<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 March 31, 2000
-----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-20253
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Wisconsin 39-1660958
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 W. 11th St., Suite 1110, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 421-7444
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Interests
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--------- --------
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
BALANCE SHEETS
March 31, 2000 and December 31, 1999
------------------------------------
ASSETS
(Unaudited)
March 31, December 31,
2000 1999
---------- ----------
INVESTMENT PROPERTIES: (Note 3)
Land $1,553,680 $1,553,680
Buildings and improvements 2,249,959 2,249,959
Accumulated depreciation (795,014) (778,690)
---------- ----------
Net investment properties 3,008,625 3,024,949
---------- ----------
OTHER ASSETS:
Cash and cash equivalents 274,159 257,312
Cash held in Indemnification Trust (Note 8) 324,472 320,341
Rents and other receivables 12,734 16,247
Deferred rent receivable 18,679 19,099
Deferred fees 17,507 17,952
Prepaid assets 1,711 2,398
---------- ----------
Total other assets 649,262 633,349
---------- ----------
Total assets $3,657,887 $3,658,298
========== ==========
The accompanying notes are an integral part of these statements.
2
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DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
LIABILITIES AND PARTNERS' CAPITAL
March 31, 2000 and December 31, 1999
------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 29,596 $ 27,140
Due to current General Partner 331 70
Security deposits 16,635 16,635
Unearned rental income 42,254 45,254
------------ ------------
Total liabilities 88,816 89,099
------------ ------------
CONTINGENET LIABILITIES: (Note 7)
PARTNERS' CAPITAL: (Notes 1, 4 and 9)
Current General Partner -
Cumulative net income (loss) 17,228 16,727
Cumulative cash distributions (8,953) (8,753)
------------ ------------
8,275 7,974
------------ ------------
Limited Partners (17,102.52 interests outstanding)
Capital contributions, net of offering costs 14,408,872 14,408,872
Cumulative net loss (49,601) (99,172)
Cumulative cash distributions (10,532,984) (10,482,984)
Reallocation of former general partners' deficit capital (265,491) (265,491)
------------ ------------
3,560,796 3,561,225
------------ ------------
Total partners' capital 3,569,071 3,569,199
------------ ------------
Total liabilities and partners' capital $ 3,657,887 $ 3,658,298
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
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DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUES:
Rental income $102,485 $109,367
Interest income 6,149 5,036
Recovery of amounts previously written off 1,610 2,683
-------- --------
110,244 117,086
-------- --------
EXPENSES:
Partnership management fees 16,530 16,301
Restoration fees 64 107
Insurance 729 1,018
General and administrative 5,338 8,233
Advisory Board fees and expenses 4,544 1,400
Professional services 16,197 11,813
Depreciation 16,324 16,324
Amortization 446 446
-------- --------
60,172 55,642
-------- --------
NET INCOME $ 50,072 $ 61,444
-------- --------
NET INCOME - GENERAL PARTNER $ 501 $ 614
NET INCOME - LIMITED PARTNERS 49,571 60,830
-------- --------
$ 50,072 $ 61,444
-------- --------
NET INCOME PER LIMITED PARTNERSHIP
INTEREST, based on 17,102.52 interests outstanding
$2.90 $3.56
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
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DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 50,072 $ 61,444
Adjustments to reconcile net income to net cash from (used in)
operating activities -
Depreciation and amortization 16,770 16,770
Recovery of amounts previously written off (1,610) (2,683)
Interest applied to Indemnification Trust Account (4,131) (3,191)
(Increase)/Decrease in rents, other receivables & prepaid assets 4,200 (6,327)
Decrease in deferred rent receivable 420 420
Increase in accounts payable and accrued expenses 2,456 2,433
Increase/(Decrease) in due to General Partner 260 17
Increase/(Decrease) in unearned rental income (3,000) 15,000
-------- --------
Net cash provided from operating activities 65,437 83,883
-------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Recoveries from former affiliates 1,610 2,683
-------- --------
Net cash provided from investing activities
1,610 2,683
-------- --------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Cash distributions to General Partner (200) (246)
Cash distributions to Limited Partners (50,000) (60,000)
-------- --------
Net cash (used in) financing activities
(50,200) (60,246)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 16,847 26,320
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 257,312 230,807
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $274,159 $257,127
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
These unaudited interim financial statements should be read in conjunction with
DiVall Income Properties 3, Limited Partnership's (the "Partnership") 1999
annual audited financial statements within Form 10-K.
These unaudited financial statements include all adjustments which are, in the
opinion of management, necessary to present a fair statement of financial
position as of March 31, 2000, and the results of operations for the three-month
periods ended March 31, 2000, and 1999, and cash flows for the three-month
periods ended March 31, 2000 and 1999. Results of operations for the periods
are not necessarily indicative of the results to be expected for the full year.
1. ORGANIZATION AND BASIS OF ACCOUNTING:
-------------------------------------
The Partnership was formed on December 12, 1989, pursuant to the Uniform Limited
Partnership Act of the State of Wisconsin. The initial capital which was
contributed during 1989, consisted of $300, representing aggregate capital
contributions of $200 by the former general partners and $100 by the Initial
Limited Partner.
The Partnership initially offered two classes of Limited Partnership interests
for sale: Distribution interests ("D-interests") and Retention interests ("R-
interests"). Each class was offered at a price (before volume discounts) of
$1,000 per interest. The Partnership offered the two classes of interests
simultaneously up to an aggregate of 25,000 interests.
The minimum offering requirements for the D-interests were met and escrowed
subscription funds were released to the Partnership as of July 13, 1990. The
offering closed on April 23, 1992, at which point 17,102.52 D-interests had been
issued, resulting in aggregate proceeds, net of discounts and offering costs, of
$14,408,872.
The minimum offering requirements for R-interests were not met. During 1991,
680.9 R-interests were converted to D-interests and were reflected as
Partnership issuances in 1991.
The Partnership is currently engaged in the business of owning and operating its
investment portfolio (the "Properties") of commercial real estate. The
Properties are leased on a triple net basis to, and operated by, franchisors or
franchisees of national, regional and local retail chains under long-term
leases. The lessees consist of fast-food, family style, and casual/theme
restaurants. At March 31, 2000, 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. Percentage rents were previously
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. However, effective January 1, 2000, the
Partnership adopted Staff
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Accounting Bulletin 101, which requires the recording of percentage rents only
when the tenant has reached the breakpoint stipulated in its lease.
The Partnership considers its operations to be in only one segment and therefore
no segment disclosure 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 consist of leasing commissions paid when properties are leased
to tenants other than the original tenant. Leasing commissions are capitalized
and amortized over the life of the lease.
Real estate taxes on the Partnership's investment properties are the
responsibility of the tenant. However, when a tenant fails to make the required
tax payments or when a property becomes vacant, the Partnership makes the
appropriate payment to avoid possible foreclosure of the property. Taxes are
accrued in the period for which the liability is incurred.
Cash and cash equivalents include cash on deposit in financial institutions and
highly liquid temporary investments with initial maturities of 90 days or less.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities (and disclosure of
contingent assets and liabilities) at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Partnership follows 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 Partnership will be dissolved on December 1, 2015, or earlier upon the prior
occurrence of any of the following events: (a) the disposition of all
interests in real estate and other Partnership assets; (b) the decision by
Majority Vote (as defined in the Amended Agreement of Limited Partnership
("Partnership Agreement")) 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. During the Second
Quarter of 1998, the General Partner received the consent of the Limited
Partners to liquidate the Partnership's assets and dissolve the Partnership.
Management is working with a potential buyer for the Properties within the
parameters of the consent. However, Management expects to continue normal
operations for the Partnership for the forseeable 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, 1999, the tax basis of the Partnership's
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assets exceeded the amounts reported in the accompanying financial statements by
approximately $3,219,000.
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")
(dissolved effective December 31, 1998) 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. Through March 31, 2000, $5,783,000 of recoveries have been
received which exceeded the original estimate of $3 million. As a result, since
1996, the Partnership has recognized $1,294,000 as income, which represents its
share of the excess recovery. The current General Partner continues to pursue
recoveries of the misappropriated funds, however no further significant
recoveries are anticipated.
3. INVESTMENT PROPERTIES:
----------------------
As of March 31, 2000, the Partnership owned five (5) fast-food restaurants
comprised of: two (2) Hardee's restaurants, one (1) Applebee's restaurant, and
two (2) Denny's restaurants. The five (5) properties are located in three (3)
states.
The Denny's property in Colorado Springs is located on a parcel of land where
the Partnership has entered into a long-term ground lease. The lease payments
are made by the tenants of the property.
During April 2000, Hardee's Food Systems, Inc. notified Management of its intent
to close its restaurant in Oak Creek, Wisconsin. The lease on the property does
not expire until 2010, and Hardee's is required to continue making rent payments
until that time or until a lease termination agreement is entered into.
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.
8
<PAGE>
According to the Partnership Agreement, the former general partners were to
commit 82% of the original offering proceeds to the acquisition of investment
properties. Upon full investment of the net proceeds of the offering,
approximately 57% of the original offering proceeds was invested in the
Partnership's properties.
The current General Partner receives a fee for managing the Partnership equal
to 4% of gross receipts, with a maximum reimbursement for office rent and
related overhead of $25,000 between the three original 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. Effective March 1, 2000, the minimum management fee and the
maximum reimbursement for office rent and overhead increased by 2.2%
representing the allowable annual Consumer Price Index adjustment per the PMA.
For purposes of computing the 4% overall fee, gross receipts includes amounts
recovered in connection with the misappropriation of assets by the former
general partners and their affiliates. TPG has received fees from the
Partnership totaling $88,261 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,
9
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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 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:
Year ending
December 31,
2000 $ 409,380
2001 409,380
2002 409,380
2003 409,380
2004 409,380
Thereafter 2,322,578
----------
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$4,369,478
==========
Two (2) of the Partnership's properties are leased to a Denny's franchisee.
Base rent from these properties amounted to approximately 28% of total base rent
in 1999.
Two (2) of the Partnership's properties are leased to Hardee's Food Systems,
Inc. Base rent from these properties amounted to approximately 44% 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
March 31, 2000, the Partnership has leased two of its properties to Hardees Food
Systems, Inc., which constitute 21% of the aggregate gross proceeds.
6. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the quarters ended March 31,
2000 and 1999, are as follow:
<TABLE>
<CAPTION>
Current General Partner Incurred as of Incurred as of
----------------------- March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
Management fees $16,530 $16,301
Restoration fees 64 107
Cash distribution 200 246
Overhead allowance 1,339 1,315
Reimbursement for out-of-pocket expenses 1,077 798
------- -------
$19,210 $18,767
======= =======
</TABLE>
7. CONTINGENT LIABILITIES:
----------------------
According to the Partnership Agreement, the current General Partner may receive
a disposition fee not to exceed 3% of the contract price of the sale of
investment properties. Fifty percent (50%) of all such disposition fees earned
by the current General Partner is to be escrowed until the aggregate amount of
recovery of the funds misappropriated from the Partnerships by the former
general partners is greater than $4,500,000. Upon reaching such recovery level,
full disposition fees will thereafter be payable and fifty percent (50%) of the
previously escrowed amounts will be paid to the current General Partner. At
such time as the recovery exceeds $6,000,000 in the aggregate, the remaining
escrowed disposition fees shall be paid to the current General Partner. If such
levels of recovery are not achieved, the current General Partner will contribute
the amounts escrowed towards the recovery. In lieu of an escrow, 50% of all
such disposition fees have been paid directly to the restoration account and
then distributed among the three Partnerships. After surpassing the $4,500,000
recovery level during March 1996, 50% of the amounts previously escrowed was
refunded to the current General Partner. The remaining amount allocated to the
Partnerships may be owed to the current General Partner if the $6,000,000
recovery level is met. As of
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March 31, 2000, the Partnership may owe the current General Partner $18,862,
which is currently reflected as a recovery, if the $6,000,000 recovery level is
achieved, which is unlikely.
8. PMA INDEMNIFICATION TRUST:
--------------------------
The 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 March
31, 2000. Funds are invested in U.S. Treasury securities. In addition, interest
totaling $74,472 has been credited to the Trust as of March 31, 2000. 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:
------------------
On May 15, 2000, the Partnership made a distribution to the Limited Partners for
the First Quarter 2000 of $65,000 amounting to approximately $3.80 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 March
31, 2000, were originally purchased at a price, including acquisition costs, of
approximately $6,091,000.
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During April 2000, Hardee's Food Systems, Inc. notified Management of its intent
to close its restaurant in Oak Creek, Wisconsin. The lease on the property does
not expire until 2010, and Hardee's is required to continue making rent payments
until that time or until a lease termination agreement is entered into.
Other Assets
- - ------------
Cash and cash equivalents were $274,000 at March 31, 2000, compared to $257,000
at December 31, 1999. The Partnership designated cash of $65,000 to fund the
First Quarter 2000 distributions to Limited Partners; $76,000 for the payment of
accounts payable and accrued expenses; and the remainder represents reserves
deemed necessary to allow the Partnership to operate normally. Cash generated
through the operations of the Partnership's investment properties and sales of
investment properties will provide the sources for future fund liquidity and
Limited Partner distributions.
The Partnership established an Indemnification Trust (the "Trust") during the
Fourth Quarter of 1993 and deposited $130,000 in the Trust during 1994, $100,000
during 1995, and $20,000 during 1996. The provision to establish the Trust was
included in the PMA 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.
Liabilities
- - -----------
Accounts payable and accrued expenses at March 31, 2000, in the amount of
$30,000, primarily represented the accrual of legal and auditing fees, but also
included $6,000 being held on behalf of the tenant of the Partnership's
Applebee's restaurant pursuant to a tax dispute with the county. Once the
dispute is settled the funds will be remitted to the county in payment of real
estate taxes or refunded to the tenant.
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 9 to the financial statements for additional information
regarding the reallocation.
Cash distributions paid to the Limited Partners and to the General Partner
during 2000, of $50,000 and $200, respectively, have also been made in
accordance with the amended Partnership Agreement. The First Quarter 2000
distribution of $65,000 was paid to the Limited Partners on May 15, 2000.
Results of Operations:
- - ----------------------
The Partnership reported net income for the quarter ended March 31, 2000, in the
amount of $50,000 compared to net income for the quarter ended March 31, 1999 of
$61,000.
Revenues
- - --------
Total revenues were $110,000, and $117,000, for the quarters ended March 31,
2000, and 1999, respectively. The decrease in revenue of $7,000 is a result of a
change in accounting method which
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precludes the recognition of percentage rents until the tenant reaches their
specified breakpoint. Previously, percentage rents had been accrued throughout
the year in which they were earned.
Total revenues, should approximate $400,000 annually or $100,000 quarterly,
based on leases currently in place. Future revenues may decrease with tenant
defaults and/or sales of Partnership properties. They may also increase with
additional rents due from tenants, if those tenants experience sales levels
which require the payment of additional rent to the Partnership.
Expenses
- - --------
For the quarters ended March 31, 2000 and 1999, cash expenses amounted to
approximately 39% and 33% of total revenues, respectively. Total expenses,
including non-cash items, amounted to 55% and 48% of total revenues for the
quarters ended March 31, 2000 and 1999, respectively.
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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
None.
14
<PAGE>
PART II - OTHER INFORMATION
Items 1 - 5.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
99.0 Correspondence to the Limited Partners dated May 15, 2000, regarding
the First Quarter 2000 distribution.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the first quarter of
fiscal year 2000.
15
<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: May 15, 2000
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: May 15, 2000
By: /s/ Kristin J. Atkinson
------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: May 15, 2000
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 2000, FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 274,159
<SECURITIES> 324,472
<RECEIVABLES> 50,631
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 649,262
<PP&E> 3,803,639
<DEPRECIATION> 795,014
<TOTAL-ASSETS> 3,657,887
<CURRENT-LIABILITIES> 88,816
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 3,569,071
<TOTAL-LIABILITY-AND-EQUITY> 3,657,887
<SALES> 102,485
<TOTAL-REVENUES> 110,244
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 60,172
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 50,072
<INCOME-TAX> 0
<INCOME-CONTINUING> 50,072
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,072
<EPS-BASIC> 2.90
<EPS-DILUTED> 2.90
</TABLE>
<PAGE>
DiVall Income Properties 3, L.P.
QUARTERLY NEWS
A publication of The Provo Group, Inc. FIRST QUARTER 2000
A New Buyer?
Management was successful in finding an interested purchaser for DiVall Income
Properties 3, L.P., ("DiVall 3"). We spent the first couple months of this year
negotiating a contract with the new buyer. On March 9th a contract was mailed
out. Unfortunately, we have yet to receive a fully executed contract, but we
remain optimistic and continue to work with the buyer to resolve contract issues
in light of the new Hardee's circumstances (see below).
Very recently we were contacted by Hardee's Food Systems. They indicated to us
that they are undergoing a major re-franchising program. However, the Hardee's
property located in Oak Creek will not be participating in the program, and in
fact, they will be closing this location. The Partnership is fortunate that we
re-negotiated all of the Hardee's Leases in 1996. At that time, the Hardee's
sales were beginning to decline and the Franchisee was struggling to meet the
rent obligations. We agreed to draw up new Lease agreements with Hardee's
Corporate instead of the Franchisee rationalizing fixed rent in exchange for the
guarantee of a financially sound Corporation. Therefore, although this location
is closing, the corporate office understands they are liable for all future rent
charges and has the financial strength to stay in good standing.
We have contacted the buyer with this new information, but we have no idea how
they will respond to the Oak Creek Hardee's going "dark". We don't think it
warrants a price modification due to the corporate guarantee.
Distribution Highlights
. 7.43% (approx.) annualized return from operations and other sources based
on $3,500,000 (estimated net asset value as of December 31, 1999).
. $65,000 total amount distributed for the First Quarter 2000 which was
consistent with projections.
. $3.80 per unit (approx.) for the First Quarter 2000 from cash flow from
operations.
. $694.00 to $533.00 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.]
<PAGE>
Page 2 DiVall 3 1 Q 00
Advisory Board
Please help me in welcoming the new Advisory Board members. They are as
follows:
. Jesse Small (Representing DiVall Insured Income Properties 2, L.P.). Mr.
-----------
Small is the President of a small Accounting Firm. In addition to being a
CPA, he has a Master's Degree in Economics.
. Albert Kramer (Representing DiVall Income Properties 3, L.P.). Mr. Kramer
-------------
is now retired, but previously worked as Tax Litigation Manager for
Phillips Petroleum Company. His education includes undergraduate and MBA
degrees from Harvard and a J.D. degree from South Texas College of Law.
. William Arnold (Representing the Broker/Dealer community). Mr. Arnold
--------------
works as a financial planner and investment advisor at his company, Arnold
& Company. Mr. Arnold graduated with a Master's Degree from the University
of Wisconsin and is a Certified Financial Planner. He indicates on his
nomination form, "I am committed to providing those investors ("DiVall")
the best possible outcome given the fraud that has occurred."
Additionally, Mr. Richard Otte will continue to serve on the Board on an interim
basis, to assure continuity of Board knowledge.
----------------------------------
Statements of Income and Cash Flow Highlights
. Revenues were consistent with the budget.
. There was a 3% increase in "total" expenses from projections.
. The increase in expenses is primarily due to legal fees related to the
anticipated liquidation of the Partnership. This is offset by budgeted
printing costs which were not incurred this quarter.
Property Highlights
Vacancies
---------
. There were no vacancies as of March 31, 2000.
Delinquencies
-------------
. Applebee's (Pittsburgh, PA) was delinquent at March 31, 2000 in the amount
of $12,733.76.
This amount was for 1999 percentage rents, and the balance was paid in
full in April.
<PAGE>
Page 3 DiVall 3 1 Q 00
Questions & Answers
1. What is the net unit value as of December 31, 1999?
We have estimated the net unit value of each interest of the Partnership to
approximate $200.00 at December 31, 1999.
2. When can I expect my next distribution mailing?
Your distribution correspondence for the Second Quarter of 2000 is
scheduled to be mailed on August 15, 2000.
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)
E-Mail: [email protected]
<PAGE>
- - --------------------------------------------------------------------------------
DIVALL INCOME PROPERTIES 3 L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
-------------------------------------------------------
1ST 1ST
QUARTER QUARTER BETTER
OPERATING REVENUES 3/31/00 3/31/00 (WORSE)
---------- ---------- ----------
<S> <C> <C> <C>
Rental income $105,450 $102,485 ($2,965)
Interest income 5,640 6,148 508
Other income 0 1,610 1,610
---------- ---------- ----------
TOTAL OPERATING REVENUES $111,090 $110,243 ($ 847)
---------- ---------- ----------
OPERATING EXPENSES
Insurance $ 717 $ 729 ($ 12)
Management fees 16,411 16,531 (120)
Overhead allowance 1,338 1,339 (1)
Advisory Board 4,300 4,545 (245)
Administrative 7,797 3,997 3,800
Professional services 2,375 2,272 103
Auditing 9,650 9,266 384
Legal 1,800 4,659 (2,859)
Defaulted tenants 900 0 900
---------- ---------- ----------
TOTAL OPERATING EXPENSES $ 45,288 $ 43,338 $ 1,950
---------- ---------- ----------
INVESTIGATION AND RESTORATION EXPENSES $ 0 $ 64 ($ 64)
---------- ---------- ----------
NON-OPERATING EXPENSES
Depreciation $ 16,323 $ 16,323 $ 0
Amortization 447 446 1
---------- ---------- ----------
TOTAL NON-OPERATING EXPENSES $ 16,770 $ 16,769 $ 1
---------- ---------- ----------
TOTAL EXPENSES $ 62,058 $ 60,171 $ 1,887
---------- ---------- ----------
NET INCOME $ 49,032 $ 50,072 $ 1,040
OPERATING CASH RECONCILIATION: VARIANCE
-----------
Depreciation and amortization 16,770 16,769 (1)
Recovery of amounts previously written off 0 (1,610) (1,610)
(Increase) Decrease in current assets 7,889 (2,511) (10,400)
Increase (Decrease) in current liabilities (1,945) 2,517 4,462
(Increase) Decrease in cash reserved for payables 1,749 500 (1,249)
Advance from/(to) future cash flows for current distributions (8,825) (3,825) 5,000
---------- ---------- ----------
Net Cash Provided From Operating Activities $ 64,670 $ 61,912 ($ 2,758)
---------- ---------- ----------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Recoveries from former general partners 0 1,610 1,610
---------- ---------- ----------
Net Cash Provided from Investing And Financing
Activities $ 0 $ 1,610 $ 1,610
---------- ---------- ----------
Total Cash Flow For Quarter $ 64,670 $ 63,522 ($ 1,148)
Cash Balance Beginning of Period 245,980 257,291 11,311
Less 4th quarter distributions paid 2/00 (40,000) (50,000) (10,000)
Change in cash reserved for payables or distributions 7,076 3,325 (3,751)
---------- ---------- ----------
Cash Balance End of Period $277,726 $274,138 ($ 3,588)
Cash reserved for 1st quarter L.P. distributions (65,000) (65,000) 0
Cash advanced from (reserved for) future distributions (8,825) (3,825) 5,000
Cash reserved for payment of payables (21,251) (72,000) (50,749)
---------- ---------- ----------
Unrestricted Cash Balance End of Period $182,650 $133,313 ($49,337)
========== ========== ==========
- - --------------------------------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
-----------------------------------------------------
* Quarterly Distribution $ 65,000 $ 65,000 $ 0
Mailing Date 5/15/00 (enclosed) -
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Refer to distribution letter for detail of quarterly distribution.
<PAGE>
<TABLE>
<CAPTION>
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
2000 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
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 (6 Properties) 4,221,014 409,380 9.70%
- - --------------------------------------------------------- ----------------------------------------------------
<CAPTION>
- - ----------------------------------------------------------- -------------------------------------
EQUIPMENT TOTALS
- - ----------------------------------------------------------- -------------------------------------
LEASE ANNUAL
EXPIRATION LEASE % ANNUAL %
DATE COST RECEIPTS RETURN COST RECEIPTS RETURN
- - ----------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
290,469 0.00% 1,239,896 116,040 9.36%
58,094 0.00%
210,976 0 0.00% 791,159 77,460 9.79%
210,976 0.00% 424,187 35,880 8.46%
(2) 369,688 0 0.00% 1,648,569 92,000 5.58%
(2) 84,500 0 0.00%
(2) 482,078 0 0.00% 1,929,472 88,000 4.56%
(2) 105,488 0 0.00%
- - ----------------------------------------------------------- -------------------------------------
- - ----------------------------------------------------------- -------------------------------------
1,812,269 0 0.00% 6,033,283 409,380 6.79%
- - ----------------------------------------------------------- -------------------------------------
</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.
