ITEM 1. Business. --------- QSR Income Properties, Ltd. (the "Partnership") is a publicly held limited partnership organized on November 1, 1985 under the California Revised Limited Partnership Act. Commencing in June 1986, 100,000 units of limited partnership interest (the "Units") were offered to the public in an interstate offering. The offering was terminated on April 30, 1987 after the sale of 52,004 Units.
The Partnership was formed to invest in property for development and operation of Rocky Rococo restaurants under an agreement with Rocky Rococo Corporation ("Rocky Rococo"), an operator and franchiser of pizza restaurants. The Partnership's original general partners were Madison Pizza Corporation, a Delaware corporation ("Madison"), and B. Wayne Hughes ("Mr. Hughes"). Effective December 1, 1989, Madison resigned as a general partner and Mr. Hughes succeeded to Madison's general partner interest in a transaction approved by Limited Partners holding a majority of the Units. Madison was subsequently dissolved on December 28, 1989. Madison had been organized by Rocky Rococo and a group of individuals, including Mr. Hughes, who had been previously engaged in real estate development, management and syndication ventures not related to Rocky Rococo (the "Organizing Shareholders"). Mr. Hughes and certain other Organizing Shareholders disposed of their Madison and Rocky Rococo stock in 1989.
In 1988, Rocky Rococo and the Partnership discontinued operations in various markets because the restaurants in those markets had not operated profitably. All 23 of the Partnership's restaurants were closed because of disappointing operating results between 1988 and 1990. As of December 31, 1996, the Partnerships' facilities have been leased (or subleased) to unaffiliated restaurant operators.
In 1996 the Partnership incurred $32,000 of holding expenses for a closed restaurant. This facility was redeployed in December 1996.
Madison contributed a total of $912,000 ($561,000 in 1989 and $351,000 in 1988) to the Partnership in full satisfaction of its obligations under a contribution agreement entered into in 1988. The funds contributed by Madison were not accrued to the benefit of Madison and were used primarily for funding ongoing fixed costs and restructuring transition expenditures. Accordingly, the amount contributed was reflected in the attached financial statements as a General Partner contribution with a subsequent "equity transfer" to the Limited Partners.
Since Madison's resignation, the Partnership has been managed by Mr. Hughes. Prior to the resignation of Madison as a general partner, the Partnership was managed by the executive officers of Madison and by Mr. Hughes. The limited partners of the Partnership have no right to participate in the management or conduct of the Partnership's business and affairs.
Currently, there are four persons who render services on behalf of the Partnership on a part-time basis. These persons include accounting, administrative, clerical and real estate personnel. The persons rendering services on a part-time basis also render services on behalf of one or more corporations previously owned by Madison, other partnerships organized by Madison and other affiliated corporations and partnerships of Mr. Hughes.
The term of the Partnership is until all properties have been sold and, in any event, not later than December 31, 2040.
In November 1995, the general partner decided to place the facility assets for sale and hired an investment banker to determine the valuation of the assets and solicit offers. Based on offers to buy the assets received, the general partner determined that the carrying value of the restaurant facilities needed to be reduced to present the value of such assets at their net realizable value. Consequently, the Partnership wrote-down the carrying value of its restaurant facilities which resulted in a charge to income of $2,350,000 for the year ended December 31, 1996.
On September 16, 1996, the general partner entered into a purchase and sale agreement with US Restaurants Properties Master LP, a Delaware limited partnership and US Restaurant Properties Operating LP, a Delaware limited partnership whereby the Partnership would sell its restaurant assets to USRP Operating LP for $7,571,234 and certain of its notes receivable at a price which provides USRP Operating LP with a 13.5% yield. USRP Operating LP will pay for the purchase of the assets with limited partnership units of USRP Master LP. USRP Master LP is a New York Stock Exchange traded master limited partnership traded under the symbol "USV".
The transaction which is subject to certain contingencies, including approval by the limited partners of the Partnership is expected to close in the first half of 1997. The transaction is expected to be tax-free for most limited partners. After the sale of the Partnership assets, the Partnership expects to liquidate, distributing to the Unitholders the limited partnership interests in USRP Master LP and any cash reserves.
ITEM 2.
ITEM 2. Properties. -----------
The Partnership had developed and operated 23 restaurant properties through June 1988.
The Partnership transferred or otherwise terminated its ownership or leasehold interests in seven of its 23 properties. Of the 16 closed properties that continued to be owned or leased by the Partnership, all have been leased or subleased to unaffiliated operators. The following table sets forth information as of December 31, 1996, concerning the 16 restaurant properties (each having from 2,800 to 3,450 square feet of restaurant space) that continue to be owned or leased by the Partnership:
Set forth below are summaries of the 16 facilities currently leased to unaffiliated operators.
The restaurant located at 3846 Lafayette in Indianapolis, Indiana, which is owned by the Partnership, has been leased on a triple net basis to a Midwest pizza chain at a rate of $74,000 per year. The lease also includes a percentage rent feature with respect to incremental sales above specified levels. The lease has a term of 15 years, with two five-year renewal options.
The restaurant located at 7863 U.S. 31 South in Greenwood, Indiana, which is owned by the Partnership, has been leased to a restaurant chain for $85,000 per year. This lease provides for a 15% increase in rent every five years with two five-year renewal options.
The restaurant located at 9755 East Washington in Indianapolis, Indiana, which is owned by the Partnership, has been leased to a restaurant chain, at a rate of $74,000 per year. This lease, which became effective in February 1989, provides for a 16% base rent increase every five years with two five-year renewal options.
The restaurant located at 315 College Mall Road in Bloomington, Indiana, which is located on land leased by the Partnership, has been subleased to a Supermarket chain at a rate of $80,000 ($46,000 net to the Partnership) per year. This lease provides for a 12% increase in base rent every four years with two five-year renewal options.
The restaurant in Muncie, Indiana, which is owned by the Partnership, was leased to a restaurant chain at a rate of $58,000 per year. The lease became effective in September 1989 and provides for a 10% increase in base rent every five years with four five-year renewal options. The lease also includes a percentage rent feature with respect to incremental sales above specified levels. The restaurant located at 9200 Arapahoe Road in Green Village, Colorado, which is owned by the Partnership, has been leased to a restaurant chain for $83,000 per year. This lease provides for a 15% increase in rent every five years with one eight-year renewal option.
The restaurant located in Bloomington, Minnesota, which located on land leased by the Partnership, has been subleased to a restaurant chain for a gross rental of $82,000 ($47,000 net to the Partnership) per year. The Partnership, in its capacity as lessee, is currently paying $35,000 to the ground lessor. The sublease allows the Partnership to sell its leasehold interest at any time, although the sub-tenant has been granted a right of first refusal for any sale transaction. The terms of the sublease provide for a 9% increase in base rent every three years with two five-year renewal options. The lease also includes a percentage rent feature with respect to incremental sales above specified levels.
The restaurant located at 2130 and Cliff Road in Eagan, Minnesota, which is owned by the Partnership, has also been leased to a restaurant chain, at a rate of $78,000 per year. This lease provides for a 9% increase in base rent every three years with two five-year renewal options. The lease also includes a percentage rent feature with respect to incremental sales above specified levels.
The restaurant located at 100 Old Sugar Creek Road in Fenton, Missouri, which is owned by the Partnership, has been leased to a restaurant chain at a rate of $75,000 per year. This lease provides for a 15% increase in base rent every five years with three five-year renewal options.
The restaurant located at 1617 N. Belt West in Bellville, Illinois, which is owned by the Partnership, has been leased to a restaurant chain at a rate of $66,000 per year. The lease expires in December 1996 and provides for three five-year renewal options.
The restaurant located at 235 S. Bolingbrook Drive in Bolingbrook, Illinois, which is owned by the Partnership, has been leased to a restaurant chain, at a rate of $71,000 per year. This lease provides for a 9% increase in base rent every three years with two five-year renewal options. The lease also includes a percentage rent feature with respect to incremental sales above specified levels.
The restaurant located at 6820 E. Northwest Highway in Crystal Lake, Illinois, which is owned by the Partnership, was leased to a restaurant chain for $77,000 per year. This lease provides for a 12% increase in rent every four years with two five-year renewal options. The lease also includes a percentage rent feature with respect to incremental sales above specified levels.
The restaurant located at 500 S. Illinois Street in Belville, Illinois, which is owned by the Partnership, has been leased to a restaurant chain, at a rate of $68,000 per year. This lease provides for a 15% increase in base rent every five years with two five year renewal options.
The restaurant located at 8071 Manchester Road in Brentwood, Missouri, which is located on land leased by the Partnership, has been subleased to a restaurant chain at a rate of $48,000 ($6,000 net to the Partnership) per year. The lease expires in September 1996 and provides for two three-year and one two year renewal options. The lessee has exercised one of their three-year options extending the lease term to September 1999.
The restaurant located at 7411 122nd Avenue in Kenosha, Wisconsin, which is owned by the Partnership, has been leased to a restaurant chain for $36,000 per year. The lease provides for a 10% increase in base rent every four years with one five-year renewal option.
The restaurant located at 2880 Coon Rapids in Coon Rapids, Minnesota, which is owned by the Partnership, has been leased to a restaurant chain for $29,450 per year. The lessee has an option to purchase the property. The exercise price is $300,000 for the first year of the lease term and increases to $325,000 in the second year and $350,000 in the third year. The lease expires December 1999.
ITEM 3.
ITEM 3. Legal Proceedings. -----------------
No material legal proceedings are pending against the Partnership.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders. ----------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of 1996.
PART II
ITEM 5.
ITEM 5. Market for the Partnership's Common Equity and Related Stockholder Matters. ------------------------------------------------------------------
No public trading market exists for the units of limited partnership interest.
Exclusive of the general partner's interest in the Partnership, as of December 31, 1996, there were approximately 3,026 record holders of Units.
Distributions to the general partner and to the Partnership's Limited Partners are made quarterly based on "Cash Available for Distribution". Cash Available for Distribution is generally the sum of (i) cash funds from operations of the Partnership, without deductions for depreciation, but after deducting for capital improvements, plus (ii) net proceeds from any sale or financing of the Partnership's properties, less adequate cash reserves for other obligations of the Partnership for which there is no other provision.
The aggregate amount of distributions paid to the limited and general partners in each year since inception of the Partnership were as follows:
Limited General Partners Partner Total ------------ ---------- ------------ 1986 $ 32,000 $ 3,000 $ 35,000 1987 451,000 43,000 494,000 1988 390,000 16,000 406,000 1989 520,000 5,000 525,000 1990 520,000 5,000 525,000 1991 1,495,000 147,000 1,642,000 1992 520,000 51,000 571,000 1993 520,000 51,000 571,000 1994 1,834,000 179,000 2,013,000 1995 676,000 66,000 742,000 1996 676,000 66,000 742,000 ------------ ---------- ------------
Total $7,634,000 $632,000 $8,266,000 ========== ======== ==========
During February 1997, the Partnership made a one-time distribution of cash reserves. Each limited partner received $26.00 per unit in the distribution.
Because of the Partnership's disappointing operating results, the General Partners waived their incentive distributions associated with the Partnership's distributions to Limited Partners from the second quarter of 1988 through fourth quarter 1990.
The general partner has an 8% interest in cash distributions attributable to operations (exclusive of distributions attributable to sale and financing proceeds) until the limited partners recover all of their investment, regardless of source. Thereafter, the general partner has a 25% interest in all cash distributions (including sale and financing proceeds). At December 31, 1996 cumulative distributions to limited partners were $7,634,000; accordingly $18,368,000 of additional distributions are required to be made to the limited partners for the limited partners to recover their capital contributions.
ITEM 6.
ITEM 6. Selected financial data. -----------------------
(1) Per unit data is based on 52,004 limited partnership units outstanding during the years ended December 31, 1996, 1995, 1994, 1993 and 1992.
(2) Includes a special distribution per unit of $25.25 in 1994 to distribute excess cash reserves.
(3) Based upon offers to purchase the Partnership's properties received in 1996, the general partner determined that the carrying value of the Partnership's real estate assets should be decreased by $2,350,000 to value such real estate assets at their net realizable value. The result of offsetting this revaluation provision against the $866,000 of net income from operations before such revaluation provision for the year of 1996 is a net loss from operations for such period of $1,484,000. A net loss of $1,528,000 has been allocated to the limited partners, resulting in a loss allocation of $29.38 per unit.
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. ---------------------------------------------------------------
The Partnership's activity began in June 1986 with the offering of up to 100,000 units of limited partnership interest to the public in an interstate offering of which 52,004 units were sold.
In 1988, the Partnership commenced a program to terminate activities associated with operating its properties as Rocky Rococo restaurants and dispose of its leasehold interests and redeploy its property interests by seeking well known, unaffiliated third party lessees to lease its properties.
As of December 31, 1988, the Partnership had acquired or entered into leases for 23 properties, all of which had been fully improved. The total cost of developing the Partnership's 23 restaurant facilities was $18,231,000, which was funded entirely through offering proceeds.
During 1988 through 1990, the Partnership's 23 restaurants were closed because they were not operating profitably. (See Item 1 above for additional information regarding the closing of the Partnership's restaurants.)
As of December 31, 1996, The remaining 16 facilities have been redeployed by leasing the facilities to third party tenants.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995:
The Partnership's net income decreased $1,304,000 from a loss of $180,000 in 1995 to a loss of $1,484,000 in 1996. The decrease is primarily attributable to a write-down of $2,350,000 to record the carrying value of the Partnership's facilities at their net realizable value (see below). Excluding the write-down of restaurant facilities in 1996 and 1995, and the loss on sale of a real estate facility in 1995, the Partnership's net income increased $240,000 in 1996 over 1995. The increase was due to increase in lease income and interest income combined with a decrease in depreciation expense.
Lease income increased $33,000 or 3% from $1,062,000 in 1995 to $1,095,000 in 1996 due to scheduled escalations in lease income. Included in lease income in 1996 and 1995 is approximately $17,000 and $26,000, respectively, of additional lease income under a percentage of rent feature with respect to incremental sales above specified levels.
Interest income increased $17,000 from $88,000 in 1995 to $105,000 in 1996 due to an increase in invested cash balances in 1996 compared to 1995.
Depreciation expense decreased $190,000 in 1996 compared to 1995 as the result of the Partnership's properties being carried at net realizable value and the discontinuation of provisions for depreciation subsequent to the first quarter of 1996.
Idle facility cost decreased $14,000 from 1995 to 1996 due to cost incurred on one closed facility in 1996 compared to two closed facilities in 1995. At December 31, 1996 all facilities have been redeployed.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994:
The Partnership's net income decreased $798,000 from $618,000 in 1994 to a loss of $180,000 in 1995. The decrease is attributable to a $406,000 loss on the sale of the Partnership's Iliff, Colorado property in November 1995, and a write-down of a restaurant facility as discussed below.
Lease income increased $39,000 or 4% from $1,023,000 in 1994 to $1,062,000 in 1995 due to scheduled escalations in lease income. Included in lease income in 1995 and 1994 is approximately $26,000 and $25,000, respectively, of additional lease income under a percentage of rent feature with respect to incremental sales above specified levels.
Interest income decreased $22,000 from $110,000 in 1994 to $88,000 in 1995 due to a decrease in invested cash balances in 1995 compared to 1994. The decrease in invested cash balances is due to a special distribution in December 1994 of $1,422,000.
During 1995, the Partnership wrote-down the carrying value of the Coon Rapids, Minnesota restaurant facility to its estimated net realizable value. The restaurant facility is closed and has not yet been redeployed. The write-down resulted in a charge to income of $400,000 for the year ended December 31, 1995.
Idle facility cost increased $10,000 from 1994 to 1995 on its closed facilities (one of the two closed facilities was sold in November 1995).
LIQUIDITY AND CAPITAL RESOURCES:
For the year ended December 31, 1996, the Partnership's leasing activities generated cash flow of $922,000. Cash flow from the Partnership's leasing activities have been sufficient to meet all current obligations of the Partnership.
Management expects to continue to fund capital expenditures and quarterly distributions to partners from operating cash flow.
In connection with the leases signed, the Partnership sold the equipment and furnishings of each facility to the lessee. In connection with these sales, the Partnership received promissory notes that are fully amortized over nine years, accrue interest at 8.5%, and require annual aggregate principal installments of approximately $40,000. These notes mature in 1998 through 2000.
PROPOSED SALE OF ASSETS
In November 1995, the general partner decided to place the facility assets for sale and hired an investment banker to determine the valuation of the assets and solicit offers. Based on offers to buy the assets received, the general partner determined that the carrying value of the assets needed to be reduced by $2,350,000 to present the value of such assets at their net realizable value. Such valuation assumes costs to be incurred in the ordinary course of sale.
On September 16, 1996, the general partner entered into a purchase and sale agreement with US Restaurants Properties Master LP, a Delaware limited partnership and US Restaurants Properties Operating LP, a Delaware limited partnership whereby the Partnership would sell its restaurant assets to USRP Operating LP for $7,571,234 and certain of its notes receivable at a price which provides USRP Operating LP with a 13.5% yield. USRP Operating LP will pay for the purchase of the assets with limited partnership units of USRP Master LP. USRP Master LP is a New York Stock Exchange traded master limited partnership traded under the symbol "USV".
The transaction which is subject to certain contingencies, including approval by the limited partners of the Partnership is expected to close in the
first half of 1997. The transaction is expected to be tax-free for most limited partners. After the sale of the Partnership's assets, the Partnership expects to liquidate, distributing to the Unitholders the limited partnership interests in USRP Master LP and any cash reserves.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data. -------------------------------------------
The Partnership's financial statements are included elsewhere herein. Reference is made to the Index to Financial Statements in Item 14(a).
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. ---------------------------------------------------------------
None.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Partnership. ---------------------------------------------------
The Partnership has no directors or executive officers.
The Partnership's general partner is Mr. B. Wayne Hughes, age 63. Mr. Hughes manages and makes investment decisions for the Partnership. Mr. Hughes has been a director of Public Storage, Inc. ("PSI"), a real estate investment trust ("REIT"), since its organization in 1980 and was President and Co-Chief Executive Officer from 1980 until November 1991 when he became Chairman of the Board and sole Chief Executive Officer. Since 1990, Mr. Hughes has been Chairman of the Board and Chief Executive Officer Public Storage Properties XI, Inc., Public Storage Properties XIV, Inc., Public Storage Properties XV, Inc., Public Storage Properties XVI, Inc., Public Storage Properties XVII, Inc., Public Storage Properties XVIII, Inc., Public Storage Properties XIX, Inc., Public Storage Properties XX, Inc., (collectively, the Public Storage Properties REITs"), REITs organized by affiliates of PSI. Mr. Hughes has been active in the real estate investment field during the past 26 years.
Pursuant to Articles XVI, XVII and XXI of the Partnership's Amended Certificate and Agreement of Limited Partnership, the general partner continues to serve until (i) death, insanity, insolvency, bankruptcy or dissolution, (ii) withdrawal with the consent of any other general partner and a majority vote of the limited partners, or (iii) removal by a majority vote of the limited partners.
There have been no events under any bankruptcy act, no criminal proceedings, and no judgments or injunctions material to the evaluation of the ability of the general partner during the past five years.
ITEM 11.
ITEM 11. Executive Compensation. -----------------------
The Partnership has no subsidiaries, directors or officers. See Item 13 for a description of certain transactions between the Partnership and its general partner and affiliates.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management. --------------------------------------------------------------- (a) As of the date hereof, no person is known by the Partnership to own beneficially more than 5% of the units of limited partnership interest. (b) The Partnership has no officers and directors.
Mr. Hughes and Madison, the two original general partners, initially contributed $262,000 to the capital of the Partnership. As a result Mr. Hughes, who succeeded to Madison's general partner interest in December 1989, will participate in the distributions to all of the Partnership's partners and in the Partnership's profits and losses in the same proportion that such capital contribution bears to the total capital contributions. Mr. Hughes and Madison also contributed $912,000 to be used primarily to fund the Partnership's capital and liquidity needs during the restructuring period. (See Item 1 for additional information regarding this contribution.) Because the Limited Partners received the benefit of Madison's contribution, the amount contributed is reflected in the financial statements attached to this report as a General Partner contribution with a subsequent "equity transfer" to the Limited Partners.
(c) Except as set forth below, the Partnership knows of no contractual arrangements, the operation of the terms of which may at a subsequent date result in a change in control of the Partnership. Articles XVI, XVII and Section 21.1 of the Partnership's Amended Certificate and Agreement of Limited Partnership, provide, in substance, that the Limited Partners shall have the right, by majority vote, to remove a general partner and that a general partner may designate a successor with the consent of any other general partner and a majority of the limited partners.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions. -----------------------------------------------
The Limited Partnership Agreement provides that the general partner will be entitled to cash incentive distributions in an amount equal to (i) 8% of cash flow from operations until the distributions to all partners from all sources equal their capital contributions; thereafter, 25% of cash flow from operations, and (ii) 25% of distributions from net proceeds from sale and financing of the Partnership's properties remaining after distribution to all partners of any portion thereof required to cause distributions to partners from all sources to equal their capital contributions. Because of the Partnership's disappointing operating results, the General Partners waived their incentive distributions associated with the Partnership's distributions to Limited Partners from the second quarter of 1988 through fourth quarter 1990. In 1996, the General Partner received $59,000 in incentive distributions and $7,000 with respect to his capital contributions.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. ---------------------------------------------------------------- (a) List of Documents filed as part of the Report.
1. Financial Statements: See Index to Financial Statements and Financial Statement Schedule.
2. Financial Statement Schedules: See Index to Financial Statements and Financial Statement Schedule.
3. Exhibits: (27) Financial Data Schedule
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of fiscal 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
QSR INCOME PROPERTIES, LTD., a California Limited Partnership
Dated: March 26, 1997 By: \s\ B.Wayne Hughes ------------------ B. Wayne Hughes General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant in the capacity and on the date indicated.
Signature Capacity Date - ------------------- -------------------- ---------------- \s\ B. Wayne Hughes - ------------------- General Partner March 26, 1997 B. Wayne Hughes
QSR INCOME PROPERTIES, LTD., A California Limited Partnership
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE (Item 14 (a))
Page Reference ----------
Report of Independent Auditors
Financial Statements and Schedules:
Balance sheets as of December 31, 1996 and 1995
For the years ended December 31, 1996, 1995 and 1994:
Statements of Operations
Statements of Partners' Equity
Statements of Cash Flows
Notes to Financial Statements -
Schedule:
III - Real Estate and Accumulated Depreciation -
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements or the notes thereto.
Report of Independent Auditors
The Partners QSR Income Properties, Ltd., a California Limited Partnership
We have audited the accompanying balance sheets of QSR Income Properties, Ltd., a California Limited Partnership, as of December 31, 1996 and 1995, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the schedule listed in the index at item 14(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of QSR Income Properties, Ltd., a California Limited Partnership, at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
March 18, 1997 Los Angeles, California
See accompanying notes.
See accompanying notes.
See accompanying notes.
See accompanying notes.
QSR INCOME PROPERTIES, LTD., a California Limited Partnership
NOTES TO FINANCIAL STATEMENTS December 31, 1996
1. Summary of Significant Accounting Policies and Partnership Matters
Description of Partnership -------------------------- QSR Income Properties, Ltd., a California Limited Partnership (the "Partnership"), was formed in November 1985 to acquire, own and operate Rocky Rococo Restaurants. The offering terminated on April 30, 1987 with 52,004 units issued and outstanding, which resulted in $26,002,000 of limited partner funds being raised. During 1989, the limited partners approved the resignation of Madison Pizza Corporation ("MPC") as Corporate General Partner and the designation of B. Wayne Hughes, the Individual General Partner, to succeed to the Corporate General Partner's interest.
The Partnership operated its facilities as Rocky Rocco pizza restaurants until 1988. During 1988, the General Partners decided to discontinue restaurant operations because the restaurants had not operated profitably. The Partnership currently leases its facilities to unaffiliated third parties.
Restaurant Facilities --------------------- The cost of land includes appraisal fees, closing costs and legal fees related to the acquisition. Buildings and equipment are depreciated on the straight-line basis over their estimated useful lives of 30 years and 5 years, respectively. Buildings which are situated on leased premises are depreciated over their minimum lease term, 20 years.
In November 1995, the Partnership's Iliff, Colorado facility was sold for $382,000 resulting in a $406,000 loss on the sale of the facility. The Partnership received net sales proceeds of $352,000 net of selling cost of $30,000. The Partnership's net book value at the time of the sale was $758,000.
In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.121 ("Statement 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Statement 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Partnership adopted Statement 121 in 1996 and based on current circumstances, the Partnership wrote-down the carrying value of its real estate facilities to net realizable values (see footnote 4).
Other Assets ------------ Other assets at December 31, 1996 represent primarily capitalized costs associated with the proposed sale of the Partnership assets in 1997 (see footnote 4). The amounts will be expensed in 1997 upon consummation of the sale.
Distributions -------------
Cash distributions per unit were $13.00, $13.00, and $35.25 for the years ended December 31, 1996, 1995 and 1994, respectively. Incentive distributions to the General Partner amounted to $59,000, $59,000 and $161,000 for 1996, 1995 and 1994, respectively.
Allocation of Net Income or Loss -------------------------------- The general partner's share of net income or loss consists of a percentage of incentive distributions received, cash flow (as defined) which relates to the general partner's share of cash distributions as set forth in the Partnership Agreement. In addition, the general partner's share of net income or loss consists of amounts attributable to his 1% capital contribution. All remaining net income or loss is allocated to the limited partners.
Use of Estimates ---------------- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Reclassifications ----------------- Certain reclassifications have been made to the financial statements for the years ended December 31, 1995 and 1994 in order to conform with the 1996 presentation.
2. Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
3. Notes Receivable
As of September 30, 1988, Rocky Rococo Corporation ("RRC"), an affiliate of MPC, owed the Partnership approximately $275,000, which comprised $205,000 in unearned management fees and $70,000 in certain other advances. As RRC did not have the funds available to repay these moneys, the Partnership elected to have RRC assign to them a $275,000 interest in a secured note receivable due to RRC. The note bears interest at the prime rate plus 2% per annum (10.5% at December 31, 1996) and provides for monthly principal and interest payments through April 22, 2002, the maturity date of the note, at which time outstanding principal and accrued interest is due and payable. At December 31, 1996 and 1995 this note had a remaining balance of $108,000 and $119,000, respectively.
In connection with the sale of the Partnership's assets to USRP Operating LP, the Partnership will sell its interest in the RRC note to B. Wayne Hughes, the General Partner at its then outstanding principal balance. (See Note 4).
The Partnership has received several notes related to the sale of restaurant equipment through December 31, 1991. These notes, which total approximately $34,000, require quarterly payments, are fully amortizing and accrue interest at 8.5%. In addition, the Partnership has received one note from a lessee as partial payment of some leasehold improvements. The notes mature on various dates through 2003. The Partnership received $4,000, $5,000 and $8,000 in interest from these notes during the years ended December 31, 1996, 1995 and 1994, respectively.
Future minimum principal payments of all notes due the Partnership as of December 31, 1996 are as follows:
1997 $ 48,000 1998 45,000 1999 36,000 2000 13,000 2001 - Thereafter 60,000 ---------- $202,000 ==========
4. Restaurant Facilities and Lease Commitments / Proposed Sale of Assets
At December 31, restaurant facilities, which are recorded at net realizable value, were comprised of the following:
In November 1995, the general partner decided to place the facility assets for sale and hired an investment banker to determine the valuation of the assets and solicit offers. Based on offers to buy the assets received, the general partner determined that the carrying value of the restaurant facilities needed to be reduced to present the value of such assets at their net realizable value. Consequently, the Partnership wrote-down the carrying value of its restaurant facilities which resulted in a charge to income of $2,350,000 for the year ended December 31, 1996.
On September 16, 1996, the general partner entered into a purchase and sale agreement with US Restaurants Properties Master LP, a Delaware limited partnership and US Restaurants Properties Operating LP, a Delaware limited partnership whereby the Partnership would sell its restaurant assets to USRP Operating LP for $7,571,234 and certain of its notes receivable at a price which provides USRP Operating LP with a 13.5% yield. USRP Operating LP will pay for the purchase of the assets with limited partnership units of USRP Master LP. USRP Master LP is a New York Stock Exchange traded master limited partnership traded under the symbol "USV".
The transaction which is subject to certain contingencies, including approval by the limited partners of the Partnership is expected to close in the first half of 1997. The transaction is expected to be tax-free for most limited partners. After the sale of the Partnership assets, the Partnership expects to liquidate distributing to the Unitholders the limited partnership interests in USRP Master LP and any cash reserves.
During 1995, the Partnership wrote-down the carrying value of its Coon Rapids, Minnesota restaurant facility to its estimated net realizable value. The write-down resulted in a charge to income of $400,000 in 1995.
Equipment was fully depreciated at December 31, 1994.
Sixteen facilities owned or leased by the Company were leased or subleased to unaffiliated third parties on a triple net basis for minimum lease terms of 2 to 20 years. The minimum future lease income to be received from these operating leases is as follows:
1997 $1,093,000 1998 1,123,000 1999 1,079,000 2000 1,032,000 2001 1,015,000 Thereafter 3,583,000 ----------- $8,925,000 ===========
The Partnership is obligated under various operating leases on its closed restaurant facilities. Each of these facilities has been subleased to an unaffiliated third party. Sub-lease income under these leases was $209,000, $203,000 and $203,000 for the period ended December 31, 1996, 1995 and 1994, respectively. Lease expense incurred under these leases for the period ended December 31, 1996, 1995 and 1994 was $120,000, $121,000 and $115,000, respectively. At December 31, 1996 the Partnership had agreements for the following minimum sublease income and lease obligations (not including impact of options to extend maturity dates):
Sublease Lease Income Expense ------------ ---------
1997 $ 214,000 $ 113,000 1998 227,000 126,000 1999 213,000 129,000 2000 180,000 129,000 2001 189,000 129,000 Thereafter 442,000 884,000 ------------ ---------
$1,465,000 $1,510,000 ========== ==========
5. General Partner Equity
Initially, the general partners contributed 1% of the aggregate capital contributions of the Partnership. The general partner has an 8% interest in cash distributions attributable to operations (exclusive of distributions attributable to sale and financing proceeds) until the limited partners recover all of their investment, regardless of source. Thereafter, the general partner has a 25% interest in all cash distributions (including sale and financing proceeds). At December 31, 1996 cumulative distributions to limited partners were $7,634,000; accordingly $18,368,000 of additional distributions are required to be made to the limited partners for the limited partners to recover their capital contributions.
6. Taxes Based on Income
Taxes based on income are the responsibility of the individual partners and, accordingly, the Partnership's financial statements do not reflect a provision for such taxes. Taxable net income was $669,000, $132,000 and $549,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The difference between taxable net income and net income is primarily related to depreciation expense resulting from differences in depreciation methods and estimated reserves for net realizable value of restaurant facilities.
7. Cost of Operations
For the years ended December 31, 1996, 1995 and 1994 cost of operations were comprised of the following:
1996 1995 1994 ---------- ---------- --------
Cost of leasing $120,000 $121,000 $115,000 Other operating expenses 21,000 19,000 21,000 --------- --------- --------- $141,000 $140,000 $136,000 ======== ======== ========
8. Idle Facility Cost
Idle facility cost is primarily comprised of utility costs, building maintenance, property taxes and insurance costs of a restaurant facility that was closed until December 1996 when it was leased to an unaffiliated third party.
(1) Property is situated on land subject to a ground lease.