<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
-----------------------
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)
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 No X
-------- -------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1995 AND DECEMBER 31, 1994
-----------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1995 1994
------------ -------------
<S> <C> <C>
INVESTMENT PROPERTIES AND EQUIPMENT: (NOTE 3)
Land $ 7,358,073 $ 7,358,073
Buildings and improvements 12,070,525 12,070,525
Equipment 246,896 246,896
Accumulated depreciation (3,899,339) (3,712,602)
----------- -----------
Net investment properties and equipment 15,776,155 15,962,892
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES: (NOTE 8) 280,676 303,811
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 826,147 1,169,554
Cash restricted for real estate taxes 50,510 6,910
Cash held in Indemnification Trust (NOTE 11) 263,246 191,798
Rents and other receivables (net of allowance of
$152,116 in 1995 and $151,161 in 1994) 56,679 68,303
Deferred rent receivable 115,962 108,024
Due from affiliated partnerships (NOTE 12) 113,917 149,435
Prepaid insurance 9,953 7,878
Unsecured notes receivable from lessees 667 5,270
Deferred loan costs (net of accumulated amortization
of $53,077 in 1995 and $51,753 in 1994) 5,957 7,281
----------- -----------
Total other assets 1,443,038 1,714,453
----------- -----------
DUE FROM FORMER AFFILIATES: (NOTE 2)
Due from former general partner affiliates 1,127,485 1,144,448
Allowance for uncollectible amounts due from
former affiliates (830,051) (830,051)
Restoration cost receivable 731,488 606,430
Allowance for uncollectible restoration receivable (731,488) (606,430)
----------- -----------
Due from former affiliates, net 297,434 314,397
----------- -----------
Total assets $17,797,303 $18,295,553
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
LIABILITIES AND PARTNERS' CAPITAL
JUNE 30, 1995 AND DECEMBER 31, 1994
-----------------------------------
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
LIABILITIES:
Mortgage notes payable (NOTE 6) $ 1,151,201 $ 1,155,528
Accounts payable and accrued expenses 60,455 43,787
Payable to tenant 0 144,000
Due to current General Partner 3,428 1,673
Accrued interest payable 147,061 121,026
Security deposits 125,410 125,410
Real estate taxes payable 50,510 132,946
Unearned rental income 92,000 0
------------ ------------
Total liabilities 1,630,065 1,724,370
------------ ------------
CONTINGENT LIABILITIES: (NOTES 10 AND 14)
PARTNERS' CAPITAL: (NOTES 1, 4 AND 14)
Former general partners -
Capital contributions 100 100
Cumulative net income 789,806 789,806
Cumulative cash distributions 0 0
Reallocation of former general partners'
capital to Limited Partners (789,906) (789,906)
------------ ------------
0 0
------------ ------------
Current General Partner -
Cumulative net income 25,113 19,530
Cumulative cash distributions (10,751) (8,518)
------------ ------------
14,362 11,012
------------ ------------
Limited Partners (25,000 interests outstanding) -
Capital contributions, net of offering costs 22,270,578 22,270,578
Cumulative net income 9,644,133 9,091,428
Cumulative cash distributions (16,551,741) (15,591,741)
Reallocation of former general partners'
capital 789,906 789,906
------------ ------------
16,152,876 16,560,171
------------ ------------
Total partners' capital 16,167,238 16,571,183
------------ ------------
Total liabilities and partners' capital $ 17,797,303 $ 18,295,553
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six Months ended
June 30, June 30,
-------------------- ------------------------
1995 1994 1995 1994
-------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental income $476,931 $552,292 $ 967,746 $1,105,386
Interest income on direct financing leases 7,218 8,329 14,725 16,920
Interest income 12,465 3,820 22,050 6,757
Other Income 664 450 1,791 31,567
-------- -------- ---------- ----------
497,278 564,891 1,006,312 1,160,630
-------- -------- ---------- ----------
EXPENSES:
Partnership management fees paid
to current General Partner 24,493 23,194 46,119 49,003
Restoration fees - current General Partner 543 0 678 628
Insurance 4,454 10,721 10,010 22,066
General and administrative (NOTE 9) 18,078 27,653 32,382 42,498
Interest 28,024 83,359 55,395 141,958
Real estate taxes, including interest and penalties 247 9,181 247 11,863
Expenses incurred due to default by lessee 824 625 1,791 625
Professional services 20,942 12,451 60,901 60,949
Professional services related to Investigation 32,784 16,044 44,392 30,470
Advisory board fees and expenses 3,912 5,427 8,045 11,199
Depreciation 91,574 108,141 186,737 216,282
Amortization 662 1,807 1,324 3,614
-------- -------- ---------- ----------
226,537 298,603 448,021 591,155
-------- -------- ---------- ----------
NET INCOME $270,741 $266,288 $ 558,291 $ 569,475
======== ======== ========== ==========
NET INCOME - CURRENT GENERAL PARTNER $ 2,707 $ 2,663 $ 5,583 $ 5,695
NET INCOME - LIMITED PARTNERS 268,034 263,625 552,708 563,780
-------- -------- ---------- ----------
$270,741 $266,288 $ 558,291 $ 569,475
======== ======== ========== ==========
NET INCOME PER LIMITED PARTNERSHIP INTEREST,
based on 25,000 interests outstanding $ 10.72 $ 10.55 $ 22.11 $ 22.55
======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------
1995 1994
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 558,291 $ 569,475
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 188,061 219,896
Interest applied to Indemnification Trust Account (11,448) 0
Increase in unearned rental income 92,000 29,412
(Increase)/Decrease in rents and other receivables 11,621 29,040
(Increase) in long-term rent receivable (7,938) 0
(Deposits)/Withdrawals for payment of real estate taxes (43,600) 21,410
(Increase)/Decrease in prepaid expenses (2,075) 18,677
Increase/(Decrease) in accounts payable and accrued expenses 16,668 12,087
(Decrease) in security deposits 0 (3,691)
(Decrease) in payable to tenant (144,000) 0
Increase/(Decrease) in due to current General Partner 1,755 (102)
Increase in accrued interest payable 26,035 0
(Decrease) in real estate taxes payable (82,436) (56,237)
---------- ---------
Net cash provided from operating activities 602,934 839,967
---------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Deposit to Indemnification Trust cash account (60,000) (25,000)
Payments from affiliated partnerships 35,518 28,540
Recoveries from former affiliates 16,963 15,705
Principal payments received on direct financing leases 23,135 20,940
Principal receipts on notes receivable 4,603 16,445
---------- ---------
Net cash from (used in) investing activities 20,219 56,630
---------- ---------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Principal payments on mortgage notes (4,327) (28,940)
Cash distributions to Limited Partners (960,000) (830,000)
Cash distributions to current General Partner (2,233) (1,194)
---------- ---------
Net cash (used in) financing activities (966,560) (860,134)
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (343,407) 36,463
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,169,554 664,475
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 826,147 $ 700,938
========== =========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 29,360 $ 141,958
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
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.
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.
Prior to 1992, depreciation of the properties was provided on a straight-line
basis over estimated useful lives of 20 to 25 years which generally approximated
the lease terms. Beginning January 1, 1992, the Partnership prospectively
revised the remaining lives of its properties to 31.5 years which management
believes is a better representation of 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.
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 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, 1994, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$4,000,000.
6
<PAGE>
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 in excess of $14,500,000, of which
approximately $1,873,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at June 30, 1995. The 9%
interest accrued as of June 30, 1995, amounted to approximately $364,000 and is
not reflected in the accompanying income statement. As of December 31, 1994,
$1,751,000 was reflected as due from former affiliates based on the estimated
overall misappropriation and related costs of $13,500,000. As of December 31,
1994, PMA savings representing cost savings to the Partnerships as a result of
the implementation of the Permanent Manager Agreement, are estimated to
approximate $565,000, of which approximately $43,000 is attributed to the
Partnership. PMA savings are not credited against the due from former
affiliates account on the financial statements of the Partnerships.
Subsequent to discovery, and in response to the regulatory inquiries, a third-
party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed (effective
February 8, 1993) to assume 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.
The current General Partner intends to vigorously pursue recovery of the
misappropriated funds from the various sources and initially estimated a range
of recovery with an estimated floor of $3 million for the Partnerships.
Accordingly, an allowance has been established against amounts due from former
general partner affiliates reflecting the current General Partner's best
estimate of potential loss from misappropriated amounts. This allowance has
been allocated among the Partnerships based on each Partnership's pro rata share
of the total misappropriation. The amount of the allowance was unchanged at
June 30, 1995. Pending the outcome of the litigation and other matters
affecting the sources of potential recovery, it is not possible to determine the
amount, if any, that will ultimately be recovered. The ultimate recovery will
likely be for an amount different than the current estimate.
As mentioned above, material weaknesses were identified in the Partnership's
internal control structure. The internal control structure was not adequate to
assure that all transactions of the Partnership were properly recorded and
reflected in the books and records and financial statements of the Partnership.
Significant transactions affecting the Partnership were apparently initiated by
DiVall and Magnuson during at least the four years ended December 31, 1992,
which initially either were not recorded on the books and records of the
Partnership or were improperly recorded and characterized. Such transactions
included unsupported disbursements or improper disbursements under the terms of
the Partnership Agreement and the encumbrance of Partnership assets. All
transactions identified during the regulatory Investigation and concurrent
reviews have been reflected in the Partnership's financial statements as of June
30, 1995. Because of the significance of the weaknesses in the internal control
structure, there could be no certainty that all improper and unsupported
transactions were identified and recorded and reflected in the Partnership's
financial statements as of December 31, 1992. Accordingly, the Partnership's
auditors were unable to render an opinion on the financial statements for the
year ended December 31, 1992. Financial statements for prior periods, including
1991 and certain prior years and
7
<PAGE>
quarterly reports as of September 30, 1992, and certain prior quarters, do not
properly reflect such transactions, but have not been restated due to the
impracticality and uncertainty in attempting to make such restatements.
Correspondingly, management elected to record in the period discovered certain
immaterial errors discovered during 1993 which related to prior periods, to
assure effective disclosure of amounts which have otherwise been deemed
immaterial in relation to partners' capital.
3. INVESTMENT PROPERTIES:
----------------------
As of June 30, 1995, the Partnership owned 22 fully constructed fast-food
restaurants and a parcel of undeveloped land. The restaurants are comprised of
the following: two (2) Chi Chi's Mexican restaurants, 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) former Porterhouse
restaurant, one (1) BW-III restaurant, and one (1) Fazoli's 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 June 30,
1995 and December 31, 1994, these costs totalled approximately $214,000 and
$169,000, respectively, and are not reflected in the Partnership's financial
statements. Management is currently marketing for sale the undeveloped parcel.
The land was originally purchased for $356,549 and has an adjusted carrying
value at June 30, 1995, of $250,000 which approximates the estimated net
realizable value.
From time to time, the Partnership experiences interruptions in rental receipts
due to tenant delinquencies and vacancies. During March 1994, the Partnership's
Happy Joe's restaurant located in Des Moines, Iowa, became vacant. Management
executed a new lease on the property during February 1995 with Fazoli's
restaurant. In September 1994, the Partnership's Denny's restaurant in Hopkins,
Minnesota, was closed by the tenant. However, the tenant continues to pay rent
and has executed a lease with a sub-tenant. During January 1995, the
Partnership evicted the tenant of the Porterhouse restaurant in Chicago,
Illinois and took possession of the property. The tenant in this property has
been delinquent and in bankruptcy throughout 1994. Management has listed the
property for re-lease.
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.
Prior to 1992, depreciation of the properties was provided on a straight-line
basis over estimated useful lives of 20 to 25 years which generally approximated
the lease terms. Beginning January 1, 1992, the Partnership prospectively
revised the remaining lives of its properties to 31.5 years which management
believes is a better representation of the estimated useful lives of the
buildings and improvements.
The Partnership's investment properties had been managed by an affiliate of the
former general partners pursuant to a management agreement which provided for a
fee equal to 1% of gross receipts. In addition, the former general partner
affiliate was entitled to receive reimbursements of general and administrative
costs, either direct or indirect. As a result of the Investigation, the
Partnership engaged a third party as Interim Manager in October 1992.
Subsequent to the appointment of the Permanent Manager, effective February 8,
1993, these services were being provided by the Permanent Manager for an overall
fee equal to 4% of the gross receipts, with a maximum reimbursement for the
office rent and related office overhead of $25,000 between the three affiliated
Partnerships as provided in the Permanent Manager Agreement ("PMA"). On May 26,
1993, the Permanent Manager, TPG, replaced
8
<PAGE>
the former general partners as the new General Partner as provided for in an
amendment to the Partnership Agreement dated May 26, 1993. Pursuant to
amendments to the Partnership Agreement, TPG continues to provide management
services for the same fee structure as provided in the PMA mentioned above.
Effective March 1, 1995, the minimum management fee and the maximum
reimbursement for office rent and overhead increased by 2.7%, representing the
allowable annual Consumer Price Index adjustment per the PMA. For purposes of
computing the 4% overall fee, gross receipts includes amounts recovered in
connection with the misappropriation of assets by the former general partners
and their affiliates. TPG has received fees from the Partnership totaling
$3,534 to date on the amounts recovered.
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% per 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.
Under the terms of the Partnership Agreement, the General Partners were
obligated to create and contribute to an escrow fund an amount equal to 25% of
Net Cash Receipts distributed to the General Partners. At December 31, 1993,
the General Partner had contributed $1,974 to the fund. The fund was to be used
to repurchase interests of Limited Partners that exhibited hardship, at the
determination of the General Partner, and for distributions to the Limited
Partners upon final dissolution of the Partnership to permit the Limited
Partners to receive an amount equal to their Liquidation Preference of 14% per
annum. During 1994, it was determined that the amounts being funded to the
escrow fund were immaterial, and the fund was eliminated. Amounts paid to the
escrow fund were returned to the Partnership.
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
9
<PAGE>
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 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 of 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 10.)
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 sales
levels. 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:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1995 1,671,784
1996 1,671,784
1997 1,671,784
1998 1,633,700
1999 1,635,900
Thereafter 13,294,258
-----------
$21,579,210
===========
</TABLE>
10
<PAGE>
6. MORTGAGE NOTES PAYABLE:
-----------------------
At June 30, 1995, mortgage notes payable consist of the following:
<TABLE>
<CAPTION>
Outstanding
Principal Balance Interest Rate Maturity Date
-----------------------------------------------------
<S> <C> <C> <C>
a. 295,368 prime + 2.5% September, 1997
b. 255,833 9.5% September, 1997
c. 600,000 prime + 2.0% August, 1992
----------
$1,151,201
==========
</TABLE>
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-III restaurant located in
Hopkins, Minnesota, with a net book value at June 30, 1995 of
$648,000. 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
June 30, 1995, of $501,000. 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 June 30, 1995, 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
$1,217,000 at June 30, 1995. See Note 13 for further discussion of
litigation concerning this note. Interest in the amount of $147,000
was accrued, but unpaid, as of June 30, 1995.
11
<PAGE>
Scheduled maturities of all notes payable, with the exception of the
$600,000 note payable mentioned above, are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1995 $ 9,635
1996 15,261
1997 526,305
--------
$551,201
========
</TABLE>
7. TRANSACTIONS WITH FORMER AFFILIATES
AND CURRENT GENERAL PARTNER:
----------------------------
Amounts paid to the current General Partner for the six months ended June 30,
1995 and 1994, are as follows:
<TABLE>
<CAPTION>
Incurred as of Unpaid at Incurred as of
Current General Partner June 30, 1995 June 30, 1995 June 30, 1994
- ------------------------------------------ -------------- ------------- --------------
<S> <C> <C> <C>
Management fees $ 46,119 $2,345 $49,003
Restoration fees 678 0 628
Overhead allowance 3,659 0 3,562
Reimbursement for out-of-pocket expenses 4,613 0 2,580
Cash distribution 2,233 1,083 1,194
-------- ------ -------
$ 57,302 $3,428 $56,967
======== ====== =======
</TABLE>
8. NET INVESTMENT IN DIRECT FINANCING LEASES:
------------------------------------------
The net investment in direct financing leases which includes the Partnership's
specialty leasehold improvement leases, is composed of the following as of June
30, 1995:
<TABLE>
<S> <C>
Minimum lease payments receivable $ 352,257
Less - Unearned income (71,581)
----------
Net investment in direct financing leases $ 280,676
==========
</TABLE>
Scheduled future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1995 $ 37,860
1996 75,720
1997 75,720
1998 75,720
1999 75,720
Thereafter 11,517
--------
$352,257
========
</TABLE>
12
<PAGE>
9. GENERAL AND ADMINISTRATIVE EXPENSES:
------------------------------------
For the periods ended June 30, 1995 and 1994, general and administrative
expenses incurred by the Partnership were as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1995 1994 1995 1994
-------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Communication costs $14,141 $13,504 $21,748 $21,438
Travel costs 485 635 885 2,695
Overhead allowance 1,846 1,768 3,659 3,562
Other administration (230) 1,758 889 4,815
Registration and filing fees 1,836 4,226 1,836 4,226
Income tax expense 0 5,762 3,365 5,762
------- ------- ------- -------
$18,078 $27,653 $32,382 $42,498
======= ======= ======= =======
</TABLE>
10. 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 are 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. The amount allocated to the
Partnership may be owed to the current General Partner if the above noted
recovery levels are met. As of June 30, 1995, the Partnership may owe the
current General Partner $7,349, which is currently reflected as a recovery, if
certain specified recovery levels are achieved.
11. PMA INDEMNIFICATION TRUST:
--------------------------
The Permanent Manager Agreement ("PMA") provides that the Permanent Manager will
be indemnified from any claims or expenses arising out of or relating to the
Permanent Manager serving in such capacity or as substitute general partner, so
long as such claims do not arise from fraudulent or criminal misconduct by the
Permanent Manager. The PMA provides that the Partnership fund this
indemnification obligation by establishing a reserve of up to $250,000 of
Partnership assets which would not be subject to the claims of the Partnership's
creditors. An Indemnification Trust ("Trust") serving such purposes has been
established at United Missouri Bank, N.A. The Trust has been fully funded with
Partnership assets as of June 30, 1995. Funds are invested in U.S. Treasury
securities. In addition, interest totaling $13,246 has been credited to the
Trust as of June 30, 1995. 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.
13
<PAGE>
12. RESTORATION TRUST ACCOUNT; EXPENSE ALLOCATIONS;
-----------------------------------------------
AND RELATED INTER-PARTNERSHIP RECEIVABLES:
------------------------------------------
Restoration costs represent expenses incurred by the Partnership in relation to
the misappropriated assets by the former general partners and their affiliates.
These costs are allocated among the Partnerships based on each partnership's
respective share of the entire misappropriation, as currently quantified. The
amount of misappropriation for each partnership is adjusted annually to reflect
new discoveries and more accurate quantification of amounts based on the
continuing Investigation. Such adjustments will result in periodic adjustments
to prior allocations of recovery costs to reflect updated information.
Consequently, previous payments for restoration expenses may not be consistent
with modified allocations. Based on modified allocations adjusted as of
December 31, 1993, the Partnership was owed $295,053 from DiVall 3 for amounts
paid on its behalf. Such amounts are reflected on the balance sheet as due from
affiliated partnerships. During 1994, the Partnership made an additional
adjustment increasing the amount due from DiVall 3 by $5,346. These amounts
have been offset by $186,482 received from DiVall 3. At June 30, 1995, the
Partnership was owed $113,917 from DiVall 3.
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 June 30, 1995, the Partnerships
recovered a total of $652,295 from the former general partners and their
affiliates. Of this amount, the Partnership received its pro-rata share in the
amount of $81,021. Additionally, $57,143, representing 50% of all disposition
fees earned by the General Partner have been paid to the recovery. Of that
amount, $7,349 was allocated to the Partnership and is contingently payable to
the General Partner upon achievement of certain recovery levels as described in
Note 10.
The PMA contemplated that the Permanent Manager could establish a separate and
distinct Restoration Trust Fund which would hold all recoveries until a final
independent adjudication by a court of competent jurisdiction or vote of the
Limited Partners ratified the allocation of proceeds to each respective
partnership. Management has concluded that a fair and reasonable interim
accounting for recovery proceeds can be accomplished at the partnership level in
a manner similar to restoration costs which are paid directly by the
Partnerships. Management reserves the right to cause the final allocation of
such costs and recoveries to be determined either by a vote of the Limited
Partners or a court of competent jurisdiction. Potential sources of recoveries
include third party litigation, promissory notes, land contracts, and personal
assets of the former general partners and their affiliates.
13. 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 Complaint filed in said lawsuit alleges, among other things, that Defendant
E & Y, was negligent in its audit work for the Partnerships by failing to
exercise ordinary care and failing to adhere to professional standards in the
following areas: reviewing, understanding, and auditing of compliance with the
Partnership Agreements; evaluation of the adequacy of internal controls;
identification of audit risks; selection and implementation of audit procedures
to address audit risks; identification of related party transactions;
compilation of sufficient evidential matters; resolution of improper transfers
and allocations; disclosure of related party transactions; and exercise of
appropriate audit skepticism. The Partnerships request the payment of damages
in the amount of $9,000,000, plus interest, attorneys fees and costs, and
whatever additional relief the court deems just and proper. E & Y filed an
Answer denying that it was negligent, and discovery is in process.
E & Y also filed third-party claims alleging fraud and negligence on the part of
the Partnerships' former law firm, Quarles & Brady. Additionally, E & Y also
filed third-party claims against Paul Magnuson, Gary DiVall, an affiliate of the
former general partners, DiVall Real Estate Investment Corporation ("DREIC"),
David Shea ("Shea") (former Acquisitions Director of DREIC), and Lisa Shatrawka
14
<PAGE>
(former Controller for DREIC and former Director of Fund Management with TPG).
In turn, Quarles & Brady has filed third-party claims against KPMG Peat Marwick,
the Partnerships' accountants preceding E & Y. The Partnerships have filed
claims against Magnuson, DiVall, DREIC, Shea, and Quarles & Brady. E&Y's claims
against Ms. Shatrawka were voluntarily dismissed.
The Partnerships have hired legal counsel under a contingent fee arrangement to
prosecute all of the Partnerships' claims. Because the spouse of a partner at
Quarles & Brady is a judge in Dane County, it was recently determined that the
case will be heard before a judge who sits in neighboring Iowa County.
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 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
collectibility of the obligations of the Private Partnerships assigned to the
Partnership has been significantly reduced and (ii) the value of the General
Partner interests in such Private Partnerships is often of little economic
value. The Partnership's recoveries in these bankruptcies have, to date, been
on a steeply discounted basis. Management anticipates that the recoveries in
the remaining unresolved bankruptcies are likely to also be on a deeply
discounted basis.
Plans of reorganization have been filed in some of the bankruptcies, and
settlement agreements in many of the Private Partnerships have been reached.
Settlements in twelve (12) of the bankruptcies to date have resulted in cash
payments to the Partnerships of a total of $611,000 and notes secured by
subordinated mortgages in the aggregate amount of $625,000. The Partnership is
continuing to vigorously defend its interests in the remaining bankruptcies.
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 loan is now held by Boatmen's). The proceeds of the Note were not
received by the Partnership. As of June 30, 1995, 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 June 30, 1995, interest in the amount of $147,000 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. The
Partnership has appealed the summary judgment to the United States Court of
Appeals for the Eighth Circuit and briefs have been filed. Pursuant to the
Restoration Trust Account procedures
15
<PAGE>
described in Note 12, 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.
14. 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.
15. SUBSEQUENT EVENTS:
------------------
On August 15, 1995, the Partnership made distributions to the Limited Partners
of $480,000 amounting to $19.20 per limited partnership interest.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
INVESTMENT PROPERTIES AND NET INVESTMENT IN DIRECT FINANCING LEASES
- -------------------------------------------------------------------
The investment properties, including equipment held by the Partnership at June
30, 1995, were originally purchased at a price, including acquisition costs, of
approximately $20,136,000.
The Partnership has not sold any investment properties during 1995. However,
the Partnership is currently marketing for sale the vacant land in Colorado
Springs, Colorado. The Partnership executed a lease on the former Happy Joe's
restaurant in Des Moines, Iowa, during February 1995, and is currently
negotiating a potential lease for the Porterhouse restaurant in Chicago,
Illinois.
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, amounted to $281,000 at June 30, 1995,
compared to $304,000 at December 31, 1994. The decrease of $23,000 was a result
of principal payments received during the quarter.
OTHER ASSETS
- ------------
Cash and cash equivalents, including cash restricted for real estate taxes held
by the Partnership, were $877,000 at June 30, 1995, compared to $1,176,000 at
December 31, 1994. The decrease is primarily due to the fourth quarter 1994
distribution in the amount of $675,000 paid to the Limited Partners during the
first quarter of 1995. The Partnership designated cash of $480,000 to fund the
Second Quarter 1995 distributions to Limited Partners, $265,000 for the payment
of quarter-end accounts payable and accrued expenses, and the remainder
represents reserves deemed necessary to allow the Partnership to operate
normally, should any significant unforeseen costs occur. 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.
16
<PAGE>
The Partnership established an Indemnification Trust (the "Trust") during the
Fourth Quarter of 1993 and deposited $100,000 in the Trust during 1993 and
$90,000 during 1994. The provision to establish the Trust was included in the
Permanent Manager Agreement for the indemnification of The Provo Group, Inc.
(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. The Partnership completed the funding of the Trust
with an additional $60,000 during the First Quarter of 1995. For additional
information regarding the Trust, refer to Note 11 to the financial statements
included in Item 1 of this report.
DUE FROM AFFILIATED PARTNERSHIPS, DUE FROM FORMER AFFILIATES, ALLOWANCE FOR
UNCOLLECTIBLE AMOUNTS DUE FROM FORMER AFFILIATES, AND DEFERRED INCOME
Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $1,127,000 at June
30, 1995. The receivable decreased from December 31, 1994, due to $17,000 of
recoveries received during the first six months of 1995 from the former general
partners and their affiliates.
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
$606,000 at December 31, 1994, to $731,000 at June 30, 1995, and includes
$364,000 of cumulative accrued interest.
The current General Partner intends to vigorously pursue recovery of the
misappropriated funds from the various sources and initially estimated a range
of recovery with an estimated floor of $3 million for the Partnerships.
Accordingly, an allowance has been established against amounts due from the
former general partners and their affiliates reflecting the current General
Partner's original estimate of potential loss from misappropriated amounts.
This allowance has been allocated among the Partnerships based on each
Partnership's pro rata share of the total misappropriation. The amount of the
allowance was unchanged at June 30, 1995. Pending the outcome of litigation and
other matters affecting the sources of potential recovery, it is not possible to
determine the amount that will ultimately be recovered. The ultimate recovery
may differ from the current estimate.
The restoration costs are allocated among the Partnerships based on each
Partnership's respective share of the misappropriation as discussed in Note 12
to the financial statements included in Item 1 of this report. The allocation
is adjusted annually 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. During 1994 and
1995, recoveries allocated to DiVall 3 were used to partially repay amounts owed
to the Partnership. At June 30, 1995, the remaining amount due from DiVall 3
was $114,000.
As a result of the misappropriation and material weaknesses in the internal
control structure of the Partnership prior to February 8, 1993, there can be no
assurance that all transactions recorded by the Partnership prior to that date,
were appropriate transactions of the Partnership and properly reflected in the
accompanying financial statements of the Partnership or that all transactions of
the Partnership prior to February 8, 1993, including improper and unsupported
transactions, have been identified and reflected in the accompanying financial
statements of the Partnership as of June 30, 1995.
LIABILITIES
- -----------
Accounts payable and accrued expenses at June 30, 1995, amounted to
approximately $60,000. The majority of this balance represented quarter-end
accruals of legal and auditing fees.
17
<PAGE>
Payable to Tenant of $144,000 at December 31, 1994, represents 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 returned to the
tenant during January, 1995.
Real estate taxes payable amounted to $51,000 at June 30, 1995, compared to
$133,000 at December 31, 1994. The decrease is primarily a result of amounts
accrued for 1994 taxes on vacant properties which were paid during the first six
months of 1995.
PARTNERS' CAPITAL
- -----------------
Net income for the quarter was allocated between the current 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 1 of this report.
The former general partners' capital account balance was reallocated to the
Limited Partners at December 31, 1993. Refer to Note 14 to the financial
statements included in Item 1 of this report for additional information
regarding the reallocation.
Cash distributions paid to the Limited Partners and to the current General
Partner during 1995 of $960,000 and $2,233, respectively, have also been made in
accordance with the amended Partnership Agreement. The Second Quarter 1995
distribution of $480,000 will be paid to the Limited Partners on August 15,
1995.
RESULTS OF OPERATIONS:
- ----------------------
Management believes that the financial results of the quarter 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.
The Partnership reported net income for the quarter ended June 30, 1995, in the
amount of $271,000 compared to $266,000 for the quarter ended June 30, 1994. Net
income for the six months ended June 30, 1995 and 1994 amounted to $558,000 and
$569,000, respectively. Results for these periods were less 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. The sale of three (3) Wendy's restaurants in Florida during the
fourth quarter of 1994 resulted in lower revenues during 1995. However, the
proceeds of the sale were used to repay mortgages on the properties which
lowered interest cost. The lower interest cost along with decreased depreciation
offset the effect of the decreased revenue.
REVENUES
- --------
Total revenues were $497,000 and $565,000 for the quarters ended June 30, 1995
and 1994, respectively. Revenues for the six month periods ended June 30, 1995
and 1994 were $1,006,000 and $1,161,000, respectively. Revenue decreased from
1994 to 1995, primarily due to the sale of three (3) Wendy's restaurants in
Florida during the fourth quarter of 1994. Additionally, during the first
quarter of 1994, a $31,000 expense accrual from the prior year was reversed and
credited to other income.
Based on leases currently in place on the remaining owned properties, total
revenues should approximate $1,950,000 annually or $487,500 quarterly. Future
revenues may decrease with tenant defaults and/or sales of Partnership
properties. They may also increase with additional rents due from tenants, if
those tenants experience sales levels which require the payment of additional
rent to the Partnership.
EXPENSES
- --------
For the quarters ended June 30, 1995 and 1994, cash expenses amounted to
approximately 27% and 33% of total revenues, respectively. For the six month
periods ended June 30, 1995 and 1994, cash expenses amounted to 26% and 32% of
total revenues respectively. Total expenses, including non-cash items, amounted
to approximately 46% and 53% of total revenues for the quarters ended June 30,
1995 and 1994, respectively and totaled 45% and 51% of total revenues for the
six months ended June 30, 1995 and 1994, respectively. Items
18
<PAGE>
negatively impacting expenses during the periods include expenses incurred
primarily in relation to the misappropriation of assets by the former general
partners and their affiliates, interest expense, and real estate taxes.
For the quarters ended June 30, 1995 and 1994, expenses incurred in relation to
the misappropriated assets amounted to $33,000 and $16,000, respectively. These
expenses totaled $44,000 and $30,000 during the first six months of 1995 and
1994, respectively. The accrual of unbilled out-of-pocket expenses related to
the Ernst & Young lawsuit along with the payment of expert witness fees caused
the increase during the second quarter of 1995. Future expenses incurred in
relation to the misappropriation will continue to have a negative impact on the
Partnership. Management has estimated that these expenses will approximate
$65,000 for the year ending December 31, 1995.
Interest expense for the second quarter of 1995 amounted to $28,000 compared to
$83,000 for the same period in 1994. Three notes repaid during November 1994,
had a favorable affect on interest expense during 1995.
As noted above, management believes the Partnership's operations have yet to
stabilize to what could be considered normal, due to the negative impact of the
costs related to the recovery of the misappropriated assets. However, these
"recovery costs" are being minimized currently as indicated by the comparative
results of the Partnership's statements of income, and will continue to be
minimized in the future.
INFLATION:
- ----------
Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio of triple net leases. By their nature, such leases actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes. If inflation causes operating margins to deteriorate for lessees,
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, the assets of the Partnership's
portfolio should perform more like marketable bonds. In other words, asset
values generally move inversely with interest rates.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. 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
Complaint filed in said lawsuit alleges, among other things, that Defendant E &
Y was negligent in its audit work for the Partnerships by failing to exercise
ordinary care and failing to adhere to professional standards in the following
areas: reviewing, understanding, and auditing of compliance in regards to the
Partnership Agreements; evaluation of the adequacy of internal controls;
identification of audit risks; selection and implementation of audit procedures
to address audit risks; identification of related party transactions;
compilation of sufficient evidential matters; resolution of improper transfers
and allocations; disclosure of related party transactions; and exercise of
appropriate audit skepticism. The Partnerships request the payment of damages
in the amount of $9,000,000, plus interest, attorneys fees and costs, and
whatever additional relief the court deems just and proper. E & Y filed an
Answer denying that it was negligent, and discovery is in process.
E & Y also filed third-party claims alleging fraud and negligence on the part of
the Partnerships' former law firm, Quarles & Brady. E & Y also filed third-
party claims against Paul Magnuson, Gary DiVall, an affiliate of the former
general partners, DiVall Real Estate Investment Corporation ("DREIC"), David
Shea ("Shea") (former Acquisitions Director for DREIC), and Lisa Shatrawka
(former Controller for DREIC and former Director of Fund Management with TPG).
In turn, Quarles & Brady has filed third party claims against KPMG Peat Marwick,
the Parnerships' accountants preceding E&Y. The Partnerships have filed claims
against Magnuson, DiVall, DREIC, Shea, and Quarles & Brady. E&Y's claims
against Ms. Shatrawka were voluntarily dismissed.
The Partnerships have hired legal counsel under a contingent fee arrangement to
prosecute all of the Partnerships' claims. Because the spouse of a partner at
Quarles & Brady is a judge in Dane County, it was recently determined that the
case will be heard before a judge who sits in neighboring Iowa County.
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 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.
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
collectibility of the obligations of the Private Partnerships assigned to the
Partnership has been significantly reduced and (ii) the value of the General
Partner interests in such Private Partnerships is often of little economic
value. The Partnership's recoveries in these bankruptcies have, to date, been
on a steeply discounted basis. Management anticipates that the recoveries in
the remaining unresolved bankruptcies are likely to also be on a deeply
discounted basis.
Plans of reorganization have been filed in some of the bankruptcies, and
settlement agreements in many of the Private Partnerships have been reached.
Settlements in twelve (12) of the bankruptcies to date have resulted in
20
<PAGE>
cash payments to the Partnerships of a total of $611,000 and notes secured by
subordinated mortgages in the aggregate amount of $625,000. The Partnership is
continuing to vigorously defend its interests in the remaining bankruptcies.
The Partnerships have been named as defendants in certain foreclosure actions
brought in state courts in Wisconsin. In each of these actions, the plaintiff
seeks to foreclose on real property owned by one of the Private Partnerships.
The Partnerships were named as subordinate lienholders on the properties. It is
believed that none of these cases constitute a claim against the individual
Public Partnerships. However, if the foreclosures are successful, the Private
Partnerships' interest in the underlying real estate may be extinguished,
rendering individual obligations to the Partnerships uncollectible. Such a
foreclosure has occurred in one instance, and is pending in at least one other
situation.
The Partnership is also pursuing collection actions against former tenants of
the Partnership and/or guarantors of former tenants of the Partnership arising
from defaults on their leases. Although the Partnership believes its claims are
valid, it is currently unknown whether the Partnerships will receive favorable
verdicts or whether any such verdicts will ultimately prove collectible.
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 I, Item 1 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 June 30, 1995, 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 June 30, 1995, interest in the amount of $147,000 had been accrued, but was
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. The Partnership has appealed the summary judgment to the United States
Court of Appeals for the Eighth Circuit and briefs have been filed. Pursuant to
the Restoration Trust Account procedures described in Note 12 to the Financial
Statements, included in Part I, Item 1 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
28.0 Correspondence to the Limited Partners dated August 15, 1995 regarding
the second quarter 1995 distributions.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the second quarter of
fiscal year 1995.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
By: The Provo Group, Inc., General Partner
By: /s/Bruce A. Provo
-------------------------------------------------
Bruce A. Provo, President
Date: August 11, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: The Provo Group, Inc., General Partner
By: /s/Bruce A. Provo
-------------------------------------------------
Bruce A. Provo, President
Date: August 11, 1995
By: /s/Kristin J. Atkinson
- ------------------------------------------------------
Kristin J. Atkinson
Vice-President, Finance and Administration
Date: August 11, 1995
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1994
<PERIOD-START> APR-01-1995 JAN-01-1995
<PERIOD-END> JUN-30-1995 JUN-30-1995
<CASH> 876,657 876,657
<SECURITIES> 263,246 263,246
<RECEIVABLES> 2,594,900 2,594,900
<ALLOWANCES> 1,713,655 1,713,655
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,021,148 2,021,148
<PP&E> 19,675,494 19,675,494
<DEPRECIATION> 3,899,339 3,899,339
<TOTAL-ASSETS> 17,797,303 17,797,303
<CURRENT-LIABILITIES> 478,864 478,864
<BONDS> 1,151,201 1,151,201
<COMMON> 0 0
0 0
0 0
<OTHER-SE> 16,167,238 16,167,238
<TOTAL-LIABILITY-AND-EQUITY> 17,797,303 17,797,303
<SALES> 484,149 982,471
<TOTAL-REVENUES> 497,278 1,006,312
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 198,513 392,626
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 28,024 55,395
<INCOME-PRETAX> 270,741 558,291
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 270,741 558,291
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 270,741 558,291
<EPS-PRIMARY> 10.72 22.11
<EPS-DILUTED> 10.72 22.11
</TABLE>
<PAGE>
[LOGO -- THE PROVO GROUP]
August 15, 1995
RE: DIVALL INSURED INCOME FUND LP (THE "PARTNERSHIP")
SECOND QUARTER 1995 DISTRIBUTION CORRESPONDENCE
Dear Limited Partner:
Enclosed please find the following:
1. Your Second Quarter 1995 distribution check amounting to approximately
$19.20 per unit representing both cash flow from operations as well as
"net" cash activity from financing and investing activities, as
presented on the Statements of Income and Cash Flow Changes;
2. Statements of Income and Cash Flow Changes for the three month period
ended June 30, 1995;
3. Property Summary with current updates as of June 30, 1995; and
4. Projected Statements of Income and Cash Flow Changes for the remaining
1995 quarterly periods.
SECOND QUARTER 1995 DISTRIBUTION
The Partnership is distributing $480,000 which represents $130,000 more
than projected for the period ended June 30, 1995. This increase is primarily
comprised of the collection of past delinquent rental income, recoveries from
former general partners, and payments received from an affiliated partnership.
It should also be noted that the lower than budgeted distribution paid for the
First Quarter of 1995 was a result of past delinquent rental income that was
collected during the second quarter.
The $480,000 total distribution paid for the second quarter represents an
8.26% annualized return on the Partnership's "NET" REMAINING INITIAL INVESTMENT
of approximately $23,245,000 as shown on page 4.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
The enclosed Statements of Income and Cash Flow Changes present results of
operations and related changes in cash flow for the second quarter ended June
30, 1995. The Partnership had net income of $271,000 which was $6,500 more than
projected, based on revenues of $497,000 and expenses of $226,000.
-------------
<PAGE>
LETTER TO LIMITED PARTNERS IN DIVALL INSURED INCOME FUND LP
August 15, 1995
Page 2
The most significant cash flow variances from our projections are as
follows:
1. The collection of $67,000 from a prior delinquent tenant (Bysom
Enterprises, Popeye's, Chicago, Illinois) combined with the receipt of
$44,000 "pre-paid" rent from another tenant (Taco Cabana, Dallas,
Texas) significantly decreased receivables. It is important to note
that the "pre-paid" rental income did not impact distributions for the
second quarter.
2. The Partnership also received $28,400 from an affiliated partnership
for previously advanced restoration costs.
3. "Operating Expenses" for the Partnership were $18,400 lower than
budgeted this quarter, primarily due to reduced administrative
expenses and legal fees associated with partnership operating
activities.
4. Partnership "Investigation and Restoration Expenses" were $16,500
higher than budgeted for the three-month period ended June 30, 1995,
due to the accrual of unbilled out-of-pocket expenses related to the
lawsuit against Ernst & Young, Quarles & Brady and Peat Marwick. The
majority of these costs are expected to be paid upon final settlement
of the lawsuit with fees for expert witnesses paid as incurred.
5. The Partnership recovered a total of $13,600 in misappropriated monies
from the former general partners and their affiliates during the
second quarter. To date the Partnership has recovered approximately
$87,000.
The collection of previously delinquent rent and misappropriated monies
from the former general partners combined with reduced operating expenses
provided for the higher than budgeted distributions paid for the second quarter.
PROPERTY SUMMARY
VACANCIES
At June 30, 1995, the Partnership had one (1) vacancy; the Porterhouse in
Chicago, Illinois.
Porterhouse: Chicago, Illinois
- -------------------------------
Earlier this year, the Partnership took possession of this property as a
result of historical issues with respect to rental delinquencies and bankruptcy
problems. We are currently in a "Letter of Intent" stage for re-leasing this
property to a new tenant.
<PAGE>
LETTER TO LIMITED PARTNERS IN DIVALL INSURED INCOME FUND LP
August 15, 1995
Page 3
RENTS RECEIVABLE
There are currently no delinquent tenants in the Partnership.
OTHER PROPERTY MATTERS
Land, Colorado Springs, Colorado
- --------------------------------
The offer to purchase this Partnership's land expired during the second
quarter. We have received no additional offers to date, but we continue to
aggressively pursue selling this property.
Fazoli's, Des Moines, Iowa
- --------------------------
Rent commenced on May 30, 1995 for this property which was formerly a Happy
Joe's restaurant that had been vacant since March 1994. The current monthly
rental payments of $3,800 are $500 higher than the former tenant's rent.
Hardee's, Fond du Lac, Wisconsin
- --------------------------------
The tenant of this property, Terratron, Inc., had experienced significant
sales difficulties throughout 1994 which resulted in a mutual agreement with the
Partnership to defer a portion of this tenant's rent. As agreed, Terratron
began a "rent catch-up" earlier this year and continues to comply with the terms
of the agreement. The payment schedule reflects a total "catch-up" by September
1995. It should be noted that Hardee's restaurants continue to experience
"concept" issues and related sales difficulties.
Popeye's, Chicago, Illinois
- ---------------------------
Bysom Enterprises, Inc., tenant of seven (7) restaurants cured their
delinquency with the Partnership; hence, no legal action was necessary during
the second quarter.
ADVISORY BOARD
The eighth Advisory Board meeting was held on August 1 and 2, 1995.
Representatives from Arthur Andersen LLP; Popham, Haik, Schnobrich & Kaufman,
Ltd.; and Shughart, Thomson & Kilroy were also in attendance at this meeting.
Primary topics of discussion included Analysis of Future Strategies for
Partnership Operations or Disposition; Former G.P. Affiliate Litigation; Pending
Partnership Litigation Issues; Second Quarter 1995 10-Q Review; Overview of
Funds; Results of Fund Operations for the Second Quarter of 1995; Property
Disposition Updates; Restoration Updates; and Advisory Board Member Selection
Updates.
<PAGE>
LETTER TO LIMITED PARTNERS IN DIVALL INSURED INCOME FUND LP
August 15, 1995
Page 3
RESTORATION
During the Second Quarter of 1995, we continued our efforts in monitoring
the bankruptcy proceedings of the DiVall "Private" Partnerships. The major
focus of our attention remains with the Ernst & Young, Quarles & Brady and Peat
Marwick lawsuit whose trial is scheduled to commence in January 1996.
The Partnerships (DiVall Insured Income Fund LP, DiVall Insured Income
Properties 2 LP and DiVall Income Properties 3 LP) collected a combined total of
$105,600 during the Second Quarter of 1995. The total amount collected to date
for all three (3) partnerships approximates $652,300.
RETURN OF CAPITAL
The following table has been updated to illustrate the breakdown of
distributions since the Partnership's first quarterly distribution, for the
period ended December 31, 1986 through June 30, 1995.
<TABLE>
<CAPTION>
DISTRIBUTION CAPITAL
------------- ------------
ANALYSIS BALANCE
------------- ------------
<S> <C> <C>
Original Capital Balance - $25,000,000
Cash Flow From Operations Since Inception $ 15,276,536 -
Total Distributions Since Inception (17,031,740) -
------------
(Return) of Capital $ (1,755,204) (1,755,204)
============ -----------
"NET" REMAINING INITIAL INVESTMENT
BY ORIGINAL PARTNERS - $23,244,796
===========
</TABLE>
QUESTIONS & ANSWERS
1. WHAT IS TPG'S POLICY FOR RECEIVING NOTIFICATION OF ADDRESS CHANGES
FROM LIMITED PARTNERS?
. It is our policy that all Limited Partner address changes be
submitted in writing to our Investor Relations Department.
<PAGE>
LETTER TO LIMITED PARTNERS IN DIVALL INSURED INCOME FUND LP
August 15, 1995
Page 5
Please note that any change in a Limited Partner's distribution
or correspondence address should be sent to Investor Relations no
later than three (3) weeks before each scheduled distribution
mailing date to insure that the change will be processed prior to
check printing and label processing.
2. WHY DOES THE DISTRIBUTION MAILING OCCUR 45 DAYS AFTER THE CALENDAR
QUARTER ENDS?
. Pursuant to the Limited Partnership Agreement, distributions (if
available) are to be paid to Limited Partners within 60 days
after the last day of the calendar quarter. We currently mail
distributions on a 45-day schedule which allows time for the
following schedule of events to occur following the close of each
calendar quarter:
1st - 15th: Accounts payables and receivables finalized for
(approximate) the quarter. Accounting books closed. Financial
Statements produced.
16th - 20th: Distribution schedules prepared and approved.
(approximate) Distribution checks processed and printed.
21st - 31st: Distribution letters drafted and reviewed.
(approximate) Distribution reports, statements, and labels
processed and printed.
1st - 15th: Advisory Board meeting held for final review of
(approximate) quarter's activities. Distribution letters
finalized and printed. Distribution mailing
processed and mailed.
It is important to note that distribution information is prepared
for more than 10,000 limited partners, custodians and
broker/dealer representatives every quarter for the Partnerships.
3. IS IT STILL POSSIBLE TO MAIL NOMINATIONS IN FOR THE ADVISORY BOARD
POSITION AVAILABLE BEGINNING OCTOBER 1, 1996?
. Yes, at this time we are in the review process of potential
candidates and the Board will still accept nominations. Please
mail or fax your nominations by August 31, 1995 to:
Attn: Investor Relations
THE PROVO GROUP, INC.
P.O. Box 2137
Madison, Wisconsin 53701-2137
FAX: (608)829-2996
<PAGE>
LETTER TO LIMITED PARTNERS IN DIVALL INSURED INCOME FUND LP
August 15, 1995
Page 6
Your next scheduled distribution correspondence for the Third Quarter of
1995 will be mailed on November 15, 1995. If you have any questions or need
additional information, please call Investor Relations at 1-800-547-7686 or 1-
608-829-2992.
Sincerely,
THE PROVO GROUP, INC.
By: [SIGNATURE OF BRENDA BLOESCH]
-----------------------------------
Brenda Bloesch
Director of Investor Relations
By: [SIGNATURE OF KRISTIN ATKINSON]
-----------------------------------
Kristin Atkinson
Vice President - Finance and Administration
Enclosures
<PAGE>
<TABLE>
<CAPTION>
DIVALL INSURED INCOME FUND L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 1995
- ------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
-----------------------------------
<S> <C> <C> <C>
2ND 2ND
QUARTER QUARTER BETTER
06/30/95 06/30/95 (WORSE)
OPERATING REVENUES -------- -------- --------
Rental income $484,900 $476,931 ($7,969)
Direct financing interest 7,200 7,219 19
Interest income 4,500 12,465 7,965
Other income 0 664 664
-------- -------- --------
TOTAL OPERATING REVENUES $496,600 $497,279 $679
-------- -------- --------
OPERATING EXPENSES
Insurance $4,500 $4,454 $46
Management fees 22,200 24,464 (2,294)
Restoration fees 0 543 (543)
Overhead allowance 1,845 1,845 0
Advisory Board 3,200 3,912 (712)
Administrative 29,225 16,428 12,797
Professional services 600 4,554 (3,954)
Auditing 12,000 12,000 0
Legal 15,000 4,087 10,913
Defaulted tenants 3,000 876 2,124
-------- -------- --------
TOTAL OPERATING EXPENSES $91,570 $73,193 $18,377
-------- -------- --------
INTEREST EXPENSE $28,500 $28,025 $475
-------- -------- --------
INVESTIGATION AND RESTORATION EXPENSES $16,000 $32,541 ($16,541)
-------- -------- --------
NON-OPERATING EXPENSES
Depreciation $95,100 $91,573 $3,527
Amortization 675 663 12
-------- -------- --------
TOTAL NON-OPERATING EXPENSES $95,775 $92,236 $3,539
-------- -------- --------
TOTAL EXPENSES $231,845 $225,995 $5,850
-------- -------- --------
NET INCOME $264,755 $271,284 $6,529
VARIANCE
OPERATING CASH RECONCILIATION: --------
Depreciation and amortization 95,775 92,236 (3,539)
(Increase) Decrease in current assets 763 99,249 98,486
Increase (Decrease) in current liabilities 33,679 54,132 20,453
Increase (Decrease) in G.P. distribution (1,059) (1,150) (91)
Cash reserved for 2nd quarter payables (35,000) (85,000) (50,000)
-------- -------- --------
NET CASH PROVIDED FROM OPERATING ACTIVITIES $358,913 $430,751 $71,838
-------- -------- --------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Payments received from affiliated partnerships 0 28,436 28,436
Recoveries from former G.P. affiliates 0 13,581 13,581
Principal received on equipment leases 11,710 11,711 1
Principal payments received on notes receivable 1,096 1,577 481
Principal payments on mortgage notes (1,350) (2,479) (1,129)
-------- -------- --------
NET CASH PROVIDED FROM INVESTING AND FINANCING
ACTIVITIES $11,456 $52,826 $41,370
-------- -------- --------
TOTAL CASH FLOW FOR QUARTER $370,369 $483,577 $113,208
CASH BALANCE BEGINNING OF PERIOD 613,612 593,080 (20,532)
Less 1st quarter distributions paid 5/95 (350,000) (285,000) 65,000
Plus cash reserved above for payables and future distributions 35,000 85,000 50,000
-------- -------- --------
CASH BALANCE END OF PERIOD $668,981 $876,657 $207,676
Cash reserved for 2nd quarter L.P. distributions (350,000) (480,000) (130,000)
Cash reserved for payment of payables (185,000) (265,000) (80,000)
-------- -------- --------
UNRESTRICTED CASH BALANCE END OF PERIOD $133,981 $131,657 ($2,324)
======== ======== ========
- ------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
-----------------------------------
* QUARTERLY DISTRIBUTION $350,000 $480,000 $130,000
MAILING DATE 8/15/95 (enclosed) -
- ------------------------------------------------------------------------------------------------------
* Refer to distribution letter for detail of quarterly distribution.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROJECTIONS FOR DIVALL INSURED INCOME FUND L.P. ORIGINAL EQUITY $25,000,000
DISCUSSION PURPOSES 1995 PROPERTY SUMMARY NET DISTRIBUTION OF CAPITAL
AND RELATED ESTIMATED RECEIPTS SINCE INCEPTION $1,755,204
-----------
CURRENT EQUITY $23,244,796
===========
PORTFOLIO
------------------------------- ---------------------------------------------
REAL ESTATE EQUIPMENT
------------------------------- ---------------------------------------------
- -------------------------------- BASE % LEASE LEASE * % *
CONCEPT LOCATION COST RENT YIELD EXPIRATION COST RECEIPTS RETURN
- -------------------------------- ------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CHI CHI'S GRAND FORKS, ND 984,801 128,700 13.07%
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 1,105,926 102,000 9.22% 68,744 0 0.00%
DENNY'S ** SCOTTSDALE, AZ 1,051,157 108,000 10.27% 40,553 0 0.00%
DENNY'S ** MESA, AZ 1,028,036 104,000 10.12% 39,218 0 0.00%
DENNY'S ** PEORIA, AZ 1,105,926 100,000 9.04% 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%
FAZOLI'S DES MOINES, IA 565,476 45,500 8.05% 39,600 0 0.00%
HARDEE'S FOND DU LAC, WI 1,026,931 129,780 12.64%
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 84,180 13.32%
POPEYE'S CHICAGO, IL 579,295 77,280 13.34%
PORTERHOUSE CHICAGO, IL 905,807 0 0.00%
TACO CABANA ARLINGTON, TX 1,474,569 108,000 7.32%
TACO CABANA DALLAS, TX 1,369,243 108,000 7.89%
TACO CABANA DALLAS, TX 1,257,596 108,000 8.59%
TACO CABANA DALLAS, TX 1,308,153 108,000 8.26%
- -------------------------------- ------------------------------- ---------------------------------------------
- -------------------------------- ------------------------------- -----------------------------------
PORTFOLIO TOTALS (23 PROPERTIES) 19,865,862 1,928,600 9.71% 626,896 75,720 12.08%
- -------------------------------- ------------------------------- -----------------------------------
-------------------------------- -------------
TOTALS TOTAL %
-------------------------------- ON 23,244,796
- -------------------------------- EQUITY
CONCEPT LOCATION INVESTED RECEIPTS * RETURN * RAISE
- -------------------------------- -------------------------------- -------------
<S> <C> <C> <C> <C> <C>
CHI CHI'S GRAND FORKS, ND 984,801 128,700 13.07%
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 1,174,670 102,000 8.68%
DENNY'S ** SCOTTSDALE, AZ 1,091,710 108,000 9.89%
DENNY'S ** MESA, AZ 1,067,254 104,000 9.74%
DENNY'S ** PEORIA, AZ 1,164,707 100,000 8.59%
BW-III HOPKINS, MN 985,050 103,860 10.54%
DENNY'S BEAVER DAM, WI 849,299 103,860 12.23%
FAZOLI'S DES MOINES, IA 605,076 45,500 7.52%
HARDEE'S FOND DU LAC, WI 1,026,931 129,780 12.64%
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 84,180 13.32%
POPEYE'S CHICAGO, IL 579,295 77,280 13.34%
PORTERHOUSE CHICAGO, IL 905,807 0 0.00%
TACO CABANA ARLINGTON, TX 1,474,569 108,000 7.32%
TACO CABANA DALLAS, TX 1,369,243 108,000 7.89%
TACO CABANA DALLAS, TX 1,257,596 108,000 8.59%
TACO CABANA DALLAS, TX 1,308,153 108,000 8.26%
- -------------------------------- ------------------------------- -------------
- -------------------------------- ------------------------------- -------------
PORTFOLIO TOTALS (23 PROPERTIES) 20,492,758 2,004,320 9.78% 8.62%
- -------------------------------- ------------------------------- -------------
</TABLE>
OUTSTANDING DEBT
<TABLE>
<CAPTION>
AMOUNT ANNUAL CURRENT AMOUNT ANNUAL CURRENT
- ------------------------------- OWED DEBT INTEREST OWED DEBT INTEREST
MORTGAGED PROPERTIES 6/30/95 SERVICE RATE 6/30/95 SERVICE RATE
- ------------------------------- -------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------
DENNY'S HOPKINS, MN 110,763 14,783 11.50% 184,605 24,637 11.50%
DENNY'S BEAVER DAM, WI 72,912 8,726 9.50% 182,921 21,514 9.50%
MULTIPLE STORES AZ, TX 600,000 0 8.50%
- ------------------------------- -------------------------------- -------------------------------
- ------------------------------- -------------------------------- -------------------------------
TOTALS 783,675 23,509 - 367,526 46,151 -
- ------------------------------- -------------------------------- -------------------------------
- ------------------------------- -------------------------------- -------------------------------
NET AFTER DEBT 19,082,187 1,905,091 9.98% 259,370 29,569 11.40%
- ------------------------------- -------------------------------- -------------------------------
</TABLE>
<TABLE>
AMOUNT ANNUAL
- ------------------------------- OWED DEBT
MORTGAGED PROPERTIES 6/30/95 SERVICE
- ------------------------------- -----------------------
<S> <C> <C>
- -------------------------------
DENNY'S HOPKINS, MN 295,368 39,420
DENNY'S BEAVER DAM, WI 255,833 30,240
MULTIPLE STORES AZ, TX 600,000 0
- ------------------------------- -----------------------
- ------------------------------- -----------------------
TOTALS 1,151,201 69,660
- ------------------------------- -----------------------
- ------------------------------- -------------------------------- --------------
NET AFTER DEBT 19,341,557 1,934,660 10.00% 8.32%
- ------------------------------- -------------------------------- --------------
</TABLE>
* A portion of the amounts disclosed include a return of principal.
** Rent is based on 12.5% of monthly sales. Rent projected for 1995 is based on
1994 sales levels.
<PAGE>
DIVALL INSURED INCOME FUND L.P.
PROJECTED STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE REMAINING 1995 DISTRIBUTION PERIODS
<TABLE>
<CAPTION>
3RD 4TH
QUARTER QUARTER
09/30/95 12/31/95
-------- --------
<S> <C> <C>
OPERATING REVENUES
Rental Income (net of 3% vacancy allowance) $465,950 $471,950
Direct Financing Interest 6,900 6,600
Interest Income 4,500 4,500
Other Income 0 0
-------- --------
TOTAL OPERATING REVENUES $477,350 $483,050
-------- --------
OPERATING EXPENSES
Insurance $ 4,500 $ 4,500
Management fees 22,200 22,200
Overhead allowance 1,845 1,845
Advisory Board 3,200 3,200
Administrative 13,825 16,625
Professional 300 300
Auditing 12,000 12,000
Legal 15,000 15,000
Real estate taxes 0 45,000
Defaulted tenants 3,000 3,000
-------- --------
TOTAL OPERATING EXPENSES $ 75,870 $123,670
-------- --------
INTEREST EXPENSE $ 28,500 $ 28,500
-------- --------
INVESTIGATION AND RESTORATION $ 16,000 $ 16,000
-------- --------
NON-OPERATING EXPENSES
Depreciation $ 93,000 $ 92,700
Amortization 675 675
-------- --------
TOTAL NON-OPERATING EXPENSES $ 93,675 $ 93,375
-------- --------
TOTAL EXPENSES $214,045 $261,545
-------- --------
NET INCOME $263,305 $221,505
OPERATING CASH RECONCILIATION:
Depreciation and amortization 93,675 93,375
(Increase) Decrease in current assets 9,364 (13,738)
(Decrease) Increase in current liabilities (5,696) 87,433
(Increase) in G.P. distribution (1,053) (886)
Cash reserved for payables 5,000 (50,000)
-------- --------
Net Cash Provided From Operating Activities $364,595 $337,689
-------- --------
CASH FLOWS FROM (USED IN) INVESTING AND
FINANCING ACTIVITIES
Principal received on equipment leases 12,030 12,360
Principal payments received on notes receivable 0 0
Principal payments on mortgage notes (1,380) (1,418)
-------- --------
Net cash From Investing and Financing Activities $ 10,650 $ 10,942
-------- --------
Total Cash Flow for Quarter $375,245 $348,631
Cash Balance Beginning of Period 668,981 689,226
Less prior quarter distributions paid (350,000) (350,000)
Less payment of accrued expenses (5,000) 50,000
-------- --------
Cash Balance End of Period $689,226 $737,857
Cash reserved for L.P. distributions (350,000) (350,000)
Cash reserved for payment of accrued expenses (200,000) (260,000)
-------- --------
Unrestricted Cash Balance End of Period $139,226 $127,857
======== ========
Quarterly Distribution $350,000 $350,000
Mailing Date 11/15/95 2/15/96
</TABLE>
