<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
---------------------------
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 0-20253
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Wisconsin 39-1660958
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 W. 11th St., Suite 1110, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 421-7444
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Interests
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 such 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
------ ------
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1998 and December 31, 1997
----------------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
INVESTMENT PROPERTIES: (Note 3)
Land $ 1,553,680 $ 2,030,982
Buildings and improvements 2,650,334 3,309,464
Accumulated depreciation (692,805) (761,861)
----------- -----------
Net investment properties 3,511,209 4,578,585
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 229,032 595,420
Cash held in Indemnification Trust (Note 8) 303,601 290,662
Rents and other receivables 0 23,062
Deferred rent receivable 21,197 31,029
Deferred fees 20,185 21,524
Prepaid assets 365 3,649
----------- -----------
Total other assets 574,380 965,346
----------- -----------
DUE FROM FORMER AFFILIATES: (Note 2)
Due from former general partner affiliates 1,734,417 1,734,417
Allowance for uncollectible amounts due from
former affiliates (1,734,417) (1,734,417)
Restoration cost receivable 5,662,696 5,181,441
Allowance for uncollectible restoration
receivable (5,662,696) (5,181,441)
----------- -----------
Due from former affiliates, net 0 0
----------- -----------
Total Assets $ 4,085,589 $ 5,543,931
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
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DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
LIABILITIES AND PARTNERS' CAPITAL
September 30, 1998 and December 31, 1997
----------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 25,455 $ 25,331
Due to current General Partner 84 1,395
Security deposits 16,635 36,819
Unearned rental income 27,254 42,254
------------ -----------
Total liabilities 69,428 105,799
------------ -----------
CONTINGENT LIABILITIES: (Note 7)
PARTNER'S CAPITAL: (Notes 1, 4 and 11)
Current General Partner -
Cumulative net income (loss) 18,186 15,445
Cumulative cash distributions (7,736) (6,640)
------------ -----------
10,450 8,805
------------ -----------
Limited Partners (17,102.52 interests outstanding)
Capital contributions, net of offering costs 14,408,872 14,408,872
Cumulative net income (loss) 45,314 (226,070)
Cumulative cash distributions (10,182,984) (8,487,984)
Reallocation of former general partners'
deficit capital (265,491) (265,491)
------------ -----------
4,005,711 5,429,327
------------ -----------
Total partners' capital 4,016,161 5,438,132
------------ -----------
Total liabilities and partners' capital $ 4,085,589 $ 5,543,931
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Rental income $ 95,308 $134,359 $304,514 $452,746
Interest income on direct financing leases 0 0 0 1,708
Interest income 7,233 9,755 34,360 23,850
Other income 0 250 42 631
Gain on sale of assets 0 7,585 238,698 7,585
Recovery of amounts previously written off 52 53 52 11,063
-------- -------- -------- --------
102,593 152,002 577,666 497,583
-------- -------- -------- --------
EXPENSES:
Partnership management fees 16,215 15,960 48,475 47,540
Restoration fees 0 0 0 103
Insurance 1,094 1,218 3,284 3,784
General and administrative 5,649 6,510 32,186 32,833
Advisory Board fees and expenses 4,578 4,178 13,489 10,200
Professional services 20,881 13,611 68,300 38,180
Professional services related to investigation 194 4,957 1,480 36,318
Appraisals 0 0 13,776 0
Environmental inspections 0 0 8,250 0
Land title surveys 11,950 0 11,950 0
Disposition fees 0 12,150 37,500 12,150
Depreciation 20,591 26,487 63,512 85,146
Amortization 446 446 1,339 1,339
-------- -------- -------- --------
81,598 85,517 303,541 267,593
-------- -------- -------- --------
NET INCOME $ 20,995 $ 66,485 $274,125 $229,990
======== ======== ======== ========
NET INCOME - GENERAL PARTNER $ 210 $ 665 $ 2,741 $ 2,300
NET INCOME - LIMITED PARTNERS 20,785 65,820 271,384 227,690
-------- -------- -------- --------
$ 20,995 $ 66,485 $274,125 $229,990
======== ======== ======== ========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST, based on 17,102.52 interests $ 1.22 $ 3.85 $ 15.87 $ 13.31
outstanding ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 274,125 $ 229,990
Adjustments to reconcile net income to net cash from (used in)
operating activities -
Depreciation and amortization 64,851 86,485
Gain on sale of assets (238,698) (7,585)
Recovery of amounts previously written off 0 (11,063)
Interest applied to Indemnification Trust Account (12,939) (11,427)
Decrease in rents, other receivables and prepaid assets 26,346 9,554
Decrease in deferred rent receivable 9,832 9,499
Deposits applied for real estate taxes 0 81,477
Increase in accounts payable and accrued expenses 124 5,250
Decrease in security deposits (20,184) (9,450)
(Decrease) in due to General Partner (1,311) (49,061)
Increase/(Decrease) in unearned rental income (15,000) 665
(Decrease) in real estate taxes payable 0 (81,217)
----------- -----------
Net cash provided from operating activities 87,146 253,117
----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Principal payments received on direct financing leases 0 30,886
Recoveries from former affiliates 0 2,571
Proceeds from sale of assets 1,242,562 404,851
----------- -----------
Net cash provided from investing activities 1,242,562 438,308
----------- -----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Cash distributions to General Partner (1,096) (920)
Cash distributions to Limited Partners (1,695,000) (1,150,000)
----------- -----------
Net cash (used in) financing activities (1,696,096) (1,150,920)
----------- -----------
NET (DECREASE) IN CASH AND CASH
EQUIVALENTS (366,388) (459,495)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 595,420 1,155,128
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 229,032 $ 695,633
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
These unaudited interim financial statements should be read in conjunction with
DiVall Income Properties 3 Limited Partnership's (the "Partnership") 1997 annual
audited financial statements within Form 10-K.
These unaudited financial statements include all adjustments which are, in the
opinion of management, necessary to present a fair statement of financial
position as of September 30, 1998, and the results of operations for the three-
and nine-month periods ended September 30, 1998, and 1997, and cash flows for
the nine-month periods ended September 30, 1998 and 1997. Results of operations
for the periods are not necessarily indicative of the results to be expected for
the full year.
The following significant event(s) have occurred subsequent to fiscal year 1997,
which require disclosure in this interim report per Regulation S-X, Rule 10-01,
Paragraph (a) (5):
During the First Quarter of 1998, the Partnership sold its Denny's property in
Sanford, Florida for $1,250,000. The sale took place in January 1998, resulting
in a gain, before disposition fees of approximately $239,000.
1. ORGANIZATION AND BASIS OF ACCOUNTING:
The Partnership was formed on December 12, 1989, pursuant to the Uniform Limited
Partnership Act of the State of Wisconsin. The initial capital which was
contributed during 1989, consisted of $300, representing aggregate capital
contributions of $200 by the former general partners and $100 by the Initial
Limited Partner.
The Partnership initially offered two classes of Limited Partnership interests
for sale: Distribution interests ("D-interests") and Retention interests ("R-
interests"). Each class was offered at a price (before volume discounts) of
$1,000 per interest. The Partnership offered the two classes of interests
simultaneously up to an aggregate of 25,000 interests.
The minimum offering requirements for the D-interests were met and escrowed
subscription funds were released to the Partnership as of July 13, 1990. The
offering closed on April 23, 1992, at which point 17,102.52 D-interests had been
issued, resulting in aggregate proceeds, net of discounts and offering costs, of
$14,408,872.
The minimum offering requirements for R-interests were not met. During 1991,
680.9 R-interests were converted to D-interests and were reflected as
Partnership issuances in 1991.
The Partnership is currently engaged in the business of owning and operating its
investment portfolio (the "Properties") of commercial real estate. The
Properties are leased on a triple net basis to, and operated by, franchisors or
franchisees of national, regional and local retail chains under long-term
leases. The lessees consist of fast-food, family style, and casual/theme
restaurants. At September 30, 1998, the
6
<PAGE>
Partnership owned five (5) properties and specialty leasehold improvements for
use in all five (5) of the Properties.
Rental revenue from investment properties is recognized on the straight-line
basis over the life of the respective lease. Revenue from direct financing
leases is recognized at level rates of return over the term of the lease.
Depreciation of the properties is provided on a straight-line basis over 31.5
years, which is the estimated useful lives of the buildings and improvements.
Deferred charges consist of leasing commissions paid when properties are leased
to tenants other than the original tenant. Leasing commissions are capitalized
and amortized over the life of the lease.
Real estate taxes on the Partnership's investment properties are the
responsibility of the tenant. However, when a tenant fails to make the required
tax payments or when a property becomes vacant, the Partnership makes the
appropriate payment to avoid possible foreclosure of the property. Taxes are
accrued in the period for which the liability is incurred.
Cash and cash equivalents include cash on deposit in financial institutions and
highly liquid temporary investments with initial maturities of 90 days or less.
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.
The Partnership will be dissolved on December 1, 2015, or earlier upon the prior
occurrence of any of the following events: (a) the disposition of all
interests in real estate and other Partnership assets; (b) the decision by
Majority Vote, as defined, of the Limited Partners to dissolve the Partnership
or to compel the sale of all or substantially all of the Partnership's assets;
(c) the failure to elect a successor General Partner within six months after
removal of the last remaining General Partner; or (d) the date of the death or
the effective date of dissolution, removal, withdrawal, bankruptcy, or
incompetency of the last remaining General Partner, unless the Partnership is
continued by vote of all Limited Partners and a replacement General Partner is
previously elected by a majority of the Limited Partners.
No provision for Federal income taxes has been made, as any liability for such
taxes would be that of the individual partners rather than the Partnership. At
December 31, 1997, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$2,800,000.
2. REGULATORY INVESTIGATION:
A preliminary investigation during 1992 by the Office of the Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation") revealed that during at least the three years ended
December 31, 1992, the former general partners of the Partnership, Gary J.
DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred substantial
cash assets of the Partnership
7
<PAGE>
and two affiliated publicly registered partnerships, DiVall Insured Income Fund
Limited Partnership ("DiVall 1") and DiVall Insured Income Properties 2 Limited
Partnership ("DiVall 2") (collectively the "Partnerships") to various other
entities previously sponsored by or otherwise affiliated with DiVall and
Magnuson. The unauthorized transfers were in violation of the respective
Partnership Agreements and resulted, in part, from material weaknesses in the
internal control system of the Partnerships. The aggregate amount of the
misappropriation, related costs, and 9% interest accrued since January 1, 1993,
is in excess of $15,800,000, of which approximately $7,397,000 has been
attributed to the Partnership and is reflected as due from former affiliates on
the balance sheet at September 30, 1998. The 9% interest accrued as of
September 30, 1998, amounted to approximately $3,294,000 and is not reflected in
the accompanying income statement. As of December 31, 1997, $6,916,000 was
reflected as due from former affiliates based on an estimated overall
misappropriation and related costs of $14,800,000.
Subsequent to discovery, and in response to the regulatory inquiries, a third-
party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed (effective
February 8, 1993) to assume responsibility for daily operations and assets of
the Partnerships as well as to develop and execute a plan of restoration for the
Partnerships. Effective May 26, 1993, the Limited Partners, by written consent
of a majority of interests, elected the Permanent Manager, TPG, as General
Partner. TPG terminated the former general partners by accepting their tendered
resignations.
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former general partners and their affiliates reflecting the
estimated $3 million receivable. This net receivable was allocated among the
Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through September 30, 1998, $5,766,000 of recoveries have
been received which exceeded the original estimate of $3 million. As a result,
the Partnership has recognized $1,283,000 as income, which represents its share
of the excess recovery. The current General Partner continues to pursue
recoveries of the misappropriated funds, however, no further significant
recoveries are anticipated.
3. INVESTMENT PROPERTIES:
As of September 30, 1998, the Partnership owned five (5) fast-food restaurants
comprised of: two (2) Hardee's restaurants, one (1) Applebee's restaurant, and
two (2) Denny's restaurants. The five (5) properties are located in three (3)
states.
The total cost of the investment properties includes the original purchase price
plus acquisition fees and other capitalized costs paid to an affiliate of the
former general partners.
During January 1998, the Partnership sold its Denny's property in Sanford,
Florida, to the tenant for $1,250,000, resulting in a gain, before disposition
fees, of approximately $239,000.
According to the Partnership Agreement, the former general partners were to
commit 82% of the original offering proceeds to the acquisition of investment
properties. Upon full investment of the net proceeds of the offering,
approximately 57% of the original offering proceeds was invested in the
Partnership's properties.
The current General Partner receives a fee for managing the Partnership equal
to 4% of gross receipts, with a maximum reimbursement for office rent and
related overhead of $25,000 between the three affiliated
8
<PAGE>
Partnerships as provided in the Permanent Manager Agreement ("PMA"). On May 26,
1993, the Permanent Manager, TPG, replaced the former general partners as the
new General Partner, as provided for in an amendment to the Partnership
Agreement dated May 26, 1993. Pursuant to amendments to the Partnership
Agreement, TPG continues to provide management services for the same fee
structure as provided in the PMA mentioned above. Effective March 1, 1998, the
minimum management fee and the maximum reimbursement for office rent and
overhead increased by 1.6% representing the allowable annual Consumer Price
Index adjustment per the PMA. For purposes of computing the 4% overall fee,
gross receipts includes amounts recovered in connection with the
misappropriation of assets by the former general partners and their affiliates.
TPG has received fees from the Partnership totaling $87,897 to date on the
amounts recovered, which has been offset against the 4% minimum fee.
Several of the Partnership's property leases contain purchase option provisions
with stated purchase prices in excess of the original cost of the properties.
The current General Partner is unaware of any unfavorable purchase options in
relation to current book value.
4. PARTNERSHIP AGREEMENT:
The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that, for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
former general partners. The Partnership Agreement also provided that Net Cash
Receipts, as defined, would be distributed 90% to the Limited Partners and 10%
to the former general partners, except that distributions to the former general
partners in excess of 1% in any calendar year would be subordinated to
distributions to the Limited Partners in an amount equal to their Original
Property Distribution Preference, as defined.
Net proceeds, as defined, were to be distributed as follows: (a) 1% to the
General Partners and 99% to the Limited Partners, until distributions to the
Limited Partners equal their Original Capital, as defined, plus their Original
Property Liquidation Preference, as defined, and (b) the remainder 90% to the
Limited Partners and 10% to the General Partners. Such distributions were to be
made as soon as practicable following the sale, financing or refinancing of an
original property.
On May 26, 1993, pursuant to the results of a solicitation of written consents
from the Limited Partners, the Partnership Agreement was amended to replace the
former general partners and amend various sections of the agreement. The former
general partners were replaced as General Partner, by TPG. Under the terms of
the amendment, net profits or losses from operations are allocated 99% to the
Limited Partners and 1% to the current General Partner. The amendment also
provided for distributions from Net Cash Receipts to be made 99% to the Limited
Partners and 1% to its current General Partner. Pursuant to the amendments to
the Partnership Agreement effective June 30, 1994, distributions of Net Cash
Receipts will not be made to the General Partner unless and until each Limited
Partner has received a distribution from Net Cash Receipts in an amount equal to
10% per annum, cumulative simple return on his or her Adjusted Original Capital,
as defined, from the Return Calculation Date, as defined, except to the extent
needed by the General Partner to pay its federal and state incomes taxes on the
income allocated to it attributable to such year. Distributions paid to the
General Partner are based on the estimated tax liability as a result of
allocated income. Subsequent to the filing of the General Partner's income tax
returns, a true-up of actual distributions is made. Net proceeds, as defined in
the Partnership Agreement, was also amended to be distributed 1% to the current
General Partner and 99% to the Limited Partners.
9
<PAGE>
Additionally, as per the amendment of the Partnership Agreement dated May 26,
1993, the total compensation paid to all persons for the sale of the investment
properties shall be limited to a competitive real estate commission, not to
exceed 6% of the contract price for the sale of the property. The General
Partner may receive up to one-half of the competitive real estate commission,
not to exceed 3%, provided that the General Partner provides a substantial
amount of services in the sales effort. It is further provided that a portion
of the amount of such fees payable to the General Partner is subordinated to its
success at recovering the funds misappropriated by the former general partners.
(See Note 7.)
Effective June 1, 1993, the Partnership Agreement was amended to (i) change the
definition of "Distribution Quarter" to be consistent with calendar quarters,
and (ii) change the distribution provisions to subordinate the General Partner's
share of distributions from Net Cash Receipts and Net Proceeds, except to the
extent necessary for the General Partner to pay its federal and state income
taxes on Partnership income allocated to the General Partner. Because these
amendments do not adversely affect the rights of the Limited Partners, pursuant
to section 10.2 of the Partnership Agreement, the amendments were made by the
General Partner without a vote of the Limited Partners.
5. LEASES:
Lease terms for the investment properties are 20 years from their inception.
The leases provide for minimum rents and additional rents based upon percentages
of gross sales in excess of specified breakpoints. The lessee is responsible
for occupancy costs such as maintenance, insurance, real estate taxes, and
utilities. Accordingly, these amounts are not reflected in the statements of
income, except in circumstances where, in management's opinion, the Partnership
will be required to pay such costs to preserve assets (i.e., payment of past-due
real estate taxes). Management has determined that the leases are properly
classified as operating leases; therefore, rental income is reported when earned
and the cost of the property, excluding the cost of the land, is depreciated
over its estimated useful life.
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1998 $ 409,380
1999 409,380
2000 409,380
2001 409,380
2002 409,380
Thereafter 3,141,338
----------
$5,188,238
==========
</TABLE>
Two (2) of the Partnership's properties are leased to a Denny's franchise. Base
rent from these properties amounted to approximately 21% of total base rent in
1997.
The original offering document required the Partnership to lease its properties
to a single tenant as long as the properties so leased do not constitute; in the
aggregate, more than 20% of the aggregate gross proceeds of the offering. As of
September 30, 1998, the Partnership has leased two of its properties to Hardees
Food Systems, Inc., which constitute 21% of the aggregate gross proceeds.
10
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6. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
Amounts paid to the current General Partner for the nine months ended September
30, 1998 and 1997, are as follow:
<TABLE>
<CAPTION>
Incurred as of Incurred as of
September 30, September 30,
Current General Partner 1998 1997
- - ----------------------- -------------- --------------
<S> <C> <C>
Management fees $48,475 $47,540
Disposition fees 37,500 12,150
Restoration fees 0 103
Cash distribution 1,096 920
Overhead allowance 3,911 3,863
Reimbursement for out-of-pocket expenses 8,954 9,034
------- -------
$99,936 $73,610
======= =======
</TABLE>
7. CONTINGENT LIABILITIES:
According to the Partnership Agreement, as amended, the current General Partner
may receive a disposition fee not to exceed 3% of the contract price of the sale
of investment properties. Fifty percent (50%) of all such disposition fees
earned by the current General Partner is to be escrowed until the aggregate
amount of recovery of the funds misappropriated from the Partnerships by the
former general partners is greater than $4,500,000. Upon reaching such recovery
level, full disposition fees will thereafter be payable and fifty percent (50%)
of the previously escrowed amounts will be paid to the current General Partner.
At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining
escrowed disposition fees shall be paid to the current General Partner. If such
levels of recovery are not achieved, the current General Partner will contribute
the amounts escrowed towards the recovery. In lieu of an escrow, 50% of all
such disposition fees have been paid directly to the restoration account and
then distributed among the three Partnerships. After surpassing the $4,500,000
recovery level during March 1996, 50% of the amounts previously escrowed was
refunded to the current General Partner. The remaining amount allocated to the
Partnerships may be owed to the current General Partner if the $6,000,000
recovery level is met. As of September 30, 1998, the Partnership may owe the
current General Partner $18,862, which is currently reflected as a recovery, if
the $6,000,000 recovery level is achieved, which is considered unlikely.
8. PMA INDEMNIFICATION TRUST:
The Permanent Manager Agreement ("PMA") provides that the Permanent Manager will
be indemnified from any claims or expenses arising out of or relating to the
Permanent Manager serving in such capacity or as substitute general partner, so
long as such claims do not arise from fraudulent or criminal misconduct by the
Permanent Manager. The PMA provides that the Partnership fund this
indemnification obligation by establishing a reserve of up to $250,000 of
Partnership assets which would not be subject to the claims of the Partnership's
creditors. An Indemnification Trust ("Trust") serving such purposes has been
established at United Missouri Bank, N.A. The Trust has been fully funded with
Partnership assets as of
11
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September 30, 1998. Funds are invested in U.S. Treasury securities. In
addition, interest totaling $53,601 has been credited to the Trust as of
September 30, 1998. The rights of the Permanent Manager to the Trust shall be
terminated upon the earliest to occur of the following events: (i) the written
release by the Permanent Manager of any and all interest in the Trust; (ii) the
expiration of the longest statute of limitations relating to a potential claim
which might be brought against the Permanent Manager and which is subject to
indemnification; or (iii) a determination by a court of competent jurisdiction
that the Permanent Manager shall have no liability to any person with respect to
a claim which is subject to indemnification under the PMA. At such time as the
indemnity provisions expire or the full indemnity is paid, any funds remaining
in the Trust will revert back to the general funds of the Partnership.
9. RESTORATION TRUST ACCOUNT AND EXPENSE ALLOCATIONS:
Restoration costs represent expenses incurred by the Partnership in relation to
the misappropriated assets by the former general partners and their affiliates.
These costs are allocated among the Partnerships based on each partnership's
respective share of the entire misappropriation, as currently quantified. The
amount of misappropriation for each partnership is adjusted annually to reflect
new discoveries and more accurate quantification of amounts based on the
continuing investigation. Such adjustments will result in periodic adjustments
to prior allocations of recovery costs to reflect updated information.
Consequently, previous payments for restoration expenses may not be consistent
with modified allocations.
Recoveries realized by the Partnerships are being distributed to each respective
partnership on the same basis as the restoration costs are currently being
allocated, adjusted for any future changes in the entire misappropriation, as a
result of the continuing investigation. As of September 30, 1998, the
Partnerships recovered a total of approximately $5,726,000 from the former
general partners and their affiliates. Of this amount, the Partnership received
its pro-rata share in the amount of $2,677,000. Additionally, $40,347,
representing 50% of all previously escrowed disposition fees earned by the
General Partner, have been paid to the recovery. Of that amount, $18,862 was
allocated to the Partnership and is contingently payable to the General Partner
upon achievement of the final recovery level as described in Note 7.
The PMA contemplated that the Permanent Manager could establish a separate and
distinct Restoration Trust Fund which would hold all recoveries until a final
independent adjudication by a court of competent jurisdiction or vote of the
Limited Partners ratified the allocation of proceeds to each respective
partnership. Management has concluded that a fair and reasonable interim
accounting for recovery proceeds can be accomplished at the partnership level in
a manner similar to restoration costs which are paid directly by the
Partnerships. Management reserves the right to cause the final allocation of
such costs and recoveries to be determined either by a vote of the Limited
Partners or a court of competent jurisdiction. Potential sources of recoveries
include third party litigation, promissory notes, land contracts, and personal
assets of the former general partners and their affiliates.
10. LITIGATION:
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing
12
<PAGE>
security interests were to secure the repayment of the funds which were diverted
by DiVall and Magnuson from the Partnership. The Partnership shares such
security interests with DiVall 1 and DiVall 2. These promissory notes and
mortgages are not recorded on the balance sheets of the Partnerships, but are
recorded as recoveries on a cash basis upon settlement.
In 1993, nineteen (19) of the Private Partnerships sought the protection of the
Bankruptcy Court in the Eastern District of Wisconsin. Seven (7) of these
bankruptcies were voluntary and twelve (12) of these bankruptcies were
involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest. These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.
The Partnership's experience in those bankruptcy cases that have concluded,
either through the approval of Plans of Reorganization, dismissal of the
bankruptcies, settlements or a combination of the foregoing, is that (i) the
value of the obligations of the Private Partnerships assigned to the Partnership
has been at a significant discount to their face amounts, and (ii) the General
Partner interests in such Private Partnerships often have little economic value.
The Partnership's recoveries in these bankruptcies have been on a steeply
discounted basis.
Plans of reorganization have been filed in the bankruptcies, and settlement
agreements in all of the Private Partnerships have been reached. Settlements in
the bankruptcies have resulted in cash payments to the Partnerships of a total
of $720,000 and notes secured by subordinated mortgages in the aggregate amount
of $625,000. The Partnerships subsequently sold the secured notes for a total
of $175,000.
11. FORMER GENERAL PARTNERS' CAPITAL ACCOUNTS:
The capital account balance of the former general partners as of May 26, 1993,
the date of their removal as general partners pursuant to the results of a
solicitation of written consents from the Limited Partners, was a deficit of
$265,491. At December 31, 1993, the former general partners' deficit capital
account balance in the amount of $265,491 was reallocated to the Limited
Partners.
12. SUBSEQUENT EVENTS:
On November 15, 1998, the Partnership made a distribution to the Limited
Partners for the Third Quarter 1998 of $50,000 amounting to approximately $2.92
per limited partnership interest.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources:
Investment Properties and Net Investment in Direct Financing Leases
The investment properties, including equipment held by the Partnership at
September 30, 1998, were originally purchased at a price, including acquisition
costs, of approximately $6,091,000.
13
<PAGE>
During January 1998, the Partnership sold its Denny's property in Sanford,
Florida, to the tenant for $1,250,000, resulting in a gain, before disposition
fees, of approximately $240,000.
Other Assets
Cash and cash equivalents held by the Partnership, were $229,000 at September
30, 1998, compared to $595,000 at December 31, 1997. The Partnership designated
cash of $50,000 to fund the Third Quarter 1998 distributions to Limited
Partners; $55,000 for the payment of accounts payable and accrued expenses; and
the remainder represents reserves deemed necessary to allow the Partnership to
operate normally. Cash generated through the operations of the Partnership's
investment properties and sales of investment properties will provide the
sources for future fund liquidity and Limited Partner distributions.
The Partnership established an Indemnification Trust (the "Trust") during the
Fourth Quarter of 1993 and deposited $130,000 in the Trust during 1994, $100,000
during 1995, and $20,000 during 1996. The provision to establish the Trust was
included in the Permanent Manager Agreement for the indemnification of TPG, in
the absence of fraud or gross negligence, from any claims or liabilities that
may arise from TPG acting as Permanent Manager. The Trust is owned by the
Partnership. For additional information regarding the Trust, refer to Note 8 to
the financial statements.
Due From Former Affiliates and Allowance for Uncollectible Amounts Due From
Former Affiliates
Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $1,734,000 at
September 30, 1998 and December 31, 1997. No further material recoveries are
anticipated.
The Partnership maintains a record of costs incurred in identifying or
recovering the misappropriated assets. These amounts are expensed when
incurred, and then recorded on the balance sheet as a restoration cost
receivable with a corresponding allowance for such receivable deemed
uncollectible. These costs are considered due from the former general partners
and their affiliates. Interest has been accrued on the misappropriated funds
since January 1, 1993, at a rate of 9% per annum and has been included in the
restoration cost receivable. The receivable increased from approximately
$5,181,000 at December 31, 1997 to $5,663,000 at September 30, 1998, and
includes $3,294,000 of cumulative accrued interest.
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former general partners and their affiliates reflecting the
estimated $3 million receivable. This net receivable was allocated among the
Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through September 30, 1998, $5,766,000 of recoveries have
been received which exceeded the original estimate of $3 million. As a result,
the Partnership has recognized $1,283,000 as income, which represents its share
of the excess recovery. The current General Partner continues to pursue
recoveries of the misappropriated funds, however, no further significant
recoveries are anticipated.
The restoration costs are allocated among the Partnerships based on each
Partnership's respective share of the misappropriation as discussed in Note 9 to
the financial statements. The allocation is adjusted periodically to reflect
any changes in the entire misappropriation. The Partnership's percentage of the
allocation was increased in 1993.
14
<PAGE>
Liabilities
Accounts payable and accrued expenses at September 30, 1998, in the amount of
$25,000, primarily represented the accrual of legal and auditing fees.
Partners' Capital
Net income for the quarter was allocated between the General Partner and the
Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement and the Amendment to the Partnership Agreement, as discussed more
fully in Note 4 of the financial statements. The former general partners'
capital account balance was reallocated to the Limited Partners at December 31,
1993. Refer to Note 11 to the financial statements for additional information
regarding the reallocation.
Cash distributions paid to the Limited Partners and to the General Partner
during 1998, of $1,695,000 and $1,096, respectively, have also been made in
accordance with the amended Partnership Agreement. The Third Quarter 1998
distribution of $50,000 was paid to the Limited Partners on November 15, 1998.
Results of Operations:
The Partnership reported net income for the quarter ended September 30, 1998,
in the amount of $21,000 compared to net income for the quarter ended September
30, 1997 of $66,000. Net income for the nine months ended September 30, 1998
and 1997 totaled $274,000 and $230,000, respectively.
Revenues
Total revenues were $103,000, and $152,000, for the quarters ended September 30,
1998, and 1997, respectively and were $578,000 and $498,000 for the nine months
ended September 30, 1998 and 1997, respectively. The increase in income in 1998
is attributable to a gain recognized on the sale of a Denny's property to the
tenant in the amount of $239,000, partially offset by a reduction in rental
income due to properties which have been sold.
Total revenues, should approximate $400,000 annually or $100,000 quarterly,
based on leases currently in place. Future revenues may decrease with tenant
defaults and/or sales of Partnership properties. They may also increase with
additional rents due from tenants, if those tenants experience sales levels
which require the payment of additional rent to the Partnership.
Expenses
For the quarters ended September 30, 1998 and 1997, cash expenses amounted to
approximately 59% and 39% of total revenues, respectively. For the nine months
ended September 30, 1998 and 1997, cash expenses totaled 41% and 36% of total
revenues, respectively. Total expenses, including non-cash items, amounted to
80% and 56% of total revenues for the quarters ended September 30, 1998 and
1997, respectively and totaled 53% and 54% of total revenues for the nine months
ended September 30, 1998 and 1997, respectively. Items negatively impacting
expenses during 1998 included disposition fees of $37,500 on the sale of the
Denny's property in Sanford, Florida, in addition to fees incurred for the
appraisal, environmental inspection and survey of the Partnership properties
totaling $34,000 and legal fees totaling $25,000, in relation to the proposed
liquidation.
15
<PAGE>
Inflation:
Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio of triple net leases. By their nature, such leases actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes. If inflation causes operating margins to deteriorate for lessees
if expenses grow faster than revenues, then, inflation may well negatively
impact the portfolio through tenant defaults.
It would be misleading to associate inflation with asset appreciation for real
estate, in general, and the Partnership's portfolio, specifically. Due to the
"triple net" nature of the property leases, asset values generally move
inversely with interest rates.
Year 2000
The Partnership's operations are not dependent on date sensitive software. The
Partnership is not aware of any Year 2000 problems with its current software.
Accounting and Partnership records software are owned and operated by third
parties who provide services to the Partnership under contract. The Partnership
is currently in the process of evaluating Year 2000 issues with these third
party providers. The Partnership believes, however, that even if any Year 2000
problems are not corrected on schedule, the cost and disruption to operations of
the Partnership are expected to be minimal.
Tenants are responsible for the operation of any equipment located at the
Partnership's properties. While the Partnership is not fully aware of the
compliance attainment efforts of its tenants, tenant preparedness for the Year
2000 should have minimal impact on the Partnership and are not expected to be
material to the Partnership's operations, financial condition or liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1 - 5.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
99.0 Correspondence to the Limited Partners dated November 15, 1998,
regarding the Third Quarter 1998 distribution.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the third quarter of
fiscal year 1998.
17
<PAGE>
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.
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
By: The Provo Group, Inc., General Partner
By: __________________________________________________
Bruce A. Provo, President
Date: November 14, 1998
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 and
in the capacities and on the dates indicated.
By: The Provo Group, Inc., General Partner
By: __________________________________________________
Bruce A. Provo, President
Date: November 14, 1998
By: __________________________________________________
Kristin J. Atkinson
Vice President - Finance and Administration
Date: November 14, 1998
18
<PAGE>
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.
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
By: The Provo Group, Inc., General Partner
By: /s/ Bruce A. Provo
---------------------------------------------
Bruce A. Provo, President
Date: November 14, 1998
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 and
in the capacities and on the dates indicated.
By: The Provo Group, Inc., General Partner
By: /s/ Bruce A. Provo
---------------------------------------------
Bruce A. Provo, President
Date: November 14, 1998
By: /s/ Kristin J. Atkinson
--------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: November 14, 1998
19
<PAGE>
DiVall Income Properties 3, L.P.
QUARTERLY NEWS
================================================================================
A publication of The Provo Group, Inc. THIRD QUARTER 1998
ADVISORY BOARD REVIEWS
SALES PROCESS
Kansas City, Missouri
October 28, 1998
The DiVall Advisory Board met today and reviewed the sales process for DiVall 1,
2, and 3. The objective of going to market was the perceived opportunity to take
advantage of cyclical strength in the triple net lease market, as well as
developing a comfort for the investors that their perceptions of value are fair
after exposure to a competitive market.
All three affiliated partnerships ... DiVall 1, DiVall 2 and DiVall 3 undertook
identical sales processes, even though their respective results were different.
DiVall 1 investors received a registered tender offer to sell for $575 per unit
last winter. The Provo Group believed a higher value could be achieved through
an independent bid process. The successful sale, related liquidating
distribution, and three quarterly distributions (which would not have been
earned by selling last winter), resulted in an additional $160 or 28% over the
initial offer.
Although the successful DiVall 1 sale demonstrates the effectiveness of the bid
process, DiVall 2 did not receive a conforming bid (a conforming bid required
bids to be all cash, completely unconditional and accompanied by a substantial
deposit. In addition, there was a minimum bid requirement of no less than 90% of
the appraised value).
The Advisory Board feels that the market began to soften for DiVall 2's
portfolio mix and lease structures before DiVall 1, which had different concepts
and lease terms.
The Advisory Board recognizes that opportunities are still available to enhance
the values of DiVall 2, irrespective of whether those opportunities were too
conservatively valued by this summer's "bidders".
(Continued on Page 2)
---------------------------------
OTHER NEWS INSIDE...
. Applebee's Sales Increase in 1998 ......... Property Highlights, pg 4
. Discussion of Liquidation Costs ............. Question & Answer, pg 5
<PAGE>
Page 2 DiVall 3 3 Q 98
Continued from cover page ...
What NOW? ... The Board feels the "matching" of buyers and sellers within
the partnerships, with reduced transaction costs should facilitate any
pressing liquidation requirements of individual limited partners; (Please
see enclosed Expression of Interest Form).
and LATER .... The Board encouraged The Provo Group to pursue taking DiVall
2 "private" in the future (due to the stability associated with its
economically diversified size) to enhance yield by reducing public
partnership administrative requirements;
MEANWHILE ... TPG will continue to operate DiVall 2 to enhance the current
yields (estimated to approximate 9% on net asset value) and to allow recent
changes in concept ownership to mature and succeed.
DiVall 3 also did not receive a conforming bid. This Partnership only has five
properties and consequently, any perceived risk for any given store creates a
heightened risk to the entire portfolio.
We continue to believe that a liquidation of the Partnership is in the best
interest of the DiVall 3 Limited Partners. Therefore, The Provo Group will
actively pursue other alternatives for liquidation of DiVall 3 during 1999. The
properties may be sold individually or in any combination provided that the
total sales price for the properties included in the transaction equals or
exceeds 90% of the combined appraised value for the assets.
It is not possible to provide the Limited Partners with a time frame for a
DiVall 3 liquidation, but we are working closely with potential buyers and hope
to dissolve the Partnership in a timely manner. We will certainly keep you
updated on the status of the liquidation process.
Overall it's been an interesting year. Each Partnership has its own unique
qualities and very different perceptions in the marketplace of each respective
portfolio's strengths and weaknesses. If the bid process did not result in a
sale, it did provide a road map for future value enhancement and maximization.
The Provo Group and the DiVall Advisory Board would like to thank all the
Limited Partners for their support and encouragement during 1998.
--------------------------------
<PAGE>
Page 3 DiVall 3 3 Q 98
--------------------------------
Distribution Highlights
. 2.3% (approx.) annualized return from operations based on $8,700,000 ("net"
remaining initial investment).
. $50,000 total amount distributed for the Third Quarter 1998 which was
$10,000 less than budgeted.
. Distributions were lower than previously expected, due to Land Title Surveys
which were performed on all of the properties.
. $2.92 per unit (approx.) for the Third Quarter 1998 from cash flow from
operations.
. $677.00 to $513.00 range of distributions per unit from the first unit sold
to the last unit sold before the offering closed (April 1992), respectively.
NOTE: Distributions are from both cash flow from operations and "net" cash
activity from financing and investing activities.]
(NOTE: Original units were purchased for $1,000/unit.)
-------------------------------------------
Statements of Income and Cash Flow Highlights
. 12% decrease in "total" operating revenues from projections.
. Revenues were lower than anticipated due to the none-cash reversal of
percentage rent accruals during the quarter. This was done due to new
accounting regulations.
. 27% increase in "total" expenses from projections.
. Expenses were higher than anticipated due to Land Title Surveys in the
amount of $12,000 which were performed on all of the properties in
preparation for the liquidation. In addition, legal fees were higher due to
work which was done in association with the liquidation.
<PAGE>
Page 4 DiVall 3 3 Q 98
---------------------------------
Property Highlights
Vacancies
---------
There were no vacancies at September 30, 1998.
Rents Receivable
----------------
There were no outstanding rents due as of September 30, 1998.
OTHER PROPERTY MATTERS
----------------------
. Applebee's (Pittsburgh, PA) sales have increased by approximately 7%
through August 1998. Therefore, the projected percentage rent due for 1998
gross sales has been estimated to be double the amount paid in 1997.
--------------------------------
Return of Capital
The following table has been updated to present the breakdown of distributions
since the Partnership's first quarterly distribution, for the period ended
September 30, 1990 through September 30, 1998.
<TABLE>
<CAPTION>
================================================================================
Distribution Capital
Analysis Balance
------------ ------------
<S> <C> <C>
Original Capital Balance - $17,102,520
Cash Flow From Operations Since Inception $ 1,799,816 -
Total Distributions Since Inception (10,232,983) -
------------
(Return) of Capital ($8,433,167) (8,433,167)
============ -----------
"Net" Remaining Initial Investment
by Original Partners - $ 8,669,353
===========
================================================================================
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
<PAGE>
Page 5 DiVall 3 3 Q 98
--------------------------------
Questions & Answers
1. Why did the Partnership invest up-front costs associated with the bid
process which included Phase I Environmental Reports, As-Built Surveys,
Title Commitments and Appraisals?
. Generally, the above referenced documents can be used for a period of six
months to one year. If we exceed this time period, the same due diligence
documents will be required when the Partnership does sell its assets in the
future. However, these documents will only need to be updated and the cost
associated with updating these documents is minimal compared to the up-
front cost. The decision to incur those costs was made to expedite a close
if an acceptable bid was received.
2. When can I expect my next distribution mailing?
. Your distribution correspondence for the Fourth Quarter of 1998 is
scheduled to be mailed on February 15, 1999.
* * *
================================================================================
For questions or additional information, please contact Investor Relations at:
1-800-547-7686 or 1-816-421-7444
All written inquiries may be mailed or faxed to:
The Provo Group, Inc.
101 West 11th Street, Suite 1110
Kansas City, Missouri 64105
(FAX 816-221-2130)
www.tpgdivall.com
================================================================================
<PAGE>
DIVALL INCOME PROPERTIES 3 L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
-----------------------------
3RD 3RD
QUARTER QUARTER BETTER
9/30/98 9/30/98 (WORSE)
-------- -------- --------
<S> <C> <C> <C>
OPERATING REVENUES
Rental income $105,280 $ 95,308 $ (9,972)
Interest income 11,088 7,233 (3,855)
Other income 0 51 51
-------- -------- --------
TOTAL OPERATING REVENUES $116,368 $102,592 $(13,776)
-------- -------- --------
OPERATING EXPENSES
Insurance $ 1,203 $ 1,095 $ 108
Management fees 16,440 16,215 225
Overhead allowance 1,326 1,308 18
Advisory Board 3,400 4,578 (1,178)
Administrative 7,165 4,338 2,827
Professional services 2,830 2,725 105
Land Title Surveys 0 11,950 (11,950)
Auditing 8,250 8,250 0
Legal 1,850 9,905 (8,055)
Defaulted tenants 300 0 300
-------- -------- --------
TOTAL OPERATING EXPENSES $ 42,764 $ 60,364 $(17,600)
-------- -------- --------
INVESTIGATION AND RESTORATION EXPENSES $ 546 $ 194 $ 352
-------- -------- --------
NON-OPERATING EXPENSES
Depreciation $ 20,592 $ 20,592 $ 0
Amortization 446 446 0
-------- -------- --------
TOTAL NON-OPERATING EXPENSES $ 21,038 $ 21,038 $ 0
-------- -------- --------
TOTAL EXPENSES $ 64,348 $ 81,596 $(17,248)
-------- -------- --------
NET INCOME $ 52,020 $ 20,996 $(31,024)
OPERATING CASH RECONCILIATION: VARIANCE
--------
Depreciation and amortization 21,038 21,038 0
(Increase) Decrease in current assets (14,765) (8,771) 5,994
Increase (Decrease) in current liabilities 8,092 7,872 (220)
(Increase) Decrease in cash reserved for payables (8,300) 7,000 15,300
Advance from/(to) future cash flows for current distributions 3,000 3,000 0
-------- -------- --------
Net Cash Provided From Operating Activities $ 61,085 $ 51,135 $ (9,950)
-------- -------- --------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Proceeds from sale of property 0 0 0
-------- -------- --------
Net Cash Provided from Investing And Financing
Activities $ 0 $ 0 $ 0
-------- -------- --------
Total Cash Flow For Quarter $ 61,085 $ 51,135 $ (9,950)
Cash Balance Beginning of Period 235,199 227,895 (7,304)
Less 2nd quarter distributions paid 8/98 (60,000) (40,000) 20,000
Change in cash reserved for payables or distributions 5,300 (10,000) (15,300)
-------- -------- --------
Cash Balance End of Period $241,584 $229,030 $(12,554)
Cash reserved for 3rd quarter L.P. distributions (60,000) (50,000) 10,000
Cash advanced from (reserved for) future distributions (2,000) (2,000) 0
Cash reserved for payment of payables (8,443) (53,000) (44,557)
-------- -------- --------
Unrestricted Cash Balance End of Period $171,141 $124,030 $(47,111)
======== ======== ========
- - ----------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
------------------------------
* Quarterly Distribution $ 60,000 $ 50,000 $(10,000)
Mailing Date 11/15/98 (enclosed)
- - ----------------------------------------------------------------------------------------------
</TABLE>
* Refer to distribution letter for detail of quarterly distribution.
<PAGE>
ORIGINAL CAPITAL $17,102,520
PROJECTIONS FOR NET DISTRIBUTION OF
DISCUSSION PURPOSES CAPITAL SINCE
INCEPTION $8,433,167
-----------
CURRENT EQUITY $8,669,363
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
1998 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
PORTFOLIO (Note 1)
-------------------------------
REAL ESTATE
-------------------------------
ANNUAL
- - -------------------------------- BASE %
CONCEPT LOCATION COST RENT YIELD
- - -------------------------------- -------------------------------
APPLEBEE'S PITTSBURGH 891,333 116,040 13.02%
* *
DENNY'S CO SPRINGS, CO 580,183 77,460 13.35%
DENNY'S ENGLEWOOD, CO 213,211 35,880 16.83%
HARDEE'S (3) ST. FRANCIS, WI 1,194,381 92,000 7.70%
* *
HARDEE'S (3) OAK CREEK, WI 1,341,906 88,000 6.56%
* *
- - -------------------------------- -------------------------------
- - -------------------------------- -------------------------------
PORTFOLIO TOTALS (5 Properties) 4,221,104 409,380 9.70%
- - -------------------------------- -------------------------------
---------------------------------------------
EQUIPMENT
---------------------------------------------
LEASE ANNUAL
- - -------------------------------- EXPIRATION LEASE %
CONCEPT LOCATION DATE COST RECEIPTS RETURN
- - -------------------------------- ---------------------------------------------
APPLEBEE'S PITTSBURGH 290,469 0.00%
* * 58,094 0.00%
DENNY'S CO SPRINGS, CO 210,976 0 0.00%
DENNY'S ENGLEWOOD, CO 210,976 0.00%
HARDEE'S (3) ST. FRANCIS, WI (2) 369,688 0 0.00%
* * (2) 84,500 0 0.00%
HARDEE'S (3) OAK CREEK, WI (2) 482,078 0 0.00%
* * (2) 105,488 0 0.00%
- - -------------------------------- ---------------------------------------------
- - -------------------------------- ------------------------------
PORTFOLIO TOTALS (5 Properties) 1,812,269 0 0.00%
- - -------------------------------- ------------------------------
-------------------------------
TOTALS
-------------------------------
- - -------------------------------- ANNUAL %
CONCEPT LOCATION COST RECEIPTS RETURN
- - -------------------------------- -------------------------------
APPLEBEE'S PITTSBURGH 1,239,896 116,040 9.36%
* *
DENNY'S CO SPRINGS, CO 791,159 77,460 9.79%
DENNY'S ENGLEWOOD, CO 424,187 35,880 8.46%
HARDEE'S (3) ST. FRANCIS, WI
* * 1,648,569 92,000 5.58%
HARDEE'S (3) OAK CREEK, WI 1,929,472 88,000 4.56%
* *
- - -------------------------------- -------------------------------
- - -------------------------------- -------------------------------
PORTFOLIO TOTALS (5 Properties) 6,033,283 409,380 6.79%
- - -------------------------------- -------------------------------
-----------------------
TOTAL %
ON $8,669,363
- - -------------------------------- EQUITY
CONCEPT LOCATION RAISE
- - -------------------------------- -----------------------
APPLEBEE'S PITTSBURGH
* *
DENNY'S CO SPRINGS, CO
DENNY'S ENGLEWOOD,CO
HARDEE'S (3) ST. FRANCIS, WI
* *
HARDEE'S (3) OAK CREEK, WI
* *
- - -------------------------------- -----------------------
- - -------------------------------- -----------------------
PORTFOLIO TOTALS (5 Properties) 4.72%
- - -------------------------------- -----------------------
Note 1: This property summary includes only current property and equipment held
by the Partnership. Equipment lease receipts shown include a return of
capital.
2: The lease was terminated and the equipment sold to Hardee's Food Systems
in conjunction with their assumption of the Terratron leases.
3: These leases were assumed by Hardee's Food Systems at rental rates lower
than those stated in the original leases.
<PAGE>
- - -------------------------------------------------------------------------------
If you are interested in buying additional units or selling your Units in DiVall
Income Properties 3, L.P., you may fill out this form and mail it to The Provo
Group, Inc. at 101 W. 11/th/ St., Ste. 1110, Kansas City, MO, 64105. Based on
the responses received, The Provo Group will compile a list of limited partners
expressing an interest in buying and a list of limited partners expressing an
interest in selling. We will then distribute those lists, along with form
transfer documents (which have been pre-approved by The Provo Group) to all
persons on those lists. This will allow sellers and buyers to contact one
another to negotiate a mutually agreeable price. If you do not wish to be
contacted by others seeking to buy or sell units, do not fill out this form. The
normal fee to process a transfer of Partnership interest is $50 per transaction.
However, the fee will be reduced to $25 for each transaction prior to June 30,
1999. The Partnership does not currently intend to offer this service again. You
must provide all of the information requested in the form below, or your name
will not be included in the lists of buyers and sellers being compiled.
Name: ______________________________ Phone: ______________________________
Address: ___________________________________________________________________
Street Address City State Zip
I own _____ units in DiVall Income Properties 3, L.P.
____ I wish to SELL my units.
(Your name, address, phone number and number of units will be provided to
all interested purchasers).
____ I wish to BUY units.
(Your name, address and phone number will be provided to all interested
sellers).
- - ------------------------------------
Signature Date
All transfers will be handled in accordance with the Partnership Agreement.
Neither The Provo Group, Inc. nor the Partnership is in the business of buying
or selling units, or arranging for the sale of units between investors. The
General Partner has elected to provide the service described above to facilitate
contact between limited partners interested in buying and limited partners
interested in selling their units. If we receive your completed form prior to
January 1, 1999, your information will be included in the lists described above.
However, there is no guarantee that your units will be sold or that you will be
successful in buying units. Neither The Provo Group, Inc. nor the Partnership
express any opinion with respect to the current fair market value of units in
the Partnership.
- - -------------------------------------------------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the September 30, 1998 Form 10-Q and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 229,032 229,032
<SECURITIES> 303,601 303,601
<RECEIVABLES> 7,438,860 7,438,860
<ALLOWANCES> 7,397,113 7,397,113
<INVENTORY> 0 0
<CURRENT-ASSETS> 574,380 574,380
<PP&E> 4,204,014 4,204,014
<DEPRECIATION> 692,805 692,805
<TOTAL-ASSETS> 4,085,589 4,085,589
<CURRENT-LIABILITIES> 69,428 69,428
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 4,016,161 4,016,161
<TOTAL-LIABILITY-AND-EQUITY> 4,085,589 4,085,589
<SALES> 95,308 304,514
<TOTAL-REVENUES> 102,593 577,666
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 81,598 303,541
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 20,995 274,125
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 20,995 274,125
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 20,995 274,125
<EPS-PRIMARY> 1.22 15.87
<EPS-DILUTED> 1.22 15.87
</TABLE>
