarily to acquirecertain Shoney’s and Captain D’s properties in sale/leaseback transactions.This facility is secured by the 173 properties owned by USRP Funding 2002-A,L.P. with a net book value of $95,944,000 as of March 31, 2003.  The Credit Agreement has a term of up to twoyears and allows for Base Rate Loans, Eurodollar Loans or a combination of thetwo.  Base Rate Loans bear interest at3.0% plus the higher of the Federal Funds Rate plus 0.5% or the PrimeRate.  Eurodollar Loans bear interest at3.0% plus LIBOR.  The Credit Agreementalso provides that up to $10,000,000 of the facility may be used for letters ofcredit.  There is a 3% fee per annum onoutstanding letters of credit as well as a 3% Derivative Exposure Usage Feeunder this facility.  As of March 31,2003, the Company had letters of credit outstanding and drawn on Bank ofAmerica in the amount of $3,645,000.  InMay 2003, the Company exercised its option to extend the maturity date on theCredit Agreement by one year to May 2004 with a maximum borrowing of$20,000,000 effective May 31, 2003.

 

In December 2002, alimited and temporary waiver and amendment was executed under the CreditAgreement which allowed the Company to borrow funds under this facility topartially finance the purchase of mortgage notes issued by Captain D’s with aface value of $12,000,000 on December 18, 2002.  The amount of this investment, without the waiver, would haveviolated the limitations on investments under this facility.  The initial waiver period ends June

 

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18, 2003, with extensionsof the waiver possible through September 16, 2003.  The Captain D’s mortgage notes bear interest at 12.5% perannum.  The Company intends to use thesenotes as partial consideration on the future acquisition of certain Captain D’sproperties prior to the expiration of the waiver.

 

In August 2001, theCompany completed a $180,000,000 offering of Triple Net Lease MortgageCertificates (the “Certificates”) through its subsidiary USRP Funding 2001-A,L.P.  The Certificates have an assumedamortization over 15 years and are secured by 275 properties with a net bookvalue of $193,659,000. Under the Property Management Agreement associated withthese properties, certain covenants and ratios must be maintained.  The Company received a waiver dated December31, 2002 on certain covenants in the Amended and Restated Property ManagementAgreement.   Through June 30, 2003, thewaiver allows Unsecured Indebtedness, as defined, to exclude the $12,000,000 ofCaptain D’s mortgage notes purchased in December 2002.

 

On November 13, 1998, theCompany issued $47,500,000 in senior notes in a private placement and are dueAugust 1, 2003.  In anticipation of thismaturity, the Company is currently discussing various financing alternativeswith its creditors and lenders. Alternatives that the Company is pursuinginclude a secured loan on certain Hawaii assets, a placement of additionalunsecured notes, and a small preferred equity transaction.  Given the favorable interest rateenvironment, the Company anticipates the financing solution will bear an annualinterest rate that is lower than the existing 8.22% on the expiring seniornotes.

 

Whenconsidering the waivers discussed above, the Company is in compliance with allcovenants associated with its debt and credit facilities as of March 31, 2003.

 

The Company’s derivativeinstruments are summarized as follows (in thousands):

 
|                   |   |                   |   |         |   |                 |   | **Fixed  Swap Rate  Paid** |            |   |          |   |                | **Liability as of** |                   |
|------------------------|--------|------------------------|--------|--------------|--------|----------------------|--------|----------------------------|-----------------|--------|---------------|--------|---------------------|---------------------|------------------------|
| **Type**               |   | **Settlement  Period** |   | **Maturity** |   | **Notional  Amount** |   |                       | **Floor  Rate** |   | **Cap  Rate** |   | **March 31,  2003** |                | **December 31,  2002** |   |
| Interest rate swap (a) |   | Quarterly              |   | May 2003     |   | $                    | 15,000 |                       | 7.05            | %      |          |   |                |                | $                      | 125 |   | $ | 325 |   |
| Interest rate collar   |   | Monthly                |   | August 2005  |   | 67,574               |   |                       |            | 4.42   | %             | 6.00   | %                   | 3,584               |                   | 3,678 |   |
| Interest rate swap     |   | Monthly                |   | June 2004    |   | 25,000               |   | 2.42                       | %               |   |          |   |                | 343                 |                   | 315 |   |
| Interest rate swap     |   | Monthly                |   | August 2003  |   | 50,000               |   | 1.9975                     | %               |   |          |   |                | 162                 |                   | 218 |   |
|                   |   |                   |   |         |   |                 |   |                       |            |   |          |   |                | $                   | 4,214                  |   | $ | 4,536 |   |
|                        |        |                        |        |              |        |                      |        |                            |                 |        |               |        |                     |                     |                        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)In April 2003, the Company paid $225,000, including accrued interest, toterminate the Interest rate swap agreement.

 

Management believes thatcash flow from operations, along with the Company’s ability to raise additionalequity, anticipated sales of properties, funds available under the CreditAgreement with Bank of America and the Company’s anticipated ability to obtainfinancing will provide the Company with sufficient liquidity to meet itsforeseeable capital needs.  However,there can be no assurance that the terms of anticipated financing will be asfavorable to the Company as under the existing facilities.

 

**Funds From Operations (FFO)**

 

TheCompany believes that it computes FFO in accordance with the standardsestablished by the National Association of Real Estate Investment Trusts(“NAREIT”) in their National Policy Bulletins dated November 8, 1999 and April5, 2002, which may differ from the methodology for calculating FFO utilized byother equity REITs, and, accordingly, may not be comparable to such otherREITs.  The Company’s FFO is computed asnet income (loss) available to common stockholders (computed in accordance withaccounting principles generally accepted in the United States of America), plusreal estate related depreciation and amortization, gains (or losses) from salesof property, impairment of long-lived assets, extraordinary items andincome/loss allocable to minority interest holders.  The Company believes that FFO, when viewed in conjunctionwith net income and cash flows, provides investors with a useful supplementalmeasure of the operating performance of a real estate company because itprovides a direct measure of the actual operating results of the Company’sproperties.  FFO is not defined bygenerally accepted accounting principles and should not be considered an alternativeto net income or cash flow as an indication of operating performance orliquidity.  FFO as disclosed by otherREITs may not be comparable to the Company’s calculation.  TheCompany

 

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believesFFO is helpful to investors as a measure of the performance of an equity REITbecause, along with the Company’s statements of financial condition, results ofoperations and cash flows, it provides investors with an understanding of theability of the Company to incur and service debt and make capitalexpenditures.  In evaluating FFO and thetrends it depicts, investors should consider the major factors affectingFFO.  Growth in FFO will result fromincreases in revenue or decreases in related operating expenses.  Conversely, FFO will decline if revenuesdecline or related operating expenses increase.  FFO does not represent amounts available for management’sdiscretionary use because of needed capital replacement or expansion, debtservice obligation, or other commitments and uncertainties.  FFO should not be considered as analternative to net income (determined in accordance with accounting principlesgenerally accepted in the United States of America), as an indication of theCompany’s financial performance, to cash flows from operating activities(determined in accordance with accounting principles generally accepted in theUnited State of America) or as a measure of the Company’s liquidity, nor is itindicative of funds available to fund the Company’s cash needs, including itsability to make distributions.

 

Thefollowing table sets forth, for the three months ended March 31, 2003 and 2002,the calculation of funds from operations.

 
|                                                |   | **Three months ended  March 31,** |   |
|-----------------------------------------------------|--------|-----------------------------------|--------|
| **(in  thousands)**                                 |   | **2003**                          |   | **2002** | ** ** |
|                                                |   |                              |   |   |   |
| Net income                                          |   | $                                 | 3,186  |   | $ | 3,950 |   |
| Preferred stock dividends                           |   | (1,776                            | )      | (1,776 | ) |
| Net income allocable to common stockholders         |   | 1,410                             |   | 2,174 |   |
|                                                |   |                              |   |   |   |
| Depreciation and amortization                       |   | 5,751                             |   | 5,321 |   |
| Gain on sale of property                            |   | (1,619                            | )      | (1,480 | ) |
| Impairment of long-lived assets                     |   | 1,595                             |   | 809 |   |
| Income allocable to minority interests              |   | —                            |   | (31 | ) |
| Cumulative effect of change in accounting principle |   | 270                               |   | — |   |
|                                                |   |                              |   |   |   |
| Funds from operations - basic                       |   | 7,407                             |   | 6,793 |   |
| Adjustments to minority interest                    |   | —                            |   | (36 | ) |
| Income allocable to minority interest               |   | —                            |   | 31 |   |
| Funds from operations - diluted                     |   | $                                 | 7,407  |   | $ | 6,788 |   |

 

**Inflation**

 

Someof the Company’s leases are subject to adjustments for increases in theConsumer Price Index, which reduces the risk to the Company of the adverseeffects of inflation.  Additionally, tothe extent inflation increases sales volume, percentage rents may tend tooffset the effects of inflation on the Company.  Because triple net leases also require the property operator topay for some or all operating expenses, property taxes, property repair andmaintenance costs and insurance, some or all of the inflationary impact ofthese expenses will be borne by the property operator and not by the Company.

 

**Seasonality**

 

Fastfood restaurant operations historically have been seasonal in nature,reflecting higher unit sales during the second and third quarters due to warmerweather and increased leisure travel. This seasonality can be expected to cause fluctuations in the Company’squarterly revenue to the extent it earns percentage rent.

 

**Risks Associatedwith Forward-Looking Statements included in this Form 10-Q**

 

Certain statementscontained in this Form 10-Q, including without limitation statements regardingthe objectives of management for future operations and statements containingthe words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,”“intend,” “expect” and similar expressions, are forward-looking statementswithin the

 

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meaning of the federalsecurities laws.  Such forward-lookingstatements are subject to known and unknown risks, uncertainties andassumptions which may cause the Company’s actual results, performance orachievements to differ materially from those anticipated or implied by theforward-looking statements.  The Companydisclaims any obligation to update any such statements or publicly announce anyupdates or revisions to any of the forward-looking statements contained hereinto reflect any change in the Company’s expectation with regard thereto or anychange in events, conditions, circumstances or assumptions underlying suchstatements.  Reference is hereby made tothe disclosures contained in the Company’s filings with the Securities andExchange Commission, including, but not limited to, the disclosures under theheadings “Risk Associated with Forward-Looking Statements included in this Form10-K” and “Factors Affecting the Company’s Business and Prospects” in “Item 1.Business” of the Company’s Annual Report on Form 10-K filed with the Securitiesand Exchange Commission on March 31, 2003.

 

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**Item 3****.    Quantitative and Qualitative DisclosuresAbout Market Risk**

** **

TheCompany has limited exposure to financial market risks, including changes ininterest rates and other relevant market prices, except as noted below.  The Company does not have any foreignoperations and thus is not exposed to foreign currency fluctuations.

 

The fair value of theCompany’s investments would be affected by an increase or decrease in interestrates as the majority of the investments are interest-bearing instruments.  However, the Company’s investment portfolioof $2,974,000 is relatively small, and changes in value relating to marketrisks would not significantly impact the Company’s operations.  The Company also has investments in fixedrate notes and mortgage loans receivable. Changes in interest rates do not have a direct impact on interest incomerelated to these notes and loans.

 

An increase or decreasein interest rates and fees would affect interest costs relating to theCompany’s variable rate debt.  Variablerate debt consists of Triple Net Lease Mortgage Certificates (the Certificates)and borrowings under the Credit Agreement with Bank of America.

 

At March 31, 2003, therewas $165,627,000 of variable rate debt outstanding on the Certificates.  The Certificates bear interest at the 30 -day LIBOR plus 48 basis points and other associated fees of approximately 52.6basis points.  The Company entered intoan interest rate swap effective July 3, 2000 with a notional amount of$50,000,000 which was subsequently reduced to $30,000,000 during the fourthquarter of 2001 and further reduced to $15,000,000 during the second quarter of2002.  The Company pays a fixed rate of7.05% and receives a variable rate based upon LIBOR under this swap agreement.

 

In conjunction with theoffering of the Certificates, the Company entered into various interest rateprotection agreements, including: an interest rate swap at a fixed rate of2.42% expiring June 2004 on a notional amount of $25,000,000; an interest rateswap at a fixed rate of 1.9975% expiring August 2003 on a notional amount of$50,000,000; and an interest rate collar with a floor of 4.42% and a ceiling of6.00% expiring August 2005 on an original notional amount of $80,000,000, whichhas been reduced to $67,574,000 as of March 31, 2003. These derivativeseffectively lock in $25,000,000 at 3.426% (2.42% plus 1.006%) through June2004, lock in $50,000,000 at 3.004% (1.9975% plus 1.006%) through August 2003,and lock in $67,574,000 as of March 31, 2003 at between 5.4260% (4.42% plus1.006%) and 7.006% (6.0% plus 1.006%) through August 2005.

 

The Company may borrowfunds under its $35,000,000 Credit Agreement with Bank of America at Prime plus3.00%, at LIBOR plus 3.00% or a combination of the two.  As of March 31, 2003, borrowings outstandingunder this agreement were $24,450,000. In May 2003, the Company exercised its option to extend the maturitydate on the Credit Agreement by one year to May 2004 with a maximum borrowingof $20,000,000 effective May 31, 2003.

 

Based on the Company’svariable rate debt and the derivatives designated as cash flow hedges againstthis debt, a 10.0% increase or decrease in interest rates (representing 14.9basis points) would result in an annual increase or decrease in interestcharges of approximately $50,000.

 

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**Item4.    Controls and Procedures**

 

TheChief Executive Officer and Chief Financial Officer of the Company (itsprincipal executive officer and principal financial officer) have concluded,based on their evaluation as of a date within 90 days prior to the date of thefiling of this Report, that, except as described below, the Company’sdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed by the Company in the reports filed or submitted by itunder the Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and include controls and procedures designed to ensure thatinformation required to be disclosed by the Company in such reports isaccumulated and communicated to the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure. In its March 2003 Letter to the Audit Committee, the Company’s auditorsnoted that the Company does not have an adequate process in place to providefor a timely and accurate closing of its accounts, which prevents criticalanalysis of accounts prior to financial statement preparation.  To address this comment, the Companyreviewed its closing process and began making adjustments that would facilitatea more timely close of the accounts for the quarter presented herein.  In addition, the Company will continue torefine its closing and analysis procedures as they relate to future quarterlyand annual reporting periods.

 

Exceptas outlined above, there were no significant changes in the Company’s internalcontrol or in other factors that could significantly affect these controlssubsequent to the date of such evaluation, including any corrective actions inregard to significant deficiencies and material weaknesses.

 

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**PART II.                OTHERINFORMATION**

** **

**Item 1.    Legal Proceedings**

 

None

 

**Item 2.    Changes in Securities andUse of Proceeds**

 

None

 

**Item 3.    Defaults upon Senior Securities**

 

None

 

**Item 4.    Submission of Matters to aVote of Security Holders**

 

None

 

**Item 5.    Other Information**

 

None

 

**Item 6.    Exhibits and Reports onForm 8-K**

 

a)                                      Exhibits

 

1)                                      Exhibit3.1 – Restated Articles of Incorporation

2)                                      Exhibit3.2 – Amended and Restated Bylaws

3)                                      Exhibit10.1 – 1997 Flexible Incentive Plan

4)                                      Exhibit99.1 – Certification by Robert J. Stetson Pursuant to Sarbanes-Oxley Act of2002

5)                                      Exhibit99.2 – Certification by Stacy M. Riffe Pursuant to Sarbanes-Oxley Act of 2002

 

b)                                     Reportsof Form 8-K

 

No reports on Form 8-Kwere filed during the quarter ended March 31, 2003.

 

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**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                      | U.S. Restaurant  Properties, Inc.     |
|---------------------------|---------------------------------------|
|                      |
|                      |
| Dated:  May 14, 2003 | By: /s/ Robert J.  Stetson            |   |
|                      | Robert J. Stetson.                    |
|                      | Chief Executive Officer  and Director |
|                      |                                  |

 

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CERTIFICATION OFCHIEF EXECUTIVE OFFICER

PURSUANT TO

SECURITIESEXCHANGE ACT RULES 13A-14 AND 15D-14

 

I, Robert J. Stetson,Chief Executive Officer of the registrant, certify that:

 

1.             I have reviewed this quarterly report on Form 10-Q ofU.S. Restaurant Properties, Inc.

 

2.             Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3.             Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4.             The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

 

a)             Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)            Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)             Presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate.

 

5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsfulfilling the equivalent function):

 

a)             Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarize,and report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls.

 

6.             The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

 
| /s/  Robert J. Stetson  |   |   |
|-------------------------|--------|--------|
| Robert J. Stetson       |   |
| Chief Executive Officer |   |
|                    |   |
|                    |   |
| Dated: May 14, 2003     |   |

 

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CERTIFICATION OFINTERIM CHIEF FINANCIAL OFFICER

PURSUANT TO

SECURITIESEXCHANGE ACT RULES 13A-14 AND 15D-14

 

I, Stacy M. Riffe, ChiefFinancial Officer of the registrant, certify that:

 

1.             I have reviewed this quarterly report on Form 10-Q ofU.S. Restaurant Properties, Inc.

 

2.             Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3.             Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4.             The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

 

a)             Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)            Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)             Presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate.

 

5.             The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s board of directors (or personsfulfilling the equivalent function):

 

a)             Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarize,and report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls.

 

6.             The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

 
| /s/  Stacy M. Riffe     |   |   |
|-------------------------|--------|--------|
| Stacy M. Riffe          |   |
| Chief Financial Officer |   |
|                    |   |
| Dated: May 14, 2003     |   |

 

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**Index toExhibits**

 
| **Exhibit  Number** |   | **Description**                                                                |
|---------------------|--------|--------------------------------------------------------------------------------|
|                |   |                                                                           |
| 3.1                 |   | Restated  Articles of Incorporation                                            |
| 3.2                 |   | Amended  and Restated Bylaws                                                   |
| 10.1                |   | 1997  Flexible Incentive Plan                                                  |
| 99.1                |   | Certification  by Robert J. Stetson Pursuant to the Sarbanes-Oxley Act of 2002 |
| 99.2                |   | Certification  by Stacy M. Riffe Pursuant to the Sarbanes-Oxley Act of 2002    |

 

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