<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 June 30, 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 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________
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
-----------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1996 1995
<S> ------------ -------------
INVESTMENT PROPERTIES: (NOTE 3)
<C> <C>
Land $ 2,085,836 $ 2,085,836
Buildings and improvements 3,766,226 3,766,226
Accumulated depreciation (703,102) (644,443)
----------- -----------
Net investment properties 5,148,960 5,207,619
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES: (NOTE 7) 786,814 976,461
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 513,155 312,290
Cash restricted for real estate taxes 2,604 42,799
Cash held in Indemnification Trust (NOTE 10) 269,245 242,725
Restoration escrow account 841,181 0
Rents and other receivables (net of allowance of $45,730 in 1995) 50,679 27,955
Due from current General Partner 0 792
Deferred rent receivable 42,557 42,904
Notes receivable 59,951 79,001
Prepaid assets 1,827 1,902
----------- -----------
Total other assets 1,781,199 750,368
----------- -----------
DUE FROM FORMER AFFILIATES: (NOTE 2)
Due from former general partner affiliates 2,271,247 4,084,424
Allowance for uncollectible amounts due from former affiliates (2,271,247) (3,017,285)
Restoration cost receivable 4,184,137 3,252,676
Allowance for uncollectible restoration receivable (4,184,137) (3,252,676)
----------- -----------
Due from former affiliates, net
0 1,067,139
Total assets ----------- -----------
$ 7,716,973 $ 8,001,587
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
LIABILITIES AND PARTNERS' CAPITAL
JUNE 30, 1996 AND DECEMBER 31, 1995
-----------------------------------
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1996 1995
------------ -------------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 23,450 $ 251,948
Due to affiliated partnerships (NOTE 11) 0 201,912
Due to current General Partner 884 0
Security deposits 97,491 103,181
Real estate taxes payable 0 3,184
----------- -----------
Total liabilities 121,825 560,225
----------- -----------
CONTINGENT LIABILITIES: (NOTE 9)
PARTNER'S CAPITAL: (NOTES 1, 4 AND 13)
Former general partners -
Capital contributions 200 200
Cumulative net loss (195,015) (195,015)
Cumulative cash distributions (70,676) (70,676)
Reallocation of former general partners' deficit
capital to Limited Partners 265,491 265,491
----------- -----------
0 0
----------- -----------
Current General Partner -
Cumulative net income (loss) 6,228 2,425
Cumulative cash distributions (2,954) (1,433)
----------- -----------
3,274 992
----------- -----------
Limited Partners (17,102.52 interests outstanding)
Capital contributions, net of offering costs 14,408,872 14,408,872
Cumulative net loss (1,138,523) (1,515,027)
Cumulative cash distributions (5,412,984) (5,187,984)
Reallocation of former general partners' deficit capital (265,491) (265,491)
----------- -----------
7,591,874 7,440,370
----------- -----------
Total partners' capital 7,595,148 7,441,362
----------- -----------
Total liabilities and partners' capital $ 7,716,973 $ 8,001,587
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
1996 1995 1996 1995
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
REVENUES:
Rental income $173,038 $187,826 $ 343,616 $370,552
Interest income on direct financing leases 23,835 37,209 50,888 54,597
Interest income 19,282 10,976 27,335 40,836
Other income 372 740 649 1,587
Recovery of amounts previously written off 16,947 0 746,038 0
-------- -------- ---------- --------
233,474 236,751 1,168,526 467,572
-------- -------- ---------- --------
EXPENSES:
Partnership management fees 15,450 13,055 30,620 27,330
Restoration fees 678 1,975 53,013 2,467
Insurance 1,378 1,256 2,646 2,288
General and administrative (NOTE 8) 16,305 13,065 25,235 22,395
Advisory Board fees and expenses 3,647 4,692 8,589 10,328
Interest 0 1,332 0 3,092
Professional services 13,061 16,930 26,248 37,975
Professional services related to investigation (67,461) 119,263 583,209 161,462
Loss on equipment lease 0 5,809 0 5,809
Depreciation 29,329 29,329 58,659 58,659
Amortization 0 3,782 0 7,565
-------- -------- ---------- --------
12,387 210,488 788,219 339,370
-------- -------- ---------- --------
NET INCOME $221,087 $ 26,263 $ 380,307 $128,202
======== ======== ========== ========
NET INCOME - GENERAL PARTNER $ 2,211 $ 263 $ 3,803 $ 1,282
NET INCOME - LIMITED PARTNERS 218,876 26,000 376,504 126,920
-------- -------- ---------- --------
$221,087 $ 26,263 $ 380,307 $128,202
======== ======== ========== ========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST, based on 17,102.52 interests outstanding $ 12.80 $ 1.52 $ 22.01 $ 7.42
======== ======== ========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
---------
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30,
----------
1996 1995
---------- ---------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 380,307 $ 128,202
Adjustments to reconcile net income to net cash from (used in)
operating activities -
Depreciation and amortization 58,659 66,224
Recovery of amounts previously written off (746,038) 0
Loss on equipment lease 0 5,809
Interest applied to Indemnification Trust Account (6,520) (6,866)
(Increase) in rents, other receivables and prepaid assets (21,857) (5,446)
(Increase)/Decrease in deferred rent receivable 347 (1,967)
Deposits applied for real estate taxes 40,195 43,553
Increase/(Decrease) in accounts payable and accrued expenses (228,498) 72,930
Decrease in security deposits (5,690) 0
Increase/(Decrease) in due to General Partner 884 (253)
(Decrease) in real estate taxes payable (3,184) (43,458)
---------- ---------
Net cash provided from (used in) operating activities
(531,395) 258,728
---------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Principal payments received on direct financing leases 189,647 174,153
Deposit to Indemnification Trust Account (20,000) (50,000)
Deposit to restoration escrow account (841,181) 0
Recoveries from former affiliates 1,813,177 61,663
Proceeds from land easement 0 17,000
Principal receipts from note 19,050 47,356
---------- ---------
Net cash provided from investing activities
1,160,693 250,172
---------- ---------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Principal payments on mortgage note 0 (61,908)
Payments of amounts due to affiliated partnerships (201,912) (59,196)
Cash distributions to General Partner (1,521) (513)
Cash distributions to Limited Partners (225,000) (360,000)
---------- ---------
Net cash (used in) financing activities
(428,433) (481,617)
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 200,865 27,283
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 312,290 382,605
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 513,155 $ 409,888
========== =========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 0 $ 3,092
========== =========
The accompanying notes are an integral part of these statements.
</TABLE>
5
<PAGE>
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF ACCOUNTING:
-------------------------------------
DiVall Income Properties 3 Limited Partnership (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 and recovering
the assets misappropriated by the former general partners and their affiliates.
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 June 30, 1996, the Partnership owned seven (7) properties and
specialty leasehold improvements for use in all seven (7) 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.
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.
6
<PAGE>
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 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, 1995, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$3,100,000.
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 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 $13,800,000, of which
approximately $6,455,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at June 30, 1996. The 9%
interest accrued as of June 30, 1996, amounted to approximately $1,902,000 and
is not reflected in the accompanying income statement. As of December 31, 1995,
$7,337,000 was reflected as due from former affiliates based on an estimated
overall misappropriation and related costs of $15,700,000. Permanent Manager
Agreement ("PMA") savings, representing cost savings to the Partnerships as a
result of the implementation of the PMA, are not credited against the due from
former affiliates account on the financial statements of the Partnership.
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.
The current General Partner is vigorously pursuing recovery of the
misappropriated funds from the various sources and initially estimated an
aggregate recovery of $3 million for the Partnerships, of which approximately
$1.4 million was allocated to the Partnership. As such, an allowance has been
established against amounts due
7
<PAGE>
from former general partner affiliates reflecting the current General Partner's
best estimate of probable loss from misappropriated amounts. This allowance has
been allocated among the Partnerships based on each Partnership's pro rata share
of the total misappropriation. The amount of the Partnership's allowance was
reduced by approximately $746,000 during the first six months of 1996 as a
result of recoveries received in excess of the original estimate. Pending
resolution of all sources of potential recovery, it is not possible to determine
the amount that will ultimately be recovered.
As mentioned above, material weaknesses were identified in the Partnership's
internal control structure. The internal control structure was not adequate to
assure that all transactions of the Partnership were properly recorded and
reflected in the books and records and financial statements of the Partnership.
Significant transactions affecting the Partnership were apparently initiated by
the former general partners during the three years ended December 31, 1992,
which initially either were not recorded on the books and records of the
Partnership or were improperly recorded and characterized. Such transactions
included unsupported disbursements or improper disbursements under the terms of
the Partnership Agreement and the encumbrance of Partnership assets. All such
transactions identified during the regulatory Investigation and concurrent
reviews have been reflected in the Partnership's financial statements as of June
30, 1996.
3. INVESTMENT PROPERTIES:
----------------------
As of June 30, 1996, the Partnership owned seven (7) fast-food restaurants
comprised of: three (3) Hardee's restaurants, one (1) Applebee's restaurant,
and three (3) Denny's restaurants. The seven (7) properties are located in five
(5) 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.
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 Partnership's investment properties had been managed by an affiliate of the
former general partners pursuant to a management agreement which provided for a
fee equal to 1% of gross receipts amounting to approximately $2,000 through
February 28, 1993. In addition, the former general partner affiliate was
entitled to receive reimbursements of general and administrative costs, either
direct or indirect, amounting to approximately $12,000 through February 28,
1993. As a result of the Investigation, the Partnership engaged a third party as
Interim Manager in October 1992. The Interim Manager received approximately
$19,000 through February 28, 1993, for management services. Subsequent to the
appointment of the Permanent Manager, effective February 8, 1993, these services
were being provided by the Permanent Manager for an overall fee equal to 4% of
gross receipts, with a maximum reimbursement for office rent and related
overhead of $25,000 between the three affiliated 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. The minimum management fee and the maximum reimbursement for office rent
and overhead have increased annually by the allowable annual Consumer Price
Index adjustment per the PMA. For purposes of computing
8
<PAGE>
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 $66,424 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 original cost.
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 The Provo Group, Inc., an
Illinois corporation. 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, was also amended to be distributed 1% to the current
General Partner and 99% to the Limited Partners.
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 10.)
9
<PAGE>
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>
<S> <C>
Year ending December 31,
1996 $ 670,900
1997 742,860
1998 742,860
1999 742,860
2000 742,860
Thereafter 7,175,975
----------
$10,818,315
===========
</TABLE>
Three (3) of the Partnership's properties are leased to a Denny's franchise.
Base rent from these properties amounted to approximately 34% of total base rent
in 1995.
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
June 30, 1996, the Partnership has leased two of its properties to Terratron,
Inc., which constitute 21% of the aggregate gross proceeds. Due to sales
difficulties in the stores leased by Terratron, a one (1) year lease
modification was entered into with the tenant, reducing 1996 base rents by
approximately $85,000. Additionally, delinquent rents totaling $46,000 were
capitalized into a five (5) year note accruing interest at 10% per annum. The
amount of the rent capitalized was written off as uncollectible at December 31,
1995.
10
<PAGE>
6. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the six months ended June 30,
1996 and 1995, are as follow:
<TABLE>
<CAPTION>
Current General Partner Incurred as of Incurred as of
- - ----------------------- June 30, 1996 June 30, 1995
-------------- --------------
<S> <C> <C>
Management fees $30,620 $27,330
Restoration fees 53,013 2,467
Cash distribution 1,521 513
Overhead allowance 2,552 2,483
Reimbursement for out-of-pocket expenses 4,766 3,141
------- -------
$92,472 $35,934
======= =======
</TABLE>
7. NET INVESTMENT IN DIRECT FINANCING LEASES:
------------------------------------------
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, is comprised of the following as of June
30, 1996:
<TABLE>
<S> <C>
Minimum lease payments receivable $ 877,282
Estimated residual values of leased
property (non-recourse) 47,356
Less - Unearned income (137,824)
----------
Net investment in direct financing leases $786,814
==========
</TABLE>
Scheduled future minimum lease payments are as follows:
<TABLE>
<S> <C>
Year ending
December 31,
1996 $202,807
1997 312,561
1998 225,470
1999 183,800
--------
$924,638
========
</TABLE>
During 1995, it was determined that the residual amounts of the leases were
overstated. Accordingly, a write-down of residual amounts to their estimated
net realizable values was recorded. The total amount of the write-down was
approximately $96,000.
11
<PAGE>
8. GENERAL AND ADMINISTRATIVE EXPENSES:
------------------------------------
For the periods ended June 30, 1996 and 1995, general and administrative
expenses incurred by the Partnership were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Communication costs $12,383 $10,133 $17,033 $15,221
Overhead allowance 1,288 1,252 2,552 2,483
Income tax expense 1,065 0 1,065 1,725
Other administration 1,569 1,680 4,585 2,966
------- ------- ------- -------
$16,305 $13,065 $25,235 $22,395
======= ======= ======= =======
</TABLE>
9. 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 exceeding 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 June 30, 1996, 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.
10. 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 June 30, 1996. Funds are invested in U.S. Treasury
securities. In addition, interest totaling $19,245 has been credited to the
Trust as of June 30, 1996. 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
12
<PAGE>
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.
11. RESTORATION TRUST ACCOUNT; EXPENSE ALLOCATIONS; AND RELATED INTER-
----------------------------------------------------------- -----
PARTNERSHIP RECEIVABLES:
------------------------
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. Based on modified allocations adjusted as of
December 31, 1993, the Partnership owed $295,053 and $192,359 to DiVall 1 and
DiVall 2, respectively, for amounts paid on its behalf. Amounts recovered from
former general partner affiliates have been used to partially repay the amounts
due to DiVall 1 and DiVall 2. At December 31, 1995, the remaining amounts due
to DiVall 1 and DiVall 2 totaled $105,824 and $73,588, respectively. Such
amounts are reflected on the balance sheet as due to affiliated partnerships.
These amount were fully repaid during March 1996 from recoveries received.
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. Any available recovery funds are being
utilized first to satisfy amounts due other partnerships for amounts advanced
under prior allocation methods. As of June 30, 1996, the Partnerships recovered
a total of approximately $4,577,000 from the former general partners and their
affiliates, accountants and attorneys. Of this amount, the Partnership received
its pro-rata share in the amount of $2,134,000. Additionally, $40,347,
representing 25% of all 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 10.
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.
On March 24, 1994, an affiliated partnership, DiVall 1, filed a complaint in the
United States District Court for the Western District of Missouri against
Boatmen's First National Bank of Kansas City ("Boatmen's) seeking a declaratory
judgment that Boatmen's has no right or interest in a promissory note executed
in the name of DiVall 1 by the former general partners (the "Note") secured by
mortgages on five DiVall 1 properties, and further seeking an injunction against
foreclosure proceedings instituted against a DiVall 1 property located in
Dallas,
13
<PAGE>
Texas under a first deed of trust and security agreement given to secure the
Note (the "Foreclosure"). The former general partners borrowed $600,000 during
or before 1991 from Metro North State Bank (now Boatmen's). The proceeds of the
Note were not received by DiVall 1. As of June 30, 1996, DiVall 1 had not paid
debt service on the Note. DiVall 1 received a notice of default on the Note in
October 1993, and the Foreclosure Action was filed in February 1994. As of June
30, 1996, interest in the amount of $200,000 had accrued but was unpaid on the
Note. Interest is accrued at the face rate of the Note. If DiVall 1 loses the
case against Boatmen's, additional interest totaling approximately $218,000,
representing the default rate of interest may be due. Boatmen's has agreed to
stay its foreclosure proceedings pending the outcome of the litigation.
Boatmen's answered the complaint and filed a motion for summary judgment to
which DiVall 1 responded. The District Court granted Boatmen's motion for
summary judgement. DiVall 1 appealed and the Eighth Circuit Court of Appeals
reversed the District Court's ruling. The case was sent back to the District
Court for further discovery and trial. Pursuant to the Restoration Trust
Account procedures described above, all of the Partnerships are sharing the
expenses of this litigation and any recoveries resulting effectively from the
partial or full cancellation of the alleged indebtedness will be allocated among
the three Partnerships on the same basis as the restoration costs are currently
being allocated.
12. 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 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.
On July 23, 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, to date, been on a
steeply discounted basis. Management anticipates that the recoveries in the
remaining unresolved bankruptcies are likely to also be on a deeply discounted
basis.
Plans of reorganization have been filed in some of the bankruptcies, and
settlement agreements in many of the Private Partnerships have been reached.
Settlements in eighteen (18) of the bankruptcies to date have resulted in cash
payments to the Partnerships of a total of $573,000 and notes secured by
subordinated mortgages in the aggregate amount of $625,000. The Partnership is
continuing to vigorously defend its interests in the remaining bankruptcies.
14
<PAGE>
13. 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.
14. SUBSEQUENT EVENTS:
------------------
On August 15, 1996, the Partnership made a distribution to the Limited Partners
for the Second Quarter 1996 of $1,125,000 amounting to approximately $65.78 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 June
30, 1996, were originally purchased at a price, including acquisition costs, of
approximately $5,869,000.
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, amounted to $787,000 at June 30, 1996,
compared to $976,000 at December 31, 1995. The decrease of $189,000 was a
result of principal and residual payments received during the quarter.
OTHER ASSETS
- - ------------
Cash and cash equivalents, including cash restricted for real estate taxes and
the restoration escrow held by the Partnership, were $1,356,940 at June 30,
1996, compared to $355,000 at December 31, 1995. The Partnership designated
cash of $1,125,000 to fund the Second Quarter 1996 distributions to Limited
Partners; $90,000 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, sales of investment properties, and any recoveries of
misappropriated funds by the former general partners will provide the sources
for future fund liquidity and Limited Partner distributions.
A Restoration escrow account was established during the First Quarter of 1996,
and $826,000, representing the net proceeds to the partnership from the
settlement of the Ernst & Young and Quarles & Brady litigation, was deposited to
the account. For information regarding the settlement refer to PART II, Item 1
of this report.
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 11
to the financial statements.
15
<PAGE>
DUE FROM FORMER AFFILIATES, ALLOWANCE FOR UNCOLLECTIBLE AMOUNTS DUE FROM FORMER
AFFILIATES AND DUE TO AFFILIATED PARTNERSHIPS
Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $2,271,000 at June
30, 1996. The receivable decreased from December 31, 1995, due to $1,813,000 of
recoveries received from the former general partners and their affiliates,
including the settlement received in the litigation against the Partnerships'
former accountants and attorneys.
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 $3,253,000 at December 31, 1995 to
$4,184,000 at June 30, 1996, and includes $1,902,000 of cumulative accrued
interest.
The current General Partner is vigorously pursuing recovery of the
misappropriated funds from the various sources, and initially estimated an
aggregate recovery of $3 million for the Partnerships, of which approximately
$1.4 million was allocated to the Partnership. As such, an allowance was
established against amounts due from the former general partners and their
affiliates reflecting the current General Partner's original estimate of
probable loss from misappropriated amounts. This allowance was allocated among
the Partnerships based on each Partnership's pro rata share of the total
misappropriation. The amount of the Partnership's allowance was reduced by
approximately $746,000 during the first six months of 1996, due to recoveries
received in excess of the original estimate.
The restoration costs are allocated among the Partnerships based on each
Partnership's respective share of the misappropriation as discussed in Note 12
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. Consequently, the Partnership had not been
paying its pro rata share of the costs. Accordingly, the Partnership recorded
payables at December 31, 1993, in the amount of $295,000 and $192,000, due to
DiVall 1 and DiVall 2, respectively, with corresponding amounts reflected as
professional expenses related to the Investigation. Recoveries allocated to the
Partnership have been used to repay the amounts owed to DiVall 1 and DiVall 2.
At December 31, 1995, the remaining amounts due to DiVall 1 and DiVall 2 for
restoration costs totaled $106,000 and $74,000, respectively. During March 1996,
these amounts were fully repaid from recoveries received.
As a result of the misappropriation and material weaknesses in the internal
control structure of the Partnership prior to February 8, 1993, there can be no
assurance that all transactions recorded by the Partnership prior to February 8,
1993, were appropriate transactions of the Partnership and properly reflected in
the accompanying financial statements of the Partnership or that all
transactions of the Partnership prior to February 8, 1993, including improper
and unsupported transactions, have been identified and reflected in the
accompanying financial statements of the Partnership as of June 30, 1996.
LIABILITIES
- - -----------
Accounts payable and accrued expenses at June 30, 1996, in the amount of
$23,000, primarily represented the accrual of legal and auditing fees.
16
<PAGE>
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 14 to the financial statements for additional information
regarding the reallocation.
Cash distributions paid to the Limited Partners and to the General Partner
during 1996, of $225,000 and $1,521, respectively, have also been made in
accordance with the amended Partnership Agreement. The Second Quarter 1996
distribution of $1,125,000 was paid to the Limited Partners on August 15, 1996.
RESULTS OF OPERATIONS:
- - ----------------------
Management believes that the financial results are not indicative of "normal"
Partnership operations. There are many events which occurred since the discovery
of the misappropriations in 1992 which have had a negative impact on financial
results. Some of these events will continue to have a negative impact on the
Partnership in the future. However, the settlement of litigation against the
Partnership's former accountants and attorneys should result in operating
results going forward which more closely represent "normal" operations than what
has been experienced during the past three years.
The Partnership reported net income for the quarter ended June 30, 1996, in the
amount of $221,000 compared to net income for the quarter ended June 30, 1995 of
$26,000. For the six months ended June 30, 1996 and 1995, net income totaled
$380,000 and $128,000, respectively. Results for both years were less than would
be expected from "normal" operations, primarily because of costs associated with
misappropriation of assets by the former general partners and their affiliates.
These costs increased significantly during the First Quarter of 1996 as the
lawsuit against the former general partner accountants and attorneys got closer
to trial and as a result of contingent fee payments made upon settlements of the
litigation. These costs decreased during the Second Quarter of 1996 due to the
settlement of the litigation.
REVENUES
- - --------
Total revenues were $233,000, and $237,000, for the quarters ended June 30,
1996, and 1995, respectively, and were $1,169,000 and $468,000 for the six
months ended June 30, 1996 and 1995, respectively. The increase in income in
1996 is attributable to the recovery of amounts from the Partnerships' former
accountants and attorneys which had been previously been written-off.
Total revenues, should approximate $750,000 annually or $187,000 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. The decrease
from 1995 to projected 1996 levels is primarily a result of the one (1) year
lease modification entered into with Terratron, the tenant of two (2) of the
Partnership's Hardee's restaurants.
17
<PAGE>
EXPENSES
- - --------
For the quarters ended June 30, 1996 and 1995, cash expenses amounted to
approximately -7% and 72% of total revenues, respectively. For the six months
ended June 30, 1996 and 1995, cash expenses totaled approximately 62% and 57%,
respectively. Total expenses, including non-cash items, amounted to 5% and 89%
of total revenues for the quarters ended June 30, 1996 and 1995, respectively,
and 67% and 73% for the six months ended June 30, 1996 and 1995. Items
negatively impacting expenses are expenses incurred primarily in relation to the
misappropriation of assets by the former general partners and their affiliates.
The reversal of an over accrual of these expenses favorably impacted the Second
Quarter of 1996 results.
For the six months ended June 30, 1996 and 1995, expenses incurred in relation
to the misappropriated assets amounted to $583,000 and $161,000, respectively.
These costs increased significantly during the First Quarter of 1996 due to the
payment of contingent fees and litigation expenses in relation to the settlement
of litigation against the Partnerships' former accountants and attorneys. Future
expenses incurred in relation to the misappropriation should have a minimal
impact on the Partnership.
As noted above, management believes the Partnership's operations have yet to
stabilize to what could be considered normal, due to the negative impact of the
costs related to the recovery of the misappropriated assets. However, these
"recovery costs" should be minimized in the future.
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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 was 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 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.
18
<PAGE>
On July 23, 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
Partnerships have 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, to
date, been on a steeply discounted basis. Management anticipates that the
recoveries in the remaining unresolved bankruptcies are likely to also be on a
deeply discounted basis.
Plans of reorganization have been filed in some of the bankruptcies, and
settlement agreements in many of the Private Partnerships have been reached.
Settlements in eighteen (18) of the bankruptcies to date have resulted in cash
payments to the Partnerships of a total of $573,000 and notes secured by
subordinated mortgages in the aggregate amount of $625,000. The Partnership is
continuing to vigorously defend its interests in the remaining bankruptcies.
The Partnerships have been named as defendants in certain foreclosure actions
brought in state courts in Wisconsin. In each of these actions, the plaintiff
seeks to foreclose on real property owned by one of the Private Partnerships.
The Partnerships were named as subordinate lienholders on the properties. It is
believed that none of these cases constitute a claim against the individual
Public Partnerships. However, if the foreclosures are successful, the Private
Partnerships' interest in the underlying real estate may be extinguished,
rendering individual obligations to the Partnerships uncollectible. Such a
foreclosure has occurred in one instance and is pending in at least one other
situation.
The Partnership is also pursuing collection actions against former tenants of
the Partnership and/or guarantors of former tenants of the Partnership arising
from defaults on their leases. Although the Partnership believes its claims are
valid, it is currently unknown whether the Partnerships will receive favorable
verdicts or whether any such verdicts will ultimately prove collectible.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
28.0 Correspondence to the Limited Partners dated August 15, 1996,
regarding the Second Quarter 1996 distribution.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the second quarter of
fiscal year 1996.
19
<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: August 14, 1996
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: August 14, 1996
By: _________________________________
Kristin J. Atkinson
Vice President - Finance and Administration
Date: August 14, 1996
20
<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: August 14, 1996
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: August 14, 1996
By: /s/Kristin J. Atkinson
-----------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: August 14, 1996
21
<PAGE>
[LOGO OF THE PROVO GROUP]
August 15, 1996
RE: SECOND QUARTER 1996 CORRESPONDENCE
DIVALL INCOME PROPERTIES 3, L.P. (THE "PARTNERSHIP")
Dear Limited Partner:
------------------------------
SECOND QUARTER 1996 HIGHLIGHTS
. The Wisconsin ATTORNEY GENERAL'S Office is SEEKING investor INPUT before
sentencing Gary J. DiVall and Paul E. Magnuson. (See enclosed correspondence
from the Office of Crime Victim Services.)
. "NET" settlement PROCEEDS from the Quarles & Brady and Ernst & Young lawsuit
were DISTRIBUTED this quarter. (See "Statements of Income and Cash Flow
Highlights" below.)
. Unauthorized "THIRD-PARTY" solicitations causing investor concern.
(See Questions & Answers below.)
------------------------------
SECOND QUARTER 1996 "DISTRIBUTION" HIGHLIGHTS
. 10.3% (approx.) annualized return from operations and other sources and 7.1%
(approx.) non-annualized return of capital from distributed "net" settlement
dollars based on $11,599,000 ("net" remaining initial investment).
. $65.78 per unit (approx.) for the SECOND QUARTER 1996 from both cash flow from
----
operations and "net" cash activity from financing and investing activities.
. $1,125,000 "total" amount distributed for the SECOND QUARTER 1996 which was
$950,000 more than budgeted, primarily due to the disbursement of "net"
settlement dollars.
. $461.00 "total" per unit (approx.) distributed SINCE INCEPTION from both cash
----
flow from operations and "net" cash activity from financing and investing
activities. (NOTE: ORIGINAL UNITS WERE PURCHASED FOR $1,000/UNIT.)
<PAGE>
[LOGO OF THE PROVO GROUP]
DIVALL INCOME PROPERTIES 3, L.P.
August 15, 1996
Page 2
------------------------------
STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS
. 23% increase in TOTAL OPERATING REVENUE from projections.
. $826,000 total "NET" SETTLEMENT DOLLARS from the Quarles & Brady and Ernst &
Young lawsuit were distributed for the quarter ended June 30, 1996.
. 5% increase in TOTAL OPERATING EXPENSES from projections.
. $122,000 reversal of RESTORATION COSTS which were previously accrued
for the Partnership.
------------------------------
PROPERTY HIGHLIGHTS
VACANCIES
---------
. There were no vacancies at June 30, 1996.
--
OTHER PROPERTY MATTERS
----------------------
. Terratron, Inc., tenant of the HARDEE'S RESTAURANTS IN WISCONSIN, was current
on its monthly rental payments; however, they continue to experience
difficulties with their CATCH-UP rental payments due the Partnership.
------------------------------
RESTORATION HIGHLIGHTS
. Recoveries received during the SECOND QUARTER 1996 totalled $16,900 (approx.)
for the Partnership.
. As previously communicated, the Partnership is in the discovery stage prior to
the trial against BOATMEN'S First National Bank of Kansas City. The TRIAL has
been scheduled for MARCH of 1997.
. "Total" recoveries received TO DATE for the Partnership amount to
approximately $2,153,000.
. The Partnership continues to monitor and negotiate the remaining settlements
as they arise with the DiVall "PRIVATE" Partnerships.
<PAGE>
DIVALL INCOME PROPERTIES 3, L.P.
August 15, 1996
Page 3
------------------------------
RETURN OF CAPITAL
The following table has been updated to illustrate the breakdown of
distributions since the Partnership's first quarterly distribution, for the
period ended September 30, 1990 through June 30, 1996.
<TABLE>
<CAPTION>
================================================================================
DISTRIBUTION CAPITAL
------------ -------
ANALYSIS BALANCE
-------- -------
<S> <C> <C>
Original Capital Balance - $17,102,520
Cash Flow From Operations Since Inception $1,034,384 -
Total Distributions Since Inception (6,537,983) -
----------
(Return) of Capital $(5,503,599) (5,503,599)
=========== ----------
"NET" REMAINING INITIAL INVESTMENT
BY ORIGINAL PARTNERS - $11,598,921
===========
================================================================================
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
------------------------------
QUESTIONS & ANSWERS
1. WHAT IS THE "CURRENT" VALUE OF MY INVESTMENT IN THE PARTNERSHIP?
. According to the Partnership Agreement, we are required to provide
valuation information annually which was approximately $440 per unit at
December 31, 1995.
It is important to understand, however, that your investment value will
most likely diminish whenever "original" capital is returned to you. For
example, this quarter's distribution included "net" settlement proceeds
which is considered return of capital. The overall impact of this $48.31
(approx.) per unit amount (reflective of "net" settlement dollars) on
1996's valuation will not be determined until early 1997.
2. HAS THERE BEEN ANY DECISION MADE REGARDING THE PARTNERSHIP'S LIQUIDATION
ALTERNATIVES OR THE POSSIBILITY OF REPOSITIONING ITS ASSETS?
. No decision has been made at this time. The Advisory Board has requested
feedback from the investor community to assist in our decision-making
process. (See enclosed letter from the Advisory Board.)
<PAGE>
DIVALL INCOME PROPERTIES 3, L.P.
August 15, 1996
Page 4
------------------------------
QUESTIONS & ANSWERS (CONT'D)
3. WHAT ARE MY "IMMEDIATE" LIQUIDATION OPTIONS FOR INTERESTS IN THE PARTNERSHIP?
. The only option for immediate liquidation of interests, at this time, is
through the secondary market. According to current secondary market trading
information provided to management, interests in the Partnership are
selling between $300-$365 per unit.
It is important to note that there has been a recent increase in the
frequency of direct "solicitations" of your interests by third parties.
Since we do not have control or support these solicitation efforts, we
strongly urge you to thoroughly review all your options and understand
their motivation -- prior to any liquidation.
We have NO affiliation with any "third-party" solicitors of your interests;
and, as noted above, we do not support any "unsolicited written offers"
that you may receive. If you are in receipt of such offers and have
questions regarding your investment, we encourage you to contact us.
As always, if you have any questions or need additional information, please
contact Investor Relations at 1-800-547-7686 or 1-608-829-2992. All written
inquiries may be mailed or faxed to:
THE PROVO GROUP, INC.
Post Office Box 2137
Madison, Wisconsin 53701-2137
(FAX 608-829-2996)
Sincerely,
THE PROVO GROUP, INC.
By: /s/ Brenda Bloesch By: /s/ Kristin Atkinson
----------------------------- ------------------------------
Brenda Bloesch Kristin Atkinson
Director of Investor Relations V.P. - Finance and Administration
Enclosures
<PAGE>
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------
DIVALL INCOME PROPERTIES 3 L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 1996
- - ----------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
--------------------------------------
<S> <C> <C> <C>
2ND 2ND
QUARTER QUARTER BETTER
OPERATING REVENUES 6/30/96 6/30/96 (WORSE)
------------ ----------- ---------
Rental income $155,515 $173,038 $17,523
Direct financing interest 23,834 23,836 2
Interest income 9,973 19,282 9,309
Recovery of amounts previously written off 0 16,947 16,947
Other income 0 372 372
------------ ----------- ---------
TOTAL OPERATING REVENUES $189,322 $233,475 $44,153
------------ ----------- ---------
OPERATING EXPENSES
Insurance $1,266 $1,378 ($112)
Management fees 15,480 15,450 30
Restoration fees 0 678 (678)
Overhead allowance 1,293 1,288 5
Advisory Board 5,250 3,647 1,603
Administrative 11,351 15,018 (3,667)
Professional services 340 295 45
Auditing 12,000 9,525 2,475
Legal 900 3,241 (2,341)
Defaulted tenants 300 0 300
------------ ----------- ---------
TOTAL OPERATING EXPENSES $48,180 $50,520 ($2,340)
------------ ----------- ---------
INVESTIGATION AND RESTORATION EXPENSES $54,700 ($67,461) $122,161
------------ ----------- ---------
NON-OPERATING EXPENSES
Depreciation $29,331 $29,329 $2
------------ ----------- ---------
TOTAL NON-OPERATING EXPENSES $29,331 $29,329 $2
------------ ----------- ---------
TOTAL EXPENSES $132,211 $12,388 $119,823
------------ ----------- ---------
NET INCOME $57,111 $221,087 $163,976
OPERATING CASH RECONCILIATION: VARIANCE
---------
Depreciation 29,331 29,329 (2)
Recovery of amounts previously written off 0 (16,947) (16,947)
(Increase) Decrease in current assets (26,710) (12,684) 14,026
Increase (Decrease) in current liabilities (115) (133,102) (132,987)
Advance from/(to) future cash flows for current distributions 5,000 0 (5,000)
Decrease in cash reserved for payables 0 75,000 75,000
------------ ----------- ---------
Net Cash Provided From Operating Activities $64,617 $162,683 $98,066
------------ ----------- ---------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Payments to affiliated partnerships 0 0 0
Recoveries from former G.P. affiliates 0 16,947 16,947
Principal received on equipment leases 98,134 106,393 8,259
Cash disbursed from restoration escrow account 0 826,160 826,160
Investment in PMA Indemnity 0 0 0
Principal payments received on notes receivable 13,089 13,090 1
------------ ----------- ---------
Net Cash Provided from Investing And Financing
Activities $111,223 $962,590 $851,367
------------ ----------- ---------
Total Cash Flow For Quarter $175,840 $1,125,273 $949,433
Cash Balance Beginning of Period 349,280 481,667 132,387
Less 1st quarter distributions paid 5/96 (175,000) (175,000) 0
Change in cash reserved for payables or distributions (5,000) (75,000) (70,000)
------------ ----------- ---------
Cash Balance End of Period $345,120 $1,356,940 $1,011,820
Cash reserved for 2nd quarter L.P. distributions (175,000) (1,125,000) (950,000)
Cash reserved for future distributions 0 0 0
Cash reserved for payment of payables (36,000) (90,000) (54,000)
------------ ----------- ---------
Unrestricted Cash Balance End of Period $134,120 $141,940 $7,820
============ =========== =========
- - ----------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
--------------------------------------
* Quarterly Distribution $175,000 $1,125,000 $950,000
Mailing Date 8/15/96 (enclosed) -
- - ----------------------------------------------------------------------------------------------------------
* Refer to distribution letter for detail of quarterly distribution.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
PROJECTIONS FOR ORIGINAL CAPITAL $17,102,520
DISCUSSION PURPOSES DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP NET DISTRIBUTION OF
1996 PROPERTY SUMMARY CAPITAL SINCE
AND RELATED ESTIMATED RECEIPTS INCEPTION $ 5,503,599
-----------
CURRENT EQUITY $11,598,921
===========
</TABLE>
PORTFOLIO (Note 1)
<TABLE>
<CAPTION>
-----------------------------------
REAL ESTATE
-----------------------------------
ANNUAL
- - ----------------------------------- BASE %
CONCEPT LOCATION COST RENT YIELD
- - ----------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
APPLEBEE'S PITTSBURGH, PA 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%
DENNY'S SANFORD, FL 1,136,433 140,340 12.35%
" "
HARDEE'S (3) ST. FRANCIS,WI 1,194,381 117,000 9.80%
" "
HARDEE'S (3) OAK CREEK, WI 1,341,906 117,000 8.72%
" "
HARDEE'S WAHOO, NE 511,616 68,280 13.35%
- - ----------------------------------- -----------------------------------
PORTFOLIO TOTALS (7 Properties) 5,869,063 672,000 11,45%
- - ----------------------------------- -----------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------
EQUIPMENT
--------------------------------------------------
LEASE ANNUAL
- - ----------------------------------- EXPIRATION LEASE %
CONCEPT LOCATION DATE COST RECEIPTS RETURN
- - ----------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C>
APPLEBEE'S PITTSBURGH, PA 290,469 0.00%
" " 58,094 0.00%
DENNY'S CO SPRINGS, CO 05/31/97 210,976 53,520 25.37%
DENNY'S ENGLEWOOD, CO 210,976 0.00%
DENNY'S SANFORD, FL 263,720 0.00%
" " 07/31/96 79,116 20,000 25.28%
HARDEE'S (3) ST. FRANCIS, WI 12/31/99 (2) 369,688 74,008 20.02%
" " 12/31/99 (2) 84,500 17,852 21.13%
HARDEE'S (3) OAK CREEK, WI 12/31/99 (2) 482,078 109,622 22.74%
" " 12/31/99 (2) 105,488 23,987 22.74%
HARDEE'S WAHOO, NE 06/30/97 290,468 59,140 20.36%
- - ----------------------------------- --------------------------------------------------
PORTFOLIO TOTALS (7 Properties) 2,445,573 358,129 14.64%
- - ----------------------------------- --------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------
TOTALS
-------------------------------
TOTAL %
ON $11,598,921
- - ----------------------------------- ANNUAL % EQUITY
CONCEPT LOCATION COST RECEIPTS RETURN RAISE
- - --------------------------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C>
APPLEBEE'S PITTSBURGH, PA 1,239,896 116,040 9.36%
" "
DENNY'S CO SPRINGS, CO 791,896 130,980 16.56%
DENNY'S ENGLEWOOD, CO 424,187 35,880 8.46%
DENNY'S SANFORD, FL 1,479,269 160,040 10.84%
" "
HARDEE'S (3) ST. FRANCIS, WI 1,648,569 208,860 12.67%
" "
HARDEE'S (3) OAK CREEK, WI 1,929,472 250,609 12.99%
" "
HARDEE'S WAHOO, NE 802,084 127,420 15.89%
- - ---------------------------------- ---------------------------------- -----------------
PORTFOLIO TOTALS (7 Properties) 8,314,636 1,030,129 12.39% 8.88%
- - ---------------------------------- ---------------------------------- -----------------
</TABLE>
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 modified effective January 1, 1996 amortizing the
remaining balance over four years at a rate of 10% per annum.
3: A one-year lease modification was entered into with this tenant,
reducing 1996 base rent by approximately $70,000.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
June 30, 1996 Form 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 515,759 515,759
<SECURITIES> 1,110,426 1,110,426
<RECEIVABLES> 7,397,212 7,397,212
<ALLOWANCES> 6,455,384 6,455,384
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,568,013 2,568,013
<PP&E> 5,852,062 5,852,062
<DEPRECIATION> 703,102 703,102
<TOTAL-ASSETS> 7,716,973 7,716,973
<CURRENT-LIABILITIES> 121,825 121,825
<BONDS> 0 0
<COMMON> 0 0
0 0
0 0
<OTHER-SE> 7,595,148 7,595,148
<TOTAL-LIABILITY-AND-EQUITY> 7,716,973 7,716,973
<SALES> 196,873 394,504
<TOTAL-REVENUES> 233,474 1,168,526
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 12,387 788,219
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 221,087 380,307
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 221,087 221,087
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 221,087 380,307
<EPS-PRIMARY> 12.80 22.01
<EPS-DILUTED> 12.80 22.01
</TABLE>
