UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1996
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___________ to ___________
Commission file number: 33-1624
CERTIFICATES OF PARTICIPATION
BK I REALTY INC.
(formerly Shearson\BK Realty, Inc.)
BK III RESTAURANTS INC.
(formerly Shearson\BK Restaurants, Inc.)
Exact name of registrant as specified in its charter
13-3100473
New York 13-3178423
State or other jurisdiction I.R.S. Employer
of incorporation or organization Identification No.
Attn: Andre Anderson
3 World Financial Center, 29th Floor, New York, NY 10285-2900
Address of principal executive offices zip code
Registrant's telephone number, including area code: (212) 526-3237
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Units
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
No market for the limited partnership units exists and therefore a market value
for the units cannot be determined.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to COP holders for the year ended December 31, 1996 (Portions of
parts I, II, III and IV)
PART I
Item 1. Business.
(a) General Development of Business
Certificates of Participation ("COPs") represent an assignment from the issuing
general partners of some, but not all, of their rights to participate in the
profits, losses and gains of, and to receive distributions from Burger King
Limited Partnership I, Burger King Limited Partnership II, and Burger King
Limited Partnership III. On May 10, 1996, Burger King Limited Partnership II
("BK-II") completed the sale of its 29 remaining restaurant properties and was
subsequently dissolved in December 1996. Accordingly, COPs' investment in
BK-II Properties Inc. ("GP-II"), the general partner of BK-II, was also
dissolved in December 1996.
The remaining issuing general partners and their respective partnerships are BK
I Realty Inc. (formerly Shearson/BK Realty, Inc.) ("GP-I"), a New York
corporation and the general partner of Burger King Limited Partnership I
("BK-I"), a New York limited partnership; and BK III Restaurants Inc. (formerly
Shearson/BK Restaurants, Inc.) ("GP-III"), a New York corporation and general
partner of Burger King Limited Partnership III ("BK-III"), a New York limited
partnership. (GP-I and GP-III are collectively referred to herein as the
"General Partners". BK-I and BK-III are collectively referred to herein as the
"Partnerships".) Each of the General Partners are affiliates of Lehman
Brothers Inc. ("Lehman") (formerly Shearson Lehman Brothers, Inc. ("Shearson"),
see Item 10).
COPs includes an assignment from GP-I of some, but not all, of GP- I's rights
to participate in the profits, losses and gains of, and to receive
distributions from BK-I (the "BK-I COPs"). More specifically, BK-I COPs
represent, in the aggregate, an assignment to the holders of the BK-I COPs
("BK-I COPs Holders") as defined under the terms of the partnership agreement
of BK-I (the "BK-I Partnership Agreement"), the rights of GP-I to receive (i)
as distributions from BK-I, up to an additional 4% of BK-I's net cash flow from
operations for each year that the BK-I limited partners have received cash
distributions equal to 12 1/2% per annum of their BK-I remaining invested
capital, and, after BK-I Payout, as defined in the BK-I Partnership Agreement,
(BK-I "Payout"), 8.89% of BK-I's net property disposition proceeds; and (ii) as
allocations by BK-I, 4% of any excess of net taxable income over BK-I's net
cash flow from operations; after BK-I Payout, 10.11% of losses; and after BK-I
Payout, 10.11% of gain on disposition of BK- I's properties (collectively, the
"BK-I Assigned Interest"). The BK-I Assigned Interest has been assigned in
equal parts to the BK-I COPs Holders. The unassigned portion of the rights of
GP-I to receive distributions and allocations from BK-I represents GP-I's
retained interest.
COPs also includes an assignment from GP-III of some, but not all, of GP-III's
rights to participate in the profits, losses and gains of, and to receive
distributions from BK-III (the "BK-III COPs"). More specifically, BK-III COPs
represent, in the aggregate, an assignment to the holders of the BK-III COPs
("BK-III COPs Holders") as defined under the terms of the partnership agreement
of BK-III (the "BK-III Partnership Agreement")(collectively, the BK- I
Partnership Agreement and the BK-III Partnership Agreement are defined as the
"Partnership Agreements"), the rights of GP-III to receive (i) as distributions
from BK-III, 4% of BK-III's net cash flow from operations for each year and,
after BK-III Payout, as defined in the BK-III Partnership Agreement, (BK-III
"Payout"), 4.7% of BK-III's net property disposition proceeds; and (ii) as
allocations by BK-III, 4% of net taxable income; after BK-III Payout, 4.88% of
losses; and, after BK-III Payout, 4.88% of gain on disposition of BK-III's
properties (collectively, the "BK-III Assigned Interest"). The BK-III Assigned
Interest has been assigned in equal parts to the BK-III COPs Holders. The
unassigned portion of the rights of BK-III represents GP-III's retained
interest.
BK-I COPs Holders and BK-III COPs Holders are collectively referred to as "COPs
Holders".
BK-I and BK-III originally acquired or ground leased, the sites for, and
constructed, 32 and 27, respectively, free-standing Burger Kingr fast-food
restaurants (each referred to as the "Property", collectively, the
"Properties") which are leased on a net basis to franchisees of Burger King
Corporation ("BKC"). Prior to the Partnerships' acquisition of each Property,
BKC proposed the site for approval by each respective General Partner. The
sites are geographically diversified throughout the United States. No further
site acquisitions are anticipated. The General Partners do not manage or
operate any Property nor do they acquire or finance the acquisition of the
equipment necessary to operate the Properties. BK-I currently owns nine
Properties and BK-III currently owns 23 Properties. Reference is made to Item
2 captioned "Properties" for information concerning the Properties.
The Partnerships' principal investment objectives are to:
(1) provide regular cash distributions, a portion of which will be "tax
sheltered"; and
(2) provide realization of the long-term appreciation in the value of the
Properties, consistent in all cases with the preservation of Partners'
capital.
BKC had the option to purchase any or all of the Properties at fair market
value, determined by an independent appraisal at any time during the eighth
through tenth years following the date of completion of the offering of limited
partnership units in each Partnership (the "Units"). The offering of the Units
in BK-I and BK-III occurred in 1982 and 1984, respectively. BKC did not
exercise its option for any of the Properties and the option has since expired.
During late 1991 and early 1992, GP-I performed an analysis of the various
options available to BK-I regarding its Properties which included marketing the
Properties for sale, the continued ownership of the Properties, or financing
the portfolio and distributing the loan proceeds to the partners. After a
detailed analysis of each option, GP-I determined that it would be in the best
interest of the partners to market BK-I Properties for sale. GP-I began the
sale of BK-I's Properties in June 1992. Through December 31, 1996, BK-I had
sold 23 of the original 32 Properties. GP-I has had discussions with a number
of institutions and other third parties interested in purchasing BK-I's nine
remaining Properties. However, an environmental issue at one of BK- I's
Properties located in Greenfield, Wisconsin (the "Greenfield Property") has
delayed BK-I's efforts to complete a sale of the remaining Properties. BK-I
had previously proposed site-specific clean-up standards for the Greenfield
Property to the Wisconsin Department of Natural Resources ("WDNR"), whose
response has taken significantly longer than originally anticipated. In light
of the unanticipated lengthy delay, GP-I has decided to move forward with its
efforts to market the Properties for sale during 1997.
After a careful evaluation of market conditions, GP-III has decided to commence
efforts to market BK-III's remaining 23 Properties during 1997 in a bulk sale
transaction. Prior to December 31, 1996, BK-III sold four Properties, one of
which was sold in the fourth quarter of 1996. Reference is made to Item 2
captioned "Properties" for information concerning Property sales since each
Partnership's inception.
There can be no assurance that GP-I or GP-III will be successful in completing
their respective Partnerships' marketing plans during 1997. As long as
Properties remain unsold, the Partnerships will continue to operate the
Properties and intends to make distributions to the partners in accordance with
the terms of the respective Partnership Agreements. Reference is made to Item
7 captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the "Message to Investors" of the 1996 Annual Report
to COPs Holders, which is filed as an exhibit under Item 14 and incorporated
herein by reference, regarding efforts to sell each Partnership's Properties.
Employees
COPs has no employees.
Competition
Percentage rents received by the Partnership from leases with the franchisees
at the Properties are based on the food and beverage sales generated by the
Properties. Competition in the fast food industry has generally become more
intense as the number of chains competing for the consumer's business has
increased. For most chains, in 1997, the primary source of revenue growth will
continue to be the development of new restaurants or the acquisition of
existing restaurants. As a result, intense price competition and aggressive
marketing promotions have become essential ingredients in the effort to
increase sales from existing restaurants. Other factors which influence sales
include, but are not limited to, product quality, customer service, and the
diversity of menu offerings.
(b) Financial Information About Industry Segments
The Partnerships' businesses consist of only one segment, the investment in the
Properties. The General Partners do not engage in sales of goods or services.
(c) Narrative Description of Business
(1) See Paragraphs (a) and (b) above.
(i) through (xii) - Not Applicable.
(xi) through (xii) - Not Applicable.
(xiii) See Paragraph (a) above.
Item 2. Properties.
The following tables set forth the location of sites which the Partnerships
have acquired or ground leased as of December 31, 1996. The Partnerships own
the completed improvements in fee ownership and either have a fee ownership in
the land or a ground leasehold interest in the land as indicated. Also
included is the location of sites which the Partnerships have sold as of
December 31, 1996, the acquisition date, and the date of sale. Financial
information regarding sales includes book value, selling price and gain on the
sale.
In the event one of the Properties defaults on its rent obligations, BKC is
required to pay to the respective Partnership the minimum rent due under the
Property's lease. If a Property remains in default for 12 months, BKC can
either declare economic abandonment of the Property and supervise its sale to a
third party or purchase the Property from the Partnership at a purchase price
which is equal to the greater of the fair market value of the Property or the
minimum guaranteed price as set forth in the management agreements between BKC
and the Partnerships.
BK-I Properties owned as of December 31, 1996
Atlanta, Georgia* Klamath Falls, Oregon*
Decatur, Alabama Springdale, Arkansas
Fairfield, Ohio Springfield, Massachusetts*
Greenfield, Wisconsin Statesville, North Carolina
Greenville, South Carolina
* Subject to a ground lease.
For the year ended December 31, 1996, the Properties located in Statesville
(NC), Decatur (AL), Springdale (AR), Atlanta (GA) and Klamath Falls (OR)
generated 11%, 14%, 10%, 13% and 13%, respectively, of BK-I's total rental
revenues. No individual Property represented 10% or more of BK-I's total
assets for the year ended December 31, 1996.
BK-I Properties Sold as of December 31, 1996
Site Acquisition Sale Net Adjusted Gain
Location Date Date Book Value Selling Price on Sale
1. Altus, Oklahoma 11/10/82 12/30/91 $ 259,954 $ 290,164 $ 30,210
2. Grand Island,
Nebraska 05/07/82 10/01/92 218,064 686,000 467,936
3. Marion, Virginia 11/24/82 10/01/92 119,207 229,900 110,693
4. Sunnyvale,
California 02/03/83 10/01/92 151,063 348,000 196,937
5. Greenbelt,
Maryland 10/12/82 11/23/92 127,217 478,500 351,283
6. Guilderland,
New York 05/20/82 12/23/92 440,742 853,000 412,258
7. Atlantic
Highlands, NJ 04/08/83 03/04/93 129,381 158,002 28,621
8. Rohnert Park,
California 10/11/82 03/23/93 111,445 206,500 95,055
9. Dothan, Alabama 11/11/82 03/26/93 298,067 725,000 426,933
10. Madison Heights,
Virginia 02/23/83 07/01/94 274,271 369,218 94,947
11. Pearl,
Mississippi 06/29/82 08/01/94 257,672 427,108 169,436
12. Falmouth,
Massachusetts 09/24/82 08/01/94 289,187 568,353 279,166
13. Tucson, Arizona 10/07/82 08/01/94 74,146 161,163 87,017
14. W. Springfield,
Massachusetts 10/18/82 08/01/94 104,977 151,391 46,414
15. Jackson,
Mississippi 02/06/85 08/01/94 332,299 503,149 170,850
16. Kansas City,
Missouri 01/10/83 12/02/94 290,626 536,691 246,065
17. Salem,
Massachusetts 09/23/82 12/09/94 335,664 590,264 254,600
18. Pasco,
Washington 06/01/82 12/15/94 271,444 618,487 347,043
19. West Allis,
Wisconsin 10/07/82 12/15/94 366,838 711,987 345,149
20. Washington,
North Carolina 08/20/82 03/08/95 180,837 619,944 439,107
21. Big Spring,
Texas 07/01/84 03/31/95 130,499 455,898 325,399
22. Carlsbad,
New Mexico 05/12/84 03/31/95 240,175 728,684 488,509
23. Wichita, Kansas 09/08/82 10/01/96 241,905 580,500 338,595
BK-III Properties owned as of December 31, 1996
Albuquerque, New Mexico* Gary, Indiana
Atlanta, Georgia Gallatin, Tennessee
Brooklyn Park, Maryland* Largo, Florida
Chattanooga, Tennessee Memphis, Tennessee
Cleburne, Texas Montgomery, Alabama*
Columbus, Indiana Mounds View, Minnesota
Covina, California Nashville, Tennessee
Edison, New Jersey North Augusta, South Carolina
Fayetteville, North Carolina* San Bernadino, California*
Federal Heights, Colorado* Shelbyville, Tennessee
Frankfort, Kentucky Sulphur Springs, Texas
Wilson, North Carolina
* Subject to a ground lease.
For the year ended December 31, 1996, no individual Property generated rental
revenues of 10% or more of BK-III's total rental revenues. Additionally, no
individual Property represented 10% or more of BK-III's total assets for the
year ended December 31, 1996.
BK-III Properties Sold as of December 31, 1996
Site Acquisition Sale Net Adjusted Gain
Location Date Date Book Value Selling Price on Sale
1. Woodstock,
Georgia 07/19/84 04/12/91 $304,047 $380,059 $ 76,012
2. Kansas City,
Missouri 05/05/86 02/10/93 336,807 398,189 61,382
3. Waterford
Township, MI 03/21/86 03/08/93 430,678 531,809 101,131
4. Delhi Township,
Ohio 06/16/86 11/15/96 123,807 507,000 383,193
Item 3. Legal Proceedings.
There are no pending legal proceedings to which the Partnerships' are a party
or to which any of their assets are subject.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for the Registrant's Units and Related Security Holder Matters.
(a) Market Information
No public market for the COPs units (the "Units") presently exists. Each
Unit currently consists of one BK-I COPs and one BK-III COPs.
(b) Holders
The number of COPs Holders as of December 31, 1996 was 608.
(c) Distributions
The following table illustrates the per Unit quarterly cash distributions
paid to COPs Holders during the past two years:
Quarter Declared 1996 1995
First Quarter $ 5.77 $ 11.70 (3)
Second Quarter 5.33 5.31 (4)
Third Quarter 5.59 5.46
Fourth Quarter 18.83 (1) 37.92
Special Distributions 184.47 (2) --
Total Cash Distributions $219.99 $ 60.39
(1) Includes a $2.83 per Unit distribution of net proceeds received from
Property sales paid on January 30, 1997.
(2) This amount includes (i) a $171.35 per Unit distribution of net proceeds
received from the sale of BK-II's remaining Properties paid on August 30,
1996, and (ii) a liquidating distribution of $13.12 per Unit paid on
December 30, 1996 representing COPs' share of BK-II's cash flow from
operations for the first and second quarters of 1996 after the payment of
BK-II's final expenses and liabilities.
(3) Includes a $5.05 per Unit distribution of net proceeds received from
Property sales paid on April 28, 1995.
(4) Includes a $0.39 per Unit distribution of net proceeds received from a
Property sale paid on August 1, 1995.
Reference is also made to the "Message to Investors" of the 1996 Annual
Report to COPs Holders, which is filed as an exhibit under Item 14, for
additional information concerning distributions paid by the Partnership.
Item 6. Selected Financial Data.
The information set forth below should be read in conjunction with the
Partnership's Financial Statements and notes thereto and Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations, also
included elsewhere herein.
GP-I
1996 1995 1994 1993 1992
Equity in earnings of BK-I $ 43,180 $ 49,322 $ 89,234 $ 78,707 $ 105,527
BK-I's net income 23,000 34,190 59,579 53,140 68,549
Earnings per COPs' Unit(1) 8.61 12.79 23.15 20.42 27.37
Total Assets at year-end (48,060) (62,210) (15,052) (11,408) 37,777
GP-III
1996 1995 1994 1993 1992
Equity in earnings of BK-III $ 87,852 $ 80,307 $ 84,786 $ 83,386 $ 88,879
BK-III's net income 52,617 54,119 56,858 56,002 59,362
Earnings per Cops' Unit(1) 20.20 20.83 21.99 21.63 23.06
Total Assets at year end 878 (2,424) 2,945 211 14,915
(1) Earnings per COPs Unit represents 80% of GP-I's and GP-III's earnings in
BK-I and BK-III, respectively, less general and administrative expenses,
divided by 3,084 COPs' Units outstanding.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The General Partners do not engage in the sale of goods or services. Their
only assets are the investments in the Partnerships.
The prospectuses of BK-I and BK-III specify that BKC had the option to purchase
any or all of the Properties at fair market value, determined by an independent
appraisal, at any time during the eighth through tenth years following the date
of completion of the offering of the Units in each Partnership. The offering
of the Units in BK-I and BK-III occurred in 1982 and 1984, respectively, and,
therefore, BKC's options to purchase the Properties has expired.
GP-I has had discussions with a number of institutions and other third parties
interested in purchasing BK-I's nine remaining Properties. However, an
environmental issue at the Greenfield Property has delayed BK-I's efforts to
complete a sale of the remaining Properties. BK-I had previously proposed
site-specific clean-up standards for the Greenfield Property to the WDNR, whose
response has taken significantly longer than originally anticipated. In light
of the unanticipated lengthy delay, GP-I has decided to move forward with its
efforts to market the Properties for sale during 1997. Upon the sale of the
Properties, GP-I intends to distribute the net sales proceeds in accordance
with the terms of BK-I's Partnership Agreement. While GP-I is hopeful that a
sale of the Properties can be completed during 1997, there can be no assurance
that such efforts will be successful.
GP-I believes that the potential environmental remediation costs associated
with the Greenfield Property should not exceed approximately $300,000 and,
therefore, in accordance with BK-I's Partnership Agreement, such amount has
been set aside from BK-I's net cash flow from operations to fund these costs.
If the proposed site-specific standards are approved by the WDNR prior to any
sale of the Properties, it is expected that any of such reserves spent on the
environmental remediation should be recovered from the proceeds of the eventual
sale of the Greenfield Property. Therefore, any remediation costs incurred
prior to a sale of the Greenfield Property will be capitalized and included in
the carrying value of BK-I's Properties. Alternatively, if the sale occurs
prior to the receipt of such approval, it is likely that any buyer will
attribute a discount to the value of the Greenfield Property in determining an
acceptable purchase price.
GP-I believes that BK-I should have sufficient assets with which to pay any
potential remediation costs on the Greenfield Property. In the unlikely event
that BK-I does not have sufficient assets with which to pay such costs, GP-I is
unaware of any Federal or State of Wisconsin environmental law potentially
imposing any personal liability on the unitholders of BK-I for their pro-rata
share of BK- I's remediation costs. Therefore, except as otherwise provided
for in BK-I's Partnership Agreement, unitholders of BK-I may be liable for
BK-I's obligations only to the extent of their respective capital
contributions.
After a careful evaluation of market conditions, GP-III has decided to commence
efforts to market BK-III's remaining 23 Properties during 1997 in a bulk sale
transaction. While GP-III is hopeful that a sale of the Properties can be
completed during 1997, there can be no assurance that such efforts will be
successful. Until all of BK-III's remaining Properties are sold, BK-III
intends to continue operating the Properties and will distribute cash flow from
operations to the partners in accordance with the terms of the BK-III's
Partnership Agreement.
As a result of BK-I's and BK-III's intention to pursue a sale of their
respective Properties, the Properties have been reclassified on the
Partnership's respective balance sheets as real estate held for sale and are
carried at the lower of cost or fair value less any estimated costs to sell the
Properties, including any estimated environmental remediation costs.
At December 31, 1996, GP-I's investment in BK-I was $(48,060), reflecting
distributions in excess of equity in earnings plus the initial investments.
GP-III's investment in BK-III was $878 at December 31, 1996, compared to
$(2,424) at December 31, 1995.
COPs Holders receive their pro rata share of the cash distributions assigned by
GP-III on a quarterly basis and their pro rata share of the cash distributions
assigned by GP-I on an annual basis in accordance with the respective
Partnership Agreements.
For 1996, COPs Holders received total distributions of $219.99 per Unit. This
included: (i) a cash distribution made as a result of the sale of BK-II's
remaining Properties in the amounts of $171.35 per Unit, (ii) the related
liquidating distribution in the amount of $13.12 per Unit, (iii) a distribution
of BK-I's annual cash flow from operations of $10.66 per Unit, (iv) quarterly
distributions of BK-III's cash flow from operations during 1996 totalling
$22.03 per Unit, (v) a distribution of net proceeds from the sale of one of BK-
I's Properties in the fourth quarter of 1996 in the amount of $1.51 per Unit,
and (vi) a distribution of net proceeds from the sale of one of BK-III's
Properties in the last quarter of 1996 in the amount of $1.32 per Unit.
Since the inception of COPs, cumulative cash distributions have totaled $972.19
per original $1,000 Unit, including distributions of cash flow from operations
in the amount of $764.11 per Unit and distributions of net proceeds from the
sales of Properties in the amount of $208.08 per Unit. Distributions of net
sales proceeds represent returns of capital which have reduced COPs' Unit size
from $1,000 to $791.92.
Results of Operations
The results of operations for the 1996, 1995, and 1994 fiscal years are
primarily attributable to the investments in BK-I and BK-III.
For the years ended December 31, 1996, 1995 and 1994, GP-I's net income was
$23,000, $34,190 and $59,579, respectively. For the years ended December 31,
1996, 1995 and 1994, GP-III's net income was $52,617, $54,119 and $56,858,
respectively. The net income fluctuated each year primarily as a result of
gains from the sales of Properties, reduced levels of depreciation expense,
reduced rental income as a result of the sale of Properties, and increases and
decreases in percentage rents received from the franchisees operating each of
the Properties. During 1996, BK-I sold a Property, realizing a total gain of
$338,595. BK-III also sold a Property during 1996, realizing a gain on the
sale of $383,193. During 1995, BK-I sold three Properties, realizing a total
gain of $1,253,015. BK-III did not sell any Properties during 1995. During
1994, BK-I sold 10 Properties, realizing a total gain of $2,040,687. BK-III
did not sell any Properties during 1994.
Same-store sales for BK-I's remaining Properties during 1996 were $11,654,459
compared to $11,138,721 for 1995, representing an increase of approximately
4.5%. Same-store sales at BK-III's Properties during 1996 were $24,212,417
compared to $23,384,120 for 1995, representing an increase of approximately
3.5%. The increase in same-store sales for both Partnerships' Properties is
primarily attributable to BKC's aggressive marketing efforts. Rental income
received by the Partnerships from the franchisees at the Properties is equal to
the greater of a minimum annual base rent or 8.5% of the Properties' annual
food and beverage sales. Therefore, increases in sales at the Properties will
often result in an increase in the Partnerships' rental income.
Item 8. Financial Statements and Supplementary Data.
Incorporated by reference to the 1996 Annual Report to COPs Holders, included
as an exhibit under Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
On July 31, 1993, Shearson sold certain of its domestic retail brokerage and
asset management businesses to Smith Barney, Harris Upham & Co. Incorporated
("Smith Barney"). Subsequent to this sale, Shearson changed its name to Lehman
Brothers Inc. The transaction did not affect the ownership of the Partnerships
or the General Partners. However, the assets acquired by Smith Barney included
the name "Shearson." Consequently, effective January 24, 1994, Shearson/BK
Realty, Inc. and Shearson/BK Restaurants, Inc. changed their names to delete
any reference to "Shearson."
COPs has no officers or directors. The General Partners of the Partnerships
manage and control the affairs of the Partnerships and have general
responsibility and authority in all matters affecting its business. Certain
officers and the director of the General Partners are now serving (or in the
past have served) as officers or directors of entities which act as general
partners of a number of real estate limited partnerships which have sought
protection under the provisions of the Federal Bankruptcy Code. The
partnerships which have filed bankruptcy petitions own real estate which has
been adversely affected by the economic conditions in the market in which that
real estate is located and, consequently, the partnerships sought the
protection of the bankruptcy laws to protect the partnerships' assets from loss
through foreclosure.
The director and executive officers of the General Partners as of December 31,
1996, are set forth below. There are no family relationships between or among
any officer and any other officer or director.
Name Age Office
Rocco F. Andriola 38 Director, President and Chief Financial Officer
Kenneth F. Boyle 33 Vice President
Timothy E. Needham 28 Vice President
The foregoing director has been elected to serve as director until the next
annual meeting of the General Partners.
Rocco F. Andriola is a Managing Director of Lehman Brothers in its Diversified
Asset Group and has held such position since October 1996. Since joining
Lehman Brothers in 1986, Mr. Andriola has been involved in a wide range of
restructuring and asset management activities involving real estate and other
direct investment transactions. From June 1991 through September 1996, Mr.
Andriola held the position of Senior Vice President in Lehman's Diversified
Asset Group. From June 1989 through May 1991, Mr. Andriola held the position
of First Vice President in Lehman's Capital Preservation and Restructuring
Group. From 1986-89, Mr. Andriola served as a Vice President in the Corporate
Transactions Group of Shearson Lehman Brothers' office of the general counsel.
Prior to joining Lehman Brothers, Mr. Andriola practiced corporate and
securities law at Donovan Leisure Newton & Irvine in New York. Mr. Andriola
received a B.A. from Fordham University, a J.D. from New York University School
of Law, and an LL.M in Corporate Law from New York University's Graduate School
of Law.
Kenneth F. Boyle is a Vice President of Lehman Brothers in its Diversified
Asset Group. Mr. Boyle joined Lehman in January 1991. Mr. Boyle is a Certified
Public Accountant and was employed by the accounting firm of KPMG Peat Marwick
LLP from 1985 to 1990. Mr. Boyle graduated from the State University of New
York at Binghamton with a B.S. degree in Accounting.
Timothy E. Needham is an Associate of Lehman Brothers and assists in the
management of commercial real estate in the Diversified Asset Group. Mr.
Needham joined Lehman in September 1995. Prior to joining Lehman, Mr. Needham
was a consultant with KPMG Peat Marwick LLP in the Banking and Investment
Services Group from 1994- 1995. Mr. Needham received his master's degree in
international management from the American Graduate School of International
Management in December 1993. Previous to entering graduate school, Mr. Needham
worked in Tokyo during 1991, for approximately one year, doing market research
for a Japanese firm. In addition, Mr. Needham is currently a candidate for the
designation of Chartered Financial Analyst, Level III.
Item 11. Executive Compensation.
Officers and the director of the General Partners are employees of Lehman and
are not compensated by the Partnerships or the General Partners for services
rendered in connection with the Partnerships.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) Security ownership of certain beneficial owners
The Registrant knows of no person who beneficially owns more than 5% of
the Units.
(b) Security ownership of management
GP-I and GP-III, under the terms of the Partnership Agreements of BK-I and
BK-III, respectively, manage the affairs of BK-I and BK-III, respectively.
GP-I and GP-III retained a share of the cash distribution and the
allocable profit or loss of BK-I and BK-III in accordance with COPs'
prospectus. Neither the director nor the officers of the General Partners
own any Units.
(c) Changes in control
None.
Item 13. Certain Relationships and Related Transactions.
(a) Transactions with Management and Others
There have been no material transactions since the beginning of the
registrants' last fiscal year between the Partnerships, their management
and others, as defined in Regulation S-K 229.404.
(b) Certain Business Relationships
There have been no business transactions between the director and officers
of the General Partners and the Partnerships.
(c) Indebtedness of Management
No management person is indebted in any amount to the Partnerships.
(d) Transactions with Promoters
There have been no transactions with promoters.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements and Supplementary Data:
GP-I:
Independent Auditors' Report
Financial Statements:
Balance Sheets at December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996, 1995 and 1994
Statements of Changes in Stockholder's Deficit for the years ended
December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994
Notes to the Financial Statements
GP-III:
Independent Auditors' Report
Financial Statements:
Balance Sheets at December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996, 1995 and 1994
Statements of Changes in Stockholder's Deficit for the years ended
December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994
Notes to the Financial Statements
The financial statements for GP-I and GP-III are incorporated by reference to
COPs' Annual Report to COPs Holders for the year ended December 31, 1996.
(2) Financial Statement Schedules:
No other schedules are presented because the information is not
applicable or is included in the financial statements or notes thereto.
(3) Exhibits:
99.1 BK-I:
Independent Auditors' Report
Financial Statements:
Balance Sheets at December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996,
1995 and 1994
Statements of Partners' Capital (Deficit) for the years ended
December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to the Financial Statements
99.2 BK-III:
Independent Auditors' Report
Financial Statements:
Balance Sheets at December 31, 1996 and 1995
Statements of Operations for the years ended December 31,
1996, 1995 and 1994
Statements of Partners' Capital (Deficit) for the years ended
December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to the Financial Statements
13.1 Annual Report to COPs Holders for the year ended
December 31, 1996.
13.2 Annual Report to COPs Holders for the years ended December 31,
1995, 1994 and 1993, incorporated by reference to exhibit 13 to
COPs' Form 10-K for those respective years.
27.1 Financial Data Schedule for BK I Realty Inc.
27.2 Financial Data Schedule for BK III Restaurants Inc.
(b) Reports on Form 8-K:
(1) There have been no reports filed on Form 8-K during the last quarter
of the period covered by this report.
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.
Dated: April 15, 1997
CERTIFICATES OF PARTICIPATION
BK I REALTY INC.
BK III RESTAURANTS INC.
BY: BK I Realty Inc.
BK III Restaurants Inc.
Registrant
BY: /s/ Rocco F. Andriola
Name: Rocco F. Andriola
Title: Director, President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
BK I REALTY INC.
BK III RESTAURANTS INC.
Registrant
Date: April 15, 1997
BY: /s/ Rocco F. Andriola
Rocco F. Andriola
Director, President and
Chief Financial Officer
Date: April 15, 1997
BY: /s/ Kenneth F. Boyle
Kenneth F. Boyle
Vice President
Date: April 15, 1997
BY: /s/ Timothy E. Needham
Timothy E. Needham
Vice President
EXHIBIT 99.1
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, 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 I 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 $1,497,736 $ --
Real estate at cost:
Land -- 1,113,406
Buildings -- 2,210,836
Fixtures and equipment -- 485,306
-- 3,809,548
Less accumulated depreciation -- (1,961,780)
-- 1,847,768
Cash and cash equivalents 1,478,513 973,641
Rent receivable 76,042 65,023
Total Assets $ 3,052,291 $ 2,886,432
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 36,025 $ 139,418
Due to Burger King Corporation 14,152 --
Distributions payable 812,096 180,645
Total Liabilities 862,273 320,063
Partners' Capital (Deficit):
General Partner (88,823) (85,088)
Limited Partners (15,000 units outstanding) 2,278,841 2,651,457
Total Partners' Capital 2,190,018 2,566,369
Total Liabilities and Partners' Capital $ 3,052,291 $ 2,886,432
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 $ (73,199) $ 5,551,950 $ 5,478,751
Net Income 89,234 3,090,619 3,179,853
Distributions to partners (Note 7) (104,472) (5,382,754) (5,487,226)
Balance at December 31, 1994 (88,437) 3,259,815 3,171,378
Net Income 49,322 1,821,210 1,870,532
Distributions to partners (Note 7) (45,973) (2,429,568) (2,475,541)
Balance at December 31, 1995 (85,088) 2,651,457 2,566,369
Net Income 43,180 983,170 1,026,350
Distributions to partners (Note 7) (46,915) (1,355,786) (1,402,701)
Balance at December 31, 1996 $ (88,823) $ 2,278,841 $ 2,190,018
Statements of Operations
For the years ended December 31, 1996 1995 1994
Income
Rent (Note 4) $ 994,879 $1,004,195 $1,820,012
Interest 58,248 75,276 40,987
Other 1,140 1,905 2,828
Total Income 1,054,267 1,081,376 1,863,827
Expenses
Depreciation 108,127 118,323 237,368
Ground lease rent (Note 4) 112,914 112,914 171,976
Management fee (Note 5) 87,601 89,129 164,912
General and administrative 57,870 143,493 150,405
Total Expenses 366,512 463,859 724,661
Income from operations 687,755 617,517 1,139,166
Other Income
Gains on sales of properties (Note 4) 338,595 1,253,015 2,040,687
Net Income $1,026,350 $1,870,532 $3,179,853
Net Income Allocated:
To the General Partner $ 43,180 $ 49,322 $ 89,234
To the Limited Partners 983,170 1,821,210 3,090,619
$1,026,350 $1,870,532 $3,179,853
Per limited partnership unit
(15,000 outstanding) $65.54 $121.41 $206.04
Statements of Cash Flows
For the years ended December 31, 1996 1995 1994
Cash Flows From Operating Activities
Net Income $1,026,350 $1,870,532 $3,179,853
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 108,127 118,323 237,368
Gains on sales of properties (338,595) (1,253,015) (2,040,687)
Increase (decrease) in cash arising from
changes in operating assets and liabilities:
Settlement escrow receivable -- 95,260 (95,260)
Rent receivable (11,019) 34,957 (28,796)
Accounts payable and accrued expenses (103,393) (112,604) 203,648
Due to Burger King Corporation 14,152 -- --
Net cash provided by operating activities 695,622 753,453 1,456,126
Cash Flows From Investing Activities
Proceeds from sales of properties 580,500 1,804,526 4,637,811
Net cash provided by investing activities 580,500 1,804,526 4,637,811
Cash Flows From Financing Activities
Cash distributions to partners (771,250) (4,713,128) (3,486,043)
Net cash used for financing activities (771,250) (4,713,128) (3,486,043)
Net increase (decrease) in cash and
cash equivalents 504,872 (2,155,149) 2,607,894
Cash and cash equivalents, beginning of period 973,641 3,128,790 520,896
Cash and cash equivalents, end of period $1,478,513 $ 973,641 $3,128,790
Notes to the Financial Statements
December 31, 1996, 1995 and 1994
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 net basis to
franchisees of Burger King Corporation ("BKC").
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."
The General Partner has had discussions with a number of institutions and other
third parties interested in purchasing the Partnership's nine remaining
Properties. However, an environmental issue at the Greenfield Property has, to
date, delayed efforts to complete a sale of the remaining Properties. In light
of this unanticipated lengthy delay the Partnership has encountered during the
past two years in its efforts to reach an agreement for a remediation plan for
the site, the General Partner has decided to move forward with efforts to
market the Properties for sale during 1997. Until all of the Properties are
sold, the Partnership will continue to operate the Properties, and it is
intended that cash flow from operations will be distributed to the partners of
the Partnership in accordance with the terms of the Partnership Agreement. As
a result of the Partnership's intention to pursue a sale of the Properties, the
Properties have been reclassified on the Partnership's balance sheet as real
estate held for sale (See Note 8).
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.
The General Partner has decided to move forward with efforts to sell the
Properties during 1997. As of December 31, 1996, the Partnership's real estate
investments (as discussed in Note 4), which had a carrying value of $1,497,736,
were reclassified as "Real Estate Held for Sale" and are carried at the lower
of cost or fair value less any estimated costs to sell the Properties,
including any estimated environmental remediation costs. 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 -- 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 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 during 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, 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, 1996, 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, BKC 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, 1996, Payout had not occurred.
4. Real Estate
As of December 31, 1996, 1995 and 1994, the Partnership owned 9, 10 and 13
Properties, respectively, consisting of the restaurant buildings, fixtures and
improvements, and in some cases, the underlying land.
The Properties are leased on a net 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 2002
or 2003. 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 term 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 $ 608,667 $ 113,224
1998 627,593 132,260
1999 630,715 135,382
2000 630,715 135,382
2001 630,715 135,382
Thereafter 543,698 152,112
- -----------------------------------------------------------------
$3,672,103 $ 803,742
Leases are on a net basis requiring the franchisees 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, 1996, 1995 and 1994 was $339,461, $296,408 and $360,257,
respectively.
During the year ended December 31, 1996, the Partnership sold the following
Property:
Date Adjusted Net Gain
of Selling Book on
Store Sale Price Value Sale
Wichita, KS 10/01/96 $580,500 $241,905 $338,595
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
For the year ended December 31, 1996, the Properties located in Statesville
(NC), Decatur (AL), Springdale (AR), Atlanta (GA) and Klamath Falls (OR)
generated 11%, 14%, 10%, 13% and 13%, respectively, of the Partnership's rental
revenues. 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 an agreement (the "Agreement") with BKC for
the management of the Properties. The Agreement provides for a fee equal to 10%
of all rental income received by the Partnership from the Properties. To the
extent the annual rental income from the Properties is less than 15% of the
Partnership's investments in the Properties, as defined in the Agreement, BKC
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, 1996, 1995 and 1994, no such amounts were due from BKC.
Pursuant to an indemnity agreement between BKC and the Partnership (the
"Indemnity Agreement"), in the event of a default under the Leases, BKC is
obligated to pay the minimum monthly rent due under the Lease for the period
that the Lease is in default. The cumulative payments made by BKC pursuant to
the Indemnity Agreement are limited to an indemnity amount which was originally
10% of the Partnership's original investment in the Properties as defined in
the Indemnity Agreement, or $1,301,325. The indemnity amount may be decreased
by the amount of the minimum monthly rent payments made by BKC 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 BKC 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 $433,862.
6. Transactions with Affiliates
Amounts reimbursed to the General Partner and its affiliates for out-of-pocket
expenses during the years ended December 31, 1996, 1995 and 1994 were as
follows:
Unpaid at Earned
December 31, ----------------------------
1996 1996 1995 1994
BK I Realty Inc. and affiliates
Out-of-pocket expenses $ -- $ 402 $1,382 $7,072
$ -- $ 402 $1,382 $7,072
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.
7. Distributions
Distributions paid or payable to the 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 $ 781,090 $52.07 $ 503,909 $ 33.59 $1,177,999 $ 78.54
from operations
Net property
disposition
proceeds 574,695 38.31 1,925,659 128.37 4,204,755 280.31
- ------------------------------------------------------------------------------
Total Limited
Partners $1,355,785 $90.38 $2,429,568 $161.96 $5,382,754 $358.85
General Partner
Cash flow
from operations $ 41,110 $ -- $ 26,522 $ -- $ 62,000 $ --
Net property
disposition
proceeds 5,805 -- 19,451 -- 42,472 --
- ------------------------------------------------------------------------------
Total General
Partner $ 46,915 $ -- $ 45,973 $ -- $ 104,472 $ --
As of December 31, 1996, the Partnership declared a distribution of $787,488,
of which $771,333 ($51.42 per unit) was paid to limited partners and $3,231 was
paid to the General Partner on January 30, 1997. The remaining $12,924 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, 1996, the unitholders received their priority return, and all
amounts retained in 1996 were paid to the General Partner on January 30, 1997
in a distribution which amounted to $37,532 and included $12,924 for the fourth
quarter of 1996.
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. The Partnership had previously proposed site- specific,
clean-up standards for the Greenfield Property to the WDNR, whose response has
taken significantly longer than originally anticipated. In light of this
unanticipated lengthy delay, the General Partner has decided to move forward
with its efforts to market the Properties for sale during 1997. Upon the sale
of the Properties, the General Partner intends to distribute the net sales
proceeds in accordance with the terms of the Partnership Agreement. While we
are hopeful that a sale of the Properties can be completed during 1997, there
can be no assurances that such efforts will be successful.
The General Partner believes that the potential environmental remediation costs
associated with the Greenfield Property should not exceed approximately
$300,000 and, therefore, in accordance with the Partnership Agreement, such
amount has been set aside from the Partnership's net cash flow from operations
to fund these costs. If the proposed site-specific standards are approved by
the WDNR prior to any sale, it is expected that any of such reserves spent on
the environmental remediation should be recovered from the proceeds of the
eventual sale of the Greenfield Property. Therefore, any remediation costs
incurred prior to a sale of the Greenfield Property will be capitalized and
included in the carrying value of the Properties. Alternatively, if the sale
occurs prior to the receipt of such approval, it is likely that any buyer will
attribute a discount to the value of the Greenfield Property in determining an
acceptable purchase price.
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,
1996 1995 1994
Financial statement net income $1,026,350 $ 1,870,532 $ 3,179,853
Tax basis depreciation over
financial statement depreciation (21,624) (36,099) (61,143)
Financial statement gain on sales of
Properties under tax basis gain on
sales of Properties 46,713 79,771 453,235
Federal income tax basis net income $1,051,439 $ 1,914,204 $ 3,571,945
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 $ 2,190,018 $ 2,566,369 $ 3,171,378
Current year financial statement
net income under federal income tax
basis net income 25,089 43,672 392,092
Cumulative financial statement net
income under cumulative federal
income tax basis net income 1,236,879 1,193,207 801,115
Federal income tax basis partners'
capital $ 3,451,986 $ 3,803,248 $ 4,364,585
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.
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
- -----------------------------------------------------------------
$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 -- -- -- --
- -------------------------------------------------------------------------------
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 -- -- -- -- --
- -------------------------------------------------------------------------------
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.
EXHIBIT 13.1
CERTIFICATES OF PARTICIPATION
1996 ANNUAL REPORT
Certificates of Participation
Certificates of Participation, formed in 1985, is an assignment by the
respective general partners of Burger King Limited Partnerships I, II and III
("BK-I", "BK-II", and "BK-III", respectively) of some of their rights to
participate in the profits, losses and gains of, and to receive distributions
from each of the partnerships. BK- II, which commenced operations in January
1983, sold its 29 remaining restaurants in May 1996 and was subsequently
dissolved in December 1996. BK-I and BK-III are public limited partnerships
which commenced operations in April 1982 and May 1984, respectively. At
December 31, 1996, BK- I and BK-III owned 9 and 23 Burger Kingr restaurants
(the "Properties"), respectively, located throughout the United States and
leased on a net basis to franchisees of Burger King Corporation ("BKC"). The
principal investment objectives of BK-I and BK-III are to make regular cash
distributions to the partners of the partnerships and realize long-term
appreciation from the sale of the Properties.
Contents
1 Message to Investors
BK I Realty Inc.
3 Independent Auditors' Report
4 Balance Sheets
4 Statements of Changes in Stockholder's Deficit
4 Statements of Operations
5 Statements of Cash Flows
6 Notes to Financial Statements
BK III Restaurants Inc.
9 Independent Auditors' Report
10 Balance Sheets
10 Statements of Changes in Stockholder's Deficit
10 Statements of Operations
11 Statements of Cash Flows
12 Notes to Financial Statements
Administrative Inquiries Performance Inquiries/Form 10-Ks
Address Changes/Transfers First Data Investor Services Group
Service Data Corporation P.O. Box 1527
2424 South 130th Circle Boston, Massachusetts 02104-1527
Omaha, Nebraska 68144-2596 Attn: Financial Communications
800-223-3464 800-223-3464
Message to Investors
Presented for your review is the 1996 Annual Report for Certificates of
Participation ("COPs"). The past year was a significant one for COPs as BK-II
completed the sale of its 29 remaining restaurant properties in May 1996 and
was subsequently dissolved in December 1996. A cash distribution of the net
sales proceeds in the amount of $171.35 per Unit was paid to COPs holders on
August 30, 1996. In addition, a final liquidating distribution in the amount
of $13.12 per Unit was also paid to COPs Holders as a result of the dissolution
of BK-II at the end of 1996. COPs' remaining investments consist of its
interests in BK-I and BK-III (together, the "Partnerships"). This letter
includes an overview of COPs' cash distributions and financial performance, and
a sales update on the Partnerships. Also included are COPs' 1996 audited
financial statements.
Cash Distributions
COPs holders receive their pro rata share of the cash distributions assigned by
BK III Restaurants Inc. ("GP-III"), the general partner of BK-III, on a
quarterly basis and their pro rata share of the cash distributions assigned by
BK I Realty Inc. ("GP-I"), the general partner of BK-I, on an annual basis in
accordance with the respective partnership agreements.
For 1996, COPs holders received total distributions of $219.99 per Unit. This
included: (i) a cash distribution made as a result of the sale of BK-II's
remaining Properties in the amount of $171.35 per Unit, (ii) the related
liquidating distribution in the amount of $13.12 per Unit, (iii) a distribution
of BK-I's annual cash flow from operations of $10.66 per Unit, (iv) quarterly
distributions of BK- III's cash flow from operations during 1996 totalling
$22.03 per Unit, (v) a distribution of net proceeds from the sale of one of
BK-I's Properties in the fourth quarter of 1996 in the amount of $1.51 per
Unit, and (vi) a distribution of net proceeds from the sale of one of BK-III's
Properties in the last quarter of 1996 in the amount of $1.32 per Unit.
Since the inception of COPs, cumulative cash distributions have totaled $972.19
per original $1,000 Unit, including distributions of cash flow from operations
in the amount of $764.11 per Unit and distributions of net proceeds from the
sales of Properties in the amount of $208.08 per Unit. Distributions of net
sales proceeds represent returns of capital which have reduced your COPs Unit
size from $1,000 to $791.92.
Sales Update
During the fourth quarter of 1996, BK-I sold its Property located in Wichita,
Kansas for net proceeds of $580,500. As discussed above, the net sales
proceeds were distributed to COPs holders on January 30, 1997. As previously
reported, GP-I has had discussions with a number of institutions and other
third parties interested in purchasing BK- I's nine remaining Properties.
However, an environmental issue at one of BK-I's Properties located in
Greenfield, Wisconsin (the "Greenfield Property") has delayed GP-I's efforts to
complete the sale of BK-I's remaining Properties. BK-I had previously proposed
site-specific clean-up standards for the Greenfield Property to the Wisconsin
Department of Natural Resources ("WDNR"), whose response has taken
significantly longer than originally anticipated. In light of the
unanticipated lengthy delay, GP-I has decided to move forward with its efforts
to market the Properties for sale during 1997. Upon the sale of the
Properties, GP-I intends to distribute the net sales proceeds in accordance
with the terms of BK-I's Partnership Agreement. Until all of the Properties
are sold, BK-I will continue to operate the Properties, and it is intended that
cash flow from operations will be distributed to the partners in accordance
with the terms of BK-I's Partnership Agreement.
During the fourth quarter of 1996, BK-III sold its leasehold interest in a
Property located in Delhi Township, Ohio for net sales proceeds of $507,000. As
discussed above, the net sales proceeds were distributed to BK-III's limited
partners on January 30, 1997. After a careful evaluation of market conditions,
GP-III has also decided to commence efforts to market BK-III's remaining 23
Properties during 1997 in a bulk sale transaction. Until all of the Properties
are sold, BK-III intends to continue operating the Properties and distributing
cash flow from operations to the partners in accordance with the terms of
BK-III's Partnership Agreement.
Property Operations
We are pleased to report that same-store sales during 1996 for BK-I's and
BK-III's Properties increased by approximately 4.5% and 3.5%, respectively, as
compared with the previous year. The increase in same-store sales is primarily
attributable to Burger King Corporation's aggressive marketing efforts. Rental
income received by the Partnerships from the franchisees at the Properties is
equal to the greater of a minimum annual base rent or 8.5% of the Properties'
annual food and beverage sales. Therefore, increases in sales volume at the
Properties will often result in an increase in the Partnerships' rental income.
Financial Highlights
For the years ended December 31,
1996 1995
BK I Realty Inc.
Equity in earnings of BK-I $ 43,180 $ 49,322
Net income 23,000 34,190
Earnings per COPs Unit (1) 8.61 12.79
BK III Restaurants Inc.
Equity in earnings of BK-III $ 87,852 $ 80,307
Net income 52,617 54,119
Earnings per COPs Unit (1) 20.20 20.83
(1) Earnings per COPs Unit represents 80% of GP-I's and GP-III's earnings in
BK-I and BK-III, respectively, less general and administrative expenses,
divided by 3,084 COPs Units outstanding.
Summary
The ultimate performance of COPs is dependent on a number of variables,
including the future operating performance of the Properties and the net
proceeds ultimately realized by BK-I and BK-III from the sale of their
respective Properties. Although we have been relatively pleased with the
operating performance of the Properties and will attempt to continue to
maximize future cash distributions, based on the projected resale values of the
Properties and estimated cash flow from operations, it is currently anticipated
that total cash distributions ultimately received by COPs Holders will, in all
likelihood, only slightly exceed their initial $1,000 per Unit investment. We
will update you on the status of the Partnerships' efforts to sell their
remaining Properties in future correspondence.
Very truly yours,
Certificates of Participation
By: BK I Realty Inc.
BK III Restaurants Inc.
General Partners
/s/Rocco F. Andriola
By: Rocco F. Andriola
President
April 15, 1997
INDEPENDENT AUDITORS' REPORT
The Stockholders
BK I Realty Inc.
We have audited the financial statements of BK I Realty Inc. as listed in the
accompanying index. These financial statements are the responsibility of the
Company'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 BK I Realty Inc. 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
February 10, 1997
BKI REALTY INC.
Balance Sheets At December 31, At December 31,
1996 1995
Assets
Investment in Burger King Limited Partnership I $ (48,060) $ (62,210)
Liabilities and Stockholder's Deficit
Liabilities:
Distributions payable (Note 5) 40,763 22,878
Accrued expenses 10,000 --
Total Liabilities 50,763 22,878
Stockholder's Deficit:
Common stock, $1.00 par value: authorized,
issued and outstanding 1,000 shares 1,000 1,000
Additional paid-in capital 419,879 409,699
Accumulated deficit (519,702) (495,787)
Total Stockholder's Deficit (98,823) (85,088)
Total Liabilities and Stockholder's Deficit $ (48,060) $ (62,210)
BK I REALTY INC.
Statements of Changes in Stockholder's Deficit
For the years ended December 31, 1996, 1995 and 1994
Additional
Common Paid-in Accumulated
Total Stock Capital Deficit
Stockholder's deficit at
December 31, 1993 $ (73,199) $1,000 $364,912 $(439,111)
Net Income 59,579 -- -- 59,579
Distributions (Note 5) (104,472) -- -- (104,472)
Capital contribution (Note 3) 29,655 -- 29,655 --
Stockholder's deficit at
December 31, 1994 (88,437) 1,000 394,567 (484,004)
Net Income 34,190 -- -- 34,190
Distributions (Note 5) (45,973) -- -- (45,973)
Capital contribution (Note 3) 15,132 -- 15,132 --
Stockholder's deficit at
December 31, 1995 (85,088) 1,000 409,699 (495,787)
Net Income 23,000 -- -- 23,000
Distributions (Note 5) (46,915) -- -- (46,915)
Capital contribution (Note 3) 10,180 -- 10,180 --
Stockholder's deficit at
December 31, 1996 $ (98,823) $1,000 $419,879 $(519,702)
BK I REALTY INC.
Statements of Operations
For the years ended December 31, 1996 1995 1994
Equity in earnings of
Burger King Limited Partnership I (Note 2) $ 43,180 $ 49,322 $ 89,234
General and administrative expenses (10,000) -- --
Income taxes (Note 3) (10,180) (15,132) (29,655)
Net Income $ 23,000 $ 34,190 $ 59,579
Earnings Per COP unit
(3,084 outstanding) $8.61 $12.79 $23.15
BK I REALTY INC.
Statements of Cash Flows
For the years ended December 31, 1996 1995 1994
Cash Flows From Operating Activities
Net Income $ 23,000 $ 34,190 $ 59,579
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of Burger King Limited
Partnership I (43,180) (49,322) (89,234)
Accrued expenses 10,000 -- --
Contributions to capital 10,180 15,132 29,655
Net cash provided by operating activities -- -- --
Cash Flows From Financing Activities
Distributions from Burger King Limited
Partnership I 29,030 96,480 92,878
Cash distributions paid (29,030) (96,480) (92,878)
Net cash used for financing activities -- -- --
Net change in cash -- -- --
Cash, beginning of period -- -- --
Cash, end of period $ -- $ -- $ --
BK I REALTY INC.
Notes to the Financial Statements
December 31, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies
BK I Realty Inc. ("GP-I"), formerly Shearson/BK Realty, Inc., is an affiliate
of Lehman Brothers Inc. ("Lehman"). GP-I was incorporated on November 24, 1981
and was organized solely to serve as general partner of Burger King Limited
Partnership I ("BK-I"). 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, GP-I's name was changed to delete any reference to
"Shearson."
The financial statements of GP-I have been prepared on the accrual basis of
accounting.
GP-I's investment in BK-I is accounted for by the equity method. The carrying
amount of this investment is increased (decreased) by GP-I's share of the
earnings (losses) of BK-I and decreased by distributions received from BK-I.
Income taxes have been provided in accordance with the provisions of SFAS No.
109, "Accounting for Income Taxes".
Earnings per COP's unit represents approximately 80% of GP-I's earnings in
BK-I, less general and administrative expenses, divided by the total number of
COP's units outstanding. For the years ended December 31, 1996, 1995 and 1994,
there were 3,084 COP's units outstanding.
2. Investment in BK-I
BK-I was formed on December 14, 1981, for the purpose of acquiring,
constructing, improving, holding, and maintaining Burger King restaurants (the
"Properties"). The Properties are leased on a net basis to franchisees of
Burger King Corporation. BK-I owned 9, 10 and 13 restaurants at December 31,
1996, 1995 and 1994, respectively. GP-I purchased the general partnership
interest for $1,000.
Following is a summary of BK-I's balance sheets as of December 31, 1996 and
1995, and statements of operations for the years ended December 31, 1996, 1995
and 1994:
Balance Sheets At December 31, At December 31,
1996 1995
Assets
Real estate held for sale $1,497,736 $ --
Real estate at cost:
Land -- 1,113,406
Buildings -- 2,210,836
Fixtures and equipment -- 485,306
-- 3,809,548
Less accumulated depreciation -- (1,961,780)
-- 1,847,768
Cash and cash equivalents 1,478,513 973,641
Rent receivable 76,042 65,023
Total Assets $3,052,291 $2,886,432
Liabilities and Partners' Capital
Liabilities:
Accounts payable and accrued expenses $ 36,025 $ 139,418
Due to Burger King Corporation 14,152 --
Distributions payable 812,096 180,645
Total Liabilities 862,273 320,063
Partners' Capital (Deficit):
General Partner (88,823) (85,088)
Limited Partners (15,000 units outstanding) 2,278,841 2,651,457
Total Partners' Capital 2,190,018 2,566,369
Total Liabilities and Partners' Capital $3,052,291 $2,886,432
Statements of Operations
For the years ended December 31, 1996 1995 1994
Income
Rental $ 994,879 $1,004,195 $1,820,012
Interest 58,248 75,276 40,987
Other 1,140 1,905 2,828
Total Income 1,054,267 1,081,376 1,863,827
Expenses
Depreciation 108,127 118,323 237,368
Ground lease rent 112,914 112,914 171,976
Management fee 87,601 89,129 164,912
General and administrative 57,870 143,493 150,405
Total Expenses 366,512 463,859 724,661
Income from operations 687,755 617,517 1,139,166
Other Income
Gains on sales of properties 338,595 1,253,015 2,040,687
Net Income $1,026,350 $1,870,532 $3,179,853
Net Income Allocated:
To the General Partner $ 43,180 $ 49,322 $ 89,234
To the Limited Partners 983,170 1,821,210 3,090,619
$1,026,350 $1,870,532 $3,179,853
Per limited partnership unit
(15,000 outstanding) $65.54 $121.41 $206.04
3. Income Taxes
BK-I COP's Holders have been assigned approximately 80% of the earnings of
GP-I. The remaining retained interest of GP-I is included in consolidated
Federal, state and local income tax returns of Lehman, its parent corporation.
The tax sharing arrangement provides that any taxes attributable to GP-I's
retained interest included in Lehman's consolidated tax liability will be
reflected as a capital contribution or dividend to GP-I. For financial
reporting purposes, income tax expense has been reflected as if GP-I had filed
separate income tax returns.
The tax effects of temporary differences are not material at December 31, 1996
and 1995.
Federal, state and local income taxes included on GP-I's financial statements
were $10,180, $15,132 and $29,655 for the years ended December 31, 1996, 1995
and 1994, respectively. A comparison of income tax expense at the federal
statutory rate of 35% to GP-I's provision for the period ended December 31, is
as follows:
1996 1995 1994
Tax at statutory federal tax rate $11,613 $17,263 $31,232
State income tax, net of federal benefit 3,979 5,914 10,700
Impact of marginal federal tax rates (5,412) (8,045) (12,277)
- -----------------------------------------------------------------------
Provisions for income taxes $10,180 $15,132 $29,655
4. Note Receivable
GP-I was partially capitalized by the stockholder issuing a Senior Subordinated
Note (the "Note") in the amount of $1,529,951 which bore interest at the rate
of 15.25% through maturity on December 1, 1990. In June 1990, the Note was
amended and the maturity extended through December 1, 1991, at a rate equal to
the bond equivalent yield of the most recently issued one-year United States
Treasury bill plus sixty basis points or 7.91%. Additionally, on its
anniversary date, the Note is automatically extended for an additional one-year
term, at a rate equal to the bond equivalent yield of the most recently issued
one-year United States Treasury bill plus 60 basis points. In accordance with
the June 1990 amendment, the maturity date was automatically extended to
December 1, 1997. At December 31, 1996 and 1995, the interest rate was 5.96%
and 5.74%, respectively.
Since no amounts are payable until maturity, for financial reporting purposes,
the Note and accrued and unpaid interest, which would be reflected as a
reduction in stockholder's equity resulting in no net change in stockholder's
equity, has not been recorded in the accompanying financial statements.
5. Distributions
Distributions paid or declared to GP-I by BK-I aggregated $46,915, $45,973 and
$104,472 for the years ended December 31, 1996, 1995 and 1994, respectively.
GP-I distributed $40,763, $22,878 and $73,385 in January 1997, January 1996 and
January 1995 for the years ended December 31, 1996, 1995 and 1994,
respectively. Of these amounts, $37,532 ($12.17 per COP's unit), $21,217
($6.88 per COP's unit) and $66,648 ($21.61 per COP's unit), respectively, were
distributed to COP's holders. Distributions of net proceeds from the sales of
Properties amounted to $4,644 ($1.51 per COP's unit), $15,561 ($5.05 per COP's
unit) and $33,978 ($11.02 per COP's unit) for the years ended December 31,
1996, 1995 and 1994, respectively.
6. Real Estate
A. During the fourth quarter of 1996, BK-I sold one Property as follows:
Date Adjusted Net Gain
of Selling Book on
Store Sale Price* Value Sale
Wichita, KS 10/01/96 $580,500 $241,905 $338,595
* Purchase price of the Property less estimated legal costs related to
the sale of the Property.
B. During the first quarter of 1995, BK-I sold three Properties as follows:
Date Adjusted Net Gains
of Selling Book on
Stores Sale Price* Value Sale
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
* Purchase price of the Properties less legal costs related to the sales of
the Properties.
C. On September 23, 1994, BK-I notified the State of Wisconsin Department of
Natural Resources ("WDNR") that petroleum and chlorinated compounds were
discovered at one of BK-I's Properties located in Greenfield, Wisconsin (the
"Greenfield Property"). The WDNR has indicated that under Wisconsin state law,
BK-I is responsible for remediating the site. BK-I had previously proposed
site-specific clean-up standards for the Greenfield Property to the WDNR, whose
response has taken significantly longer than originally anticipated. In light
of the unanticipated lengthy delay, GP-I has decided to move forward with its
efforts to market BK-I's remaining Properties for sale during 1997. Upon the
sale of the Properties, GP-I intends to distribute the net sales proceeds in
accordance with the terms of BK- I's Partnership Agreement. While GP-I is
hopeful that a sale of the Properties can be completed during 1997, there can
be no assurances that such efforts will be successful.
GP-I believes that the potential environmental remediation costs associated
with the Greenfield Property should not exceed approximately $300,000 and,
therefore, in accordance with BK-I's Partnership Agreement, such amount has
been set aside from BK-I's net cash flow from operations to fund these costs.
If the proposed site- specific standards are approved by the WDNR prior to any
sale, it is expected that any of such reserves spent on the environmental
remediation should be recovered from the proceeds of the eventual sale of the
Greenfield Property. Therefore, any remediation costs incurred prior to a sale
of the Greenfield Property will be capitalized and included in the carrying
value of BK-I's Properties. Alternatively, if the sale occurs prior to the
receipt of such approval, it is likely that any buyer will attribute a discount
to the value of the Greenfield Property in determining an acceptable purchase
price.
INDEPENDENT AUDITORS' REPORT
The Stockholders
BK III Restaurants Inc.
We have audited the financial statements of BK III Restaurants Inc. as listed
in the accompanying index. These financial statements are the responsibility of
the Company'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 BK III Restaurants Inc. 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
February 10, 1997
BK III RESTAURANTS INC.
Balance Sheets At December 31, At December 31,
1996 1995
Assets
Investment in Burger King Limited Partnership III $ 878 $ (2,424)
Liabilities and Stockholder's Deficit
Liabilities:
Distributions payable (Note 5) 25,648 20,205
Accrued expenses 10,000 --
Total Liabilities 35,648 20,205
Stockholder's Deficit:
Common stock, $1.00 par value: authorized,
issued and outstanding 1,000 shares 1,000 1,000
Additional paid-in capital 352,993 327,758
Accumulated deficit (388,763) (351,387)
Total Stockholder's Deficit (34,770) (22,629)
Total Liabilities and Stockholder's Capital $ 878 $ (2,424)
BK III RESTAURANTS INC.
Statements of Changes in Stockholder's Deficit
For the years ended December 31, 1996, 1995 and 1994
Additional
Common Paid-in Accumulated
Total Stock Capital Deficit
Stockholder's deficit at
December 31, 1993 $(18,345) $1,000 $273,642 $(292,987)
Net Income 56,858 -- -- 56,858
Distributions (Note 5) (83,517) -- -- (83,517)
Capital contribution (Note 3) 27,928 -- 27,928 --
Stockholder's deficit at
December 31, 1994 (17,076) 1,000 301,570 (319,646)
Net Income 54,119 -- -- 54,119
Distributions (Note 5) (85,860) -- -- (85,860)
Capital contribution (Note 3) 26,188 -- 26,188 --
Stockholder's deficit at
December 31, 1995 (22,629) 1,000 327,758 (351,387)
Net Income 52,617 -- -- 52,617
Distributions (Note 5) (89,993) -- -- (89,993)
Capital contribution (Note 3) 25,235 -- 25,235 --
Stockholder's deficit at
December 31, 1996 $(34,770) $1,000 $352,993 $(388,763)
BK III RESTAURANTS INC.
Statements of Operations
For the years ended December 31, 1996 1995 1994
Equity in earnings of
Burger King Limited Partnership III (Note 2) $87,852 $80,307 $84,786
General and administrative expenses (10,000) -- --
Income taxes (Note 3) (25,235) (26,188) (27,928)
Net Income $52,617 $54,119 $56,858
Earnings Per COP unit
(3,084 outstanding) $20.20 $20.83 $21.99
BK III RESTAURANTS INC.
Statements of Cash Flows
For the years ended December 31, 1996 1995 1994
Cash Flows From Operating Activities
Net Income $52,617 $54,119 $56,858
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in earnings of Burger King Limited
Partnership III (87,852) (80,307) (84,786)
Accrued expenses 10,000 -- --
Contributions to capital 25,235 26,188 27,928
Net cash provided by operating activities -- -- --
Cash Flows From Financing Activities
Distributions from Burger King Limited
Partnership III 84,550 85,676 82,052
Cash distributions paid (84,550) (85,676) (82,052)
Net cash used for financing activities -- -- --
Net change in cash -- -- --
Cash, beginning of period -- -- --
Cash, end of period $ -- $ -- $ --
BK III RESTAURANTS INC.
Notes to the Financial Statements
December 31, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies
BK III Restaurants Inc. ("GP-III"), formerly Shearson/BK Restaurants, Inc., is
an affiliate of Lehman Brothers Inc. ("Lehman"). GP-III was incorporated on
October 25, 1983 and was organized solely to serve as general partner in Burger
King Limited Partnership III ("BK-III"). 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, GP-III's name was changed to delete any
reference to "Shearson."
The financial statements of GP-III have been prepared on the accrual basis of
accounting.
GP-III's investment in BK-III is accounted for by the equity method. The
carrying amount of this investment is increased (decreased) by GP- III's share
of the earnings (losses) of BK-III and decreased by distributions received from
BK-III.
Income taxes have been provided in accordance with the provisions of SFAS No.
109, "Accounting for Income Taxes".
Earnings per COP's unit represents approximately 80% of GP-III's earnings in
BK-III, less general and administrative expenses, divided by the total number
of COP's units outstanding. For the years ended December 31, 1996, 1995 and
1994, there were 3,084 COP's units outstanding.
2. Investment in BK-III
BK-III was formed on November 22, 1983, for the purpose of acquiring,
constructing, improving, holding, and maintaining Burger King restaurants (the
"Properties"). The Properties are leased on a net basis to franchisees of
Burger King Corporation. BK-III owned 23, 24 and 24 restaurants at December
31, 1996, 1995 and 1994, respectively. GP-III purchased the general
partnership interest for $1,000.
Following is a summary of BK-III's balance sheets as of December 31, 1996 and
1995, and statements of operations for the years ended December 31, 1996, 1995
and 1994:
Balance Sheets At December 31, At December 31,
1996 1995
Assets
Real estate held for sale $5,175,404 $ --
Real estate at cost:
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 -- 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 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 Operations
For the years ended December 31, 1996 1995 1994
Income
Rental $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 287,544 279,546 257,583
Management fee 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 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
3. Income Taxes
BK-III COP's Holders have been assigned approximately 80% of the earnings of
GP-III. The remaining retained interest of GP-III is included in consolidated
Federal, state and local income tax returns of Lehman, its parent corporation.
The tax sharing arrangement provides that any taxes attributable to GP-III's
retained interest included in Lehman's consolidated tax liability will be
reflected as a capital contribution or dividend to GP-III. For financial
reporting purposes, income tax expense has been reflected as if GP-III had
filed separate income tax returns.
The tax effects of temporary differences are not material at December 31, 1996
and 1995.
Federal, state and local income taxes included on GP-III's financial statements
were $25,235, 26,188 and $27,928 for the years ended December 31, 1996, 1995
and 1994, respectively. A comparison of income tax expense at the federal
statutory rate of 35% to GP-III's provision for the period ended December 31,
is as follows:
1996 1995 1994
Tax at statutory federal tax rate $27,248 $28,107 $29,675
State income tax, net of federal benefit 9,335 9,630 10,167
Impact of marginal federal tax rates (11,348) (11,549) (11,914)
- --------------------------------------------------------------------------
Provisions for income taxes $25,235 $26,188 $27,928
4. Note Receivable
GP-III was partially capitalized by the stockholder issuing a Senior
Subordinated Note (the "Note") in the amount of $1,696,257 which bore interest
at the rate of 15.25% through maturity on December 1, 1990. In June 1990, the
Note was amended and the maturity extended through December 1, 1991 at a rate
equal to the bond equivalent yield of the most recently issued one-year United
States Treasury bill plus 60 basis points or 7.91%. Additionally, on its
anniversary date, the Note is automatically extended for an additional one-year
term, at a rate equal to the bond equivalent yield of the most recently issued
one-year United States Treasury bill plus 60 basis points. In accordance with
the June 1990 amendment, the maturity date was automatically extended to
December 1, 1997. At December 31, 1996 and 1995, the interest rate was 5.96%
and 5.74%, respectively.
Since no amounts are payable until maturity, for financial reporting purposes,
the Note and accrued and unpaid interest, which would be reflected as a
reduction in stockholder's equity resulting in no net change in stockholder's
equity, has not been recorded in the accompanying financial statements.
5. Distributions
Distributions paid or declared to GP-III by BK-III aggregated $89,993, $85,860
and $83,517 for the years ended December 31, 1996, 1995 and 1994, respectively,
of which GP-III distributed $71,995 ($23.35 per COP's unit), $68,688 ($22.27
per COP's unit) and $66,814 ($21.67 per COP's unit) for 1996, 1995 and 1994,
respectively, to COP's holders. In January 1997, GP-III distributed the fourth
quarter 1996 distribution of $25,648, of which $20,519 ($6.65 per COP's unit)
was paid to COP's holders.
6. Real Estate
A. During the fourth quarter of 1996, BK-III sold its leasehold interest in
one Property as follows:
Date Adjusted Net Gain
of Selling Book on
Store Sale Price* Value Sale
Delhi Township, OH 11/15/96 $507,000 $123,807 $383,193
* Purchase price of the Properties less legal costs related to the sales of
the Properties.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> (48,060)
<CURRENT-LIABILITIES> 50,763
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> (98,823)
<TOTAL-LIABILITY-AND-EQUITY> (48,060)
<SALES> 0
<TOTAL-REVENUES> 43,180
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 33,180
<INCOME-TAX> 10,180
<INCOME-CONTINUING> 23,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,000
<EPS-PRIMARY> 8.61
<EPS-DILUTED> 8.61
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 878
<CURRENT-LIABILITIES> 35,648
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> (34,770)
<TOTAL-LIABILITY-AND-EQUITY> 878
<SALES> 0
<TOTAL-REVENUES> 87,852
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 77,852
<INCOME-TAX> 25,235
<INCOME-CONTINUING> 52,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,617
<EPS-PRIMARY> 20.20
<EPS-DILUTED> 20.20
</TABLE>
