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, 2001, the Partnership consisted of one General Partner and 977 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, 2001, the Partnership owned four (4) Properties and specialty leasehold improvements for use in all four (4) of the Properties, as more fully described in Item 2.
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 (7% to 8%) of gross sales above a threshold amount.
The Partnership owned the following Properties (including specialty leasehold improvements) as of December 31, 2001:
Footnotes.
(1) Purchase price includes all costs incurred to acquire the property. (2) Purchase price includes cost of specialty leasehold improvements.
The Partnership previously owned a Denny's restaurant on Arapahoe Road in Englewood, Colorado, which was located on a parcel of land where the Partnership had entered into a Ground Lease. The Partnership had been assigned all of the rights and interest in the Ground Lease by the Ground Lease Lessee, Phoenix Restaurant Group, Inc., ("Phoenix"). However, Phoenix retained the obligations under the Ground Lease and the ground lease payments were made by the former tenant. The Partnership, as the Landlord, also entered into the Englewood Property Lease with tenant, Phoenix. Due to bankruptcy proceedings of Phoenix, the Englewood Property Lease between the Partnership and Phoenix was terminated in the Fourth Quarter and rent on the Englewood property ceased as of December 2001. Management is uncertain whether the $9,600 due from the former tenant, all of which has been reserved, will be collected. In addition, the bankruptcy court approved the motion filed by Phoenix to release it from both the Englewood Property Lease and the Ground Lease, and thus the Partnership's rights and interest in the Ground Lease have been discharged. Because the Partnership did not assume any of Phoenix's obligations under the Ground Lease, the Partnership has taken the position that it is not liable for any amounts of unpaid rent or expenses due to the Ground Lessor. Possession of the property was returned to the Ground Lessor which resulted in a write-off of the Englewood property and a $141,000 loss in the Fourth Quarter.
Due to bankruptcy proceedings by a former tenant, Phoenix Restaurant Group, Inc., ("Phoenix"), the related lease on the Colorado Springs property was terminated in the Fourth Quarter of 2001 and rent ceased as of December 2001. The entire amount due of approximately $20,600 from the former tenant has been reserved. The amount is included in the Partnership's filing for damages in Bankruptcy Court of approximately $77,000, or one year of rent, although it is uncertain whether the amount will be collectible. Management is also actively marketing new leasing or a potential buyer for the vacant property.
During March 2001, Hardee's Food Systems, Inc. notified Management of its intent to close its restaurant in Oak Creek, Wisconsin. The lease on the property was not set to expire until 2010. In the Second Quarter of 2001, a lease termination agreement was executed and the tenant ceased the payment of rent as of April 30, 2001. Hardee's Food Systems agreed to pay the Partnership a lease termination fee of approximately two years rent or $181,000. Management is actively marketing new leasing or a potential buyer for the vacant property.
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
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, 2001, there were 977 record holders of Interests in the Partnership.
(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 2001 and 2000, $310,000 and $250,000 was distributed in the aggregate to the Limited Partners. In 2001 and 2000, the General Partner received aggregate distributions of $492 and $877, respectively.
Item 6.
Item 6. Selected Financial Data
The Partnership's selected financial data included below has been derived from the Partnership's financial statements. Arthur Andersen LLP's report on the financial statements, for the years ended December 31, 2001 and 2000, is included in this annual report on page 15. The financial data selected below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and with the financial statements and the related notes appearing elsewhere in this annual report.
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP (a Wisconsin limited partnership)
December 31, 2001, 2000, 1999, 1998, and 1997
Item 7.
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, 2001, were originally purchased at a price, including acquisition costs, of approximately $5,667,000.
At December 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. However, due to the write-off of the former Englewood property during the Fourth Quarter of 2001 only four (4) properties remain at December 31, 2001. In addition, the former Hardee's- Oak Creek lease was terminated in the Second Quarter of 2001 and the former Denny's- Colorado Springs lease was terminated in the Fourth Quarter of 2001. Both properties remain vacant as of December 31, 2001. Therefore, the four (4) remaining properties at December 31, 2001 are comprised of: one (1) Hardee's restaurant, one (1) Applebee's restaurant, and two (2) vacant properties. Management anticipates that the remaining four properties will be sold by the end of 2002. If this timing should not occur, Management is comfortable that the two remaining property leases are sound and that the Partnership will be able to adequately meet its future expenses. In addition, Management is prepared to waive Management fees paid by the Partnership to TPG if the need should arise.
The Partnership previously owned a Denny's restaurant on Arapahoe Road in Englewood, Colorado, which was located on a parcel of land where the Partnership had entered into a Ground Lease. The Partnership had been assigned all of the rights and interest in the Ground Lease by the Ground Lease Lessee, Phoenix Restaurant Group, Inc., ("Phoenix"). However, Phoenix retained the obligations under the Ground Lease and the ground lease payments were made by the former tenant. The Partnership, as the Landlord, also entered into the Englewood Property Lease with tenant, Phoenix. Due to bankruptcy proceedings of Phoenix, the Englewood Property Lease between the Partnership and Phoenix was terminated in the Fourth Quarter and rent on the Englewood property ceased as of December 2001. Management is uncertain whether the $9,600 due from the former tenant, all of which has been reserved, will be collected. In addition, the bankruptcy court approved the motion filed by Phoenix to release it from both the Englewood Property Lease and the Ground Lease, and thus the Partnership's rights and interest in the Ground Lease have been discharged. Because the Partnership did not assume any of Phoenix's obligations under the Ground Lease, the Partnership has taken the position that it is not liable for any amounts of unpaid rent or expenses due to the Ground Lessor. Possession of the property was returned to the Ground Lessor which resulted in a write-off of the Englewood property and a $141,000 loss in the Fourth Quarter.
Due to bankruptcy proceedings by a former tenant, Phoenix Restaurant Group, Inc., ("Phoenix"), the related lease on the Colorado Springs property was terminated in the Fourth Quarter of 2001 and rent ceased as of December 2001. The entire amount due of approximately $20,600 from the former tenant has been reserved. The amount is included in the Partnership's filing for damages in Bankruptcy Court of approximately $77,000, or one year of rent, although it is uncertain whether the amount will be collectible. Management is also actively marketing new leasing or a potential buyer for the vacant property.
During March 2001, Hardee's Food Systems, Inc. notified Management of its intent to close its restaurant in Oak Creek, Wisconsin. The lease on the property was not set to expire until 2010. In the Second Quarter of 2001, a lease termination agreement was executed and the tenant ceased the payment of rent as of April 30, 2001. Hardee's Food Systems agreed to pay the Partnership a lease termination fee of approximately two years rent or $181,000. Management is actively marketing new leasing or a potential buyer for the vacant property.
Other Assets - ------------
Cash and cash equivalents held by the Partnership, were $240,000 at December 31, 2001, compared to $252,000 at December 31, 2000. The Partnership designated cash of $25,000 to fund the Fourth Quarter 2001 distributions to Limited Partners, which is scheduled to be paid in February 2002; $59,000 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. 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.
Property taxes escrow at December 31, 2001, in the amount of approximately $9,600, represented four (4) months of 2001 real estate taxes for the former Hardee's- Oak Creek property paid by Hardee's Food Systems, Inc. upon the lease termination agreement with Management.
Deferred fees were approximately $8,000 and $16,000, net of amortization, at December 31, 2001 and 2000, respectively. Deferred fees represent leasing commissions paid when properties are leased and/or upon the negotiated extension of a lease. Leasing commissions are capitalized and amortized over the life of the lease. During the Second Quarter of 2001, the net deferred fee balance related to the former Hardee's- Oak Creek tenant was written-off due to its lease termination.
The Note receivable balance at December 31, 2001 was $45,250. In the Second Quarter of 2001, a lease termination agreement was executed with Hardee's Food Systems upon the closing of its restaurant in Oak Creek, Wisconsin. Hardee's Food Systems agreed to pay a lease termination fee of approximately two (2) years rent or $181,000. The payments were scheduled to be received in four equal (4) installments of $45,250. The first payment was received in May 2001 upon the execution of the agreement, and the subsequent installments were reflected as Note receivable on the balance sheet in the Second Quarter of 2001. Note receivable installments were received in August and October 2001. The remaining installment, which is reflected in the Note receivable on the balance sheet at December 31, 2001, is scheduled to be received in February 2002.
Liabilities - -----------
Accounts payable and accrued expenses at December 31, 2001, in the amount of $33,000, primarily represented accruals of auditing, tax, and data processing fees.
Property taxes payable at December 31, 2001, in the amount of $35,000, represented accruals of 2001 real estate taxes in relation to the vacant Oak Creek and Colorado Springs properties.
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 2001, of $310,000 and $492, respectively, have also been made in accordance with the Partnership Agreement. The Fourth Quarter 2001 distribution of $25,000 is scheduled to be paid to the Limited Partners on February 15, 2002.
Results of Operations: - ----------------------
The Partnership reported net income for the year ended December 31, 2001, in the amount of $123,000 compared to net income for the years ended December 31, 2000 and 1999 of $219,000 and $197,000. Results for 2001 were different than would be expected from "normal" operations, primarily because of the former Hardee's- Oak Creek $181,000 lease termination fee, the non-cash disposal of the Denny's-Englewood property at a loss of $141,000, defaulted tenant real estate taxes, and write-offs for uncollectible rents in the Fourth Quarter. In addition, results for 1999 were different than would be expected from "normal" operations, primarily because of property valuation costs.
Revenues - --------
Total revenues were $577,000, $459,000, and $456,000, for the years ended December 31, 2001, 2000, and 1999, respectively. The increase in revenue in 2001 was due primarily to the $181,000 lease termination fee, offset by decreased rental income, upon the termination of the Hardee's-Oak Creek property lease in the Second Quarter of 2001.
As of December 31, 2001 total revenues, should approximate $208,000 annually or $52,000 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 years ended December 31, 2001, 2000, and 1999, cash expenses amounted to approximately 36%, 38%, and 42% of total revenues, respectively. Total expenses, including non-cash items, amounted to 79%, 52%, and 57% of total revenues for the years ended December 31, 2001, 2000, and 1999, respectively. The increase in total expenses in 2001 is due primarily to the loss on the disposal of the Denny's-Englewood property, defaulted tenant real estate taxes, and the write-off of uncollectible receivables in the Fourth Quarter. In addition, in 1999 the Partnership incurred legal fees, and fees for environmental inspections and land title surveys in connection with the proposed liquidation of the Partnership.
The loss on disposal of asset, write-off of uncollectible receivables, depreciation, and amortization are non-cash items and do not affect current operating cash flow of the Partnership or distributions to the Limited Partners.
Selected Quarterly Financial Information (unaudited) - ---------------------------------------------------- Quarter Ended March 31, June 30, September 30, December 31, 2001 2001 2001 2001 --------- -------- ------------- ------------ Revenues $115,502 $275,490 $85,493 $100,174 Net Income (Loss) 58,327 205,572 29,747 (170,459) Net Income (Loss) Per Unit 3.38 11.90 1.72 (9.87)
Quarter Ended March 31, June 30, September 30, December 31, 2001 2001 2001 2001 --------- -------- ------------- ------------ Revenues $110,244 $110,333 $111,152 $127,194 Net Income (Loss) 50,072 40,253 56,541 72,506 Net Income (Loss) Per Unit 2.90 2.33 3.27 4.20
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 8% of total rental income for 2001. 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.
New Accounting Pronouncement: - -----------------------------
In October 2001, Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144) was issued. FAS 144 supercedes Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (FAS 121). FAS 144 primarily addresses issues relating to the implementation of FAS 121 and develops a single accounting model for long-lived assets to be disposed of, whether previously held and used or newly acquired. The provisions of FAS 144 will be effective for fiscal years beginning after December 15, 2001. The Company adopted FAS 144 on January 1, 2002 with no impact on financial statements.
Critical Accounting Policies: - -----------------------------
The Partnership believes that its most significant accounting policies deal with:
Depreciation methods and lives- Depreciation of the properties is provided on a straight-line basis over 31.5 years, which is the estimated useful life of the buildings and improvements. While the Partnership believes these are the appropriate lives and methods, use of different lives and methods could result in different impacts on net income. Additionally, the value of real estate is typically based on market conditions and property performance, so depreciated book value of real estate may not reflect the market value of real estate assets.
Revenue recognition- Rental revenue from investment properties is recognized on the straight-line basis over the life of the respective lease. Percentage rents are accrued only when the tenant has reached the breakpoint stipulated in the lease.
The Partnership periodically reviews its long-lived assets, primarily real estate, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Partnership's review involves comparing current and future operating performance of the assets, the most significant of which is undiscounted operating cash flows, to the carrying value of the assets. Based on this analysis, a provision for possible loss is recognized, if any.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
None.
Item 8.
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 ...................... 14
Balance Sheets, December 31, 2001 and 2000 ...................... 15-16
Statements of Income for the Years Ended December 31, 2001, 2000, and 1999 ...................... 17
Statement of Partners' Capital for the Years Ended December 31, 2001, 2000, and 1999 ...................... 18
Statements of Cash Flows for the Years Ended December 31, 2001, 2000, and 1999 ...................... 19
Notes to Financial Statements ...................... 20-28
Schedule III--Real Estate and Accumulated Depreciation ...................... 35
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, 2001 and 2000, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
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.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois March 8, 2002
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 2001 and 2000
ASSETS
December 31, December 31, 2001 2000 ------------ ------------ INVESTMENT PROPERTIES: (Note 3) Land $ 1,553,680 $ 1,553,680 Buildings and improvements 2,036,749 2,249,959 Accumulated depreciation (836,890) (843,984) ----------- ----------- Net investment properties 2,753,539 2,959,655 ----------- ----------- OTHER ASSETS: Cash and cash equivalents 240,148 251,528 Cash held in indemnification trust (Note 8) 355,012 339,740 Property taxes escrow 9,563 0 Rents and other receivables 26,044 17,982 Deferred rent receivable 4,350 17,420 Due from General Partner 682 0 Deferred fees 8,365 16,167 Prepaid assets 4,082 2,681 Note receivable (Note 3) 45,250 0 ----------- ----------- Total other assets 693,496 645,518 ----------- ----------- Total assets $ 3,447,035 $ 3,605,173 =========== ===========
The accompanying notes are an integral part of these statements.
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 2001 and 2000 --------------------------
LIABILITIES AND PARTNERS' CAPITAL
The accompanying notes are an integral part of these statements.
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the Years Ended December 31, 2001, 2000, and 1999
The accompanying notes are an integral part of these statements.
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
For the years ended December 31, 2001, 2000 and 1999 ----------------------------------------------------
The accompanying notes are an integral part of these statements.
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000, and 1999 -----------------------------------------------------
The accompanying notes are an integral part of these statements.
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000, AND 1999
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, 2001, the Partnership owned four (4) properties and specialty leasehold improvements for use in all four (4) of the Properties.
Rental revenue from investment properties is recognized on the straight-line basis over the life of the respective lease. Percentage rents are accrued only when the tenant has reached the breakpoint stipulated in the lease.
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 fees represent leasing commissions paid when properties are leased and upon the negotiated extension of a lease. 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. In October 2001, Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144) was issued. FAS 144 supercedes Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (FAS 121). FAS 144 primarily addresses issues relating to the implementation of FAS 121 and develops a single accounting model for long-lived assets to be disposed of, whether previously held and used or newly acquired. The provisions of FAS 144 will be effective for fiscal years beginning after December 15, 2001. The Company adopted FAS 144 on January 1, 2002 with no impact on 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. During 1999, Management entered into an agreement to sell the Properties. The sale was not consummated and the agreement was terminated. Management is currently seeking buyers for the Partnership's remaining four (4) Properties within the parameters of the consent and anticipates that all the Properties will be sold by the end of 2002. However, Management expects to continue normal operations for the Partnership until the sales are complete.
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, 2001, the tax basis of the Partnership's assets exceeded the amounts reported in the accompanying financial statements by approximately $3,285,841.
The following represents a reconciliation of net income as stated on the Partnership's statements of income to net income for tax reporting purposes:
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, 2001, $5,803,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, during 1996, 1997, 1999, 2000 and 2001 the Partnership has recognized $1,303,000 as income, which represents its share of the excess recovery. There were no restoration activities or recoveries in 1998. The current General Partner continues to pursue recoveries of the misappropriated funds, however, no further significant recoveries are anticipated.
3. INVESTMENT PROPERTIES: ----------------------
At December 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. However, due to the write-off of the former Englewood property during the Fourth Quarter of 2001 only four (4) properties remain at December 31, 2001. In addition, the former Hardee's- Oak Creek lease was terminated in the Second Quarter of 2001 and the former Denny's- Colorado Springs lease was terminated in the Fourth Quarter of 2001. Both properties remain vacant as of December 31, 2001. Therefore, the four (4) remaining properties at December 31, 2001 are comprised of: one (1) Hardee's restaurant, one (1) Applebee's restaurant, and two (2) vacant properties. The four (4) properties are located in three (3) states. Management anticipates that the remaining four properties will be sold by the end of 2002. If this timing should not occur, Management is comfortable that the two remaining leases are sound and that the Partnership will be able to adequately meet its future expenses. In addition, Management is prepared to accrue the Partnership's monthly Management fees due to TPG if the need should arise, until the fees can be satisfied from liquidation activities.
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.
The Partnership previously owned a Denny's restaurant on Arapahoe Road in Englewood, Colorado, which was located on a parcel of land where the Partnership had entered into a Ground Lease. The Partnership had been assigned all of the rights and interest in the Ground Lease by the Ground Lease Lessee, Phoenix Restaurant Group, Inc., ("Phoenix"). However, Phoenix retained the obligations under the Ground Lease and the ground lease payments were made by the former tenant. The Partnership, as the Landlord, also entered into the Englewood Property Lease with tenant, Phoenix. Due to bankruptcy proceedings of Phoenix, the Englewood Property Lease between the Partnership and Phoenix was terminated in the Fourth Quarter and rent on the Englewood property ceased as of December 2001. Management is uncertain whether the $9,600 due from the former tenant, all of which has been reserved, will be collected. In addition, the bankruptcy court approved the motion filed by Phoenix to release it from both the Englewood Property Lease and the Ground Lease, and thus the Partnership's rights and interest in the Ground Lease have been discharged. Because the Partnership did not assume any of Phoenix's obligations under the Ground Lease, the Partnership has taken the position that it is not liable for any amounts of unpaid rent or expenses due to the Ground Lessor. Possession of the property was returned to the Ground Lessor which resulted in a write-off of the Englewood property and a $141,000 loss in the Fourth Quarter.
Due to bankruptcy proceedings by a former tenant, Phoenix Restaurant Group, Inc., ("Phoenix"), the related lease on the Colorado Springs property was terminated in the Fourth Quarter of 2001 and rent ceased as of December 2001. The entire amount due of approximately $20,600 from the former tenant has been reserved. The amount is included in the Partnership's filing for damages in Bankruptcy Court of approximately $77,000, or one year of rent, although it is uncertain whether the amount will be collectible. Management is also actively marketing new leasing or a potential buyer for the vacant property.
During March 2001, Hardee's Food Systems, Inc. notified Management of its intent to close its restaurant in Oak Creek, Wisconsin. The lease on the property was not set to expire until 2010. In the Second Quarter of 2001, a lease termination agreement was executed and the tenant ceased the payment of rent as of April 30, 2001. Hardee's Food Systems agreed to pay a lease termination fee of
approximately two (2) years rent or $181,000. The payments are scheduled to be received in four (4) equal installments of $45,250. The first payment was received in May 2001 upon the execution of the agreement, and the subsequent installments were reflected as Note receivable on the balance sheet in the Second Quarter of 2001. Note receivable installments were received in August and October 2001. The remaining installment, which is reflected in the Note receivable on the balance sheet at December 31, 2001, is scheduled to be received in February 2002. Management is actively marketing new leasing or a potential buyer for the vacant property.
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, subject to a minimum fee, with a maximum reimbursement for office rent and related office overhead of $25,000 between the three original affiliated Partnerships. Effective March 1, 2001, the minimum management fee and the maximum reimbursement for office rent and overhead increased by 3.4% 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 $88,690 to date on the amounts recovered, which has been offset against the 4% minimum fee.
Several of the Partnership's property leases contain purchase option provisions with stated purchase prices in excess of the original cost of the properties. The current General Partner is unaware of any unfavorable purchase options in relation to original cost.
4. PARTNERSHIP AGREEMENT: ----------------------
The Partnership Agreement, prior to an amendment effective May 26, 1993, provided that, for financial reporting and income tax purposes, net profits or losses from operations were allocated 90% to the Limited Partners and 10% to the former general partners. The Partnership Agreement also provided that Net Cash Receipts, as defined, would be distributed 90% to the Limited Partners and 10% to the former general partners, except that distributions to the former general partners in excess of 1% in any calendar year would be subordinated to distributions to the Limited Partners in an amount equal to their Original Property Distribution Preference, as defined.
Net proceeds, as defined, were to be distributed as follows: (a) 1% to the General Partners and 99% to the Limited Partners, until distributions to the Limited Partners equal their Original Capital, as defined, plus their Original Property Liquidation Preference, as defined, and (b) the remainder 90% to the Limited Partners and 10% to the General Partners. Such distributions were to be made as soon as practicable following the sale, financing or refinancing of an original property.
On May 26, 1993, pursuant to the results of a solicitation of written consents from the Limited Partners, the Partnership Agreement was amended to replace the former general partners and amend various sections of the agreement. The former general partners were replaced as General Partner, by The Provo Group, Inc., an Illinois Corporation. Under the terms of the amendment, net profits or losses from operations are allocated 99% to the Limited Partners and 1% to the current General Partner. The amendment also provided for distributions from Net Cash Receipts to be made 99% to the Limited Partners and 1% to its current General Partner. Pursuant to the amendments to the Partnership
Agreement effective June 30, 1994, distributions of Net Cash Receipts will not be made to the General Partner unless and until each Limited Partner has received a distribution from Net Cash Receipts in an amount equal to 10% per annum, cumulative simple return on his or her Adjusted Original Capital, as defined, from the Return Calculation Date, as defined, except to the extent needed by the General Partner to pay its federal and state 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,
2002 $ 208,040 2003 208,040 2004 208,040 2005 208,040 2006 208,040 Thereafter 622,117 --------- $1,662,317 ==========
Percentage rentals included in rental income in 2001, 2000 and 1999, were $27,423, $17,635 and $18,341, respectively.
During 2001, two (2) of the Partnership's properties, (located in Colorado Springs and Englewood, Colorado), were leased to Phoenix Restaurant Group, Inc. Base rent from these properties is approximately 32% of total base rent in 2001. Due to bankruptcy proceedings of Phoenix, the aforementioned leases were terminated in the Fourth Quarter of 2001. In addition, possession of the Englewood property was returned to the Ground Lessor resulting in the write-off of the property and a $141,000 loss in the Fourth Quarter of 2001. As of December 31, 2001 the Colorado Springs property is vacant.
Until April 30, 2001 two (2) of the Partnership's properties, (located in Oak Creek and St. Francis, Wisconsin), were leased to a Hardee's Food Systems, Inc. Base rent from these properties is approximately 35% of total base rents in 2001. In the Second Quarter of 2001 a lease termination agreement was executed in relation to the Oak Creek property and the property remains vacant at December 31, 2001.
At December 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. However, due to the write-off of the former Englewood property during the Fourth Quarter of 2001 only four (4) properties remain at December 31, 2001. In addition, the Hardee's- Oak Creek lease was terminated in the Second Quarter of 2001 and the Denny's- Colorado Springs lease was terminated in the Fourth Quarter of 2001. Therefore, the four (4) remaining properties are comprised of: one (1) Hardee's restaurant, one (1) Applebee's restaurant, and two (2) vacant properties.
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. Until April 30, 2001, the Partnership had leased two of its properties to Hardee's Food Systems, Inc., which constituted 21% of the aggregate gross proceeds.
6. TRANSACTIONS WITH CURRENT GENERAL PARTNER: ------------------------------------------
Amounts incurred to the current General Partner for the years ended December 31, 2001, 2000, and 1999, are as follows:
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, 2001, 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 established at United Missouri Bank, N.A. The Trust has been fully funded with Partnership assets as of December 31, 2001. Funds are invested in U.S. Treasury securities. In addition, interest totaling $105,012 has been credited to the Trust as of December 31, 2001. 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 January 2002, the final Note receivable installment of $45,250 was received from Hardee's Food Systems, Inc. by the Partnership.
In February 2002, the Partnership made a distribution to the Limited Partners from operations for the Fourth Quarter 2001 of $25,000 amounting to $1.46 per Interest.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
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 51 - 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.
Diane R. Conley, Age 40- Controller- Divall Properties. Ms. Conley joined TPG in November 1986 to become Controller for four limited partnerships managed by TPG. Ms. Conley graduated with a B.S. in Accounting from Rochester Institute of Technology in Rochester, New York in 1984 and became a Certified Public Accountant in 1986. Ms. Conley was an independent auditor with Coopers and Lybrand for three years and supervised audit staff on a variety of engagements. Prior to joining TPG she provided financial consulting services for clients of varied industries.
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:
William Arnold - Investment Broker. 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.
Jesse Small - Self-employed. Mr. Small is the President of a small Accounting Firm. In addition to being a CPA, he has a Master's Degree in Economics. Mr. Small is a Limited Partner representing DiVall 2.
Richard W. Otte - Editorial Writer. Mr. Otte is in his seventh 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 Kramer - Retired. Mr. Kramer is now retired, but previously worked as a 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. Mr. Kramer is a Limited Partner representing DiVall 3.
Item 11.
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.
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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) As of December 31, 2001, the following entity is known to beneficially own 5% or more of the outstanding Interests as follows:
(b) As of December 31, 2001, neither the General Partner nor any of its affiliates owned any Interests in the Partnership.
Item 13.
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, 2001, the minimum management fee and the maximum reimbursement for office rent and overhead increased by 3.4%, 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 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, 2001, the Partnership had fully funded the Trust.
The following fees and reimbursements from the Partnership were incurred to management in 2001:
The Provo Group, Inc. --------------------- Management Fees $68,932 Restoration Fees 322 Office Overhead Allowance 5,587 Direct Cost Reimbursements 2,229 ------- 2001 Total $77,070 =======
PART IV
Item 14.
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, 2001 and 2000
Statements of Income for the Years Ended December 31, 2001, 2000 and
Statements of Partners' Capital for the Years Ended December 31, 2001, 2000 and 1999
Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999
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.
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.
10.0 Permanent Manager Agreement filed as an exhibit to the Current Report on Form 8-K dated January 22, 1993, incorporated herein by reference.
99.0 Correspondence to the Limited Partners dated February 15, 2002, regarding the Fourth Quarter 2001 distribution.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the fourth quarter of fiscal year 2001.
DIVALL INCOME PROPERTIES 3 LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2001
(A) Approximates aggregate costs for federal income tax purposes.
(B) Reconciliation of "Real Estate and Accumulated Depreciation":
(1) This property was written down to its estimated net realizable value at December 31, 1998.
Year ended Year ended Investments in Real Estate (B) December 31, 2001 December 31, 2000 - -------------------------------------------------------------------------- Balance at beginning of year $ 3,803,639 $ 3,803,639 Property write-down 0 0
Disposal of Property- Englewood,CO (213,210) 0 -------------------------------
Balance at end of year $ 3,590,429 $ 3,803,639 ===============================
Year ended Year ended Accumulated Depreciation (B) December 31, 2001 December 31, 2000 - -------------------------------------------------------------------------- Balance at beginning of year $ 843,984 $ 778,690
Additions charged to costs and expenses 65,294 65,294
Disposal of Property-Englewood, CO (72,388) 0 -----------------------------
Balance at end of year $ 836,890 $ 843,984 =============================
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, 2002
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, 2002
By: /s/ Diane Conley -------------------------------------- Diane Conley Controller
Date: March 26, 2002