**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

** **

**FORM 10-Q**

** **

| **ý** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                    |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                 |
|       | **For the quarterly period ended September 30, 2003**                                                                                                                                                                                                                                                                                                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                 |
|       | **OR**                                                                                                                                                                                                                                                                                                                                                                                               |
|       |                                                                                                                                                                                                                                                                                                                                                                                                 |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                 |
|       | **For the transition period from                                to                              ** |

** **

**Commission file number 1-13089**

 

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

(Exact nameof 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)       |

 
| **Title of  each class**                               |   | **Name of  each exchange on which registered** |
|--------------------------------------------------------|--------|------------------------------------------------|
| Common  Stock, par value $0.001 per share              |   | New York  Stock Exchange                       |
|                                                   |   |                                           |
| $1.93 Series  A Cumulative Convertible Preferred Stock |   | New York  Stock Exchange                       |

 

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 thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

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

 

 

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

 

As of November 7, 2003,U.S. Restaurant Properties, Inc. had 22,514,689 shares of common stock $0.001par value outstanding.

 

 

----

 

U.S. RESTAURANT PROPERTIES, INC.

 

 
| PART I.  | FINANCIAL INFORMATION |
|----------|-----------------------|
|     |                  |   |
|     |                  |   |
|     | Item 1.               | Financial Statements |
|     |                  |   |
|     |                  | Unaudited Condensed Consolidated Balance  Sheets as of September 30, 2003 and December 31, 2002 |
|     |                  |   |
|     |                  | Unaudited Condensed Consolidated Statements  of Operations for the three and nine months ended September 30, 2003 and  2002 |
|     |                  |   |
|     |                  | Unaudited Condensed Consolidated Statements  of Comprehensive Operations for the three and nine months ended  September 30, 2003 and 2002 |
|     |                  |   |
|     |                  | Unaudited Condensed Consolidated Statement  of Stockholders’ Equity for the nine months ended September 30, 2003 |
|     |                  |   |
|     |                  | Unaudited Condensed Consolidated Statements  of Cash Flows for the nine months ended September 30, 2003 and 2002 |
|     |                  |   |
|     |                  | Notes to Unaudited Condensed Consolidated  Financial Statements |
|     |                  |   |
|     | Item 2.               | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|     |                  |   |
|     | Item 3.               | Quantitative and Qualitative Disclosures  About Market Risk |
|     |                  |   |
|     | Item 4.               | Controls and Procedures |
|     |                  |   |
|     |                  |   |
| PART II. |                  | OTHER INFORMATION |
|     |                  |   |
|     | Item 6.               | Exhibits and Reports on Form 8-K |

 

2

----

 

**PART I.****    FINANCIALINFORMATION**

 

**Item1.****           FinancialStatements**

 

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

**UnauditedCondensed Consolidated Balance Sheets**

**(Inthousands, except per share data)**

 
|                                                                                                                                                                                                                                                                     |   | **September 30,  2003** |    | **December 31,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
| **Assets**                                                                                                                                                                                                                                                               |   |                         |    |                        |   |
|                                                                                                                                                                                                                                                                     |   |                         |    |                        |   |
| Property, net                                                                                                                                                                                                                                                            |   |                         |    |                        |   |
| Land                                                                                                                                                                                                                                                                     |   | $                            | 200,353 |                        | $      | 202,404 |   |
| Building and leasehold  improvements                                                                                                                                                                                                                                     |   | 359,322                      |    | 372,191                     |   |
| Machinery and equipment                                                                                                                                                                                                                                                  |   | 12,813                       |    | 11,868                      |   |
|                                                                                                                                                                                                                                                                     |   | 572,488                      |    | 586,463                     |   |
| Less:  accumulated depreciation                                                                                                                                                                                                                                     |   | (106,332                     | )       | (100,002                    | )      |
|                                                                                                                                                                                                                                                                     |   | 466,156                      |    | 486,461                     |   |
|                                                                                                                                                                                                                                                                     |   |                         |    |                        |   |
| Construction in progress                                                                                                                                                                                                                                                 |   | 569                          |    | 256                         |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                |   | 4,648                        |    | 4,392                       |   |
| Restricted cash and marketable  securities                                                                                                                                                                                                                               |   | 2,980                        |    | 2,211                       |   |
| Rent and other receivables, net  (includes $1,253 and $2,531 allowance for doubtful accounts  at September 30, 2003 and December 31, 2002, respectively)                                                                                                       |   | 6,975                        |    | 7,299                       |   |
| Straight line rent receivables,  net  (includes $443 and $484 allowance for doubtful accounts  at September 30, 2003 and December 31, 2002, respectively, and  $3,630 and $3,746 of remodel grants at September 30, 2003 and December 31,  2002, respectively) |   | 15,093                       |    | 15,600                      |   |
| Prepaid expenses and other  assets                                                                                                                                                                                                                                       |   | 3,636                        |    | 3,354                       |   |
| Inventories                                                                                                                                                                                                                                                              |   | 2,640                        |    | 1,289                       |   |
| Investments                                                                                                                                                                                                                                                              |   | 2,908                        |    | 3,025                       |   |
| Notes receivable, net  (includes $0 and $13 due from related parties, and $2,917  and $3,636 allowance for doubtful accounts at  September 30, 2003 and December 31, 2002, respectively)                                                                       |   | 6,637                        |    | 10,268                      |   |
| Mortgage loans receivable, net  (includes $223 and $583 allowance for doubtful accounts  at September 30, 2003 and December 31, 2002, respectively)                                                                                                            |   | 11,340                       |    | 34,469                      |   |
| Net investment in direct  financing leases                                                                                                                                                                                                                               |   | 278                          |    | 518                         |   |
| Deferred financing costs and  intangibles, net                                                                                                                                                                                                                           |   | 8,019                        |    | 9,935                       |   |
| **Total assets**                                                                                                                                                                                                                                                         |   | $                            | 531,879 |                        | $      | 579,077 |   |

 

*SeeNotes to Unaudited Condensed Consolidated Financial Statements.*

 

3

----

 

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

**UnauditedCondensed Consolidated Balance Sheets**

**(Inthousands, except per share data)**

 
|                                                                                                                                                                                                              |   | **September 30,  2003** |    | **December 31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|-----------------------------|--------|
| **Liabilities and stockholders’ equity**                                                                                                                                                                     |   |                         |    |                        |   |
|                                                                                                                                                                                                              |   |                         |    |                        |   |
| Accounts payable and accrued  liabilities                                                                                                                                                                         |   | $                            | 20,339  |                        | $      | 18,142 |   |
| Accrued dividends and  distributions                                                                                                                                                                              |   | 2,200                        |    | 2,181                       |   |
| Unearned contingent rent                                                                                                                                                                                          |   | 908                          |    | 826                         |   |
| Deferred gain on sale of  property                                                                                                                                                                                |   | 236                          |    | 926                         |   |
| Line of credit                                                                                                                                                                                                    |   | 26,000                       |    | 25,000                      |   |
| Interest rate derivatives at  fair value                                                                                                                                                                          |   | 3,320                        |    | 4,536                       |   |
| Notes payable                                                                                                                                                                                                     |   | 270,218                      |    | 327,428                     |   |
| Mortgage note payable                                                                                                                                                                                             |   | 919                          |    | 946                         |   |
| **Total liabilities**                                                                                                                                                                                             |   | 324,140                      |    | 379,985                     |   |
|                                                                                                                                                                                                              |   |                         |    |                        |   |
| **Commitments and contingencies**                                                                                                                                                                                 |   |                         |    |                        |   |
|                                                                                                                                                                                                              |   |                         |    |                        |   |
| **Minority interests**                                                                                                                                                                                            |   | 53,957                       |    | 52,845                      |   |
|                                                                                                                                                                                                              |   |                         |    |                        |   |
| **Stockholders’ equity**                                                                                                                                                                                     |   |                         |    |                        |   |
|                                                                                                                                                                                                              |   |                         |    |                        |   |
| Preferred stock, $0.001 par  value per share:                                                                                                                                                                     |   |                         |    |                        |   |
| Series A Cumulative Convertible  Preferred Stock - 50,000 shares authorized, 3,680 shares issued and  outstanding at September 30, 2003 and December 31, 2002 (aggregate  liquidation value of $92,000) |   | 4                            |    | 4                           |   |
| Series B Convertible Preferred  Stock - 20 shares authorized, 16 shares issued and outstanding at  September 30, 2003 (aggregate liquidation value of $16,000)                                               |   | —                       |    | —                      |   |
| Common stock, $0.001 par value  per share:                                                                                                                                                                        |   |                         |    |                        |   |
| 100,000 shares authorized,  19,924 and 19,832 shares issued and outstanding at September 30, 2003  and December 31, 2002, respectively                                                                  |   | 20                           |    | 20                          |   |
| Additional paid-in capital                                                                                                                                                                                        |   | 343,525                      |    | 327,756                     |   |
| Excess stock, $0.001 par value per share  15,000 shares authorized, no shares issued                                                                                                                              |   | —                       |    | —                      |   |
| Accumulated other comprehensive  loss                                                                                                                                                                             |   | (3,320                       | )       | (4,411                      | )      |
| Loans to stockholders for  common stock                                                                                                                                                                           |   | (299                         | )       | (299                        | )      |
| Distributions in excess of net  income                                                                                                                                                                            |   | (186,148                     | )       | (176,823                    | )      |
| **Total stockholders’ equity**                                                                                                                                                                               |   | 153,782                      |    | 146,247                     |   |
| **Total liabilities and stockholders’ equity**                                                                                                                                                               |   | $                            | 531,879 |                        | $      | 579,077 |   |

* *

*See Notes to Unaudited Condensed ConsolidatedFinancial Statements.*

 

4

----

 

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

**UnauditedCondensed Consolidated Statement of Operations**

**(Inthousands, except per share data)**

** **
|                                                                                                                           |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                                                           |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
| Revenues:                                                                                                                      |   |                                       |   |                                      |   |   |   |   |   |
| Real estate rental                                                                                                             |   | $                                          | 15,099 |                                      | $      | 14,926 |   | $ | 45,312 |   | $ | 45,398 |   |
| Tenant expense reimbursements                                                                                                  |   | 864                                        |   | 722                                       |   | 2,552 |   | 2,368 |   |
| Lease termination fees                                                                                                         |   | 29                                         |   | —                                    |   | 1,660 |   | 92 |   |
| Interest on mortgage loans                                                                                                     |   | 566                                        |   | 1,124                                     |   | 2,335 |   | 2,423 |   |
| Retail operations                                                                                                              |   | 15,682                                     |   | 10,216                                    |   | 43,490 |   | 26,607 |   |
| Total revenues                                                                                                                 |   | 32,240                                     |   | 26,988                                    |   | 95,349 |   | 76,888 |   |
| Expenses:                                                                                                                      |   |                                       |   |                                      |   |   |   |   |   |
| Ground rent                                                                                                                    |   | 939                                        |   | 828                                       |   | 2,858 |   | 2,732 |   |
| Property taxes                                                                                                                 |   | 72                                         |   | 135                                       |   | 411 |   | 524 |   |
| Other property                                                                                                                 |   | 127                                        |   | 84                                        |   | 329 |   | 287 |   |
| Legal                                                                                                                          |   | 920                                        |   | 469                                       |   | 1,477 |   | 1,457 |   |
| Depreciation and amortization                                                                                                  |   | 5,791                                      |   | 4,962                                     |   | 16,442 |   | 15,179 |   |
| Impairment of long-lived assets                                                                                                |   | 1,525                                      |   | —                                    |   | 2,342 |   | 523 |   |
| Recoveries of provision for  doubtful accounts                                                                                 |   | (137                                       | )      | (229                                      | )      | (307 | ) | (234 | ) |
| General and administrative                                                                                                     |   | 2,784                                      |   | 2,531                                     |   | 9,472 |   | 7,637 |   |
| Retail cost of sales                                                                                                           |   | 13,393                                     |   | 8,517                                     |   | 37,189 |   | 22,499 |   |
| Total expenses                                                                                                                 |   | 25,414                                     |   | 17,297                                    |   | 70,213 |   | 50,604 |   |
| Income from continuing  operations                                                                                             |   | 6,826                                      |   | 9,691                                     |   | 25,136 |   | 26,284 |   |
| Non-operating income                                                                                                           |   | 8                                          |   | 215                                       |   | 29 |   | 849 |   |
| Interest expense                                                                                                               |   | (4,615                                     | )      | (5,594                                    | )      | (15,707 | ) | (16,691 | ) |
| Minority interests                                                                                                             |   | (1,205                                     | )      | (1,163                                    | )      | (3,542 | ) | (3,512 | ) |
| Net income from continuing  operations before discontinued operations and cumulative effect of change in  accounting principle |   | 1,014                                      |   | 3,149                                     |   | 5,916 |   | 6,930 |   |
| Income from discontinued  operations                                                                                           |   | 4,306                                      |   | 1,608                                     |   | 10,377 |   | 3,045 |   |
| Cumulative effect of change in  accounting principle                                                                           |   | —                                     |   | —                                    |   | (270 | ) | — |   |
| Net income                                                                                                                     |   | 5,320                                      |   | 4,757                                     |   | 16,023 |   | 9,975 |   |
| Dividends on preferred stock                                                                                                   |   | (2,185                                     | )      | (1,776                                    | )      | (5,736 | ) | (5,327 | ) |
| Net income allocable to common  stockholders                                                                                   |   | $                                          | 3,135  |                                      | $      | 2,981 |   | $ | 10,287 |   | $ | 4,648 |   |
|                                                                                                                           |   |                                       |   |                                      |   |   |   |   |   |
| Net income per share - basic  and diluted:                                                                                     |   |                                       |   |                                      |   |   |   |   |   |
|                                                                                                                           |   |                                       |   |                                      |   |   |   |   |   |
| Income (loss) from continuing  operations allocable to common stockholders                                                     |   | $                                          | (0.06  | )                                         | $      | 0.07 |   | $ | 0.01 |   | $ | 0.08 |   |
| Income from discontinued  operations                                                                                           |   | 0.22                                       |   | 0.08                                      |   | 0.52 |   | 0.16 |   |
| Cumulative effect of change in  accounting principle                                                                           |   | —                                     |   | —                                    |   | (0.01 | ) | — |   |
| Net income per share                                                                                                           |   | $                                          | 0.16   |                                      | $      | 0.15 |   | $ | 0.52 |   | $ | 0.24 |   |
|                                                                                                                           |   |                                       |   |                                      |   |   |   |   |   |
| Weighted average shares  outstanding                                                                                           |   |                                       |   |                                      |   |   |   |   |   |
| Basic                                                                                                                          |   | 19,909                                     |   | 19,737                                    |   | 19,871 |   | 19,606 |   |
| Diluted                                                                                                                        |   | 20,024                                     |   | 19,824                                    |   | 19,955 |   | 19,741 |   |

* *

*See Notes to Unaudited Condensed ConsolidatedFinancial Statements*

 

5

----

 

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

**Unaudited Condensed Consolidated Statements of OtherComprehensive Operations**

**(Inthousands)**

 
|                                      |   | **Three months ended  September 30,** |       | **Nine months ended  September 30,** |       |
|-------------------------------------------|--------|--------------------------------------------|------------|-------------------------------------------|------------|
|                                      |   | **2003**                                   |       | **2002**                                  |       | **2003** |   | **2002** |   |
|                                      |   |                                       | ** ** |                                      | ** ** |   | ** ** |   | ** ** |
| Net income                                |   | $                                          | 5,320      |                                      | $          | 4,757 |   | $ | 16,023 |   | $ | 9,975 |   |
| Other comprehensive income  (loss) -      |   |                                       |       |                                      |       |   |   |   |   |
| Hedge settlement adjustment               |   | 707                                        |       | 710                                       |       | 2,292 |   | 2,652 |   |
| Fair value adjustment for  derivatives    |   | (57                                        | )          | (2,504                                    | )          | (1,201 | ) | (4,324 | ) |
| Change in unrealized loss on  investments |   | —                                     |       | 2,506                                     |       | — |   | 2,522 |   |
| Comprehensive income                      |   | $                                          | 5,970      |                                      | $          | 5,469 |   | $ | 17,114 |   | $ | 10,825 |   |

* *

*See Notes to Unaudited Condensed ConsolidatedFinancial Statements.*

 

6

----

 

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

**Unaudited Condensed Consolidated Statement ofStockholders’ Equity**

**NineMonths Ended September 30, 2003**

**(Inthousands)**

 
|                                           |   |                          |   |                          |   |       |   |          |   |                             |   |          |                         |   |                                        | **Accumulated  Other  Comprehensive  Income (Loss)** |                                    |    |   |    |   |    |   |
|------------------------------------------------|--------|-------------------------------|--------|-------------------------------|--------|------------|--------|---------------|--------|----------------------------------|--------|---------------|------------------------------|--------|---------------------------------------------|------------------------------------------------------|-----------------------------------------|---------|--------|---------|--------|---------|--------|
|                                           |   | **Series A  Preferred Stock** |   | **Series B  Preferred Stock** |   |       |   |          |   | **Additional  Paid-in  Capital** |   |          | **Loans  To-  Shareholders** |   | **Distributions  In Excess of  Net Income** |                                                 | **Total****Stockholders’  Equity** |    |
|                                           |   |                          |   | **Common Stock**              |   |       |   |          |   |                             |
|                                           |   | **Shares**                    |   | **Par Value**                 |   | **Shares** |   | **Par Value** |   | **Shares**                       |   | **Par Value** |                         |   |                                        |                                                 |                                    |    |
|                                           |   |                          |   |                          |   |       |   |          |   |                             |   |          |                         |   |                                        |                                                 |                                    |    |   |    |   |    |   |
| Balance at January 1, 2003                |   | 3,680                         |   | $                             | 4      |       | — |          | $      | —                           |   | 19,832        |                         | $      | 20                                          |                                                 | $                                       | 327,756 |   | $       | (4,411 | )       | $      | (299 | ) | $ | (176,823 | ) | $ | 146,247 |   |
| Net income                                     |   |                          |   |                          |   |       |   |          |   |                             |   |          |                         |   |                                        |                                                 |                                    |    |   | 16,023  |   | 16,023  |   |
| Preferred stock - Series B issuance            |   |                          |   |                          |   | 16         |   | —        |   |                             |   |          |                         | 14,406 |                                        |                                                 |                                    |    |   |    |   | 14,406  |   |
| Preferred stock - Series B warrants            |   |                          |   |                          |   |       |   |          |   |                             |   |          |                         | 253    |                                        |                                                 |                                    |    |   |    |   | 253     |   |
| Preferred stock - Series B warrants  accretion |   |                          |   |                          |   |       |   |          |   |                             |   |          |                         | 89     |                                        |                                                 |                                    |    |   | (89     | )      | —  |   |
| Proceeds from exercised stock options          |   |                          |   |                          |   |       |   |          |   | 92                               |   |          |                         | 1,012  |                                        |                                                 |                                    |    |   |    |   | 1,012   |   |
| Stock-based compensation to employees          |   |                          |   |                          |   |       |   |          |   |                             |   |          |                         | 9      |                                        |                                                 |                                    |    |   |    |   | 9       |   |
| Other comprehensive income (loss):             |   |                          |   |                          |   |       |   |          |   |                             |   |          |                         |   |                                        |                                                 |                                    |    |   |    |   |    |   |
| Hedge settlement adjustment                    |   |                          |   |                          |   |       |   |          |   |                             |   |          |                         |   |                                        | 2,292                                                |                                    |    |   |    |   | 2,292   |   |
| Fair value adjustment for derivatives          |   |                          |   |                          |   |       |   |          |   |                             |   |          |                         |   |                                        | (1,201                                               | )                                       |    |   |    |   | (1,201  | )      |
| Distributions declared on common stock         |   |                          |   |                          |   |       |   |          |   |                             |   |          |                         |   |                                        |                                                 |                                    |    |   | (19,680 | )      | (19,680 | )      |
| Distributions declared on preferred stock      |   |                          |   |                          |   |       |   |          |   |                             |   |          |                         |   |                                        |                                                 |                                    |    |   | (5,579  | )      | (5,579  | )      |
| Balance at September 30, 2003             |   | 3,680                         |   | $                             | 4      |       | 16     |          | $      | —                           |   | 19,924        |                         | $      | 20                                          |                                                 | $                                       | 343,525 |   | $       | (3,320 | )       | $      | (299 | ) | $ | (186,148 | ) | $ | 153,782 |   |

* *

*SeeNotes to Unaudited Condensed Consolidated Financial Statements.*

 

7

----

 

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

**Unaudited Condensed Consolidated Statements of Cash Flows**

**(Inthousands)**

 
|                                                                               |   | **Nine Months Ended  September 30,** |       |
|------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                               |   | **2003**                                  |       | **2002** |   |
|                                                                               |   |                                      | ** ** |   | ** ** |
| **Cash flows from operating activities:**                                          |   |                                      |       |   |   |
|                                                                               |   |                                      |       |   |   |
| Net income                                                                         |   | $                                         | 16,023     |   | $ | 9,975 |   |
| Adjustments to reconcile net income to net  cash flows from operating activities:  |   |                                      |       |   |   |
| Depreciation and amortization                                                      |   | 16,971                                    |       | 16,595 |   |
| Cumulative effect of change in  accounting principle                               |   | 270                                       |       | — |   |
| Amortization of deferred  financing costs and discounts                            |   | 1,317                                     |       | 1,452 |   |
| Impairment of long-lived assets                                                    |   | 3,872                                     |       | 1,851 |   |
| Accretion of interest income                                                       |   | —                                    |       | (444 | ) |
| Fair value adjustment for  interest rate derivatives                               |   | (125                                      | )          | (402 | ) |
| Minority interests                                                                 |   | 3,542                                     |       | 3,512 |   |
| Gain on sale of property                                                           |   | (10,275                                   | )          | (2,253 | ) |
| Gain on disposal of asset  retirement obligation                                   |   | (64                                       | )          | — |   |
| Change in rent and other  receivables, net                                         |   | 296                                       |       | (267 | ) |
| Change in straight line rent,  net                                                 |   | (265                                      | )          | (1,638 | ) |
| Change in prepaid expenses                                                         |   | (282                                      | )          | (632 | ) |
| Change in inventories                                                              |   | (1,571                                    | )          | (746 | ) |
| Change in net investment in  direct financing leases                               |   | 144                                       |       | 406 |   |
| Change in accounts payable and  accrued liabilities                                |   | 2,811                                     |       | (2,360 | ) |
| Change in unearned contingent  rent                                                |   | 82                                        |       | (128 | ) |
| Other increases                                                                    |   | (298                                      | )          | (302 | ) |
| Cash flows provided by  operating activities                                       |   | 32,448                                    |       | 24,619 |   |
|                                                                               |   |                                      |       |   |   |
| **Cash flows from investing activities:**                                          |   |                                      |       |   |   |
|                                                                               |   |                                      |       |   |   |
| Proceeds from sale of property  and equipment                                      |   | 35,100                                    |       | 16,300 |   |
| Purchase of property                                                               |   | (7,863                                    | )          | (10,387 | ) |
| Purchase of machinery and  equipment                                               |   | (3,300                                    | )          | (259 | ) |
| Purchase of investments                                                            |   | —                                    |       | (3,014 | ) |
| Proceeds from sale of  investments                                                 |   | —                                    |       | 4,838 |   |
| Change in restricted cash                                                          |   | (769                                      | )          | 5,395 |   |
| Mortgage loans receivable  acquired                                                |   | (11                                       | )          | (26,583 | ) |
| Mortgage loans receivable  principal payments                                      |   | 11,676                                    |       | 4,120 |   |
| Notes receivable issued                                                            |   | (63                                       | )          | (1,275 | ) |
| Notes receivable principal  payments                                               |   | 2,239                                     |       | 959 |   |
| Other increases                                                                    |   | 260                                       |       | 345 |   |
| Cash flows provided by (used  in) investing activities                             |   | 37,269                                    |       | (9,561 | ) |
|                                                                               |   |                                      |       |   |   |
| **Cash flows from financing activities:**                                          |   |                                      |       |   |   |
|                                                                               |   |                                      |       |   |   |
| Proceeds from line of credit                                                       |   | $                                         | 34,950     |   | $ | 17,700 |   |
| Payments on line of credit                                                         |   | (33,950                                   | )          | (2,500 | ) |
| Proceeds from issuance of  Series B preferred stock                                |   | 14,406                                    |       | — |   |
| Proceeds from issuance of  Series B preferred stock warrants                       |   | 253                                       |       | — |   |
| Distributions to minority interest  shareholders                                   |   | (3,576                                    | )          | (3,593 | ) |
| Payment of common stock  dividends                                                 |   | (19,680                                   | )          | (19,420 | ) |
| Payment of preferred stock  dividends                                              |   | (5,579                                    | )          | (5,327 | ) |
| Proceeds from sale of stock and  exercised stock options                           |   | 1,012                                     |       | 1,516 |   |
| Payments on notes/mortgage note  payable                                           |   | (57,026                                   | )          | (7,540 | ) |
| Financing costs                                                                    |   | (271                                      | )          | (650 | ) |
| Cash flows used in financing  activities                                           |   | (69,461                                   | )          | (19,814 | ) |
|                                                                               |   |                                      |       |   |   |
| Increase (decrease) in cash and  cash equivalents                                  |   | 256                                       |       | (4,756 | ) |
| Cash and cash equivalents at  beginning of period                                  |   | 4,392                                     |       | 10,346 |   |
| Cash and cash equivalents at  end of period                                        |   | $                                         | 4,648      |   | $ | 5,590 |   |
|                                                                               |   |                                      |       |   |   |
| **Supplemental disclosure:**                                                       |   |                                      |       |   |   |
| Interest paid during the period                                                    |   | $                                         | 11,498     |   | $ | 12,097 |   |
| Taxes paid during the period                                                       |   | $                                         | 358        |   | $ | 238 |   |
|                                                                               |   |                                      |       |   |   |
| **Non-cash investing and financing  activities:**                                  |   |                                      |       |   |   |
| Mortgage loans receivable  tendered for property acquisitions                      |   | $                                         | 12,000     |   | $ | 11,547 |   |
| Security deposit and note  receivable written off                                  |   | 1,037                                     |       | — |   |
| Decrease in common and  preferred stock dividends accrued                          |   | —                                    |       | 3,932 |   |
| Notes received on sale of  property                                                |   | —                                    |       | 294 |   |
| Operating Partnership Units  exchanged for common stock                            |   | —                                    |       | 1,411 |   |
| Property received in exchange  for Operating Partnership Units and Note Receivable |   | 2,265                                     |       | — |   |
| Reclassification of notes  receivable to loans to stockholders for common stock    |   | —                                    |       | 475 |   |

 

*See Notes to Unaudited Condensed ConsolidatedFinancial Statements.*

 

8

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

**Notes to UnauditedCondensed Consolidated Financial Statements**

 

**1.****                                      InterimUnaudited Financial Information**

 

U.S. RestaurantProperties, Inc. (“USRP” and, collectively with its subsidiaries, the“Company”) is a fully integrated, self-administered and self-managed RealEstate Investment Trust (a “REIT”), as defined under the Internal Revenue Codeof 1986, as amended.  The Company owns,acquires and manages branded chain restaurants and selected service retailproperties.  Additionally, from time totime, the Company makes opportunistic investments in mortgage loans, secured byleasehold interests in restaurants or real estate.  The business and operations of the Company are conductedprimarily through USRP’s wholly-owned and controlled subsidiary, U.S.Restaurant Properties Operating L.P., USRP’s operating partnership (“OP”).  As of September 30, 2003, the Companyowned 785 properties in 48 states.

 

In June 2003, theCompany formed a new taxable REIT subsidiary (“TRS”), USRP Holding Corp.(“Holding”).  Holding was formed as anowned and controlled subsidiary of OP.  The change in the Company’s structure was made to ensure continuedcompliance by the Company with Internal Revenue Service rules regardingqualification as a REIT with regard to related party transactions between theCompany’s subsidiaries.  As a result ofthe change in organizational structure, rental income from the Company’sShoney’s and Captain D’s real estate, as well as the net operations from thegasoline stations and restaurants operated by the Company affiliates, willbecome subject to Federal and State income taxes.

 

Holding has three wholly-ownedsubsidiaries, Fuel Supply, Inc. (“FSI”), USRP (Hawaii), LLC, and USRP(S&C), LLC.  FSI, which wasorganized in April 2001, operates various retail businesses located oncertain Company properties in order to transition the operations from onetenant to another.  USRP (Hawaii), LLCwas formed in June 2003 and owns the Company’s Hawaii servicestations.  USRP (S&C), LLC was formedin June 2003 and owns 65 of the Company’s Shoney’s and Captain D’srestaurants, as well as the partnership interest of USRP (Sho) 1, L.P.    Holding owns the Company-operatednon-Hawaii service stations.  Subsequentto September 30, 2003, Holding owns the unpledged Shoney’s and Captain D’sproperties.

 

Basis ofPresentation and Estimates

 

The accompanying interimunaudited condensed consolidated financial statements should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K, as amended, for the yearended December 31, 2002 and the Form 8-K, as amended, filedAugust 18, 2003 with the Securities and Exchange Commission (“SEC”).  Operating results for the three and ninemonths ended September 30, 2003 are not necessarily indicative of theresults to be expected for the year ending December 31, 2003.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen omitted in this report on Form 10-Q pursuant to the Rules and Regulationsof the SEC.  In the opinion ofmanagement, the disclosures contained in this report are adequate to make theinformation presented not misleading.

 

Accounting measurements atinterim dates inherently involve greater reliance on estimates than at year endand the results of operations for the interim periods shown in the report arenot necessarily indicative of results to be expected for the fiscal year.  In the opinion of management, theaccompanying unaudited condensed consolidated financial statements include alladjustments (of a normal recurring nature) necessary to present fairly theconsolidated financial position of the Company as of September 30, 2003,the consolidated results of its operations and comprehensive operations for thethree and nine months ended September 30, 2003 and 2002, and theconsolidated statements of cash flows and stockholders’ equity for the ninemonths ended September 30, 2003.

 

9

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The preparation of consolidatedfinancial statements, in conformity with accounting principles generallyaccepted in the United States of America, requires management to make estimatesand assumptions that affect reported amounts of certain assets, liabilities,contingent assets and liabilities, revenues and expenses as of and for thereporting periods.  Actual results maydiffer from such estimates.  Anydifferences from those estimates are recorded in the period in which they areidentified.

 

Amounts in previous periodshave been reclassified to conform to current period presentation.

 

**SIGNIFICANT ACCOUNTING POLICIES**

 

This section should beread in conjunction with the more detailed information regarding the Company’ssignificant accounting policies contained in the Company’s Annual Report onForm 10-K, as amended, for the year ended December 31, 2002 and Form 8-K,as amended, filed August 18, 2003.

 

**New Accounting Standards**

 

Statement of FinancialAccounting Standards (“SFAS”) No. 148, “Accounting forStock-Based Compensation —Transition and Disclosure,” amends SFAS No. 123,“Accounting for Stock-Based Compensation,” and provides new transition methodsif an entity adopts the fair value based method of valuing stock-basedcompensation as well as requiring additional disclosures in interim and annualfinancial statements.  At this time, theCompany intends to continue to utilize the intrinsic value model of accountingfor stock option grants which results in compensation costs equal to theexcess, if any, of the fair value of the Company’s stock at the measurementdate above the stock options strike price. Pro-forma disclosures are as follows (in thousands, except pershare data):

 

**Pro-formaStock-Based Compensation Cost**
|                                                         |   | **Three months ended  September 30,** |   | **Nine months ended  September 30,** |   |
|--------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                         |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
| Net income allocable to common  stockholders,  as reported   |   | $                                          | 3,135  |                                      | $      | 2,981 |   | $ | 10,287 |   | $ | 4,648 |   |
| Stock-based compensation  recognized, net                    |   | —                                     |   | —                                    |   | 9 |   | 86 |   |
|                                                         |   | 3,135                                      |   | 2,981                                     |   | 10,296 |   | 4,734 |   |
| Pro-forma stock-based  compensation                          |   | (2                                         | )      | (40                                       | )      | (27 | ) | (120 | ) |
| Pro-forma net income allocable  to common  stockholders      |   | $                                          | 3,133  |                                      | $      | 2,941 |   | $ | 10,269 |   | $ | 4,614 |   |
|                                                         |   |                                       |   |                                      |   |   |   |   |   |
| Basic and diluted income per  share:                         |   |                                       |   |                                      |   |   |   |   |   |
| As reported - basic and diluted                              |   | $                                          | 0.16   |                                      | $      | 0.15 |   | $ | 0.52 |   | $ | 0.24 |   |
| Pro-forma - basic                                            |   | $                                          | 0.16   |                                      | $      | 0.15 |   | $ | 0.52 |   | $ | 0.24 |   |
| Pro-forma - diluted                                          |   | $                                          | 0.16   |                                      | $      | 0.15 |   | $ | 0.51 |   | $ | 0.23 |   |
|                                                         |   |                                       |   |                                      |   |   |   |   |   |
| Stock options:                                               |   |                                       |   |                                      |   |   |   |   |   |
| Pro-forma estimated  compensation value per  options granted |   | $                                          | 2.06   |                                      | $      | 2.50 |   | $ | 2.10 |   | $ | 2.01 |   |

 

10

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SFAS No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities,” was issued inApril 2003 and was adopted by the Company on July 1, 2003.  This Statement is to be appliedprospectively and is effective for contracts entered into or modified afterJune 30, 2003, and for hedging relationships designated afterJune 30, 2003.  This Statementamends and clarifies accounting for derivative instruments, including certainderivative instruments embedded in other contracts, and for hedging activitiesunder SFAS No. 133.  The Company has nonew derivative instruments effective during 2003.  Management will evaluate all future derivative instruments underthe provisions of SFAS No. 149 to determine whether there is an impact on theCompany’s consolidated financial statements.

 

SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity,” was adopted by and effective for the Company on July 1,2003.  This Statement addresses how anissuer classifies and measures financial instruments with characteristics ofboth liabilities and equity. The Series B Preferred is neither mandatorilyredeemable, as defined in SFAS No. 150, nor does it embody an unconditionalobligation to transfer equity shares of the Company.  The Series B Preferred does contain conditional obligations toredeem in cash or shares, but the conditions or events are not certain to occurat September 30, 2003. Accordingly, the Series B Preferred does not fall under the scope ofSFAS No. 150 at this time. EITF D-98, “Classification and Measurement ofPreferred Securities,” provides guidance to determine if preferred securitiesshould be classified as permanent equity. As none of the redemption requirements of the securities are outside thecontrol of the Company, management concluded that the Series B Preferred isappropriately classified as equity as of September 30, 2003.

 

Management also examinedits classification of its minority interests under the guidance of SFAS No.150. At this time, management believes the current classification of itsminority interests in the Company’s Condensed Consolidated Balance Sheets as ofSeptember 30, 2003 is appropriate. See Note 11, “Subsequent Events,” for information regarding theredemption of the USRP/HCI Partnership 1, L.P. ("HJV") minorityinterest.  The Company will continue tomonitor its remaining financial instruments which have characteristics of bothdebt and equity for appropriate classification under SFAS No. 150.

 

FASB Interpretation(“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others,” requiresdisclosures to be made by a guarantor about its obligations under certainguarantees that it has issued.  FIN No.45 is generally effective prospectively for guarantees issued or modified afterDecember 31, 2002.  FIN No. 45 alsorequires liability recognition for certain types of debt.  The Interpretation requires a guarantor torecognize a liability at the inception of a guarantee whether or not payment isprobable, creating the concept of a “stand ready” obligation.  See Note 10, “Commitments and Contingencies,”for disclosure of the Company’s guarantees at September 30, 2003.

 

11

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**Income Per Share**

 

Basic income per share iscomputed based upon the weighted average number of shares of common stockoutstanding.  Diluted income per sharetypically reflects the dilutive effect of stock options, units of beneficialinterest in the Operating Partnership (“OP Units”), convertible preferred stockand convertible stock warrants.  Areconciliation of the basic and diluted weighted average shares is as follows:

 
|                                                                                                                            |   | **Three months ended  September 30,** |   | **Nine months ended  September 30,** |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
| **(In thousands, except per share  amounts)**                                                                                   |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                                                                                            |   |                                       |   |                                      |   |   |   |   |   |
| Net income from continuing  operations before discontinued operations and cumulative effect of change in  accounting  principle |   | $                                          | 1,014  |                                      | $      | 3,149 |   | $ | 5,916 |   | $ | 6,930 |   |
| Dividends on preferred stock                                                                                                    |   | (2,185                                     | )      | (1,776                                    | )      | (5,736 | ) | (5,327 | ) |
|                                                                                                                            |   | (1,171                                     | )      | 1,373                                     |   | 180 |   | 1,603 |   |
| Income from discontinued  operations                                                                                            |   | 4,306                                      |   | 1,608                                     |   | 10,377 |   | 3,045 |   |
| Cumulative effect of change in  accounting principle                                                                            |   | —                                     |   | —                                    |   | (270 | ) | — |   |
| Net income allocable to common  stockholders                                                                                    |   | $                                          | 3,135  |                                      | $      | 2,981 |   | $ | 10,287 |   | $ | 4,648 |   |
|                                                                                                                            |   |                                       |   |                                      |   |   |   |   |   |
| Basic and diluted net income  per share:                                                                                        |   |                                       |   |                                      |   |   |   |   |   |
|                                                                                                                            |   |                                       |   |                                      |   |   |   |   |   |
| Income (loss) from continuing  operations allocable to common stockholders                                                      |   | $                                          | (0.06  | )                                         | $      | 0.07 |   | $ | 0.01 |   | $ | 0.08 |   |
| Income from discontinued  operations                                                                                            |   | 0.22                                       |   | 0.08                                      |   | 0.52 |   | 0.16 |   |
| Cumulative effect of change in  accounting principle                                                                            |   | —                                     |   | —                                    |   | (0.01 | ) | — |   |
| Net income per share, basic and  diluted                                                                                        |   | $                                          | 0.16   |                                      | $      | 0.15 |   | $ | 0.52 |   | $ | 0.24 |   |
|                                                                                                                            |   |                                       |   |                                      |   |   |   |   |   |
| Weighted average shares  outstanding:                                                                                           |   |                                       |   |                                      |   |   |   |   |   |
| Basic                                                                                                                           |   | 19,909                                     |   | 19,737                                    |   | 19,871 |   | 19,606 |   |
| Dilutive effect of OP units                                                                                                     |   | 80                                         |   | 47                                        |   | 54 |   | 103 |   |
| Dilutive effect of stock  options                                                                                               |   | 20                                         |   | 40                                        |   | 15 |   | 32 |   |
| Dilutive effect of preferred  stock                                                                                             |   | 15                                         |   | —                                    |   | 15 |   | — |   |
| Diluted                                                                                                                         |   | 20,024                                     |   | 19,824                                    |   | 19,955 |   | 19,741 |   |
|                                                                                                                            |   |                                       |   |                                      |   |   |   |   |   |
| Antidilutive securities:                                                                                                        |   |                                       |   |                                      |   |   |   |   |   |
| Stock options                                                                                                                   |   | 14                                         |   | 46                                        |   | 41 |   | 46 |   |
| Convertible preferred stock                                                                                                     |   | 4,438                                      |   | 3,453                                     |   | 4,438 |   | 3,453 |   |
| Convertible stock warrants                                                                                                      |   | 206                                        |   | —                                    |   | 206 |   | — |   |

 

12

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**Investments**

 

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

 

**Derivatives**

 

Derivative financialinstruments are recognized as either assets or liabilities on the balance sheetat fair value.  If the derivative isdesignated as a fair-value hedge, the changes in the fair value of thederivative and the hedged item are recognized currently in earnings.  If the derivative is designated as a cashflow hedge, the effective portion of the changes in fair value of thederivative is included in other comprehensive income and is reclassified toearnings when the hedged item affects earnings.  For a derivative that does not qualify or is not designated as ahedge, changes in fair value are recognized currently in earnings.

 

**Revenue Recognition**

 

The Company’s revenuesprimarily include rental income on real estate properties and operating revenuefrom retail operations.

 

Rental revenues are derivedprimarily from the leasing of the Company’s 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.  The triple net structure is designed to provide a predictablestream of income while minimizing ongoing property operating costs.  Accordingly, the accompanying condensedconsolidated financial statements do not reflect property taxes and insurancecosts or reimbursements when the tenant has legally assumed responsibility forthese liabilities.  As the Companyremains legally responsible for ground rents under its ground leases andreceives payment from its tenants for these costs, amounts reimbursed fromtenants for ground rents are recorded as rental revenue.  Rental revenues and ground rent expense arerecognized on a straight-line basis unless significant collection problemsoccur with the lessee, at which time rents are recognized on a cash basis.  The Company occasionally provides remodelinggrants, which are included in the straight-lining of revenue, to tenants inconsideration for early renewal and restructure of existing leases.  Contingent rent is recognized as revenueafter the related lease sales targets are achieved.  The Company recognized contingent rent revenues of $0.8 millionand $2.3 million for the three and nine months ended September 30, 2003,respectively, as compared to $1.0 million and $2.9 million for the three andnine months ended September 30, 2002, respectively.

 

Retail revenues are derivedfrom gasoline sales, car washes, convenience store merchandise and food salesat properties operated by the Company. Revenue is recognized upon the sale of gasoline, merchandise or thedelivery of services.

 

 

**2.****                                      Property**

 

**Discontinued Operations**

 

SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” requires that the resultsof operations of assets sold or held for sale, and any gains or lossesrecognized on assets sold or held for sale, be

 

13

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classified separately in theCompany’s Condensed Consolidated Statements of Operations.  In accordance with SFAS No. 144, the resultsof operations of the assets sold or held for sale have been presented as“Income from discontinued operations” in the accompanying CondensedConsolidated Statements of Operations for the three and nine months endedSeptember 30, 2003 and 2002.

 

During the three and ninemonths ended September 30, 2003, the Company completed the sale of 25 and62 properties, respectively, for net cash proceeds of $14.1 million and $35.1million, respectively, net of closing costs of $1.2 million and $2.2 million,respectively.

 

The following table presentsthe revenues, depreciation and amortization, impairment of long-lived assets,other expenses, net gain on sales of property, and income from discontinuedoperations for the three and nine months ended September 30, 2003 and 2002for the 62 properties sold during the nine months ended September 30, 2003and 46 properties sold during the twelve months ended December 31, 2002(in thousands):

 
|                                 |   | **Three months ended  September 30,** |   | **Nine months ended  September 30,** |   |
|--------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                 |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                 |   |                                       |   |                                      |   |   |   |   |   |
| Revenues                             |   | $                                          | 806    |                                      | $      | 2,049 |   | $ | 3,852 |   | $ | 5,892 |   |
| Depreciation and amortization        |   | (50                                        | )      | (409                                      | )      | (529 | ) | (1,416 | ) |
| Impairment of long-lived assets      |   | —                                     |   | (133                                      | )      | (1,530 | ) | (1,328 | ) |
| Other expenses                       |   | (21                                        | )      | (878                                      | )      | (1,691 | ) | (2,356 | ) |
|                                 |   | 735                                        |   | 629                                       |   | 102 |   | 792 |   |
| Gain on sales of property, net       |   | 3,571                                      |   | 979                                       |   | 10,275 |   | 2,253 |   |
| Income from discontinued  operations |   | $                                          | 4,306  |                                      | $      | 1,608 |   | $ | 10,377 |   | $ | 3,045 |   |

 

**Other Impairments**

 

During the three and ninemonths ended September 30, 2003, impairment charges of $1.5 million and$2.3 million were recognized from the revaluing of 19 and 33 assets,respectively, to their estimated fair values. Impairment charges result when the Company determines from its regularanalysis of real property assets that circumstances indicate the book value ofan asset may not be fully recoverable. As part of this regular analysis, any time a property is marketed forsale at a price less than net book value, an impairment charge is immediatelyrecognized.  Of the Company’s $1.5million third quarter impairment charges, approximately $0.8 million resultedfrom this analysis.  The remaining $0.7million resulted in part from a $0.3 million charge related to a workoutagreement with a multi-unit tenant during 2002. Under the terms of thisagreement, the Company may be able to fully recover the outstanding balancesdue, which would then require the Company to recognize gains or impairments oneach specific property as the settlement agreement is executed.  The remaining $0.4 million resulted from ananalysis of short-lived ground leases on which the tenant had vacated.  Since ownership of the building and anyfixtures typically reverts to the landowner at the expiration of a groundlease, it was unlikely that the Company would find a tenant for the propertydue to the brevity of the remaining ground lease term.  Accordingly, management recognized animpairment for the remaining asset value for the fixtures on the ground leases.

 

14

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**3.****         Lineof Credit, Notes Payable and Mortgage Note Payable**

 

The Company’stotal debt is summarized as follows (in thousands):

 
|                                                                |   | **Maturity  Date**  |   | **Interest  Rate** |   | **September 30,  2003** |    | **December 31,  2002** |   |
|---------------------------------------------------------------------|--------|---------------------|--------|--------------------|--------|------------------------------|---------|-----------------------------|--------|
| Revolving credit facility (1)                                       |   | May 2004       |   | LIBOR + 3.0        | %      | $                            | 26,000  |                        | $      | 25,000 |   |
| Notes Payable                                                       |   |                |   |               |   |                         |    |                        |   |
| Senior unsecured notes,  interest-only paid semiannually            |   | May 2005       |   | 7.15               | %      | $                            | 111,000 |                        | $      | 111,000 |   |
| Variable rate Certificates,  principal and interest payable monthly |   | August 2006    |   | LIBOR + 0.48       | %      | 158,720                      |    | 168,220                     |   |
| Senior unsecured notes,  interest-only paid semiannually            |   | August 2003    |   | 8.22               | %      | —                       |    | 47,500                      |   |
| Debt premium, net                                                   |   |                |   |               |   | 498                          |    | 708                         |   |
|                                                                |   | Total Notes Payable |   |               |   | $                            | 270,218 |                        | $      | 327,428 |   |
|                                                                |   |                |   |               |   |                         |    |                        |   |
| Mortgage Note Payable                                               |   | June 2007      |   | 8.00               | %      | $                            | 919     |                        | $      | 946 |   |
|                                                                |   |                |   |               |   |                         |    |                        |   |   |   |
| **Total Debt**                                                      |   |                |   |               |   | $                            | 297,137 |                        | $      | 353,374 |   |

 

----

(1)On November 4, 2003, theline of credit was replaced with a new line. See Note 11, “Subsequent Events,” for additional information.

 

In May 2002, theCompany entered into a Credit Agreement with Bank of America (“BOA”) (the“Credit Agreement”), through its subsidiary USRP Funding 2002-A, L.P., for asecured line of credit of $35.0 million which is subject to a DerivativeExposure Reserve and a Borrowing Base, as defined.  Borrowings under this facility are used primarily to acquirecertain Shoney’s and Captain D’s properties in purchase/leaseback transactions.This credit facility is secured by the capital stock of USRP Funding 2002-A,L.P and USRP (S&C), LLC, wholly-owned subsidiaries of the Company.  The Credit Agreement, as originallystructured, had a term of up to two years and allowed for Base Rate Loans,Eurodollar Loans or a combination of the two. Base Rate Loans bear interest at 3.0% plus the higher of the FederalFunds Rate plus 0.5% or the Prime Rate. Eurodollar Loans bear interest at 3.0% plus LIBOR.  The Credit Agreement also provided that upto $10.0 million of the facility could be used for letters of credit.  There was a 3.0% fee per annum onoutstanding letters of credit as well as a 3.0% Derivative Exposure Usage Feeunder this facility.  As ofSeptember 30, 2003, the Company had $2.1 million letters of credit outstanding and drawn under thisfacility. During 2003, the Company executed various extensions andmodifications to this Credit Agreement as it negotiated a new creditfacility.  One modification extended theCompany’s $30.0 million borrowing capacity through November 17, 2003. Asof September 30, 2003, funds available under the Credit Agreement wereapproximately $139,000.  OnNovember 4, 2003, the Company replaced its line of credit, and as ofNovember 7, 2003, funds available under the new line of credit were $3.5million.  See Note 11, “SubsequentEvents,” for additional information.

 

In 1998, the Company issued$47.5 million in senior notes in a private placement which were originallyscheduled to mature on August 1, 2003. On July 1, 2003, the Company prepaid $23.8 million of thenotes.  In connection with thisprepayment, the Company paid $0.8 million in accrued interest and incurred amake-whole interest payment of $137,000. The Company repaid the remaining balance on July 29, 2003.

 

The Company is in compliancewith all covenants associated with its debt and credit facilities as ofSeptember 30, 2003.

 

15

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**4.****                                      DerivativeInstruments**

 

The Company’s derivativeinstruments as of September 30, 2003 are summarized as follows (inthousands):

 
|                   |   |                   |   | **Liability**  |   |
|------------------------|--------|------------------------|--------|----------------|--------|
| **Type**               |   | **Settlement  Period** |   | **Maturity**   |   | **Notional  Amount** |   | **Fixed  Swap  Rate  Paid** |   | **Floor  Rate** |   | **Cap  Rate** |   | **Sept. 30,  2003** |   | **Dec. 31,  2002** |   |
| Interest rate swap     |   | Quarterly              |   | May 2003  |   | $ | 15,000 |   | 7.05 | % |   |   |   |   | $ | — |   | $ | 325 |   |
| Interest rate collar   |   | Monthly                |   | Aug. 2005      |   | 63,321 |   | — |   | 4.42 | % | 6.00 | % | 2,983 |   | 3,678 |   |
| Interest rate swap     |   | Monthly                |   | June 2004 |   | 25,000 |   | 2.42 | % |   |   |   |   | 240 |   | 315 |   |
| Interest rate swap (1) |   | Monthly                |   | Aug. 2003      |   | 50,000 |   | 2.00 | % |   |   |   |   | — |   | 218 |   |
| Interest rate swap (2) |   | Monthly                |   | Sept. 2005     |   | 30,000 |   | 2.12 | % |   |   |   |   | 97 |   | — |   |
| Interest rate swap (2) |   | Monthly                |   | Sept. 2005     |   | 25,000 |   | 2.33 | % |   |   |   |   | — |   | — |   |
|                   |   |                   |   |           |   |   |   |   |   |   |   |   |   | $ | 3,320 |   | $ | 4,536 |   |
|                        |        |                        |        |                |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)  Expired upon maturity without renewal.

(2)  Effective April 2004.

 

Derivative financialinstruments are utilized by the Company to manage its exposure to market risksfrom changes in interest rates.  TheCompany’s derivative financial instruments include interest rate swaps andinterest rate collars, in which the Company receives variable payments based onan appropriate LIBOR index. The Company expects to make approximately $2.8million in derivative settlement payments over the next 12 months.

 

The Company terminated afixed to floating interest rate swap with Bank of America inSeptember 2002.  Proceeds of $1.1million from the termination were collected in October 2002.  A gain of approximately $0.9 millionresulted from the termination, which increased the basis of the underlying notepayable in the Company’s Condensed Consolidated Balance Sheets and is beingamortized over the remaining term of the previously hedged item(May 2005).  As ofSeptember 30, 2003, the remaining unamortized basis adjustment was $0.5million.

 

 

**5.****                                      RelatedParty Transactions**

 

During 2002, the Companyacquired a 7.5% equity interest in Shoney’s, Inc.  An affiliate of the Lone Star Funds (see Note 6 below) owns theremainder of Shoney’s, Inc.  As ofSeptember 30, 2003, the Company’s investments in Shoney’s consisted of aninvestment in common stock of $2.4 million, mortgage loans receivable of $2.1million and a net book value of real estate purchased and leased back toShoney’s of approximately $54.4 million. See Note 11, “Subsequent Events,” for information regarding the sale ofthe Company’s equity interest in Shoney’s.

 

 

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

 

The Company had19,923,689 and 19,831,689 shares of common stock outstanding as ofSeptember 30, 2003 and December 31, 2002, respectively.

 

**Lone Star Funds**

 

Two stockholders of the Company(LSF3 Investments I, LLC, a Delaware limited liability company, and LSF3Investments II, LLC, a Delaware limited liability company (the “Lone StarFunds”)) owned approximately 19.0% of the Company’s outstanding common stock asof September 30, 2003.  See Note11, “Subsequent Events,” for additional information regarding the Company’scommon stock offering on October 17, 2003, after which the equity interestof Lone Star Funds, as selling stockholders, was reduced to approximately 9.9%.

 

16

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**Series B Preferred**

 

On June 19, 2003, theCompany raised proceeds of $15.2 million, net of placement fees but excludingcertain transaction costs, from the sale of 16,000 shares of Series BConvertible Preferred Stock (the “Series B Preferred”) in a private placementwith certain institutional investors.

 

The Series B Preferred carriesan 8.0% dividend and is convertible into shares of common stock at a fixedconversion price of $16.00 per share, which represented a premium to the marketprice for the Company’s common stock on the date of issuance.  The Series B preferred stock is not subjectto mandatory redemption but is redeemable after three years at stated valueplus accrued and unpaid dividends in cash, or, if specific conditions are met,in shares of common stock based on a weighted average conversioncalculation.  The Company also issuedwarrants to the investors to purchase 206,452 shares of common stock at anexercise price of $16.50 per share.  Thewarrants have a seven-year term.  Theestimated fair value of the warrants, utilizing Black-Scholes option valuationmethodology, was $1.23 per share at the date of issuance.

 

The offering also included atwelve-month option for the institutional investors to invest an additional$4.0 million in stated value Series B Preferred under the same terms as theinitial investment, with certain conversion price adjustments for the thencurrent market price for the Company’s common stock.

 

See Note 11, “SubsequentEvents,” for information regarding the October 2003 issuance of $4.0million of additional Series B preferred shares in connection with theCompany’s recent stock offering.

 

**Distributions to Common and PreferredStockholders**

 

During the nine months endedSeptember 30, 2003, the Company declared distributions of $19.7 million toits common stockholders (or $0.99 per share of Common Stock) and $5.6 millionto its Series A preferred stockholders (or $1.45 per share of Series APreferred Stock).  The Company alsodeclared a pro-rated distribution from the date of issuance toSeptember 30, 2003, of $0.3 million to its Series B preferredstockholders. During the nine months ended September 30, 2002, the Companydistributed $19.4 million to its common stockholders (or $0.99 per share ofCommon Stock) and $5.3 million to its Series A preferred stockholders (or $1.45per share of Series A Preferred Stock).

 

**Minority Interests**

 

During 1999, theCompany issued $55.0 million of 8.5% preferred equity interest in the HJV to athird party for net proceeds of $52.8 million. Under the terms of this transaction, the preferred interest holderreceives annual distributions equal to $4.7 million, payable monthly from thecash flows of HJV.  Income is allocatedto the preferred interest holder equal to the holder’s distribution. From timeto time, the Company may be required to exchange properties that do not meetspecified criteria as defined in the partnership agreement.

 

Based on anevaluation of the minority interests under SFAS No. 150, Management believesthe current classification of its minority interests in the Company’s CondensedConsolidated Balance Sheets as of September 30, 2003 is appropriate.   See Note 11, “Subsequent Events,” for additionalinformation regarding the redemption of the HJV minority interest onNovember 4, 2003.

 

During the ninemonths ended September 30, 2003, the Company acquired a property,including land and building, in exchange for 79,845 OP Units and theforgiveness of a $1.1 million note receivable owed to the Company.  The fair value of the land and buildingreceived at the time of the exchange was $2.3 million.

 

Minority interestactivity for the nine months ended September 30, 2003 is as follows (inthousands):

 
| Balance at January 1, 2003         |   | $      | 52,845 |   |
|-----------------------------------------|--------|--------|--------|--------|
| Distributions paid and accrued          |   | (3,576 | )      |
| Income allocated to minority  interests |   | 3,542  |   |
| 79,845 OP Units issued                  |   | 1,146  |   |
| Balance at September 30,  2003     |   | $      | 53,957 |   |

 

17

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**7.****                                      SegmentInformation**

 

Operating segmentsare defined as components of an enterprise for which separate financialinformation is available that is evaluated by the chief operating decisionmaker in deciding how to allocate resources and in assessing performance.  The Company has two operating segments, realestate and retail.

 

*Real Estate.*  Real estate activities principally includeacquiring, owning, leasing and managing restaurant and gas station properties.The Company derives its real estate revenues from rental income on itsportfolio of 785 branded chain restaurants and service station propertieslocated throughout 48 states.

 

*Retail*. Revenuesfrom this segment are generated from the sales of gasoline and conveniencestore merchandise, and food sales at restaurants operated by the Company.  At September 30, 2003, FSI operatednine service stations in Texas, eight in Hawaii, one in California and one inIllinois, along with three restaurants, two in Texas and one in Kansas.  In January 2002, FSI began utilizing afuel terminal in Hawaii to store fuel distributed to its Hawaii servicestations.  At September 30, 2003,in addition to the service stations currently operated, FSI sold fuel to sevenservice stations in Hawaii, two in Texas and two in Illinois.

 

*Intersegment Charges. *Intersegmentcharges are eliminated in consolidation and primarily include the costs of rentand interest.  The Retail segment paysrent to the Real Estate segment to lease the properties that it operates.  Interest is also paid by the Retail segmentto the Real Estate segment.  Interest ischarged at an annual rate of 9.5% on intercompany balances as well as on a noteestablished on January 1, 2002 for the sale of the Hawaii fuel terminal toFSI.  Intercompany balances representprimarily the cash advances made by the Real Estate segment to the Retailsegment to fund its operations.

 

18

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The following tables present the Company’s reportableamounts by segment for the three months ended September 30, 2003 and 2002(in thousands):

 
| **2003**                                                           |   | **Real Estate** |   | **Retail** |   | **Intercompany** |   | **Consolidated** |   |
|--------------------------------------------------------------------|--------|-----------------|--------|------------|--------|------------------|--------|------------------|--------|
| Real estate rental                                                 |   | $               | 15,421 |       | $      | —           |   | $                | (322   | ) | $ | 15,099 |   |
| Retail operations                                                  |   | —          |   | 15,682     |   | —           |   | 15,682           |   |
| Interest on mortgage loans and  tenant  expense reimbursements     |   | 1,756           |   | —     |   | (326             | )      | 1,430            |   |
| Lease termination fees                                             |   | 29              |   | —     |   | —           |   | 29               |   |
| Total revenues                                                     |   | 17,206          |   | 15,682     |   | (648             | )      | 32,240           |   |
| Interest expense                                                   |   | (4,612          | )      | (329       | )      | 326              |   | (4,615           | )      |
| Depreciation and amortization                                      |   | (5,679          | )      | (112       | )      | —           |   | (5,791           | )      |
| General and administrative                                         |   | (1,286          | )      | (1,498     | )      | —           |   | (2,784           | )      |
| Retail cost of sales                                               |   | —          |   | (13,393    | )      | —           |   | (13,393          | )      |
| Other expenses, net                                                |   | (4,683          | )      | (282       | )      | 322              |   | (4,643           | )      |
| Income from continuing  operations  before discontinued operations |   | 946             |   | 68         |   | —           |   | 1,014            |   |
| Income (loss) from discontinued  operations                        |   | 4,311           |   | (5         | )      | —           |   | 4,306            |   |
| Net income                                                         |   | $               | 5,257  |       | $      | 63               |   | $                | — |   | $ | 5,320 |   |

 
| **2002**                                                                  |   | **Real Estate** |   | **Retail** |   | **Intercompany** |   | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|--------|-----------------|--------|------------|--------|------------------|--------|------------------|------------|
| Real estate rental                                                        |   | $               | 15,529 |       | $      | —           |   | $                | (603       | ) | $ | 14,926 |   |
| Retail operations                                                         |   | —          |   | 10,216     |   | —           |   | 10,216           |       |
| Interest on mortgage loans and  tenant  expense reimbursements            |   | 2,043           |   | —     |   | (197             | )      | 1,846            |       |
| Total revenues                                                            |   | 17,572          |   | 10,216     |   | (800             | )      | 26,988           |       |
| Interest expense                                                          |   | (5,594          | )      | (197       | )      | 197              |   | (5,594           | )          |
| Depreciation and amortization                                             |   | (4,952          | )      | (10        | )      | —           |   | (4,962           | )          |
| General and administrative                                                |   | (1,147          | )      | (1,384     | )      | —           |   | (2,531           | )          |
| Retail cost of sales                                                      |   | —          |   | (8,517     | )      | —           |   | (8,517           | )          |
| Other expenses, net                                                       |   | (2,314          | )      | (524       | )      | 603              |   | (2,235           | )          |
| Income (loss) from continuing  operations  before discontinued operations |   | 3,565           |   | (416       | )      | —           |   | 3,149            |       |
| Income (loss) from discontinued  operations                               |   | 1,627           |   | (19        | )      | —           |   | 1,608            |       |
| Net income (loss)                                                         |   | $               | 5,192  |       | $      | (435             | )      | $                | —     |   | $ | 4,757 |   |

 

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The following tablespresent the Company’s reportable amounts by segment as of and for the ninemonths ended September 30, 2003 and 2002 (in thousands):

 
| **2003**                                                                                                    |   | **Real Estate** |    | **Retail** |   | **Intercompany** |   | **Consolidated** |    |
|-------------------------------------------------------------------------------------------------------------|--------|-----------------|---------|------------|--------|------------------|--------|------------------|---------|
| Real estate rental                                                                                          |   | $               | 46,256  |       | $      | —           |   | $                | (944    | ) | $ | 45,312 |   |
| Retail operations                                                                                           |   | —          |    | 43,490     |   | —           |   | 43,490           |    |
| Interest on mortgage loans and  tenant  expense reimbursements                                              |   | 5,931           |    | —     |   | (1,044           | )      | 4,887            |    |
| Lease termination fees                                                                                      |   | 1,660           |    | —     |   | —           |   | 1,660            |    |
| Total revenues                                                                                              |   | 53,847          |    | 43,490     |   | (1,988           | )      | 95,349           |    |
| Interest expense                                                                                            |   | (15,695         | )       | (1,056     | )      | 1,044            |   | (15,707          | )       |
| Depreciation and amortization                                                                               |   | (16,151         | )       | (291       | )      | —           |   | (16,442          | )       |
| General and administrative                                                                                  |   | (4,221          | )       | (5,251     | )      | —           |   | (9,472           | )       |
| Retail cost of sales                                                                                        |   | —          |    | (37,189    | )      | —           |   | (37,189          | )       |
| Other expenses, net                                                                                         |   | (10,833         | )       | (734       | )      | 944              |   | (10,623          | )       |
| Income (loss) from continuing  operations before discontinued operations and change in accounting principle |   | 6,947           |    | (1,031     | )      | —           |   | 5,916            |    |
| Income (loss) from discontinued  operations                                                                 |   | 10,558          |    | (181       | )      | —           |   | 10,377           |    |
| Change in accounting principle                                                                              |   | (241            | )       | (29        | )      | —           |   | (270             | )       |
| Net income (loss)                                                                                           |   | $               | 17,264  |       | $      | (1,241           | )      | $                | —  |   | $ | 16,023 |   |
|                                                                                                        |   |            |    |       |   |             |   |             |    |
| Identifiable assets                                                                                         |   | $               | 528,322 |       | $      | 13,078           |   | $                | (14,169 | ) | $ | 527,231 |   |
| Cash allocable to segments                                                                                  |   | 3,349           |    | 1,299      |   | —           |   | 4,648            |    |
| Total assets                                                                                                |   | $               | 531,671 |       | $      | 14,377           |   | $                | (14,169 | ) | $ | 531,879 |   |

 
| **2002**                                                                  |   | **Real Estate** |    | **Retail** |   | **Intercompany** |   | **Consolidated** | ** ** |
|---------------------------------------------------------------------------|--------|-----------------|---------|------------|--------|------------------|--------|------------------|------------|
| Real estate rental                                                        |   | $               | 46,608  |       | $      | —           |   | $                | (1,210     | ) | $ | 45,398 |   |
| Retail operations                                                         |   | —          |    | 26,607     |   | —           |   | 26,607           |       |
| Interest on mortgage loans and  tenant  expense reimbursements            |   | 5,370           |    | —     |   | (579             | )      | 4,791            |       |
| Lease termination fees                                                    |   | 92              |    | —     |   | —           |   | 92               |       |
| Total revenues                                                            |   | 52,070          |    | 26,607     |   | (1,789           | )      | 76,888           |       |
| Interest expense                                                          |   | (16,691         | )       | (579       | )      | 579              |   | (16,691          | )          |
| Depreciation and amortization                                             |   | (15,151         | )       | (28        | )      | —           |   | (15,179          | )          |
| General and administrative                                                |   | (4,021          | )       | (3,616     | )      | —           |   | (7,637           | )          |
| Retail cost of sales                                                      |   | —          |    | (22,499    | )      | —           |   | (22,499          | )          |
| Other expenses, net                                                       |   | (8,009          | )       | (1,153     | )      | 1,210            |   | (7,952           | )          |
| Income (loss) from continuing  operations  before discontinued operations |   | 8,198           |    | (1,268     | )      | —           |   | 6,930            |       |
| Income (loss) from discontinued  operations                               |   | 3,095           |    | (50        | )      | —           |   | 3,045            |       |
| Net income (loss)                                                         |   | $               | 11,293  |       | $      | (1,318           | )      | $                | —     |   | $ | 9,975 |   |
|                                                                      |   |            |    |       |   |             |   |             |       |
| Identifiable assets                                                       |   | $               | 567,292 |       | $      | 7,776            |   | $                | (8,070     | ) | $ | 566,998 |   |
| Cash allocable to segments                                                |   | 4,658           |    | 932        |   | —           |   | 5,590            |       |
| Total assets                                                              |   | $               | 571,950 |       | $      | 8,708            |   | $                | (8,070     | ) | $ | 572,588 |   |

 

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**8.****                                      Changein Accounting Principle**

 

On January 1, 2003,the Company adopted SFAS No. 143, “Accounting for Asset RetirementObligations.”  This Statement addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  As a result of adopting SFAS No.143, the Company capitalized net asset retirement costs of $0.3 million,recorded asset retirement obligations of $0.6 million and recognized acumulative effect of change in accounting principle of $0.3 million onJanuary 1, 2003.   The retirementobligations relate to the estimated future costs for the removal of tanks, fuellines and other required modifications to the Company’s gas stations.  The Company recognized $32,000 in accretionexpense related to the properties with asset retirement obligations during thenine months ended September 30, 2003.

 

**9.****                                      SignificantTenant Negotiations**

 

**Fina**

 

In February 2002,the leasehold lender of 51 Fina stations in the Dallas/Ft. Worth area assumedthe defaulting tenant’s interest in the lease and took over operations from thebankrupt tenant. As of December 31, 2002, there was $2.6 million owed tothe Company under the leases, representing pre-assumption property taxes, forwhich the Company had reserved $0.8 million. Effective in February 2003,the Company entered into a lease termination agreement and received a leasetermination fee of $3.4 million, a portion of which was applied to outstandingreceivable balances, with the remaining $1.7 million recorded as leasetermination fee revenue.  The Companyalso, through its subsidiary FSI, purchased equipment for approximately $2.2million, gas and convenience store inventory from the tenant at an agreed-uponcost of $2.9 million, and took over the operation of 25 of these Finastations.  The remaining 26 propertieswere temporarily closed.  As ofSeptember 30, 2003, 21 stations had been re-leased, 14 stations had beensold and two leasehold properties were returned to the property owners.  Of the remaining 14 properties, nine arefee-owned and five are leaseholds.  Ofthe nine fee properties, FSI is operating four and five are vacant. Of theremaining leaseholds, FSI is operating three and two are vacant.  During the nine months endedSeptember 30, 2003, impairment charges of $1.0 million were recognizedfrom revaluing 14 Fina stations to their estimated fair value.

 

**Lyon’s of California**

 

AtSeptember 30, 2003, the Company had $2.9 million of mortgage loansreceivable from Lyon’s of California, Inc. (“Lyons”).  The loans were secured by certain Lyons restaurant properties andpartially guaranteed by ICH Corporation (“ICH”), the former owner of Lyons.  The Company also held a $0.1 million notereceivable from ICH which was written off during the 2003 third quarter. Sybra,Inc. (“Sybra”), a former wholly-owned subsidiary of ICH, is the lessee of 58 ofthe Company’s Arby’s restaurants, making it the Company’s largest tenant.

 

Due to the 2001 Lyons andICH bankruptcy filings, the Company recorded an allowance for doubtful accountsof $2.5 million and $0.3 million on balances due from Lyons and ICH,respectively, during the year ended December 31, 2001.  Interest income associated with these noteshas not been recognized since September 2001.  All of these notes are valued based on the estimated fair valueof the collateral, as collateral disposal is the only means through which theCompany will collect proceeds.  Sincethe inceptions of the notes, through September 30, 2003, the Company hasreceived $6.9 million in proceeds from the liquidation of this collateral,including $3.6 million in April 2003, which is primarily associated withthe ICH guarantee.  As a result of theseevents, the fair value of the collateral supporting these notes has become morecertain.  The allowance on the Lyonsnotes was reduced from $2.5 million to $0.6 million during the year endedDecember 31, 2002.  The Companyfurther reduced the allowance on the Lyons and ICH notes by $0.5 million duringthe first nine months of 2003.

 

**Embers**

 

During 2002, a significanttenant/mortgagee, Embers, experienced financial difficulty, and the Companyexecuted a workout agreement whereby Embers would sell all of its real estate,including fee properties owned by the Company that were leased to the tenant,and would remit all net proceeds to the Company until 100% of all mortgageloans, accrued interest, real estate taxes, rent receivables, late fees andother costs had been recovered. Interest income associated with these loans hasnot been recognized since December 2002. During 2002, the Company received approximately $1.5 million of cashfrom these sale transactions to partially repay its mortgage notes.  During 2003,

 

21

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the Company received $2.8million in cash from the sale of four of the fee-owned properties, andrecognized a gain on sale of $1.3 million. Each quarter, the Company individually evaluates all of its mortgageloans and real estate associated with this tenant to determine if any asset hasbeen impaired.   As a result of thisevaluation, a $0.5 million impairment was recognized on the Embers-relatedassets during the first nine months of 2003, of which $0.3 million wasrecognized in the third quarter. At September 30, 2003, the Company heldmortgage loans receivable of $2.6 million, net book value of real estate andequipment of $0.7 million and rent receivables and other assets of $1.8 millionrelated to Embers.

 

**10.****                               Commitmentand Contingencies**

 

**Litigation**

 

**Alon USA, L.P.**

 

During the first quarter of2003, the Company filed a lawsuit against Alon USA, L.P. (“Alon”), the owner ofthe Fina brand.  The Company terminatedthe tenant’s leasehold interest during February 2003 for 51 Fina servicelocations, and immediately closed 26 of them. Alon counter-claimed against the Company, alleging that pursuant to aBranding Assurance Agreement entered into with the Company, these gas stationsmust be continuously operated selling Fina branded gasoline.  The Company’s suit maintained that theBranding Assurance Agreement only required open and operating stations toremain under the Fina brand during the Company’s ownership period, and that theCompany had a right to sell the properties for other than Fina branded gasolinestations.  The Company disputed Alon’sposition and did not reopen several of the stations and sold two stations forother than Fina branded gasoline stations.

 

Effective August 22, 2003,a Settlement Agreement and Mutual Release (the “Settlement Agreement”) wasexecuted between the parties. The Agreement expires on December 31, 2008,after which time the Company is no longer under an obligation to maintaincontinuously operating stores under the Fina brand.

 

Summarized below aresignificant terms of the Settlement Agreement.

 

•                  For eachproperty covered under the Settlement Agreement, a partial “release price,” asdefined, is due Alon for stores which do not remain open and operating underthe Fina brand since the inception of the branding assurance agreement.

•                  USRP paidapproximately $0.3 million at closing which included approximately $0.2 millionfor the release of five stores and approximately $39,000 for days that storeswere closed through the effective date of the Settlement Agreement,August 22, 2003.

•                  USRP has anobligation for future payments, or release prices as defined in the SettlementAgreement, in the event stores do not remain open and operating under the Finabrand.

•                  In the event ofa sale of a store, USRP may contractually require the purchaser to assumeresponsibility for the branding assurance agreement and the release price.

•                  If the new ownerdefaults on the agreement with USRP to maintain a continuously operating storeunder the Fina brand, USRP would be directly responsible for the release pricepayment to Alon.  However, if thisoccurs, the Company would seek recourse against the defaulting owner.

 

During the third quarter,two additional releases totaling $0.1 million were made by the Company underthe terms of the Settlement Agreement. The Company recovered the release pricefor one of the properties from its tenant. Accordingly, the net release prices paid during the quarter, includingthe amounts paid at closing, totaled approximately $0.3 million.

 

FIN No. 45, as furtherdiscussed in “Guarantees” below, requires disclosures to be made by a guarantorabout its obligations under certain guarantees and also requires liabilityrecognition for certain types of debt whether or not payment is probable.  Guarantees under the Alon agreement areincluded in the guarantees table below.

 

22

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**Motel Enterprises, Inc.**

 

Prior to 2001, the Company losta case at the trial court level. After a judgment of specific performance wasentered against the Company for a total of $0.6 million plus interest andattorneys’ fees, USRP posted an $0.8 million bond and appealed the damage awardof the trial court, arguing that the court provided erroneous instructions asto the measure of damages and improperly excluded the Company’s expertwitness.  During 2001, USRP wrote off$0.4 million for this case, believing that the underlying note had sufficientvalue to cover the remainder of the judgment. USRP prevailed on appeal and the judgment was reversed and remanded fora new trial.  A verdict was again issuedagainst the Company.  The case was thenappealed to the Supreme Court of Texas. Late in the third quarter of 2003, the State Supreme Court declined tohear the case, whereupon the Company immediately filed a petition forre-hearing.  Based on this most recentdeclination by the courts, and even though no ruling has been made on the mostrecent petition, the Company further evaluated the note and has determined thatcollectibility is unlikely.  Managementtherefore charged off the remaining amount under the judgement.

 

**Other Legal**

 

The Company is subject tovarious legal proceedings in the ordinary course of business.  The resolution of these matters cannot bepredicted with any certainty, but management believes the final outcome of suchmatters will not have a material effect on the financial position, results ofoperations or cash flows of the Company.

 

**Guarantees**

 

FIN No. 45 requiresdisclosures to be made by a guarantor about its obligations under certainguarantees it has issued and also requires liability recognition forguarantees.  A guarantor is required torecognize a liability at the inception of a guarantee whether or not payment isprobable, creating the concept of a “stand ready” obligation.

 

The Company’s guarantees in place as ofSeptember 30, 2003 are listed in the table below.  For the guarantees on indebtedness, notriggering events or conditions have occurred that would require payment underthe guarantees, and management believes the assets associated with the loansthat are guaranteed are sufficient to cover the maximum potential amount offuture payments and therefore would not require the Company to provideadditional collateral to support the guarantees.

 
| **(in thousands)**    |   |                        |   |                           |   |
|-----------------------|--------|-----------------------------|--------|--------------------------------|--------|
| **Debtor**            |   | **September 30, 2003** |   | **Maximum  Guaranteed Amount** |   |
| Alon (1)              |   | $                           | 36     |                           | $      | 2,978 |   |
| Letters of Credit (2) |   | $                           | — |                           | $      | 3,092 |   |
| Total Guarantees      |   | $                           | 36     |                           | $      | 6,070 |   |

 

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(1)A Settlement Agreement between Alon and the Company obligated USRPto potential future payments of property release prices, as defined, on Alonproperties that do not remain open and operating under the Fina brand duringthe term of the Agreement, through December 2008.  Contracts for sales of any of theseproperties by USRP to third parties may contractually obligate the purchaser tomaintain the Fina brand on the gasoline service stations, or pay the releaseprice should a branding change be desired by the purchaser.  In the event a new owner defaults on theagreement with USRP to maintain a continuously operating store under the Finabrand, the Company would remain directly responsible for payment of the releaseprice to Alon.

 

(2)The Company obtains irrevocable standby letters of credit toguarantee payment of a specific financial obligations.  As of September 30, 2003, the Companyhad one letter of credit funded by its line of credit, and three other lettersof credit which were collateralized with cash for its wholly-owned subsidiaryFSI. Two of the FSI letters of credit secure payment to a gasoline provider andexpire April 2004, and one secures payment of excise taxes to the InternalRevenue Service and expires December 2003.  If the Company defaults on its financial obligations under thestipulations of the letters of credit, it would be required to pay up to themaximum guaranteed amount.

 

 

**11.****                               SubsequentEvents**

 

**Common Stock Offering**

 

On October 14, 2003,the Company completed a common stock offering of 4,075,000 shares of its commonstock, including 1,500,000 shares offered by the Lone Star Funds.  The Company did not receive any of theproceeds from the sale of the common stock by the Lone Star Funds. The Companyand the selling stockholders granted the

 

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underwriters an option topurchase an additional 611,250 shares to cover over-allotments, if any.Proceeds of $38.5 million from the offering, net of transaction expenses, werereceived on October 17, 2003.

 

**Series B Restriction Waiver**

 

In connection with theprivate placement of the Series B preferred stock, the Company agreed with theSeries B preferred stock investors that the Company would not, without theirprior written consent, prior to December 30, 2003 (90 days following theOctober 1, 2003 effective date of the resale registration statement),issue any additional shares of common stock or securities convertible intocommon stock.  The Series B preferredstock investors agreed to waive the foregoing restriction in order to permitthe Company to sell the shares of common stock being offered in the commonstock offering in exchange for the Company’s agreement to:

 

•                  Sell to the Series B preferred stockinvestors an additional $4.0 million of Series B preferred stock at statedvalue, with a fixed conversion price of $16.00 per share and issue additionalwarrants; and

•                  Increase the amount of Series Bpreferred stock that the Series B preferred stock investors have the right topurchase under the 12-month option by an additional $1.0 million for a totaloption of $5.0 million.

 

On October 17, 2003,the Company issued the $4.0 million of additional Series B preferred stock tothe existing holders.

 

**Shoney’s and Captain D’s Transactions**

 

On October 6, 2003,the Company completed the sale of its 7.5% equity interest in Shoney’s, Inc. toShoney’s largest shareholder.  Netproceeds were $4.5 million.  The Companyanticipates recognizing a gain of approximately $2.1 million.

 

On October 17 and 22,2003, the Company completed two purchase transactions totaling approximately$26.7 million in which 33 Captain D’s properties were acquired with proceedsfrom the common stock offering.

 

On October 22, 2003, theCompany purchased $15.0 million of Captain D’s mortgage loans with proceedsfrom the common stock offering and other available funds.

 

**New Revolving Credit Facility**

 

On November 4, 2003,the Company executed the first part of its new $50.0 million credit facility,in a transaction that provided $30.0 million of the facility from Bank ofAmerica, N.A.  The Company anticipatesthat the remaining $20.0 million will be provided by participating lenders.Commitments are expected during the fourth quarter. The term of the facility isthree years expiring November 2006, and subject to various conditions.  The annual interest rate on the borrowingsunder the facility is LIBOR plus 300 basis points. The facility provides thatup to $5.0 million may be used for letters of credit.  The amount borrowed under the facility is based on the earningsbefore interest, taxes, depreciation and amortization generated by theproperties that collateralize the facility. Borrowings under the facility are secured by a negative pledge on theproperties and a pledge of the Company’s equity interests in the subsidiarieswhich own the borrowing base properties. Borrowings under the new facility will be used to repay the debt on theoriginal facility, fund property acquisitions and for general corporatepurposes.

 

**Redemption of Highland Joint Venture Preferred Partnership Interests**

 

OnNovember 4, 2003, the Company redeemed the $52.8 million partnershipinterest in one of its operating partnerships, USRP/HCI Partnership 1, L.P.,that was owned by an affiliate of Bank of America. In conjunction with the newrevolving credit facility, the commitment from Bank of America also providedfor a term loan facility in the amount of $35.0 million to partially fund theredemption of the partnership interest. The remaining $17.8 million required toredeem the interest was paid with cash, including cash generated from the issuanceof additional shares of the Company’s series A preferred stock to an affiliateof Bank of America.

 

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**HawaiiTerm Loan**

 

The Company has receiveda non-binding indication of interest from, and is in the process of negotiatingdefinitive documents with First Hawaiian Bank to provide a $12.0 millionsecured term loan facility.  Borrowingsunder this facility would bear interest at either LIBOR plus 250 basis points,or 50 basis points over the lender’s prime rate, at the Company’s option.  Principal amounts outstanding would beamortized over a 15-year period but would mature on the eighth anniversary ofthe date of funding.  This facilitywould be secured by certain of the Company’s properties in Hawaii. Borrowingsunder the term loan facility will be used to fund new property acquisitions,pay down other debt and for general corporate purposes.

 

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**Item 2.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Management’s discussionand analysis of financial condition and results of operations are based uponthe Company’s consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of theseconsolidated financial statements requires management of the Company to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosures of contingentassets and liabilities.  On a regularbasis, the Company evaluates these estimates, including asset impairments andprovision for doubtful accounts. Management’s estimates are based on historical experience and on variousother assumptions that are believed to be reasonable under thecircumstances.  Actual results maydiffer from these estimates.

 

**Results of Operations**

** **

Real estate rentalrevenues are derived primarily from leasing the Company’s properties (primarilybranded chain 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 47.1% of theCompany’s leases provide for a base rent plus a percentage of the sales inexcess of a threshold amount.  As aresult, portions of the Company’s revenues are a function of the number ofproperties in operation and their level of sales.  Sales at individual properties are influenced by local marketconditions, the efforts of specific operators, marketing, new product programs,support of the franchisor and the general state of the economy.

 

***Comparison of the three months endedSeptember 30, 2003 to the three months ended September 30, 2002***

 

**Revenues**

 

Revenuesfrom real estate properties consist of rental revenues, tenant expensereimbursements, lease termination fees and interest on mortgage loans.  Revenue from retail operations is derivedprimarily from service properties operated by the Company, including gasolineservice stations and car washes, as well as from convenience store sales.  For the three months ended September 30,2003, revenues increased $5.3 million, or 19.5%, to $32.2 million.  The change was primarily attributable to thefollowing:

 

•                  an increase of$5.5 million, or 53.5%, to $15.7 million in retail operations which relatedprimarily to revenue growth in fuel sales, including an increase of  $4.6 million in the Company’s Hawaii servicestation operations.  The nature of theCompany’s retail operations causes a relatively high number of ownershipchanges, as well as numerous acquisitions and dispositions, making it difficultto utilize a same store measure that presents meaningful information. Onemeasure of store performance utilized by the Company relates to the number ofmonths that the stores are open for business in each period.  During the 2003 third quarter, there wereeight additional store months in Hawaii compared to the prior yearquarter.  There was also a greaternumber of service stations operated by the Company compared to the prior yearperiod, including the remaining unsold Fina stores, which the Company beganoperating after a lease termination in February 2003;

•                  an increase of$0.2 million, or 1.2%, to $15.1 million in rental income due primarily to:

•                  an increase of$0.4 million in base rents attributable to an increase in the number of newleases entered into over the prior 12 months which related to the period endedSeptember 30, 2003; and

•                  a decrease of$0.2 million in percentage rents, primarily attributable to lower sales atBurger King units.

 

These increases are partiallyoffset by a decrease of $0.6 million, or 49.6%, in interest on mortgage loans,due primarily to a $23.1 million decline in the Company’s mortgage loansreceivable portfolio, which included $12.0 million of Captain D’s mortgageloans which were tendered for the purchase of 15 Captain D’s properties in thesecond quarter.

 

 

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**Expenses**

 

Expenses increased $8.1million, or 46.9%, to $25.4 million for the three months endedSeptember 30, 2003.  The increasewas primarily attributable to the following:

 

•                  anincrease of $4.9 million, or 57.3%, to $13.4 million in retail cost of salesdue to increased number of store months and sales volumes during the period,particularly in Hawaii, and to the inclusion of operations of the remainingunsold Fina stores, which the Company began operating after a lease terminationin February 2003;

•                  an increase of$1.5 million in impairments of long-lived assets due to the revaluation of 19properties to their

estimated fairvalues.  Impairment charges result whenthe Company determines from its regular analysis of real property assets thatcircumstances indicate the book value of an asset may not be fullyrecoverable.  As part of this regularanalysis, any time a property is marketed for sale at a price less than netbook value, an impairment charge is immediately recognized.  Of the Company’s third quarter impairmentcharges, approximately $0.8 million resulted from this analysis. The remaining$0.7 million resulted in part from a $0.3 million charge related to a workoutagreement with a multi-unit tenant during 2002. Under the terms of thisagreement, the Company may be able to fully recover the outstanding balancesdue, which would then require the Company to recognize gains or impairments oneach specific property as the settlement agreement is executed. The remaining$0.4 million resulted from an analysis of short-lived ground leases on whichthe tenant had vacated.  Since ownershipof the building and any fixtures typically reverts to the landowner at theexpiration of a ground lease, it was unlikely that the Company would find atenant for the property due to the brevity of the remaining ground leaseterm.  Accordingly, managementrecognized an impairment for the remaining asset value for the fixtures on theground leases. No impairment expense was recorded in continuing operations forthe prior year period;

•                  an increase of$0.8 million, or 16.7%, to $5.8 million in depreciation and amortization dueprimarily to a full quarter’s depreciation on the 51 Shoney’s and Captain D’sacquired in the prior year and the 22 Shoney’s and Captain D’s acquired throughSeptember of 2003;

•                  an increase of$0.5 million, or 96.2%, to $0.9 million in legal expenses due to higher costs,particularly costs related to a branding assurance suit and to another pendingcase; and

•                  a net increaseof $0.4 million, or 13.0%, to $3.8 million in various accounts mostlyattributable to an increase in the provision for doubtful accounts and higherground rent and property expenses.

 

Gainson sales of property for the three months ended September 30, 2003 were$3.6 million resulting from the sale of 25 properties, compared to gains of$1.0 million for the prior year quarter from the sale of 10 properties. Thesegains are reflected in the Company’s Unaudited Condensed ConsolidatedStatements of Operations as “Income from discontinued operations” in accordancewith the requirements of SFAS No. 144.

 

Non-operating incomedecreased $0.2 million due primarily to the 2002 liquidation of the Company’strading securities and to gains on the sale of securities in 2002.

 

Interest expense decreased $1.0million, or 17.5%, to $4.6 million due to a lower overall notes payable balanceoutstanding, as well as lower interest rates in 2003 compared to 2002.

 

Income from discontinued operationswas $4.3 million for the three months ended September 30, 2003. Inaccordance with SFAS No. 144, discontinued operations represent the operationsof properties sold, as well as any gain or loss recognized on theirdisposition.  The operating results relateto the sale of 62 properties during the nine months ended September 30,2003 and 46 properties during the twelve months ended December 31, 2002and is reflected in the Company’s Unaudited Condensed Consolidated Statementsof Operations as “Income from discontinued operations.”

 

*Comparison of the nine months ended September 30,2003 to the nine months ended September 30, 2002*

 

**Revenues**

 

Revenues from real estateproperties consist of rental revenues, tenant expense reimbursements, leasetermination fees and interest on mortgage loans.  Revenue from retail operations is derived primarily from serviceproperties operated by the Company, including gasoline service stations and carwashes, as well as from convenience store

 

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sales.  For the nine months ended September 30,2003, revenues increased $18.5 million, or 24.0%, to $95.3 million compared tothe corresponding prior year period. The increase is primarily attributable tothe following:

 

•                  an increase of$16.9 million, or 63.5%, to $43.5 million in retail operations which relatedprimarily to revenue growth in fuel sales, including an increase of $14.5million in the Company’s Hawaii service station operations.  During the nine months endedSeptember 30, 2003, there were 35 additional store months in Hawaiicompared to the same prior year period. Store months for non-Hawaii operations also increased. There were326  store months based on an average of36 stores open during the period, compared to 279 based on an average of 31stores open during the same prior year period. There was also a greater number of service stations operated by theCompany compared to the prior year period, including the remaining unsold Finastores, which the Company began operating after a lease termination inFebruary 2003;

•                  an increase of$1.6 million in lease termination fee income, due almost entirely to theFebruary 2003  termination of Finastation leases in the Dallas/Fort Worth, Texas area; and

•                  an increase of$0.2 million in tenant expense reimbursements, due to a higher average perstore value for ground leases for which reimbursements were received in2003.  The average per storereimbursement in the first nine months of 2003 was $32,300 for 79 storescompared to $29,239 for 81 stores for the corresponding prior year period.

 

**Expenses**

 

Expenses increased$19.6 million, or 38.8%, to $70.2 million compared to the prior yearperiod.  The increase was primarilyattributable to the following:

 

•                  an increase of $14.7 million, or65.3%, to $37.2 million in cost of sales due to increased sales volumes andstore months, particularly in Hawaii, and to the inclusion of operations of theremaining unsold Fina stores, which the Company began operating after a leasetermination in February 2003.  Theincreased volumes resulted from an increase to 36 stores operated from 31 inthe same prior year period and from an increase to 326 months from 279 in thesame prior year period;

•                  an increase of $1.8 million inimpairments of long-lived assets due to the revaluing of 33 assets to theirestimated fair value. Of the Company’s impairment charges of $2.3 million inthe nine months ended September 30, 2003, approximately $1.5 millionrelated to the third quarter as discussed on the prior page.

•                  an increase of$1.8 million, or 14.8%, to $14.2 million in various accounts mostlyattributable to an increase in the provision for doubtful accounts and higherground rent, partially offset by lower property taxes; and

•                  an increase of$1.3 million, or 8.3%, to $16.4 million in depreciation and amortization dueprimarily to nine months’ depreciation on the 51 Shoney’s and Captain D’sacquired in the prior year and the 22 Shoney’s and Captain D’s acquired throughSeptember of 2003;

 

Retail operations areadministered by Fuel Supply, Inc. (“FSI”), a wholly-owned subsidiary of USRPHolding Corp. (“Holding”).   Holding isa taxable REIT subsidiary of U.S. Restaurant Properties, Inc..  FSI has incurred net operating losses(“NOLs”) since inception.  The Companyrecognized a deferred tax benefit in 2002 of approximately $0.1 millionassociated with these NOLs, which management believes may be used to offset anyUSRP (S&C), LLC and USRP (Hawaii), LLC taxable income.

 

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Income from discontinuedoperations was $10.4 million for the nine months ended September 30, 2003.These results relate to the sale of 62 properties during the nine months endedSeptember 30, 2003 and 46 properties during the twelve months endedDecember 31,2002, and are reflected in the Company’s Unaudited CondensedConsolidated Statements of Operations as “Income from discontinued operations.”

 

Minority interests in earningswere $3.5 million for the nine months ended September 30, 2003 and 2002,respectively, and are related to the Highland Joint Venture preferredpartnership interests and the OP Units outstanding at September 30, 2003.

 

Non-operating income was$29,000 and $0.8 million for the nine months ended September 30, 2003 and2002, respectively.  The decrease wasprimarily due to the 2002 liquidation of the Company’s trading securities andto the gains on sale of securities in 2002.

 

Interest expense decreased $1.0million, or 5.9%, to $15.7 million during the period due to:

•                  $1.3million decrease in interest expense due to a lower notes payable balanceoutstanding, as well as lower interest rates in 2003 compared to 2002;

•                  $0.4 milliondecrease in derivative settlement payments; offset by

•                  $0.4 millionincrease for the fair value of interest rate derivatives; and

•                  $0.3 millionincrease in amortization of loan origination fees.

 

On January 1, 2003,the Company adopted SFAS No. 143, “Accounting for Asset RetirementObligations,” which addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  As a result ofadopting SFAS No. 143, the Company recognized a $0.3 million charge in theCompany’s Unaudited Condensed Consolidated Statements of Operations as“Cumulative effect of change in accounting principle” on January 1,2003.  This retirement obligationrelates to the estimated future costs for the removal of tanks, fuel lines andother required modifications to the Company’s gas stations.

 

 

**Liquidity and Capital Resources**

 

 

CASH FLOWS
| **(in thousands)**                              |   | **For the nine  months ended  September 30, 2003** |   |
|-------------------------------------------------|--------|---------------------------------------------------------|--------|
|                                            |   |                                                    |   |
| Cash flows provided by  operating activities    |   | $                                                       | 32,448 |   |
| Cash flows provided by  investing activities    |   | 37,269                                                  |   |
| Cash flows used in financing  activities        |   | (69,461                                                 | )      |
|                                            |   |                                                    |   |
| Increase in cash and cash  equivalents          |   | $                                                       | 256    |   |
| Cash and cash equivalents,  beginning of period |   | 4,392                                                   |   |
|                                            |   |                                                    |   |
| Cash and cash equivalents, end  of period       |   | $                                                       | 4,648  |   |

 

OPERATING ACTIVITIES

 

The Company’s principalsources of cash to meet its working capital and dividend requirements arerental revenues generated by the Company’s properties and operating revenuesfrom the Company’s retail segment.

 

Cash flows provided byoperating activities of $32.4 million was attributable to the real estate andretail operations.

 

INVESTING ACTIVITIES

 

Cash generated in excess ofoperating requirements and dividend payments is generally used to acquireadditional properties or to reduce amounts outstanding under the Company’scredit agreement.

 

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The Company’s cash flowsprovided by investing activities of $37.3 million was primarily attributableto:

 

•                  $35.1 million ofnet proceeds from property sales;

•                  $11.7 million ofproceeds from paydowns on mortgage loans receivable; and

•                  $2.2 million ofproceeds from paydowns on notes receivable.

 

The cash flows used ininvesting activities was partially offset by:

 

•                  $11.0 millionfor the acquisition of rental properties and equipment; and

•                  $0.8 millionincrease in restricted cash and marketable securities, of which $0.6 millionrelated to restricted cash collateralizing two letters of credit and $0.2million related to additional marketable securities.

 

FINANCING ACTIVITIES

 

The Company’s cash flows usedin financing activities of $69.5 million was attributable to:

 

•                  $57.0 million in payments resultingin a decrease in notes payable, primarily related to the payoff of theCompany’s $47.5 million senior unsecured notes, and a $9.5 million payment onthe variable rate certificates;

•                  $34.0 million of repayments under theCompany’s line of credit;

•                  $19.7 million in Common Stockdividend distributions;

•                  $5.6 million in Preferred Stockdividend distributions; and

•                  $3.6 million in distributions to minorityinterest stockholders.

 

 

The Company’s cash flows fromfinancing activities was partially offset by:

 

•                  $35.0 million ofproceeds from borrowings under the Company’s line of credit;

•                  $14.7 million,net of placement fees of approximately $1.3 million, of proceeds from theSeries B convertible preferred stock offering and the Series B warrants; and

•                  $1.0 million ofproceeds from the sale of stock and exercised stock options.

 

LIQUIDITY REQUIREMENTS

 

The Company expects to spendapproximately $18,000 during the remainder of 2003 to renovate and remodelcurrently owned properties.  Managementexpects to meet its short-term liquidity requirements consisting of normalrecurring operating expenses, debt service requirements, property improvementsand distributions to stockholders primarily through cash flows provided fromreal estate and retail operations.  Tothe extent the Company’s cash flow from real estate and retail operatingactivities is not sufficient to finance such short-term liquidity requirements,the Company may utilize its credit facility. As of September 30, 2003, the funds available to the Company underthe credit facility were $139,000.  TheCompany’s long-term liquidity requirements as of September 30, 2003consist primarily of debt maturing after September 30, 2003, totalingapproximately $269.7 million, which includes maturities throughAugust 2006. The Company expects to meet these long-term liquidityrequirements primarily through long-term secured and unsecured borrowings, otherdebt and equity financing alternatives, as well as cash proceeds received fromthe sale of properties.

 

During the third quarterof 2003, the Company paid in full the $47.5 million senior unsecured notebalance.

 

 

***Status ofFinancially Troubled Tenants and Legal Proceedings***

 

 

**Fina**

 

In February 2002,the leasehold lender of 51 Fina stations in the Dallas/Ft. Worth area assumedthe defaulting tenant’s interest in the lease and took over operations from thebankrupt tenant. As of December 31, 2002, there was $2.6 million owed tothe Company under the leases, representing pre-assumption property taxes, forwhich the

 

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Company had reserved $0.8million. Effective in February 2003, the Company entered into a leasetermination agreement and received a lease termination fee of $3.4 million, aportion of which was applied to outstanding receivable balances, with theremaining $1.7 million recorded as lease termination fee revenue.  The Company also, through its subsidiary FSI,purchased equipment for approximately $2.2 million, gas and convenience storeinventory from the tenant at an agreed-upon cost of $2.9 million, and took overthe operation of 25 of these Fina stations. The remaining 26 properties were temporarily closed.  As of September 30, 2003, 21 stationshad been re-leased, 14 stations had been sold and two leasehold properties werereturned to the property owners.  Of theremaining 14 properties, nine are fee-owned and five are leaseholds.  Of the nine fee properties, FSI is operatingfour and five are vacant. Of the remaining leaseholds, FSI is operating threeand two are vacant.  During the ninemonths ended September 30, 2003, impairment charges of $1.0 million wererecognized from revaluing 14 Fina stations to their estimated fair value.

 

**Lyon’s of California**

 

AtSeptember 30, 2003, the Company had $2.9 million of mortgage loansreceivable from Lyon’s of California, Inc. (“Lyons”).  The loans were secured by certain Lyons restaurant properties andpartially guaranteed by ICH Corporation (“ICH”), the former owner ofLyons.  The Company also held a $0.1million note receivable from ICH which was written off during the 2003 thirdquarter. Sybra, Inc. (“Sybra”), a former wholly-owned subsidiary of ICH, is thelessee of 58 of the Company’s Arby’s restaurants, making it the Company’slargest tenant.

 

Dueto the 2001 Lyons and ICH bankruptcy filings, the Company recorded an allowancefor doubtful accounts of $2.5 million and $0.3 million on balances due fromLyons and ICH, respectively, during the year ended December 31, 2001.  Interest income associated with these noteshas not been recognized since September 2001.  All of these notes are valued based on the estimated fair valueof the collateral, as collateral disposal is the only means through which theCompany will collect proceeds.  Sincethe inceptions of the notes, through September 30, 2003, the Company hasreceived $6.9 million in proceeds from the liquidation of this collateral,including $3.6 million in April 2003, which is primarily associated withthe ICH guarantee.  As a result of theseevents, the fair value of the collateral supporting these notes has become morecertain.  The allowance on the Lyonsnotes was reduced from $2.5 million to $0.6 million during the year endedDecember 31, 2002.  The Companyfurther reduced the allowance on the Lyons and ICH notes by $0.5 million duringthe first nine months of 2003.

 

**Embers**

 

During 2002, a significanttenant/mortgagee, Embers, experienced financial difficulty, and the Companyexecuted a workout agreement whereby Embers would sell all of its real estate,including fee properties owned by the Company that were leased to the tenant,and would remit all net proceeds to the Company until 100% of all mortgageloans, accrued interest, real estate taxes, rent receivables, late fees andother costs had been recovered. Interest income associated with these loans hasnot been recognized since December 2002. During 2002, the Company received approximately $1.5 million of cashfrom these sale transactions to partially repay its mortgage notes.  During 2003, the Company received $2.8million in cash from the sale of four of the fee-owned properties, andrecognized a gain on sale of $1.3 million. Each quarter, the Company individually evaluates all of its mortgageloans and real estate associated with this tenant to determine if any asset hasbeen impaired.   As a result of thisevaluation, a $0.5 million impairment was recognized on the Embers-relatedassets during the first nine months of 2003, of which $0.3 million wasrecognized in the third quarter. At September 30, 2003, the Company heldmortgage loans receivable of $2.6 million, net book value of real estate andequipment of $0.7 million and rent receivables and other assets of $1.8 millionrelated to Embers.

 

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**Alon USA, L.P.**

 

During the first quarter of2003, the Company filed a lawsuit against Alon USA, L.P. (“Alon”), the owner ofthe Fina brand.  The Company terminated thetenant’s leasehold interest during February 2003 for 51 Fina servicelocations, and immediately closed 26 of them. Alon counter-claimed against the Company, alleging that pursuant to aBranding Assurance Agreement entered into with the Company, these gas stationsmust be continuously operated selling Fina branded gasoline.  The Company’s suit maintained that theBranding Assurance Agreement only required open and operating stations toremain under the Fina brand during the Company’s ownership period, and that theCompany had a right to sell the properties for other than Fina branded gasolinestations.  The Company disputed Alon’sposition and did not reopen several of the stations and sold two stations forother than Fina branded gasoline stations.

 

Effective August 22, 2003,a Settlement Agreement and Mutual Release (the “Settlement Agreement”) wasexecuted between the parties. The Agreement expires on December 31, 2008,after which time the Company is no longer under an obligation to maintaincontinuously operating stores under the Fina brand.

 

Summarized below aresignificant terms of the Settlement Agreement.

 

•                  For eachproperty covered under the Settlement Agreement, a partial “release price,” asdefined, is due Alon for stores which do not remain open and operating underthe Fina brand since the inception of the branding assurance agreement.

•                  USRP paidapproximately $0.3 million at closing which included approximately $0.2 millionfor the release of five stores and approximately $39,000 for days that storeswere closed through the effective date of the Settlement Agreement,August 22, 2003.

•                  USRP has anobligation for future payments, or release prices as defined in the SettlementAgreement, in the event stores do not remain open and operating under the Finabrand.

•                  In the event ofa sale of a store, USRP may contractually require the purchaser to assumeresponsibility for the branding assurance agreement and the release price.

•                  If the new ownerdefaults on the agreement with USRP to maintain a continuously operating storeunder the Fina brand, USRP would be directly responsible for the release pricepayment to Alon.  However, if thisoccurs, the Company would seek recourse against the defaulting owner.  As a result, the Company does not expect to havea significant obligation under the Settlement Agreement for the remainder ofits term.

 

In addition, for thosestores retained by the Company and those leased to tenants, the Company intendsto utilize the Fina brand until the term of the branding agreement expires.

 

**Motel Enterprises, Inc.**

 

Prior to 2001, the Company losta case at the trial court level. After a judgment of specific performance wasentered against the Company for a total of $0.6 million plus interest andattorneys’ fees, USRP posted an $0.8 million bond and appealed the damage awardof the trial court, arguing that the court provided erroneous instructions asto the measure of damages and improperly excluded the Company’s expertwitness.  During 2001, USRP wrote off$0.4 million for this case, believing that the underlying note had sufficientvalue to cover the remainder of the judgment. USRP prevailed on appeal and the judgment was reversed and remanded fora new trial.  A verdict was again issuedagainst the Company.  The case was thenappealed to the Supreme Court of Texas. Late in the third quarter of 2003, the State Supreme Court declined tohear the case, whereupon the Company immediately filed a petition forre-hearing.  Based on this most recentdeclination by the courts, and even though no ruling has been made on the mostrecent petition, the Company further evaluated the note and has determined thatcollectibility is unlikely.  Managementtherefore charged off the remaining amount under the judgement.

 

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***Company Debt andDerivatives***

 

In May 2002, theCompany entered into a Credit Agreement with Bank of America (“BOA”) (the“Credit Agreement”), through its subsidiary USRP Funding 2002-A, L.P., for asecured line of credit of $35.0 million which is subject to a DerivativeExposure Reserve and a Borrowing Base, as defined.  Borrowings under this facility are used primarily to acquirecertain Shoney’s and Captain D’s properties in purchase/leaseback transactions.This credit facility is secured by the capital stock of USRP Funding 2002-A,L.P and USRP (S&C), LLC, wholly-owned subsidiaries of the Company.  The Credit Agreement, as originallystructured, had a term of up to two years and allowed for Base Rate Loans,Eurodollar Loans or a combination of the two. Base Rate Loans bear interest at 3.0% plus the higher of the FederalFunds Rate plus 0.5% or the Prime Rate. Eurodollar Loans bear interest at 3.0% plus LIBOR.  The Credit Agreement also provided that upto $10.0 million of the facility could be used for letters of credit.  There was a 3.0% fee per annum onoutstanding letters of credit as well as a 3.0% Derivative Exposure Usage Feeunder this facility.  As ofSeptember 30, 2003, the Company had $2.1 million letters of credit outstanding and drawn under thisfacility.   During 2003, the Companyexecuted various extensions and modifications to this Credit Agreement as itnegotiated a new credit facility.  Onemodification extended the Company’s $30.0 million borrowing capacity throughNovember 17, 2003. As of September 30, 2003, funds available underthe Credit Agreement were approximately $139,000.  On November 4, 2003, the Company replaced its line ofcredit, and on November 7, 2003, funds available under the new line ofcredit were $3.5 million.  See Note 11,“Subsequent Events,” for additional information.

 

In 1998, the Company issued$47.5 million in senior notes in a private placement which were originallyscheduled to mature on August 1, 2003. On July 1, 2003, the Company prepaid $23.8 million of thenotes.  In connection with thisprepayment, the Company paid $0.8 million in accrued interest and incurred amake-whole interest payment of $137,000. The Company repaid the remaining balance on July 29, 2003.

 

The Company is incompliance with all covenants associated with its debt and credit facilities asof September 30, 2003.

 

Derivative financialinstruments are utilized by the Company to manage its exposure to market risksfrom changes in interest rates.  TheCompany’s derivative financial instruments include interest rate swaps andinterest rate collars, in which the Company receives variable payments based onan appropriate LIBOR index. The Company expects to make approximately $2.8million in derivative settlement payments over the next 12 months.

 

Management believes thatcash flow from operations, along with the Company’s ability to raise additionalequity, anticipated sales of properties, funds available under the CreditAgreement and the Company’s anticipated ability to obtain financing willprovide the Company with sufficient liquidity to meet its foreseeable capitalneeds.  However, there can be noassurance that such additional financing will be available at the time the Companyneeds it or the terms of anticipated financing will be as favorable to theCompany as under the existing facilities.

 

**Funds From Operations (FFO)**

 

The Company believes thesupplemental non-GAAP measure FFO is a useful indicator of operatingperformance and that it is most directly comparable to GAAP net income.   Management uses FFO as a supplementalmeasure to conduct and evaluate the business because there are certainlimitations of utilizing GAAP net income by itself as the primary measure ofour operating performance.  Historicalcost accounting for real estate assets in accordance with GAAP requires thatthe value of real estate assets be depreciated.  Since real estate values instead have historically risen orfallen with market conditions, the presentation of operating results for real estatecompanies that use historical cost accounting is insufficient by itself.  As a result, the National Association ofReal Estate Investment Trusts (“NAREIT”) created FFO as a supplementalperformance measure that excludes historical cost real estate depreciation,among other items, from GAAP net income. The Company’s FFO is computed as net income (loss) available to commonstockholders (computed in accordance with accounting principles generallyaccepted in the United States of America), plus real estate relateddepreciation and amortization, excluding gains (or losses) from sales ofproperty, cumulative effects of changes in accounting principles, andincome/loss allocable to minority interest holders.  The Company believes that the use of FFO, combined with therequired primary GAAP presentations, has improved management’s and theinvesting public’s understanding of REIT operating results.  Further, the use of FFO has made comparisonsof those results more meaningful and has enabled the evaluation of theCompany’s operating performance compared to other REITs that use the NAREITdefinition in order to make more informed business

 

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decisions based on industrytrends or conditions. Therefore, the Company considers FFO a useful measure forreviewing its comparative operating and financial performance because, byexcluding gains or losses related to sales of previously depreciated operatingreal estate assets and excluding real estate asset depreciation andamortization, FFO assists in the comparison of the operating performance ofreal estate between periods or as compared to other REITs.  Other REITS may use a difference definitionof FFO.

 

The following table setsforth, for the three and nine months ended September 30, 2003 and 2002,the reconciliation of funds from operations to net income.

 
|                                                               |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|--------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
| **(in thousands)**                                                 |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Funds from operations allocable  to common  stockholders - diluted |   | $                                          | 5,413  |                                      | $      | 7,345 |   | $ | 17,202 |   | $ | 18,925 |   |
| Loss (income) allocable to  minority interest                      |   | (36                                        | )      | 6                                         |   | (36 | ) | (6 | ) |
| Gain on sales of property                                          |   | 3,571                                      |   | 979                                       |   | 10,275 |   | 2,253 |   |
| Depreciation and amortization                                      |   | (5,813                                     | )      | (5,349                                    | )      | (16,884 | ) | (16,524 | ) |
| Cumulative effect of change in  accounting principle               |   | —                                     |   | —                                    |   | (270 | ) | — |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Net income allocable to common  stockholders                       |   | 3,135                                      |   | 2,981                                     |   | 10,287 |   | 4,648 |   |
| Preferred stock dividends                                          |   | 2,185                                      |   | 1,776                                     |   | 5,736 |   | 5,327 |   |
|                                                               |   |                                       |   |                                      |   |   |   |   |   |
| Net income                                                         |   | $                                          | 5,320  |                                      | $      | 4,757 |   | $ | 16,023 |   | $ | 9,975 |   |

 

**Inflation**

 

Some of the Company’sleases are subject to adjustments for increases in the Consumer Price Index,which reduces the risk to the Company of the adverse effects of inflation.  Additionally, to the extent inflationincreases sales volume, percentage rents may tend to offset the effects ofinflation.  Because triple net leasesalso require the property operator to pay for some or all operating expenses,property taxes, property repair and maintenance costs and insurance, some orall of the inflationary impact of these expenses will be borne by the propertyoperator and not by the Company.

 

**Seasonality**

 

Restaurant operationshistorically have been seasonal in nature, reflecting higher unit sales duringthe second and third quarters due to warmer weather and increased leisuretravel.  This seasonality can beexpected to cause fluctuations in the Company’s quarterly revenue to the extentit earns percentage rent.

 

**Risks Associated with Forward-Looking Statements included in this Form10-Q**

 

Certain statements contained inthis Form 10-Q, including without limitation statements regarding theobjectives of management for future operations and statements containing thewords “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,”“expect” and similar expressions, are forward-looking statements within themeaning of the federal securities laws. Such forward-looking statements are subject to known and unknown risks,uncertainties and assumptions which may cause the Company’s actual results,performance or achievements to differ materially from those anticipated orimplied by the forward-looking statements. The Company disclaims any obligation to update any such statements orpublicly announce any updates or revisions to any of the forward-lookingstatements contained herein to reflect any change in the Company’s expectationwith regard thereto or any change in events, conditions, circumstances orassumptions underlying such statements. Reference is hereby made to the disclosures contained in the Company’sfilings with the Securities and Exchange Commission, including, but not limitedto, the disclosures under the headings “Risk Associated with Forward-LookingStatements included in this Form 10-K” and “Factors Affecting the Company’sBusiness and Prospects” in Item 1, “Business,” of the Company’s

 

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Annual Report on Form 10-K, asamended, for the year ended December 31, 2002 and the Form 8-K, asamended, filed August 18, 2003 with the Securities and ExchangeCommission.

 

**Item 3.****           Quantitativeand Qualitative Disclosures About Market Risk**

** **

The Company is exposed tocertain market risks that arise in the ordinary course of business. The Companymay enter into derivative financial instrument transactions to manage or reducemarket risk, but does not enter into derivative financial instrumenttransactions for trading purposes, nor does the Company have any foreignoperations and thus is not exposed to foreign currency fluctuations. Adiscussion of the Company’s primary market risk exposure is presented below.

 

**Market Risk on Investments**

The fair value of the Company’sinvestments would be negatively affected by a decrease in interest rates as themajority of the investments are interest-bearing, and therefore subject to themarket risk of loss from a decline in interest rates which could impact futureearnings and cash flows.  However, theCompany’s investment portfolio of $2.9 million is relatively small, and changesin value relating to market risks would not significantly impact the Company’soperations.  The Company also hasinvestments 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.

 

**Market Risk on Variable Rate Debt**

The Company’s interestrate risk is sensitive to interest rate changes on its variable rate debt.  The Company had total outstanding debt of$297.1 million at September 30, 2003, of which approximately $184.7million was variable rate debt.  Of thisamount, $66.4 million, or 36.0% was unhedged. All other things being equal, theinterest expense on the Company’s unhedged variable rate debt will decrease asinterest rates decline and will increase as rates rise.  This exposure to interest rate risk isgenerally managed using derivative financial instruments such as interest rateswaps in conjunction with a portion of the Company’s variable rate debt tomitigate the interest rate risk on an associated financial instrument or tolock in an interest rate on its variable rate debt under its Credit Agreementwith Bank of America and its Triple Net Lease Mortgage Certificates.  As it relates to unhedged variable ratedebt, if market interest rates average 1.0% more than in 2002, the impactrelated to additional annual interest expense would decrease net income andcash flows by $0.5 million for 2003. This amount was determined by calculating the effect of a hypotheticalinterest rate on our unhedged variable rate debt.  This sensitivity analysis assumes that there are no changes inthe Company’s financial structure. Management believes the fair value of its variable rate debt equals itscarrying value as of September 30, 2003.

 

**Market Risk on Fixed Rate Debt**

The Company’s long-termfixed interest rate debt is also subject to market risk.  Fixed rate debt outstanding atSeptember 30, 2003 was $112.4 million with a weighted average interestrate of 7.2%. All other things being equal, the fair market value of theCompany’s fixed interest rate debt will increase as rates decline and willdecrease as rates rise.  $47.5 millionof the Company’s total fixed rate debt was paid in full before itsAugust 1, 2003 due date, thus reducing the fixed rate market risk on thatportion of the Company’s debt portfolio. None of the liquidated debt was replaced with additional fixed ratedebt; however, a portion of the payoff was made with borrowings under theCompany’s variable rate line of credit. All of the fixed rate debt isunhedged.  As it relates to the unhedgedfixed rate debt, if annual market interest rates average 1.0% more than in2002, the impact related to the fair market value of the unhedged fixed ratedebt $1.1 million for 2003.  This amountwas determined by calculating the effect of hypothetical interest rate changeson our remaining unhedged fixed rate debt. This sensitivity analysis assumes that there are no changes in theCompany’s financial structure. Management believes the fair value of its fixed rate debt equals itscarrying value as of September 30, 2003.

 

**Item 4.****          ****Controlsand Procedures**

 

****The Chief Executive Officer andChief Financial Officer of the Company (its principal executive officer andprincipal financial officer) have concluded, based on their evaluation as ofSeptember 30, 2003 that, except as described below, the Company’sdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed by the Company in the reports filed or submitted by itunder the Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and include controls and procedures designed to ensure thatinformation required to be disclosed by the Company in such reports isaccumulated and communicated to the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding required****

**** ****

****35****

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**** ****

****disclosure.  In its March 2003 Letter to the AuditCommittee, the Company’s auditors noted that the Company does not have anadequate process in place to provide for a timely and accurate closing of itsaccounts, which prevents critical analysis of accounts prior to financialstatement preparation.  To address thiscomment, the Company reviewed its closing process and began making adjustmentsthat would facilitate a more timely close of the accounts for the quarterpresented herein. In addition, the Company will continue to refine its closingand analysis procedures as they relate to future quarterly and annual reportingperiods.****

 

****Except as outlined above, there were nosignificant changes in the Company’s internal control or in other factors thatcould significantly affect these controls subsequent to the date of suchevaluation, including any corrective actions in regard to significantdeficiencies and material weaknesses.****

 

 

**PARTII.**                                                OTHERINFORMATION

 

 

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

 

a)                                      Exhibits

 

Exhibit 10.1 –Fifth Amendment to Credit Agreement

Exhibit 10.2 –Sixth Amendment to Credit Agreement

Exhibit 10.3 –$50.0 million Credit Agreement dated November 4, 2003

Exhibit 10.4 –$35.0 million Term Loan Credit Agreement dated as of November 4, 2003

Exhibit 10.5 –Securities Purchase Agreement

Exhibit 10.6 –Intercreditor Agreement dated as of November 4, 2003

Exhibit 10.7 –U.S. Restaurant Properties Operating, L.P. Pledge Agreement

Exhibit 31.1 –Section 302 Certification by Robert J. Stetson Pursuant to Sarbanes-OxleyAct of

2002

Exhibit 31.2 –Section 302 Certification by Stacy M. Riffe Pursuant to Sarbanes-Oxley Actof

2002

Exhibit 32.1 –Section 906 Certification by Robert J. Stetson Pursuant to Sarbanes-OxleyAct of

2002

Exhibit 32.2 –Section 906 Certification by Stacy M. Riffe Pursuant to Sarbanes-Oxley Actof

2002

 

b)                                     Reports on Form8-K

 

A report onForm 8-K was filed with the Securities and Exchange Commission onAugust 18, 2003, as amended September 19, 2003, updating thefinancial statements included in the Company’s Annual Reporton Form 10-K, as amended, for discontinued operations that haveresulted from dispositions of real estate assets during the six months endedJune 30, 2003.

 

A report onForm 8-K dated October 13, 2003 was filed with the Securities and ExchangeCommission on October 27, 2003 reporting on the issuance of a pressrelease on October 14, 2003 disclosing the pricing of the common stockoffering and the filing of the underwriting agreement.

 

A report onForm 8-K dated November 6, 2003 was filed with the Securities and ExchangeCommission on November 7, 2003 which furnished a press release onNovember 6, 2003 announcing third quarter earnings.

 

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**SIGNATURE**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                                | U.S.  Restaurant Properties, Inc. |
|-------------------------------------|-----------------------------------|
|                                |                              |   |
|                                |                              |   |
| Dated:  November 14, 2003 | By:                               |         /s/  Stacy M. Riffe |   |
|                                |                              | Stacy M.  Riffe |
|                                |                              | Chief  Financial Officer |

 

37

 

**Indexto Exhibits**

 
| **Exhibit  Number** |   | **Description**                                                                                 |
|---------------------|--------|-------------------------------------------------------------------------------------------------|
|                |   |                                                                                            |
| 10.1                |   | Fifth Amendment to Credit Agreement                                                             |
| 10.2                |   | Sixth Amendment to Credit Agreement                                                             |
| 10.3                |   | $50.0  million Credit Agreement dated November 4, 2003                                     |
| 10.4                |   | $35.0  million Term Loan Credit Agreement dated as of November 4, 2003                     |
| 10.5                |   | Securities  Purchase Agreement                                                                  |
| 10.6                |   | Intercreditor  Agreement dated as of November 4, 2003                                           |
| 10.7                |   | U.S.  Restaurant Properties Operating, L.P. Pledge Agreement                                    |
| 31.1                |   | Section 302 Certification by Robert J. Stetson Pursuant to the  Sarbanes-Oxley Act of 2002 |
| 31.2                |   | Section 302 Certification by Stacy M. Riffe Pursuant to the  Sarbanes-Oxley Act of 2002    |
| 32.1                |   | Section 906 Certification by Robert J. Stetson Pursuant to the  Sarbanes-Oxley Act of 2002 |
| 32.2                |   | Section 906 Certification by Stacy M. Riffe Pursuant to the  Sarbanes-Oxley Act of 2002    |

 

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