**UNITED STATESSECURITIES 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 June 30, 2002**

** **

**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 checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

| Yes   ý |   | No   o |
|------------------------|--------|------------------|

 

As of August 7, 2002, U.S. Restaurant Properties, Inc. had 19,816,689shares of common stock $.001 par value outstanding.

 

 

----

 

U.S. RESTAURANTPROPERTIES, INC.

 

 
| PART I.  |  FINANCIAL INFORMATION |
|----------|-----------------------------|
|     |                        |   |
|     | Item 1                      | Financial Statements |
|     |                        |   |
|     |                        | Condensed  Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and December 31,  2001 |
|     |                        |   |
|     |                        | Condensed  Consolidated Statements of Operations for the three and six months ended June  30, 2002 and 2001 (Unaudited) |
|     |                        |   |
|     |                        | Condensed  Consolidated Statements of Other Comprehensive Operations for the three and  six months ended June 30, 2002 and 2001 (Unaudited) |
|     |                        |   |
|     |                        | Condensed  Consolidated Statement of Stockholders’ Equity for the six months ended June  30, 2002 (Unaudited) |
|     |                        |   |
|     |                        | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2002  and 2001 (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 |
|     |                        |   |
| 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.********FINANCIALINFORMATION**

 

**Item1.****   ****FinancialStatements**

 

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

**CondensedConsolidated Balance Sheets**

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

 
|                                                                                                                                                          |   | **June 30,  2002** |       | **December 31,  2001** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|------------------------|------------|
|                                                                                                                                                          |   | **(Unaudited)**    | ** ** |                   | ** ** |
| **Assets**                                                                                                                                                    |   |               |       |                   |       |
|                                                                                                                                                          |   |               |       |                   |       |
| Property, net                                                                                                                                                 |   |               |       |                   |       |
| Land                                                                                                                                                          |   | $                  | 189,818    |                   | $          | 184,074 |   |
| Building and leasehold improvements                                                                                                                           |   | 366,681            |       | 362,920                |       |
| Machinery and equipment                                                                                                                                       |   | 11,768             |       | 11,018                 |       |
|                                                                                                                                                          |   | 568,267            |       | 558,012                |       |
| Less:   accumulated depreciation                                                                                                                         |   | (92,896            | )          | (83,233                | )          |
|                                                                                                                                                          |   | 475,371            |       | 474,779                |       |
|                                                                                                                                                          |   |               |       |                   |       |
| Assets held for sale                                                                                                                                          |   | —             |       | 22,071                 |       |
| Construction in progress                                                                                                                                      |   | 430                |       | 640                    |       |
| Cash and cash equivalents                                                                                                                                     |   | 11,842             |       | 10,346                 |       |
| Restricted cash and marketable securities                                                                                                                     |   | 4,139              |       | 6,622                  |       |
| Rent and other receivables, net                                                                                                                               |   |               |       |                   |       |
| (includes $4,176 and $4,747 allowance for  doubtful accounts at June 30, 2002 and December 31, 2001, respectively)                                            |   | 16,400             |       | 16,760                 |       |
| Prepaid expenses and other assets                                                                                                                             |   | 2,466              |       | 2,534                  |       |
| Inventories                                                                                                                                                   |   | 1,695              |       | 633                    |       |
| Investments                                                                                                                                                   |   | 3,331              |       | 5,108                  |       |
| Notes receivable, net                                                                                                                                         |   |               |       |                   |       |
| (includes $13 and $488 due from related  parties and $3,289 and $4,040 allowance for doubtful accounts at June 30,  2002 and December 31, 2001, respectively) |   | 15,549             |       | 8,145                  |       |
| Mortgage loans receivable, net                                                                                                                                |   |               |       |                   |       |
| (includes $2,500 allowance for doubtful  accounts at June 30, 2002 and December 31, 2001)                                                                     |   | 14,644             |       | 16,187                 |       |
| Net investment in direct financing leases                                                                                                                     |   | 831                |       | 1,300                  |       |
| Deferred financing costs and intangibles,  net                                                                                                                |   | 11,979             |       | 12,383                 |       |
| **Total assets**                                                                                                                                              |   | $                  | 558,677    |                   | $          | 577,508 |   |

 

continued on next page

*See Notes to Condensed ConsolidatedFinancial Statements.*

 

3

----

 
|                                                                                                                                                       |   | **June 30,  2002** | ** ** | **December 31,  2001** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|------------------------|------------|
|                                                                                                                                                       |   | **(Unaudited)**    | ** ** |                   | ** ** |
| **Liabilities and stockholders’ equity**                                                                                                              |   |               |       |                   |       |
|                                                                                                                                                       |   |               |       |                   |       |
| Accounts payable and accrued liabilities                                                                                                                   |   | $                  | 15,389     |                   | $          | 18,255 |   |
| Accrued dividends and distributions                                                                                                                        |   | 2,169              |       | 6,112                  |       |
| Unearned contingent rent                                                                                                                                   |   | 817                |       | 1,124                  |       |
| Deferred gain on sale of property                                                                                                                          |   | 322                |       | 215                    |       |
| Interest rate swap agreements at fair  value                                                                                                               |   | 2,819              |       | 3,746                  |       |
| Notes payable                                                                                                                                              |   | 331,536            |       | 336,140                |       |
| Mortgage note payable                                                                                                                                      |   | 963                |       | 979                    |       |
| **Total liabilities**                                                                                                                                      |   | 354,015            |       | 366,571                |       |
|                                                                                                                                                       |   |               |       |                   |       |
| **Commitments and contingencies**                                                                                                                          |   |               |       |                   |       |
|                                                                                                                                                       |   |               |       |                   |       |
| **Minority interest in operating partnerships**                                                                                                            |   | 54,277             |       | 54,337                 |       |
|                                                                                                                                                       |   |               |       |                   |       |
| **Stockholders’ equity**                                                                                                                              |   |               |       |                   |       |
|                                                                                                                                                       |   |               |       |                   |       |
| Preferred stock, $.001 par value per  share;                                                                                                               |   |               |       |                   |       |
| 50,000 shares authorized, Series A - 3,680  shares issued and outstanding at June 30, 2002 and December 31, 2001  (aggregate liquidation value of $92,000) |   | 4                  |       | 4                      |       |
| Common stock, $.001 par value per share;                                                                                                                   |   |               |       |                   |       |
| 100,000 shares authorized, 19,585 and  19,459 shares issued and outstanding at June 30, 2002 and December 31, 2001,  respectively                          |   | 20                 |       | 19                     |       |
| Additional paid-in capital                                                                                                                                 |   | 325,908            |       | 324,448                |       |
| Excess stock, $.001 par value per share                                                                                                                    |   |               |       |                   |       |
| 15,000 shares authorized, no shares issued                                                                                                                 |   | —             |       | —                 |       |
| Accumulated other comprehensive loss                                                                                                                       |   | (4,933             | )          | (5,071                 | )          |
| Loans to stockholders for common stock                                                                                                                     |   | (1,349             | )          | (850                   | )          |
| Distributions in excess of net income                                                                                                                      |   | (169,265           | )          | (161,950               | )          |
| **Total stockholders’ equity**                                                                                                                        |   | 150,385            |       | 156,600                |       |
| **Total liabilities and stockholders’ equity**                                                                                                        |   | $                  | 558,677    |                   | $          | 577,508 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

4

----

 

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

**CondensedConsolidated Statements of Operations**

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

**(Unaudited)**

 
|                                                                                                |   | **Three Months Ended  June 30,** |       | **Six Months Ended  June 30,** |       |
|-----------------------------------------------------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|------------|
|                                                                                                |   | **2002**                         | ** ** | **2001**                       | ** ** | **2002** | ** ** | **2001** |   |
| **Real Estate**                                                                                     |   |                             |       |                           |       |   |   |   | ** ** |
| Revenues:                                                                                           |   |                             |       |                           |       |   |   |   |   |
| Rental income                                                                                       |   | $                                | 16,795     |                           | $          | 17,495 |   | $ | 33,364 |   | $ | 34,618 |   |
| Interest income                                                                                     |   | 784                              |       | 1,335                          |       | 1,825 |   | 2,681 |   |
| Amortization of unearned income on direct  financing leases                                         |   | 73                               |       | 82                             |       | 135 |   | 177 |   |
| Total revenues                                                                                      |   | 17,652                           |       | 18,912                         |       | 35,324 |   | 37,476 |   |
| Expenses:                                                                                           |   |                             |       |                           |       |   |   |   |   |
| Property                                                                                            |   | 520                              |       | 459                            |       | 1,106 |   | 739 |   |
| Depreciation and amortization                                                                       |   | 5,988                            |       | 5,485                          |       | 11,265 |   | 11,408 |   |
| General and administrative                                                                          |   | 2,031                            |       | 1,925                          |       | 3,937 |   | 5,019 |   |
| Provisions for doubtful accounts                                                                    |   | (91                              | )          | (198                           | )          | (5 | ) | 950 |   |
| Interest expense                                                                                    |   | 4,279                            |       | 6,568                          |       | 8,565 |   | 13,541 |   |
| Amortization of loan origination fees                                                               |   | 423                              |       | 2,099                          |       | 846 |   | 4,102 |   |
| Derivative settlement payments                                                                      |   | 958                              |       | 407                            |       | 1,942 |   | 535 |   |
| Impairment of long-lived assets                                                                     |   | 640                              |       | 120                            |       | 1,328 |   | 16,049 |   |
| Fair value adjustment for interest rate  swap                                                       |   | (84                              | )          | 669                            |       | (256 | ) | 2,359 |   |
| Total expenses                                                                                      |   | 14,664                           |       | 17,534                         |       | 28,728 |   | 54,702 |   |
| Income (loss) from real estate operations                                                           |   | 2,988                            |       | 1,378                          |       | 6,596 |   | (17,226 | ) |
|                                                                                                |   |                             |       |                           |       |   |   |   |   |
| **Retail Operations**                                                                               |   |                             |       |                           |       |   |   |   |   |
| Operating revenue                                                                                   |   | 10,001                           |       | 1,986                          |       | 17,217 |   | 1,986 |   |
| Operating general and administrative                                                                |   | (1,517                           | )          | (130                           | )          | (2,626 | ) | (130 | ) |
| Cost of sales                                                                                       |   | (8,471                           | )          | (1,665                         | )          | (14,411 | ) | (1,665 | ) |
| Income from retail operations                                                                       |   | 13                               |       | 191                            |       | 180 |   | 191 |   |
|                                                                                                |   |                             |       |                           |       |   |   |   |   |
| Gain on sale of property                                                                            |   | —                           |       | 1,542                          |       | — |   | 1,608 |   |
| Income (loss) from continuing operations                                                            |   | 3,001                            |       | 3,111                          |       | 6,776 |   | (15,427 | ) |
| Minority interests                                                                                  |   | (1,216                           | )          | (1,170                         | )          | (2,349 | ) | (2,174 | ) |
| Net income (loss) from continuing  operations before discontinued operations and extraordinary item |   | 1,785                            |       | 1,941                          |       | 4,427 |   | (17,601 | ) |
| Income (loss) from discontinued operations                                                          |   | (517                             | )          | (154                           | )          | 791 |   | (191 | ) |
| Loss on early extinguishment of debt                                                                |   | —                           |       | —                         |       | — |   | (340 | ) |
| Net income (loss)                                                                                   |   | 1,268                            |       | 1,787                          |       | 5,218 |   | (18,132 | ) |
| Dividends on preferred stock                                                                        |   | (1,775                           | )          | (1,775                         | )          | (3,551 | ) | (3,551 | ) |
| Net income (loss) allocable to common  stockholders                                                 |   | $                                | (507       | )                              | $          | 12 |   | $ | 1,667 |   | $ | (21,683 | ) |
|                                                                                                |   |                             |       |                           |       |   |   |   |   |
| Basic and diluted net income (loss) per  share:                                                     |   |                             |       |                           |       |   |   |   |   |
| Income (loss) from continuing operations                                                            |   | $                                | —     |                           | $          | 0.01 |   | $ | 0.04 |   | $ | (1.19 | ) |
| Income (loss) from discontinued operations                                                          |   | (0.03                            | )          | (0.01                          | )          | 0.04 |   | (0.01 | ) |
| Extraordinary loss                                                                                  |   | —                           |       | —                         |       | — |   | (0.02 | ) |
| Net income (loss) per share                                                                         |   | $                                | (0.03      | )                              | $          | — |   | $ | 0.08 |   | $ | (1.22 | ) |
|                                                                                                |   |                             |       |                           |       |   |   |   |   |
| Weighted average shares outstanding                                                                 |   |                             |       |                           |       |   |   |   |   |
| Basic                                                                                               |   | 19,561                           |       | 17,886                         |       | 19,540 |   | 17,711 |   |
| Diluted                                                                                             |   | 19,794                           |       | 18,137                         |       | 19,766 |   | 17,711 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

5

----

 

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

**CondensedConsolidated Statements of Other Comprehensive Operations**

**(In thousands)**

**(Unaudited)**

 
|                                                                                |   | **Three months ended June 30,** |       | **Six months ended June 30,** |   |
|-------------------------------------------------------------------------------------|--------|---------------------------------|------------|-------------------------------|--------|
|                                                                                |   | **2002**                        | ** ** | **2001**                      |   | **2002** | ** ** | **2001** | ** ** |
|                                                                                |   |                            |       |                          |   |   |   |   |   |
| Net income (loss)                                                                   |   | $                               | 1,268      |                          | $      | 1,787 |   | $ | 5,218 |   | $ | (18,132 | ) |
| Cumulative effect of change in accounting  for derivative instrument                |   | —                          |       | —                        |   | — |   | (1,474 | ) |
| Reclassification adjustment - hedge  settlement                                     |   | —                          |       | 737                           |   | — |   | 1,474 |   |
| Other comprehensive income (loss) -  unrealized gain (loss) on derivative valuation |   | (1,025                          | )          | —                        |   | 122 |   | — |   |
| unrealized gain on bond investments                                                 |   | 67                              |       | 158                           |   | 16 |   | 45 |   |
| Comprehensive income (loss)                                                         |   | $                               | 310        |                          | $      | 2,682 |   | $ | 5,356 |   | $ | (18,087 | ) |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

6

----

 

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

**CondensedConsolidated Statement of Stockholders’ Equity**

**For the Six MonthsEnded June 30, 2002**

**(In thousands)**

**(Unaudited)**

 
|                                       |   | **Preferred Stock** |       | **Common Stock** |   | **Additional  Paid-in  Capital** |       | **Loans  To  Shareholders** |       | **Distributions  In Excess of  Net Income** |       | **Accumulated  Other  Comprehensive  Gain (Loss)** |    | **Total**  |   |
|--------------------------------------------|--------|---------------------|------------|------------------|--------|----------------------------------|------------|-----------------------------|------------|---------------------------------------------|------------|----------------------------------------------------|---------|------------|--------|
|                                       |   | **Shares**          | ** ** | **Par Value**    |   | **Shares**                       | ** ** | **Par Value**               | ** ** | ** **                                  | ** ** |                                               |    | ** ** |
|                                       |   |                |       |             |   |                             |       |                        |       |                                        |       |                                               |    |       |   |   |   |   |   |
| Balance at  January 1, 2002                |   | 3,680               |       | $                | 4      |                             | 19,459     |                        | $          | 19                                          |       | $                                                  | 324,448 |       | $      | (850 | ) | $ | (161,950 | ) | $ | (5,071 | ) | $ | 156,600 |   |
| Net income                                 |   |                |       |             |   |                             |       |                        |       |                                        |       |                                               |    | 5,218      |   |   |   | 5,218 |   |
| Purchase of  common stock by officers      |   |                |       |             |   | 10                               |       |                        |       | 120                                         |       | (24                                                | )       |       |   |   |   | 96 |   |
| Reclassification  of Officer Notes         |   |                |       |             |   |                             |       |                        |       |                                        |       | (475                                               | )       |       |   |   |   | (475 | ) |
| Proceeds from  exercised stock options     |   |                |       |             |   | 116                              |       | 1                           |       | 1,254                                       |       |                                               |    |       |   |   |   | 1,255 |   |
| Stock-based  compensation to employees     |   |                |       |             |   |                             |       |                        |       | 86                                          |       |                                               |    |       |   |   |   | 86 |   |
| Other  comprehensive gain (loss) -         |   |                |       |             |   |                             |       |                        |       |                                        |       |                                               |    |       |   |   |   |   |   |
| Unrealized gain  on derivatives            |   |                |       |             |   |                             |       |                        |       |                                        |       |                                               |    |       |   | 122 |   | 122 |   |
| Unrealized gain  on investments            |   |                |       |             |   |                             |       |                        |       |                                        |       |                                               |    |       |   | 16 |   | 16 |   |
| Distributions  declared on common stock    |   |                |       |             |   |                             |       |                        |       |                                        |       |                                               |    | (10,758    | )      |   |   | (10,758 | ) |
| Distributions  declared on preferred stock |   |                |       |             |   |                             |       |                        |       |                                        |       |                                               |    | (1,775     | )      |   |   | (1,775 | ) |
| Balance at June  30, 2002                  |   | 3,680               |       | $                | 4      |                             | 19,585     |                        | $          | 20                                          |       | $                                                  | 325,908 |       | $      | (1,349 | ) | $ | (169,265 | ) | $ | (4,933 | ) | $ | 150,385 |   |
|                                            |        |                     |            |                  |        |                                  |            |                             |            |                                             |            |                                                    |         |            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

7

----

 

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

**CondensedConsolidated Statements of Cash Flows**

**(In thousands)**

**(Unaudited)**

 
|                                                                                     |   | **Six Months Ended  June 30,** |       |
|------------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                     |   |                           |
|                                                                                     |   | **2002**                       | ** ** | **2001** | ** ** |
|                                                                                     |   |                           |       |   |   |
| **Cash flows from operating activities:**                                                |   |                           |       |   |   |
|                                                                                     |   |                           |       |   |   |
| Net income (loss)                                                                        |   | $                              | 5,218      |   | $ | (18,132 | ) |
| Adjustments to reconcile net income (loss)  to net cash flows from operating activities: |   |                           |       |   |   |
| (Gain) loss on discontinued operations                                                   |   | (791                           | )          | 191 |   |
| Depreciation and amortization                                                            |   | 11,265                         |       | 11,408 |   |
| Extraordinary loss on extinguishment of  debt                                            |   | —                         |       | 340 |   |
| Amortization of deferred financing costs  and discounts                                  |   | 847                            |       | 4,155 |   |
| Impairment of long-lived assets                                                          |   | 1,328                          |       | 16,049 |   |
| Provision for doubtful accounts                                                          |   | 17                             |       | 950 |   |
| Stock-based compensation                                                                 |   | 86                             |       | — |   |
| Accretion of interest income                                                             |   | (313                           | )          | (409 | ) |
| Fair value adjustment for interest rate  swap agreements                                 |   | (256                           | )          | 2,359 |   |
| Minority interests                                                                       |   | 2,349                          |       | 2,174 |   |
| Gain on sale of property                                                                 |   | —                         |       | (1,608 | ) |
| Gain on sale of investments                                                              |   | (113                           | )          | — |   |
| Decrease (increase) in rent and other  receivables, net                                  |   | (799                           | )          | 1,281 |   |
| Decrease (increase) in prepaid expenses                                                  |   | 307                            |       | (25 | ) |
| Increase in inventories                                                                  |   | (1,062                         | )          | (279 | ) |
| Reduction in net investment in direct  financing leases                                  |   | 317                            |       | 446 |   |
| Decrease in accounts payable and accrued  liabilities                                    |   | (3,089                         | )          | (1,983 | ) |
| Decrease in unearned contingent rent                                                     |   | (307                           | )          | (269 | ) |
| Cash provided by operating activities                                                    |   | 15,004                         |       | 16,648 |   |
|                                                                                     |   |                           |       |   |   |
| **Cash flows from investing activities:**                                                |   |                           |       |   |   |
|                                                                                     |   |                           |       |   |   |
| Proceeds from sale of property and  equipment                                            |   | 9,989                          |       | 14,493 |   |
| Purchase of property                                                                     |   | (393                           | )          | (1,652 | ) |
| Purchase of machinery and equipment                                                      |   | (82                            | )          | (33 | ) |
| Purchase of investments                                                                  |   | (3,014                         | )          | (8 | ) |
| Proceeds from sale of investments                                                        |   | 4,838                          |       | — |   |
| Distributions received on investments                                                    |   | 546                            |       | 22 |   |
| Decrease (increase) in restricted cash                                                   |   | 2,483                          |       | (44 | ) |
| Increase in mortgage notes receivable                                                    |   | (84                            | )          | (40 | ) |
| Reduction of mortgage loans receivable  principal                                        |   | 1,665                          |       | 2,149 |   |
| Increase in notes receivable                                                             |   | (6,625                         | )          | (878 | ) |
| Reduction of notes receivable principal                                                  |   | 255                            |       | 5,234 |   |
| Cash provided by investing activities                                                    |   | 9,578                          |       | 19,243 |   |
|                                                                                          |        |                                |            |  |  |  |  |

 

Continued on next page

*See Notes toCondensed Consolidated Financial Statements.*

 

8

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|                                                                                |   | **Six Months Ended  June 30,** |       |
|-------------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                                |   |                           |
|                                                                                |   | **2002**                       | ** ** | **2001** | ** ** |
|                                                                                |   |                           |       |   |   |
| **Cash flows from financing activities:**                                           |   |                           |       |   |   |
|                                                                                |   |                           |       |   |   |
| Payments on line of credit                                                          |   | $                              | —     |   | $ | (119,036 | ) |
| Distributions to minority interest                                                  |   | (2,409                         | )          | (2,426 | ) |
| Cash distributions to stockholders                                                  |   | (12,904                        | )          | (11,683 | ) |
| Payment of preferred stock dividends                                                |   | (3,551                         | )          | (3,551 | ) |
| Proceeds from sale of stock                                                         |   | 1,351                          |       | 4,838 |   |
| Payments on notes/mortgage payable                                                  |   | (4,919                         | )          | (69,677 | ) |
| Proceeds on notes/mortgage payable                                                  |   | —                         |       | 180,700 |   |
| Financing costs and other intangibles                                               |   | (654                           | )          | (4,484 | ) |
| Cash flows used in financing activities                                             |   | (23,086                        | )          | (25,319 | ) |
|                                                                                |   |                           |       |   |   |
| Increase in cash and cash equivalents                                               |   | 1,496                          |       | 10,572 |   |
| Cash and cash equivalents at beginning of  period                                   |   | 10,346                         |       | 5,509 |   |
| Cash and cash equivalents at end of period                                          |   | $                              | 11,842     |   | $ | 16,081 |   |
|                                                                                |   |                           |       |   |   |
| **Supplemental disclosure:**                                                        |   |                           |       |   |   |
| Interest paid during the period                                                     |   | $                              | 10,723     |   | $ | 14,725 |   |
|                                                                                |   |                           |       |   |   |
| **Non-cash investing and financing activities:**                                    |   |                           |       |   |   |
| Interest receivable transferred to  mortgage receivable                             |   | $                              | 38         |   | $ | — |   |
| Net transfer of property from direct  financing leases to property and equipment    |   | 147                            |       | 562 |   |
| Unrealized gain on investments classified  as available for sale                    |   | 16                             |       | 45 |   |
| Notes received on sale of property                                                  |   | 741                            |       | 878 |   |
| Adjustment for interest rate swap recorded  to other comprehensive income           |   | 122                            |       | — |   |
| Interest rate swap (fair value hedge) on  fixed rate senior unsecured notes payable |   | 242                            |       | — |   |
| Net transfers from construction in  progress to property                            |   | —                         |       | 7,855 |   |
| Security deposit and note receivable  transferred                                   |   | —                         |       | 700 |   |
| Account receivable conversion to note                                               |   | —                         |       | 124 |   |
| Increase (decrease) in common and  preferred stock dividends accrued                |   | (3,921                         | )          | 18 |   |
| Loan to officer for common stock purchase                                           |   | 24                             |       | — |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

9

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

**Notes to Condensed Consolidated Financial Statements**

**(Unaudited)**

 

**1.****            ****Interim Unaudited Financial Information**

 

U.S. Restaurant Properties, Inc. (the “Company”) is a self-administeredand self-managed real estate investment trust (“REIT”), as defined under theInternal Revenue Code of 1986, as amended. As noted in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001, the Company became the successor entity to U.S. RestaurantProperties Master L.P. (collectively with its subsidiaries,”USRP”) in October1997.  The business and operations ofthe Company are conducted primarily through U.S. Restaurant PropertiesOperating L.P. (“OP”).  At June 30,2002, the Company, directly or indirectly, owned 99.34% of and controlled theOP.  As of June 30, 2002, the Companyowned 794 properties in 48 states.

 

The accompanying condensed consolidated financial statements should beread in conjunction with the consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001, which was filed with the Securities and Exchange Commission(“SEC”).  The results of operations forthe three and six months ended June 30, 2002 are not necessarily indicative ofthe results to be expected for the year ending December 31, 2002.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America, have beencondensed or omitted in this report on Form 10-Q pursuant to the Rules andRegulations of the SEC.  In the opinionof management, the disclosures contained in this report are adequate to makethe information presented not misleading.

 

Accounting measurements at interim dates inherently involve greaterreliance on estimates than at year end and the results of operations for theinterim periods shown in this report are not necessarily indicative of resultsto be expected for the fiscal year.  Inthe opinion of management, the accompanying unaudited condensed consolidatedfinancial statements include all adjustments (of a normal recurring nature)necessary to present fairly the consolidated financial position of the Companyas of June 30, 2002, and the consolidated results of its operations,comprehensive operations, stockholders’ equity and cash flows for the three andsix months ended June 30, 2002 and 2001.

 

The Company derives itsrevenues 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 include costs for property taxes and insurance which are theresponsibility of the tenants. Additionally, those amounts associated with ground rent expense wherethe tenant is responsible for the ground rents have been recorded as areduction to rent revenues with no impact on net income.  For the three and six months ended June 30,2002 and 2001, the Company has recorded rent expense of $935,000 and $1,860,000in 2002, respectively, and $1,023,000 and $1,999,000 in 2001, respectively, asreductions to rent revenues.

 

The preparation of consolidated financial statements, in conformitywith accounting principles generally accepted in the United States of America,requires management to make estimates and assumptions that affect reportedamounts of certain assets, liabilities, revenues and expenses as of and for thereporting periods.  Actual results maydiffer from such estimates.

 

Amounts in previous periods have been reclassified to conform tocurrent period presentation.

 

Rent revenues and expenses under operating leases are recognized on astraight-line basis, unless significant collection problems occur with thelessee, at which time rents are recorded on a cash basis.  Contingent rent is recognized as revenueafter the related lease sales targets are achieved.

 

Investments in equity securities with readily determinable fair valuesand debt securities are classified as either available-for-sale or trading,based on the Company’s intent with respect to those securities.  Such investments are classified as tradingsecurities if those securities are held principally for the purpose of sellingthem in the near term.  All other suchinvestments are classified as available-for-sale.  These investments are recorded at fair value on the 

 

10

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balance sheet.  Changes in fairvalue during the period are recorded in earnings for trading securities and inother comprehensive operations 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.

 

Statement of FinancialAccounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instrumentsand Hedging Activities,” as amended, was effective for the Company January 1,2001.  This standard requires that allderivative financial instruments be recognized as either assets or liabilitieson the balance sheet at their fair values and that accounting for the changesin the fair values is dependent upon the intended use of the derivatives and theirresulting designations.  If thederivative is designated as a fair-value hedge, the changes in the fair valueof the derivative and the hedged item will be recognized in earnings.  If the derivative is designated as a cashflow hedge, changes in fair value of the derivative will be recorded in othercomprehensive income and will be recorded in the statement of operations whenthe hedged item affects earnings.  SFASNo. 133 defines new requirements for designation and documentation of hedgingrelationships as well as ongoing effectiveness assessments in order to usehedge accounting.  For a derivative thatdoes not qualify as a hedge, changes in fair value will be recognized inearnings. The adoption of SFAS No. 133 as of January 1, 2001, resulted in therecognition of a liability of $1,474,000, which was amortized into operationsduring the first six months of 2001.

 

SFAS No. 143, “Accountingfor Asset Retirement Obligations” was issued in June 2001, and will be adoptedby the 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.  The Company hasnot yet determined the effect adopting SFAS No. 143 will have on its financialstatements.

 

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets” was issued in August 2001, and was adopted by the Company on January 1,2002.  This Statement supersedes SFASNo. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of”, and the accounting and reporting provisions of APBOpinion No. 30, “Reporting the Results of Operations—Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions”, for the disposal of a *segment of abusiness* (as previously defined in that Opinion).  SFAS No. 144 retains the requirements ofSFAS No. 121 to (a) recognize an impairment loss only if the carrying amount ofa long-lived asset is not recoverable from its undiscounted cash flows and (b)measure an impairment loss as the difference between the carrying amount andfair value of the asset.  This Statementrequires that a long-lived asset to be abandoned, exchanged for a similarproductive asset, or distributed to owners in a spinoff be considered held andused until it is disposed of.  Theaccounting model for long-lived assets to be disposed of by sale is used forall long-lived assets, whether previously held and used or newly acquired.  That accounting model retains therequirement of SFAS No. 121 to measure a long-lived asset classified as heldfor sale at the lower of its carrying amount or fair value less cost to selland to cease depreciation.  ThisStatement requires that the current and historical results of operations ofdisposed properties and assets classified as held for sale, are classified asdiscontinued operations.  This resultsin the reclassification of historical operations for property dispositions orassets classified as held for sale that occur subsequent to January 1, 2002.

 

SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections” was issued inApril 2002 and is effective for fiscal years beginning after May 15, 2002.  Portions of the Statement that areapplicable to the Company include the rescission of FASB Statement No. 4,“Reporting Gains and Losses from Extinguishment of Debt”, and an amendment toFASB Statement No. 13, “Accounting for Leases”, to eliminate an inconsistencybetween the required accounting for sale-leaseback transactions and therequired accounting for certain lease modifications that have economic effectsthat are similar to sale-leaseback transactions. When the Company adopts FASBStatement No. 145, any gain or loss on extinguishment of debt will be includedin income from continuing operations, rather than as an extraordinaryitem.  In addition, gains and lossesfrom extinguishment of debt that occurred in prior periods will be reclassifiedfrom extraordinary items into continuing operations.

 

11

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SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities" was issued in June 2002 and will be effective for exit ordisposal activities subsequent to December 31, 2002.  The Company has not yet determined the effect SFAS No. 146 willhave on its financial statements.

 

The Company had 19,585,207 and 19,459,207 shares of common stockoutstanding as of June 30, 2002 and December 31, 2001, respectively.

 

**2.****            ****Net Income (Loss) per Share of Common Stock**

 
|                                                                                                |   | **Three months ended  June 30,** |       | **Six months ended  June 30,** |       |
|-----------------------------------------------------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|------------|
|                                                                                                |   |                             |       |
| **(In thousands, except per share  amounts)**                                                       |   | **2002**                         | ** ** | **2001**                       | ** ** | **2002** | ** ** | **2001** | ** ** |
|                                                                                                |   |                             |       |                           |       |   |   |   |   |
| Net income (loss) from continuing  operations before discontinued operations and extraordinary item |   | $                                | 1,785      |                           | $          | 1,941 |   | $ | 4,427 |   | $ | (17,601 | ) |
| Dividends on preferred stock                                                                        |   | (1,775                           | )          | (1,775                         | )          | (3,551 | ) | (3,551 | ) |
| Net income (loss) from continuing  operations allocable to common stockholders                      |   | 10                               |       | 166                            |       | 876 |   | (21,152 | ) |
| Income (loss) from discontinued operations                                                          |   | (517                             | )          | (154                           | )          | 791 |   | (191 | ) |
| Loss on early extinguishment of debt                                                                |   | —                           |       | —                         |       | — |   | (340 | ) |
|                                                                                                |   |                             |       |                           |       |   |   |   |   |
| Net income (loss) allocable to common  stockholders                                                 |   | $                                | (507       | )                              | $          | 12 |   | $ | 1,667 |   | $ | (21,683 | ) |
|                                                                                                |   |                             |       |                           |       |   |   |   |   |
| Basic and diluted net income (loss) per  share:                                                     |   |                             |       |                           |       |   |   |   |   |
| Income (loss) from continuing operations                                                            |   | $                                | —     |                           | $          | 0.01 |   | $ | 0.04 |   | $ | (1.19 | ) |
| Income (loss) from discontinued operations                                                          |   | (0.03                            | )          | (0.01                          | )          | 0.04 |   | (0.01 | ) |
| Extraordinary loss                                                                                  |   | —                           |       | —                         |       | — |   | (0.02 | ) |
| Net income (loss) per share                                                                         |   | $                                | (0.03      | )                              | $          | — |   | $ | 0.08 |   | $ | (1.22 | ) |
|                                                                                                |   |                             |       |                           |       |   |   |   |   |
| Weighted average shares outstanding (a):                                                            |   |                             |       |                           |       |   |   |   |   |
| Basic                                                                                               |   | 19,561                           |       | 17,886                         |       | 19,540 |   | 17,711 |   |
| Dilutive effect of outstanding options                                                              |   | 46                               |       | 39                             |       | 39 |   | — |   |
| Dilutive effect of OP units                                                                         |   | 132                              |       | 134                            |       | 132 |   | — |   |
| Dilutive effect of guaranteed stock                                                                 |   | 55                               |       | 78                             |       | 55 |   | — |   |
| Diluted                                                                                             |   | 19,794                           |       | 18,137                         |       | 19,766 |   | 17,711 |   |
|                                                                                                |   |                             |       |                           |       |   |   |   |   |
| Antidilutive securities:                                                                            |   |                             |       |                           |       |   |   |   |   |
| Stock options                                                                                       |   | 46                               |       | 53                             |       | 46 |   | 418 |   |
| OP units                                                                                            |   | —                           |       | —                         |       | — |   | 134 |   |
| Guaranteed stock                                                                                    |   | —                           |       | —                         |       | — |   | 134 |   |
| Convertible preferred stock                                                                         |   | 3,680                            |       | 3,680                          |       | 3,680 |   | 3,680 |   |

 

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(a)                                  Basic income (loss) per share is computedbased upon the weighted average number of shares of common stockoutstanding.  Diluted income (loss) pershare typically reflects the dilutive effect of stock options,  OP units, OP units and shares on which theprice is guaranteed (“Guaranteed Stock”) and convertible preferred stock.

 

**3.****                                     ****Property**

 

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 reclassifiedseparately as discontinued operations. During the three and six months ended June 30, 2002, the Companyrecognized income (loss) from discontinued operations of $(517,000) and$791,000, respectively, including a gain (loss) on disposal of $(206,000) and$1,274,000, respectively. 

 

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Results of discontinued operations for the threeand six months ended June 30, 2002 relate to the sale of ten and seventeenproperties, respectively.  The gain(loss) on disposal amounts are included under the Statement of Operationscaption of “Income (loss) from discontinued operations.”  During the three and six months ended June30, 2001, the Company recognized a loss from discontinued operations of$154,000 and $191,000, respectively.

 

During the six months ended June 30, 2002, the Company completed thesale and disposal of properties for net cash proceeds of $9,989,000, net ofclosing costs, and $741,000 of notes. Of the $9,989,000 in cash proceeds, $9,525,000 relates to the sale of 17properties included in discontinued operations and $464,000 related to thepartial sale of certain properties. During the six months ended June 30, 2002, the Company purchased$475,000 of building and equipment, which was comprised of $82,000 ofequipment, $105,000 of building improvements paid by the Company on behalf of atenant, and $288,000 of remodeling costs. The Company reclassified a net amount of $147,000 between property andnet investment in direct financing leases during the six months ended June 30,2002.

 

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 likely, secures an appraisal or other estimate of fair marketvalue of the property affected.  Duringthe six months ended June 30, 2002, as a result of the Company’s regularanalysis of its investments to determine if circumstances indicate that thecarrying amount of an asset may not be recoverable, impairment charges of$1,718,000 were recorded from the revaluing of fourteen assets to their estimatedfair value.  Included in the totalamount of impairment charges is $390,000 which is reflected in income (loss)from discontinued operations.

 

 

On August 1, 2002, the Company completed the firsttranche of the its total planned acquisitions of Shoney’s and Captain D’s properties in sale/leasebacktransactions.  This first trancheconsisted of the purchase of four Shoney’s properties for a total purchaseprice of $4,047,000.

 

**4.****            ****Investments**

 

The aggregate cost basis and net unrealized loss for investmentsclassified as available for sale at June 30, 2002 were $3,756,000 and$2,506,000, respectively.  Net unrealizedgains and losses are recorded in accumulated other comprehensive income.  For the six months ended June 30, 2002,  an unrealized gain of $16,000 was recordedon available for sale investments.  Inaddition to these investments, the Company has other investments carried at acost basis of approximately $2,081,000. During the six months ended June 30, 2002, the Company liquidated itstrading securities.

 

**5.****            ****Lines of Credit, Bridge Loan and Notes Payable**

 

In May 2002, the Company entered into a Credit Agreement with Bank ofAmerica, through its subsidiary USRP Funding 2002-A, L.P., for a securedrevolving credit facility of $35,000,000, which is subject to a DerivativeExposure Reserve and a Borrowing Base, as defined.  Borrowings under this facility will be used primarily to acquirecertain Shoney’s and Captain D’s properties in sale/leasebacktransactions.  This facility is securedby the 

 

13

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147 properties owned by USRP Funding 2002-A, L.P. with a borrowing basevalue of  $29,450,000 and a net bookvalue of $75,879,000 as of  June 30,2002.  The Credit Agreement has a termof up to two years and allows for Base Rate Loans, Eurodollar Loans or acombination of the two.  Base Rate Loansbear interest at 3.0% plus the higher of the Federal Funds Rate plus 0.5% orthe Prime Rate.  Eurodollar Loans bearinterest at 3.0% plus LIBOR.  The CreditAgreement also provides that up to $10,000,000 of the facility may be used forletters of credit.  There is a 3% feeper annum on outstanding letters of credit as well as a 3% Derivative ExposureUsage Fee under this facility.  As ofJune 30, 2002, there were no borrowings under this facility, and the Companyhad letters of credit outstanding and drawn on Bank of America in the amount of$3,139,000.

 

On July 1, 2002, a limited and temporary waiver and amendment wasexecuted under this $35,000,000 Credit Agreement with Bank of America whichallowed the Company to borrow funds under this facility to partially financethe purchase of mortgage notes issued by Captain D’s with a face value of$20,000,000 on July 10, 2002.  Theamount of this investment, without the waiver, would have violated thelimitations on investments under this facility.  The initial waiver period expires on September 29, 2002 withextensions possible through December 28, 2002, subject to specified extensionfees.  The Captain D’s mortgage notesbear interest at 12% per annum.  TheCompany intends to utilize these notes as consideration to partially financethe acquisition of certain Captain D’s properties in 2002.

 

In August 2001, theCompany completed a $180,000,000 offering of Triple Net Lease MortgageCertificates (the “Certificates”) through its subsidiary U.S. RestaurantProperties, Inc. 2001-A, L.P.  Proceedsfrom the offering were primarily used to repay approximately $156,997,000outstanding under the Company’s secured bridge facility with Bank of America(described below) and the balance of the net proceeds were used for generalcorporate purposes including the prepayment of the $27,500,000 Senior B SecuredGuaranteed Notes (described below) in October 2001.  The Certificates amortize over 15 years, bear interest at the 30— day LIBOR plus 48 basis points and other associated fees of approximately52.6 basis points, and have an assumed final distribution or maturity date ofAugust 28, 2006.  As of June 30, 2002,there was $172,908,000 outstanding on the Certificates.  The Certificates are secured by 274properties with a net book value of $200,073,000 at June 30, 2002.

 

In January 2001, theCompany entered into an indenture agreement with Bank of America for a securedbridge facility of $175,000,000. Proceeds from this bridge facility were used to pay-off the outstandingbalance of the OP’s $175,000,000 revolving credit line (described below) and a$50,000,000 unsecured term loan from Credit Lyonnais.  The initial term of the bridge loan matured in July 2001, and theCompany entered into options to extend the facility through August 31,2001.  In August 2001, the Company paidthe outstanding balance of this bridge facility with the proceeds from theoffering of the Certificates.

 

In January 2001, the Company entered into a Credit Agreement with Bankof America for an unsecured revolving credit facility in the amount of$7,000,000.  The Credit Agreement had aterm of up to two years bearing interest in traunches of 30, 60, 90 or 180 -day LIBOR contracts plus 225 basis points. The Credit Agreement also provided that up to $3,500,000 of the facilitycould be used for letters of credit.  In2001, letters of credit in the amount of $812,000 were issued for the benefitof a supplier of fuel.  There was a2.25% fee per annum on the outstanding letters of credit.  Amounts available under this facility were furtherreduced by the market value of the Bank of America Derivatives (described inNote 6 below) in excess of a $2,000,000 threshold.  This facility expired in the second quarter of 2002 and wasreplaced by the  $35,000,000 CreditAgreement with Bank of America (described above) .

 

In January 1998, the OP entered into a credit agreement with asyndicate of banks for an unsecured revolving credit line of $175,000,000.  The OP received advances under this creditagreement to finance the acquisition of properties, to repair and updateproperties and for working capital. This credit agreement, which expired on January 9, 2001,  provided that borrowings thereunder bearinterest in traunches of 30, 60 or 90 - day LIBOR contracts at the then currentLIBOR plus a margin spread of either 1.05%, 1.20% or 1.35%, dependent on aleverage ratio formula. On February 23, 1999, the OP entered into an Assignmentand Acceptance agreement that became effective on April 12, 1999.  Under the terms of the Assignment andAcceptance, the OP accepted the assignment of $10,000,000 of the availablecredit line.  This agreement effectivelyreduced the maximum availability under the revolving credit agreement by$10,000,000.  On January 9, 2001, theCompany paid the outstanding balance under this facility as scheduled withproceeds from a bridge loan advanced by Bank of America.

 

On February 26, 1997, the Company issued $40,000,000 inprivately placed debt which consisted of $12,500,000 Series A Senior SecuredGuaranteed Notes with a 8.06% interest rate, due January 31, 2000, and $27,500,000 Series B Senior

 

14

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Secured Guaranteed Notes with a 8.30% interest rate, dueJanuary 31, 2002. In January 2000, the Company paid the $12,500,000 Series ASenior Secured Guaranteed Notes in full as scheduled.  Effective January 9, 2001, the Company secured the Series BSenior Notes with properties having an aggregate net book value ofapproximately $38,575,000.  Under theterms of the Waiver and Second Amendment to Note Purchase Agreement, theCompany was required to secure the noteholders on the same basis and withsimilar collateral as that provided to Bank of America.  In October 2001, the Company prepaid the $27,500,000Series B Senior Secured Guaranteed Notes in full.  In connection with this prepayment, the Company paid $388,000 ofmake-whole fees and wrote-off $216,000 worth of unamortized loan originationfees associated with this facility.

 

On May 12, 1998, the Company issued $111,000,000 of seven year fixedrate senior unsecured notes payable in a private placement.  The notes bear interest at the rate of 7.15%per annum and are due May 1, 2005.  Thenet proceeds of the notes were used to repay a portion of a revolving creditagreement and for general corporate purposes. In conjunction with the notes payable agreement, the underwriters andthe Company entered into a rate lock agreement for the purpose of setting theinterest rate on these notes payable. The fee paid to lock in the rate on these notes payable wasapproximately $424,000 and is being amortized over the term of the notes as anadjustment to interest expense.  As aresult of certain guarantees required by the existing  Bank of America Credit Agreement, the subsidiaries of the Companyexecuted a Subsidiary Guaranty in the first quarter of 2001 for the benefit ofthese noteholders.

 

On November 13, 1998, the Company issued $47,500,000 in senior notespayable in a private placement.  Thenotes bear interest at the rate of 8.22% per annum and are due August 1,2003.  The net proceeds were used torepay a portion of a revolving credit agreement and for general corporatepurposes.  In conjunction with the notespayable agreement, the underwriters and the Company entered into a rate lockagreement for the purpose of setting the interest rate of these notespayable.  The fee paid to lock in therate on these notes payable was approximately $406,000 and is being amortizedover the term of the notes as an adjustment to interest expense.  As a result of certain guarantees requiredby the existing  Bank of America CreditAgreement,  the subsidiaries of theCompany executed a Subsidiary Guaranty in the first quarter of 2001 for thebenefit of these noteholders.

 

On August 10, 1998, the Company assumed a mortgage note payable as partof an office building acquisition.  Thenote bears interest at a rate of 8.00% per annum with payments of principal andinterest due monthly through June 2007. As of June 30, 2002, the balance was $963,000.

 

In April 1999, the OPentered into a credit agreement with Credit Lyonnais for an unsecured term loanof $50,000,000.  This credit facilitywas scheduled to mature in April 2002. On January 9, 2001, the Company paid the outstanding balance under thisfacility with proceeds from a bridge loan issued by Bank of America.  In connection with this pay-off, the Companywrote-off $340,000 worth of unamortized loan origination fees associated withthis facility in January 2001.

 

The Company is in compliance with all covenants associatedwith its debt and credit facilities as of June 30, 2002.

 

**6.****             ****Derivative Instruments**

 

Derivative financialinstruments are utilized by the Company to manage market risks associated withchanges in interest rates.  Derivativefinancial instruments include interest rate swaps and interest ratecollars.  During the three and sixmonths ended June 30, 2002, the Company recognized $84,000 and $256,000,respectively, in income related to the ineffective portion of an interest rateswap with Credit Lyonnais, and recognized $(1,025,000) and $122,000,respectively, in other comprehensive income (loss) representing the effectiveportion of the cash flow hedges.

 

Effective February 2002,the Company entered into a fixed to floating interest rate swap with Bank ofAmerica.  This fixed to floatinginterest rate swap is on a $25,000,000 notional value on which the Companyreceives a fixed rate of 7.15% and pays a floating rate based on the threemonth LIBOR plus a spread of 2.92%. This interest rate swap terminates in May 2005.  The Company has designated this swap as afair value hedge.  Accordingly, allchanges in value of the derivative and hedged item are recorded in earnings.

 

In conjunction with thecompletion of the offering of the Certificates, the Company entered intovarious interest rate protection agreements (the “Bank of AmericaDerivatives”), including: an interest rate swap at a fixed rate of 

 

15

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3.825% for one year on anotional amount of $50,000,000 and an interest rate collar with a floor of4.42% and a ceiling of 6.00% for four years on an original notional amount of$80,000,000 which has been amortized down to $73,800,000 as of June 30,2002.These derivatives effectively lock in $50,000,000 at 4.8310% (3.825% plus1.006%) for one year, lock in $73,800,000 as of June 30,2002 at between 5.4260%(4.42% plus 1.006%) and 7.006% (6.0% plus 1.006%) for four years.

 

Effective July 3, 2000, the Company entered into an interest rate swapwith Credit Lyonnais for a notional amount of $50,000,000 on which the Companypays a fixed rate of 7.05% and receives a variable rate based upon LIBOR.  The interest rate swap agreement terminatesin May 2003 but may be terminated earlier subject to certain restrictions.  The agreement calls for the net expense orincome to be paid or received quarterly. This swap was secured by six properties with an aggregate net book valueof $3,198,000 on February 23, 2001.  Theadoption of SFAS No. 133 as of January 1, 2001 resulted in the recognition of aliability of $1,474,000 with a cumulative effect adjustment to othercomprehensive income of $1,474,000.  Theinterest rate swap was designated as a cash flow hedge of the variable rateinterest payments related to the Company’s term loan with Credit Lyonnais.  As previously discussed, during January2001, the Company repaid the Credit Lyonnais term loan in full with proceedsfrom a bridge loan. Accordingly, the cash flow hedge relationship was terminated,and the $1,474,000 in accumulated other comprehensive operations wasre-classified to earnings over a six-month period, which was the anticipatedterm of the bridge loan.  From January2001 until August 2001, this interest rate swap was not designated as a hedge,and accordingly all changes in value were recorded directly to earnings.  In connection with the completion of theCertificate offering, the Company designated this interest rate swap as a cashflow hedge of the variable interest rate payments on $50,000,000 of theCertificates.  The Company reduced thenotional amount of this interest rate swap by $20,000,000 during 2001 for acost of approximately $1,405,000. During the first quarter of 2002, the Company paid $549,000 to reducethe notional amount of this interest rate swap to $15,000,000 effective May 13,2002.

 

**7.****            ****Related Party Transactions**

 

In order to satisfyfranchisor requirements, the Managing General Partner of Arkansas Restaurants#10 L.P. (“ARK #10”) is owned by the chief executive officer of the Company anda member of the board of directors of the Company.  The chief executive officer receives no compensation for thisrole.  ARK #10 was established to holdand operate five Burger King and one Schlotzsky’s franchises in Arkansas andKansas, respectively.  The Burger Kingoperations were either sold to third parties or closed in 1999.  At December 31, 1999, a note receivable of$1,187,000 was due from ARK #10 for which the Company had reserved $1,141,000as an allowance for uncollectability. The note receivable was due on July 1, 2016 and had an interest rate of9.0% per annum.  During 2000, theCompany determined that the reduced operations of ARK #10 made collection ofthis note improbable and wrote down the note against the establishedreserve.  The Schlotzsky’s franchise wastransferred to the Company effective October 1, 2001 as partial payment for thenote receivable.  At June 30, 2002,there were no other monies owed to the Company by ARK #10.

 

In connection with Mr. Robert Stetson’s resignation as Chief ExecutiveOfficer and President of the Company, the Company entered into a SettlementAgreement and Consulting Agreement with Mr. Stetson as of October 6, 1999.  Pursuant to the terms of the SettlementAgreement, the Company agreed to provide Mr. Stetson one or more loans, up toan aggregate of $800,000, for the sole purpose of acquiring shares of theCompany’s common stock from time to time in the open market.  In March 2000, the Company advanced $400,000to Mr. Stetson 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.  Pursuant to the note agreement, Mr. Stetsonhas pledged the common stock purchased with the note proceeds as collateral forthe loan.  This note is classified asLoans to stockholders for common stock on the balance sheet.

 

Effective September 22, 2000, the Company and Mr. Stetson entered intoan Amendment to the Settlement Agreement that provided for two changes to theoriginal Settlement Agreement that were completed in October 2000.  First, Mr. Stetson executed a secondpromissory note in the amount of $300,000 in exchange for which he received35,037 restricted shares of the Company’s Common Stock (calculated based on avalue of $8.5625 per share).  Second,the Company advanced Mr. Stetson $75,000 under a third promissory note to beused for the sole purpose of acquiring shares of the Company’s common stock inthe open market.  Both notes bearinterest at 7.0% per annum and provide for quarterly payments of interest onlythrough July 2006, with a final payment of principal and interest due inOctober 2006.  In addition, both notesare secured by the restricted Common Stock and stock purchased with theproceeds of the notes.

 

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Both of these notes are classified as Loans to stockholders for commonstock on the balance sheet.

 

On December 20, 2000, USRP/HCI Partnership 1, L.P., a subsidiary of theCompany (“HJV”), made an advance to the preferred interest holder in the amountof $700,000.  Under the terms of theadvance agreement dated December 1, 2000, the $700,000 advance bore interest atan annual interest rate of 9.0%.   Thisadvance was paid in full as scheduled in April 2001.

 

In conjunction with the merger between the Company and QSV Properties,Inc., the former managing partner of USRP, the Company’s predecessor, theCompany assumed a note receivable from Mr. Stetson in the amount of $959,000due on January 22, 2001 with an interest rate of 10.00% as well as a notepayable to Mr. Darrel L. Rolph, who was then a director of the Company, for$959,000 due on January 22, 2001 with an interest rate of 10.00%.  Both the note receivable and note payablewere paid in full on the scheduled due date.

 

In connection with their resignations from the Company’s board ofdirectors in March 2001, Messrs. Margolin, Rolph and Rolph entered intoNoncompetition and Release Agreements with the Company pursuant to which eachof them agreed not to (a) submit or cause the submission of any proposals ornominations of candidates for election as directors of the Company or (b)solicit proxies from any of the Company’s stockholders, in each case prior toDecember 31, 2003.  Additionally, Mr.Margolin agreed not to directly or indirectly own manage, control, participatein, invest in or provide consulting services to any entity or businessorganization that engages in or owns, invests in, manages or controls anyventure engaged in the ownership, management, acquisition or development ofrestaurant, gasoline and convenience store properties similar to those of theCompany and its affiliates for the one-year period ended March 9, 2002.  As consideration under such agreement and inconnection with the termination of Mr. Margolin’s employment agreement with theCompany, the Company paid Mr. Margolin $800,000 in severance compensation whichwas expensed during the quarter ended March 31, 2001.  Similarly, each of the Rolphs agreed not to directly orindirectly compete with the Company, other than through the restaurantoperations of the Rolphs in existence as of March 2001.

 

On August 27, 2001, as part of the employment arrangement with theCompany’s new Chief Financial Officer and Chief Operating Officer, H.G.Carrington, Jr., the Company advanced Mr. Carrington $550,000 for the purposeof acquiring shares of the Company’s common stock.  The promissory note provides for an interest rate of 5.0% perannum and quarterly payments of interest only through May 2006, with a finalpayment of principal and interest due in August 2006.  This $550,000 note is classified as a Loan to stockholders forcommon stock on the balance sheet.

 

In January 2002, the Company advanced Harry O. Davis, the Company’sSenior Vice-President of Asset Management, $24,000 for the purpose of acquiringshares of the Company’s Common Stock. The promissory note provides for an interest rate of 6.0% per annum andquarterly payments of interest only beginning in April 2002 through December2006, with a final payment of principal and all unpaid interest in January2007.  This note is classified as a Loanto stockholders for Common Stock on the balance sheet.

 

On January 24, 2002, Lone Star U.S. Acquisitions LLC (an affiliate ofthe Lone Star Holders described in Note 8 below), the OP, LSF 4 Acquisition,LLC and Shoney’s Inc. entered into an Agreement and Plan of Merger pursuant towhich LSF 4 Acquisition, LLC would merge into Shoney’s, with Shoney’s being thesurviving entity.  Pursuant to the termsof the merger, which was consummated on April 10, 2002, all of the outstandingshares of common stock of Shoney’s were cancelled and converted into the rightto receive $0.36 in cash and each outstanding membership interest in LSF 4Acquisition, LLC (owned 90.1% by Lone Star U.S. Acquisitions and 9.9% by theOP) would be converted into and exchanged for 100 shares of common stock ofShoney’s, as the surviving entity in the merger.  Under  the terms of thelimited liability company agreement, Lone Star Acquisitions contributed 90.1%of the initial capital and the OP contributed 9.9% of the initial capital toLSF 4 Acquisition, LLC.  Pursuant to theterms of financing arrangements 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 tofund any additional capital requirements of the entity, other than its initialcapital contribution.  The Company hadcompleted the purchase of four properties from Shoney’s on August 1, 2002 andintends to acquire additional properties in the near future.

 

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

 

Two stockholders of the Company (LSF3 Investments I, LLC, a Delawarelimited liability company, and LSF3 Investments II, LLC, a Delaware limitedliability company (the “Lone Star Holders”)) own approximately 19.19% of theoutstanding Common Stock as of June 30, 2002.

 

**Distributionsto Common and Preferred Stockholders**

 

During the three months ended March 31, 2002, the Company changed itsdeclaration date for its dividends from the last working day of the previousperiod to the first working day of the current period.  During the six months ended June 30, 2002,the Company paid six common stock dividends and declared five, and paid twopreferred stock dividends and declared one.

 

**Minority Interests**

 

As described in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2001, each OP unit not owned by the Companyrepresents a minority interest in the OP. Each OP unit participates in any income (loss) of the OP based on thepercent ownership in the OP and receives a cash dividend in an amountequivalent to a share of Common Stock. Each OP unit may be exchanged at any time by the holder thereof for oneshare of common stock of the Company. With each exchange of outstanding OP units for common stock, theCompany’s percentage ownership interest in the OP, directly or indirectly, willincrease.  As of June 30, 2002, therewere 131,915 OP units outstanding not owned by the Company with a guaranteedmarket price of $25.00 per unit.  TheseOP units expired July 29, 2002 and were exchanged for 221,482 shares of commonstock on August 2, 2002.

 

During 1999, the Company issued $55,000,000 of 8.5%preferred interest in HJV to a third party for net proceeds of$52,793,000.  Under the terms of thistransaction, the preferred interest holder receives annual distributions equalto $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 be required from time to time to exchange propertiesthat do not meet specified criteria as defined in the partnership agreement.

 

The 131,915 OP units outstanding at June 30, 2002 andDecember 31, 2001 not owned by the Company and the preferred partnership interests represent the minority interestsof the Company.

 

Minority interest in the OP and the preferred partnershipconsists of the following at June 30, 2002 (in thousands):

 

| Balance  at January 1, 2002                   |   | $      | 54,337 |   |
|-----------------------------------------------|--------|--------|--------|--------|
| Distributions  paid and accrued in the period |   | (2,409 | )      |
| Income  allocated to minority interest        |   | 2,349  |   |
| Balance at June 30, 2002                      |   | $      | 54,277 |   |

 

**9.****                                     ****Segment Information**

 

Effective April2001, with the formation of Fuel Supply Inc., a wholly-owned subsidiary of theCompany (“FSI”), and the commencement of retail operations, the Company now hastwo operating segments, real estate and retail.  Operating segments are defined as components of an enterprise forwhich separate financial information is available that is evaluated by thechief operating decision maker(s) in deciding how to allocate resources and inassessing performance.

 

*RealEstate.*  Real estate activities are comprised ofproperty management, acquisition and development operations and relatedbusiness objectives.  The Companyderives its revenues primarily from rental income received on its 794restaurant and service station properties located throughout 48 states.

 

*Retail*. Commencing in April 2001, the Company formed FSI, which began retailsales. Revenues from this segment are generated from the sale of gasoline andconvenience store merchandise, and food sales at restaurants operated by theCompany.  At June 30, 2002, FSI operatedfive service stations in Texas, five in Hawaii and two in Illinois.  In January 2002, FSI commenced operating afuel terminal in Hawaii to store fuel sold at its Hawaii service stations.  At June 30, 2002, in addition to the servicestations currently operated, FSI sold fuel to eight service stations in 

 

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Hawaii, seven in Texas and four in Illinois.  FSI also operates four non-service station properties: one carwash in California and three restaurants, two located in Texas and one locatedin Kansas.

 

*IntersegmentCharges. *Intersegment charges are eliminated inconsolidation and include the costs of rent and interest.  The Retail segment pays rent to the RealEstate segment for leased properties that it operates.  Beginning in 2002, interest is also paid bythe Retail segment to the Real Estate segment. Interest is charged at an annual rate of 9.5% on intercompany balancesas well as on a note established on January 1, 2002 for the sale of the Hawaiifuel terminal to FSI.  Intercompanybalances represent primarily the cash advances made by the Real Estate segmentto the Retail segment to fund its operations. Intersegment rent and interest eliminated in consolidation for the sixmonths ended June 30, 2002 were $607,000 and $382,000, respectively.

 

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**Item2.****   ****Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Results of Operations**

 

TheCompany derives its revenue primarily from the leasing of its properties(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 50% of theCompany’s leases provide for a base rent plus a percentage of the sales inexcess of a threshold amount.  As a result,portions of the Company’s revenues are a function of the number of propertiesin 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.

 

***Comparisonof the three months ended June 30, 2002 to the three months ended June 30, 2001***

 

Revenues from real estate operations, including income earned on directfinancing leases, in the three months ended June 30, 2002 totaled $17,652,000,down 6.7% from the $18,912,000 recorded for the three months ended June 30,2001.  The decrease in revenues isprimarily due to sales of properties, as well as lower interest income due tothe sales of the Company’s trading and certain available for sale securities during2002.  For the three months ended June30, 2002, approximately 7.0% of the Company’s rental revenues resulted frompercentage rents (rents determined as a percentage of tenant sales), comparedwith 7.6% for the three months ended June 30, 2001.  Also included in revenues is interest income relating to notesand mortgage receivables from tenants and related parties.  Interest income was $784,000 for the threemonths ended June 30, 2002, compared with $1,335,000 for the three months endedJune 30, 2001.

 

Retail operations commenced in April 2001.  Retail income, which is comprised of revenue from operatingactivities, was $10,001,000 for the three months ended June 30, 2002, comparedto $1,986,000 for the three months ended June 30, 2001.  Cost of sales associated with this revenuetotaled $8,471,000 and general and administrative costs associated with thisrevenue totaled $1,517,000 for the three months ended June 30, 2002, comparedto $1,665,000 and $130,000, respectively, during the three months ended June30, 2001. These increases are due to the increase in the number of storesoperating during 2002 compared to 2001 and the full period of operations forthe quarter ended June 30, 2002.

 

Property expenses for thethree months ended June 30, 2002 totaled $520,000, an increase of 13.3% whencompared to the three months ended June 30, 2001.  Depreciation and amortization expenses in the three months endedJune 30, 2002 totaled $5,988,000, an increase of 9.2% when compared to thethree months ended June 30, 2001.  Thisincrease is primarily due to $690,000 expense recorded in June 2002 for fifteenmonths of depreciation of assets reclassified from Assets Held for Sale toProperty in accordance with SFAS No. 144, partially offset by the decrease indepreciation expense due to fewer properties owned during 2002 as compared tothe same period in 2001.

 

General and administrative expenses for the three months ended June 30,2002 totaled $2,031,000, an increase of 5.5% when compared to the three monthsended June 30, 2001.  This increase isprimarily due to costs associated with tenant work-outs incurred during thethree months ended June 30, 2002 as compared to the three months ended June 30,2001**.**

 

Provisions for doubtfulaccounts for the three months ended June 30, 2002 totaled $(91,000) compared to$(198,000) for the three months ended June 30, 2001, resulting from theCompany’s regular analysis of its receivables to determine if circumstancesindicate that the carrying value of the receivable may not be recoverable.

 

Interest expense, amortization of loan origination fees and derivativesettlement payments for the three months ended June 30, 2002 totaled$5,660,000, a decrease of 37.6% when compared to the three months ended June30, 2001.  This decrease is primarilydue to the Company’s decrease in its outstanding debt  at June 30, 2002 compared to June 30, 2001 by approximately$16,000,000, the higher amortization of costs in 2001 associated with the$175,000,000 bridge loan provided by Bank of America, as well as a reduction ininterest rates.

 

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During the three months ended June 30, 2002, as a result of theCompany’s regular analysis of its investments to determine if circumstancesindicate that the carrying amount of an asset may not be recoverable, an assetimpairment charge of $640,000 was recorded from the revaluing of seven assetsto their estimated fair value.  Duringthe three months ended June 30, 2001, the Company recorded an asset impairmentcharge of $120,000.

 

Derivative financial instruments are utilized by the Company to manageits exposure to market risks from changes in interest rates.  Derivative financial instruments includeinterest rate swaps and interest rate collars. During the three months ended June 30, 2002, the Company recognized$84,000 in income related to the ineffective portion of an interest rateswap.  Loss on an interest rate swapagreement for the three months ended June 30, 2001 totaled $669,000.

 

Gain (loss) on sale ofproperty for the three months ended June 30, 2002 is reflected in income (loss)from discontinued operations in accordance with FAS144.  Gain (loss) on sale of property was$1,542,000 for the three months ended June 30, 2001 and relates to the sale of15 properties for cash proceeds of $12,739,000.

 

Minority interests in net income was $1,216,000 for the three monthsended June 30, 2002 compared to $1,170,000 for the three months ended June 30,2001.  For both the three months endedJune 30, 2002 and 2001, the amounts relate primarily to the Company’s minorityinterest in HJV, which was formed in October 1999.

 

Income (loss) from discontinued operations was $(517,000) for the threemonths ended June 30, 2002 compared to $(154,000) for the three months endedJune 30, 2001.  In accordance with SFAS144, discontinued operations represent the operations of properties disposed ofor classified as held for sale subsequent to January 1, 2002 as well as anygain or loss recognized in their disposition. Ten properties were disposed of in the second quarter of 2002 resultingin a gain (loss) of $(206,000) with cash proceeds of $3,743,000, net of closingcosts and $741,000 of notes.  Of the$3,743,000 in cash proceeds, $3,279,000 relates to the sale of ten discontinuedoperations and $464,000 relates to the partial sale of certain properties.  The operating results of these 10 propertiessold in the second quarter of 2002 are reflected as income (loss) fromdiscontinued operations for the three months ended June 30, 2002 and 2001.

 

*Comparison of the six months ended June 30, 2002 tothe six months ended June 30, 2001*

 

Revenues from real estate operations, including interest income andincome earned on direct financing leases, in the six months ended June 30, 2002totaled $35,324,000, down 5.7% from the $37,476,000 recorded for the six monthsended June 30, 2001.  Rental revenuesdecreased 3.6% from $34,618,000 in the six months ended June 30, 2001 to$33,364,000 in 2002  primarily due to decreasesin the number of properties owned during 2002 as compared to the same period in2001.  For the six months ended June 30,2002, approximately 6.3% of the Company’s rental revenues resulted frompercentage rents (rents determined as a percentage of tenant sales), comparedwith 7.2% for the six months ended June 30, 2001.  The decrease of 31.9% in interest income from $2,681,000 in thesix months ended June 30, 2001 to $1,825,000 in 2002 is primarily due to thesales of the Company’s trading and available for sale securities during 2002,as well as short-term investment of excess cash during 2001.

 

Retail operations commenced in April 2001.  Retail income, which is comprised of revenue from operatingactivities, was $17,217,000 for the six months ended June 30, 2002, compared to$1,986,000 for the six months ended June 30, 2001.  Cost of sales associated with this revenue totaled $14,411,000and general and administrative costs associated with this revenue totaled$2,626,000 for the six months ended June 30, 2002, compared to $1,665,000 and$130,000, respectively, during the six months ended June 30, 2001. Theseincreases are due to the increase in the number of stores operating during 2002compared to 2001 and a full period of operations for the six months ended June30, 2002.

 

Property expenses for thesix months ended June 30, 2002 totaled $1,106,000, an increase of 49.7% whencompared to the six months ended June 30, 2001.  This increase is primarily due to higher property taxes andhigher rent expense during 2002 versus 2001. Depreciation and amortization expenses in the six months ended June 30,2002 totaled $11,265,000, a decrease of 1.3% when compared to the six monthsended June 30, 2001. This decrease is primarily due to the decrease indepreciation expense due to fewer properties owned during 2002 as compared tothe same period in 2001, partially offset by $690,000 expense recorded in June2002 for fifteen months of depreciation of assets reclassified from Assets heldfor sale to Property.

 

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General and administrative expenses for the six months ended June 30,2002 totaled $3,937,000, a decrease of 21.6% when compared to the six monthsended June 30, 2001.  During the sixmonths ended June 30, 2001, the Company incurred costs of $813,000 forseverance related to the Company’s former chief executive officer, a provisionof $350,000 for severance related to the Company’s former chief financialofficer and $230,000 for costs associated with hiring the Company’s new chiefoperating officer/chief financial officer. These costs were partially offset by lower costs associated with tenantwork-outs in the first six months of 2001.

 

Provisions for doubtful accounts for the six months ended June 30, 2002totaled $(5,000) compared to $950,000 for the six months ended June 30, 2001,resulting from the Company’s regular analysis of its receivables to determineif circumstances indicate that the carrying value of the receivable may not berecovered.

 

Interest expense, amortization of loan origination fees and derivativesettlement payments for the six months ended June 30, 2002 totaled $11,353,000,a decrease of 37.6%, when compared to the six months ended June 30, 2001. Thisdecrease is primarily due to lower debt levels, lower interest rates and loweramortization of loan fees.  Amortizationof loan origination fees decreased 79.4% from $4,102,000 in 2001 to $846,000 in2002.  This decrease is due to the feesassociated with the Bank of America bridge facility which were expensed overthe first six months of 2001.

 

During the six months ended June 30, 2002, as a result of the Company’sregular analysis of its investments to determine if circumstances indicate thatthe carrying amount of an asset may not be recoverable, an asset impairmentcharge of $1,328,000 was recorded from the revaluing of eighteen assets totheir estimated fair value.  During thesix months ended June 30, 2001, the Company recorded an asset impairment chargeof $16,049,000. During the six months ended June 30, 2001, BC Oil Ventures LLC,the tenant leasing the service stations and fuel terminal in Hawaii, defaultedon its monthly rent payments.  Aftercareful assessment of various factors relevant to these properties, managementdetermined it was appropriate to sell these properties.  Accordingly, the Company classified theseproperties as Assets Held for Sale at that time and an impairment charge of$7,743,000 was recorded to write these assets down to their estimated proceedsfrom the anticipated disposal of these properties net of estimated costs tosell.  In addition, management analyzedservice stations in Missouri, Illinois and Texas which were late paying rentand defaulting on certain lease terms for possible impairment.  It was determined that 16 of theseproperties had carrying values in excess of fair value.  The Company recorded an impairment charge of$7,567,000 in the six months ended June 30, 2001 to revalue these assets toestimated fair value.  The estimatedfair value of these assets was determined by discounting the estimated cashflows of each asset.  As a result of theCompany’s regular analysis of its investments to determine if circumstancesindicate that the carrying amount of an asset may not be recoverable,additional impairment charges of $739,000 were recorded for the six monthsended June 30, 2001 from the revaluing of ten other assets to their estimatedfair value.

 

Derivative financial instruments are utilized by the Company to manageits exposure to market risks from changes in interest rates.  Derivative financial instruments includeinterest rate swaps and interest rate collars. During the six months ended June 30, 2002, the Company recognized$256,000 in income related to the ineffective portions of interest rateswap.  Loss on this interest rate swapagreement for the six months ended June 30, 2001 totaled $2,359,000. Of the$2,359,000 recorded, $1,474,000 represents reclassification of the January 1,2001 adjustment from other comprehensive income and $885,000 represents thechange in the fair value of the interest rate swap.

 

Gain (loss) on sale of property for the six monthsended June 30, 2002 is reflected in income (loss) from discontinued operationsin accordance with FAS144.  Gain (loss)on sale of property was $1,608,000 for the six months ended June 30, 2001 andrelates to the sale of 22 properties for cash proceeds of $14,493,000, net ofclosing costs, and notes of $878,000.

 

Minority interests in net income was $2,349,000 for the six monthsended June 30, 2002 compared to $2,174,000 for the six months ended June 30,2001.  For both the six months endedJune 30, 2002 and 2001, the amounts relate primarily to the Company’s minorityinterest in HJV, which was formed in October 1999.

 

Income (loss) from discontinued operations was $791,000 for the sixmonths ended June 30, 2002 compared to $(191,000) for the six months ended June30, 2001.  In accordance with SFAS 144,discontinued operations represent the operations of properties disposed ofsubsequent to January 1, 2002 as well as any gain or loss recognized in theirdisposition.  Seventeen properties weredisposed of or classified as held for sale in the six months ended June 30,2002 resulting in a gain (loss) of $1,274,000 with cash proceeds of $9,989,000,net of closing costs and $741,000 of notes. Of the $9,989,000 in cash proceeds, $9,525,000 relates to the sale of 17discontinued 

 

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operations and $464,000 related to the partial sale of certainproperties.  The operating results ofthese 17 properties disposed of in the first half of 2002 are reflected asincome (loss) from discontinued operations for the six months ended June 30,2002 and 2001.

 

Loss on early extinguishment of debt was $340,000 for the six monthsended June 30, 2001.  On January 9,2001, the Company paid the outstanding balance under the Credit Lyonnaisfacility with proceeds from a bridge loan issued by Bank of America.  In connection with this pay-off, the Companywrote-off $340,000 in unamortized loan origination fees associated with thisfacility.

 

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**Liquidityand Capital Resources**

 

The Company’s principalsource of cash to meet its short-term cash requirements is from rental revenuesgenerated by the Company’s properties. As of June 30, 2002, the Company had letters of intent for theacquisition of 37 restaurant properties for approximately $23,855,000.  The terms of the Company’s leases (“triplenet leases”) generally require that the tenant is responsible for maintenanceand improvements to the pertinent property. Thus, the Company is generally not required to expend funds for remodelsand renovations.  However, the Companyexpects to spend approximately $590,000 during the remainder of the year endingDecember 31, 2002 to renovate and remodel currently owned properties.

 

During the first quarterof 2002, a party defaulted on its contract to purchase from the Company 23properties located in Hawaii.  In April2002, a settlement was reached in which the Company received cash of $660,000and a note receivable of $125,000.  Ofthe $785,000 settlement, approximately $125,000 was used to satisfy receivablesdue to the Company and $660,000 was recognized as revenue in the quarter endedJune 30, 2002.

 

During the three months ended March 31, 2002, the Company changed itsdeclaration date for its dividends from the last working day of the previousperiod to the first of every period. During the six months ended June 30, 2002, the Company paid six commonstock dividends and declared five, and paid two preferred stock dividends anddeclared one.

 

During June 2001, the Company was informed that one of its tenants hadfiled for protection under Chapter 11 of the Bankruptcy Code of the UnitedStates (the “Bankruptcy Code”).  GantAcquisition LLC (“Gant”), which leased 27****service stations in North Carolina under aMaster Lease with the Company, filed on May 21, 2001.  Annual rent from these properties is approximately$1,288,000.  At June 30, 2002, there wasapproximately $16,000 of receivables due from this tenant and the Company hadno reserve for these amounts.****The Bankruptcy Court has severed theMaster Lease between Gant and the Company, permitting Gant to reject six of theleases subject to the Master Lease while continuing to pay rent on theremaining 21 properties..  The Companyappealed this ruling in May 2002. Depending on the outcome of this appeal, which is anticipated to beruled upon in the fourth quarter of 2002, the remaining six properties willeither be sold, with all proceeds payable to the Company, or Gant will beresponsible for all back rent due. Gant continues to pay rent on 21 of the 27properties.

 

During October 2001, the Company was informed that one of itsborrowers, Lyon’s of California, Inc. (“Lyons”), had filed for protection underChapter 11 of the Bankruptcy Code.  AtJune 30, 2002 there was approximately $9,131,000 due on notes from Lyon’s forwhich $2,500,000 had been reserved. Interest income associated with these notes has not been recognizedsince September 2001.

 

During February 2002, the Company was informed that ICH Corporation(“ICH”) and its wholly owned subsidiary, Sybra, Inc. (“Sybra”), filed forprotection under Chapter 11 of the Bankruptcy Code.  At June 30, 2002 there was approximately $567,000 due from ICHfor which $275,000 had been reserved. ICH Corporation also serves as a guarantor for the Lyon’s notespreviously described.  Sybra, Inc.currently leases 59 Arby’s® restaurant sites from the Company.  Annual rent from these properties isapproximately $4,591,000.  Allpost-bankruptcy rent has been received from this tenant, and the Company doesnot anticipate any impairment of values associated with these properties.

 

In August 2001, the Company completed a $180,000,000 offering of theCertificates through its subsidiary USRP Funding 2001-A, L.P.  Proceeds from the offering were primarilyused to repay approximately $156,997,000 outstanding under the Company’ssecured bridge facility with Bank of America and the balance of the netproceeds were used for general corporate purposes including the prepayment ofthe $27,500,000 Senior B Secured Guaranteed Notes in October 2001.  The Certificates amortize over 15 years,bear interest at the 30 — day LIBOR plus 48 basis points and other associatedfees of approximately 52.6 basis points, and have an assumed final distributionor maturity date of August 28, 2006.  AtJune 30, 2002 there was $172,908,000 outstanding on the Certificates.

 

In conjunction with the completion of the offering of the Certificates,the Company entered into various interest rate protection agreements,including: an interest rate swap at a fixed rate of 3.825% for one year on anotional amount of $50,000,000, an interest rate collar with a floor of 4.42%and a ceiling of 6.00% for four years on an original notional amount of$80,000,000 which has been amortized down to $73,800,000 as of June 30, 2002.These derivatives effectively lock in $50,000,000 at 4.8310% (3.825% plus1.006%) for one year, lock in $73,800,000 as of June 30, 2002 at between5.4260% (4.42% plus 1.006%) and 7.006% (6.0% plus 1.006%) for four years.

 

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Effective February 2002, the Company entered into a fixed to floatinginterest rate swap with Bank of America. This fixed to floating interest rate swap is on a $25,000,000 notionalvalue on which the Company receives a fixed rate of 7.15% and pays a floatingrate based on the three month LIBOR plus a spread of 2.92%.  This interest rate swap terminates in May2005.

 

Effective July 3, 2000, the Company entered into an interest rate swapwith Credit Lyonnais for a notional amount of $50,000,000 on which the Companypays a fixed rate of 7.05% and receives a variable rate based upon LIBOR.  The interest rate swap agreement terminatesin May 2003 but may be terminated earlier subject to certain restrictions.  The agreement calls for the net expense orincome to be paid or received quarterly. This swap was secured by six properties with an aggregate net book valueof $3,198,000 on February 23, 2001. The Company reduced the notional amount ofthis interest rate swap by $20,000,000 during 2001 for a cost of approximately$1,405,000.  During the first quarter of2002, the Company paid $549,000 to reduce the notional amount of this interestrate swap to $15,000,000 effective May 13, 2002.

 

In January 2001, the Company entered into a Credit Agreement with Bankof America for an unsecured revolving credit facility in the amount of$7,000,000.  The Credit Agreement had aterm of up to two years bearing interest in traunches of 30, 60, 90 or 180 -day LIBOR contracts plus 225 basis points. The Credit Agreement also provided that up to $3,500,000 of the facilitymay be used for letters of credit.  In2001, letters of credit in the amount of $812,000 were issued for the benefitof a supplier of fuel.  There is a 2.25%fee per annum on the outstanding letters of credit.  Amounts available under this facility are further reduced by themarket value of the Bank of America Derivatives in excess of a $2,000,000threshold.  This facility expired in thesecond quarter of 2002 and was replaced by a $35,000,000 Credit Agreement withBank of America finalized in May 2002.

 

In May 2002, the Company entered into a Credit Agreement with Bank ofAmerica, through its subsidiary USRP Funding 2002-A, L.P., for a securedrevolving credit facility of $35,000,000, which is subject to a DerivativeExposure Reserve and a Borrowing Base, as defined.  Borrowings under this facility will be used primarily to acquirecertain Shoney’s and Captain D’s properties in sale/leasebacktransactions.  This facility is securedby the 147 properties owned by USRP Funding 2002-A, L.P. with a borrowing basevalue of  $29,450,000 and a net bookvalue of $75,879,000 as of  June 30,2002.  The Credit Agreement has a termof up to two years and allows for Base Rate Loans, Eurodollar Loans or acombination of the two.  Base Rate Loansbear interest at 3.0% plus the higher of the Federal Funds Rate plus 0.5% orthe Prime Rate.  Eurodollar Loans bearinterest at 3.0% plus LIBOR.  The CreditAgreement also provides that up to $10,000,000 of the facility may be used forletters of credit.  There is a 3% feeper annum on outstanding letters of credit as well as a 3% Derivative ExposureUsage Fee under this facility.  As ofJune 30, 2002, there were no borrowings under this facility, and the Companyhad letters of credit outstanding and drawn on Bank of America in the amount of$3,139,000.

 

On July 1, 2002, a limited and temporary waiver and amendment wasexecuted under this $35,000,000 Credit Agreement with Bank of America whichallowed the Company to borrow funds under this facility to partially financethe purchase of mortgage notes issued by Captain D’s with a face value of$20,000,000 on July 10, 2002.  Theamount of this investment, without the waiver, would have violated thelimitations on investments under this facility.  The initial waiver period expires on September 29, 2002 withextensions possible through December 28, 2002, subject to specified extensionfees.  The Captain D’s mortgage notesbear interest at 12% per annum.  TheCompany intends to utilize these notes as consideration to partially financethe acquisition of certain Captain D’s properties in 2002.

 

During 1999, the Company issued $55,000,000 of 8.5% preferred interestin USRP/HCI Partnership 1, L.P. (“HJV”), a subsidiary of the Company, to athird party for net proceeds of $52,793,000. Under the terms of this transaction, the preferred interest holderreceives annual distributions equal to $4,675,000 payable monthly from the cashflows of HJV.  Income is allocated tothe preferred interest holder equal to their distribution.  The Company may be required from time totime to exchange properties that do not meet specified criteria as defined inthe partnership agreement.

 

Management believes that cash flow from operations, along with theCompany’s ability to raise additional equity or debt and anticipated sales ofproperties will provide the Company with sufficient liquidity to meet itsshort-term and long-term capital needs. However, there can be no assurances that the terms at which new debt isobtained will be as favorable to the Company as under the existing facilities.

 

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**Funds From Operations (FFO)**

 

The Companybelieves that it computes FFO in accordance with the standards established bythe National Association of Real Estate Investment Trusts (“NAREIT”) in theirNational Policy Bulletins dated November 8, 1999 and April 5, 2002, which maydiffer from the methodology for calculating FFO utilized by other equity REITs,and, accordingly, may not be comparable to such other REITs.  The Company’s FFO is computed as net income(loss) available to common stockholders (computed in accordance with accountingprinciples generally accepted in the United States of America), plus realestate related depreciation and amortization, gains (or losses) from sales ofproperty, impairment of long-lived assets, extraordinary items and income/lossallocable to minority interest holders. The Company believes FFO is helpful to investors as a measure of theperformance of an equity REIT because, along with the Company’s statements offinancial condition, results of operations and cash flows, it providesinvestors with an understanding of the ability of the Company to incur andservice debt and make capital expenditures. In evaluating FFO and the trends it depicts, investors should considerthe major factors affecting FFO.  Growthin FFO will result from increases in revenue or decreases in related operatingexpenses.  Conversely, FFO will declineif revenues decline or related operating expenses increase.  FFO does not represent amounts available formanagement’s discretionary use because of needed capital replacement orexpansion, debt service obligation, or other commitments anduncertainties.  FFO should not beconsidered as an alternative to net income (determined in accordance withaccounting principles generally accepted in the United States of America), asan indication of the Company’s financial performance, to cash flows fromoperating activities (determined in accordance with accounting principlesgenerally accepted in the United State of America) or as a measure of theCompany’s liquidity, nor is it indicative of funds available to fund theCompany’s cash needs, including its ability to make distributions.

 

The following table sets forth, for the three andsix months ended June 30, 2002 and 2001, the calculation of funds fromoperations.

 
|                                                |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|-----------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **(In thousands)**                                  |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                                |   |                             |   |                           |   |   |   |   |   |
| Net income (loss) allocable to common  stockholders |   | $                                | (507   | )                              | $      | 12 |   | $ | 1,667 |   | $ | (21,683 | ) |
|                                                |   |                             |   |                           |   |   |   |   |   |
| Depreciation and amortization                       |   | 5,986                            |   | 5,801                          |   | 11,307 |   | 11,800 |   |
| (Gain) loss on sale of property                     |   | 206                              |   | (1,542                         | )      | (1,274 | ) | (1,608 | ) |
| Impairment of long-lived assets                     |   | 909                              |   | 120                            |   | 1,718 |   | 16,049 |   |
| Adjustments allocable to minority interest          |   | (45                              | )      | (31                            | )      | (76 | ) | (196 | ) |
| Extraordinary loss                                  |   | —                           |   | —                         |   | — |   | 340 |   |
|                                                |   |                             |   |                           |   |   |   |   |   |
| Funds from operations – basic                  |   | 6,549                            |   | 4,360                          |   | 13,342 |   | 4,702 |   |
| Income (loss) allocable to minority  interest       |   | 48                               |   | 2                              |   | 12 |   | (163 | ) |
| Adjustments allocable to minority interest          |   | 45                               |   | 31                             |   | 76 |   | 196 |   |
|                                                |   |                             |   |                           |   |   |   |   |   |
| Fund from operations – diluted                 |   | $                                | 6,642  |                           | $      | 4,393 |   | $ | 13,430 |   | $ | 4,735 |   |

 

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**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 Associated with Forward-Looking Statementsincluded in this Form 10-Q**

 

Certain statements contained in this Form 10-Q, including withoutlimitation statements regarding the objectives of management for futureoperations and statements containing the words “believe,” “may,” “will,”“estimate,” “continue,” “anticipate,” “intend,” “expect” and similarexpressions, are forward-looking statements within the 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 theheading “Risk Factors” in “Item 1. Business” of the Company’s Annual Report onForm 10-K filed with the Securities and Exchange Commission on April 1, 2002.

 

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**Item3.****   ****Quantitativeand Qualitative Disclosures About Market Risk**

 

The Companyhas limited exposure to financial market risks, including changes in interestrates 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 the Company’s investments would be affected by anincrease or decrease in interest rates as the majority of the investments areinterest denominated instruments. However, the Company’s investment portfolio of $3,331,000 is relativelysmall, and changes in value relating to market risks would not significantlyimpact the Company’s operations.  TheCompany also has investments in fixed rate notes and mortgage loans receivable.  Changes in interest rates do not have adirect impact on interest income related to these notes and loans.

 

An increase or decreasein interest rates and fees would affect interest costs relating to theCompany’s variable rate Certificates. At June 30, 2002 there was $172,908,000 of variable rate debtoutstanding on these Certificates.  TheCertificates bear interest at the 30 - day LIBOR plus 100.6 basis points.  The Company entered into an interest rateswap effective July 3, 2000 with a notional amount of $50,000,000 which wassubsequently reduced to $30,000,000 during the fourth quarter of 2001 andfurther reduced to $15,000,000 during the second quarter of 2002.  The Company pays a fixed rate of 7.05% andreceives a variable rate based upon LIBOR under this swap agreement. Inconjunction with the completion of the offering of the Certificates, theCompany entered into the Bank of America Derivatives, including: an interestrate swap at a fixed rate of 3.825% for one year on a notional amount of$50,000,000, an interest rate collar with a floor of 4.42% and a ceiling of6.00% for four years on an original notional amount of $80,000,000 which hasbeen amortized down to $73,800,000 as of June 30, 2002. These derivativeseffectively lock in $50,000,000 at 4.8310% (3.825% plus 1.006%) for one year,lock in $73,800,000 as of June 30, 2002 at between 5.4260% (4.42% plus 1.006%)and 7.006% (6.0% plus 1.006%) for four years. Based on the Company’s variable rate debt and the derivatives designatedas cash flow hedges against this debt, a 10.0% increase or decrease in interestrates would result in an annual increase or decrease in interest charges ofapproximately $147,000. Effective February 2002, the Company entered into afixed to floating interest rate swap with Bank of America.  This fixed to floating interest rate swap ison a $25,000,000 notional value on which the Company receives a fixed rate of7.15% and pays a floating rate based on the three month LIBOR plus a spread of2.92%.  This interest rate swapterminates in May 2005.  The Company hasdesignated this swap as a fair value hedge. Accordingly, all changes in value of the derivative and hedged item arerecorded in earnings.

 

The Company has on occasion issued shares of common stock or OP Unitsin exchange for property, and has guaranteed a minimum value for thoseshares/units.  Should the market valueof the common stock not reach the guaranteed value by a specified date (usuallytwo or three years after issue), then the Company may be obligated to issueadditional shares/units under the guarantee agreements.  At June 30, 2002 there were 131,915 OP Unitsoutstanding with a guaranteed market price of $25.00 per unit which expiredJuly 29, 2002.  These OP Units were exchanged for 221,482 shares of common stockon August 2, 2002.

 

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**PART II.**                OTHER INFORMATION

 

 

**Item 1.**    Legal Proceedings

 

None

 

**Item 2.**    Changes in Securities and Use ofProceeds

 

None

 

**Item 3.**    Defaults upon Senior Securities

 

None

 

**Item 4.**    Submission of Matters to a Vote ofSecurity Holders

 

The Company held its Annual Meeting of Shareholders onMay 21, 2002.  The following matterswere submitted to a vote of shareholders of the Company’s common stock with theresults indicated below:

 
| **Matter**            |   | **Approved** |   | **Withheld, Against  or Abstained** |   |
|-----------------------|--------|--------------|--------|-------------------------------------|--------|
|                  |   |         |   |                                |   |
| Election of Directors |   |         |   |                                |   |
|                  |   |         |   |                                |   |
| David M. West         |   | 13,864,545   |   | 205,677                             |   |
| Len W. Allen, Jr.     |   | 13,867,079   |   | 203,143                             |   |
| G. Steven Dawson      |   | 13,910,585   |   | 159,637                             |   |
| Robert Gidel          |   | 13,911,235   |   | 158,987                             |   |
| Robert J. Stetson     |   | 13,076,163   |   | 994,059                             |   |
| Gregory I. Strong     |   | 13,866,364   |   | 203,858                             |   |
| John C. Deterding     |   | 13,888,565   |   | 181,657                             |   |
| James H. Kropp        |   | 13,906,885   |   | 163,337                             |   |

 

**Item 5.**    Other Information

 

None

 

**Item 6.**    Exhibits and Reports on Form 8-K

 

a)                                      Exhibits

 

1)                                      Exhibit 10.1 – Credit Agreement dated May31, 2002

2)                                      Exhibit 10.2 – Temporary Waiver andAmendment dated July 1, 2002 on Credit Agreement dated May 31, 2002

3)                                      Exhibit 11.1 – Earnings per ShareComputation

4)                                      Exhibit 99.1 – Certification by Robert J.Stetson Pursuant to the Sarbanes-Oxley Act of 2002

5)                                      Exhibit 99.2 – Certification by H.G.Carrington, Jr. Pursuant to the Sarbanes-Oxley Act of 2002

 

 

b)                                     Reports on Form 8-K

 

No reports on Form 8-K were filed during the quarterended June 30, 2002.

 

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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:   August 14, 2002 |   | By:                              |   /s/ H.G.  Carrington, Jr. |   |
|                          |   | Chief Financial  Officer         |
|                          |   | Chief Operating  Officer         |
|                          |   | (Principal  Financial Officer)   |
|                               |        |                                  |  |  |  |

 

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**INDEX TO EXHIBITS**

 
| **EXHIBIT  NUMBER** |   | **DESCRIPTION**                                                                           |
|---------------------|--------|-------------------------------------------------------------------------------------------|
|                |   |                                                                                      |
| 10.1                |   | Credit Agreement  dated May 31, 2002                                                      |
| 10.2                |   | Temporary Waiver  and Amendment dated July 1, 2002 on Credit Agreement dated May 31, 2002 |
| 11.1                |   | Earnings per Share  Computation                                                           |
| 99.1                |   | Certification by Robert J. Stetson Pursuant to the  Sarbanes-Oxley Act of 2002            |
| 99.2                |   | Certification by H.G. Carrington, Jr. Pursuant to  the Sarbanes-Oxley Act of 2002         |

 

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