<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 September 30, 1996
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to_____________________
Commission file number 0-16722
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
WISCONSIN 36-6845083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 West 11th Street, Suite 1110, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 421-7444
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Interests
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1996 and December 31, 1995
----------------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1996 1995
-------------- -------------
INVESTMENT PROPERTIES AND EQUIPMENT: (NOTE 3 AND 6)
<S> <C> <C>
Land $ 7,358,073 $ 7,358,073
Buildings and improvements 12,070,525 12,070,525
Equipment 246,896 246,896
Accumulated depreciation (4,342,470) (4,078,904)
----------- -----------
Net investment properties and equipment 15,333,024 15,596,590
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES: (NOTE 8) 217,534 256,359
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 1,062,629 815,512
Cash restricted for real estate taxes 3,450 28,218
Cash held in Indemnification Trust (NOTE 11) 281,520 270,488
Rents and other receivables (net of allowance of
$8,120 in 1996 and $182,039 in 1995) 97,039 74,939
Deferred rent receivable 132,834 123,900
Due from affiliated partnerships(NOTE 12) 0 105,833
Due from current General Partner 0 1,754
Prepaid insurance 2,228 6,795
Unsecured notes receivable from lessees (net of allowance of
$19,500 in 1996) 0 0
Deferred charges (net of accumulated amortization
of $58,539 in 1996 and $55,343 in 1995) 16,646 19,844
----------- -----------
Total other assets 1,596,346 1,447,283
----------- -----------
DUE FROM FORMER AFFILIATES: (NOTE 2)
Due from former general partner affiliates 620,741 1,123,625
Allowance for uncollectible amounts due from
former affiliates (620,741) (830,051)
Restoration cost receivable 1,203,685 907,774
Allowance for uncollectible restoration receivable (1,203,685) (907,774)
----------- -----------
Due from former affiliates, net 0 293,574
----------- -----------
Total assets $17,146,904 $17,593,806
=========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
2
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
----------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
LIABILITIES:
<S> <C> <C>
Mortgage notes payable (NOTE 6) $ 1,135,519 $ 1,145,564
Accounts payable and accrued expenses 43,158 118,039
Payable to tenant 0 96,000
Due to current General Partner 1,232 959
Accrued interest payable 212,830 173,527
Security deposits 115,747 125,410
Real estate taxes payable 41,265 87,877
Unearned rental income 47,792 3,787
------------ ------------
Total liabilities 1,597,543 1,751,163
------------ ------------
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 42,146 30,181
Cumulative cash distributions (16,928) (12,142)
------------ ------------
25,218 18,039
------------ ------------
Limited Partners (25,000 interests outstanding) -
Capital contributions, net of offering costs 22,270,578 22,270,578
Cumulative net income 11,330,400 10,145,861
Cumulative cash distributions (18,866,741) (17,381,741)
Reallocation of former
general partners' capital 789,906 789,906
------------ ------------
15,524,143 15,824,604
------------ ------------
Total partners' capital 15,549,361 15,842,643
------------ ------------
Total liabilities and partners' capital $ 17,146,904 $ 17,593,806
============ ============
</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 Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
-------- -------- ---------- ----------
REVENUES:
<S> <C> <C> <C> <C>
Rental income $480,851 $490,314 $1,507,332 $1,458,060
Interest income on direct financing leases 5,664 6,923 17,965 21,648
Interest income 12,680 5,472 35,569 27,522
Other income 556 991 4,181 2,782
Lease termination fee 0 0 164,419 0
Recovery of amounts previously written off 4,115 0 209,310 0
-------- -------- ---------- ----------
503,866 503,700 1,938,776 1,510,012
-------- -------- ---------- ----------
EXPENSES:
Partnership management fees 22,770 20,861 67,896 66,980
Restoration fees 165 67 8,622 745
Insurance 4,053 4,540 13,326 14,550
General and administrative 11,027 9,854 48,996 42,236
Interest 27,175 28,175 81,504 83,570
Real estate taxes 13,027 (195) 13,027 52
Expenses incurred due to default by lessee 1,878 4,642 6,532 6,433
Professional services 20,231 32,379 60,253 93,280
Professional services related to investigation 2,833 41,326 163,634 85,718
Advisory Board fees and expenses 3,826 4,426 11,717 12,471
Depreciation 87,925 89,829 263,564 276,566
Amortization 1,066 662 3,197 1,986
-------- -------- ---------- ----------
195,976 236,566 742,268 684,587
-------- -------- ---------- ----------
NET INCOME $307,890 $267,134 $1,196,508 $ 825,425
======== ======== ========== ==========
NET INCOME - CURRENT GENERAL
PARTNER $ 3,079 $ 2,671 $ 11,965 $ 8,254
NET INCOME - LIMITED 304,811 264,463 1,184,543 817,171
PARTNERS -------- -------- ---------- ----------
$307,890 $267,134 $1,196,508 $ 825,425
======== ======== ========== ==========
NET INCOME PER LIMITED
PARTNERSHIP INTEREST,
based on 25,000 interests outstanding $ 12.19 $ 10.58 $ 47.38 $ 32.69
======== ======== ========== ==========
</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>
Nine Months Ended September 30,
-------------------------------
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,196,508 $ 825,425
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 263,761 278,552
Recovery of amounts previously written off (209,310) 0
Interest applied to Indemnification Trust Account (11,032) (11,448)
Increase in unearned rental income 44,005 72,000
(Increase) in rents and other receivables (17,347) (29,784)
(Increase) in deferred rent receivable (8,934) (11,907)
(Deposits)/Withdrawals for payment of real estate taxes 24,768 (36,576)
Decrease in prepaid expenses 4,567 2,465
Increase/(Decrease) in accounts
payable and accrued expenses (74,881) 34,928
(Decrease) in payable to tenant (96,000) (144,000)
(Decrease) in security deposits held (9,663) 0
Increase/(Decrease) in due to current General Partner 273 (604)
Increase in accrued interest payable 39,303 39,267
(Decrease) in real estate taxes payable (46,612) (89,460)
----------- -----------
Net cash provided from operating activities 1,099,406 928,858
----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Deposit to Indemnification Trust cash account 0 (60,000)
Payments from affiliated partnerships 105,833 39,019
Recoveries from former affiliates 502,884 18,634
Principal payments received on direct financing leases 38,825 28,832
Principal receipts on notes receivable 0 5,270
----------- -----------
Net cash provided by investing activities 647,542 31,755
----------- -----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Principal payments on mortgage notes (10,045) (6,997)
Cash distributions to Limited Partners (1,485,000) (1,440,000)
Cash distributions to current General Partner (4,786) (3,302)
----------- -----------
Net cash (used in) financing activities (1,499,831) (1,450,299)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 247,117 (489,686)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 815,512 1,169,554
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,062,629 $ 679,868
=========== ===========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 42,201 $ 44,302
=========== ===========
</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.
The Partnership is currently engaged in the business of owning and operating its
investment portfolio (the "Properties") of commercial real estate and recovering
the assets misappropriated by the former general partners and/or their
affiliates. The Properties are leased on a triple net basis to, and operated
by, franchisors or franchisees of national, regional and local retail chains
under long-term leases. The lessees consist of fast-food, family style, and
casual/theme restaurants. At September 30, 1996, the Partnership owned 22
properties and a parcel of undeveloped land.
Rental revenue from investment properties is recognized on the straight-line
basis over the life of the respective lease. Revenue from direct financing
leases is recognized at level rates of return over the term of the lease.
Depreciation of the properties is provided on a straight-line basis over 31.5
years which is the estimated useful lives of the buildings and improvements.
Equipment is depreciated on a straight-line basis over the estimated useful
lives of 5 years.
Real estate taxes on the Partnership's investment properties are the
responsibility of the tenant. However, when a tenant fails to make the required
tax payments or when a property becomes vacant, the Partnership makes the
appropriate payment to avoid possible foreclosure of the property. Taxes are
accrued in the period in which the liability is incurred.
Cash and cash equivalents include cash on deposit in financial institutions and
highly liquid temporary investments with initial maturities of 90 days or less.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities (and disclosure of
contingent assets and liabilities) at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
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 a majority in interest of the Limited Partners.
6
<PAGE>
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, 1995, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$4,000,000.
2. REGULATORY INVESTIGATION:
-------------------------
A preliminary investigation during 1992 by the Office of the Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation"), revealed that during at least the 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 $14,000,000, of which
approximately $1,824,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at September 30, 1996. The
9% interest accrued as of September 30, 1996, amounted to approximately $575,000
and is not reflected in the accompanying income statement. As of December 31,
1995, $2,031,000 was reflected as due from former affiliates based on the
estimated overall misappropriation and related costs of $15,700,000. Permanent
Manager Agreement ("PMA") savings, representing cost savings to the Partnerships
as a result of the implementation of the PMA, 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 is vigorously pursuing recovery of the
misappropriated funds from the various sources and initially estimated an
aggregate recovery of $3 million for the Partnerships, of which approximately
$400,000 was allocated to the Partnership. As such, an allowance has been
established against amounts due from former general partner affiliates
reflecting the current General Partner's best estimate of probable 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 recorded by the Partnership was
reduced by approximately $209,000 during the first nine months of 1996, as a
result of recoveries in excess of those estimates. Pending the resolution of
all sources of potential recovery, it is not possible to determine the actual
amount 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
September 30, 1996. Because of the significance of the weaknesses in the
internal control structure, there could be no certainty that all improper and
unsupported
7
<PAGE>
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 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 currently
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 September 30, 1996, 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) BW-3 restaurant, one
(1) Fazoli's restaurant, and one (1) former Porterhouse 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 September
30, 1996 and December 31, 1995, these costs totaled approximately $256,000 and
$220,000, respectively, and are not reflected in the Partnership's financial
statements. Management is currently attempting to sell the undeveloped parcel.
The land was originally purchased for $356,549 and has an adjusted carrying
value at September 30, 1996, 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 January 1995, the Partnership
evicted the tenant and took possession of the Porterhouse restaurant in Chicago,
Illinois. The tenant in this property had been delinquent and in bankruptcy
throughout 1994. Management is currently in lease negotiations with a potential
new tenant for this property.
During June 1996, the tenant of one of the Partnership's Chi-Chi's restaurants
vacated the property and paid a lease termination fee of $164,000, representing
one year's rent, real estate taxes and security deposit. Management is currently
negotiating a potential new lease for the property.
The tenant of the Partnership's Hardee's restaurant has experienced a
significant decline in sales over the past two years. Management has modified
the rent for this tenant for 1996 in an effort to avoid having the tenant vacate
the property resulting in a decrease in base rent for 1996 of approximately
$40,000. Additionally, delinquent rent totaling approximately $19,000 was
capitalized into a five (5) year note accruing interest at 10% per annum. The
Partnership recorded an allowance for uncollectible rent for the amount
capitalized at December 31, 1995. During September 1996, management began
negotiating a new lease with Hardee's Food Systems, Inc., whereby all payments
due fromTerratron for 1996 would be received. Management anticipates execution
of this lease during the Fourth Quarter of 1996.
The total cost of the investment properties and equipment includes the original
purchase price plus acquisition fees and other capitalized costs paid to an
affiliate of the former general partners.
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 amounting to approximately $3,700 through
February 28, 1993. In addition, the former general partner affiliate was
entitled to receive
8
<PAGE>
reimbursements of general and administrative costs, either direct or indirect,
amounting to approximately $26,000 through February 28, 1993. As a result of
the Investigation, the Partnership engaged a third party as Interim Manager in
October 1992. The Interim Manager received approximately $28,000 through
February 28, 1993, for management services. 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 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. The
minimum management fee and the maximum reimbursement for office rent and
overhead have increased annually by 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 $12,311 to date on the amounts recovered,
which has been offset against the 4% minimum fee.
Several of the Partnership's property leases contain purchase option provisions
with stated purchase prices in excess of the original cost of the properties.
The current General Partner is unaware of any unfavorable purchase options in
relation to original cost.
4. PARTNERSHIP AGREEMENT:
----------------------
The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that, for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
General Partners. The Partnership Agreement also provided for quarterly cash
distributions from Net Cash Receipts, as defined, within 60 days after the last
day of the first full calendar quarter following the date of release of the
subscription funds from escrow and each calendar quarter thereafter, in which
such funds were available for distribution with respect to such quarter. Such
distributions were to be made 90% to Limited Partners and 10% to the former
general partners, provided, however, that quarterly distributions would be
cumulative and were not to be made to the former general partners unless and
until each Limited Partner had received a distribution from Net Cash Receipts,
as defined, in an amount equal to 10.5% 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.
9
<PAGE>
On May 26, 1993, pursuant to the results of a solicitation of written consents
from the Limited Partners, the Partnership Agreement was amended to replace the
former general partners and amend various sections of the agreement. The former
general partners were replaced as General Partner by The Provo Group, Inc., an
Illinois corporation. Under the terms of the amendment, net profits or losses
from operations are allocated 99% to the Limited Partners and 1% to the current
General Partner. The amendment also provided for distributions from Net Cash
Receipts to be made 99% to the Limited Partners and 1% to the current General
Partner provided that quarterly distributions will be cumulative and will not be
made to the current General Partner unless and until each Limited Partner has
received a distribution from Net Cash Receipts in an amount equal to 10.5% per
annum, cumulative simple return on his or her Adjusted Original Capital, as
defined, from the Return Calculation Date, as defined except to the extent
needed by the General Partner to pay its federal and state income taxes on the
income allocated to it attributable to such year. Distributions paid to the
General Partner are based on the estimated tax liability resulting from
allocated income. Subsequent to the filing of the General Partner's income tax
returns, a true-up with actual distributions is made.
The provisions regarding distribution of Net Proceeds, as defined, were also
amended to provide that Net Proceeds are to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a 14% per annum, cumulative simple return therein from the
Return Calculation Date, including in the calculation of such return all prior
distributions of Net Cash Receipts and any prior distributions of Net Proceeds
under this clause except to the extent needed by the General Partner to pay its
federal and state income tax on the income allocated to it attributable to such
year; and (c) then, to Limited Partners, 99%, and to the General Partner, 1%, of
remaining Net Proceeds available for distribution.
Additionally, per the amendment of the Partnership Agreement dated May 26, 1993,
the total compensation paid to all persons for the sale of the investment
properties shall be limited to a competitive real estate commission, not to
exceed 6% of the contract price for the sale of the property. The General
Partner may receive up to one-half of the competitive real estate commission,
not to exceed 3%, provided that the General Partner provides a substantial
amount of services in the sales effort. It is further provided that a portion
of the amount of such fees payable to the General Partner is subordinated to its
success at recovering the funds misappropriated by the former general partners.
(See Note 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 breakpoints.
The lessee is responsible for occupancy costs such as maintenance, insurance,
real estate taxes, and utilities. Accordingly, these amounts are not reflected
in the statements of income, except in circumstances where, in management's
opinion, the Partnership will be required to pay such costs to preserve its
assets (i.e., payment of past-due real estate taxes). Management has determined
that the leases are properly classified as operating leases; therefore, rental
income is reported when earned and the cost of the property, excluding the cost
of the land, is depreciated over its estimated useful life.
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1996 $ 2,123,784
1997 2,163,564
1998 2,174,014
1999 2,176,764
2000 2,232,217
Thereafter 18,663,588
-----------
$29,533,931
===========
</TABLE>
Seven of these properties are leased to a single Popeye's franchisee in the
Chicago, Illinois area. Base rent for 1995 from this tenant amounted to 27% of
total base rent for the Partnership.
10
<PAGE>
6. MORTGAGE NOTES PAYABLE:
-----------------------
At September 30, 1996, mortgage notes payable consist of the following:
<TABLE>
<CAPTION>
Outstanding
Principal Interest Rate Maturity Date
----------- ------------- --------------
<S> <C> <C> <C>
a. $286,968 prime + 2.5% September 1997
b. 248,551 9.5% September 1997
c. 600,000 prime + 2.0% August 1992
----------
$1,135,519
==========
</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-3 restaurant located in Hopkins,
Minnesota, with a net book value at September 30, 1996 of $625,500. 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 September 30, 1996,
of $481,684. 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 September 30, 1996, the Partnership has not paid
debt service on this note. During 1993, 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 $1,197,940
at September 30, 1996. See Note 13 for further discussion of litigation
concerning this note. Interest in the amount of $213,000 was accrued,
but unpaid, as of September 30, 1996. The interest accrual has been
recorded at the face rate of the note. If the Partnership loses the
dispute, additional interest amounting to approximately $232,000,
representing the default interest, may be due and would be shared by the
Partnership and its affiliated Partnerships.
Scheduled maturities of all notes payable, with the exception of the
disputed $600,000 note payable mentioned above, are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1996 $ 3,138
1997 532,381
--------
$535,519
========
</TABLE>
11
<PAGE>
7. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the nine months ended September
30, 1996 and 1995, are as follows.
<TABLE>
<CAPTION>
Incurred as of Incurred as of
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Current General Partner
- - -----------------------
Management fees $67,896 $66,980
Restoration fees 8,622 745
Overhead allowance 5,657 5,505
Reimbursement for out-of-pocket expenses 8,586 9,446
Cash distribution 4,786 3,302
------- -------
$95,637 $85,978
======= =======
</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 comprised of the following as of
September 30, 1996:
<TABLE>
<CAPTION>
<S> <C>
Minimum lease payments receivable $257,607
Less - Unearned income (40,073)
--------
Net investment in direct financing leases $217,534
========
</TABLE>
Scheduled future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1996 $ 18,930
1997 75,720
1998 75,720
1999 75,720
2000 11,517
--------
$257,607
========
</TABLE>
9. GENERAL AND ADMINISTRATIVE EXPENSES:
------------------------------------
For the periods ended September 30, 1996 and 1995, general and administrative
expenses incurred by the Partnership were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
--------- ------- ------- ---------
<S> <C> <C> <C> <C>
Communication costs $ 8,455 $6,956 $32,335 $28,704
Travel costs 864 193 2,254 1,078
Overhead allowance 1,897 1,846 5,657 5,505
Income tax expense 0 0 4,506 3,365
Other administration (189) 859 4,244 3,584
------- ------ ------- -------
$11,027 $9,854 $48,996 $42,236
======= ====== ======= =======
</TABLE>
12
<PAGE>
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 is to be escrowed until the aggregate
amount of recovery for the funds misappropriated from the Partnerships by the
former general partners is greater than $4,500,000. Upon reaching such recovery
level, full disposition fees will thereafter be payable and fifty percent (50%)
of the previously escrowed amounts will be paid to the current General Partner.
At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining
escrowed disposition fees shall be paid to the current General Partner. If such
levels of recovery are not achieved, the current General Partner will contribute
the amounts escrowed towards the recovery. In lieu of an escrow, 50% of all
such disposition fees have been paid directly to the restoration account and
then distributed among the three Partnerships. After exceeding an aggregate
recovery of $4,500,000 during March 1996, 50% of the previously escrowed amounts
was paid back to the current General Partner. The remaining amount allocated to
the Partnership may be owed to the current General Partner if the $6,000,000
recovery level is met. As of September 30, 1996, the Partnership may owe the
current General Partner $5,189, which is currently reflected as a recovery, if
the $6,000,000 recovery level is achieved.
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 September 30, 1996. Funds are invested in U.S.
Treasury securities. In addition, interest totaling $31,520 has been credited
to the Trust as of September 30, 1996. The rights of the Permanent Manager to
the Trust shall be terminated upon the earliest to occur of the following
events: (I) the written release by the Permanent Manager of any and all interest
in the Trust; (ii) the expiration of the longest statute of limitations relating
to a potential claim which might be brought against the Permanent Manager and
which is subject to indemnification; or (iii) a determination by a court of
competent jurisdiction that the Permanent Manager shall have no liability to any
person with respect to a claim which is subject to indemnification under the
PMA. At such time as the indemnity provisions expire or the full indemnity is
paid, any funds remaining in the Trust will revert back to the general funds of
the Partnership.
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 repaid in full as of September 30, 1996.
Recoveries realized by the Partnerships are being distributed to each respective
partnership on the same basis as the restoration costs are currently being
allocated. Any available recovery funds have been utilized first to satisfy
amounts due other partnerships for amounts advanced under prior allocation
methods. As of September 30, 1996, the Partnerships recovered a total of
approximately $4,610,000 from the former general partners and their affiliates,
accountants and attorneys. Of this amount, the Partnership received its pro-
rata share in the amount of $596,163. Additionally, $40,347, representing 50%
of all previously escrowed disposition fees earned by the General Partner, is
reflected as a recovery. Of that amount, $5,189 was allocated to the
Partnership and is contingently payable to the General Partner upon achievement
of the final recovery level as described in Note 10.
13
<PAGE>
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:
-----------
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
value of the obligations of the Private Partnerships assigned to the Partnership
has been at a significant discount to their face amounts, and (ii) the General
Partner interests in such Private Partnerships often have little economic value.
The Partnership's recoveries in these bankruptcies have, 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 eighteen (18) of the bankruptcies to date have resulted in cash
payments to the Partnerships of a total of $580,000 and notes secured by
subordinated mortgages in the aggregate amount of $625,000. Two of the
settlement notes have subsequently been sold for a total of $50,000, and an
option has been granted to purchase the remaining note for $125,000. 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 note is now held by Boatmen's). The proceeds of the Note were not
received by the Partnership. As of September 30, 1996, the Partnership had not
paid debt service on the Note. The Partnership received a notice of default on
the Note in October 1993 and the Foreclosure Action was filed in February 1994.
As of September 30, 1996, interest in the amount of $213,000 was accrued, but
unpaid, on the Note. Boatmen's has agreed to stay its foreclosure proceedings.
Boatmen's answered the complaint and filed a motion for summary judgment to
which the Partnership responded. Boatmen's motion for summary judgment was
granted by the District Court. The Partnership appealed the summary judgment to
the United States Court of Appeals for the Eighth Circuit which overturned the
ruling of the District Court. The case has been remanded back to the District
Court for the completion of discovery and trial. Pursuant to the Restoration
Trust Account procedures described in Note 12, all of the Partnerships are
sharing the expenses of this litigation and any recoveries resulting
14
<PAGE>
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 November 15, 1996, the Partnership made distributions to the Limited Partners
for the Third Quarter of 1996 of $350,000 amounting to approximately $14.00 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
September 30, 1996, were originally purchased at a price, including acquisition
costs, of approximately $20,136,000.
The Partnership is currently marketing for sale or lease the vacant land in
Colorado Springs, Colorado and is pursuing a potential lease for the Porterhouse
restaurant in Chicago, Illinois and the Chi Chi's restaurant in Grand Forks,
North Dakota. Management will pursue all sale or leasing opportunities that may
arise.
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, amounted to $218,000 at September 30,
1996, compared to $256,000 at December 31, 1995. The decrease of $38,000 was a
result of principal payments received.
OTHER ASSETS
- - ------------
Cash and cash equivalents, including cash restricted for real estate taxes held
by the Partnership, were $1,066,000 at September 30, 1996, compared to $844,000
at December 31, 1995. The Partnership designated cash of $350,000 to fund the
Third Quarter 1996 distributions to Limited Partners, $585,000 for the payment
of accounts payable and accrued expenses, and the remainder represents reserves
deemed necessary to allow the Partnership to operate normally. Cash generated
through the operations of the Partnership's investment properties, sales of
investment properties, and any recoveries of misappropriated funds by the former
general partners will provide the sources for future fund liquidity and Limited
Partner distributions.
The Partnership established an Indemnification Trust (the "Trust") during the
Fourth Quarter of 1993 and deposited $100,000 in the Trust during 1993, $90,000
during 1994, and $60,000 during 1995. The provision to establish the Trust was
included in the Permanent Manager Agreement for the indemnification of TPG, in
the absence of fraud or gross negligence, from any claims or liabilities that
may arise from TPG acting as Permanent Manager. The Trust is owned by the
Partnership. For additional information regarding the Trust, refer to Note 11
to the financial statements.
15
<PAGE>
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 $621,000 at
September 30, 1996. The receivable decreased from December 31, 1995 due to
$503,000 of recoveries received from the former general partners and their
affiliates, including amounts recovered from the Partnership's former
accountants and attorneys.
The Partnership maintains a record of costs incurred in identifying or
recovering the misappropriated assets. These amounts are expensed when incurred,
and then, recorded on the balance sheet as a restoration cost receivable with a
corresponding allowance for such receivable deemed uncollectible. These costs
are considered due from the former general partners and their affiliates.
Interest has been accrued on the misappropriated funds since January 1, 1993, at
a rate of 9% per annum and has been included in the restoration cost receivable.
The receivable increased from approximately $908,000 at December, 31, 1995, to
$1,204,000 at September 30, 1996, and includes $575,000 of cumulative accrued
interest.
The current General Partner is vigorously pursuing recovery of the
misappropriated funds from the various sources and initially estimated an
aggregate recovery of $3 million for the Partnerships, of which approximately
$400,000 was allocated to the Partnership. As such, an allowance was
established against amounts due from the former general partners and their
affiliates reflecting the current General Partner's original estimate of
probable loss from misappropriated amounts. This allowance was allocated among
the Partnerships based on each Partnership's pro rata share of the total
misappropriation. The amount of the allowance recorded by the Partnership was
reduced by approximately $209,000 during the first nine months of 1996 due to
recoveries received in excess of the original 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. The allocation is adjusted periodically to reflect
any changes in the entire misappropriation. The Partnership's percentage of the
allocation was reduced in 1993. Consequently, the Partnership had been paying
more than its pro rata share of the costs. Accordingly, the Partnership
recorded a receivable at December 31, 1993, in the amount of $295,000, due from
DiVall 3 with a corresponding reduction reflected in professional expenses
relating to the Investigation, former general partner removal expenses, and
interim fund manager fees and expenses. Recoveries allocated to DiVall 3 have
been used to partially repay amounts owed to the Partnership. At December 31,
1995, the remaining amount due from DiVall 3 was $106,000. During March 1996,
the remaining amount due was repaid by DiVall 3 from its share of recoveries
received.
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 February 8,
1993, 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 September 30, 1996.
LIABILITIES
- - -----------
Mortgage notes payable decreased from $1,146,000 at December 31, 1995, to
$1,136,000 at September 30, 1996, due to monthly principal payments made on the
notes.
Accounts payable and accrued expenses at September 30, 1996, amounted to
approximately $43,000. The majority of this balance represented accruals of
legal and auditing fees.
Payable to tenant of $96,000 at December 31, 1996, 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 credited against
current rents during 1996.
16
<PAGE>
Real estate taxes payable amounted to $41,000 at September 30, 1996, compared to
$88,000 at December 31, 1995. The decrease is primarily a result of amounts
accrued for 1995 taxes on vacant properties which were paid in 1996.
PARTNERS' CAPITAL
- - -----------------
Net income for the quarter was allocated between the General Partner and the
Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement and the Amendment to the Partnership Agreement, as discussed more
fully in Note 4 of the financial statements. The former general partners'
capital account balance was reallocated to the Limited Partners at December 31,
1993. Refer to Note 14 to the financial statements for additional information
regarding the reallocation.
Cash distributions paid to the Limited Partners and to the General Partner
during 1996 of $1,485,000 and $4,786, respectively, have also been made in
accordance with the amended Partnership Agreement. The Third Quarter 1996
distribution of $350,000 was paid to the Limited Partners on November 15, 1996.
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. However, the settlement of litigation
against the Partnership's former accountants and attorneys should result in
operating results going forward which more closely represent "normal" operations
than what has been experienced during the past three years.
The Partnership reported net income for the quarter ended September 30, 1996, in
the amount of $308,000 compared to $267,000 for the quarter ended September 30,
1995. For the nine months ended September 30, 1996 and 1995, net income totaled
$1,197,000 and $825,000, respectively. Net income for 1996 includes a $164,000
lease termination fee received from the tenant of a Chi Chi's restaurant, which
is being recorded as income in the current period because management expects to
have a new lease in place prior to the end of 1996. Results for all 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, and modifications to leases. The costs related to the
misappropriation increased significantly during the First Quarter of 1996 as the
lawsuit against the former general partner accountants and attorneys got closer
to trial and due to the payment of contingent fees related to the settlement of
the litigation. These costs decreased during the remainder of 1996 due to the
settlement of the litigation.
REVENUES
- - --------
Total revenues were $504,000 and $504,000 for the quarters ended September 30,
1996 and 1995, respectively, and were $1,939,000 and $1,510,000 for the nine
months ended September 30, 1996 and 1995, respectively. Revenue for 1996
includes a $209,000 adjustment to the write-off of amounts due from the former
general partners, and a $164,000 lease termination fee.
Based on leases currently in place on the remaining owned properties, total
revenues should approximate $1,880,000 annually or $470,000 quarterly. Future
revenues may decrease with tenant defaults and/or sales of Partnership
properties or due to the early termination of leases. 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 September 30, 1996 and 1995, cash expenses amounted to
approximately 21% and 29% of total revenues, respectively. For the nine months
ended September 30, 1996 and 1995, cash expenses totaled approximately 25% and
27%, respectively. Total expenses, including non-cash items, amounted to
approximately 39% and 47% of total revenues for the quarters ended September 30,
1996 and 1995, and 38% and 45% for the
17
<PAGE>
nine months ended September 30, 1996 and 1995, respectively. Items negatively
impacting expenses include expenses incurred primarily in relation to the
misappropriation of assets by the former general partners and their affiliates
and interest expense.
For the nine months ended September 30, 1996 and 1995, expenses incurred in
relation to the misappropriated assets amounted to $164,000 and $86,000,
respectively. Future expenses incurred in relation to the misappropriation
should have only a minimal impact on the Partnership.
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" should be minimized going forward.
INFLATION:
- - ----------
Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio of triple net leases. By their nature, such leases actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes. If inflation causes operating margins to deteriorate for lessees
if expenses grow faster than revenues, then, inflation may well negatively
impact the portfolio through tenant defaults.
It would be misleading to associate inflation with asset appreciation for real
estate, in general, and the Partnership's portfolio, specifically. Due to the
"triple net" nature of the property leases, asset values generally move
inversely with interest rates.
PART II - OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
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
value of the obligations of the Private Partnerships assigned to the
Partnerships have been at a significant discount to their face amounts, and (ii)
the General Partner interests in such Private Partnerships often have little
economic value. The Partnership's recoveries in these bankruptcies have, 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 eighteen (18) of the bankruptcies to date have resulted in cash
payments to the Partnerships of a total of $580,000 and notes secured by
subordinated mortgages in the aggregate amount of $625,000. Two of the
settlement notes have subsequently been sold for a total $50,000, and an option
has been granted to purchase the remaining note for $125,000. The Partnership is
continuing to vigorously defend its interests in the remaining bankruptcies.
18
<PAGE>
The Partnerships have been named as defendants in certain foreclosure actions
brought in state courts in Wisconsin. In each of these actions, the plaintiff
seeks to foreclose on real property owned by one of the Private Partnerships.
The Partnerships were named as subordinate lienholders on the properties. It is
believed that none of these cases constitute a claim against the individual
Public Partnerships. However, if the foreclosures are successful, the Private
Partnerships' interest in the underlying real estate may be extinguished,
rendering individual obligations to the Partnerships uncollectible. Such a
foreclosure has occurred in one instance and is pending in at least one other
situation.
On March 24, 1994, the Partnership filed a complaint in the United States
District Court for the Western District of Missouri against Boatmen's First
National Bank of Kansas City ("Boatmen's") seeking a declaratory judgment that
Boatmen's has no right or interest in a promissory note executed in the name of
the Partnership by the former general partners (the "Note") secured by mortgages
on five Partnership properties, and further seeking an injunction against
foreclosure proceedings instituted against a Partnership property located in
Dallas, Texas, under a first deed of trust and security agreement given to
secure the Note (the "Foreclosure"). As further described in Note 6 to the
Financial Statements included in Part 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 September 30, 1996, the Partnership had not
paid debt service on the Note. The Partnership received a notice of default on
the Note in October 1993, and the Foreclosure Action was filed in February 1994.
As of September 30, 1996, interest in the amount of $213,000 had been accrued,
but was unpaid on the Note. The interest accrual has been recorded at the face
rate of the note. If the Partnership loses the dispute, additional interest
amounting to approximately $232,000 representing the default interest, may be
due. Boatmen's has agreed to stay its foreclosure proceedings. Boatmen's
answered the complaint and filed a motion for summary judgment to which the
Partnership responded. Boatmen's motion for summary judgment was granted by the
District Court. The Partnership appealed the summary judgment to the United
States Court of Appeals for the Eighth Circuit which overturned the ruling of
the District Court. The case has been remanded back to the District Court for
the completion of discovery and trial. 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 November 15, 1996
regarding the Third Quarter 1996 distribution.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the third quarter of
fiscal year 1996.
19
<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: November 13, 1996
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: November 13, 1996
By: /s/ Kristin J. Atkinson
-----------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: November 13, 1996
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from September
30, 1996 Form 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 1,066,079 1,066,079
<SECURITIES> 281,520 281,520
<RECEIVABLES> 2,376,866 2,376,866
<ALLOWANCES> 1,910,585 1,910,585
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,813,880 1,813,880
<PP&E> 19,675,494 19,675,494
<DEPRECIATION> 4,342,470 4,342,470
<TOTAL-ASSETS> 17,146,904 17,146,904
<CURRENT-LIABILITIES> 1,597,543 1,597,543
<BONDS> 0 0
<COMMON> 0 0
0 0
0 0
<OTHER-SE> 15,549,361 15,549,361
<TOTAL-LIABILITY-AND-EQUITY> 17,146,904 17,146,904
<SALES> 486,515 1,689,716
<TOTAL-REVENUES> 503,866 1,938,776
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 168,801 660,764
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 27,175 81,504
<INCOME-PRETAX> 307,890 1,196,508
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 307,890 1,196,508
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 307,890 1,196,508
<EPS-PRIMARY> 12.19 47.38
<EPS-DILUTED> 12.19 47.38
</TABLE>
<PAGE>
[LOGO OF THE PROVO GROUP]
November 15, 1996
RE: THIRD QUARTER 1996 CORRESPONDENCE
DIVALL INSURED INCOME FUND, L.P. (THE "PARTNERSHIP")
Dear Limited Partner:
-----------------------------
THIRD QUARTER 1996 HIGHLIGHTS
. Former general partner, GARY J. . Former general partner, PAUL E.
DIVALL, is currently scheduled to be MAGNUSON, recently pleaded
sentenced on DECEMBER 2, 1996 for "no-contest" to criminal charges
his plea of "no contest" to criminal brought against him by the Wisconsin
charges brought against him by the Attorney General's Office earlier
Wisconsin Attorney General's Office this year. A sentencing hearing date
earlier this year. has been "tentatively" scheduled for
JANUARY 1997.
-----------------------------
THIRD QUARTER 1996 "DISTRIBUTION" HIGHLIGHTS
. 6.2% (approx.) annualized return . $814.00 to $711.00 range of
from operations and other sources distribution per unit from the first
based on $22,576,000 ("net" unit sold to the last unit sold
remaining initial investment). before the offering closed (March
1988), respectively.
. $14.00 per unit (approx.) for the
THIRD QUARTER 1996 from both cash Distributions are from both cash flow
flow from operations and "net" cash from operations and "net" cash
activity from financing and activity from financing and investing
investing activities. activities.
. $350,000 "total" amount distributed (NOTE: ORIGINAL UNITS WERE PURCHASED
for the THIRD QUARTER 1996 as FOR $1,000/UNIT.)
budgeted.
1410 Northport Drive
Madison, Wisconsin 53704
Post Office Box 2137
Madison, Wisconsin 53701-2137
608.244.7661
FAX 608.244.7663
<PAGE>
[LOGO OF THE PROVO GROUP]
DiVall Insured Income Fund, L.P.
November 15, 1996
Page 2
----------------------------
STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS
. 0.4% decrease in . 9% increase in . 5% decrease in
OPERATING REVENUES "TOTAL" EXPENSES NET INCOME from projections.
from projections. from projections.
. Tenant DELINQUENCIES were $88,000 LESS than
budgeted for the Third Quarter of 1996.
. $13,000 of REAL ESTATE . $7,800 less RENTAL INCOME than
TAXES were paid by the budgeted was recorded during the
Partnership during the third quarter primarily due to the
third quarter for the Chi Chi's vacancy. (NOTE: The lease
"vacant" Chi Chi's termination fee received from the
restaurant in Grand Forks, former Chi Chi's tenant last quarter
ND. (NOTE: The lease included one-year's payment of rental
termination fee received income.)
last quarter from the
former Chi Chi's tenant
included one-year's
payment of property taxes.)
. Investigation and Restoration costs were $2,400
MORE than projected due to the legal costs
associated with the upcoming "BOATMEN'S" trial.
(NOTE: This lawsuit's expenses and recoveries are shared with
the Partnership's affiliated partnerships.)
----------------------------
PROPERTY HIGHLIGHTS
VACANCIES
---------
. PORTERHOUSE restaurant (Chicago, IL) . CHI CHI'S restaurant (Grand Forks,
was vacant at September 30, 1996. ND) was vacant at September 30, 1996.
The Partnership continues to work The Partnership is awaiting approval
with prospective tenants for either of proposed lease terms from a
the re-lease or sale of this "prospective" tenant for this
property. property.
<PAGE>
[LOGO OF THE PROVO GROUP]
DIVALL INSURED INCOME FUND, L.P.
November 15, 1996
Page 3
------------------------------------
PROPERTY HIGHLIGHTS (CONT'D)
RENTS RECEIVABLE
----------------
. Terratron, Inc., tenant of HARDEE'S restaurant (Fond du Lac, WI), remained
current with its monthly rental payments; however, they are delinquent with
their CATCH UP rental payments at September 30, 1996.
The Partnership is currently negotiating with HARDEE'S FOOD SYSTEMS, INC. as a
prospective tenant for this property. Delinquencies will be cured at the time
of closing which is scheduled to occur during the Fourth Quarter of 1996.
. BW-3 restaurant (Hopkins, MN), which was sublet by DenAmerica (formerly L&H
Restaurants) was $12,000 in DEFAULT at the quarter ended September 30, 1996.
DenAmerica continues to work with the Partnership to cure the rental income
delinquency of this BW-3 restaurant.
OTHER PROPERTY MATTERS
----------------------
. Bysom Enterprises, Ltd., tenant of seven (7) POPEYE'S restaurants in Chicago,
Illinois is current with all store rents. They have also experienced notable
SALES INCREASES over the past two (2) years. (NOTE: Previously, this tenant
had been consistently "delinquent" in rental payments to the Partnership.)
. TP Acquisition Corporation, tenant of four (4) TACO CABANA restaurants in
Texas, has recently experienced a significant SALES INCREASE over previous
years' sales.
------------------------------------
RESTORATION HIGHLIGHTS
. The Partnership continues its "discovery" phase with respect to the Boatmen's
litigation. The trial against BOATMEN'S First National Bank of Kansas City has
been "tentatively" rescheduled to occur during the SECOND QUARTER OF 1997.
. Recoveries received during the THIRD QUARTER 1996 totalled $4,100 (approx.)
for the Partnership.
. "Total" recoveries received TO DATE for the Partnership amount to
approximately $601,300.
<PAGE>
[LOGO OF THE PROVO GROUP]
DIVALL INSURED INCOME FUND, L.P.
November 15, 1996
Page 4
----------------------------------
RESTORATION HIGHLIGHTS (CONT'D)
. The Partnership is negotiating its final settlements with the
DiVall "PRIVATE" Partnerships.
----------------------------------
RETURN OF CAPITAL
The following table has been updated to present the breakdown of distributions
since the Partnership's first quarterly distribution, for the period ended
December 31, 1986 through September 30, 1996.
<TABLE>
<CAPTION>
================================================================================
DISTRIBUTION CAPITAL
------------ -------
ANALYSIS BALANCE
-------- -------
<S> <C> <C>
Original Capital Balance - $25,000,000
Cash Flow From Operations Since Inception $ 16,792,746 -
Total Distributions Since Inception (19,216,740) -
------------
(Return) of Capital $ (2,423,994) (2,423,994)
============ -----------
"NET" REMAINING INITIAL INVESTMENT
BY ORIGINAL PARTNERS - $22,576,006
===========
================================================================================
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
----------------------------------
ADVISORY BOARD
The thirteenth Advisory Board meeting was held on October 29 and 30, 1996.
The new Board member, Mr. Richard Otte, who replaced Mr. Michael Bloom (whose
term expired September 30, 1996), was given a comprehensive orientation of the
Partnerships' affairs. Mr. Otte was nominated by the Limited Partners and
selected to represent DiVall Insured Income Properties 2, L.P. to serve a two
(2) year term.
<PAGE>
[LOGO OF THE PROVO GROUP]
DIVALL INSURED INCOME FUND, L.P.
November 15, 1996
Page 5
-----------------------------------
ADVISORY BOARD (CONT'D)
The members carrying over from the prior Board include Mr. Gerhard Zoller
representing DiVall Insured Income Fund, L.P., Dr. Albert Eschen representing
DiVall Income Properties 3, L.P., and Mr. Todd Witthoeft representing the
broker/dealer community.
For further information regarding the new Advisory Board member, please refer
to the enclosed biographical summary.
-----------------------------------
QUESTIONS & ANSWERS
1. HAS THERE BEEN A DECISION MADE REGARDING THE PARTNERSHIP'S LIQUIDATION
ALTERNATIVES OR THE POSSIBILITY OF REPOSITIONING ITS ASSETS?
. As a result of the feedback we received from investors in DiVall
Insured Income Fund, L.P. (survey results enclosed), it has been
recommended that the Partnership be dissolved over the next 3-5 years.
In the interim, management will continue to work aggressively to
maximize the values of the Partnership's asset portfolio.
WE APPRECIATE THE FEEDBACK WE RECEIVED FROM THE SURVEY. THANK YOU FOR
YOUR PARTICIPATION.
2. WHAT ARE MY "IMMEDIATE" LIQUIDATION OPTIONS FOR INTERESTS IN THE
PARTNERSHIP?
. The only option for immediate liquidation of interests, at this time,
is through the secondary market. According to current secondary market
trading information provided to management, interests in the
Partnership are selling between $400-$500 per unit.
. IT IS IMPORTANT TO NOTE THAT PERIODICALLY YOU MAY RECEIVE DIRECT
"SOLICITATIONS" OF YOUR INTERESTS BY THIRD PARTIES. WE DO NOT CONTROL
NOR SUPPORT THESE SOLICITATION EFFORTS. WE STRONGLY URGE YOU TO
THOROUGHLY REVIEW ALL YOUR OPTIONS AND UNDERSTAND EACH SOLICITOR'S
MOTIVATION. WE ENCOURAGE YOU TO CONTACT US IF YOU HAVE ANY QUESTIONS
ABOUT YOUR INVESTMENT.
<PAGE>
[LOGO OF THE PROVO GROUP]
DIVALL INSURED INCOME FUND, L.P.
November 15, 1996
Page 6
------------------------------------
QUESTIONS & ANSWERS (CONT'D)
3. WHEN CAN I EXPECT TO RECEIVE MY SCHEDULE K-1 FOR 1996?
. Our current schedule for mailing all 1996 Schedule K-1's for your
Partnership and its affiliated partnerships is no later than March 14,
1997.
4. WHEN WILL 1996 PER UNIT VALUES BE AVAILABLE FOR MY INVESTMENT IN THE
PARTNERSHIP?
. The Partnership's 1996 "year-end" valuation information is tentatively
scheduled to be available by the First Quarter of 1997. We will
include this information in our 1996 Annual Reports which we plan to
mail by early April 1997.
5. WHEN CAN I EXPECT MY NEXT DISTRIBUTION MAILING?
. Your next scheduled distribution correspondence for the Fourth Quarter
of 1996 will be mailed on February 14, 1997.
As always, if you have any questions or need additional information, please
contact Investor Relations at 1-800-547-7686 or 1-608-244-7661. All written
inquiries may be mailed or faxed to our "NEW" location:
THE PROVO GROUP, INC.
Post Office Box 2137 1410 Northport Drive
Madison, Wisconsin 53701-2137 Madison, Wisconsin 53704
(FAX 608-244-7663)
Sincerely,
THE PROVO GROUP, INC.
By: /s/ Brenda Bloesch By: /s/ Kristin Atkinson
-------------------------------- ---------------------------------
Brenda Bloesch Kristin Atkinson
Director of Investor Relations V.P. - Finance and Administration
Enclosures
<PAGE>
DIVALL INSURED INCOME FUND L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
------------------------------------
3RD 3RD CASH
QUARTER QUARTER BETTER
9/30/96 9/30/96 (WORSE)
--------- ---------- ----------
<S> <C> <C> <C>
OPERATING REVENUES
Rental income $ 488,729 $ 480,851 $ (7,878)
Direct financing interest 5,664 5,664 0
Interest income 11,714 12,680 966
Recoveries of Amounts Previously Written Off 0 4,115 4,115
Other income 0 556 556
--------- ---------- ----------
TOTAL OPERATING REVENUES $ 506,107 $ 503,866 $ (2,241)
--------- ---------- ----------
OPERATING EXPENSES
Insurance $ 4,500 $ 4,053 $ 447
Management fees 22,812 22,770 42
Restoration fees 0 165 (165)
Overhead allowance 1,900 1,896 4
Advisory Board 4,250 3,826 424
Administrative 8,006 9,130 (1,124)
Professional services 250 2,470 (2,220)
Auditing 12,000 12,000 0
Legal 10,500 5,761 4,739
Real Estate Taxes 0 13,027 (13,027)
Defaulted tenants 100 1,878 (1,778)
--------- ---------- ----------
TOTAL OPERATING EXPENSES $ 64,318 $ 76,976 $ (12,658)
--------- ---------- ----------
INTEREST EXPENSE $ 27,430 $ 27,175 $ 255
--------- ---------- ----------
INVESTIGATION AND RESTORATION EXPENSES $ 385 $ 2,833 $ (2,448)
--------- ---------- ----------
NON-OPERATING EXPENSES
Depreciation $ 87,309 $ 87,927 $ (618)
Amortization 1,068 1,065 3
--------- ---------- ----------
TOTAL NON-OPERATING EXPENSES $ 88,377 $ 88,992 $ (615)
--------- ---------- ----------
TOTAL EXPENSES $ 180,510 $ 195,976 $ (15,466)
--------- ---------- ----------
NET INCOME $ 325,597 $ 307,890 $ (17,707)
OPERATING CASH RECONCILIATION: VARIANCE
----------
Depreciation and amortization 88,377 88,992 615
Recovery of amounts previously written off 0 (4,115) (4,115)
(Increase) Decrease in current assets (47,704) 40,753 88,457
Increase (Decrease) in current liabilities 5,188 30 (5,158)
G.P. distribution (1,302) (1,232) 70
Cash reserved for payables (20,000) (95,000) (75,000)
Advance from (to) future cash flows for current distributions (10,000) 0 10,000
--------- ---------- ----------
Net Cash Provided From Operating Activities $ 340,156 $ 337,318 $ (2,838)
--------- ---------- ----------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Payments received from affiliated partnerships 0 0 0
Recoveries from former G.P. affiliates 0 4,115 4,115
Principal received on equipment leases 13,264 13,265 1
Principal payments on mortgage notes (3,219) (3,437) (218)
--------- ---------- ----------
Net Cash Provided from Investing And Financing
Activities $ 10,045 $ 13,943 $ 3,898
--------- ---------- ----------
Total Cash Flow For Quarter $ 350,201 $ 351,261 $ 1,060
Cash Balance Beginning of Period 630,404 1,304,818 674,414
Less 2nd quarter distributions paid 8/96 (350,000) (685,000) (335,000)
Plus cash reserved above for payables and future distributions 30,000 95,000 65,000
--------- ---------- ----------
Cash Balance End of Period $ 660,605 $1,066,079 $ 405,474
Cash reserved for 3rd quarter L.P. distributions (350,000) (350,000) 0
Cash reserved for payment of payables and future distributions (185,000) (585,000) (400,000)
--------- ---------- ----------
Unrestricted Cash Balance End of Period $ 125,605 $ 131,079 $ 5,474
========= ========== ==========
PROJECTED ACTUAL VARIANCE
- - -----------------------------------------------------------------------------------------------------------
* Quarterly Distribution $ 350,000 $ 350,000 $ 0
Mailing Date 11/15/96 (enclosed) -
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
* Refer to distribution letter for detail of quarterly distribution.
<PAGE>
PROJECTIONS FOR
DISCUSSION PURPOSES
<TABLE>
<CAPTION>
DIVALL INSURED INCOME FUND L.P. ORIGINAL EQUITY $25,000,000
1996 PROPERTY SUMMARY NET DISTRIBUTION OF CAPITAL
AND RELATED ESTIMATED RECEIPTS SINCE INCEPTION $2,423,994
CURRENT EQUITY $22,576,006
PORTFOLIO
----------------------------- ---------------------------------------------
REAL ESTATE EQUIPMENT
----------------------------- ---------------------------------------------
- - ---------------------------------- BASE % LEASE LEASE * % *
CONCEPT LOCATION COST RENT YIELD EXPIRATION COST RECEIPTS RETURN
- - ---------------------------------- ----------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CHI CHI'S GRAND FORKS, ND 984,801 0 0.00%
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 95,000 8.59% 68,744 0 0.00%
DENNY'S ** SCOTTSDALE, AZ 1,051,157 107,500 10.23% 40,553 0 0.00%
DENNY'S ** MESA, AZ 1,028,036 82,100 7.99% 39,218 0 0.00%
DENNY'S ** PEORIA, AZ 1,105,926 93,000 8.41% 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 90,000 8.76%
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 1,474,569 132,000 8.95%
TACO CABANA DALLAS, TX 1,369,243 132,000 9.64%
TACO CABANA DALLAS, TX 1,257,596 132,000 10.50%
TACO CABANA DALLAS, TX 1,308,153 132,000 10.09%
- - --------------------------------- -------------------------------- -----------------------------
PORTFOLIO TOTALS (23 Properties) 19,865,862 1,819,720 9.16% 626,896 75,720 12.08%
- - --------------------------------- -------------------------------- -----------------------------
OUTSTANDING DEBT
-------------------------------- -----------------------------
AMOUNT ANNUAL CURRENT AMOUNT ANNUAL CURRENT
- - --------------------------------- OWED DEBT INTEREST OWED DEBT INTEREST
MORTGAGED PROPERTIES 9/30/96 SERVICE RATE 9/30/96 SERVICE RATE
- - --------------------------------- -------------------------------- -----------------------------
- - ---------------------------------
DENNY'S HOPKINS, MN 107,613 14,783 10.75% 179,355 24,637 10.75%
DENNY'S BEAVER DAM, WI 70,837 8,726 9.50% 177,714 21,514 9.50%
MULTIPLE STORES AZ, TX 600,000 0 8.50%
- - ---------------------------------
- - --------------------------------- -------------------------------- ----------------------------
TOTALS 778,450 23,509 - 357,069 46,151 -
- - --------------------------------- -------------------------------- ----------------------------
- - --------------------------------- -------------------------------- ----------------------------
NET AFTER DEBT 19,087,412 1,796,211 9.41% 269,827 29,569 10.96%
- - --------------------------------- -------------------------------- ----------------------------
<CAPTION>
-------------
TOTALS ON 22,576,006
- - ---------------------------------- ----------------------------------- EQUITY
CONCEPT LOCATION INVESTED RECEIPTS * RETURN * RAISE
- - ---------------------------------- ----------------------------------- -------------
<S> <C> <C> <C> <C> <C>
CHI CHI'S GRAND FORKS, ND 984,801 0 0.00%
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 95,000 8.09%
DENNY'S ** SCOTTSDALE, AZ 1,091,710 107,500 9.85%
DENNY'S ** MESA, AZ 1,067,254 82,100 7.69%
DENNY'S ** PEORIA, AZ 1,164,707 93,000 7.98%
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 90,000 8.76%
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 1,474,569 132,000 8.95%
TACO CABANA DALLAS, TX 1,369,243 132,000 9.64%
TACO CABANA DALLAS, TX 1,257,596 132,000 10.50%
TACO CABANA DALLAS, TX 1,308,153 132,000 10.09%
- - ---------------------------------- -----------------------------------
- - ---------------------------------- ----------------------------------- -------------
PORTFOLIO TOTALS (23 Properties) 20,492,758 1,895,440 9.25% 8.40%
- - ---------------------------------- ----------------------------------- -------------
OUTSTANDING DEBT
---------------------
AMOUNT ANNUAL
- - -------------------------------- OWED DEBT
MORTGAGED PROPERTIES 9/30/96 SERVICE
- - -------------------------------- ---------------------
- - --------------------------------
DENNY'S HOPKINS, MN 286,968 39,420
DENNY'S BEAVER DAM, WI 248,551 30,240
MULTIPLE STORES AZ, TX 600,000 0
- - -------------------------------- ---------------------
TOTALS 1,135,519 69,660
- - -------------------------------- ---------------------
- - -------------------------------- --------------------------------- -------------
NET AFTER DEBT 19,357,239 1,825,780 9.43% 8.09%
- - -------------------------------- --------------------------------- -------------
</TABLE>
* A portion of the amounts disclosed include a return of principal.
** Rent is based on 12.5% of monthly sales. Rent projected for 1996 is
based on 1995 sales levels.
<PAGE>
[LOGO]
- - --------------------------------------------------------------------------------
BIOGRAPHICAL SUMMARY FOR
------------------------
RICHARD W. OTTE
---------------
Current Position: Mr. Otte is in his sixth year as an Editorial Board member and
editorial writer for The Volusian, a DeLand, Florida, subsidiary of the
News-Journal Corporation in Daytona Beach, Florida.
Experience: Mr. Otte retired in 1988 after 34 years with the Dispatch Printing
Co., serving his last eight years as Managing Editor of the Columbus Dispatch
and as a member of its Operating Committee. He previously was the executive
sports editor of the newspaper in Ohio's capital city. Mr. Otte's 49 years in
professional journalism also include news reporting, editing and sports
assignments with the Daytona Journal Herald and Springfield News-Sun. He was
co-owner of the Daytona Beach Astros professional baseball club in 1979-1980.
Affiliations: Mr. Otte is a Life Member of the National Amateur Athletic Union
as well as past president of the Ohio AAU, Ohio Associated Press Society and
Ohio AP Sports Writers Association. He was a founder and past president of the
Central Ohio Swimming Association.
Personal: Mr. Otte and wife Marjory reside in the Spruce Creek Fly-In Community
near Daytona Beach. Both are graduates of Wittenberg University. Mr. Otte was
presented the Ohio Associated Press Special Recognition Award in 1986,
Wittenberg's Distinguished Graduate Award in 1987 and a Sigma Delta Chi
Professional Journalism Society Appreciation Award in 1988.
- - --------------------------------------------------------------------------------
<PAGE>
[LOGO]
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
DIVALL INSURED INCOME FUND, L.P. - INVESTMENT SURVEY RESPONSE SUMMARY SHEET
Total Number of DiVall 1 Investors = 1,785 Total Number of DiVall 1 Investor Responses = 609
Total Number of Units in DiVall 1 = 25,000 Total Number of DiVall 1 Unit Responses = 9,785.50
Total Investor Response Percentage 34.12%
Total Unit Response Percentage 39.14%
Strongly For For No Opinion Against Strongly Against
----------------- ----------------- ----------------- ----------------- ----------------
Investors Units Investors Units Investors Units Investors Units Investors Units
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Maximize values for future liquidation. 66.67% 62.81% 17.73% 19.14% 11.66% 15.32% 2.13% 1.06% 1.81% 1.67%
Create additional current liquidity
alternatives. 26.60% 27.23% 28.24% 30.21% 33.83% 34.08% 5.42% 5.28% 5.91% 3.20%
Create long-term income and preserve
tax advantages. 18.06% 20.90% 15.11% 14.62% 34.65% 34.59% 17.41% 14.55% 14.78% 15.33%
Grow the portfolio through reinvestment
of distributions; additional L.P.
investment; and/or debt financing 4.76% 3.75% 4.11% 3.06% 33.00% 33.90% 22.33% 23.36% 35.80% 35.94%
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
