<PAGE>
FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
(Former name, former address and former fiscal year, if changed since last
report.)
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting securities held by
nonaffiliates of the Registrant: The aggregate market value of limited
partnership interests held by nonaffiliates is not determinable since there is
no public trading market for the limited partnership interests.
Index to Exhibits located on page: 30 - 31
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PART I
<PAGE>
Item 1. Business
Background
The Registrant, DiVall Income Properties 3 Limited Partnership (the
"Partnership"), is a limited partnership organized under the Wisconsin Uniform
Limited Partnership Act pursuant to an Agreement of Limited Partnership dated as
of December 12, 1989, and amended as of December 18, 1989, February 19, 1990,
April 9, 1990, February 8, 1993, May 26, 1993, June 1, 1993, and June 30, 1994
(collectively the "Partnership Agreement"). As of December 31, 1998, the
Partnership consisted of one General Partner and 1,092 Limited Partners owning
an aggregate of 17,102.52 Limited Partnership D-Interests (the "D-Interests")
acquired at a public offering price of $1,000 per Interest before volume
discounts. The Interests were sold pursuant to a Registration Statement on Form
S-11 filed under the Securities Act of 1933 dated April 23, 1990. On April 23,
1992, the Partnership closed the offering at 17,102.52 D- Interests
($17,102,520), providing net proceeds to the Partnership after volume discounts
and offering costs of $14,408,872.
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 December 31, 1998, the Partnership owned five (5) Properties and
specialty leasehold improvements for use in all five (5) of the Properties, as
more fully described in Item 2. During the Second Quarter of 1998, the General
Partner received the written consent of a majority of the Limited Partners to
liquidate the Partnership's assets and dissolve the Partnership. Management is
currently seeking a purchaser for the Partnership's Properties within the
parameters of this consent. However, management expects to continue normal
operations for the Partnership for the foreseeable future.
The Partnership's return on its investment will be derived principally from
rental payments received from its lessees. Therefore, the Partnership's return
on its investment is largely dependent upon, among other factors, the business
success of its lessees. The business success of the Partnership's individual
lessees can be adversely affected on three general levels. First, the tenants
rely heavily on the management contributions of a few key entrepreneurial
owners. The business operations of such entrepreneurial tenants can be adversely
affected by death, disability or divorce of a key owner, or by such owner's poor
business decisions such as an undercapitalized business expansion. Second,
changes in a local market area can adversely affect a lessee's business
operation. A local economy can suffer a downturn with high unemployment.
Socioeconomic neighborhood changes can affect retail demand at specific sites
and traffic patterns may change, or stronger competitors may enter a market.
These and other local market factors can potentially adversely affect the
lessees of Partnership properties. Finally, despite an individual lessee's solid
business plans in a strong local market, the chain concept itself can suffer
reversals or changes in management policy which can in turn affect the
profitability of operations for Partnership properties. Therefore, there can be
no assurance that any specific lessee will have the ability to pay its rent over
the entire term of its lease with the Partnership.
Since all of the Partnership's investment in properties and equipment involves
restaurant tenants, the restaurant market is the major market segment with a
material impact on Partnership operations. It would
2
<PAGE>
appear that the management skill and potential operating efficiencies realized
by Partnership lessees will be a major ingredient for their future operating
success in a very competitive restaurant and food service marketplace.
There is no way to determine with any certainty, which, if any, tenants will
succeed or fail in their business operations over the term of their respective
leases with the Partnership. It can be reasonably anticipated that some lessees
will default on future lease payments to the Partnership which will result in
the loss of expected lease income for the Partnership. Management will use its
best efforts to vigorously pursue collection of any defaulted amounts and to
protect the Partnership assets and future rental income potential by trying to
re-lease any Properties with rental defaults. External events which could impact
the Partnership's liquidity are the entrance of other competitors into the
market areas of our tenants; liquidity and working capital needs of the
leaseholders; and failure or withdrawal of any of the national franchises held
by the Partnership's tenant. Each of these events, alone or in combination,
would affect the liquidity level of leaseholders resulting in possible default
by the tenant. Since the information regarding plans for future liquidity and
expansion of closely held organizations, which are tenants of the Partnership,
tends to be of a private and proprietary nature, anticipation of individual
liquidity problems is difficult, and prediction of future events is nearly
impossible.
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, two of 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.
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 the responsibility for daily operations
and assets of the Partnerships as well as to develop and execute a plan of
restoration to the Partnerships. As reported in the Partnership's report on Form
8-K dated May 26, 1993, effective as of that date, the Limited Partners, by
written consent of a majority of interests, elected the Permanent Manager, TPG,
as General Partner. Additional results of the solicitation included the approval
of the Permanent Manager Agreement ("PMA"), the acceptance of the resignations
of the former general partners, amendments to certain provisions of the
Partnership Agreement pertaining to general partner interests and compensation,
and an amendment of the Partnership Agreement providing for an Advisory Board
(the "Board").
The Permanent Manager Agreement
The PMA was entered into on February 8, 1993, between the Partnership, DiVall 1
(which was dissolved in December 1998), DiVall 2, the now former general
partners DiVall and Magnuson, their controlled affiliates, and TPG, naming TPG
as the Permanent Manager. The PMA contains provisions allowing the Permanent
Manager to submit the PMA, the issue of electing the Permanent Manager as
General Partner, and the issue of acceptance of the resignations of the former
general partners to a vote of the Limited Partners through a solicitation of
written consents.
3
<PAGE>
TPG, as the new General Partner, has been operating and managing the affairs of
the Partnership in accordance with the provisions of the PMA and the Partnership
Agreement.
Advisory Board
The concept of the Advisory Board was first introduced by TPG during the
solicitation of written consents for the Partnerships, and is the only type of
oversight body known to exist for similar partnerships at this time. The first
Advisory Board was appointed in October 1993, and held its first meeting in
November 1993. The three person Advisory Board is empowered to, among other
functions, review operational policies and practices, review extraordinary
transactions, and advise and serve as an audit committee to the Partnership and
the General Partner. The Advisory Board does not have the authority to direct
management decisions or policies of the Partnership or remove the General
Partner. The powers of the Advisory Board are advisory only. The Advisory Board
has full and free access to the Partnership's books and records, and individual
Advisory Board members have the right to communicate directly with the Limited
Partners concerning Partnership business. Members of the Advisory Board are
compensated $3,000 annually and $1,200 for each quarterly meeting attended.
The Advisory Board currently consists of a broker dealer representative, Steven
Carson; and a Limited Partner from each of the two remaining Partnerships:
Richard Otte from DiVall 2 and Albert Gerritz from the Partnership. For a brief
description of each Advisory Board member, refer to Item 10, Directors and
Executive Officers of the Registrant.
The Partnership has no employees.
All of the Partnership's business is conducted in the United States.
Item 2. Properties
The Partnership's Properties are leased under 20 year leases. All leases are
triple net which require the tenant to pay all property operating costs
including maintenance, repairs, utilities, property taxes, and insurance. All
leases contain percentage rent provisions which require the tenant to pay a
specified percentage (3% to 7%) of gross sales above a threshold amount.
The Partnership owned the following Properties (including specialty leasehold
improvements) as of December 31, 1998:
<TABLE>
<CAPTION>
Lease
Acquisi- Property Name Purchase Rental Per Expiration Renewal
tion Date & Address Lessee Price (1) Annum Date Options
- - --------- --------- ------ --------- ----- ---- -------
<S> <C> <C> <C> <C> <C> <C>
08/14/90 Hardee's Hardee's Food 1,648,569(2) 92,000 01/31/2010 None
2450 E Layton Ave Systems, Inc.
St Francis, WI
09/11/90 Applebee's B.T. Woodlipp, 1,297,990(2) 116,040 11/30/2009 None
2101 Greentree Rd Inc.
Pittsburgh, PA
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Lease
Acquisi- Property Name Purchase Rental Per Expiration Renewal
tion Date & Address Lessee Price (1) Annum Date Options
- - --------- --------- ------ --------- ----- ---- -------
<S> <C> <C> <C> <C> <C> <C>
02/05/91 Hardee's Hardee's Food 1,929,472(2) 88,000 05/31/2010 None
9505 S 13th St Systems, Inc.
Oak Creek, WI
07/01/91 Denny's DenAmerica, Inc. 424,187(2) 35,880 06/30/2011 None
9060 Arapahoe Rd
Englewood, CO
04/28/92 Denny's DenAmerica, Inc. 791,159(2) 77,460 05/31/2012 (3)
---------- ------
4375 Sinton Rd
Colorado Springs, CO
$6,091,377 $409,380
========== ========
</TABLE>
Footnotes.
(1) Purchase price includes all costs incurred to acquire the property.
(2) Purchase price includes cost of specialty leasehold improvements.
(3) Renewal options available.
In connection with the proposed liquidation of the Partnership, appraisals were
received on all of the Partnership's Properties. The two Hardee's were written
down to their estimated net realizable values based on the appraisals received.
The write-downs approximated $400,000.
During 1997, the Partnership sold its Hardee's property in Wahoo, Nebraska for
approximately $405,000, resulting in a gain, before disposition fees, of
approximately $8,000.
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.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market Price and Dividends on Registrant's Common Equity and Related
Stockholder Matters
(a) Although some Interests have been traded, there is no active public
market for the Interests and it is not anticipated that an active
public market for the Interests will develop.
(b) As of December 31, 1998, there were 1,092 record holders of Interests
in the Partnership.
5
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(c) The Partnership does not pay dividends. However, the Partnership
Agreement provides for distributable net cash receipts of the
Partnership to be distributed on a quarterly or monthly basis, 99% to
the Limited Partners and 1% to the General Partner, subject to the
limitations on distributions to the General Partner described in the
Partnership Agreement. During 1998 and 1997, $1,745,000 and $1,650,000,
respectively, were distributed in the aggregate to the Limited
Partners. In 1998 and 1997, the General Partner received aggregate
distributions of $1,325 and $2,418, respectively.
Item 6. Selected Financial Data
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
(a Wisconsin limited partnership)
December 31, 1998, 1997, 1996, 1995, and 1994
(not covered by Independent Auditors' Report)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenue $ 698,995 $ 939,210 $ 1,812,164 $ 951,189 $ 1,079,845
- - ----------------------------------------------------------------------------------------------------
Net Income
(Loss) (68,993) 604,505 697,472 20,425 385,971
- - ----------------------------------------------------------------------------------------------------
Net Income
(Loss) per
Limited Partner
Interest (3.99) 34.99 40.37 1.18 22.34
- - ----------------------------------------------------------------------------------------------------
Total Assets 3,685,808 5,543,931 6,720,437 8,001,587 8,723,385
- - ----------------------------------------------------------------------------------------------------
Total Partners'
Capital 3,622,874 5,438,132 6,486,045 7,441,362 8,155,826
- - ----------------------------------------------------------------------------------------------------
Cash
Distributions
per Limited
Partnership
Interest 102.03 96.48 96.48 42.98 123.24
- - ----------------------------------------------------------------------------------------------------
</TABLE>
(a) The above selected financial data should be read in conjunction with
the financial statements and the related notes appearing elsewhere in
this annual report.
6
<PAGE>
Item 7. 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 Properties, including equipment held by the Partnership at December 31,
1998, were originally purchased at a price, including acquisition costs, of
approximately $6,091,000.
During 1997, the Partnership sold its Hardee's property in Wahoo, Nebraska for
approximately $405,000, resulting in a gain, before disposition fees, of
approximately $8,000.
During 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 $231,000 at December 31,
1998, compared to $595,000 at December 31, 1997. The Partnership designated cash
of $60,000 to fund the Fourth Quarter 1998 distributions to Limited Partners
paid in February 1999; $46,000 for the payment of year-end accounts payable and
accrued expenses; and the remainder represents reserves deemed necessary to
allow the Partnership to operate normally. The decrease is primarily due to
recoveries received during the Fourth Quarter of 1997, which was distributed
during the First Quarter of 1998. Cash generated through the operations of the
Partnership's Properties, and sales of 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 included in Item 8 of this report.
Liabilities
Accounts payable and accrued expenses at December 31, 1998, in the amount of
$19,000, primarily represented accruals of legal and auditing fees.
Security deposits decreased from $37,000 at December 31, 1997, to $17,000 at
December 31, 1998, due to the application of the security deposit on the Denny's
property in Florida to the purchase price of the property.
7
<PAGE>
Partners' Capital
Net income for the year was allocated between the General Partner and the
Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement as discussed more fully in Note 4 of the financial statements included
in Item 8 of this report. The former general partners' capital account balance
was reallocated to the Limited Partners at December 31, 1993. Refer to Note 9 to
the financial statements included in Item 8 of this report for additional
information regarding the reallocation.
Cash distributions paid to the Limited Partners and to the General Partner
during 1998, of $1,745,000 and $1,325, respectively, have also been made in
accordance with the Partnership Agreement. The Fourth Quarter 1998 distribution
of $60,000 was paid to the Limited Partners on February 15, 1999.
Results of Operations:
The Partnership reported a net loss for the year ended December 31, 1998, in the
amount of $69,000 compared to net income for the years ended December 31, 1997
and 1996 of $605,000 and $697,000. Results for all three years were different
than would be expected from "normal" operations, primarily because of costs
associated with misappropriation of assets by the former general partners and
their affiliates, non-cash write-offs of uncollectible rent and equipment lease
losses, the write-down of Properties to their net realizable values, and
property valuation costs. In addition, 1996 and 1997 results were impacted by
the reversal of a portion of the former general partner receivable write-off,
and 1998 was impacted by a gain on the sale of the Florida Denny's Property.
Revenues
Total revenues were $699,000, $939,000, and $1,812,000, for the years ended
December 31, 1998, 1997, and 1996, respectively. Revenue in 1996 included a
$1,000,000 reversal of a prior year write-off of the former general partner
receivable due to recoveries received in excess of original estimates. The 1997
reversal amounted to $283,000. 1998 revenue included a $239,000 gain on the sale
of the Florida Denny's Property. Overall, revenues have decreased due to the
sale of Properties, leaving fewer revenue-generating Properties in the
Partnership's portfolio.
Total revenues should approximate $400,000 annually, based on leases currently
in place. Future revenues may decrease with tenant defaults and/or sales of
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 years ended December 31, 1998, 1997, and 1996, cash expenses amounted to
approximately 40%, 24%, and 48% of total revenues, respectively. Total expenses,
including non-cash items, amounted to 110%, 36%, and 62% of total revenues for
the years ended December 31, 1998, 1997, and 1996, respectively. Items
negatively impacting expenses during the last three years are expenses incurred
in relation to the misappropriation of assets by the former general partners and
their affiliates, write-offs of uncollectible rent, losses on equipment leases,
and Property write-downs. In addition, during 1998 the Partnership incurred
legal fees, appraisal costs, and fees for environmental inspections and land
title surveys in connection with the proposed liquidation of the Partnership.
8
<PAGE>
The losses, write-offs, Property write-downs, and depreciation are non-cash
items and do not affect current operating cash flow of the Partnership or
distributions to the Limited Partners.
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. Although the Partnership's leases have percentage rent clauses,
percentage rents represented only 3% of total rental income for 1998. 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 and the costs to
make these systems Year 2000 compliant will be borne by the third parties. 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. The
Partnership does plan to evaluate the preparedness of its tenants.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
None.
9
<PAGE>
Item 8. Financial Statements and Supplementary Data
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
(a Wisconsin limited partnership)
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Independent Public Accountants .......................... 11
Balance Sheets, December 31, 1998 and 1997......................... 12 - 13
Statements of Income for the Years
Ended December 31, 1998, 1997, and 1996 ........................... 14
Statement of Partners' Capital for the
Years Ended December 31, 1998, 1997,
and 1996 .......................................................... 15
Statements of Cash Flows for the Years
Ended December 31, 1998, 1997, and 1996 ........................... 16 - 17
Notes to Financial Statements ..................................... 18 - 25
Schedule III--Real Estate and Accumulated
Depreciation ...................................................... 32
10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Divall Insured Properties 3 Limited Partnership:
We have audited the accompanying balance sheets of Divall Income Properties 3
Limited Partnership(the Partnership), as of December 31, 1998 and 1997, and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Divall Income Properties 3
Limited Partnership, as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Chicago, Illinois
February 18, 1999
<PAGE>
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
INVESTMENT PROPERTIES: (Note 3)
<S> <C> <C>
Land $ 1,553,680 $ 2,030,982
Buildings and improvements 2,249,959 3,309,464
Accumulated depreciation (713,396) (761,861)
----------- -----------
Net investment properties 3,090,243 4,578,585
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 230,807 595,420
Cash held in indemnification trust (Note 8) 306,386 290,662
Rents and other receivables 14,463 23,062
Deferred rent receivable 20,778 31,029
Deferred fees 19,738 21,524
Prepaid assets 3,393 3,649
----------- -----------
Total other assets 595,565 965,346
----------- -----------
Total assets $ 3,685,808 $ 5,543,931
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
12
<PAGE>
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
December 31 December 31,
1998 1997
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 18,816 $ 25,331
Due to current General Partner 229 1,395
Security deposits 16,635 36,819
Unearned rental income 27,254 42,254
------------ ------------
Total liabilities 62,934 105,799
------------ ------------
CONTINGENT LIABILITIES: (Note 7)
PARTNERS' CAPITAL: (Notes 1, 4 and 9)
Current General Partner -
Cumulative net income 14,756 15,445
Cumulative cash distributions (7,965) (6,640)
------------ ------------
6,791 8,805
------------ ------------
Limited Partners (17,102.52 interests outstanding)
Capital contributions, net of offering costs 14,408,872 14,408,872
Cumulative net loss (294,314) (226,070)
Cumulative cash distributions (10,232,984) (8,487,984)
Reallocation of former general partners' deficit capital (265,491) (265,491)
------------ ------------
3,616,083 5,429,327
------------ ------------
Total partners' capital 3,622,874 5,438,132
------------ ------------
Total liabilities and partners' capital $ 3,685,808 $ 5,543,931
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
13
<PAGE>
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Rental income (Note 5) $ 420,630 $ 597,697 $ 674,703
Interest income on direct financing leases 0 1,708 85,204
Interest income 39,573 31,435 51,243
Other income 94 17,714 1,217
Gain on sale of assets 238,698 7,585 0
Recovery of amounts previously written off (Note 2) 0 283,071 999,797
---------- ---------- ----------
698,995 939,210 1,812,164
---------- ---------- ----------
EXPENSES:
Management fees (Note 6) 64,690 52,177 86,826
Disposition fees (Note 6) 37,500 12,150 0
Restoration fees (Note 6) 0 11,323 63,163
Insurance 4,328 4,925 5,112
General and administrative 40,219 39,119 43,875
Advisory Board fees and expenses 17,850 14,752 16,332
Appraisals 13,776 0 0
Environmental inspections 8,250 0 0
Land title surveys 11,950 0 0
Professional services 81,622 49,768 53,761
Professional services related to Investigation 1,480 37,754 609,079
Depreciation 84,103 110,951 117,318
Amortization 1,786 1,786 0
Loss on equipment leases 0 0 115,726
Write-down of properties to net realizable value
(Note 3) 400,374 0 3,500
---------- ---------- ----------
767,928 334,705 1,114,692
---------- ---------- ----------
NET INCOME (LOSS) $ (68,933) $ 604,505 $ 697,472
========== ========== ==========
NET INCOME (LOSS) - CURRENT GENERAL $ (689) $ 6,045 $ 6,975
PARTNER
NET INCOME (LOSS) - LIMITED PARTNERS (68,244) 598,460 690,497
---------- ---------- ----------
$ (68,933) $ 604,505 $ 697,472
---------- ========== ==========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP INTEREST, based on 17,102.52
interests outstanding $ (3.99) $ 34.99 $ 40.37
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE>
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Current General Partner Limited Partners
--------------------------------- -------------------------------------------------------------------
Capital
Cumulative Cumulative Contributions, Cumulative Cumulative
Net Income Cash Net of Net Income Cash
(Loss) Distributions Total Offering Costs (Loss) Distributions Reallocation Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 2,425 $(1,433) $ 992 $14,408,872 $(1,515,027) $ (5,187,984) $(265,491) $7,440,370
Cash Distributions
($96.48 per limited
partnership interest
outstanding) (2,789) (2,789) (1,650,000) (1,650,000)
Net Income 6,975 6,975 690,497 690,497
------- ------- ----------- ----------- ----------- ------------ --------- ----------
BALANCE AT DECEMBER 31, 1996 $ 9,400 $(4,222) $ 5,178 $14,408,872 $ (824,530) $ (6,837,984) $(265,491) $6,480,867
Cash Distributions
($96.48 per
limited partnership
interest outstanding) (2,418) (2,418) (1,650,000) (1,650,000)
Net Income 6,045 6,045 598,460 598,460
------- ------- ----------- ----------- ----------- ------------ --------- ----------
BALANCE AT DECEMBER 31, 1997 $15,445 $(6,640) $ 8,805 $14,408,872 $ (226,070) $ (8,487,984) $(265,491) $5,429,327
Cash Distributions
($102.03 per
limited partnership
interest outstanding) (1,325) (1,325) (1,745,000) (1,745,000)
Net Loss (689) (689) (68,244) (68,244)
------- ------- ----------- ----------- ----------- ------------ --------- ----------
BALANCE AT DECEMBER 31, 1998 $14,756 $(7,965) $ 6,791 $14,408,872 $ (294,314) $(10,232,984) $(265,491) $3,616,083
======= ======= =========== =========== =========== ============ ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE>
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (68,933) $ 604,505 $ 697,472
Adjustments to reconcile net income (loss) to net cash
from (used in) operating activities -
Depreciation and amortization 85,889 112,737 117,318
Write-down of properties to net realizable value 400,374 0 3,500
Net gain on disposition (238,698) (7,585) 0
Recovery of amounts previously written off 0 (283,071) (999,797)
Loss on equipment leases 0 0 115,726
Interest applied to Indemnification Trust Account (15,724) (14,414) (13,523)
(Increase)/Decrease in rents, other receivables and prepaid assets 8,855 4,667 (729)
Decrease in deferred rent receivable 10,251 10,079 1,796
Deposits (received) applied for real estate taxes 0 81,447 (38,648)
(Decrease) in accounts payable and accrued expenses (6,515) (4,949) (221,668)
Increase/(Decrease) in due to General Partner (1,166) (47,932) 26,017
(Decrease) in security deposits (20,184) (10,160) (10,614)
Increase/(Decrease) in real estate taxes payable 0 (81,217) 78,033
Increase/(Decrease) in unearned rental income (15,000) 15,665 26,589
----------- ----------- -----------
Net cash provided from (used in) operating activities 139,149 379,772 (218,528)
----------- ----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Principal payments received on direct financing leases 0 25,017 753,954
Deposit to Indemnification Trust Account 0 0 (20,000)
Recoveries from former G.P. affiliates 0 283,071 2,066,936
Proceeds from sale of land and buildings 1,242,563 404,850 36,176
Principal receipts from note 0 0 79,001
----------- ----------- -----------
Net cash provided from investing activities 1,242,563 712,938 2,916,067
----------- ----------- -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Payments of amounts due to affiliated partnerships 0 0 (201,912)
Cash distributions to General Partner (1,325) (2,418) (2,789)
Cash distributions to Limited Partners (1,745,000) (1,650,000) (1,650,000)
----------- ----------- -----------
Net cash (used in) financing activities (1,746,325) (1,652,418) (1,854,701)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (364,613) (559,708) 842,838
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 595,420 1,155,128 312,290
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 230,807 $ 595,420 $ 1,155,128
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE>
Supplemental Information to the Statements of Cash Flows
The following significant non-cash transactions occurred during the three years
affecting the Partnership's financial statements:
1. During 1996, the Partnership was deeded land with a value of
$36,176 in exchange for a note receivable from a tenant.
2. During 1996, security deposits totaling $45,588 were applied
as equipment lease payments for a tenant.
3. During 1996, the Partnership incurred leasing commissions
totaling $23,310 which were unpaid at year-end. The amount was
paid in full during 1997.
The accompanying notes are an integral part of these statements.
17
<PAGE>
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
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. 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 December 31, 1998, the 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.
Percentage rents are accrued throughout the year based on the tenant's actual
reported year-to-date sales along with Management's estimate of the tenant's
sales for any remaining unreported periods during the year.
The Partnership operates in only one segment and therefore no further segment
reporting is made.
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 represent 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.
18
<PAGE>
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.
Certain reclassifications have been made to the prior year financial statements
to make them consistent with the current year presentation.
During 1996, the Partnership adopted Statement of Financial Accounting Standards
No.121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, which requires that all long-lived assets
be reviewed for impairment in value whenever changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The adoption of
SFAS 121 had no impact on the Partnership's financial statements.
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. The General Partner received the consent of
the Limited Partners to liquidate the Partnership's assets and dissolve the
Partnership, during the Second Quarter of 1998. Management is currently seeking
a buyer for the Partnership's Properties within the parameters of the consent.
However, Management expects to continue normal operations for the Partnership
for the foreseeable future.
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, 1998, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$3,200,000.
19
<PAGE>
The following represents a reconciliation of net income (loss) as stated on the
Partnership's statements of income to net income for tax reporting purposes:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) per statements of income $ (68,933) $ 604,505 $ 697,472
Book to tax depreciation difference 368 8,014 8,491
Straight line rent adjustment (10,251) (10,079) (1,796)
Prepaid rent (15,000) 0 0
Property write-downs 400,374 0 0
Allowance for receivables 0 0 (45,730)
Loss on equipment leases 0 0 (53,288)
Other, net (2,547) 5,231 (168,552)
--------- --------- ---------
Net income for tax reporting purposes $ 304,011 $ 607,671 $ 436,597
========= ========= =========
</TABLE>
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.
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. Restoration expenses and recoveries have been allocated based
on the same percentages. Through December 31, 1998, $5,766,000 of recoveries
have been received which exceeded the original estimate of $3 million. As a
result, during 1996 and 1997, 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.
20
<PAGE>
3. INVESTMENT PROPERTIES:
As of December 31, 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.
During 1997, the Partnership sold its Hardee's property in Wahoo, Nebraska, for
approximately $405,000, resulting in a gain, before disposition fees, of
approximately $8,000.
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.
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.
In connection with the proposed liquidation of the Partnership, appraisals were
received on all of the Partnership's Properties. The two Hardee's were written
down to their estimated net realizable values based on the appraisals received.
The write-downs totaled approximately $400,000.
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 the close 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
office overhead of $25,000 between the three affiliated Partnerships. 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 Permanent Manager Agreement ("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 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
21
<PAGE>
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 income 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 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
22
<PAGE>
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> <C>
1999 $409,380
2000 409,380
2001 409,380
2002 409,380
2003 409,380
Thereafter 2,731,958
----------
$4,778,858
==========
</TABLE>
Percentage rentals included in rental income in 1998, 1997, and 1996 were
$11,692, $20,658, and $13,399, respectively.
Two (2) of the Partnership's properties are leased to a Denny's franchise. Base
rent from these properties amounted to approximately 27% of total base rent in
1998.
Two (2) of the Partnership's properties are leased to a Hardee's franchise. Base
rent from these properties is approximately 43% of total base rents.
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
December 31, 1998, the Partnership has leased two of its properties to Hardee's
Food Systems, Inc., which constituted 21% of the aggregate gross proceeds.
23
<PAGE>
6. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
Amounts incurred to the current General Partner for the years ended December 31,
1998, 1997, and 1996, are as follows:
<TABLE>
<CAPTION>
Current General Partner Incurred Incurred Incurred for the
for the year ended for the year ended year ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Management fees $64,690 $52,177 $ 86,826
Disposition fees 37,500 12,150 0
Restoration fees 0 11,323 63,163
Leasing commissions 0 0 23,310
Cash distribution 1,325 2,418 2,789
Overhead allowance 5,219 5,150 5,127
Reimbursement for out-of-pocket expenses 10,229 11,493 9,118
------ ------ --------
$118,963 $94,711 $ 190,333
======== ======= =======
</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 a restoration account and then
distributed among the three Partnerships. Fifty percent (50%) of the total
amount paid to the recovery was refunded to the current General Partner during
1996, after exceeding the $4,500,000 recovery level. 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 December 31, 1998, the Partnership may
owe the current General Partner $18,862, which has been reflected as a recovery,
if the $6,000,000 recovery level is achieved. Management believes it is unlikely
that this recovery level will be achieved.
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
24
<PAGE>
established at United Missouri Bank, N.A. The Trust has been fully funded with
Partnership assets as of December 31, 1998. Funds are invested in U.S. Treasury
securities. In addition, interest totaling $56,386 has been credited to the
Trust as of December 31, 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. 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.
10. SUBSEQUENT EVENTS:
In February 1999, the Partnership made a distribution to the Limited Partners
from operations for the Fourth Quarter 1998 of $60,000 amounting to $3.51 per
Interest.
25
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
TPG is an Illinois corporation with its principal office at 101 West 11th
Street, Suite 1110, Kansas City, Missouri 64105. TPG was elected General Partner
by vote of the Limited Partners effective May 26, 1993. Prior to such date, TPG
had been managing the Partnership since February 8, 1993, under the terms of the
Permanent Manager Agreement ("PMA"), which remains in effect. TPG also serves as
the corporate general partner for DiVall 2. See Items 1 and 13 hereof for
additional information about the PMA and the election of TPG as the General
Partner.
The executive officers and director of the General Partner who control the
affairs of the Partnership are as follows:
Bruce A. Provo, Age 48 - President, Founder and Director. Mr. Provo has
been involved in the management of real estate and other asset
portfolios since 1979. Since he founded the company in 1985, Mr. Provo
has been President of TPG. From 1982 to 1986, Mr. Provo served as
President and Chief Operating Officer of the North Kansas City
Development Company ("NKCDC"), North Kansas City, Missouri. NKCDC was
founded in 1903 and the assets of the company were sold in December,
1985 for $102,500,000. NKCDC owned commercial and industrial
properties, including an office park and a retail district, as well as
apartment complexes, motels, recreational facilities, fast food
restaurants, and other properties. NKCDC's holdings consisted of over
100 separate properties and constituted approximately 20% of the
privately held real property in North Kansas City, Missouri (a four
square mile municipality). Following the sale of the company's real
estate, Mr. Provo served as the President and Chief Executive Officer
and Liquidating Trustee of NKCDC from 1986 to 1991.
Mr. Provo graduated from Miami University, Oxford, Ohio in 1972 with a
B.S. in Accounting. He became a Certified Public Accountant in 1974 and
was a manager in the banking and financial services division of Arthur
Andersen LLP prior to joining Rubloff Development Corporation in 1979.
From 1979 through 1985, Mr. Provo served as Vice President - Finance
and then as President of Rubloff Development Corporation. Mr. Provo has
previously served on the Board of Directors of the National Realty
Committee, a legislative "watchdog" organization for the commercial
real estate industry headquartered in Washington, DC.
Kristin J. Atkinson, Age 36 - Vice President - Finance and
Administration. Ms. Atkinson joined TPG in September 1994, to provide
management expertise in the areas of financial controls and management
accounting services for four limited partnerships
26
<PAGE>
managed by TPG. Prior to joining TPG, Ms. Atkinson was Manager of
Financial Reporting for Farm & Home Savings Association (a $4 billion
savings and loan association) for nine years where she was responsible
for supervision of the preparation of internal and external financial
documentation, including regulatory filings for the savings association
and its parent company. Ms. Atkinson graduated Magna Cum Laude with a
B.S. in Accounting from Missouri Southern State College in Joplin,
Missouri and worked as an accountant for James P. Arthur and Company
for one year before joining Farm & Home Savings Association.
The Advisory Board, although its members are not "Directors" or "Executive
Officers" of the Partnership, provides advisory oversight to management of the
Partnership and consists of:
Steve Carson - Self-Employed Investment Advisor. Mr. Carson's primary
client concentration includes labor union, pension, and annuity funds.
Mr. Carson worked for First Albany Corporation for 11 years. He began
his career as a retail broker at E.F Hutton & Company and served as
Vice President, Shearson American Express from 1980- 1986. Mr. Carson
attended Northrup University in Los Angeles, California. He has served
as Board Member and President on various Civic Boards in Syracuse, New
York. Mr. Carson represents the broker-dealer community.
Richard W. Otte - Editorial Writer. Mr. Otte is in his sixth year as an
Editorial Board Member and editorial writer for The Volusion, a DeLand,
Florida, subsidiary of the News-Journal Corporation in Daytona Beach,
Florida. Mr. Otte retired in 1988 after 34 years with the Dispatch
Printing Co., serving his last eight years as Managing Editor of the
Columbus Dispatch and as a member of its Operating Committee. He
previously was the executive sports editor of the newspaper in Ohio's
capital city. Mr. Otte's 49 years in professional journalism also
include news reporting, editing and sports assignments with the Daytona
Journal Herald and Springfield News-Sun. Mr. Otte is a Limited Partner
representing DiVall 2.
Albert Gerritz - Retired, Perinton Volunteer Ambulance Corps. Mr.
Gerritz has held various offices in Finance and Administration,
including President. Mr. Gerritz retired in 1986 after 36 years with
Eastman Kodak Co. where he was Supervisor of Engineering Services,
Research Labs. Mr. Gerritz was instrumental in identifying the need and
pursuing the development of a unique research complex for Kodak, which
became the case study for his consulting activities on research
facilities nationwide. Mr. Gerritz also worked for forty years in the
Bushnell's Basin Fire Department and served five years as Chief. Mr.
Gerritz has a life membership in National Society of Professional
Engineers. Mr. Gerritz is a Limited Partner representing DiVall 3.
Item 11. Executive Compensation
The Partnership has not paid any "executive compensation" to the corporate
General Partner or to the directors and officers of the General Partner. The
General Partner's participation in the income of the Partnership is set forth in
the Partnership Agreement, which is filed as Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5
hereto. The current General Partner received management fees and expense
reimbursements during the year.
27
<PAGE>
See Item 13 below, and Note 6 to the financial statements in Item 8 hereof, for
further discussion of payments by the Partnership to the General Partner and
former general partners.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) As of December 31, 1998, the following entity is known to beneficially own
5% or more of the outstanding Interests as follows:
<TABLE>
<CAPTION>
Interests Percentage of
Title of Name and Address of Beneficially Interests of
Class Beneficial Owner Owned Outstanding
----- ---------------- ----- -----------
<S> <C> <C> <C>
Limited Partnership The Engineers Joint Pension Fund 1,500 8.77%
Interests 4325 S. Salina Street
Syracuse, NY 13205
</TABLE>
(b) As of December 31, 1998, neither the General Partner nor any of its
affiliates owned any Interests in the Partnership.
Item 13. Certain Relationships and Related Transactions
The compensation to be paid to TPG is governed by the Partnership Agreement, as
amended by vote of the Limited Partners to reflect the terms of the PMA. TPG's
compensation includes a base fee equal to 4% of the Partnership's gross
collected receipts, subject to a minimum of $57,000 per year. For this purpose,
"gross collected receipts" means all cash revenues arising from operations and
reserves of the Partnerships, including any proceeds recovered with respect to
the obligations of the former general partners. The portion of such fee
resulting from recoveries from former general partners is designated as
restoration fees. TPG is also entitled to reimbursement for office rent and
utilities not to exceed $4,750 per year. TPG is entitled to reimbursement of
reasonable direct costs and expenses, such as travel, lodging, overnight
delivery and postage, but has no right to be reimbursed for administrative
expenses such as payroll, payroll taxes, insurance, retirement and other
benefits, base phone and fax charges, office furniture and equipment, copier
rent, and the like. Between the Partnerships, TPG is entitled to an aggregate
minimum base management fee of $300,000 per year and reimbursement for office
rent in the maximum amount of $25,000 per year. The Partnership shall only be
responsible for its allocable share of such minimum and maximum amounts as
indicated above ($57,000 minimum base fee and $4,750 maximum rent
reimbursement). TPG is entitled to an annual increase in the minimum base
management fee and maximum office overhead reimbursement in an amount not to
exceed the percentage increase in the Consumer Price Index ("CPI") for the
immediately preceding calendar year. 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 CPI adjustment.
Additionally, TPG is allowed up to one-half of the Competitive Real Estate
Commission, not to exceed 3% upon the disposition of assets. The payment of a
portion of such fees is subordinated to TPG's success at recovering the funds
misappropriated by the former general partners.
The PMA has an expiration date of December 31, 2002, but may be terminated
earlier (a) by a vote at any time by a majority in interest of the Limited
Partners, (b) upon the dissolution and winding up of the Partnership, (c) upon
the entry of an order of a court finding that the Permanent Manager has engaged
in
28
<PAGE>
fraud or other like misconduct or has shown itself to be incompetent in carrying
out its duties under the Partnership Agreement, or (d) upon sixty (60) days
written notice from the Permanent Manager to the Limited Partners of the
Partnership. Upon termination of the PMA, other than by the voluntary action of
TPG, TPG shall be paid a termination fee of one month's Base Fee allocable to
the Partnership, subject to a minimum of $4,750. In the event that TPG is
terminated by action of a substitute general partner, TPG shall also receive, as
part of this termination fee, 4% of any proceeds recovered with respect to the
obligations of the former general partners, whenever such proceeds are
collected.
Under the PMA, TPG shall be indemnified by the Partnership, DiVall and Magnuson,
and their controlled affiliates, and shall be held harmless from all claims of
any party to the Partnership Agreement and from any third party including,
without limitation, the Limited Partners of the Partnership, for any and all
liabilities, damages, costs, and expenses, including reasonable attorneys' fees,
arising from or related to claims relating to or arising from the PMA or its
status as Permanent Manager. The indemnification does not extend to claims
arising from fraud or criminal misconduct of TPG as established by court
findings. To the extent possible, the Partnership is to provide TPG with
appropriate errors and omissions, officers liability or similar insurance
coverage, at no cost to TPG. In addition, TPG is granted the right to establish
the Trust in an amount not to exceed $250,000, solely for the purpose of funding
such indemnification obligations. Once a determination has been made that no
such claims can or will be made against TPG, the balance of the Trust will
become unrestricted cash of the Partnership. As of December 31, 1998, the
Partnership had fully funded the Trust.
The following fees and reimbursements from the Partnership were incurred to
management in 1998:
<TABLE>
<CAPTION>
The Provo Group, Inc.
<S> <C>
Management Fees $64,690
Disposition Fees 37,500
Office Overhead Allowance 5,219
Direct Cost Reimbursements 10,229
-------
1998 Total $117,638
========
</TABLE>
29
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The following financial statements of DiVall Income Properties
3 Limited Partnership are included in Part II, Item 8:
Report of Independent Public Accountants
Balance Sheets, December 31, 1998 and 1997
Statements of Income for the Years Ended December 31, 1998,
1997 and 1996
Statements of Partners' Capital for the Years Ended December
31, 1998, 1997 and 1996
Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Notes to Financial Statements
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instruction or are inapplicable and,
therefore, have been omitted.
3. Listing of Exhibits
3.1 Agreement of Limited Partnership dated as of December
12, 1989, and amended as of December 18, 1989,
February 19, 1990, and April 9, 1990, filed as Exhibit
3A to Amendment No.2 to the Partnership's Registration
Statement on Form S-11 dated April 23, 1990,
incorporated herein by reference.
3.2 Amendment to Amended Agreement of Limited Partnership
dated as of February 8, 1993, filed as Exhibit 3.3 to
the Partnership's 10-K for the year ended December 31,
1992, and incorporated herein by reference.
3.3 Amendment to Amended Agreement of Limited Partnership
dated as of May 26, 1993, filed as Exhibit 3.3 to the
Partnership's 10-K for the year ended December 31,
1993, and incorporated herein by reference.
30
<PAGE>
3.4 Amendment to Amended Agreement of Limited Partnership
dated as of June 1, 1993, filed as Exhibit 3.4 to the
Partnership's 10-K for the year ended December 31,
1993, and incorporated herein by reference.
3.5 Amendment to Amended Agreement of Limited Partnership
dated as of June 30, 1994, filed as Exhibit 3.5 to the
Partnership's 10-K for the year ended December 31,
1994, and incorporated herein by reference.
0.0 Permanent Manager Agreement filed as an exhibit to the
Current Report on Form 8-K dated January 22, 1993,
incorporated herein by reference.
9.0 Correspondence to the Limited Partners dated February
15, 1999, regarding the Fourth Quarter 1998
distribution.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the fourth
quarter of fiscal year 1998.
31
<PAGE>
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Gross amount at which
Initial cost to Partnership carried at end of year (A)
Building Building
and and Accumulated
Property Encumbrances Land Improvements Land Improvements Total depreciation
- - -----------------------------------------------------------------------------------------------------------------------------------
Pittsburgh, Pennsylvania - $ 274,467 $ 616,866 $ 274,467 $ 616,866 $ 891,333 $ 175,952
St. Francis, Wisconsin - 485,354 709,028 468,354 606,153 1,074,507 204,506
Oak Creek, Wisconsin - 496,505 845,400 496,505 547,901 1,044,406 224,407
Englewood, Colorado - - 213,210 - 213,210 213,210 52,271
Colorado Springs, Colorado - 314,354 265,829 314,354 265,829 580,183 56,260
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0 $1,570,680 $2,650,333 $1,553,680 $2,249,959 $3,803,639 $713,396
====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Life on which
depreciation
in latest statement
of operations
Date of Date is computed
Property construction acquired (years)
- - --------------------------------------------------------------------------
<S> <C> <C> <C>
Pittsburgh, Pennsylvania 1990 9/11/90 31.5
St. Francis, Wisconsin 1990 8/14/90 31.5
Oak Creek, Wisconsin 1991 2/5/91 31.5
Englewood, Colorado 1991 7/1/91 31.5
Colorado Springs, Colorado - 4/28/92 31.5
</TABLE>
(A) Represents aggregate costs for federal income tax purposes.
(B) Reconciliation of "Real Estate and Accumulated Depreciation":
<TABLE>
<CAPTION>
Year ended Year ended
Investments in Real Estate December 31, 1998 December 31, 1997
- - --------------------------------- ---------------------- ------------------------
<S> <C> <C>
Balance at beginning of year $ 5,340,446 $ 5,848,562
Property write-down (400,374) 0
Sale of Property (1,136,433)) (508,116)
---------------------- ------------------------
Balance at end of year $3,803,639 $5,340,446
====================== ========================
</TABLE>
<TABLE>
<CAPTION>
Year ended Year ended
Accumulated Depreciation December 31, 1998 December 31, 1997
- - --------------------------------- ------------------------ ------------------------
<S> <C> <C>
Balance at beginning of year $ 761,861 $ 761,761
Additions charged to costs
and expenses 84,103 110,951
Sale of Property (132,568) (110,851)
----------------- -------------------
Balance at end of year $713,396 $761,861
================= ===================
</TABLE>
32
<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: March 26, 1999
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: March 26, 1999
By: /s/Kristin J. Atkinson
---------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: March 26, 1999
33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
December 31, 1998 Form 10-K and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 230,807 595,420
<SECURITIES> 306,386 290,662
<RECEIVABLES> 58,372 79,264
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 595,565 965,346
<PP&E> 3,803,639 5,340,446
<DEPRECIATION> 713,396 761,861
<TOTAL-ASSETS> 3,685,808 5,543,931
<CURRENT-LIABILITIES> 62,934 105,799
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 3,622,874 5,438,132
<TOTAL-LIABILITY-AND-EQUITY> 3,685,808 5,543,931
<SALES> 420,630 599,405
<TOTAL-REVENUES> 698,995 939,210
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 767,928 334,705
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (68,933) 604,505
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (68,933) 604,505
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (68,933) 604,505
<EPS-PRIMARY> (3.99) 34.99
<EPS-DILUTED> (3.99) 34.99
</TABLE>
<PAGE>
DiVall Income Properties 3, L.P.
QUARTERLY NEWS
- - --------------------------------------------------------------------------------
A publication of The Provo Group, Inc. FOURTH QUARTER 1998
Inquiring Minds Want to Know ...
As we enter the year 1999, many investors are asking, "What's taking so long?"
or "Will it ever sell?" and finally, "Why are my distribution checks so low?"
Reasonable questions, let's get some answers ...
What's taking so long? Because this partnership has a limited number of
properties there is a lack of diversity and stability creating more risks,
thereby limiting its attractiveness to potential buyers. The lack of appeal may
also be attributed to its primary concepts ... Hardee's and Denny's.
Will it ever sell? The best answer to that question is to give you the most
current information and let you be the judge. There are five (5) properties in
this portfolio, an Applebees, 2 Hardee's and 2 Denny's.
The Applebee's restaurant located in Pittsburgh, PA continues to perform
exceedingly well, with 1998 sales increasing 10% over 1997. This restaurant is a
good anchor for the portfolio, but it has a "right of first refusal" on any
proposed third party sale. Therefore if a buyer makes an offer for the
portfolio, the tenant may choose to buy the property rather than allowing the
bidder to buy it.
The two Hardee's restaurants have been experiencing a decline in sales since
1992. Nationwide, Hardee's has been viewed as a weak and struggling concept.
Good news though, change is on its way. CKE Restaurants, ("CKE") has been
selected as the top restaurant stock for 1999 by several stock analysts. Why
does that affect you? CKE purchased all of the Hardee's stock and is now the
parent company of Hardee's Food Systems (Thus, CKE now owns both of your
Hardee's). CKE now has a viable plan to turn Hardee's business around via an
extensive remodeling plan, menu revisions, and improvements in national
advertising. Many Hardee's restaurants are being dual branded with the popular
Carl's Jr. restaurant chain also owned by CKE. A new owner with a strong balance
sheet could significantly improve Hardee's operations. This would make the
portfolio more marketable. In the meantime, increased sales would improve
percentage rents which may increase distributions.
The Denny's restaurants are effectively status quo. They remain current in their
rental payments, but show no signs of any significant increase or decrease in
sales for 1999.
Why are my distribution checks so low? Again, there are only five restaurant
properties remaining in this portfolio. Each time a restaurant has been sold,
the sale proceeds have been paid to the investors in one lump sum. Consequently,
after each sale there were fewer properties contributing to monthly revenues.
The bottom line is that the remaining five properties generate limited revenues.
Therefore, funds available for distribution are limited and significantly
impacted by the cost of "public" reporting. This is one reason why The Provo
Group recognizes a sale of this portfolio is in the best interest of the
investors and continues to pursue purchasers. However, while we hope to
liquidate the Partnership in a timely manner, we won't compromise your value for
a quick sale.
<PAGE>
PAGE 2 DIVALL 3 4 Q 98
-----------------------------------------------------
DISTRIBUTION HIGHLIGHTS
o 2.8% (approx.) annualized return from operations
based on $8,700,000 ("net" remaining initial
"book" investment).
o $60,000 total amount distributed for the Fourth
Quarter 1998 which was consistent with
projections.
o $3.51 per unit (approx.) for the Fourth Quarter
1998 from cash flow from operations.
o $680.00 to $516.00 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
o 7% increase in "total" operating revenues from
projections.
o There was an increase of $400,000 in "total"
expenses from projections.
o Revenues were higher than anticipated due to the
non-cash accrual of percentage rents which will be
billed and collected in 1999.
o Expenses were higher than anticipated due to the
non-cash write down of the two Hardee's properties
to their appraised value.
<PAGE>
PAGE 3 DIVALL 3 4 Q 98
-----------------------------------------------------
PROPERTY HIGHLIGHTS
VACANCIES
There were no vacancies at December 31, 1998.
RENTS RECEIVABLE
There were no outstanding rents due as of December 31, 1998.
-----------------------------------------------------
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 December 31, 1998.
<TABLE>
<CAPTION>
Distribution Capital
Analysis Balance
<S> <C> <C>
Original Capital Balance -- $ 17,102,520
Cash Flow From Operations Since Inception $ 1,859,816 --
Total Distributions Since Inception (10,292,983) --
(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 4 DIVALL 3 4 Q 98
-----------------------------------------------------
QUESTIONS & ANSWERS
1. What is the value of my investment?
Management is currently calculating an estimated Net Unit Value for the
Partnership, as of December 31, 1998. We plan to have this information
available on February 26, 1999.
2. When can I expect my next distribution mailing?
o Your distribution correspondence for the First Quarter of 1999
is scheduled to be mailed on May 14, 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>
[LOGO FOR THE PROVO GROUP APPEARS HERE]
DIVALL INCOME PROPERTIES 3 L.P.
STATEMENT OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 1998
- - --------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
------------------------------------
4TH 4TH
QUARTER QUARTER BETTER
OPERATING REVENUES 12/31/98 12/31/98 (WORSE)
-------- -------- ------
Rental income $105,281 $116,116 $10,835
Interest income 8,140 5,213 (2,927)
Other income 0 0 0
TOTAL OPERATING REVENUES -------- --------- ---------
$113,421 $121,329 $7,908
-------- --------- ---------
OPERATING EXPENSES
Insurance $1,203 $1,044 $159
Management fees 16,440 16,215 225
Overhead allowance 1,326 1,308 18
Advisory Board 3,400 4,360 (960)
Administrative 7,745 6,700 1,045
Professional services 2,830 2,931 (101)
Property write-downs 0 400,374 (400,374)
Auditing 8,250 9,067 (817)
Legal 1,800 1,325 475
Defaulted tenants 300 26 274
TOTAL OPERATING EXPENSES -------- --------- ---------
$43,294 $443,350 ($400,056)
-------- --------- ---------
INVESTIGATION AND RESTORATION EXPENSES $546 $0 $546
-------- --------- ---------
NON-OPERATING EXPENSES
Depreciation $20,592 $20,592 $0
Amortization 446 466 (0)
TOTAL NON-OPERATING EXPENSES -------- --------- ---------
$21,038 $21,038 $(0)
-------- --------- ---------
TOTAL EXPENSES $64,878 $464,388 ($399,510)
-------- --------- ---------
NET INCOME $48,543 ($343,059) ($391,602)
OPERATING CASH RECONCILIATION VARIANCE
---------
Depreciation and amortization 21,038 21,038 0
Property write-downs 0 400,374 400,374
(Increase) Decrease in current assets (10,686) (19,859) (9,173)
Increase (Decrease) in current liabilities (1,958) (6,722) (4,764)
(Increase) Decrease in cash reserved for
payables 1,764 6,700 4,936
Advance from/(to) future cash flows for
current distributions 2,000 2,000 0
Net Cash Provided From Operating Activities -------- --------- ---------
$60,701 $60,472 ($229)
-------- --------- ---------
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 $60,701 $60,472 ($229)
Cash Balance Beginning of Period 241,584 229,032 (12,552)
Less 3rd quarter distribution paid 11/98 (60,000) (50,000) 10,000
Change in cash reserved for payables or
distributions (3,764) (8,700) (4,936)
Cash Balance End of Period -------- --------- ---------
$238,521 $230,804 ($7,717)
Cash reserved for 4th quarter L.P.
distributions (60,000) (60,000) 0
Cash advanced from (reserved for) future
distributions 0 0 0
Cash reserved for payment of payables (6,679) (46,300) (39,621)
-------- --------- ---------
Unrestricted Cash Balance End of Period $171,842 $124,504 ($47,338)
======== ========= =========
- - --------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
------------------------------------
$60,000 $60,000 $0
*Quarterly Distribution
Mailing Date 2/15/99 (enclosed) -
- - --------------------------------------------------------------------------------
*Refer to distribution letter for detail of quarterly distribution.
<PAGE>
[PROVO LOGO APPEARS HERE]
<TABLE>
<CAPTION>
--------------------------------
ORIGINAL CAPITAL $17,102,520
PROJECTIONS FOR NET DISTRIBUTION OF
DISCUSSION PURPOSES DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP CAPITAL SINCE
1998 PROPERTY SUMMARY INCEPTION $8,433,167
AND RELATED ESTIMATED RECEIPTS ------------
CURRENT EQUITY $8,669,353
--------------------------------
PORTFOLIO (Note 1)
-------------------------------------
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%
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) 4,221,014 409,380 9.70%
- - ---------------------------------------- ------------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------- ---------------------------
EQUIPMENT TOTALS
--------------------------------------- ---------------------------
LEASE ANNUAL
- - ---------------------------------------- EXPIRATION LEASE % ANNUAL %
CONCEPT LOCATION DATE COST RECEIPTS RETURN COST RECEIPTS RETURN
- - ---------------------------------------- ---------- --------- -------- ------ --------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
APPLEBEE'S PITTSBURGH, PA 290,469 0.00% 1,239,896 116,040 9.36%
" " 58,094 0.00%
DENNY'S CO SPRINGS, CO 210,976 0 0.00% 791,159 77,460 9.79%
DENNY'S ENGLEWOOD, CO 210,976 0.00% 424,187 35,880 8.46%
HARDEE'S (3) ST. FRANCIS, WI (2) 369,688 0 0.00% 1,648,569 92,000 5.58%
" " (2) 84,500 0 0.00%
HARDEE'S (3) OAK CREEK, WI (2) 482,078 0 0.00% 1,929,472 88,000 4.56%
" " (2) 105,488 0 0.00%
---------- --------- -------- ------ --------- -------- -----
---------------------------- --------------------------
PORTFOLIO TOTALS (5 Properties) 1,812,269 0 0.00% 6,033,283 409,380 6.79%
------------------------------------
</TABLE>
<TABLE>
<CAPTION>
TOTAL %
ON $8,669,353
- - ---------------------------------------- EQUITY
CONCEPT LOCATION RAISE
- - ---------------------------------------- -------------
<S> <C> <C>
APPLEBEE'S PITTSBURGH, PA
" "
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%
- - ---------------------------------------- ------------
</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 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.
