EXHIBIT 3.1
__________ INDEPENDENT AUDITORS' REPORT ___________
The Partners
Burger King Limited Partnership I:
We have audited the accompanying balance sheets of Burger King Limited
Partnership I (a New York limited partnership) as of December 31, 1995 and
1994, and the related statements of operations, partners' capital (deficit) and
cash flows for each of the years in the three-year period ended December 31,
1995. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Burger King Limited
Partnership I as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
February 2, 1996
Burger King Limited Partnership I
Balance Sheets
December 31, 1995 and 1994
Assets 1995 1994
Real estate at cost (Note 4):
Land $ 1,113,406 $ 1,415,906
Buildings 2,210,836 2,896,441
Fixtures and equipment 485,306 635,649
3,809,548 4,947,996
Less - accumulated depreciation (1,961,780) (2,430,394)
1,847,768 2,517,602
Cash and cash equivalents 973,641 3,128,790
Settlement escrow receivable --- 95,260
Rent receivable 65,023 99,980
Total Assets $ 2,886,432 $ 5,841,632
Liabilities and Partners' Capital
Liabilities:
Accounts payable
and accrued expenses $ 138,118 $ 250,273
Due to affiliates 1,300 1,749
Distributions payable 180,645 2,418,232
Total Liabilities 320,063 2,670,254
Partners' Capital (Deficit):
General Partner (85,088) (88,437)
Limited Partners
(15,000 interests outstanding) 2,651,457 3,259,815
Total Partners' Capital 2,566,369 3,171,378
Total Liabilities
and Partners' Capital $ 2,886,432 $ 5,841,632
Burger King Limited Partnership I
Statements of Partners' Capital (Deficit)
For the years ended December 31, 1995, 1994 and 1993
Limited General
Partners Partner Total
Balance at December 31, 1992 $6,353,528 $ (68,447) $6,285,081
Net income 1,655,740 78,707 1,734,447
Distributions to partners (Note 7) (2,457,318) (83,459) (2,540,777)
Balance at December 31, 1993 5,551,950 (73,199) 5,478,751
Net income 3,090,619 89,234 3,179,853
Distributions to partners (Note 7) (5,382,754) (104,472) (5,487,226)
Balance at December 31, 1994 3,259,815 (88,437) 3,171,378
Net income 1,821,210 49,322 1,870,532
Distributions to partners (Note 7) (2,429,568) (45,973) (2,475,541)
Balance at December 31, 1995 $2,651,457 $ (85,088) $2,566,369
Burger King Limited Partnership I
Statements of Operations
For the years ended December 31, 1995, 1994 and 1993
Income 1995 1994 1993
Rental income (Note 4) $ 1,004,195 $ 1,820,012 $ 1,907,913
Interest income 75,276 40,987 14,955
Miscellaneous income 1,905 2,828 4,262
Total Income 1,081,376 1,863,827 1,927,130
Expenses
Depreciation 118,323 237,368 280,182
Ground lease rent (Note 4) 112,914 171,976 216,777
Management fee (Note 5) 89,129 164,912 169,369
General and administrative 143,493 150,405 76,964
Total Expenses 463,859 724,661 743,292
Income from operations 617,517 1,139,166 1,183,838
Other Income
Gain on sales
of properties (Note 4) 1,253,015 2,040,687 550,609
Net Income $ 1,870,532 $ 3,179,853 $ 1,734,447
Net Income Allocated:
To the General Partner $ 49,322 $ 89,234 $ 78,707
To the Limited Partners 1,821,210 3,090,619 1,655,740
$ 1,870,532 $ 3,179,853 $ 1,734,447
Per limited partnership
interest (15,000 outstanding) $ 121.41 $ 206.04 $ 110.38
Burger King Limited Partnership I
Statements of Cash Flows
For the years ended December 31, 1995, 1994 and 1993
Cash Flows from
Operating Activities: 1995 1994 1993
Net income $ 1,870,532 $ 3,179,853 $ 1,734,447
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation 118,323 237,368 280,182
Gain on sales of properties (1,253,015) (2,040,687) (550,609)
Increase (decrease) in cash
arising from changes in
operating assets and liabilities:
Settlement escrow receivable 95,260 (95,260) ---
Rent receivable 34,957 (28,796) (15,621)
Accounts payable
and accrued expenses (112,155) 205,764 4,909
Due to affiliates (449) (2,116) 2,265
Net cash provided
by operating activities 753,453 1,456,126 1,455,573
Cash Flows from Investing Activities:
Proceeds from
sales of properties 1,804,526 4,637,811 1,089,502
Net cash provided
by investing activities 1,804,526 4,637,811 1,089,502
Cash Flows from Financing Activities:
Cash distributions
to partners (4,713,128) (3,486,043) (2,748,653)
Net cash used for
financing activities (4,713,128) (3,486,043) (2,748,653)
Net increase (decrease)
in cash and cash equivalents (2,155,149) 2,607,894 (203,578)
Cash and cash equivalents
at beginning of period 3,128,790 520,896 724,474
Cash and cash equivalents
at end of period $ 973,641 $ 3,128,790 $ 520,896
Burger King Limited Partnership I
Notes to the Financial Statements
December 31, 1995, 1994 and 1993
1. Organization
Burger King Limited Partnership I (the "Partnership") was formed as a New York
limited partnership on December 14, 1981. The Partnership was formed for the
purpose of acquiring, constructing, improving, holding, and maintaining Burger
King restaurant properties (the "Properties") to be leased on a long-term net
basis to franchisees of Burger King Corporation ("Burger King").
The general partner is BK I Realty Inc. (the "General Partner"), formerly
Shearson/BK Realty, Inc., an affiliate of Lehman Brothers Inc. On July 31,
1993, certain of Shearson Lehman Brothers Inc.'s domestic retail brokerage and
management businesses were sold to Smith Barney, Harris Upham & Co. Inc.
Included in the purchase was the name "Shearson." Consequently, the General
Partner's name was changed to delete any reference to "Shearson."
2. Significant Accounting Policies
Basis of Accounting - The accompanying financial statements have been prepared
on the accrual basis of accounting in accordance with generally accepted
accounting principles. Revenues are recognized as earned and expenses are
recorded as obligations are incurred. Partnership's revenue is realized from
base and percentage rents received on each individual property. Base rents on
the leased properties increase in an amount equal to corresponding increases in
expenses incurred pursuant to the underlying ground leases. Accordingly, the
net base rents that the Partnership receives do not change during the lease
terms.
Real Estate Investments - Real estate investments, which consist of buildings,
fixtures and improvements and, in some cases, the underlying land are recorded
at cost less accumulated depreciation. Cost includes the initial purchase
price of the Properties plus closing costs, acquisition and legal fees and
original capital improvements. Depreciation of buildings is computed using the
straight-line method over an estimated useful life of 20 years. Depreciation
of the fixtures and improvements was computed under the straight-line method
over an estimated useful life of 7 years.
Accounting for Impairment - In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121, " Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("FAS 121"), which 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. FAS 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. The Partnership
adopted FAS 121 in the fourth quarter of 1995. Based on current circumstances,
adoption of FAS 121 had no impact on the Partnership's financial statements.
Cash Equivalents - Cash equivalents consist of short-term highly liquid
investments which have maturities of three months or less from the date of
purchase. The carrying value approximates fair value because of the short
maturity of these instruments.
Concentration of Credit Risk - Financial instruments which potentially subject
the Partnership to a concentration of credit risk principally consist of cash
in excess of the financial institutions' insurance limits. The Partnership
invests available cash with high credit quality financial institutions.
Income Taxes - No provision for income taxes has been made in the financial
statements of the Partnership since such taxes are the responsibility of the
individual partners rather than of the Partnership.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. Partnership Allocations
Allocation of Income and Loss - In accordance with the partnership agreement
dated December 14, 1981 (the "Partnership Agreement"), credits and income or
gain from the Partnership's operations are allocated, without regard to
depreciation, in proportion to distributions of net cash flow from operations
made to the partners. To the extent that any such income or gain exceeds
distributions in any year, such excess shall be allocated 95% to the limited
partners and 5% to the General Partner. Depreciation shall be allocated
annually in proportion to the partners' respective capital accounts as of the
beginning of the year.
Net income is allocated monthly and is apportioned to the limited partners of
the Partnership in the pro rata basis in which the number of interests owned by
each limited partner on the last day of the month bears to the total number of
interests owned by the General Partner and all the limited partners as of that
date. At December 31, 1995, 1994 and 1993 and during the years then ended,
there were 15,000 units of limited partnership interests outstanding (the
"Interests").
Gains with respect to dispositions of the Properties shall be allocated as
follows: first, 99% to the limited partners and 1% to the General Partner until
the limited partners achieve payout as defined in the Partnership Agreement
("Payout"); second, to any partner in an amount sufficient to increase his
negative capital account to zero; and third, 88.89% to the limited partners and
11.11% to the General Partner. Subsequent to Payout, gains shall be allocated
to the General Partner until their capital account equals 11.11% of the
aggregate outstanding capital balances of all the partners and any remaining
gain shall be allocated 88.89% to the limited partners and 11.11% to the
General Partner.
Prior to Payout, losses shall be allocated 99% to the limited partners and 1%
to the General Partner. Subsequent to Payout, losses shall be allocated 88.89%
to the limited partners and 11.11% to the General Partner.
Cash Distributions - Distributions of net cash flows from operations are made
quarterly and are allocated 95% to the limited partners and 1% to the General
Partner, with the remaining 4% distributed to the limited partners to the
extent that cash distributions to the limited partners for the Partnership's
fiscal year do not equal at least 12.5% of their remaining invested capital and
the remainder, if any, is distributed to the General Partner. For the year
ended December 31, 1995, distributions to the limited partners were in excess
of a 12.5% return on their remaining invested capital as defined in the
Partnership Agreement.
Distributions of net property disposition proceeds are made quarterly and are
allocated 99% to the limited partners and 1% to the General Partner until
Payout. After Payout, Burger King receives an additional management fee equal
to 10% of the net property disposition proceeds, and the remainder is
distributed 88.89% to the limited partners and 11.11% to the General Partner.
As of December 31, 1995, Payout had not occurred.
4. Real Estate
As of December 31, 1995, 1994 and 1993, the Partnership owned 10, 13 and 23
Properties, respectively, consisting of the restaurant buildings, fixtures and
improvements, and in some cases, the underlying land.
The leases between the Partnership and the franchisees (the "Leases") had an
initial term of 20 years with no renewal options. With respect to those
Properties in which the Partnership does not own the underlying land, there is
a ground lease between the Partnership and Burger King (collectively, the
"Ground Leases"). The Ground Leases had an initial term of 10 years with a
minimum of two five-year renewal options. All of the Leases expire in the year
2002 or 2003. Minimum future rentals on the noncancelable term of the Leases
and the related Ground Leases as of December 31, 1995 are as follows:
Minimum Ground
Years ending Rental Lease
December 31, Income Obligations
1996 $ 671,142 $ 112,914
1997 671,563 113,224
1998 690,489 132,260
1999 693,611 135,382
2000 693,611 135,382
Thereafter 1,291,469 287,494
$4,711,885 $ 916,656
Leases are on a net basis whereby the franchisees are required to pay all
taxes, assessments, maintenance costs, insurance premiums and other impositions
against the premises. The franchisee is also required to make percentage
rental payments to the extent that 8.5% of such franchisee's annual gross sales
exceed the minimum base rent. Percentage rental income for the years ended
December 31, 1995, 1994 and 1993 was $296,408, $360,257 and $230,089,
respectively.
During the year ended December 31, 1995, the Partnership sold the following
Properties:
Dates Adjusted Net Gains
of Selling Book on
Stores Sales Prices Values Sales
Washington, NC 3/08/95 $ 619,944 $ 180,837 $ 439,107
Carlsbad, NM 3/31/95 728,684 240,175 488,509
Big Spring, TX 3/31/95 455,898 130,499 325,399
$1,804,526 $ 551,511 $1,253,015
During the year ended December 31, 1994, the Partnership sold the following
Properties:
Dates Adjusted Net Gains
of Selling Book on
Stores Sales Prices Values Sales
Madison Heights, VA 7/01/94 $ 369,218 $ 274,271 $ 94,947
Pearl, MS 8/01/94 427,108 257,672 169,436
Falmouth, MA 8/01/94 568,353 289,187 279,166
Tucson, AZ 8/01/94 161,163 74,146 87,017
W. Springfield, MA 8/01/94 151,391 104,977 46,414
Jackson, MS 8/01/94 503,149 332,299 170,850
Kansas City, MO 12/02/94 536,691 290,626 246,065
Salem, MA 12/09/94 590,264 335,664 254,600
Pasco, WA 12/15/94 618,487 271,444 347,043
West Allis, WI 12/15/94 711,987 366,838 345,149
$4,637,811 $2,597,124 $2,040,687
During the year ended December 31, 1993, the Partnership sold the following
Properties:
Dates Adjusted Net Gains
of Selling Book on
Stores Sales Prices Values Sales
Atlantic Highlands, NJ 3/04/93 $ 158,002 $ 129,381 $ 28,621
Rohnert Park, CA 3/23/93 206,500 111,445 95,055
Dothan, AL 3/24/93 725,000 298,067 426,933
$1,089,502 $ 538,893 $ 550,609
5. Management Agreement
The Partnership has entered into agreements with Burger King for the management
of the Properties. These agreements provide for a fee equal to 10% of all
rental income received by the Partnership from the Properties, as defined in
the Partnership Agreement. To the extent the annual rental income from the
Properties is less than 15% of the Partnership's investments in the Properties,
Burger King is required to refund all or a portion of such management fee to
provide the Partnership with a 15% return on funds invested in the Properties.
At December 31, 1995, 1994 and 1993, no such amounts were due from Burger King.
Pursuant to an indemnity agreement, Burger King is obligated to contribute
minimum monthly rent payments in the event of a default under the leases up to
an indemnity amount, as defined below. The indemnity amount was originally 10%
of the Partnership's original investment in the Properties as defined in the
Partnership Agreement, or $1,301,325. The indemnity amount may be decreased by
the amount of the minimum monthly rent payments made by Burger King to the
Partnership pursuant to the indemnity agreement. In 1987 and subsequent years,
the indemnity amount was decreased on an annual basis by an amount equal to the
greater of (1) payments made by Burger King pursuant to the indemnity agreement
or (2) 6-2/3% of the fifth year amount of the indemnity until it is reduced to
zero. On December 31,1995, the indemnity amount was approximately $520,608.
6. Transactions with Affiliates
The amount of fees received for services performed and reimbursements for
expenses incurred on the Partnership's behalf by affiliates as of December 31,
1995, 1994 and 1993 was $7,036, $3,375 and $6,762, respectively, of which
$1,300 and $1,749 were unpaid at December 31, 1995 and 1994, respectively.
Cash and cash equivalents reflected on the Partnership's balance sheets at
December 31, 1995 and 1994 were on deposit with an affiliate of the General
Partner.
7. Distributions
Distributions paid or payable to the limited partners and the General Partner
for the years ended December 31 1995, 1994, and 1993 aggregated:
------1995------ ------1994------ ------1993------
Total Per Unit Total Per Unit Total Per Unit
Limited Partners
Cash flow
from operations $ 503,909 $ 33.59 $1,177,999 $ 78.54 $1,378,711 $ 91.91
Net property
disposition
proceeds 1,925,659 128.37 4,204,755 280.31 1,078,607 71.91
Total
Limited
Partners $2,429,568 $161.96 $5,382,754 $358.85 $2,457,318 $163.82
General Partner
Cash flow
from operations $ 26,522 --- $ 62,000 --- $ 72,564 ---
Net property
disposition
proceeds 19,451 --- 42,472 --- $ 10,895 ---
Total
General Partner $ 45,973 --- $104,472 --- $ 83,459 ---
As of December 31, 1995, the Partnership declared a distribution of $166,071,
of which $157,767 ($10.52 per unit) was paid to limited partners and $1,661 was
paid to the General Partner on January 30, 1996. The remaining $6,643 was
distributed to the General Partner in accordance with the Partnership
Agreement.
Pursuant to the terms of the Partnership Agreement, 80% of the General
Partner's quarterly distributions from operations are retained by the
Partnership, until it is determined that the unitholders have received their
priority return as defined in the Partnership Agreement. For the year ended
December 31, 1995, the unitholders received their priority return, and all
amounts retained in 1995 were paid to the General Partner on January 30, 1996
in a distribution which amounted to $21,217 and included $6,643 for the fourth
quarter of 1995.
8. Contingency
On September 23, 1994, the Partnership notified the State of Wisconsin
Department of Natural Resources ("WDNR") that petroleum and chlorinated
compounds were discovered at one of the Partnership's restaurant properties
located in Greenfield, Wisconsin (the "Greenfield Property"). The WDNR has
indicated that under Wisconsin state law, the Partnership is responsible for
remediating the site. On May 26, 1995, the Partnership proposed site-specific
soil clean-up standards ("Clean-up Standards") on the Greenfield Property for
the WDNR's approval. To date, the Partnership has not received a response from
the WDNR to the proposal. Until the WDNR approves the Clean-up Standards and
the costs of the remediation can be assessed, it is extremely difficult to move
forward with the sale of the Partnership's remaining 10 Properties. Given the
amount of time the WDNR is taking to review the Partnership's proposal, BK I
Realty Inc. ("the General Partner") does not expect the sale of the Properties
to be concluded during the first half of 1996. In accordance with the
Partnership Agreement, the Partnership has set aside $300,000 from net cash
flow from operations to fund potential environmental remediation costs in
connection with the Greenfield Property. The General Partner currently
anticipates that the cost of the environmental remediation will be recovered
from the proceeds of the eventual sale of the Greenfield Property.
9. Reconciliation of Financial Statement Net Income and Partners' Capital to
Federal Income Tax Basis Net Income and Partners' Capital
Reconciliation of financial statement net income to federal income tax basis
net income:
Years Ended December 31,
1995 1994 1993
Financial statement
net income $1,870,532 $3,179,853 $1,734,447
Tax basis depreciation
over financial statement
depreciation (36,099) (61,143) (177,904)
Financial statement gain
on sales of Properties
under tax basis gain
on sales of Properties 79,771 453,235 102,136
Federal income tax
basis net income $1,914,204 $3,571,945 $1,658,679
Reconciliation of financial statement basis partners' capital to federal income
tax basis partners' capital:
Years Ended December 31,
1995 1994 1993
Financial statement
basis partners' capital $2,566,369 $3,171,378 $5,478,751
Current year financial
statement net income
under (over) federal
income tax basis
net income 43,672 392,092 (75,768)
Cumulative federal
income tax basis
net income over
cumulative financial
statement net income 1,193,207 801,115 876,883
Federal income tax basis
partners' capital $3,803,248 $4,364,585 $6,279,866
Because many types of transactions are susceptible to varying interpretations
under Federal and state tax laws and regulations, the amounts reported above
may be subject to change at a later date upon final determination by the taxing
authorities.