<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
June 30, 1996 and December 31, 1995
-----------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
June 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 (4,254,543) (4,078,904)
----------- -----------
Net investment properties and equipment 15,420,951 15,596,590
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES:(NOTE 8) 230,800 256,359
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 1,015,431 815,512
Cash restricted for real estate taxes 3,461 28,218
Cash held in Indemnification Trust(NOTE 11) 277,409 270,488
Restoration escrow account 285,926 0
Rents and other receivables (net of allowance of
$7,955 in 1996 and $182,039 in 1995) 98,018 74,939
Deferred rent receivable 128,865 123,900
Due from affiliated partnerships(NOTE 12) 0 105,833
Due from current General Partner 0 1,754
Prepaid insurance 6,280 6,795
Unsecured notes receivable from lessees (net of allowance of
$19,500 in 1996) 0 0
Deferred charges (net of accumulated amortization
of $57,473 in 1996 and $55,343 in 1995) 17,712 19,844
----------- -----------
Total other assets 1,833,102 1,447,283
----------- -----------
DUE FROM FORMER AFFILIATES:(NOTE 2)
Due from former general partner affiliates 624,856 1,123,625
Allowance for uncollectible amounts due from
former affiliates (624,856) (830,051)
Restoration cost receivable 1,160,827 907,774
Allowance for uncollectible restoration receivable (1,160,827) (907,774)
----------- -----------
Due from former affiliates, net 0 293,574
----------- -----------
Total assets $17,484,853 $17,593,806
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
-----------------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1996 1995
----------- ----------
<S> <C> <C>
LIABILITIES:
Mortgage notes payable (NOTE 6) $ 1,138,956 $ 1,145,564
Accounts payable and accrued expenses 28,852 118,039
Payable to tenant 8,000 96,000
Due to current General Partner 2,093 959
Accrued interest payable 199,633 173,527
Security deposits 115,747 125,410
Real estate taxes payable 60,074 87,877
Unearned rental income 3,792 3,787
----------- -----------
Total liabilities 1,557,147 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 39,067 30,181
Cumulative cash distributions (15,696) (12,142)
----------- -----------
23,371 18,039
----------- -----------
Limited Partners (25,000 interests outstanding) -
Capital contributions, net of offering costs 22,270,578 22,270,578
Cumulative net income 11,025,592 10,145,861
Cumulative cash distributions (18,181,741) (17,381,741)
Reallocation of former
general partners' capital 789,906 789,906
----------- -----------
15,904,335 15,824,604
----------- -----------
Total partner's capital 15,927,706 15,842,643
----------- -----------
Total liabilities and partners' capital $17,484,853 $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 Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income $506,313 $476,931 $1,026,481 $967,746
Interest income on direct financing leases 5,991 7,218 12,301 14,725
Interest income 13,391 12,465 22,889 2,050
Other income 3,031 664 3,625 1,791
Lease termination fee 164,419 0 164,419 0
Recovery of amounts previously written off 4,662 0 205,195 0
-------- -------- ---------- ---------
697,807 497,278 1,434,910 1,006,312
-------- -------- ---------- ---------
EXPENSES:
Partnership management fees 22,770 24,493 45,126 46,119
Restoration fees 187 543 8,457 678
Insurance 4,774 4,454 9,273 10,010
General and administrative 24,848 18,078 37,969 32,382
Interest 27,120 28,024 54,329 55,395
Real estate taxes 0 247 0 247
Expenses incurred due to default by lessee 1,667 824 4,654 1,791
Professional services 18,959 20,942 40,022 60,901
Professional services related to
investigation (18,478) 32,784 160,801 44,392
Advisory board fees and expenses 3,679 3,912 7,891 8,045
Depreciation 87,925 91,574 175,639 186,737
Amortization 1,066 662 2,131 1,324
-------- -------- ---------- ---------
174,517 226,537 546,292 448,021
-------- -------- ---------- ---------
NET INCOME $523,290 $270,741 $888,618 $558,291
======== ======== ========== =========
NET INCOME - CURRENT GENERAL
PARTNER $5,233 $2,707 $8,886 $5,583
NET INCOME - LIMITED PARTNERS 518,057 268,034 879,732 552,708
-------- -------- ---------- ---------
$523,290 $270,741 $888,618 $558,291
======== ======== ========== =========
NET INCOME PER LIMITED
PARTNERSHIP INTEREST,
based on 25,000 interests outstanding $20.72 $10.72 $35.19 $22.11
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $888,618 $558,291
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 177,770 188,061
Recovery of amounts previously written off (205,195) 0
Interest applied to Indemnification Trust Account (6,921) (11,448)
Increase in unearned rental income 5 92,000
(Increase)/Decrease in rents and other receivables (21,325) 11,621
(Increase) in deferred rent receivable (4,965) (7,938)
(Deposits)/Withdrawals for payment of real estate taxes 24,757 (43,600)
(Increase)/Decrease in prepaid expenses 515 (2,075)
Increase/(Decrease) in accounts
payable and accrued expenses (89,187) 16,668
(Decrease) in payable to tenant (88,000) (144,000)
(Decrease) in security deposits held (9,663) 0
Increase/(Decrease) in due to current General Partner 1,134 1,755
Increase in accrued interest payable 26,106 26,035
(Decrease) in real estate taxes payable (27,803) (82,436)
---------- ----------
Net cash provided from operating activities 665,846 602,934
---------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Deposit to Indemnification Trust cash account 0 (60,000)
Payments from affiliated partnerships 105,833 35,518
Recoveries from former affiliates 498,769 16,963
Deposits to restoration escrow account (285,926) 0
Principal payments received on direct financing leases 25,559 23,135
Principal receipts on notes receivable 0 4,603
---------- ----------
Net cash provided by (used in) investing activities 344,235 20,219
---------- ----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Principal payments on mortgage notes (6,608) (4,327)
Cash distributions to Limited Partners (800,000) (960,000)
Cash distributions to current General Partner (3,554) (2,233)
---------- ----------
Net cash (used in) financing activities (810,162) (966,560)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 199,919 (343,407)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 815,512 1,169,554
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,015,431 $826,147
========== ==========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $28,223 $29,360
========= ==========
</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 June 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
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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 $13,800,000, of which
approximately $1,786,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at June 30, 1996. The 9%
interest accrued as of June 30, 1996, amounted to approximately $534,000 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 $205,000 during the first six 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 June
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 June 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 June 30,
1996 and December 31, 1995, these costs totaled approximately $244,000 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 June 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
paid a lease termination fee of $164,000, representing one year's rent, real
estate taxes and security deposit, and vacated the property. Management is
currently negotiating a potential new lease for the property.
The tenant of the Partnership's Hardee's restaurant has experienced significant
declines 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.
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 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,
8
<PAGE>
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 $12,146 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.
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
9
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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 June 30, 1996, mortgage notes payable consist of the following:
<TABLE>
<CAPTION>
Outstanding
Principal Balance Interest Rate Maturity Date
----------------- -------------- --------------
<C> <C> <C>
a. $ 288,904 prime + 2.5% September 1997
b. 250,052 9.5% September 1997
c. 600,000 prime + 2.0% August 1992
--------
$1,138,956
==========
</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 June 30, 1996 of $630,090. The proceeds of the note were
used to convert a Rocky Rococo restaurant to a Denny's restaurant.
b. In September 1992, the Partnership entered into a loan agreement with Bank
One, Beaver Dam, Wisconsin, in the amount of $270,000. The loan bears
interest at 9.5% and is payable in monthly installments of $2,520 through
September 1997, with a lump-sum amount of $239,747 due at that time. The
loan is secured by a mortgage on a Denny's restaurant located in Beaver
Dam, Wisconsin, with a net book value at June 30, 1996, of $485,543. The
proceeds of the loan were used to convert a Rocky Rococo restaurant to a
Denny's restaurant.
c. During the Investigation, discussed in Note 2, it was discovered that the
former general partners borrowed $600,000 during or before 1991 from Metro
North State Bank in Missouri (this loan is now held by Boatmen's First
National Bank of Kansas City) secured by mortgages on five (5) Partnership
properties. The mortgage note bears interest at the referenced prime rate,
as defined, plus 2% and was due August 15, 1992. The proceeds of the note
were not received by the Partnership and, accordingly, a corresponding
amount due from former affiliates was recorded in 1992. As of June 30,
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 $1,201,779 at June 30, 1996. See Note 13 for further
discussion of litigation concerning this note. Interest in the amount of
$200,000 was accrued, but unpaid, as of June 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
$218,000, representing the default interest, may be due and would be
shared by the Partnership and its affiliated Partnerships.
11
<PAGE>
Scheduled maturities of all notes payable, with the exception of
the disputed $600,000 note payable mentioned above, are as
follows:
Year ending
December 31,
1996 $ 6,575
1997 532,381
---------
$ 538,956
===========
7. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the six months ended June 30,
1996 and 1995, are as follows.
<TABLE>
<CAPTION>
Incurred as of Incurred as of
June 30, 1996 June 30, 1995
-------------- --------------
Current General Partner
- - -----------------------
<S> <C> <C>
Management fees $45,126 $46,119
Restoration fees 8,457 678
Overhead allowance 3,760 3,659
Reimbursement for out-of-pocket expenses 6,190 4,613
Cash distribution 3,554 2,233
------- -------
$67,087 $57,302
======= =======
</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 June
30, 1996:
Minimum lease payments receivable $ 276,538
Less - Unearned income (45,738)
--------
Net investment in direct financing leases $ 230,800
==========
Scheduled future minimum lease payments are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending
December 31,
1996 $ 37,861
1997 75,720
1998 75,720
1999 75,720
2000 11,517
--------
$276,538
========
</TABLE>
12
<PAGE>
9. GENERAL AND ADMINISTRATIVE EXPENSES:
------------------------------------
For the periods ended June 30, 1996 and 1995, general and administrative
expenses incurred by the Partnership were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
-------- --------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Communication costs $16,967 $14,141 $23,880 $21,748
Travel costs 670 485 1,390 885
Overhead allowance 1,897 1,846 3,760 3,659
Income tax expense 4,506 0 4,506 3,365
Other administration 808 1,606 4,433 2,725
------- ------- ------- -------
$24,848 $18,078 $37,969 $32,382
======= ======= ======= =======
</TABLE>
10. CONTINGENT LIABILITIES:
----------------------
According to the Partnership Agreement, as amended, the current General Partner
may receive a disposition fee not to exceed 3% of the contract price of the sale
of investment properties. Fifty percent (50%) of all such disposition fees
earned by the current General Partner 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 June 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 June 30, 1996. Funds are invested in U.S. Treasury
securities. In addition, interest totaling $27,409 has been credited to the
Trust as of June 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.
13
<PAGE>
12. RESTORATION TRUST ACCOUNT; EXPENSE ALLOCATIONS;
AND RELATED INTER-PARTNERSHIP RECEIVABLES:
Restoration costs represent expenses incurred by the Partnership in relation to
the misappropriated assets by the former general partners and their affiliates.
These costs are allocated among the Partnerships based on each partnership's
respective share of the entire misappropriation, as currently quantified. The
amount of misappropriation for each partnership is adjusted annually to reflect
new discoveries and more accurate quantification of amounts based on the
continuing investigation. Such adjustments will result in periodic adjustments
to prior allocations of recovery costs to reflect updated information.
Consequently, previous payments for restoration expenses may not be consistent
with modified allocations. Based on modified allocations adjusted as of
December 31, 1993, the Partnership was owed $295,053 from DiVall 3 for amounts
paid on its behalf. Such amounts are reflected on the balance sheet as due from
affiliated partnerships. During 1994, the Partnership made an additional
adjustment increasing the amount due from DiVall 3 by $5,346. These amounts
have been repaid in full as of June 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 June 30, 1996, the Partnerships recovered a total of
approximately $4,578,000 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 $592,048. Additionally, $40,347, representing 25% of
all disposition fees earned by the General Partner have been paid to the
recovery. Of that amount, $5,189 was allocated to the Partnership and is
contingently payable to the General Partner upon achievement of the final
recovery level as described in Note 10.
The PMA contemplated that the Permanent Manager could establish a separate and
distinct Restoration Trust Fund which would hold all recoveries until a final
independent adjudication by a court of competent jurisdiction or vote of the
Limited Partners ratified the allocation of proceeds to each respective
partnership. Management has concluded that a fair and reasonable interim
accounting for recovery proceeds can be accomplished at the partnership level in
a manner similar to restoration costs which are paid directly by the
Partnerships. Management reserves the right to cause the final allocation of
such costs and recoveries to be determined either by a vote of the Limited
Partners or a court of competent jurisdiction. Potential sources of recoveries
include third-party litigation, promissory notes, land contracts, and personal
assets of the former general partners and their affiliates.
13. LITIGATION:
-----------
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.
14
<PAGE>
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 $573,000 and notes secured by
subordinated mortgages in the aggregate amount of $625,000. The Partnership is
continuing to vigorously defend its interests in the remaining bankruptcies.
On March 24, 1994, the Partnership filed a complaint in the United States
District Court for the Western District of Missouri against Boatmen's First
National Bank of Kansas City ("Boatmen's) seeking a declaratory judgment that
Boatmen's has no right or interest in a promissory note executed in the name of
the Partnership by the former general partners (the "Note") secured by mortgages
on five Partnership properties, and further seeking an injunction against
foreclosure proceedings instituted against a Partnership property located in
Dallas, Texas, under a first deed of trust and security agreement given to
secure the Note (the "Foreclosure"). As further described in Note 6, the former
general partners borrowed $600,000 during or before 1991 from Metro North State
Bank (the note is now held by Boatmen's). The proceeds of the Note were not
received by the Partnership. As of June 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 June 30, 1996, interest in the amount of $200,000 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 effectively from the
partial or full cancellation of the alleged indebtedness will be allocated among
the three Partnerships on the same basis as the restoration costs are currently
being allocated via appropriate payments by the Partnership to its affiliated
Partnerships.
14. FORMER GENERAL PARTNERS' CAPITAL ACCOUNTS:
------------------------------------------
The capital account balance of the former general partners as of May 26, 1993,
the date of their removal as general partners pursuant to the results of a
solicitation of written consents from the Limited Partners, was $789,906.
Because any amount payable to the former general partners with respect to their
capital accounts is subject to (a) the satisfaction of certain preferential
return requirements for the Limited Partners (See Note 4); and (b) the
assignment of such amounts to the Partnerships with respect to the amounts due
to the Partnerships from the former general partners, payment to the former
general partners with respect to their capital account balances as of May 26,
1993, is highly remote. In the unlikely event that the Partnership would owe
the former general partners any residual amount, such amounts would be due the
restoration fund for the benefit of all the Partnerships, and therefore
represent a contingent liability. At December 31, 1993, the former general
partners' capital account balance in the amount of $789,906 was reallocated to
the Limited Partners.
15. SUBSEQUENT EVENTS:
------------------
On August 15, 1996, the Partnership made distributions to the Limited Partners
for the Second Quarter of 1996 of $685,000 amounting to approximately $27.40 per
limited partnership interest.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
- - --------------------------------
INVESTMENT PROPERTIES AND NET INVESTMENT IN DIRECT FINANCING LEASES
- - -------------------------------------------------------------------
The investment properties, including equipment held by the Partnership at June
30, 1996, were originally purchased at a price, including acquisition costs, of
approximately $20,136,000.
15
<PAGE>
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 $231,000 at June 30, 1996,
compared to $256,000 at December 31, 1995. The decrease of $25,000 was a result
of principal payments received.
OTHER ASSETS
- - ------------
Cash and cash equivalents, including cash restricted for real estate taxes and
the restoration escrow held by the Partnership, were $1,305,000 at June 30,
1996, compared to $844,000 at December 31, 1995. The Partnership designated
cash of $685,000 to fund the Second Quarter 1996 distributions to Limited
Partners, $490,000 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.
A Restoration escrow account was established during the First Quarter of 1996,
and $283,000, representing the net proceeds to the Partnership from the
settlement of the litigation against the Partnerships' former accountants and
attorneys, was deposited into the account. Interest deposited to the account
during the Second Quarter of 1996 totaled $3,000. For information regarding the
settlement, refer to PART II, Item 1 of this report. The balance of this
account is being distributed to limited partners as part of the Second Quarter
distribution on August 15, 1996.
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.
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 $625,000 at June
30, 1996. The receivable decreased from December 31, 1995 due to $499,000 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
$1,161,000 at June 30, 1996, and includes $534,000 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 $205,000 during the first six months of 1996 due to
recoveries received in excess of the original estimate.
16
<PAGE>
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 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 June 30, 1996.
LIABILITIES
- - -----------
Mortgage notes payable decreased from $1,146,000 at December 31, 1995, to
$1,139,000 at June 30, 1996, due to monthly principal payments made on the
notes.
Accounts payable and accrued expenses at June 30, 1996, amounted to
approximately $29,000. The majority of this balance represented accruals of
legal and auditing fees.
Payable to tenant of $8,000 at June 30, 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 is being credited
against current rents during 1996.
Real estate taxes payable amounted to $60,000 at June 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 $800,000 and $3,554, respectively, have also been made in
accordance with the amended Partnership Agreement. The Second Quarter 1996
distribution of $685,000 was paid to the Limited Partners on August 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.
17
<PAGE>
The Partnership reported net income for the quarter ended June 30, 1996, in the
amount of $523,000 compared to $271,000 for the quarter ended June 30, 1995.
For the six months ended June 30, 1996 and 1995, net income totaled $889,000 and
$558,000, 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 Second Quarter
of 1996 due to the settlement of the litigation.
REVENUES
- - --------
Total revenues were $698,000 and $497,000 for the quarters ended June 30, 1996
and 1995, respectively, and were $1,435,000 and $1,006,000 for the six months
ended June 30, 1996 and 1995, respectively. Revenue for 1996 includes a
$200,000 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 June 30, 1996 and 1995, cash expenses amounted to
approximately 12% and 27% of total revenues, respectively. For both the six
months ended June 30, 1996 and 1995, cash expenses totaled approximately 26%.
Total expenses, including non-cash items, amounted to approximately 25% and 46%
of total revenues for the quarters ended June 30, 1996 and 1995, and 38% and 45%
for the six months ended June 30, 1996 and 1995. 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 six months ended June 30, 1996 and 1995, expenses incurred in relation
to the misappropriated assets amounted to $161,000 and $44,000, 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.
18
<PAGE>
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 $573,000 and notes secured by
subordinated mortgages in the aggregate amount of $625,000. The Partnership is
continuing to vigorously defend its interests in the remaining bankruptcies.
The Partnerships have been named as defendants in certain foreclosure actions
brought in state courts in Wisconsin. In each of these actions, the plaintiff
seeks to foreclose on real property owned by one of the Private Partnerships.
The Partnerships were named as subordinate lienholders on the properties. It is
believed that none of these cases constitute a claim against the individual
Public Partnerships. However, if the foreclosures are successful, the Private
Partnerships' interest in the underlying real estate may be extinguished,
rendering individual obligations to the Partnerships uncollectible. Such a
foreclosure has occurred in one instance and is pending in at least one other
situation. The Partnership is also pursuing collection actions against former
tenants of the Partnership and/or guarantors of former tenants of the
Partnership arising from defaults on their leases. Although the Partnership
believes its claims are valid, it is currently unknown whether the Partnerships
will receive favorable verdicts or whether any such verdicts will ultimately
prove collectible.
On March 24, 1994, the Partnership filed a complaint in the United States
District Court for the Western District of Missouri against Boatmen's First
National Bank of Kansas City ("Boatmen's") seeking a declaratory judgment that
Boatmen's has no right or interest in a promissory note executed in the name of
the Partnership by the former general partners (the "Note") secured by mortgages
on five Partnership properties, and further seeking an injunction against
foreclosure proceedings instituted against a Partnership property located in
Dallas, Texas, under a first deed of trust and security agreement given to
secure the Note (the "Foreclosure"). As further described in Note 6 to the
Financial Statements included in Part I, Item 1 of this report, the former
general partners borrowed $600,000 during or before 1991 from Metro North State
Bank (the note is now held by Boatmen's). The proceeds of the Note were not
received by the Partnership. As of June 30, 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 June 30, 1996, interest in the amount of $200,000 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 $218,000 representing the
19
<PAGE>
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 August 15, 1996
regarding the Second Quarter 1996 distribution.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the second quarter of
fiscal year 1996.
20
<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: ___________________________________________
Bruce A. Provo, President
Date: August 14, 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: ___________________________________________
Bruce A. Provo, President
Date: August 14, 1996
By: ___________________________________________
Kristin J. Atkinson
Vice President - Finance and Administration
Date: August 14, 1996
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
By: The Provo Group, Inc., General Partner
By: /s/ Bruce A. Provo
-------------------------------------------
Bruce A. Provo, President
Date: August 14, 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: August 14, 1996
By: /s/ Kristin J. Atkinson
-------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: August 14, 1996
22
<PAGE>
[LOGO OF THE PROVO GROUP]
August 15, 1996
RE: SECOND QUARTER 1996 CORRESPONDENCE
DIVALL INSURED INCOME FUND, L.P. (THE "PARTNERSHIP")
Dear Limited Partner:
=========================
SECOND QUARTER 1996 HIGHLIGHTS
. During the Second Quarter of 1996, the Partnership TERMINATED its lease
agreement with CHI CHI'S in Grand Forks, North Dakota. (See "Property
Highlights" below.)
. "NET" settlement PROCEEDS from the Quarles & Brady and Ernst & Young lawsuit
were DISTRIBUTED this quarter. (See "Statements of Income and Cash Flow
Highlights" below.)
. The Wisconsin ATTORNEY GENERAL'S Office is SEEKING investor INPUT before
sentencing Gary J. DiVall and Paul E. Magnuson. (See enclosed correspondence
from the Office of Crime Victim Services.)
. Unauthorized "THIRD-PARTY" solicitations causing investor concern. (See
Questions & Answers below.)
=========================
SECOND QUARTER 1996 "DISTRIBUTION" HIGHLIGHTS
. 7.1% (approx.) annualized return from operations and other sources and 1.3%
(approx.) non-annualized return of capital from distributed "net" settlement
dollars based on $22,590,000 ("net" remaining initial investment).
. $27.40 per unit (approx.) for the SECOND QUARTER 1996 from both cash flow
from operations and "net" cash activity from financing and investing
activities.
. $685,000 "total" amount distributed for the SECOND QUARTER 1996 which was
$335,000 more than budgeted, primarily due to the disbursement of "net"
settlement dollars.
. $800.00 "total" per unit (approx.) distributed SINCE INCEPTION from both cash
flow from operations and "net" cash activity from financing and investing
activities. (NOTE: ORIGINAL UNITS WERE PURCHASED FOR $1,000/UNIT.)
<PAGE>
[LOGO OF THE PROVO GROUP]
DiVall Insured Income Fund, L.P.
August 15, 1996
Page 2
=========================
STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS
. 3% increase in OPERATING REVENUES from projections.
. 4% increase in OPERATING EXPENSES from projections.
. 68% increase in total NET INCOME from projections.
. $283,000 total "NET" SETTLEMENT DOLLARS from the Quarles & Brady and Ernst &
Young lawsuit were distributed for the quarter ended June 30, 1996.
. $34,000 reversal of RESTORATION COSTS WHICH were previously accrued for the
Partnership.
. Tenant DELINQUENCIES were $11,000 LESS than budgeted for the quarter.
. $7,100 MORE in RENTAL INCOME than budgeted was recorded during the second
quarter due to percentage rents.
PROPERTY HIGHLIGHTS
VACANCIES
---------
. PORTERHOUSE restaurant (Chicago, IL) was vacant at June 30, 1996. The
Partnership is currently working with other prospective tenants for either
the re-lease or sale of this property.
It should be noted that the lease agreement negotiated earlier this year with
BJ's Market is still delayed due to the pending SBA financing approval for
this "prospective" tenant.
. CHI CHI'S restaurant (Grand Forks, ND) was vacant at June 30, 1996. The
tenant, Chi Chi's, Inc., paid the Partnership a lease termination fee in the
amount of $164,000 during the quarter.
The Partnership arranged the lease termination due to increasing "sales
difficulties" experienced by this restaurant. The termination fee reflects
rental income and real estate taxes for one year as well as a security
deposit. (NOTE: The termination fee will be earned throughout the term of the
lease.)
The Partnership is currently negotiating a new lease with a "prospective"
tenant for this property.
<PAGE>
[LOGO OF THE PROVO GROUP]
DiVall Insured Income Fund, L.P.
August 15, 1996
Page 3
RENTS RECEIVABLE
----------------
. BW-3 restaurant (Hopkins, MN), which was sublet by L & H Restaurants (tenant
of Denny's), was in DEFAULT at the quarter ended June 30, 1996.
As a result of L & H Restaurants' sublet arrangement, they are responsible
and have been cooperating with the payment due to the Partnership. At June
30, 1996, there was a rent receivable in the amount of $23,000 for this
property.
OTHER PROPERTY MATTERS
----------------------
. Terratron, Inc., tenant of HARDEE'S restaurant (Fond du Lac, WI)
remains current on its monthly rental payments; however, they
continue to experience difficulties with their CATCH-UP rental
payments due the Partnership.
=========================
RESTORATION HIGHLIGHTS
. Recoveries received during the SECOND QUARTER 1996 totalled $4,700 (approx.)
for the Partnership.
. As previously communicated, the Partnership is in the discovery stage prior
to the trial against BOATMEN'S First National Bank of Kansas City. The TRIAL
has been scheduled for MARCH of 1997.
. "Total" recoveries received TO DATE for the Partnership amount to
approximately $597,200.
. The Partnership continues to monitor and negotiate the remaining settlements
as they arise with the DiVall "PRIVATE" Partnerships.
=========================
RETURN OF CAPITAL
The following table has been updated to illustrate the breakdown of
distributions since the Partnership's first quarterly distribution, for the
period ended December 31, 1986 through June 30, 1996.
<PAGE>
[LOGO OF THE PROVO GROUP]
DiVall Insured Income Fund, L.P.
August 15, 1996
Page 4
----------------------------------
Return of Capital (cont'd)
<TABLE>
<CAPTION>
DISTRIBUTION CAPITAL
ANALYSIS BALANCE
-------- -------
<S> <C> <C>
Original Capital Balance - $25,000,000
Cash Flow From Operations Since Inception $ 16,456,689 -
Total Distributions Since Inception (18,866,740) -
------------
(Return) of Capital $ (2,410,051) (2,410,051)
============ -----------
"NET" REMAINING INITIAL INVESTMENT
BY ORIGINAL PARTNERS - $22,589,949
===========
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
----------------------------------
Questions & Answers
1. What is the "current" value of my investment in the Partnership?
. According to the Partnership Agreement, we are required to provide
valuation information annually which was approximately $610 per unit at
December 31, 1995.
It is important to understand, however, that your investment value will
most likely diminish whenever "original" capital is returned to you. For
example, this quarter's distribution included "net" settlement proceeds
which is considered return of capital. The overall impact of this $11.32
(approx.) per unit amount (reflective of "net" settlement dollars) on
1996's valuation will not be determined until early 1997.
2. Has there been any decision made regarding the Partnership's liquidation
alternatives or the possibility of repositioning its assets?
. No decision has been made at this time. The Advisory Board has requested
feedback from the investor community to assist in our decision-making
process. (See enclosed letter from the Advisory Board.)
<PAGE>
[LOGO OF THE PROVO GROUP]
DiVall Insured Income Fund, L.P.
August 15, 1996
Page 5
----------------------------------
Questions & Answers (cont'd)
3. 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 $360-$540 per unit.
It is important to note that there has been a recent increase in the
frequency of direct "solicitations" of your interests by third parties.
Since we do not have control or support these solicitation efforts, we
strongly urge you to thoroughly review all your options and understand
their motivation -- prior to any liquidation.
We have NO affiliation with any "third-party" solicitors of your
interests; and, as noted above, we do not support any "unsolicited
written offers" that you may receive. If you are in receipt of such
offers and have questions regarding your investment, we encourage you to
contact us.
As always, if you have any questions or need additional information, please
contact Investor Relations at 1-800-547-7686 or 1-608-829-2992. All written
inquiries may be mailed or faxed to:
THE PROVO GROUP, INC.
Post Office Box 2137
Madison, Wisconsin 53701-2137
(FAX 608-829-2996)
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>
<TABLE>
<CAPTION>
DIVALL INSURED INCOME FUND L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 1996
PROJECTED ACTUAL VARIANCE
2ND 2ND CASH
QUARTER QUARTER BETTER
OPERATING REVENUES 6/30/96 6/30/96 (WORSE)
--------- --------- --------
<S> <C> <C> <C>
Rental income $499,178 $506,313 $7,135
Direct financing interest 5,991 5,991 0
Interest income 11,537 13,391 1,854
Recoveries of Amounts Previously Written Off 0 4,662 4,662
Lease Termination Fee 0 164,419 164,419
Other income 0 3,031 3,031
--------- --------- --------
TOTAL OPERATING REVENUES $516,706 $697,807 $181,101
--------- --------- --------
OPERATING EXPENSES
Insurance $4,460 $4,775 ($315)
Management fees 22,812 22,770 42
Restoration fees 0 187 (187)
Overhead allowance 1,900 1,897 3
Advisory Board 4,250 3,679 571
Administrative 17,657 22,954 (5,297)
Professional services 500 1,529 (1,029)
Auditing 12,000 12,000 0
Legal 10,500 5,429 5,071
Defaulted tenants 0 1,667 (1,667)
--------- --------- --------
TOTAL OPERATING EXPENSES $74,079 $76,887 ($2,808)
--------- --------- --------
INTEREST EXPENSE $27,370 $27,119 $251
--------- --------- --------
INVESTIGATION AND RESTORATION EXPENSES $15,050 ($18,478) $33,528
--------- --------- --------
NON-OPERATING EXPENSES
Depreciation $87,309 $87,925 ($616)
Amortization 1,068 1,066 2
--------- --------- --------
TOTAL NON-OPERATING EXPENSES $88,377 $88,991 ($614)
--------- --------- --------
TOTAL EXPENSES $204,876 $174,519 $30,357
--------- --------- --------
NET INCOME $311,830 $523,288 $211,458
OPERATING CASH RECONCILIATION: VARIANCE
Depreciation and amortization 88,377 88,991 614
Recovery of amounts previously written off 0 (4,662) (4,662)
(Increase) Decrease in current assets (36,425) (25,233) 11,192
Increase (Decrease) in current liabilities 17,933 (128,272) (146,205)
G.P. distribution (1,247) (2,093) (846)
Cash reserved for payables (30,000) (65,000) (35,000)
Advance from (to) future cash flows for current distributions (10,000) 0 10,000
--------- --------- --------
Net Cash Provided From Operating Activities $340,468 $387,019 $46,551
--------- --------- --------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Payments received from affiliated partnerships 0 0 0
Recoveries from former G.P. affiliates 0 4,662 4,662
Cash disbursed from restoration escrow account 0 282,736 282,736
Principal received on equipment leases 12,938 12,939 1
Principal payments on mortgage notes (3,135) (3,348) (213)
--------- --------- --------
Net Cash Provided from Investing And Financing
Activities $9,803 $296,989 $287,186
--------- --------- --------
Total Cash Flow For Quarter $350,271 $684,008 $333,737
Cash Balance Beginning of Period 590,133 1,005,810 415,677
Less 1st quarter distributions paid 5/96 (350,000) (450,000) (100,000)
Plus cash reserved above for payables and future distributions 40,000 65,000 25,000
--------- --------- --------
Cash Balance End of Period $630,404 $1,304,818 $674,414
Cash reserved for 2nd quarter L.P. distributions (350,000) (685,000) (335,000)
Cash reserved for payment of payables and future distributions (155,000) (490,000) (335,000)
--------- --------- --------
Unrestricted Cash Balance End of Period $125,404 $129,818 $4,414
========= ========= ========
PROJECTED ACTUAL VARIANCE
--------- --------- --------
* Quarterly Distribution $350,000 $685,000 $335,000
Mailing Date 8/15/96 (enclosed)
</TABLE>
* Refer to distribution letter for detail of quarterly distribution.
<PAGE>
<TABLE>
<CAPTION>
PROJECTIONS FOR DIVALL INSURED INCOME FUND L.P. ORIGINAL EQUITY $25,000,000
1996 PROPERTY SUMMARY NET DISTRIBUTION OF CAPITAL
DISCUSSION PURPOSES AND RELATED ESTIMATED RECEIPTS SINCE INCEPTION $2,410,051
------------
CURRENT EQUITY $22,589,949
PORTFOLIO
------------------------------------
REAL ESTATE
- - ----------- ---------------- ------------------------------------
CONCEPT LOCATION COST BASE RENT % YIELD
- - ----------- ---------------- ---------- --------- -------
<S> <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%
DENNY'S ** SCOTTSDALE, AZ 1,051,157 107,500 10.23%
DENNY'S ** MESA, AZ 1,028,036 82,100 7.99%
DENNY'S ** PEORIA, AZ 1,105,926 93,000 8.41%
BW-III HOPKINS, MN 795,050 66,000 8.30%
DENNY'S BEAVER DAM, WI 659,299 66,000 10.01%
FAZOLI'S DES MOINES, IA 565,476 45,500 8.05%
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 610,983 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%
- - -------------------------------- ------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------
EQUIPMENT
----------------------------------------------
- - ----------- ---------------- LEASE LEASE * %*
CONCEPT LOCATION EXPIRATION COST RECEIPTS RETURN
- - ----------- ---------------- ---------- ------- -------- ------
<S> <C> <C> <C> <C> <C>
CHI CHI'S GRAND FORKS, ND
CHI CHI'S EAU CLAIRE, WI
VACANT LAND COL. SPRINGS, CO
DENNY'S ** GLENDALE, AZ 68,744 0 0.00%
DENNY'S ** SCOTTSDALE, AZ 40,553 0 0.00%
DENNY'S ** MESA, AZ 39,218 0 0.00%
DENNY'S ** PEORIA, AZ 58,781 0 0.00%
BW-III HOPKINS, MN 1/15/2000 190,000 37,860 19.93%
DENNY'S BEAVER DAM, WI 3/31/2000 190,000 37,860 19.93%
FAZOLI'S DES MOINES, IA 39,600 0 0.00%
HARDEE'S FOND DU LAC, WI
POPEYE'S CHICAGO, IL
POPEYE'S CHICAGO, IL
POPEYE'S CHICAGO, IL
POPEYE'S CHICAGO, IL
POPEYE'S CHICAGO, IL
POPEYE'S CHICAGO, IL
POPEYE'S CHICAGO, IL
PORTERHOUSE CHICAGO, IL
TACO CABANA ARLINGTON, TX
TACO CABANA DALLAS, TX
TACO CABANA DALLAS, TX
TACO CABANA DALLAS, TX
- - -------------------------------- ----------------------------------------------
- - -------------------------------- ----------------------------------------------
PORTFOLIO TOTALS (23 Properties) 626,896 75,720 12.08%
- - -------------------------------- ----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------
-------------------------------------- TOTAL %
TOTALS ON 22,589,949
- - ----------- ---------------- -------------------------------------- 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% 8.39%
- - -------------------------------- -------------------------------------- -------------
</TABLE>
OUTSTANDING DEBT
<TABLE>
<CAPTION>
---------- --------- --------
AMOUNT ANNUAL CURRENT
- - ---------------------------------- OWED DEBT INTEREST
MORTGAGED PROPERTIES 6/30/96 SERVICE RATE
- - ---------------------------------- ---------- --------- --------
<C> <C> <C> <C> <C>
DENNY'S HOPKINS, MN 108,339 14,783 11.50%
DENNY'S BEAVER DAM, WI 71,265 8,726 9.50%
MULTIPLE STORES AZ, TX 600,000 0 8.50%
- - ---------------------------------- ---------- --------- --------
- - ---------------------------------- ---------- --------- --------
TOTALS 779,604 23,509 --
- - ---------------------------------- ---------- --------- --------
- - ---------------------------------- ---------- --------- --------
NET AFTER DEBT 19,086,258 1,796,211 9.41%
- - ---------------------------------- ---------- --------- --------
</TABLE>
<TABLE>
<CAPTION>
------- ------- -------- --------- ---------
AMOUNT ANNUAL CURRENT AMOUNT ANNUAL
- - ---------------------------------- OWED DEBT INTEREST OWED DEBT
MORTGAGED PROPERTIES 6/30/96 SERVICE RATE 6/30/96 SERVICE
- - ---------------------------------- ------- ------- -------- --------- ---------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
DENNY'S HOPKINS, MN 180,565 24,637 11.50% 288,904 39,420
DENNY'S BEAVER DAM, WI 178,787 21,514 9.50% 250,052 30,240
MULTIPLE STORES AZ, TX 600,000 0
- - ---------------------------------- ------- ------- -------- --------- ---------
- - ---------------------------------- ------- ------- -------- --------- ---------
TOTALS 359,352 46,151 -- 1,138,956 69,660
- - ---------------------------------- ------- ------- -------- --------- ---------
- - ---------------------------------- ------- ------- -------- --------- --------- ---- ----
NET AFTER DEBT 267,544 29,569 11.05% 19,353,802 1,825,780 9.43% 8.08%
- - ---------------------------------- ------- ------- -------- --------- --------- ---- ----
</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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
June 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 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 1,018,892 1,018,892
<SECURITIES> 563,335 563,335
<RECEIVABLES> 2,275,313 2,275,313
<ALLOWANCES> 1,793,638 1,793,638
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,063,902 2,063,902
<PP&E> 19,675,494 19,675,494
<DEPRECIATION> 4,254,543 4,254,543
<TOTAL-ASSETS> 17,484,853 17,484,853
<CURRENT-LIABILITIES> 418,191 418,191
<BONDS> 1,138,956 1,138,956
<COMMON> 0 0
0 0
0 0
<OTHER-SE> 15,927,706 15,927,706
<TOTAL-LIABILITY-AND-EQUITY> 17,484,853 17,484,853
<SALES> 676,723 1,203,201
<TOTAL-REVENUES> 697,807 1,434,910
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 147,397 491,963
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 27,120 54,329
<INCOME-PRETAX> 523,290 888,618
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 523,290 888,618
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 523,290 888,618
<EPS-PRIMARY> 20.72 35.19
<EPS-DILUTED> 20.72 35.19
</TABLE>
