EXHIBIT 99.2
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, 1996 and
1995, 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,
1996. 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, 1996 and 1995, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 31, 1997
Balance Sheets At December 31, At December 31,
1996 1995
Assets
Real estate held for sale $ 5,175,404 $ --
Real estate at cost (Note 4):
Land -- 2,981,088
Buildings -- 5,552,773
Fixtures and equipment -- 2,744,188
-- 11,278,049
Less accumulated depreciation -- (5,702,818)
-- 5,575,231
Cash and cash equivalents 1,022,064 502,341
Rent receivable 80,880 50,447
Due from affiliates 14,239 14,239
Due from Burger King Corporation (Note 5) -- 50,977
Total Assets $ 6,292,587 $ 6,193,235
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 44,811 $ 42,023
Distributions payable (Note 6) 918,562 404,096
Total Liabilities 963,373 446,119
Partners' Capital (Deficit):
General Partner (24,770) (22,629)
Limited Partners (15,000 units outstanding) 5,353,984 5,769,745
Total Partners' Capital 5,329,214 5,747,116
Total Liabilities and Partners' Capital $ 6,292,587 $ 6,193,235
Statements of Partners' Capital (Deficit)
For the years ended December 31, 1996, 1995 and 1994
General Limited
Partner Partners Total
Balance at December 31, 1993 $ (18,345) $6,406,421 $6,388,076
Net Income 84,786 1,333,287 1,418,073
Distributions to partners (Note 6) (83,517) (1,586,832) (1,670,349)
Balance at December 31, 1994 (17,076) 6,152,876 6,135,800
Net Income 80,307 1,248,202 1,328,509
Distributions to partners (Note 6) (85,860) (1,631,333) (1,717,193)
Balance at December 31, 1995 (22,629) 5,769,745 5,747,116
Net Income 87,852 1,699,729 1,787,581
Distributions to partners (Note 6) (89,993) (2,115,490) (2,205,483)
Balance at December 31, 1996 $ (24,770) $ 5,353,984 $ 5,329,214
Statements of Operations
For the years ended December 31, 1996 1995 1994
Income
Rent (Note 4) $2,257,335 $2,159,733 $2,044,028
Interest 24,477 26,299 16,366
Other 2,350 2,165 3,776
Total Income 2,284,162 2,188,197 2,064,170
Expenses
Depreciation 276,020 277,639 277,639
Ground lease rent (Note 4) 287,544 279,546 257,583
Management fee (Note 5) 234,051 211,958 21,464
General and administrative 82,159 90,545 89,411
Total Expenses 879,774 859,688 646,097
Income from operations $1,404,388 $1,328,509 $1,418,073
Other Income
Gain on sale of property (Note 4) 383,193 -- --
Net Income $1,787,581 $1,328,509 $1,418,073
Net Income Allocated:
To the General Partner $ 87,852 $ 80,307 $ 84,786
To the Limited Partners 1,699,729 1,248,202 1,333,287
$1,787,581 $1,328,509 $1,418,073
Per limited partnership unit
(15,000 outstanding) $113.32 $83.21 $88.89
Statements of Cash Flows
For the years ended December 31, 1996 1995 1994
Cash Flows From Operating Activities
Net Income $1,787,581 $1,328,509 $1,418,073
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 276,020 277,639 277,639
Gain on sale of property (383,193) -- --
Increase (decrease) in cash arising from
changes in operating assets and liabilities:
Rent receivable (30,433) (16,209) (19,161)
Due from Burger King Corporation 50,977 125,986 (3,103)
Accounts payable and accrued expenses 2,788 (487) (2,842)
Net cash provided by operating activities 1,703,740 1,715,438 1,670,606
Cash Flows From Investing Activities
Proceeds from sale of property 507,000 -- --
Net cash provided by investing activities 507,000 -- --
Cash Flows From Financing Activities
Cash distributions to partners (1,691,017) (1,713,517) (1,641,042)
Net cash used for financing activities (1,691,017) (1,713,517) (1,641,042)
Net increase in cash and cash equivalents 519,723 1,921 29,564
Cash and cash equivalents, beginning
of period 502,341 500,420 470,856
Cash and cash equivalents, end of period $1,022,064 $ 502,341 $ 500,420
Notes to the Financial Statements
December 31, 1996, 1995 and 1994
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 ("BKC").
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 legal
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.
After a careful evaluation of market conditions, the General Partner has
decided to commence efforts to market the Partnership's remaining 23 Properties
during 1997 in a bulk sale transaction. Despite the possibility that sales of
Properties could occur in 1997, there can be no assurance that the General
Partner will be successful in selling any or all of the Partnership's
Properties this year. Until all of the Partnership's remaining Properties are
sold, the Partnership intends to continue operating the Properties and
distributing cash flow from operations to the partners in accordance with the
terms of the Partnership Agreement.
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 revenue is realized from base
and percentage rents received on each individual Property. Minimum base rents
on the leased Properties increase in an amount equal to corresponding increases
in expenses incurred pursuant to the underlying ground leases.
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 requires that assets held for
sale or disposal be carried at the lower of carrying amount or fair value less
cost to sell and prohibits depreciation from being recorded during the periods
which the asset is being held for sale or disposal. The Partnership adopted
FAS 121 in the fourth quarter of 1995.
Real Estate Held for Sale -- Prior to December 31, 1996, the Partnership's real
estate investments, which consist of buildings, fixtures and improvements and,
in some cases, the underlying land were recorded at cost less accumulated
depreciation. Cost included the initial purchase price of the Properties plus
closing costs, acquisition and legal fees and original capital improvements.
After a careful evaluation of market conditions, the General Partner has
decided to commence efforts to market the Partnership's remaining Properties
for sale. As of December 31, 1996, the Partnership's real estate investments
(as discussed in Note 4) which had a carrying value of $5,175,404, were
reclassified as Real Estate Held for Sale and depreciation will be suspended in
accordance with FAS 121. Depreciation of buildings was 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. Reclassifications Certain prior year
amounts have been reclassified in order to conform to the current year's
presentation.
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 units owned by
each limited partner on the last day of the month bears to the total number of
units owned by the General Partner and all the limited partners as of that
date. At December 31, 1996, 1995 and 1994 and for the years then ended, there
were 15,000 units of limited partnership units outstanding (the "Units").
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 BKC and the
remainder is distributed 94.12% to the limited partners and 5.88% to the
General Partner. As of December 31, 1996, Payout had not occurred.
4. Real Estate
As of December 31, 1996, the Partnership owned 23 Properties and as of December
31, 1995 and 1994, the Partnership owned 24 Properties, consisting of the
restaurant buildings, fixtures and improvements, and in some cases, the
underlying land.
The Properties are leased on a net lease basis to franchisees of BKC. The
leases between the Partnership and the franchisees (the "Leases") had an
initial term of 20 years with no renewal options. All of the Leases expire in
the year 2003 or 2004. With respect to those Properties in which the
Partnership does not own the underlying land, there is a ground lease between
the Partnership and BKC (collectively, the "Ground Leases"). The Ground Leases
had an initial term of 10 years with a minimum of two five-year renewal
options. Minimum future rentals on the noncancelable terms of the Leases and
the related Ground Leases as of December 31, 1996 are as follows:
Minimum Ground
Years ending Rental Lease
December 31, Income Obligations
1997 $ 1,805,880 $ 250,943
1998 1,805,880 250,943
1999 1,809,631 254,695
2000 1,833,510 278,572
2001 1,846,804 291,870
Later years 6,222,171 971,630
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$15,323,876 $2,298,653
The Leases are on a net basis requiring franchisees to pay all taxes,
assessments, maintenance costs, insurance premiums and other impositions
against the premises. The franchisees are also required to make percentage
rental payments to the extent that 8.5% of such Property's gross sales exceed
the minimum base rent paid by the franchisee. Percentage rental income for
December 31, 1996, 1995 and 1994 was $365,499, $268,846, and $175,104,
respectively.
On November 15, 1996, the Partnership's leasehold interest in a Property
located in Delhi Township, OH (the "Delhi Property") was sold to the franchisee
at the Delhi Property for net proceeds of $507,000, resulting in a gain of
$383,193.
During the fourth quarter of 1996, the General Partner decided to commence
efforts to market the Partnership's remaining Properties during 1997 in a bulk
sale transaction and reclassified the Properties from Real Estate to Real
Estate Held for Sale (see Note 2).
For the year ended December 31, 1996, no individual Property generated rental
revenues of 10% or more of the Partnership's total rental revenues.
Additionally, no individual Property represented 10% or more of the
Partnership's total assets for the year ended December 31, 1996.
5. Management Agreement
The Partnership has entered into agreements (the "Agreements") with BKC 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. To the extent that the Partnership does not receive
annual rents from the Properties equal to a 15.5% return on its initial
investment in the Properties, as defined in the Agreements, BKC will refund all
or a portion of the management fee received in order to provide the Partnership
with such a return. At December 31, 1996, 1995 and 1994, $0, $50,977 and
$128,924, respectively, were due from BKC for such refunds.
Pursuant to an indemnity agreement between BKC and the Partnership, in the
event of a default by a franchisee under any Lease, BKC is obligated to pay the
minimum monthly rent due under the 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, 1996, the indemnity amount was approximately $588,904.
The Property located in Memphis, Tennessee ceased operations on September 9,
1994. Since that time, BKC has continued to pay the minimum monthly rent 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 BKC declared economic abandonment of the Properties. BKC 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. 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, 1996, 1995 and 1994 are aggregated as follows:
1996 1995 1994
Total Per Unit Total Per Unit Total Per Unit
Limited Partners
Cash flow
from operations $1,613,560 $107.58 $1,631,333 $108.76 $1,586,832 $105.79
Net property
disposition
proceeds 501,930 33.46 -- -- -- --
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Total Limited
Partners $2,115,490 $141.04 $1,631,333 $108.76 $1,586,832 $105.79
General Partner
Cash flow
from operations $ 84,923 $ -- $ 85,860 $ -- $ 83,517 $ --
Net property
disposition
proceeds 5,070 -- -- -- -- --
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Total General
Partner $ 89,993 $ -- $ 85,860 $ -- $ 83,517 $ --
As of December 31, 1996, the Partnership had declared distributions of
$918,562, of which $892,915 ($59.53 per Unit) was paid to the limited partners
and $25,647 was paid to the General Partner on January 30, 1997.
7. Transactions with Affiliates
Amounts reimbursed to the General Partner and their affiliates for out-
of-pocket expenses during the years ended December 31, 1996, 1995 and 1994 are
as follows:
Unpaid at Earned
December 31, -------------------------
1996 1996 1995 1994
BK III Restaurants Inc. and affiliates
Out-of-pocket expenses $ -- $2,341 $ 80 $ 53
$ -- $2,341 $ 80 $ 53
Cash and cash equivalents reflected on the Partnership's balance sheet at
December 31, 1995 were on deposit with an affiliate of the General Partner. As
of December 31, 1996, no cash and cash equivalents were on deposit with an
affiliate of the General Partner or the Partnership.
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,
1996 1995 1994
Financial statement net income $1,787,581 $1,328,509 $1,418,073
Tax basis depreciation over
financial statement depreciation (179,924) (219,940) (226,948)
Tax basis gain on sales of Properties
under financial statement gain on
sales of Properties (20,030) -- --
Other -- (21,462) 21,462
Federal income tax basis net income $1,587,627 $1,087,107 $1,212,587
Reconciliation of financial statement basis partners' capital to federal income
tax basis partners' capital:
Years Ended December 31,
1996 1995 1994
Financial statement basis partners'
capital $5,329,214 $5,747,116 $6,135,800
Current year financial statement
net income over federal income
tax basis net income (199,954) (241,402) (205,486)
Cumulative financial statement
net income under cumulative federal
income tax basis net income 1,634,865 1,876,267 2,081,753
Federal income tax basis partners'
capital $6,764,125 $7,381,981 $8,012,067
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.