-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TzKtBvmviJT+cX0KCZDgKm1mNyzxyaDpF+vyQFe1esztui+A148GzSsRBhYapWZR m8bf/oqaAI03nz0cEuAXNQ== 0000950131-97-002171.txt : 19970509 0000950131-97-002171.hdr.sgml : 19970509 ACCESSION NUMBER: 0000950131-97-002171 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIVALL INSURED INCOME FUND LTD PARTNERSHIP CENTRAL INDEX KEY: 0000786974 STANDARD INDUSTRIAL CLASSIFICATION: 6500 IRS NUMBER: 366845083 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16722 FILM NUMBER: 97567071 BUSINESS ADDRESS: STREET 1: 101 W 11TH ST STREET 2: STE 1110 CITY: KANSAS CITY STATE: MO ZIP: 64105 BUSINESS PHONE: 8164217444 MAIL ADDRESS: STREET 1: C/O PROVO GROUP STREET 2: 101 WEST 11TH STREET CITY: KANSAS CITY STATE: MO ZIP: 64105 10-K 1 FORM 10-K FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 ------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to ___________________ Commission file number 0-16722 DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) WISCONSIN 36-6845083 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 101 West 11th Street, Suite 1110, Kansas City, Missouri 64105 (Address of principal executive offices, including zip code) (816) 421-7444 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report.) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Interests Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_________ --------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value of the voting securities held by nonaffiliates of the Registrant: The aggregate market value of limited partnership interests held by nonaffiliates is not determinable since there is no public trading market for the limited partnership interests. Index to Exhibits located on page: 37 - 38 ----------------- PART I ITEM 1. BUSINESS BACKGROUND - - ---------- The Registrant, DiVall Insured Income Fund 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 November 29, 1985, and amended as of September 15, 1986, June 16, 1987, February 8, 1993, May 26, 1993, and June 30, 1994. As of December 31, 1996, the Partnership consisted of one General Partner and 1,787 Limited Partners owning an aggregate of 25,000 Limited Partnership Interests (the "Interests") acquired at a public offering price of $1,000 per Interest before volume discounts. The Interests were sold commencing September 17, 1986, pursuant to a Registration Statement on Form S-11 filed under the Securities Act of 1933 (Registration 33- 2552) as amended. On March 16, 1988, the Partnership closed the offering at the maximum offering amount of 25,000 Interests ($25,000,000), providing net proceeds to the Partnership after volume discounts and offering costs of $22,270,578. The Partnership is currently engaged in the business of owning and operating its investment portfolio (the "Properties") of commercial real estate and recovering the assets misappropriated by the former general partners and/or their affiliates. The misappropriation is more fully discussed under Recent Developments. 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, 1996, the Partnership owned 22 properties and a parcel of undeveloped land, as more fully described in Item 2. Prior to the disposal of the Properties, the Partnership's return on its investment will be derived principally from rental payments received from its lessees. Therefore, the Partnership's return on its investment is largely dependent, among other factors, upon the business success of its lessees. The business success of the Partnership's individual lessees can be adversely affected on three general levels. First, the tenants rely heavily on the management contributions of a few key entrepreneurial owners. The business operations of such entrepreneurial tenants can be adversely affected by death, disability or divorce of a key owner, or by such owner's poor business decisions such as an undercapitalized business expansion. Second, changes in a local market area can adversely affect a lessee's business operation. A local economy can suffer a downturn with high unemployment. Socioeconomic neighborhood changes can affect retail demand at specific sites and traffic patterns may change, or stronger competitors may enter a market. These and other local market factors can potentially adversely affect the lessees of Partnership properties. Finally, despite an individual lessee's solid business plans in a strong local market, the chain concept itself can suffer reversals or changes in management policy which in turn can affect the profitability of operations for Partnership properties. Therefore, there can be no assurance that any specific lessee will have the ability to pay its rent over the entire term of its lease with the Partnership. Since 98% of the Partnership's investment in properties and equipment involves restaurant tenants, the restaurant market is the major market segment with a material impact on Partnership operations. It would appear that the management skill and potential operating efficiencies realized by Partnership lessees will be a major ingredient for their future operating success in a very competitive restaurant and food service marketplace. 2 There is no way to determine, with any certainty, which, if any, tenants will succeed or fail in their business operations over the term of their respective leases with the Partnership. It can be reasonably anticipated that some lessees will default on future lease payments to the Partnership which will result in the loss of expected lease income for the Partnership. Management will use its best efforts to vigorously pursue collection of any defaulted amounts and to protect the Partnership's assets and future rental income potential by trying to re-lease any properties with rental defaults. External events which could impact the Partnership's liquidity are the entrance of other competitors into the market areas of our tenants; liquidity and working capital needs of the leaseholders; and failure or withdrawal of any of the national franchises held by the Partnership's tenant. Each of these events, alone or in combination, would affect the liquidity level of leaseholders resulting in possible default by the tenant. Since the information regarding plans for future liquidity and expansion of closely held organizations, which are tenants of the Partnership, tend to be of a private and proprietary nature, anticipation of individual liquidity problems is difficult, and prediction of future events is nearly impossible. A preliminary investigation during 1992 by the Office of the Commissioner of Securities for the State of Wisconsin and the Securities and Exchange Commission (the "Investigation"), revealed that during at least the four years ended December 31, 1992, two of the former general partners of the Partnership, Gary J. DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred substantial cash assets of the Partnership and two affiliated publicly registered partnerships, DiVall Insured Income Properties 2 Limited Partnership ("DiVall 2") and DiVall Income Properties 3 Limited Partnership ("DiVall 3") (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. The aggregate amount of the misappropriation, related costs and 9% interest accrued since January 1, 1993, is approximately $14,000,000, net of recoveries, of which $1,808,000 has been allocated to the Partnership. Subsequent to discovery, and in response to the regulatory inquiries, a third- party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed (effective February 8, 1993) to assume the responsibility for daily operations and assets of the Partnerships as well as to develop and execute a plan of restoration to the Partnerships. As reported in the Partnership's report on Form 8-K dated May 26, 1993, effective as of that date, the Limited Partners, by written consent of a majority of interests, elected the Permanent Manager, TPG, as General Partner. Additional results of the solicitation included the approval of the Permanent Manager Agreement ("PMA"), the acceptance of the resignations of the former general partners, amendments to certain provisions of the Partnership Agreement pertaining to general partner interests and compensation, and an amendment of the Partnership Agreement providing for an Advisory Board (the "Board"). THE PERMANENT MANAGER AGREEMENT - - ------------------------------- The PMA was entered into on February 8, 1993, between the Partnership, DiVall 2, DiVall 3, the now former general partners DiVall and Magnuson, their controlled affiliates, and TPG, naming TPG as the Permanent Manager. The PMA contains provisions allowing the Permanent Manager to submit the PMA, the issue of electing the Permanent Manager as General Partner, and the issue of acceptance of the resignations of the former general partners to a vote of the Limited Partners through a solicitation of written consents. TPG, as the new General Partner, has been operating and managing the affairs of the Partnership in accordance with the provisions of the PMA and the Partnership Agreement, as amended. 3 ADVISORY BOARD - - -------------- The concept of the Advisory Board was first introduced by TPG during the solicitation of written consents for the Partnerships and is the only type of oversight body known to exist for similar partnerships at this time. The first Advisory Board was appointed in October 1993, and held its first meeting in November 1993. The four person Board is empowered to, among other functions, review operational policies and practices, review extraordinary transactions, and advise and serve as an audit committee to the Partnership and the General Partner. The Advisory Board does not have the authority to direct management decisions or policies or remove the General Partner. The powers of the Board are advisory only. The Board has full and free access to the Partnership's books and records, and individual Board members have the right to communicate directly with the Limited Partners concerning Partnership business. Members of the Board are compensated $3,000 annually and $1,200 for each quarterly meeting attended. The Board currently consists of a broker dealer representative, D. Todd Witthoeft of Nelson Witthoeft Financial; and a Limited Partner from each of the three Partnerships: Gerhard Zoller from the Partnership, Richard Otte from DiVall 2, and Dr. Albert Eschen from DiVall 3. The position of industry representative was created for approximately a three (3) year period which ended January 31, 1996. For a brief description of each Board member, refer to Item 10, Directors and Executive Officers of the Registrant. RESTORATION PLAN - - ---------------- TPG, upon the commencement of its management of the Partnerships, developed a strategy (the "Restoration Plan" or "Plan") for recovering as much of the amounts misappropriated by the former general partners and their affiliates as possible. The Plan focuses on recovery from the following sources: (a) personal property, (b) promissory notes, (c) land contracts, (d) litigation, and (e) PMA savings. A. Personal Property. DiVall and Magnuson appear to have very few ----------------- unencumbered personal assets which would materially benefit the Partnerships. The Partnerships have obtained security interests in substantially all of DiVall and Magnuson's assets which have been identified. The security interests included a mortgage on DiVall's residence and surrounding farm land which was subsequently sold to a third party. B. Promissory Notes. Pursuant to the PMA, DiVall, Magnuson, and entities ---------------- owned by them, granted the Partnership a security interest in certain promissory notes and mortgages due from other DiVall related entities (the "Private Partnerships"). Recovery of amounts due under these notes is substantially complete, but the amount of such recoveries has been significantly discounted because many of the Private Partnerships are currently involved in bankruptcy proceedings. See Item 3, Legal Proceedings, for additional information regarding the bankruptcy proceedings of the Private Partnerships. C. Land Contracts. The Partnerships were assigned two land contracts -------------- from the Partnership's former general partners. These contracts were not originally identified nor assigned in connection with the PMA, and settlements have been received on these contracts. 4 D. Litigation. The Partnerships have initiated lawsuits against the ---------- Partnership's former auditors, former securities counsel, former general partners and a former affiliate. Settlements were received in these lawsuits during 1996. Refer to Item 3, Legal Proceedings, and Note 12 to the financial statements included in Item 8 below for additional information concerning the settlement of these lawsuits. E. PMA Savings. Pursuant to the terms of the PMA, The Provo Group, Inc. ----------- is to account to the former general partners for all of the following which are avoided or reduced by implementation of the PMA: (I) Fees payable to the general partner or entities controlled by the general partner, (ii) brokerage commissions, and (iii) residuals. Under the PMA, all such savings shall be credited against the amount owed the Partnership by the former general partners. Total amounts recovered at December 31, 1996, amounted to $5,161,000, of which approximately $667,000 was allocated to the Partnership. Currently, there are few potential sources of recovery remaining. The total amounts due the Partnerships from the former general partners and their affiliates as of December 31, 1996, as a result of the misappropriation of assets, approximates $14,000,000, net of recoveries, which includes the amount of the misappropriation discovered to date, related costs, and 9% interest accrued since January 1, 1993. ITEM 2. PROPERTIES The Partnership's properties are leased under long-term leases, generally with terms of approximately 20 years. All leases are triple net which require the tenant to pay all property operating costs including maintenance, repairs, utilities, property taxes, and insurance. A majority of the leases contain percentage rent provisions which require the tenant to pay a specified percentage (3% to 8%) of gross sales above a threshold amount. At December 31, 1996, the Partnership owned the following restaurant Properties:
Lease Acquisi- Property Name & Purchase Rental Per Expiration Renewal tion Date Address Lessee Price (1) Annum Date Options - - --------- ------- ------ --------- ---------- ----------- ------- 03/27/87 Denny's DenAmerica, Inc. $ 849,299 $ 66,000 03-31-2013 (3) 827 Park Ave. Beaver Dam, WI 06/30/87 BW-3 DenAmerica, Inc.(5) 985,050 66,000 01-15-2013 (3) 502 N Blake Rd Hopkins, MN 10/08/87 Fazoli's Fazoli's Restaurants, 605,076(2) 45,504 05-29-2005 (3) 3600 Merle Hay Rd Inc. Des Moines, IA 07/08/87 Taco Cabana TP Acquisition Corp. 1,308,153 132,000 06-30-2007 (4) 4355 Camp Wisdom Dallas, TX
5
Lease Acquisi- Property Name & Purchase Rental Per Expiration Renewal tion Date Address Lessee Price (1) Annum Date Options - - --------- ------- ------ --------- ---------- ----------- ------- 01/08/87 Taco Cabana TP Acquisition Corp. 1,474,569 132,000 06-30-2007 (4) 1505 N Collins St. Arlington, TX 09/28/87 Taco Cabana TP Acquisition Corp. 1,257,596 132,000 06-30-2007 (4) 12475 NW Hwy & Shiloh Rd Dallas, TX 10/27/87 Chi-Chi's Mexican Chi Chi's, Inc. 1,042,730 136,260 10-31-2007 None 1030 Clairemont Ave. Eau Claire, WI 12/01/87 Popeye's Bysom Enterprises, 610,893 81,420 10-31-2007 None Famous Chicken Ltd. 7430 S Stoney Island Ave Chicago, IL 12/01/87 Popeye's Bysom Enterprises, 579,295 77,280 10-31-2007 None Famous Chicken Ltd. 300 E 35th St. Chicago, IL 12/01/87 Popeye's Bysom Enterprises, 610,893 81,420 10-31-2007 None Famous Chicken Ltd. 346 E 95th St. Chicago, IL 12/01/87 Popeye's Bysom Enterprises, 484,501 64,620 09-30-2007 None Famous Chicken Ltd. 111 W 75th St. Chicago, IL 12/01/87 Popeye's Bysom Enterprises, 473,968 63,180 09-30-2007 None Famous Chicken Ltd. 818 E 47th St. Chicago, IL 12/01/87 Popeye's Bysom Enterprises, 631,958 84,180 10-31-2007 None Famous Chicken Ltd. 8732 S Stoney Island Ave Chicago, IL 12/01/87 Popeye's Bysom Enterprises, 437,105 58,260 09-30-2007 None Famous Chicken Ltd. 5431 S Halsted Chicago, IL 12/23/87 Rio Bravo Manzana Grand, Inc. 984,801 100,000 10-31-2006 (3) 3000 32nd Ave, S Grand Forks, ND 12/24/87 Denny's DenAmerica, Inc. 1,174,670 136,500 01-24-2010 (3) 10614 N 43rd Ave (2) Glendale, AZ
6
Lease Acquisi- Property Name & Purchase Rental Per Expiration Renewal tion Date Address Lessee Price (1) Annum Date Options - - --------- ------- ------ --------- ---------- ----------- ------- 12/24/87 Denny's DenAmerica, Inc. 1,164,707 136,500 01-24-2010 (3) 87th and Grand Ave (2) Peoria, AZ 03/18/88 Denny's DenAmerica, Inc. 1,091,710 139,980 11-06-2010 (3) 7605 E McDowell (2) Scottsdale, AZ 03/18/88 Denny's DenAmerica, Inc. 1,067,254 139,980 11-25-2010 (3) 1231 W Baseline (2) Mesa, AZ 03/24/88 Hardee's Hardee's Food 1,026,931 72,000 03-31-2008 (3) 838 E Johnson St Systems, Inc. Fond du Lac, WI 03/25/88 Taco Cabana TP Acquisition Corp. 1,369,243 132,000 06-30-2007 (4) 1827 Greenville Ave Dallas, TX 04/15/88 BJ's Market BJ's, Inc. 905,807 60,000 03-31-2000 (4) 8736 S Stoney Island Ave Chicago, IL
Footnotes: (1) Purchase price includes all costs incurred to acquire the property. (2) Purchase price includes the cost of equipment. (3) Two five-year renewal options available. (4) One five-year renewal option available. (5) This tenant has subleased the property to Stone Canyon, Inc., the operator of BW-3. The BW-3 restaurant (formerly Denny's) in Hopkins, Minnesota, was vacated by the tenant in September 1994. The property's lease, however, does not expire until 2013, and the tenant continued to make all payments required by the lease. During March 1995, the tenant executed a lease with a sub-tenant, Stone Creek, Inc. for the property. During the first quarter of 1997, the tenant, DenAmerica, notified the Partnership that it wants to be released from the lease on this property as well as the Denny's in Beaver Dam, Wisconsin. Management is currently working with DenAmerica to resolve the issue. On January 26, 1995, the Partnership evicted the tenant and took possession of the Porterhouse restaurant in Chicago, Illinois. The tenant of this property had been delinquent throughout 1994. However, bankruptcy issues with the tenant impacted the Partnership with respect to the appropriate or allowable actions in dealing with the tenant's eviction. During January 1997, a new lease was entered into for the property with the tenant of BJ's Market. The tenant of the Partnership's Hardee's restaurant has experienced sales difficulties over the past three years. Management entered into a one-year lease modification in an effort to avoid having the tenant vacate the property, which reduced 1996 rents by approximately $40,000. Additionally, delinquent rent totaling 7 approximately $19,000 was capitalized into a five (5) year note accruing interest at 10% per annum. The Partnership recorded an allowance for uncollectible rent for the amount capitalized at December 31, 1995. During the Fourth Quarter of 1996, management terminated the lease with the tenant and entered into a new lease with Hardee's Food Systems, Inc. In connection with this transaction, the capitalized rent was received. The new lease resulted in annual rents which are $57,000 lower than the previous tenant's contract rent and $18,000 lower than the 1996 adjusted rent. In addition to the 22 restaurant properties, the Partnership also owns a vacant parcel of land in Colorado Springs, Colorado. This land was acquired in 1987 for an original acquisition cost of $356,549, from Rocky Mountain Investment Corporation ("RMIC"), an affiliate of the former general partners. The Partnership had intended to build a Rocky Rococo restaurant on the land and lease it back to RMIC, but RMIC, as the result of subsequent financial difficulties, did not meet conditions for a lease. In connection with the Partnership's purchase, RMIC executed an agreement whereby it promised to pay the Partnership an amount equal to a 14.5% per annum return on the purchase price of the property, from the date of purchase. RMIC's obligations under the agreement were personally guaranteed by Gary DiVall, a former general partner. As of December 31, 1996, rent obligations and carrying costs due under this agreement, amounted to approximately $270,000 and are not reflected in the Partnership's financial statements as they are deemed uncollectible. The Partnership wrote down the cost of the land to its estimated net realizable value at December 31, 1993 of $250,000 and further reduced the carrying value to $200,000 during 1996. Management is currently attempting to sell the undeveloped parcel. ITEM 3. LEGAL PROCEEDINGS On March 16, 1993, the Partnership, along with DiVall 2 and DiVall 3 initiated a lawsuit against Ernst & Young LLP ("E&Y"), a certified public accounting firm, in the Circuit Court of Dane County, Wisconsin, in connection with the audits of the Partnerships performed by E & Y for the years 1989, 1990 and 1991. The Partnerships requested the payment of damages in the amount of $9,000,000, plus interest, attorneys fees and costs, and whatever additional relief the court deemed just and proper. The Partnerships hired legal counsel under a contingent fee arrangement to prosecute all of the Partnerships' claims. E & Y filed an Answer denying that it was negligent. E & Y also filed third-party claims alleging fraud and negligence on the part of the Partnerships' former securities law firm, Quarles & Brady. The Partnerships also filed claims against Magnuson, DiVall, DiVall Real Estate Investment Corporation, David Shea, and Quarles & Brady. The trial of the case was scheduled to take place in Iowa County, Wisconsin, beginning on March 20, 1996. Shortly before trial, the Partnerships reached a resolution of their claims against Quarles & Brady. A resolution of the claims against Ernst & Young was reached after opening statements. As a result of these settlements, net proceeds to the Partnership, after the payment of contingent legal fees and related costs, totaled approximately $300,000. As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned by them, granted the Partnership a security interest in certain promissory notes and mortgages from other DiVall related entities (the "Private Partnerships"). In the aggregate, the face amount of these notes were equal to a minimum of $8,264,932. In addition, DiVall, Magnuson, and related entities owned by them, granted the Partnership a security interest in their general partner interests in the Private Partnerships. The foregoing security interests 9 were to secure the repayment of the funds which were diverted by DiVall and Magnuson from the Partnership. The Partnership shares such security interests with DiVall 2 and DiVall 3. These promissory notes and mortgages are not recorded on the balance sheets of the Partnerships, but are recorded as recoveries on a cash basis upon settlement. On July 23, 1993, nineteen (19) of the Private Partnerships sought the protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven (7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies were involuntary. Several of the Private Partnerships seeking bankruptcy owe promissory notes to DiVall, Magnuson, or entities owned by them, in which the Partnership has a security interest. These cases were subsequently transferred to the Western District Bankruptcy Court located in Madison, Wisconsin. The Partnership's experience in those bankruptcy cases that have concluded, either through the approval of Plans of Reorganization, dismissal of the bankruptcies, settlements or a combination of the foregoing, is that (i) the value of the obligations of the Private Partnerships assigned to the Partnerships have been at a significant discount to their face amounts, and (ii) the General Partner interests in such Private Partnerships often have little economic value. The Partnership's recoveries in these bankruptcies have been on a steeply discounted basis. Plans of reorganization have been filed in the bankruptcies, and settlement agreements in all of the Private Partnerships have been reached. Settlements in the bankruptcies have resulted in cash payments to the Partnerships of a total of $720,000 and notes secured by subordinated mortgages in the aggregate amount of $625,000. The Partnerships subsequently sold the secured notes for a total of $175,000. The Partnerships have been named as defendants in certain foreclosure actions brought in state courts in Wisconsin. In each of these actions, the plaintiff seeks to foreclose on real property owned by one of the Private Partnerships. The Partnerships were named as subordinate lienholders on the properties. It is believed that none of these cases constitute a claim against the individual Public Partnerships. However, if the foreclosures are successful, the Private Partnerships' interest in the underlying real estate may be extinguished, rendering individual obligations to the Partnerships uncollectible. Such a foreclosure has occurred in one instance and is pending in at least one other situation. On March 24, 1994, the Partnership filed a complaint in the United States District Court for the Western District of Missouri against Boatmen's First National Bank of Kansas City ("Boatmen's") seeking a declaratory judgment that Boatmen's has no right or interest in a promissory note executed in the name of the Partnership by the former general partners (the "Note") secured by mortgages on five Partnership properties, and further seeking an injunction against foreclosure proceedings instituted against a Partnership property located in Dallas, Texas, under a first deed of trust and security agreement given to secure the Note (the "Foreclosure"). As further described in Note 6 to the Financial Statements included in Part II, Item 8 of this report, the former general partners borrowed $600,000 during or before 1991 from Metro North State Bank (the note is now held by Boatmen's). The proceeds of the Note were not received by the Partnership. As of December 31, 1996, the Partnership had not paid debt service on the Note. The Partnership received a notice of default on the Note in October 1993, and the Foreclosure Action was filed in February 1994. As of December 31, 1996, interest in the amount of $226,000 had been accrued, but was unpaid on the Note. The interest accrual has been recorded at the face rate of the note. If the Partnership loses the dispute, additional interest amounting to approximately $246,000 representing the default interest, may be due. Boatmen's has agreed to stay its foreclosure proceedings. Boatmen's answered the complaint and filed a motion for summary judgment to which the Partnership responded. Boatmen's motion for summary judgment was granted by the District Court. The Partnership appealed the summary judgment to the United States Court of Appeals for the Eighth Circuit 9 which overturned the ruling of the District Court. The case has been remanded back to the District Court for the completion of discovery and trial. The trial of the case is scheduled to begin on June 23, 1997. Pursuant to the Restoration Trust Account procedures described in Note 11 to the Financial Statements, included in Part II, Item 8 of this report, all of the Partnerships are sharing the expenses of this litigation, and any recoveries resulting effectively from the partial or full cancellation of the alleged indebtedness will be allocated among the three Partnerships on the same basis as the restoration costs are currently being allocated via appropriate payments by the Partnership to its affiliated Partnerships. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Although some interests have been traded, there is no active public market for limited partnership interests and it is not anticipated that an active public market for limited partnership interests will develop. (b) As of December 31, 1996, there were 1,787 record holders of limited partnership interests in the Partnership. (c) The Partnership Agreement, as amended, provides for distributable net cash receipts of the Partnership to be distributed on a quarterly 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 Amended Partnership Agreement. During 1996 and 1995, $1,835,000 and $1,790,000, respectively, were distributed in the aggregate to the Limited Partners. The General Partner received aggregate distributions of $6,045 in 1996 and $3,624 in 1995. 10 ITEM 6. SELECTED FINANCIAL DATA DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP (a Wisconsin limited partnership) December 31, 1996, 1995, 1994, 1993 and 1992 (not covered by Independent Auditors' Report)
------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------------------------------------------------------------------------------------ Total Revenue $ 2,534,391 $ 2,047,636 $ 2,767,500 $ 2,689,405 $ 2,554,921 ------------------------------------------------------------------------------------------ Net Income 1,511,229 1,065,084 1,059,888 872,828 457,119 ------------------------------------------------------------------------------------------ Net Income per Limited Partner Interest 59.84 42.18 41.97 34.64 16.46 ------------------------------------------------------------------------------------------ Total Assets 17,050,623 17,593,806 18,295,553 20,482,154 20,963,059 ------------------------------------------------------------------------------------------ Total Partners' Capital 15,512,827 15,842,643 16,571,183 17,055,050 17,926,985 ------------------------------------------------------------------------------------------ Cash Distributions per Limited Partnership Interest 73.40 71.60 61.60 69.90 67.17 ------------------------------------------------------------------------------------------
(a) The above selected financial data should be read in conjunction with the financial statements and the related notes appearing elsewhere in this annual report. 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 investment properties, including equipment held by the Partnership at December 31, 1996, were originally purchased at a price, including acquisition costs, of approximately $20,136,000. The Partnership is currently marketing for sale or lease the vacant land in Colorado Springs, Colorado. During January 1997, the Partnership executed a lease for the Porterhouse restaurant in Chicago, Illinois with the tenant of BJ's Market. During June 1996, the tenant of one of the Partnership's Chi-Chi's restaurants vacated the property and paid a lease termination fee of $164,000, representing one year's rent, real estate taxes and security deposit. During the Fourth Quarter of 1996, a new lease was executed for the property with the tenant of Rio Bravo. 11 The net investment in direct financing leases, which includes the Partnership's specialty leasehold improvement leases, amounted to $204,000 at December 31, 1996, compared to $256,000 at December 31, 1995. The decrease of $52,000 was a result of principal payments received during the year. OTHER ASSETS - - ------------ Cash and cash equivalents, including cash restricted for real estate taxes held by the Partnership, were $1,038,000 at December 31, 1996, compared to $844,000 at December 31, 1995. The Partnership designated cash of $350,000 to fund the Fourth Quarter 1996 distributions to Limited Partners paid in February 1997, $560,000 for the payment of year-end accounts payable and accrued expenses, and the remainder represents reserves deemed necessary to allow the Partnership to operate normally. The increase in cash is primarily due to recoveries received during the Fourth Quarter of 1996 as well as the collection of capitalized rent from Terratron, the former tenant of the Partnership's Hardee's restaurant. Cash generated through the operations of the Partnership's investment properties, sales of investment properties, and any recoveries of misappropriated funds by the former general partners will provide the sources for future fund liquidity and Limited Partner distributions. The Partnership established an Indemnification Trust (the "Trust") during the Fourth Quarter of 1993 and deposited $100,000 in the Trust during 1993, $90,000 during 1994, and $60,000 during 1995. 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 10 to the financial statements included in Item 8 of this report. DUE FROM AFFILIATED PARTNERSHIPS, DUE FROM FORMER AFFILIATES, ALLOWANCE FOR - - --------------------------------------------------------------------------- UNCOLLECTIBLE AMOUNTS DUE FROM FORMER AFFILIATES, DUE TO AFFILIATED PARTNERSHIPS - - -------------------------------------------------------------------------------- Due from former affiliates represented misappropriated assets due from the former general partners and their affiliates in the amount of $555,000 at December 31, 1996. The receivable decreased from the prior year due to $569,000 of recoveries received during the year from the former general partners and their affiliates, including a settlement received from the Partnership's former accountants and attorneys. The Partnership maintains a record of costs incurred in identifying or recovering the misappropriated assets. These amounts are expensed when incurred, and then, recorded on the balance sheet as a restoration cost receivable with a corresponding allowance for such receivable deemed uncollectible. These costs are considered due from the former general partners and their affiliates. Interest has been accrued on the misappropriated funds since January 1, 1993, at a rate of 9% per annum and has been included in the restoration cost receivable. The receivable increased from approximately $908,000 at December, 31, 1995, to $1,253,000 at December 31, 1996, and includes $616,000 of cumulative accrued interest. In 1993, the current General Partner estimated an aggregate recovery of $3 million for the Partnerships. At that time, an allowance was established against amounts due from former general partners and their affiliates reflecting the estimated $3 million receivable. This net receivable was allocated among the Partnerships based on each Partnership's pro rata share of the total misappropriation. Through December 31, 1996, $5,160,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, the Partnership has recognized $275,000 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. 12 The restoration costs are allocated among the Partnerships based on each Partnership's respective share of the misappropriation as discussed in Note 11 to the financial statements included in Item 8 of this report. The allocation is adjusted periodically to reflect any changes in the entire misappropriation. The Partnership's percentage of the allocation was reduced in 1993. Consequently, the Partnership had been paying more than its pro rata share of the costs. Accordingly, the Partnership recorded a receivable at December 31, 1993, in the amount of $295,000, due from DiVall 3 with a corresponding reduction reflected in professional expenses relating to the Investigation, former general partner removal expenses, and interim fund manager fees and expenses. Recoveries allocated to DiVall 3 were used to repay amounts owed to the Partnership. During 1996, the amount due from DiVall 3 was fully repaid. LIABILITIES - - ----------- Mortgage notes payable decreased from $1,146,000 at December 31, 1995, to $1,015,000 at December 31, 1996, due to monthly principal payments made on the notes as well as additional principal reductions made from excess cash flows. Accounts payable and accrued expenses at December 31, 1996, amounted to approximately $48,000. The majority of this balance represented year-end accruals of legal and auditing fees. The decrease is primarily due to the payment of out-of-pocket costs related to the lawsuit against the Partnership's former accountants and attorneys, which had been accrued in 1996. Payable to tenant of $96,000 at December 31, 1995, represented a portion of the monthly payments received from a tenant which must be refunded to them, due to their not achieving specified sales goals. This amount was used to offset rental payments due from the tenant during 1996. Real estate taxes payable amounted to $72,000 at December 31, 1996, compared to $88,000 at December 31, 1995. The decrease is primarily a result of a reduction in the real estate tax assessment on the former Porterhouse property which was vacant during 1996. Due to the current General Partner amounted to $26,000 at December 31, 1996, representing a true-up of the general partner's management fee, a leasing commission for the lease of a Hardee's restaurant, and the Fourth Quarter distribution, all of which were paid in 1997. 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 and the Amendment to 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 13 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 1996 of $1,835,000 and $6,045, respectively, have also been made in accordance with the amended Partnership Agreement. The Fourth Quarter 1996 distribution of $350,000 was paid to the Limited Partners on February 15, 1997. 13 RESULTS OF OPERATIONS: - - ---------------------- Management believes that the financial results of 1996 are not indicative of "normal" Partnership operations. There are many events which occurred since the discovery of the misappropriations in 1992 which have had a negative impact on financial results. Some of these events will continue to have a negative impact on the Partnership in the future. However, the settlement of litigation against the Partnerships' former accountants and attorneys should result in operating results going forward which more closely represent "normal" operations than what has been experienced during the past four years. The Partnership reported net income for the year ended December 31, 1996, in the amount of $1,511,000 compared to $1,065,000 for the year ended December 31, 1995, and net income for the year ended December 31, 1994, of $1,060,000. Results for all three years were different than would be expected from "normal" operations, primarily because of costs associated with the misappropriation of assets by the former general partners and their affiliates, modifications to leases, non-cash write-offs, and real estate taxes. Results for 1996 were also impacted by a lease termination fee received and the reversal of a portion of the former general partner receivable write-off. The costs associated with the misappropriation increased significantly during 1995 and 1996 as the lawsuit against the former general partner accountants and attorneys got closer to trial and as a result of contingent fee payments made in connection with the settlement. REVENUES - - -------- Total revenues were $2,534,000, $2,048,000 and $2,768,000 for the years ended December 31, 1996, 1995 and 1994. Rental revenue in 1996 and 1995 reflects a decline of approximately $400,000 compared with 1994 as a result of three (3) Wendy's properties sold in 1994. Revenue for 1994 includes a gain of $309,000 on the sales of three (3) Wendys restaurants in Florida. Revenue for 1996 includes lease modification fees in the amount of $164,000 from Chi-Chi's and a recovery of $275,000 for a portion of the former general partner receivable which had previously been written off. Based on leases currently in place on the remaining owned properties, total revenues should approximate $2,000,000 annually. 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, 1996, 1995, and 1994, cash expenses amounted to approximately 24%, 29% and 30% of total revenues, respectively. Total expenses, including non-cash items, amounted to approximately 40%, 48%, and 62% of total revenues for the years ended December 31, 1996, 1995, and 1994, respectively. Items negatively impacting expenses during the last three years include expenses incurred primarily in relation to the misappropriation of assets by the former general partners and their affiliates, interest expense, non-cash write offs, property write-downs, and real estate taxes. For the years ended December 31, 1996, 1995, and 1994, expenses incurred in relation to the misappropriated assets amounted to $169,000, $133,000, and $73,000, respectively. Future expenses incurred in relation to the misappropriation should have a minimal impact on the Partnership. Interest expense for 1996 amounted to $107,000 compared to $111,000 in 1995 and $188,000 in 1994. Three notes repaid during November 1994 had a favorable affect on interest expense during 1996 and 1995. 14 Additional expenses impacting operating results are write-offs of uncollectible rent, and write-downs of property to their estimated net realizable values. All of these items, including depreciation, are non-cash items and do not affect current operating cash flow of the Partnership or distributions to the Limited Partners. Write-offs for uncollectible rents and receivables amounted to $9,000, $24,000, and $73,000, during 1996, 1995, and 1994 respectively. The write-offs are the result of defaults as well as modifications to several property leases since inception of the Partnership. The Partnership wrote down the carrying value of the former Porterhouse restaurant in Chicago, Illinois, during 1994 by $331,000 to a new carrying value of $380,000 which management believes is more reflective of its net realizable value. During 1996, the Colorado land was written down to its estimated net realizable value of $200,000, resulting in a $50,000 charge to income. Real estate tax expenses for 1995 and 1994 were inordinately high as former management allowed these taxes to become delinquent for several years while interest and penalties accumulated, along with new liabilities incurred on vacant properties and defaulted tenants. The Partnership incurred real estate taxes on behalf of tenants in the amounts of $30,000, $64,000, and $130,000 for the years ended December 31, 1996, 1995, and 1994, 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. Although the majority of the Partnership's leases have percentage rent clauses, revenues from percentage rents represented only 5% of fixed rental income for 1996. 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. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP ---------------------------------------------- (a Wisconsin limited partnership) --------------------------------- INDEX TO FINANCIAL STATEMENTS AND SCHEDULES -------------------------------------------
Page ---- Report of Independent Public Accountants .......... 17 Balance Sheets, December 31, 1996 and 1995 .......... 18 - 19 Statements of Income for the Years Ended December 31, 1996, 1995, and 1994 .......... 20 Statements of Partners' Capital for the Years Ended December 31, 1996, 1995, and 1994 .......... 21 Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and 1994 .......... 22 - 23 Notes to Financial Statements .......... 24 - 34 Schedule III--Real Estate and Accumulated Depreciation .......... 39
16 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Divall Insured Income Fund Limited Partnership: We have audited the accompanying balance sheets of Divall Insured Income Fund Limited Partnership (the Partnership) as of December 31, 1996 and 1995, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Divall Insured Income Fund Limited Partnership as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This scheduled 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 Chicago, Illinois March 13, 1997 DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP BALANCE SHEETS DECEMBER 31, 1996 AND 1995 -------------------------- ASSETS
December 31, December 31, 1996 1995 ------------- ------------- INVESTMENT PROPERTIES AND EQUIPMENT:(NOTE 3 AND 6) Land $ 7,308,073 $ 7,358,073 Buildings and improvements 12,070,525 12,070,525 Equipment 246,896 246,896 Accumulated depreciation (4,430,396) (4,078,904) ----------- ----------- Net investment properties and equipment 15,195,098 15,596,590 ----------- ----------- NET INVESTMENT IN DIRECT FINANCING LEASES:(NOTE 8) 203,934 256,359 ----------- ----------- OTHER ASSETS: Cash and cash equivalents 1,019,582 815,512 Cash restricted for real estate taxes 18,048 28,218 Cash held in Indemnification Trust(NOTE 10) 284,615 270,488 Rents and other receivables (net of allowance of $1,320 in 1996 and $182,039 in 1995) 117,880 74,939 Deferred rent receivable 136,925 123,900 Due from affiliated partnerships(NOTE 11) 0 105,833 Due from current General Partner 0 1,754 Prepaid insurance 14,268 6,795 Deferred charges (net of accumulated amortization of $60,086 in 1996 and $55,343 in 1995) 60,273 19,844 ----------- ----------- Total other assets 1,651,591 1,447,283 ----------- ----------- DUE FROM FORMER AFFILIATES:(NOTE 2) Due from former general partner affiliates 555,052 1,123,625 Allowance for uncollectible amounts due from former affiliates (555,052) (830,051) Restoration cost receivable 1,252,957 907,774 Allowance for uncollectible restoration receivable (1,252,957) (907,774) ----------- ----------- Due from former affiliates, net 0 293,574 ----------- ----------- Total assets $17,050,623 $17,593,806 =========== ===========
The accompanying notes are an integral part of these statements. 18 DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP BALANCE SHEETS DECEMBER 31, 1996 AND 1995 -------------------------- LIABILITIES AND PARTNERS' CAPITAL
December 31, December 31, 1996 1995 ------------ ----------- LIABILITIES: Mortgage notes payable (NOTE 6) $ 1,015,429 $ 1,145,564 Accounts payable and accrued expenses 47,816 118,039 Payable to tenant 0 96,000 Due to current General Partner 26,275 959 Accrued interest payable 226,027 173,527 Security deposits 104,930 125,410 Real estate taxes payable 72,200 87,877 Unearned rental income 45,119 3,787 ------------ ----------- Total liabilities 1,537,796 1,751,163 ------------ ----------- CONTINGENT LIABILITIES: (NOTES 9 AND 13) PARTNERS' CAPITAL:(NOTES 1, 4 AND 13) Current General Partner - Cumulative net income 45,293 30,181 Cumulative cash distributions (18,187) (12,142) ------------ ----------- 27,106 18,039 ------------ ----------- Limited Partners (25,000 interests outstanding) - Capital contributions, net of offering costs 22,270,578 22,270,578 Cumulative net income 11,641,978 10,145,861 Cumulative cash distributions (19,216,741) (17,381,741) Reallocation of former general partners' capital 789,906 789,906 ------------ ------------ 15,485,721 15,824,604 ------------ ------------ Total partners' capital 15,512,827 15,842,643 ------------ ------------ Total liabilities and partners' capital $17,050,623 $17,593,806 ============ ============
The accompanying notes are an integral part of these statements. 19 DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 -----------------------------------------------------
1996 1995 1994 ----------- ----------- ------------ REVENUES: Rental income $1,994,422 $1,938,501 $2,367,473 Lease termination fee(NOTE 5) 164,419 0 0 Interest income on direct financing leases 23,295 28,268 32,769 Interest income 46,268 39,879 18,410 Recovery of amounts previously written off (NOTE 12) 274,999 0 0 Other Income 30,988 40,988 40,339 Net gain on sale of land and buildings 0 0 308,509 ---------- ---------- ------------ 2,534,391 2,047,636 2,767,500 ---------- ---------- ------------ EXPENSES: Partnership management fees (NOTE 7) 99,309 87,375 95,141 Disposition fees (NOTE 7) 0 0 30,000 Disposition fees - Restoration 0 0 30,000 Restoration fees (NOTE 7) 11,249 833 2,856 Insurance 17,725 19,066 38,957 General and administrative 61,558 55,670 86,436 Interest 107,024 111,054 187,553 Real estate taxes, including interest and penalties 29,690 64,456 129,597 Expenses incurred due to default by lessee 11,453 9,782 1,433 Professional services 85,333 92,630 144,934 Professional services related to Investigation 169,243 133,035 73,098 Advisory Board fees and expenses 15,459 14,459 19,470 Depreciation 351,492 366,302 427,075 Amortization 4,743 3,590 37,008 Provision for uncollectible rents and other receivables 8,884 24,300 73,340 Write-down of property to net realizable value 50,000 0 330,714 ---------- ---------- ------------ 1,023,162 982,552 1,707,612 ---------- ---------- ------------ NET INCOME $1,511,229 $1,065,084 $1,059,888 ========== ========== ============ NET INCOME - CURRENT GENERAL PARTNER $ 15,112 $ 10,651 $ 10,599 NET INCOME - LIMITED PARTNERS 1,496,117 1,054,433 1,049,289 ---------- ---------- ------------ $1,511,229 $1,065,084 $1,059,888 ========== ========== ============ NET INCOME PER LIMITED PARTNERSHIP INTEREST, based on 25,000 interests outstanding $59.84 $42.18 $41.97 ========== ========== ============
The accompanying notes are an integral part of these statements. 20 DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 -----------------------------------------------------
Current General Partner Limited Partners ----------------------------------------------------------------------------------- Capital Cumulative Cumulative Contributions Cumulative Cumulative Net Cash Net of Net Cash Income Distributions Total Offering Costs Income Distribution ---------- ------------- ----- -------------- ----------- ------------ BALANCE AT DECEMBER 31, 1993 $ 8,931 $ (4,763) $ 4,168 $22,270,578 $ 8,042,139 $(14,051,741) Cash Distributions ($61.60 per limited partnership interest) (3,755) (3,755) (1,540,000) Net Income 10,599 10,599 1,049,289 ------- ------- ----------- BALANCE AT DECEMBER 31, 1994 $19,530 $ (8,518) $11,012 $22,270,578 $ 9,091,428 $(15,591,741) Cash Distributions ($71.60 per limited partnership interest) (3,624) (3,624) Net Income 10,651 10,651 1,054,433 (1,790,000) ------- ------- ----------- BALANCE AT DECEMBER 31, 1995 $30,181 $(12,142) $18,039 $22,270,578 $10,145,861 $(17,381,741) Cash Distributions ($73.40 per limited partnership interest) (6,045) (6,045) (1,835,000) Net Income 15,112 15,112 1,496,117 ------- ------- ----------- ------------ BALANCE AT DECEMBER 31, 1996 $45,293 $(18,187) $27,106 $22,270,578 $11,641,978 $(19,216,741) ======= ======== ======= =========== =========== ============ Reallocation Total ------------ ----- BALANCE AT DECEMBER 31, 1993 $789,906 $17,050,882 Cash Distributions ($61.60 per limited partnership interest) (1,540,000) Net Income 1,049,289 --------- ----------- BALANCE AT DECEMBER 31, 1994 $789,906 $16,560,171 Cash Distributions ($71.60 per limited partnership interest) (1,790,000) Net Income 1,054,433 --------- ----------- BALANCE AT DECEMBER 31, 1995 $789,906 $15,824,604 Cash Distributions ($73.40 per limited partnership interest) (1,835,000) Net Income 1,496,117 --------- ----------- BALANCE AT DECEMBER 31, 1996 $789,906 $15,485,721 ========= ===========
The accompanying notes are an integral part of these statements. 21 DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 -----------------------------------------------------
1996 1995 1994 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,511,229 $ 1,065,084 $ 1,059,888 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 356,235 369,892 464,083 Recovery of amounts previously written off (274,999) 0 0 Provision for uncollectible rents and other receivables 8,884 24,300 73,340 Write-down of property to net realizable value 50,000 0 330,714 Gain on lease termination (26,248) 0 0 (Gain) from sale of investment properties 0 0 (308,509) Interest applied to Indemnification Trust Account (14,127) (18,690) (1,798) Increase/(Decrease) in unearned rental income 41,332 3,787 (99,505) (Increase)/Decrease in rents and other receivables (51,792) (30,936) (4,933) Increase in deferred rent receivable (13,025) (15,876) (108,024) (Deposits)/Withdrawals for payment of real estate taxes 10,170 (21,308) 20,813 (Increase)/Decrease in prepaid expenses (7,473) 1,083 29,644 (Increase)/Decrease in due from current General Partner 1,754 (1,754) 0 Increase/(Decrease) in accounts payable and accrued expenses (99,023) 74,252 (17,605) Increase/(Decrease) in payable to tenant (96,000) (48,000) 96,000 Increase/(Decrease) in due to current General Partner 8,944 (714) (1,239) Increase/(Decrease) in accrued interest payable 52,500 52,501 (28,192) (Decrease) in security deposits (9,665) 0 (9,691) Increase/(Decrease) in real estate taxes payable (15,677) (45,069) 54,426 ----------- ----------- ------------ Net cash provided from operating activities 1,433,019 1,408,552 1,549,412 ----------- ----------- ------------ CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Deposit to Indemnification Trust cash account 0 (60,000) (90,000) Increase in deferred charges 0 (16,153) 0 Proceeds from sale of investment properties 15,400 0 2,000,000 Payments from affiliated partnerships 105,833 43,602 145,618 Recoveries from former affiliates 568,573 20,823 71,407 Principal payments received on direct financing leases 52,425 47,452 42,950 Principal receipts on notes receivable 0 5,270 26,374 ----------- ----------- ------------ Net cash provided from investing activities 742,231 40,994 2,196,349 ----------- ----------- ------------ CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Principal payments on mortgage notes (130,135) (9,964) (1,460,761) Payments to affiliated partnerships 0 0 (236,166) Cash distributions to Limited Partners (1,835,000) (1,790,000) (1,540,000) Cash distributions to current General Partner (6,045) (3,624) (3,755) ----------- ----------- ------------ Net cash (used in) financing activities (1,971,180) (1,803,588) (3,240,682) ----------- ----------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 204,070 (354,042) 505,079 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 815,512 1,169,554 664,475 ----------- ----------- ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,019,582 $ 815,512 $ 1,169,554 =========== =========== ============ SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 54,524 $ 58,553 $ 215,745 =========== =========== ============
The accompanying notes are an integral part of these statements. 22 Supplemental Information to the Statements of Cash Flows -------------------------------------------------------- The following significant noncash transactions occurred during the three years affecting the Partnership's financial statements: 1. During 1996, the Partnership was deeded land with a value of $15,400 in satisfaction of a note receivable from a tenant. 2. During 1996, security deposits totaling $10,815 were applied to a note receivable from a tenant. 3. During 1996, the Partnership incurred leasing commissions totaling $45,172 which were unpaid at year-end. The accompanying notes are an integral part of these statements. 23 DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995, AND 1994 1. ORGANIZATION AND BASIS OF ACCOUNTING: ------------------------------------- DiVall Insured Income Fund Limited Partnership (the "Partnership") was formed on November 29, 1985, pursuant to the Uniform Limited Partnership Act of the State of Wisconsin. The initial capital which was contributed during 1986, consisted of $110, representing aggregate capital contributions of $100 by the former general partners and $10 by the Initial Limited Partner. The Partnership initially offered 15,000 additional limited partnership interests ("Interests") at $1,000 per Interest. Subsequently, the former general partners exercised their option to increase the offering to 25,000 Interests. The offering closed on March 16, 1988 at which point 25,000 Interests had been sold, resulting in the receipt by the Partnership of offering proceeds of $22,270,578, net of offering costs and after volume discounts. The Partnership is currently engaged in the business of owning and operating its investment portfolio (the "Properties") of commercial real estate and recovering the assets misappropriated by the former general partners and/or their affiliates. The Properties are leased on a triple net basis to, and operated by, franchisors or franchisees of national, regional and local retail chains under long-term leases. The lessees consist of fast-food, family style, and casual/theme restaurants. At December 31, 1996, the Partnership owned 22 properties and a parcel of undeveloped land. Rental revenue from investment properties is recognized on the straight-line basis over the life of the respective lease. Revenue from direct financing leases is recognized at level rates of return over the term of the lease. Depreciation of the properties is provided on a straight-line basis over 31.5 years which is the estimated useful lives of the buildings and improvements. Equipment is depreciated on a straight-line basis over the estimated useful lives of 5 years. Deferred charges primarily 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 in 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 these estimates. 24 During 1996, the Partnership adopted Statement of Financial Accounting Standards No.121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, which requires that all long-lived assets be reviewed for impairment in value whenever changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The adoption of SFAS 121 had no impact on the Partnership's financial statements in 1996. The Partnership will be dissolved on November 30, 2010, or earlier upon the prior occurrence of any of the following events: (a) the disposition of all properties of the Partnership; (b) the written determination by the General Partner that the Partnership's assets may constitute "plan assets" for the purposes of ERISA; (c) the agreement of Limited Partners owning a majority of the outstanding interests to dissolve the Partnership; or (d) the bankruptcy or termination of the existing General Partner, unless an additional General Partner is previously elected by the Limited Partners. No provision for Federal income taxes has been made, as any liability for such taxes would be that of the individual partners rather than the Partnership. At December 31, 1996, the tax basis of the Partnership's assets exceeded the amounts reported in the accompanying financial statements by approximately $3,900,000. The following represents a reconciliation of net income as stated on the Partnership's statements of income to net income for tax reporting purposes:
1996 1995 1994 ----------- ------------ ------------ Net income, per statements of income $1,511,229 $1,065,084 $1,059,888 Book to tax depreciation difference (48,172) (34,873) (3,314) Book over tax gain from asset disposition 0 0 (63,823) Straight line rent adjustment (13,025) (15,876) (207,529) Affiliate receivable basis adjustment 0 0 (3,849) Bad debt reserve/expense 216,514 44,914 (73,875) Book valuation adjustment of real property (55,230) 0 94,711 Interest expense 39,303 52,500 (26,192) Sales commission (30,000) 0 30,000 Prepaid rent 41,332 3,787 (48,000) Other, net 131 220 19,325 ---------- ---------- ---------- Net income(loss) for tax reporting purposes $1,662,082 $1,115,756 $ 777,342 ========== ========== ==========
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 four years ended December 31, 1992, two of the former general partners of the Partnership, Gary J. DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred substantial cash assets of the Partnership and two affiliated publicly registered partnerships, DiVall Insured Income Properties 2 Limited Partnership ("DiVall 2") and DiVall Income Properties 3 Limited Partnership ("DiVall 3") (collectively the "Partnerships") to various other entities previously sponsored by or otherwise affiliated with DiVall and Magnuson. The unauthorized transfers were in violation of the respective Partnership Agreements and resulted in part, from material weaknesses in the internal control system of the Partnerships. The aggregate amount of the misappropriation, related costs, and 9% interest accrued since January 1, 1993, is approximately $14,000,000, of which approximately $1,808,000 has been attributed to the Partnership and is reflected as due from former affiliates on the balance sheet at December 31, 1996. The 9% interest accrued as of December 31, 1996, amounted to approximately $616,000 and is not reflected in the accompanying income statement. 25 As of December 31, 1995, $2,031,000 was reflected as due from former affiliates based on the estimated overall misappropriation and related costs of $15,700,000. Subsequent to discovery, and in response to the regulatory inquiries, a third- party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed (effective February 8, 1993) to assume the 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 December 31, 1996, $5,160,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, the Partnership has recognized $275,000 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 December 31, 1996, the Partnership owned 22 fully constructed fast-food restaurants and a parcel of undeveloped land. The restaurants are comprised of the following: one (1) Chi Chi's Mexican restaurant, four (4) Taco Cabana restaurants, five (5) Denny's restaurants, seven (7) Popeye's Famous Fried Chicken restaurants, one (1) Hardee's restaurant, one (1) BW-3 restaurant, one (1) Fazoli's restaurant, one (1) Rio Bravo restaurant, and one (1) BJ's Market restaurant. The 22 properties are located in seven (7) states. The undeveloped land is located in Colorado Springs, Colorado, and was originally purchased in contemplation of constructing and leasing a Rocky Rococo's restaurant. The land was purchased from a former affiliate of the Partnership in 1987. As part of the purchase, the former affiliate agreed to reimburse the Partnership for any costs to carry the property while the land remained unimproved and nonearning. The construction never commenced and the former affiliate has not fully reimbursed the Partnership for its costs. The unreimbursed costs include guaranteed monthly rent, real estate taxes, insurance, and additional items required to maintain the property. At December 31, 1996 and 1995, these costs totaled approximately $270,000 and $220,000, respectively, and are not reflected in the Partnership's financial statements. Management is currently attempting to sell the undeveloped parcel. The land was originally purchased for $356,549 and has an adjusted carrying value at December 31, 1996, of $200,000 which approximates the estimated net realizable value. A $50,000 write-down was taken on the property during 1996. From time to time, the Partnership experiences interruptions in rental receipts due to tenant delinquencies and vacancies. During June 1996, the tenant of the Partnerships' Chi-Chi's restaurant in Grand Forks, North Dakota paid a lease termination fee equal to one year's rent, real estate taxes, and security deposit, and vacated the premises. During the Fourth Quarter of 1996, this property was leased to the tenant of Rio Bravo. During January 1995, the Partnership evicted the tenant and took possession of the Porterhouse restaurant in Chicago, Illinois. The tenant in this property had been delinquent and in bankruptcy throughout 1994. A new lease on this property was executed in January 1997 with the tenant of BJ's Market. The tenant of the Partnerships' Hardee's restaurant has experienced significant declines in sales over the past two years. Management had modified the rent for this tenant for 1996 in an effort to avoid having the tenant vacate the property resulting in a decrease in base rent for 1996 of approximately $40,000. Additionally, delinquent rent totaling approximately $19,000 was capitalized into a five (5)-year note accruing interest at 10% per annum. The Partnership recorded an allowance for uncollectible rent for the amount capitalized at 26 December 31, 1995. During the Fourth Quarter of 1996, management terminated the lease with the tenant and entered into a new lease with Hardee's Food Systems, Inc. In connection with this transaction, the capitalized rent was paid. The new lease resulted in annual rents which are $57,000 lower than the previous tenant's contract and $18,000 lower than the 1996 adjusted rent. The total cost of the investment properties and equipment includes the original purchase price plus acquisition fees and other capitalized costs paid to a former affiliate of the general partners. The current General Partner receives a fee for managing the Partnership equal to 4% of the gross receipts, with a maximum reimbursement for office rent and related office overhead of $25,000 between the three affiliated Partnerships. Effective March 1, 1996, the minimum management fee and the maximum reimbursement for office rent and overhead increased by 2.8%, 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 $14,938 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 General Partners. The Partnership Agreement also provided for quarterly cash distributions from Net Cash Receipts, as defined, within 60 days after the last day of the first full calendar quarter following the date of release of the subscription funds from escrow, and each calendar quarter thereafter, in which such funds were available for distribution with respect to such quarter. Such distributions were to be made 90% to Limited Partners and 10% to the former general partners, provided, however, that quarterly distributions would be cumulative and were not to be made to the former general partners unless and until each Limited Partner had received a distribution from Net Cash Receipts, as defined, in an amount equal to 10.5% annum, cumulative simple return on his or her Adjusted Original Capital, as defined, from the Return Calculation Date, as defined. Net proceeds, as originally defined, were to be distributed as follows: (a) to the Limited Partners, an amount equal to 100% of their Adjusted Original Capital, (b) then, to the Limited Partners, an amount necessary to provide each Limited Partner a 14% per annum, cumulative simple return thereon from the Return Calculation Date, including in the calculation of such return, all prior distributions of Net Cash Receipts and any prior distributions of Net Proceeds of this clause, and (c) then, to Limited Partners, 88%, and to the General Partners, 12%, of remaining Net Proceeds available for distribution. 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 the current General Partner provided that quarterly distributions will be cumulative and will not be made to the current General Partner unless and until each Limited Partner has received a distribution from Net Cash Receipts in an amount equal to 10.5% 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 27 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 resulting from allocated income. Subsequent to the filing of the General Partner's income tax returns, a true-up with actual distributions is made. The provisions regarding distribution of Net Proceeds, as defined, were also amended to provide that Net Proceeds are to be distributed as follows: (a) to the Limited Partners, an amount equal to 100% of their Adjusted Original Capital; (b) then, to the Limited Partners, an amount necessary to provide each Limited Partner a 14% per annum, cumulative simple return therein from the Return Calculation Date, including in the calculation of such return all prior distributions of Net Cash Receipts and any prior distributions of Net Proceeds under this clause except to the extent needed by the General Partner to pay its federal and state income tax on the income allocated to it attributable to such year; and (c) then, to Limited Partners, 99%, and to the General Partner, 1%, of remaining Net Proceeds available for distribution. Additionally, 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 9.) 5. LEASES: ------- Lease terms for the majority of the investment properties are 20 years from their inception. The leases generally provide for minimum rents and additional rents based upon a percentage 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 its 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, 1997 $ 2,052,084 1998 2,087,534 1999 2,090,284 2000 2,145,737 2001 2,147,632 Thereafter 15,172,642 ----------- $25,695,913 ===========
Percentage rents included in rental income in 1996, 1995, and 1994 were $477,523, $421,932, and $479,232, respectively. The fluctuations in percentage rental income are a result of fluctuations in sales of the tenants 28 in the Partnership's properties. Seven of these properties are leased to a single Popeye's franchisee in the Chicago, Illinois area. Base rent for 1996 from this tenant amounted to 28% of total base rent for the Partnership. During June 1996, the Partnership received a cash settlement of $164,000 in exchange for the early termination of a lease on a former Chi-Chi's restaurant in Grand Forks, North Dakota. 6. MORTGAGE NOTES PAYABLE: ----------------------- At December 31, 1996, mortgage notes payable consist of the following:
Outstanding Principal Balance Interest Rate Maturity Date ------------------------------------------------------------- a. $168,480 prime + 2.5% September 1997 b. 246,949 9.5% September 1997 c. 600,000 prime + 2.0% August 1992 ---------- $1,015,429 ==========
a. In September 1992, the Partnership entered into a promissory note agreement with Riverside Bank, Minnesota, in the amount of $310,000. The note bears interest at the referenced prime rate, as defined, plus 2.5%. Principal and interest are paid in monthly installments of $3,285 until September 1997, when all outstanding amounts are due. The note is secured by a mortgage on a BW-3 restaurant located in Hopkins, Minnesota, with a net book value at December 31, 1996 of $620,908. The proceeds of the note were used to convert a Rocky Rococo restaurant to a Denny's restaurant. b. In September 1992, the Partnership entered into a loan agreement with Bank One, Beaver Dam, Wisconsin, in the amount of $270,000. The loan bears interest at 9.5% and is payable in monthly installments of $2,520 through September 1997, with a lump-sum amount of $239,747 due at that time. The loan is secured by a mortgage on a Denny's restaurant located in Beaver Dam, Wisconsin, with a net book value at December 31, 1996, of $477,825. The proceeds of the loan were used to convert a Rocky Rococo restaurant to a Denny's restaurant. c. During the Investigation, discussed in Note 2, it was discovered that the former general partners borrowed $600,000 during or before 1991 from Metro North State Bank in Missouri (this loan is now held by Boatmen's First National Bank of Kansas City) secured by mortgages on five (5) Partnership properties. The mortgage note bears interest at the referenced prime rate, as defined, plus 2% and was due August 15, 1992. The proceeds of the note were not received by the Partnership and, accordingly, a corresponding amount due from former affiliates was recorded in 1992. As of December 31, 1996, the Partnership has not paid debt service on this note. Management met with representatives of the bank and disputed the obligation. The Partnership received a notice of default on this note in October 1993 and an action of foreclosure was filed in February 1994 on one of the Partnership's properties located in Dallas, Texas, with a net book value of $1,194,101 at December 31, 1996. See Note 12 for further discussion of litigation concerning this note. Interest in the amount of $226,000 was accrued, but unpaid, as of December 31, 1996. The interest accrual has been recorded at the face rate of the note. If the Partnership loses the dispute, additional interest amounting to approximately $246,000, representing the default interest, may be due. 29 Scheduled maturities of all notes payable, with the exception of the $600,000 note payable mentioned above, are as follows:
Year ending December 31, 1997 $415,429 -------- $415,429 ========
7. TRANSACTIONS WITH CURRENT GENERAL PARTNER: ----------------------- Amounts incurred to the current General Partner for the years ended December 31, 1996, 1995, and 1994, are as follows.
Incurred Incurred Incurred for the year ended for the year ended for the year ended December 31, December 31, December 31, 1996 1995 1994 Current General Partner -------- -------- -------- - - ----------------------- Management fees $ 99,309 $ 87,375 $ 95,141 Disposition fees 0 0 30,000 Restoration fees 11,249 833 2,856 Overhead allowance 7,555 7,351 7,156 Leasing Commissions 45,172 0 0 Reimbursement for out-of-pocket expenses 11,616 13,264 7,880 Cash distribution 6,045 3,624 3,755 -------- -------- -------- $180,946 $112,447 $146,788 ======== ======== ========
8. NET INVESTMENT IN DIRECT FINANCING LEASES: ----------------------------------------- The net investment in direct financing leases which includes the Partnership's specialty leasehold improvement leases, is comprised of the following as of December 31, 1996: Minimum lease payments receivable $238,677 Less - Unearned income (34,743) -------- Net investment in direct financing leases $203,934 ========
Scheduled future minimum lease payments are as follows:
Year ending December 31, 1997 $75,720 1998 75,720 1999 75,720 2000 11,517 ------- $238,677 ========
30 9. CONTINGENT LIABILITIES: ---------------------- According to the Partnership Agreement, as amended, the current General Partner may receive a disposition fee not to exceed 3% of the contract price of the sale of investment properties. Fifty percent (50%) of all such disposition fees earned by the current General Partner is to be escrowed until the aggregate amount of recovery for 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. Fifty percent (50%) of the total amount paid to the recovery was refunded to the current General Partner during 1996 after exceeding the recovery level of $4,500,000. The remaining amount allocated to the Partnership may be owed to the current General Partner if the $6,000,000 recovery level is met. As of December 31, 1996, the Partnership may owe the current General Partner $5,189, which is currently reflected as a recovery, if the $6,000,000 recovery level is achieved. 10. PMA INDEMNIFICATION TRUST: -------------------------- The Permanent Manager Agreement ("PMA") provides that the Permanent Manager will be indemnified from any claims or expenses arising out of or relating to the Permanent Manager serving in such capacity or as substitute general partner, so long as such claims do not arise from fraudulent or criminal misconduct by the Permanent Manager. The PMA provides that the Partnership fund this indemnification obligation by establishing a reserve of up to $250,000 of Partnership assets which would not be subject to the claims of the Partnership's creditors. An Indemnification Trust ("Trust") serving such purposes has been established at United Missouri Bank, N.A. The Trust has been fully funded with Partnership assets as of December 31, 1996. Funds are invested in U.S. Treasury securities. In addition, interest totaling $34,615 has been credited to the Trust as of December 31, 1996. The rights of the Permanent Manager to the Trust shall be terminated upon the earliest to occur of the following events: (i) the written release by the Permanent Manager of any and all interest in the Trust; (ii) the expiration of the longest statute of limitations relating to a potential claim which might be brought against the Permanent Manager and which is subject to indemnification; or (iii) a determination by a court of competent jurisdiction that the Permanent Manager shall have no liability to any person with respect to a claim which is subject to indemnification under the PMA. At such time as the indemnity provisions expire or the full indemnity is paid, any funds remaining in the Trust will revert back to the general funds of the Partnership. 11. RESTORATION TRUST ACCOUNT; EXPENSE ALLOCATIONS; ----------------------------------------------- AND RELATED INTER-PARTNERSHIP RECEIVABLES: ----------------------------------------- Restoration costs represent expenses incurred by the Partnership associated with the misappropriated assets by the former general partners and their affiliates. These costs are allocated among the Partnerships based on each partnership's respective share of the entire misappropriation, as currently quantified. The amount of misappropriation for each partnership is adjusted annually to reflect new discoveries and more accurate quantification of amounts based on the continuing Investigation. Such adjustments may result in periodic adjustments to prior allocations of recovery costs to reflect updated information. Consequently, previous payments for restoration expenses may not be consistent with modified allocations. Based on modified allocations adjusted as of December 31, 1993, the Partnership was owed $295,053 from DiVall 3 for amounts paid on its behalf. During 1994, the Partnership made an additional adjustment increasing the amount due from DiVall 3 by $5,346. As of December 31, 1996, the Partnership has been repaid all amounts owed from DiVall 3. 31 When recoveries are realized by the Partnerships, the amounts received are distributed to each respective partnership on the same basis as the restoration costs are currently being allocated. Additionally, any available recovery funds have been utilized first to satisfy amounts due other partnerships for amounts advanced under prior allocation methods. As of December 31, 1996, the Partnerships recovered a total of $5,120,365 from the former general partners and their affiliates, accountant and attorneys. Of this amount, the Partnership received its pro-rata share in the amount of $661,860. Additionally, $40,346, representing 50% of all previously escrowed disposition fees earned by the General Partner have been paid to the recovery. Of that amount, $5,189 was allocated to the Partnership and is contingently payable to the General Partner upon achievement of certain recovery levels as described in Note 9. The PMA contemplated that the Permanent Manager could establish a separate and distinct Restoration Trust Fund which would hold all recoveries until a final independent adjudication by a court of competent jurisdiction or vote of the Limited Partners ratified the allocation of proceeds to each respective partnership. Management has concluded that a fair and reasonable interim accounting for recovery proceeds can be accomplished at the partnership level in a manner similar to restoration costs which are paid directly by the Partnerships. Management reserves the right to cause the final allocation of such costs and recoveries to be determined either by a vote of the Limited Partners or a court of competent jurisdiction. Potential sources of recoveries include third party litigation, promissory notes, land contracts, and personal assets of the former general partners and their affiliates. 12. LITIGATION: ----------- On March 16, 1993, the Partnership, along with DiVall 2 and DiVall 3, initiated a lawsuit against Ernst & Young LLP ("E & Y"), a certified public accounting firm, in the Circuit Court of Dane County, Wisconsin in connection with the audits of the Partnerships performed by E & Y for the years 1989, 1990 and 1991. The Partnerships requested the payment of damages in the amount of $9,000,000, plus interest, attorneys fees and costs, and whatever additional relief the court deemed just and proper. The Partnerships hired legal counsel under a contingent fee arrangement to prosecute all of the Partnerships' claims. E & Y filed an Answer denying that it was negligent. E & Y also filed third-party claims alleging fraud and negligence on the part of the Partnerships' former law firm, Quarles & Brady. The Partnerships also filed claims against Magnuson, DiVall, DiVall Real Estate Investment Corporation, David Shea, and Quarles & Brady. The trial of the case was scheduled to take place in Iowa County, Wisconsin, beginning on March 20, 1996. Shortly before trial, the Partnerships reached a resolution of their claims against Quarles & Brady. A resolution of the claims against Ernst & Young was reached after opening statements. As a result of these settlements, net proceeds to the Partnership, after the payment of contingent legal fees and related costs, totaled approximately, $300,000. As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned by them, granted the Partnership a security interest in certain promissory notes and mortgages from other DiVall related entities (the "Private Partnerships"). In the aggregate, the face amount of these notes were equal to a minimum of $8,264,932. In addition, DiVall, Magnuson, and related entities owned by them, granted the Partnership a security interest in their general partner interests in the Private Partnerships. The foregoing security interests were to secure the repayment of the funds which were diverted by DiVall and Magnuson from the Partnership. The Partnership shares such security interests with DiVall 2 and DiVall 3. These promissory notes and mortgages are not recorded on the balance sheets of the Partnerships, but are recorded as recoveries on a cash basis upon settlement. On July 23, 1993, nineteen (19) of the Private Partnerships sought the protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven (7) of these bankruptcies were voluntary and twelve (12) of these 32 bankruptcies were voluntary and twelve (12) of these bankruptcies were involuntary. Several of the Private Partnerships seeking bankruptcy owe promissory notes to DiVall, Magnuson, or entities owned by them, in which the Partnership has a security interest. These cases were subsequently transferred to the Western District Bankruptcy Court located in Madison, Wisconsin. The Partnership's experience in those bankruptcy cases that have concluded, either through the approval of Plans of Reorganization, dismissal of the bankruptcies, settlements or a combination of the foregoing, is that (i) the value of the obligations of the Private Partnerships assigned to the Partnership has been at a significant discount to their face amounts, and (ii) the General Partner interests in such Private Partnerships often have little economic value. The Partnership's recoveries in these bankruptcies have been on a steeply discounted basis. Plans of reorganization have been filed in the bankruptcies, and settlement agreements in all of the Private Partnerships have been reached. Settlements in the bankruptcies resulted in cash payments to the Partnerships of a total of $720,000 and notes secured by subordinated mortgages in the aggregate amount of $625,000. The Partnerships subsequently sold the secured notes for a total of $175,000. On March 24, 1994, the Partnership filed a complaint in the United States District Court for the Western District of Missouri against Boatmen's First National Bank of Kansas City ("Boatmen's) seeking a declaratory judgment that Boatmen's has no right or interest in a promissory note executed in the name of the Partnership by the former general partners (the "Note") secured by mortgages on five Partnership properties, and further seeking an injunction against foreclosure proceedings instituted against a Partnership property located in Dallas, Texas, under a first deed of trust and security agreement given to secure the Note (the "Foreclosure"). As further described in Note 6, the former general partners borrowed $600,000 during or before 1991 from Metro North State Bank (the note is now held by Boatmen's). The proceeds of the Note were not received by the Partnership. As of December 31, 1996, the Partnership had not paid debt service on the Note. The Partnership received a notice of default on the Note in October 1993 and the Foreclosure Action was filed in February 1994. As of December 31, 1996, interest in the amount of $226,000 was accrued, but unpaid, on the Note. Boatmen's has agreed to stay its foreclosure proceedings. Boatmen's answered the complaint and filed a motion for summary judgment to which the Partnership responded. Boatmen's motion for summary judgment was granted by the District Court. The Partnership appealed the summary judgment to the United States Court of Appeals for the Eighth Circuit which overturned the ruling of the District Court. The case has been remanded back to the District Court for the completion of discovery and trial. Trial of the case is scheduled to begin on June 23, 1997. Pursuant to the Restoration Trust Account procedures described in Note 11, all of the Partnerships are sharing the expenses of this litigation and any recoveries resulting effectively from the partial or full cancellation of the alleged indebtedness will be allocated among the three Partnerships on the same basis as the restoration costs are currently being allocated via appropriate payments by the Partnership to its affiliated Partnerships. 13. FORMER GENERAL PARTNERS' CAPITAL ACCOUNTS: ------------------------------------------ The capital account balance of the former general partners as of May 26, 1993, the date of their removal as general partners pursuant to the results of a solicitation of written consents from the Limited Partners, was $789,906. Because any amount payable to the former general partners with respect to their capital accounts is subject to (a) the satisfaction of certain preferential return requirements for the Limited Partners (See Note 4); and (b) the assignment of such amounts to the Partnerships with respect to the amounts due to the Partnerships from the former general partners, payment to the former general partners with respect to their capital account balances as of May 26, 1993, is highly remote. In the unlikely event that the Partnership would owe the former general partners any residual amount, such amounts would be due the restoration fund for the benefit of all the Partnerships, and therefore represent a contingent liability. At December 31, 1993, the former general partners' capital account balance in the amount of $789,906 was reallocated to the Limited Partners. 33 14. SUBSEQUENT EVENTS: ------------------ On February 15, 1997, the Partnership made distributions to the Limited Partners of $350,000 amounting to $14.00 per limited partnership interest. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The General Partner of the Partnership is The Provo Group, Inc., an Illinois corporation ("TPG") 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. 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 and DiVall 3. 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 46 - 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 and Chief Executive Officer 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 the 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 Administration and then as President of Rubloff Development Corporation. Mr. Provo has previously served on the Board of Directors of the National Realty Committee, a legislative "watchdog" organization for the commercial real estate industry headquartered in Washington, DC. KRISTIN J. ATKINSON, AGE 34 - VICE PRESIDENT - FINANCE AND ADMINISTRATION. Ms. Atkinson joined The Provo Group, Inc. in September 1994, to provide management expertise in the areas of financial controls and management accounting services for four limited partnerships managed by TPG. Prior to joining TPG, Ms. Atkinson was Manager of Financial Reporting for Farm & Home Savings Association, a $4 billion savings and loan 34 association, for nine years where she was responsible for supervision of the preparation of internal and external financial documentation, including regulatory filings for the savings association and its parent company. Ms. Atkinson graduated Magna Cum Laude with a B.S. in Accounting from Missouri Southern State College in Joplin, Missouri and worked as an accountant for James P. Arthur and Company for one year before joining Farm & Home Savings Association. BRENDA BLOESCH, AGE 35 - DIRECTOR OF INVESTOR RELATIONS. Ms. Bloesch joined The Provo Group, Inc. in March 1993, to oversee and provide various levels of client support for more than 8,000 broker dealers, registered representatives, custodians and investors. Primarily responsible for all communications regarding four limited partnerships managed by TPG, Ms. Bloesch is also involved with database management and partnership compliance issues. Prior to joining TPG, Ms. Bloesch was Manager of Investment Services at DiVall Real Estate Investment Corporation ("DREIC") for four years and Publisher Services Manager at NewsNet, Inc. for five years. Her role at DREIC allowed Ms. Bloesch to obtain extensive knowledge of limited partnerships and gain familiarity with the broker and investor communities. Ms. Bloesch is a graduate of Lock Haven University in Lock Haven, Pennsylvania, where she received her B.A. in Journalism and Media Studies. 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: D.TODD WITTHOEFT - VICE PRESIDENT OF NELSON WITTHOEFT FINANCIAL. Mr. Witthoeft has been an investment broker for over ten (10) years and was one of the original founders of Calton and Associates. Mr. Witthoeft serves as part of the firm's due diligence committee which reviews the structure of public and private limited partnerships prior to offering to clients. Mr. Witthoeft has over 400 clients and has taught personal financial planning courses. Mr. Witthoeft holds the following securities licenses: Options Principal, Licensed Life Insurance Agent - series 4; General Securities Representative - series 7; General Securities Principal -series 24; and State Agent - series 63. GERHARD ZOLLER - ADVISOR. Mr. Zoller is currently involved in special training projects at J.H. Findorff & Son, Inc., a leading construction firm in Wisconsin. Mr. Zoller has worked for this company for 27 years and served as both President and then Chairman of the Board in more recent years. Prior business background and experience include positions as Project Manager, Estimator and Chief Executive. Mr. Zoller has also been actively managing personal investments for over 25 years including several real estate limited partnerships. Mr. Zoller is a Limited Partner in DiVall 1. RICHARD W. OTTE - EDITORIAL WRITER. Mr. Otte is in his sixth year as an Editorial Board Member and editorial writer for The Volusion, a DeLand, Florida, subsidiary of the News-Journal Corporation in Daytona Beach, Florida. Mr. Otte retired in 1988 after 34 years with the Dispatch Printing Co., serving his last eight years as Managing Editor of the Columbus Dispatch and as a member of its Operating Committee. He previously was the executive sports editor of the newspaper in Ohio's capital city. Mr. Otte's 49 years in professional journalism also include news reporting, editing and sports assignments with the Daytona Journal Herald and Springfield News-Sun. Mr. Otte is a Limited Partner in DiVall 2. ALBERT H. ESCHEN - OPTOMETRIST. Dr. Eschen has been an optometrist for 46 years and is also employed by New York City's Department of Health. Prior business experience include partnerships or personal investments in Crown Nursing Home; Coronet Nursing Home; and 35 Sands Hotel & Casino. Dr. Eschen is currently a member of the American Optometry Association and is a member of the Board of Directors Illinois College Alumni Association. Dr. Eschen was past-President of the Brooklyn Optometric Society and was the first optometrist to be appointed to New York City's Department of Health. Dr. Eschen is a Limited Partner in DiVall 3. ITEM 11. EXECUTIVE COMPENSATION The Partnership has not paid any "executive compensation" to the corporate General Partner or to the directors and officers of the General Partner. The General Partner's participation in the income of the Partnership is set forth in the Agreement of Limited Partnership and amendments thereto, which are 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 7 to the financial statements in Item 8 hereof for further discussion of payments by the Partnership to the General Partner and the former general partners. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) As of December 31, 1996, no one person or group is known by the Partnership to own beneficially more than 5% of the outstanding interests of the Partnership. (b) As of December 31, 1996, neither the General Partner nor any of its affiliates owned any Limited Partner Interests in the Partnership. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The compensation to be paid to TPG is governed by the Partnership Agreement, as amended by vote of the Limited Partners to reflect the terms of the PMA. TPG's compensation includes a base fee equal to 4% of the Partnership's gross collected receipts, subject to a minimum of $84,000 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 $7,000 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 three 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 ($84,000 minimum base fee and $7,000 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, 1996, the minimum management fee and the maximum reimbursement for office rent and overhead increased by 2.7% 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 36 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 $7,000. 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 PMA 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 and segregate Partnership assets in an amount, not to exceed $250,000, solely for the purpose of funding such indemnification obligations (the "Indemnification Trust"). Once a determination has been made that no such claims can or will be made against TPG, the balance of the Indemnification Trust will become unrestricted cash of the Partnership. At December 31, 1996 the Partnership had fully funded the Indemnification Trust. The following fees and reimbursements from the Partnership were incurred to management in 1996: The Provo Group, Inc. --------------------- Management Fees $ 99,309 Restoration Fees 11,249 Leasing Commissions 45,172 Office Overhead Allowance 7,555 Direct Cost Reimbursements 11,616 -------- 1996 Total $174,901 ========
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following financial statements of DiVall Insured Income Fund Limited Partnership are included in Part II, Item 8: Report of Independent Public Accountants Balance Sheets, December 31, 1996 and 1995 Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 Statements of Partners' Capital for the Years Ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 37 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 November 25, 1985, amended as of September 15, 1986, filed as Exhibit 3A to Amendment No. 1 to the Partnership's Registration Statement on Form S-11 as filed on July 22, 1986, incorporated herein by reference. 3.2 Amendments to Amended Agreement of Limited Partnership dated as of June 16, 1987, included as part of Supplement dated September 25, 1987, filed under Rule 424(b)(3), incorporated herein by reference. 3.3 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. 3.4 Amendment to Amended Agreement of Limited Partnership dated as of May 26, 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, files 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. 28.0 Correspondence to the Limited Partners dated February 15, 1997 regarding the Fourth Quarter 1996 distributions. (b) Report on Form 8-K: The Registrant filed no reports on Form 8-K during the fourth quarter of fiscal year 1996. 38 DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996
Gross amount at which Initial cost to Partnership carried at end of year (A) --------------------------- -------------------------- Cost Building capitalized Building and subsequent and Property Encumbrances Land Improvements to acquisitions Land Improvements Total - - ----------------------------------------------------------------------------------------------------------------------------------- Colorado Springs, Colorado $ - $ 356,549 $ - $ - $ 200,000 $ - $ 200,000 Beaver Dam, Wisconsin 258,589 126,854 452,445 80,000 126,854 532,445 659,299 Hopkins, Minnesota 296,939 195,755 479,295 120,000 195,755 599,295 795,050 Dallas, Texas - 797,952 510,201 - 797,952 510,201 1,308,153 Arlington, Texas - 1,002,707 471,862 - 1,002,707 471,862 1,474,569 Dallas, Texas - 729,406 528,190 - 729,406 528,190 1,257,596 Des Moines, Iowa - 197,667 367,809 - 197,667 367,809 565,476 Eau Claire, Wisconsin - 250,255 792,475 - 250,255 792,475 1,042,730 Chicago, Illinois - 151,670 427,625 - 151,670 427,625 579,295 Chicago, Illinois - 164,941 445,952 - 164,941 445,952 610,893 Chicago, Illinois - 176,948 455,010 - 176,948 455,010 631,958 Chicago, Illinois - 97,743 513,150 - 97,743 513,150 610,893 Chicago, Illinois - 133,764 340,204 - 133,764 340,204 473,968 Chicago, Illinois - 90,581 346,524 - 90,581 346,524 437,105 Chicago, Illinois - 95,847 388,654 - 95,847 388,654 484,501 Grand Forks, North Dakota - 246,200 738,601 - 246,200 738,601 984,801 Peoria, Arizona (1) 338,887 688,044 78,995 338,887 767,039 1,105,926 Glendale, Arizona (1) 400,503 626,428 78,995 400,503 705,423 1,105,926 Mesa, Arizona (1) 412,879 638,278 - 389,758 638,278 1,028,036 Scottsdale, Arizona (1) 339,151 712,006 - 339,151 712,006 1,051,157 Fond Du Lac, Wisconsin - 270,267 756,664 - 270,267 756,664 1,026,931 Chicago, Illinois (2) - 197,277 708,529 - 66,499 508,593 575,092 Dallas, Texas 600,000 844,718 524,525 - 844,718 524,525 1,369,243 -------------------------------------------------------------------------------------------------------- $1,155,528 $7,618,521 $11,912,471 $357,990 $7,308,073 $12,070,525 $19,378,598 ======================================================================================================== Life on which depreciation in latest statement of operations is Accumulated Date of Date computed Property depreciation construction acquired (years) - - ------------------------------------------------------------------------------------------------------- Colorado Springs, Colorado $ - - 1/31/87 31.5 Beaver Dam, Wisconsin 181,474 1986 3/27/87 31.5 Hopkins, Minnesota 174,142 1985 6/30/87 31.5 Dallas, Texas 188,028 1987 7/8/87 31.5 Arlington, Texas 173,899 1987 1/8/87 31.5 Dallas, Texas 188,570 1987 9/28/87 31.5 Des Moines, Iowa 120,892 1986 10/8/87 31.5 Eau Claire, Wisconsin 279,875 1986 10/27/87 31.5 Chicago, Illinois 149,376 1982 12/1/87 31.5 Chicago, Illinois 155,779 1986 12/1/87 31.5 Chicago, Illinois 158,943 1982 12/1/87 31.5 Chicago, Illinois 179,252 1993 12/1/87 31.5 Chicago, Illinois 118,839 1980 12/1/87 31.5 Chicago, Illinois 121,047 1985 12/1/87 31.5 Chicago, Illinois 135,764 1985 12/1/87 31.5 Grand Forks, North Dakota 255,163 1984 12/23/87 31.5 Peoria, Arizona 263,712 1984 12/24/87 31.5 Glendale, Arizona 242,425 1984 12/24/87 31.5 Mesa, Arizona 213,125 1985 3/18/88 31.5 Scottsdale, Arizona 237,743 1985 3/18/88 31.5 Fond Du Lac, Wisconsin 252,655 1981 3/24/88 31.5 Chicago, Illinois (2) 218,152 1987 4/15/88 31.5 Dallas, Texas 175,142 1987 3/25/88 31.5 ------------- $ 4,183,997 =============
(1) These properties also serve as collateral on the $600,000 Dallas, Texas encumbrance. (2) This property is currently vacant, and was written down to its estimated net realizable value of $480,000 at December 31, 1994. (A) Represents aggregate costs for federal income tax purposes. (B) Reconciliation of "Real Estate and Accumulated Depreciation":
Year ended Year ended Investments in Real Estate December 31, 1996 December 31, 1995 - - ------------------------------------------------------------------------------------------ Balance at beginning of year $19,428,598 $19,428,598 Property write-down 50,000 0 ------------------------------------------- Balance at end of year $19,378,598 $19,428,598 ===========================================
Year ended Year ended Accumulated Depreciation December 31, 1996 December 31, 1995 - - ------------------------------------------------------------------------------------------------------ Balance at beginning of year $3,833,774 $3,486,027 Additions charges to costs and expenses 350,223 347,747 --------------------------------------------------- Balance at end of year $4,183,997 $3,833,774 ===================================================
39 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 INSURED INCOME FUND LIMITED PARTNERSHIP By: The Provo Group, Inc., General Partner By: /s/ Bruce A. Provo -------------------------------------------------- Bruce A. Provo, President Date: March 28, 1997 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 28, 1997 By: /s/ Kristin J. Atkinson ---------------------------------------------------- Kristin J. Atkinson Vice President - Finance and Administration Date: March 28, 1997 40 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1996 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1,037,630 284,615 2,342,609 1,809,329 0 1,855,525 19,625,494 4,430,396 17,050,623 1,537,796 0 0 0 0 15,512,827 17,050,623 2,182,136 2,534,391 0 0 907,254 8,884 107,024 1,511,229 0 1,511,229 0 0 0 1,511,229 59.84 59.84
EX-99 3 DIVALL INSURED INCOME FUND, L.P. DIVALL INSURED INCOME FUND, L.P. QUARTERLY NEWS ================================================================================ - - -------------------------------------------------------------------------------- A PUBLICATION OF THE PROVO GROUP, INC. FOURTH QUARTER 1996 - - -------------------------------------------------------------------------------- PROVO REPORTS TO THE ADVISORY BOARD Kansas City, Missouri Bruce A. Provo was pleased to report to the DiVall Advisory Board at their quarterly meeting, held on January 29, 1997, "that after four years of challenges, the Partnership has been substantially returned to normal operations." Board members have received numerous solicitations to buy their units and the more offers they receive the more their confidence grows in the DiVall Public Partnerships. Mr. Provo expressed his hope "that other Limited Partners would recognize that solicitations are a form of flattery...they want something the investors already have. The vultures are probably reading our correspondence more closely than many Limited Partners." He also wondered "where were these guys four years ago before operations stabilized?" ______________________ OTHER NEWS INSIDE... . What's Expected for 1997?..................... PROJECTION HIGHLIGHTS, PG 4 . Will There Be Special Distributions?.......... PROJECTION HIGHLIGHTS, PG 4 . More Recoveries Received..................... RESTORATION HIGHLIGHTS, PG 4 . Investors B-E-W-A-R-E........................... QUESTIONS & ANSWERS, PG 5 . Hardee's Corporate Signs New Lease.............. PROPERTY HIGHLIGHTS, PG 3 . Vacant Chi-Chi's Re-Leased...................... PROPERTY HIGHLIGHTS, PG 4 . Where are the Former GPs?................................ HIGHLIGHTS, PG 2 . I Need My Schedule K-1!......................... QUESTIONS & ANSWERS, PG 5
PAGE 2 DIVALL 1 4 Q 96 _______________________________ HIGHLIGHTS . Management reports that OPERATING RESULTS for the Partnership should stabilize during 1997 and more closely represent "normal" activities, --------- since most of the recovery efforts are behind us. . Former general partner, GARY J. DIVALL, was sentenced to eight (8) years in prison along with seven (7) years of subsequent probation for his plea of "no contest" to criminal charges brought against him by the Wisconsin Attorney General's Office last year. Bruce Provo was the only witness testifying at the sentencing hearing. . The sentencing hearing date for the former general partner, PAUL E. MAGNUSON, has been re-scheduled for MARCH 3, 1997. . Last year he had pleaded "no-contest" to criminal charges brought against him by the Wisconsin Attorney General's Office. (NOTE: SEE ENCLOSED UPDATE FROM THE OFFICE OF CRIME VICTIM SERVICES.) _______________________________ DISTRIBUTION HIGHLIGHTS . 6.2% (approx.) annualized return from operations and other sources based on $22,600,000 ("net" remaining initial investment). . $14.00 per unit (approx.) for the FOURTH QUARTER 1996 from both cash flow from operations and "net" cash activity from financing and investing activities. . $350,000 "total" amount distributed for the FOURTH QUARTER 1996 as budgeted. . $828.00 to $725.00 range of distributions per unit from the first unit sold to the last unit sold before the offering closed (March 1988), respectively. Distributions are from both cash flow from operations and "net" cash activity from financing and investing activities. (NOTE: ORIGINAL UNITS WERE PURCHASED FOR $1,000/UNIT.) _______________________________ STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS . 19% increase in OPERATING REVENUES from projections. . 1% decrease in "NET" INCOME from projections. PAGE 3 DIVALL 1 4 Q 96 ___________________________ STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS (CONT'D) . $66,000 in recoveries were received by the Partnership during the fourth quarter as a result of settlements with the DiVall "Private" Partnerships and the sale of the mortgage on Gary DiVall's farm. . $27,000 of "catch-up" rental income was received in November 1996 from Terratron, Inc., former tenant of the HARDEE'S restaurant in Fond du Lac, Wisconsin. (NOTE: SEE "PROPERTY HIGHLIGHTS" BELOW FOR FURTHER DISCUSSION.) . Excess cash received during the quarter was used to reduce "high-interest" debt that the Partnership currently has with Riverside Bank in Minnesota. . $17,000 was accrued for real estate taxes at December 31, 1996 for the "vacant" PORTERHOUSE restaurant in Chicago, Illinois. It should be noted that the Partnership received a substantial reduction ($38,000 to $11,000) for this property's real estate taxes for 1996 which will be paid in 1997. . $5,600 was paid by the Partnership during the fourth quarter for INVESTIGATION AND RESTORATION expenses associated with the "Boatmen's" litigation. (This lawsuit's expenses and recoveries are shared with the Partnership's affiliated partnerships.) _____________________ PROPERTY HIGHLIGHTS VACANCIES --------- . PORTERHOUSE restaurant (Chicago, IL) was vacant at December 31, 1996. The ------ Partnership is currently working with a prospective tenant for the re-lease of this property with final lease negotiations in progress. (Re-lease expected to occur by the First Quarter of 1997.) RENTS RECEIVABLE ---------------- . BW-3 restaurant (Hopkins, MN), sublet by DenAmerica, was $6,800 delinquent in rent at December 31, 1996. DenAmerica has been working with the Partnership to cure this delinquency. ---- OTHER PROPERTY MATTERS ---------------------- . Hardee's Food Systems, Inc. signed a new lease with the Partnership in November 1996 for the HARDEE'S restaurant in Fond du Lac, WI. . (cont'd) The corporate Hardee's replaced the former tenant, Terratron, Inc. As a result of the final lease negotiations, this property's rental delinquency was cured. ----- PAGE 4 DIVALL 1 4 Q 96 _____________________ PROPERTY HIGHLIGHTS (CONT'D) OTHER PROPERTY MATTERS ---------------------- . Bysom Enterprises, Ltd., tenant of seven (7) POPEYE'S restaurants in Chicago, Illinois remains current with all store rents. They also continue to experience notable sales increases. (In prior years, this tenant had been consistently "delinquent" in rental payments to the Partnership.) . Mandaza, Inc., tenant of the RIO BRAVO restaurant (Grand Forks, ND) signed a lease with the Partnership in December replacing the vacant former CHI CHI'S restaurant. Rent commences April 1997. (The former Chi Chi's tenant previously paid a lease termination fee which included one-year's payment of rental income and property taxes.) . TP Acquisition Corporation, tenant of four (4) TACO CABANA restaurants in Texas, continues to experience sales increases with its restaurants and is current with all rental payments. ------- _____________________ RESTORATION HIGHLIGHTS . Recoveries received during the FOURTH QUARTER 1996 totalled $66,000 (approx.) for the Partnership. . "Total" recoveries received TO DATE for the Partnership amount to approximately $667,000. . The Partnership is gearing up for its trial against BOATMEN'S First ----- National Bank of Kansas City which has been scheduled for MARCH 3, 1997. _____________________ 1997 DISTRIBUTION "PROJECTION" HIGHLIGHTS . Management expects the Partnership's operations to stabilize during 1997 excluding special distributions from non-recurring activities such as property sales and "final" recoveries related to the misappropriation of the former general partners and their affiliates. (NOTE: Any special distributions made will be included in quarterly distribution checks.) . $15.00 per unit (approx.) from both cash flow from operations and "net" cash activity from financing and investing activities based on the budgeted $375,000 for each quarter during 1997. . 6.6% (approx.) annualized return on the "net" remaining initial investment which should approximate $22,600,000 during 1997. PAGE 5 DIVALL 1 4 Q 96 _______________________ RETURN OF CAPITAL The following table has been updated to present the breakdown of distributions since the Partnership's first quarterly distribution, for the period ended ----- December 31, 1986 through December 31, 1996.
================================================================================ DISTRIBUTION CAPITAL ------------- ------------ ANALYSIS BALANCE ------------- ------------ Original Capital Balance - $25,000,000 Cash Flow From Operations Since Inception $ 17,183,548 - Total Distributions Since Inception (19,566,740) - ------------ (Return) of Capital $ (2,383,192) (2,383,192) ============ ----------- "NET" REMAINING INITIAL INVESTMENT BY ORIGINAL PARTNERS - $22,616,808 =========== ================================================================================
(NOTE: For a more individualized discussion of return of capital contact Investor Relations.) _______________________ QUESTIONS & ANSWERS 1. WHAT ARE MY "IMMEDIATE" LIQUIDATION OPTIONS FOR INTERESTS IN THE PARTNERSHIP? . The only option for "immediate" liquidation of interests, at this time, is through the secondary market. According to current secondary market trading information provided to management, interests in the Partnership have sold during the last quarter between $400-$520 per unit. . (CONT'D) IT IS IMPORTANT TO NOTE THAT YOU MAY RECEIVE DIRECT "SOLICITATIONS" OF YOUR INTERESTS BY THIRD PARTIES. WE DO NOT CONTROL NOR SUPPORT THESE SOLICITATION EFFORTS. WE STRONGLY URGE YOU TO THOROUGHLY REVIEW ALL YOUR OPTIONS AND UNDERSTAND EACH SOLICITOR'S MOTIVATION. WE ENCOURAGE YOU TO CONTACT US IF YOU HAVE ANY QUESTIONS ABOUT YOUR INVESTMENT. 2. WHEN CAN I EXPECT TO RECEIVE MY SCHEDULE K-1 FOR 1996? . Our current schedule for mailing all 1996 Schedule K-1's for your --- Partnership and its affiliated partnerships is no later than FEBRUARY 28, 1997. PAGE 6 DIVALL 1 4 Q 96 ___________________________ QUESTIONS & ANSWERS (CONT'D) 3. WHEN WILL 1996 PER UNIT VALUES BE AVAILABLE FOR MY INVESTMENT IN THE PARTNERSHIP? 4. WHEN CAN I EXPECT MY NEXT DISTRIBUTION MAILING? . The Partnership's 1996 "year-end" valuation information is currently scheduled to be available by March 1997. We will include this information in our 1996 Annual Reports which will be mailed by early APRIL 1997. . Your next scheduled distribution correspondence for the First Quarter of 1997 will be mailed on MAY 15, 1997. * * * ================================================================================ For questions or additional information, please contact Investor Relations at 1-800-547-7686 or 1-608-244-7661. All written inquiries may be mailed or faxed to: THE PROVO GROUP, INC. Post Office Box 2137 1410 Northport Drive Madison, Wisconsin 53701-2137 Madison, Wisconsin 53704 (FAX 608-244-7663) ================================================================================ DIVALL INSURED INCOME FUND L.P. STATEMENTS OF INCOME AND CASH FLOW CHANGES FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 1996 - - -------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE --------------------------------- 4TH 4TH CASH QUARTER QUARTER BETTER OPERATING REVENUES 12/31/96 12/31/96 (WORSE) --------- --------- --------- Rental income $483,879 $487,091 $ 3,212 Direct financing interest 5,330 5,330 0 Interest income 11,831 10,696 (1,135) Recoveries of Amounts Previously Written Off 0 65,689 65,689 Other income 0 26,808 26,808 -------- -------- --------- TOTAL OPERATING REVENUES $501,040 $595,614 $ 94,574 -------- -------- --------- OPERATING EXPENSES Insurance $ 4,500 $ 4,398 $ 102 Management fees 22,812 30,797 (7,985) Restoration fees 0 2,628 (2,628) Overhead allowance 1,900 1,896 4 Advisory Board 4,250 3,739 511 Administrative 8,113 10,657 (2,544) Professional services 250 2,635 (2,385) Auditing 12,000 8,568 3,432 Legal 10,500 13,886 (3,386) Real Estate Taxes 2,800 16,663 (13,863) Write-off of uncollectible receivable 0 8,884 (8,884) Property write-downs 0 50,000 50,000) Defaulted tenants 0 4,921 (4,921) -------- -------- --------- TOTAL OPERATING EXPENSES $ 67,125 $159,672 ($92,547) -------- -------- --------- INTEREST EXPENSE $ 27,255 $ 25,522 $ 1,733 -------- -------- --------- INVESTIGATION AND RESTORATION EXPENSES $ 385 $ 5,609 ($5,224) -------- -------- --------- NON-OPERATING EXPENSES Depreciation $ 87,309 $ 87,927 ($618) Amortization 1,068 1,545 (477) -------- -------- --------- TOTAL NON-OPERATING EXPENSES $ 88,377 $ 89,472 ($1,095) -------- -------- --------- TOTAL EXPENSES $183,142 $280,275 $ 97,133) -------- -------- --------- NET INCOME $317,898 $315,339 ($2,559) OPERATING CASH RECONCILIATION: VARIANCE --------- Depreciation and amortization 88,377 89,472 1,095 Recovery of amounts previously written off 0 (65,689) (65,689) Property write-downs 0 50,000 50,000 Write-off of uncollectible receivable 0 8,884 8,884 (Increase) Decrease in current assets (41,942) (80,453) (38,511) Increase (Decrease) in current liabilities 42,103 46,062 3,959 G.P. distribution (1,272) (1,261) 11 Cash reserved for payables (60,000) 25,000 85,000 Advance from (to) future cash flows for current distributions (5,000) 0 5,000 -------- -------- --------- NET CASH PROVIDED FROM OPERATING ACTIVITIES $340,164 $387,354 $ 47,190 -------- -------- --------- CASH FLOWS FROM (USED IN) INVESTING AND FINANCING ACTIVITIES Recoveries from former G.P. affiliates 0 65,689 65,689 Principal received on equipment leases 13,600 13,600 0 Principal payments on mortgage notes (3,392) (120,091) (116,699) -------- -------- --------- NET CASH PROVIDED FROM INVESTING AND FINANCING ACTIVITIES $ 10,208 ($40,802) ($51,010) -------- -------- --------- TOTAL CASH FLOW FOR QUARTER $350,372 $346,552 ($3,820) CASH BALANCE BEGINNING OF PERIOD 660,605 1,066,079 405,474 Less 3rd quarter distributions paid 11/96 (350,000) (350,000) 0 Plus cash reserved above for payables and future distributions 65,000 (25,000) (90,000) -------- ---------- -------- CASH BALANCE END OF PERIOD $725,977 $1,037,631 $311,654 Cash reserved for 4th quarter L.P. distributions (350,000) (350,000) 0 Cash reserved for payment of payables and future distributions (250,000) (560,000) (310,000) -------- -------- --------- UNRESTRICTED CASH BALANCE END OF PERIOD $125,977 $127,631 $ 1,654 ======== ======== ========= - - ------------------------------------------------------------------------------------------------------- PROJECTED ACTUAL VARIANCE --------------------------------- *QUARTERLY DISTRIBUTION $ 350,000 $350,000 $ 0 MAILING DATE 2/15/97 (ENCLOSED) - - - -------------------------------------------------------------------------------------------------------
*Refer to distribution letter for detail of quarterly distribution. The ProvoGroup PROJECTIONS FOR DIVALL INSURED INCOME FUND L.P. DISCUSSION PURPOSES 1996 PROPERTY SUMMARY AND RELATED ESTIMATED RECEIPTS PORTFOLIO
---------------------------- --------------------------------------- REAL ESTATE EQUIPMENT ---------------------------- --------------------------------------- BASE % LEASE LEASE % - - ------------------------------- CONCEPT LOCATION COST RENT YIELD EXPIRATION COST RECEIPTS RETURN - - ------------------------------- ---------------------------- ---------------------------------------- RIO BRAVO GRAND FORKS, ND 984,801 100,000 10.15% CHI CHI'S EAU CLAIRE, WI 1,042,730 136,260 13.07% VACANT LAND COL SPRINGS, CO 356,549 0 0.00% DENNY'S ** GLENDALE, AZ 1,105,926 90,000 8.14% 68,744 0 0.00% DENNY'S ** SCOTTSDALE, AZ 1,051,157 90,000 8.56% 40,553 0 0.00% DENNY'S ** MESA, AZ 1,028,036 90,000 8.75% 39,218 0 0.00% DENNY'S ** PEORIA, AZ 1,105,926 90,000 8.14% 58,781 0 0.00% BW-III HOPKINS, MN 795,050 66,000 8.30% 1/15/2000 190,000 37,860 19.93% DENNY'S BEAVER DAM, WI 659,299 66,000 10.01% 3/31/2000 190,000 37,860 19.93% FAZOLPS DES MOINES, IA 565,476 45,500 8.05% 39,600 0 0.00% HARDEE'S FOND DU LAC, WI 1,026,931 72,000 7.01% POPEYE'S CHICAGO, IL 473,968 63,180 13.33% POPEYE'S CHICAGO, IL 610,893 81,420 13.33% POPEYE'S CHICAGO, IL 484,501 64,620 13.34% POPEYE'S CHICAGO, IL 610,893 81,420 13.33% POPEYE'S CHICAGO, IL 437,105 58,260 13.33% POPEYE'S CHICAGO, IL 631,958 54,180 13.32% POPEYE'S CHICAGO, IL 579,295 77,280 13.34% PORTERHOUSE CHICAGO, IL 905,807 0 0.00% TACO CABANA ARLINGTON, TX 1,474,569 132,000 8.95% TACO CABANA DALLAS, TX 1,369,243 132,000 9.64% TACO CABANA DALLAS, TX 1,257,596 132,000 10.50% TACO CABANA DALLAS, TX 1,308,153 132,000 10.09% - - ------------------------------- ----------------------------- -------------------------- - - ------------------------------- ----------------------------- -------------------------- PORTFOLIO TOTAL (23 Properties) 19,865,862 1,884,120 9.48% 626,896 75,720 12.08% - - ------------------------------- ----------------------------- -------------------------- OUTSTANDING DEBT --------------------------------- --------------------------- AMOUNT ANNUAL CURRENT AMOUNT ANNUAL CURRENT OWED DEBT INTEREST OWED DEBT INTEREST - - ------------------------------ MORTGAGED PROPERTIES 12/31/96 SERVICE RATE 12/31/96 SERVICE RATE - - ------------------------------ ---------------------------------- ---------------------------- - - ----------------------------- DENNY'S HOPKINS, MIN 63,180 14,783 10,75% 105,300 24,637 10.75% DENNY'S BEAVER DAM, WI 70,380 8,726 9.50% 176,568 21,514 9.50% MULTIPLE STORES AZ, TX 600,000 0 8.50% - - ------------------------------- ---------------------------------- ----------------------------- - - ------------------------------- ---------------------------------- ----------------------------- TOTALS 733,560 23,509 - 281,868 46,151 - - - ------------------------------- ---------------------------------- ----------------------------- - - ------------------------------- ---------------------------------- ----------------------------- NET AFTER DEBT 19,132,302 1,860,611 9.72% 345,528 29,569 8.57% - - ------------------------------- ---------------------------------- ----------------------------- - - ----------------------------------------- ORIGINAL EQUITY $25,000,000 NET DISTRIBUTION OF CAPITAL SINCE INCEPTION 2,383,192 ----------- CURRENT EQUITY $22,616,808 =========== - - ----------------------------------------- TOTAL % ----------------------------- ON 22,616,808 TOTALS EQUITY ---------------------------------- CONCEPT INVESTED RECEIPTS * RETURN * RAISE - - -------------- ---------------------------------- ----------- RIO BRAVO 984,801 100,000 10.15% CHI CHI'S 1,042,730 136,260 13.07% VACANT LAND 356,549 0 0.00% DENNY'S ** 1,174,670 90,000 7.66% DENNY'S ** 1,091,710 90,000 8.24% DENNY'S ** 1,067,254 90,000 8.43% DENNY'S ** 1,164,707 90,000 7.73% BW-III 985,050 103,860 10.54% DENNY'S ** 849,299 103,860 12.23% FAZOLPS 605,076 45,500 7.52% HARDEE'S 1,026,931 72,000 7.01% POPEYE'S 473,968 63,180 13.33% POPEYE'S 610,893 81,420 13.33% POPEYE'S 484,501 64,620 13.34% POPEYE'S 610,893 81,420 13.33% POPEYE'S 437,105 58,260 13.33% POPEYE'S 631,958 84,180 13.32% POPEYE'S 579,295 77,280 13.34% PORTERHOUSE 905,807 0 0.00% TACO CABANA 1,474,569 132,000 8.95% TACO CABANA 1,369,243 132,000 9.64% TACO CABANA 1,257,596 132,000 10.50% TACO CABANA 1,308,153 132,000 10.09% - - ----------- --------------------------------------------- 20,492,758 1,959,540 9.56% 8.67% --------------------------------------------- -------------------------------- AMOUNT ANNUAL OWED DEBT - - ------------------------------ MORTGAGED PROPERTIES 12/31/96 SERVICE - - ------------------------------ ------------------------------- - - ------------------------------ DENNY'S HOPKINS, MIN 168,480 39,420 DENNY'S BEAVER DAM, WI 246,948 30,240 MULTIPLE STORES AZ, TX 600,000 0 - - ------------------------------- ------------------------------ - - ------------------------------- ------------------------------ TOTALS 1,015,428 69,660 - - ------------------------------- ------------------------------ - - ------------------------------- ------------------------------------------------- NET AFTER DEBT 19,477,330 1,890,180 9.70% 8.36% - - ------------------------------- ------------------------------------------------
* A portion of the amounts disclosed include a return of principal. ** Rent is based on 12.5% of monthly sales. Rent projected for 1997 is based on 1996 sales levels. -----END PRIVACY-ENHANCED MESSAGE-----