EXHIBIT 3.3
_____________________ INDEPENDENT AUDITORS' REPORT _____________________
The Partners
Burger King Limited Partnership III:
We have audited the accompanying balance sheets of Burger King Limited
Partnership III (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 III 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 15, 1996
Burger King Limited Partnership III
Balance Sheets
December 31, 1995 and 1994
Assets 1995 1994
Real estate at cost (Note 4):
Land $ 2,981,088 $ 2,981,088
Buildings 5,552,773 5,552,773
Fixtures and equipment 2,744,188 2,744,188
11,278,049 11,278,049
Less - accumulated depreciation (5,702,818) (5,425,179)
5,575,231 5,852,870
Cash and cash equivalents 502,341 500,420
Rent receivable 50,447 34,238
Due from affiliates (Note 7) 13,054 12,889
Due from Burger King Corporation (Note 5) 50,977 176,963
Total Assets $ 6,192,050 $ 6,577,380
Liabilities and Partners' Capital
Liabilities:
Accounts payable and
accrued expenses $ 40,838 $ 41,160
Distributions payable (Note 6) 404,096 400,420
Total Liabilities 444,934 441,580
Partners' Capital (Deficit):
General Partner (22,629) (17,076)
Limited Partners
(15,000 interests outstanding) 5,769,745 6,152,876
Total Partners' Capital 5,747,116 6,135,800
Total Liabilities and
Partners' Capital $ 6,192,050 $ 6,577,380
Burger King Limited Partnership III
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 $ 7,309,706 $ (19,490) $ 7,290,216
Net income 1,403,287 83,386 1,486,673
Distributions to partners (Note 6) (2,306,572) (82,241) (2,388,813)
Balance at December 31, 1993 6,406,421 (18,345) 6,388,076
Net income 1,333,287 84,786 1,418,073
Distributions to partners (Note 6) (1,586,832) (83,517) (1,670,349)
Balance at December 31, 1994 6,152,876 (17,076) 6,135,800
Net income 1,248,202 80,307 1,328,509
Distributions to partners (Note 6) (1,631,333) (85,860) (1,717,193)
Balance at December 31, 1995 $ 5,769,745$ (22,629) $ 5,747,116
Burger King Limited Partnership III
Statements of Operations
For the years ended December 31, 1995, 1994 and 1993
Income 1995 1994 1993
Rental income (Note 4) $ 2,159,733 $ 2,044,028 $ 1,941,005
Interest income 26,299 16,366 16,646
Miscellaneous income 2,165 3,776 2,436
Total Income 2,188,197 2,064,170 1,960,087
Expenses
Depreciation 277,639 277,639 311,064
Ground lease rent (Note 4) 279,546 257,583 255,866
Management fee (Note 5) 211,958 21,464 --
General and administrative 90,545 89,411 68,997
Total Expenses 859,688 646,097 635,927
Income from operations 1,328,509 1,418,073 1,324,160
Other Income
Gain on sales of properties (Note 4) -- -- 162,513
Net Income $ 1,328,509 $ 1,418,073 $ 1,486,673
Net Income Allocated:
To the General Partner $ 80,307 $ 84,786 $ 83,386
To the Limited Partners 1,248,202 1,333,287 1,403,287
$ 1,328,509 $ 1,418,073 $ 1,486,673
Per limited partnership
interest (15,000 outstanding) $83.21 $88.89 $93.55
Burger King Limited Partnership III
Statements of Cash Flows
For the years ended December 31, 1995, 1994 and 1993
Cash Flows from Operating Activities: 1995 1994 1993
Net income $ 1,328,509 $ 1,418,073 $ 1,486,673
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 277,639 277,639 311,064
Gain on sales of properties -- -- (162,513)
Increase (decrease) in cash
arising from changes in
operating assets and liabilities:
Rent receivable (16,209) (19,161) (4,199)
Due from affiliates, net (165) (609) 1,473
Due from Burger King
Corporation 125,986 (3,103) 13,279
Accounts payable and
accrued expenses (322) (2,233) (543)
Net cash provided by operating
activities 1,715,438 1,670,606 1,645,234
Cash Flows from Investing Activities:
Proceeds from sales of properties -- -- 929,998
Net cash provided by investing activities -- -- 929,998
Cash Flows from Financing Activities:
Cash distributions to
partners (1,713,517) (1,641,042) (2,705,805)
Net cash used for financing
activities (1,713,517) (1,641,042) (2,705,805)
Net increase (decrease) in cash
and cash equivalents 1,921 29,564 (130,573)
Cash and cash equivalents at
beginning of year 500,420 470,856 601,429
Cash and cash equivalents at
end of year $ 502,341 $ 500,420 $ 470,856
Burger King Limited Partnership III
Notes to Financial Statements
December 31, 1995, 1994 and 1993
1. Organization
Burger King Limited Partnership III (the "Partnership") was formed as a New
York limited partnership on November 22, 1983. The Partnership was formed for
the purpose of acquiring, constructing, improving, holding and maintaining
Burger King restaurants (the "Properties"). The Properties are leased on a
long-term net basis to franchisees of Burger King Corporation ("Burger King").
The general partner is BK III Restaurants Inc. (the "General Partner"),
formerly Shearson/BK Restaurants, 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."
On February 15, 1996, based upon, among other things, the advice of
Partnership's counsel, Skadden, Arps, Slate, Meagher & Flom, the General
Partner adopted a resolution that states, among other things, if a Change of
Control (as defined below) occurs, the General Partner may distribute the
Partnership's cash balances not required for its ordinary course day-to-day
operations. "Change of Control" means any purchase or offer to purchase more
than 10% of the Units that is not approved in advance by the General Partner.
In determining the amount of the distribution, the General Partner may take
into account all material factors. In addition, the Partnership will not be
obligated to make any distribution to any partner, and no partner will be
entitled to receive any distribution, until the General Partner has declared
the distribution and established a record date and distribution date for the
distribution. The Partnership filed a Form 8-K disclosing this resolution on
February 29, 1996.
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 - Pursuant to the terms of the partnership
agreement dated November 22, 1983 (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 flows 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 each 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 for 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, 94.12% to the limited partners and
5.88% to the General Partner. Subsequent to Payout, gains shall be allocated
to the General Partner until his capital account equals 5.88% of the aggregate
outstanding capital account balances of all partners, and any remaining gain
shall be allocated 94.12% to the limited partners and 5.88% 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 94.12% to
the limited partners and 5.88% 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 5% to the General
Partner.
Distributions of net property disposition proceeds will be allocated 99% to the
limited partners and 1% to the General Partner until Payout. After Payout, an
additional management fee of 15% of the excess of the net property disposition
proceeds over the amount required to reach Payout is paid to Burger King and
the remainder is distributed 94.12% to the limited partners and 5.88% 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 24 Properties,
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
2003 or 2004. Minimum future rentals on the noncancelable terms 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 $ 1,907,327 $ 296,001
1997 1,908,472 297,146
1998 1,909,617 298,291
1999 1,914,514 303,188
2000 1,939,537 328,210
Later years 8,689,166 1,565,214
$ 18,268,633 $ 3,088,050
The Leases are on a net basis and the franchisees are required to pay all
taxes, assessments, maintenance costs, insurance premiums and other impositions
against the premises. The lessee is also required to make percentage rental
payments to the extent that 8.5% of such lessee's gross sales exceed the
minimum base rent paid by the lessee. Percentage rental income for December
31, 1995, 1994 and 1993 was $268,846, $175,104, and $41,173, respectively.
The General Partner is currently formulating a strategy for the sale of the
properties that will maximize their value.
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 base
rents and 20% of all percentage rent received by the Partnership from the
Properties, as defined in the Partnership Agreement. To the extent that the
Partnership does not receive annual rents from the Properties equal to a 15.5%
return on its investment in the Properties, Burger King will refund all or a
portion of the management fee received to provide the Partnership with such a
return. At December 31, 1995, 1994 and 1993, $50,977, $128,924 and $173,860,
respectively, were due from Burger King for such refunds.
Pursuant to an indemnity agreement, Burger King is obligated to contribute
minimum monthly rent payments in the event of a default under any lease up to
the 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 $1,261,922. 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 1989 and
subsequent years, the indemnity amount has been 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 $673,031.
The property located in Memphis, Tennessee ceased operations on September 9,
1994. Burger King funded the minimum monthly rent payments to the Partnership
in accordance with the indemnity agreement.
Two Properties located in Kansas City, Missouri and Waterford Township,
Michigan ceased operations and subsequently defaulted on their minimum rent
obligations. These Properties remained in default on their rent obligations,
and Burger King declared economic abandonment of the Properties. Burger King
funded monthly rent payments to the Partnership in accordance with the
indemnity agreement, and on February 10 and March 8, 1993, the Partnership sold
the stores for $398,189 and $531,809, respectively to a third party in
accordance with the terms and conditions of the Partnership Agreement. The
Property located in Kansas City, Missouri, at the date of the sale, had a book
value of $336,807, resulting in a gain on the sale in the amount of $61,382.
The Property located in Waterford Township, Michigan, at the date of the sale,
had a book value of $430,678, resulting in a gain on the sale in the amount of
$101,131. The net proceeds of the sale were distributed to the partners
pursuant to the Partnership Agreement and were included in the Partnership's
1993 first quarter distribution.
6. Distributions
Distributions paid or payable to 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 $1,631,333 $108.76 $1,586,832 $105.79 $1,385,874 $ 92.39
operations
Net property
disposition
proceeds -- -- -- -- 920,698 61.38
Total Limited
Partners $1,631,333 $108.76 $1,586,832 $105.79 $2,306,572 $153.77
General Partner
Cash flow from $ 85,860 -- $ 83,517 -- $ 72,947 --
operations
Net property
disposition
proceeds -- -- -- -- 9,300 --
Total General
Partner $ 85,860 -- $ 83,517 -- $ 82,247 --
As of December 31, 1995, the Partnership had declared distributions of
$404,096, of which $383,891 ($25.59 per Unit) was paid to the limited partners
and $20,204.80 was paid to the General Partner on January 30, 1996.
7. 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 $5,276, $3,508 and $4,371, respectively, of which
$1,185 and $1,350 was 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.
8. 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 $ 1,328,509 $ 1,418,073 $ 1,486,673
Tax basis depreciation over financial
statement depreciation (219,940) (226,948) (226,837)
Tax basis gain on sales of Properties
under financial statement gain on
sales of Properties -- -- (130,711)
Other (21,462) 21,462 --
Federal income tax basis net income $ 1,087,107 $ 1,212,587 $ 1,129,125
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 $ 5,747,116 $ 6,135,800 $ 6,388,076
Current year financial statement net
income over federal income tax basis
net income (241,402) (205,486) (357,548)
Cumulative federal income tax basis
net income over cumulative financial
statement net income 1,876,267 2,081,753 2,439,301
Federal income tax basis partners'
capital $ 7,381,981 $ 8,012,067 $ 8,469,829
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.