<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 March 31, 1996
-----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to____________________
Commission file number 0-16722
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Wisconsin 36-6845083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 West 11th Street, Suite 1110, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 421-7444
(Registrant's telephone number, including area code)
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
March 31, 1996 and December 31, 1995
------------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1996 1995
----------- -----------
<S> <C> <C>
INVESTMENT PROPERTIES AND EQUIPMENT: (NOTES 3 AND 6)
Land $ 7,358,073 $ 7,358,073
Buildings and improvements 12,070,525 12,070,525
Equipment 246,896 246,896
Accumulated depreciation (4,166,616) (4,078,904)
----------- -----------
Net investment properties and equipment 15,508,878 15,596,590
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES: (NOTE 8) 243,738 256,359
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 1,003,740 815,512
Cash restricted for real estate taxes 2,073 28,218
Cash held in Indemnification Trust (NOTE 11) 273,931 270,488
Restoration escrow account 282,736 0
Rents and other receivables (net of allowance of
$10,184 in 1996 and $182,039 in 1995) 71,239 74,939
Deferred rent receivable 127,830 123,900
Due from affiliated partnerships (NOTE 12) 0 105,833
Due from current General Partner 0 1,754
Prepaid insurance 8,579 6,795
Unsecured notes receivable from lessees (net of
allowance of $19,500 in 1996) 0 0
Deferred charges (net of accumulated amortization
of $56,409 in 1996 and $55,343 in 1995) 18,778 19,844
----------- -----------
Total other assets 1,788,906 1,447,283
----------- -----------
DUE FROM FORMER AFFILIATES: (NOTE 2)
Due from former general partner affiliates 629,518 1,123,625
Allowance for uncollectible amounts due from
former affiliates (629,518) (830,051)
Restoration cost receivable 1,138,935 907,774
Allowance for uncollectible restoration receivable (1,138,935) (907,774)
----------- -----------
Due from former affiliates, net 0 293,574
----------- -----------
Total assets $17,541,522 $17,593,806
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES:
Mortgage notes payable (NOTE 6) $ 1,142,304 $ 1,145,564
Accounts payable and accrued expenses 62,294 118,039
Payable to tenant 96,000 96,000
Due to current General Partner 1,461 959
Accrued interest payable 186,580 173,527
Security deposits 125,410 125,410
Real estate taxes payable 70,962 87,877
Unearned rental income 0 3,787
------------ ------------
Total liabilities 1,685,011 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 33,834 30,181
Cumulative cash distributions (13,603) (12,142)
------------ ------------
20,231 18,039
------------ ------------
Limited Partners (25,000 interests outstanding) -
Capital contributions, net of offering costs 22,270,578 22,270,578
Cumulative net income 10,507,537 10,145,861
Cumulative cash distributions (17,731,741) (17,381,741)
Reallocation of former
general partners' capital 789,906 789,906
------------ ------------
15,836,280 15,824,604
------------ ------------
Total partners' capital 15,856,511 15,842,643
------------ ------------
Total liabilities and partners' capital $ 17,541,522 $ 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 March 31,
----------------------------
1996 1995
-------- ---------
<S> <C> <C>
REVENUES:
Rental income $520,168 $490,815
Interest income on direct financing leases 6,310 7,507
Interest income 9,498 9,585
Other income 594 1,127
Recovery of amounts previously written off 200,533 0
-------- --------
737,103 509,034
-------- --------
EXPENSES:
Partnership management fees 22,356 21,626
Restoration fees 8,270 135
Insurance 4,499 5,556
General and administrative 13,121 14,304
Interest 27,209 27,371
Expenses incurred due to default by lessee 2,987 967
Professional services 21,063 39,959
Professional services related to investigation 179,279 11,608
Advisory board fees and expenses 4,212 4,133
Depreciation 87,714 95,163
Amortization 1,065 662
-------- --------
371,775 221,484
-------- --------
NET INCOME $365,328 $287,550
======== ========
NET INCOME - CURRENT GENERAL PARTNER $ 3,653 $ 2,876
NET INCOME - LIMITED PARTNERS 361,675 284,674
-------- --------
$365,328 $287,550
======== ========
NET INCOME PER LIMITED PARTNERSHIP INTEREST,
based on 25,000 interests outstanding $14.47 $11.39
====== ======
</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>
Three Months Ended March 31,
------------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 365,328 $ 287,550
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 88,779 95,825
Recovery of amounts previously written off (200,533) 0
Interest applied to Indemnification Trust Account (3,443) (4,024)
Increase/(Decrease) in unearned rental income (3,787) 24,000
(Increase)/Decrease in rents and other receivables 5,454 (53,822)
(Increase) in deferred rent receivable (3,930) (3,969)
(Deposits)/Withdrawals for payment of real estate taxes 26,145 (49,495)
(Increase) in prepaid expenses (1,784) (2,670)
(Decrease) in accounts
payable and accrued expenses (55,745) (5,069)
(Decrease) in payable to tenant 0 (144,000)
Increase/(Decrease) in due to current General Partner 502 (523)
Increase in accrued interest payable 13,053 12,945
(Decrease) in real estate taxes payable (16,915) (76,542)
---------- ----------
Net cash provided from operating activities 213,124 80,206
---------- ----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Deposit to Indemnification Trust cash account 0 (60,000)
Payments from affiliated partnerships 105,833 7,082
Recoveries from former affiliates 494,107 3,382
Deposits to restoration escrow account (282,736) 0
Principal payments received on direct financing leases 12,621 11,424
Principal receipts on notes receivable 0 3,026
---------- ----------
Net cash provided by (used in) investing activities 329,825 (35,086)
---------- ----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Principal payments on mortgage notes (3,260) (1,848)
Cash distributions to Limited Partners (350,000) (675,000)
Cash distributions to current General Partner (1,461) (1,150)
---------- ----------
Net cash (used in) financing activities (354,721) (677,998)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 188,228 (632,878)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 815,512 1,169,554
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,003,740 $ 536,676
========== ==========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 14,156 $ 14,426
========== ==========
</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 March 31, 1996, the Partnership owned 22 properties
and a parcel of undeveloped land.
Rental revenue from investment properties is recognized on the straight-line
basis over the life of the respective lease. Revenue from direct financing
leases is recognized at level rates of return over the term of the lease.
Depreciation of the properties is provided on a straight-line basis over 31.5
years which is the estimated useful lives of the buildings and improvements.
Equipment is depreciated on a straight-line basis over the estimated useful
lives of 5 years.
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 liabilites) 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 $13,700,000, of which
approximately $1,768,000 has been attributed to the Partnership and is
reflected as due from former affiliates on the balance sheet at March 31,
1996. The 9% interest accrued as of March 31, 1996, amounted to
approximately $495,000 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 $200,000 at March 31, 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 March 31,
7
<PAGE>
1996. Because of the significance of the weaknesses in the internal
control structure, there could be no certainty that all improper and
unsupported transactions were identified and recorded and reflected in the
Partnership's financial statements as of December 31, 1992. Accordingly,
the Partnership's auditors were unable to render an opinion on the
financial statements for the year ended December 31, 1992. Financial
statements for prior periods, including 1991 and certain prior years and
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 March 31, 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 March 31, 1996 and December 31, 1995, these costs totalled approximately
$232,000 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 March 31, 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 March 1994, the
Partnership's Happy Joe's restaurant located in Des Moines, Iowa, became
vacant. Management executed a new lease on the property during February
1995. In September 1994, the Partnership's Denny's restaurant in Hopkins,
Minnesota, was closed by the tenant. However, the tenant continues to pay
rent and has executed a lease with a sub-tenant. During January 1995, the
Partnership evicted the tenant 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.
The tenant of the Partnerships' 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
8
<PAGE>
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, 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. Effective March 1, 1996, the minimum
management fee and the maximum reimbursement for office rent and overhead
increased by 2.8%, representing the allowable annual Consumer Price Index
adjustment per the PMA. For purposes of computing the 4% overall fee, gross
receipts includes amounts recovered in connection with the misappropriation
of assets by the former general partners and their affiliates. TPG has
received fees from the Partnership totaling $3,689 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.
10
<PAGE>
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
Year ending
December 31,
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
===========
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.
6. MORTGAGE NOTES PAYABLE:
-----------------------
At March 31, 1996, mortgage notes payable consist of the following:
Outstanding
Principal Balance Interest Rate Maturity Date
----------------- -------------- --------------
a. $290,787 prime + 2.5% September 1997
b. 251,517 9.5% September 1997
c. 600,000 prime + 2.0% August 1992
--------
$1,142,304
==========
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 March 31, 1996 of $634,682. 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
March 31, 1996, of $489,402. 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.
11
<PAGE>
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 March 31, 1996, the Partnership has not paid
debt service on this note. Management met with representatives of the
bank and disputed the obligation. The Partnership received a notice of
default on this note in October 1993 and an action of foreclosure was
filed in February 1994 on one of the Partnership's properties located
in Dallas, Texas, with a net book value of $1,205,619 at March 31,
1996. See Note 13 for further discussion of litigation concerning this
note. Interest in the amount of $187,000 was accrued, but unpaid, as
of March 31, 1996. The interest accrual has been recorded at the face
rate of the note. If the Partnership loses the dispute, additional
interest amounting to approximately $204,000, 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
$600,000 note payable mentioned above, are as follows:
Year ending
December 31,
1996 $ 9,923
1997 532,381
---------
$ 542,304
=========
7. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the quarters ended March 31,
1996 and 1995, are as follows.
Incurred as of Incurred as of
March 31, 1996 March 31, 1995
-------------- --------------
Current General Partner
- - -----------------------
Management fees $22,356 $21,625
Restoration fees 8,270 135
Overhead allowance 1,863 1,813
Reimbursement for out-of-pocket expenses 2,620 2,183
Cash distribution 1,461 1,150
------- -------
$36,570 $26,906
======= =======
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
March 31, 1996:
Minimum lease payments receivable $ 295,467
Less - Unearned income (51,729)
---------
Net investment in direct financing leases $ 243,738
==========
12
<PAGE>
Scheduled future minimum lease payments are as follows:
Year ending
December 31,
1996 $ 56,790
1997 75,720
1998 75,720
1999 75,720
2000 11,517
--------
$295,467
========
9. GENERAL AND ADMINISTRATIVE EXPENSES:
------------------------------------
For the quarters ended March 31, 1996 and 1995, general and administrative
expenses incurred by the Partnership were as follows:
Three Months Ended March 31,
----------------------------
1996 1995
------------- -------------
Communication costs $ 6,913 $ 7,607
Travel costs 720 400
Overhead allowance 1,863 1,813
Income tax expense 0 3,365
Other administration 3,625 1,119
------- -------
$13,121 $14,304
======= =======
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 surpassing 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 March 31, 1996, the Partnership may owe the
current General Partner $5,189, which is currently reflected as a recovery, if
the $6,000,000 recovery level is achieved.
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
13
<PAGE>
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 March 31,
1996. Funds are invested in U.S. Treasury securities. In addition, interest
totaling $23,931 has been credited to the Trust as of March 31, 1996. The
rights of the Permanent Manager to the Trust shall be terminated upon the
earliest to occur of the following events: (i) the written release by the
Permanent Manager of any and all interest in the Trust; (ii) the expiration of
the longest statute of limitations relating to a potential claim which might be
brought against the Permanent Manager and which is subject to indemnification;
or (iii) a determination by a court of competent jurisdiction that the Permanent
Manager shall have no liability to any person with respect to a claim which is
subject to indemnification under the PMA. At such time as the indemnity
provisions expire or the full indemnity is paid, any funds remaining in the
Trust will revert back to the general funds of the Partnership.
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 March 31, 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 March 31, 1996, the Partnerships recovered a total of
approximately $4,541,000 from the former general partners and their affiliates.
Of this amount, the Partnership received its pro-rata share in the amount of
$587,386. 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:
-----------
On March 16, 1993, the Partnership, along with DiVall 2 and DiVall 3, initiated
a lawsuit against Ernst & Young LLP ("E & Y"), a certified public accounting
firm, in the Circuit Court of Dane County, Wisconsin in connection with the
audits of the Partnerships performed by E & Y for the years 1989, 1990 and 1991.
The Complaint filed in said lawsuit alleges, among other things, that Defendant
E & Y, was negligent in its audit work for the Partnerships by failing to
exercise ordinary care and failing to adhere to professional standards in the
following areas: reviewing, understanding, and auditing of compliance with the
Partnership Agreements; evaluation of the adequacy of internal controls;
identification of audit
14
<PAGE>
risks; selection and implementation of audit procedures to address audit risks;
identification of related party transactions; compilation of sufficient
evidential matters; resolution of improper transfers and allocations; disclosure
of related party transactions; and exercise of appropriate audit skepticism. The
Partnerships requested the payment of damages in the amount of $9,000,000, plus
interest, attorneys fees and costs, and whatever additional relief the court
deemed just and proper. The Partnerships hired legal counsel under a contingent
fee arrangement to prosecute all of the Partnerships' claims. E & Y filed an
Answer denying that it was negligent.
E & Y also filed third-party claims alleging fraud and negligence on the part of
the Partnerships' former law firm, Quarles & Brady. E & Y also filed third-party
claims against Paul Magnuson, Gary DiVall, an affiliate of the former general
partners, DiVall Real Estate Investment Corporation ("DREIC"), David Shea
("Shea") (former Acquisitions Director of DREIC), and Lisa Shatrawka (former
Controller for DREIC and former Director of Fund Management with TPG). In turn,
Quarles & Brady filed third-party claims against KPMG Peat Marwick, the
Partnerships' accountants preceding E & Y. The Partnerships also filed claims
against Magnuson, DiVall, DREIC, Shea, and Quarles & Brady. E&Y's claims against
Ms. Shatrawka and its fraud claims against Quarles & Brady were voluntarily
dismissed.
The trial of the case was scheduled to take place in Iowa County, Wisconsin,
beginning on March 20, 1996. Shortly before trial the Partnerships reached a
resolution of their claims against Quarles & Brady. A resolution of the claims
against Ernst & Young was reached after opening statements. As a result of these
settlements, net proceeds deposited in the partnership's restoration escrow
account totaled approximately $283,000.
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure the
repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 2 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
On July 23, 1993, nineteen (19) of the Private Partnerships sought the
protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven
(7) of these bankruptcies were voluntary and twelve (12) of these 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 sixteen (16) of the bankruptcies to date have resulted in cash
payments to the Partnerships of a total of $537,000 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
15
<PAGE>
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 March 31, 1996, the Partnership had
not paid debt service on the Note. The Partnership received a notice of default
on the Note in October 1993 and the Foreclosure Action was filed in February
1994. As of March 31, 1996, interest in the amount of $187,000 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 May 15, 1996, the Partnership made distributions to the Limited Partners for
the First Quarter of 1996 of $450,000 amounting to approximately $18.00 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 March
31, 1996, were originally purchased at a price, including acquisition costs, of
approximately $20,136,000.
The Partnership is currently marketing for sale or lease the vacant land in
Colorado Springs, Colorado and is pursuing a potential lease for the Porterhouse
restaurant in Chicago, Illinois. 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 $244,000 at March 31, 1996,
compared to $256,000 at December 31, 1995. The decrease of $12,000 was a result
of principal payments received during the quarter.
16
<PAGE>
Other Assets
- - ------------
Cash and cash equivalents, including cash restricted for real estate taxes
held by the Partnership, were $1,006,000 at March 31, 1996, compared to
$844,000 at December 31, 1995. The Partnership designated cash of $450,000
to fund the First Quarter 1996 distributions to Limited Partners, $425,000
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. For information
regarding the settlement, refer to PART II, Item 1 of this report.
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 $630,000 at
March 31, 1996. The receivable decreased from December 31, 1995 due to
$494,000 of recoveries received during the quarter 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 $1,139,000
at March 31, 1996, and includes $495,000 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 has been 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 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
$200,000 at March 31, 1996. The ultimate recovery may differ from the
current estimate.
The restoration costs are allocated among the Partnerships based on each
Partnership's respective share of the misappropriation as discussed in Note
12 to the financial statements. 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
17
<PAGE>
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 March 31, 1996.
Liabilities
- - -----------
Mortgage notes payable decreased from $1,146,000 at December 31, 1995, to
$1,142,000 at March 31, 1996, due to monthly principal payments made on the
notes.
Accounts payable and accrued expenses at March 31, 1996, amounted to
approximately $62,000. The majority of this balance represented accruals
of legal and auditing fees.
Payable to tenant of $96,000 at March 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 will be credited
against future rents during 1996.
Real estate taxes payable amounted to $71,000 at March 31, 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 $350,000 and $1,461, respectively, have also been made in
accordance with the amended Partnership Agreement. The First Quarter 1996
distribution of $450,000 was paid to the Limited Partners on May 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 March 31, 1996,
in the amount of $365,000 compared to $288,000 for the quarter ended March
31, 1995. Results for both 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 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.
18
<PAGE>
Revenues
--------
Total revenues were $737,000 and $509,000 for the quarters ended March 31,
1996 and 1995 respectively. Revenue for 1996 includes a $200,000
adjustment to the write-off of amounts due from the former general
partners.
Based on leases currently in place on the remaining owned properties, total
revenues should approximate $2,000,000 annually or $500,000 quarterly.
Future revenues may decrease with tenant defaults and/or sales of
Partnership properties. They may also increase with additional rents due
from tenants, if those tenants experience sales levels which require the
payment of additional rent to the Partnership.
Expenses
--------
For the quarters ended March 31, 1996 and 1995, cash expenses amounted to
approximately 38% and 25% of total revenues, respectively. Total expenses,
including non-cash items, amounted to approximately 50% and 44% of total
revenues for the quarters ended March 31, 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 quarters ended March 31, 1996 and 1995, expenses incurred in
relation to the misappropriated assets amounted to $179,000 and $12,000,
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
On March 16, 1993, the Partnership, along with DiVall 2 and DiVall 3
initiated a lawsuit against Ernst & Young LLP ("E&Y"), a certified public
accounting firm, in the Circuit Court of Dane County, Wisconsin, in
connection with the audits of the Partnerships performed by E & Y for the
years 1989, 1990 and 1991. The Complaint filed in said lawsuit alleges,
among other things, that Defendant E & Y was negligent in its audit work
for the Partnerships by failing to exercise ordinary care and failing to
adhere to professional standards in the following areas: reviewing,
understanding, and auditing of compliance in regards to the Partnership
Agreements; evaluation of the adequacy of internal controls; identification
of audit risks; selection and implementation of audit procedures to address
audit risks; identification of related party transactions; compilation of
sufficient evidential matters; resolution of improper transfers and
allocations; disclosure of related party transactions; and exercise of
appropriate audit skepticism. The Partnerships requested the payment of
damages in the amount of $9,000,000, plus interest, attorneys fees and
costs, and whatever additional relief the court deemed just and proper. The
Partnerships have hired legal counsel under a contingent fee arrangement to
prosecute all of the Partnerships' claims. E & Y filed an Answer denying
that it was negligent.
19
<PAGE>
E & Y also filed third-party claims alleging fraud and negligence on the part of
the Partnerships' former securities law firm, Quarles & Brady. E & Y also filed
third-party claims against Paul Magnuson; Gary DiVall; an affiliate of the
former general partners, DiVall Real Estate Investment Corporation ("DREIC");
David Shea ("Shea"), former Acquisitions Director for DREIC; and Lisa Shatrawka,
former Controller for DREIC and former Director of Fund Management with TPG. In
turn, Quarles & Brady filed third party claims against KPMG Peat Marwick, the
Partnerships' accountants preceding E&Y. The Partnerships also filed claims
against Magnuson, DiVall, DREIC, Shea, and Quarles & Brady. E&Y's claims against
Ms. Shatrawka and its fraud claims against Quarles & Brady were voluntarily
dismissed.
The trial of the case was scheduled to take place in Iowa County, Wisconsin,
beginning on March 20, 1996. Shortly before trial The Partnerships reached a
resolution of their claims against Quarles & Brady. A resolution of the claims
against Ernst & Young was reached after opening statements. As a result of these
settlements, net proceeds deposited in the partnership's restoration escrow
account totaled approximately $283,000.
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure the
repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 2 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
On July 23, 1993, nineteen (19) of the Private Partnerships sought the
protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven
(7) of these bankruptcies were voluntary and twelve (12) of these 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 sixteen (16) of the bankruptcies to date have resulted in cash
payments to the Partnerships of a total of $537,000 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.
20
<PAGE>
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 March 31, 1996, the Partnership had not paid
debt service on the Note. The Partnership received a notice of default on the
Note in October 1993, and the Foreclosure Action was filed in February 1994. As
of March 31, 1996, interest in the amount of $187,000 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 $204,000 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 May 15, 1996
regarding the First Quarter 1996 distribution.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the first quarter of
fiscal year 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: __________________________________________________
Bruce A. Provo, President
Date: May 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: May 14, 1996
By: _____________________________________________________
Kristin J. Atkinson
Vice President - Finance and Administration
Date: May 14, 1996
22
<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: May 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: May 14, 1996
By: /s/Kristin J. Atkinson
-------------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: May 14, 1996
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the March 31, 1996 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,288,549
<SECURITIES> 273,931
<RECEIVABLES> 2,305,210
<ALLOWANCES> 1,835,046
<INVENTORY> 0
<CURRENT-ASSETS> 2,032,644
<PP&E> 19,675,494
<DEPRECIATION> 4,166,616
<TOTAL-ASSETS> 17,541,522
<CURRENT-LIABILITIES> 542,707
<BONDS> 1,142,304
<COMMON> 0
0
0
<OTHER-SE> 15,856,511
<TOTAL-LIABILITY-AND-EQUITY> 17,541,522
<SALES> 526,478
<TOTAL-REVENUES> 737,103
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 344,566
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,209
<INCOME-PRETAX> 365,328
<INCOME-TAX> 0
<INCOME-CONTINUING> 365,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 365,328
<EPS-PRIMARY> 14.47
<EPS-DILUTED> 14.47
</TABLE>
<PAGE>
May 15, 1996
RE: FIRST QUARTER 1996 CORRESPONDENCE
DIVALL INSURED INCOME FUND, L.P. (THE "PARTNERSHIP")
Dear Limited Partner:
-----------------------------
FIRST QUARTER 1996 HIGHLIGHTS
. During the First Quarter of 1996, we SETTLED our lawsuit
-------
with QUARLES & BRADY and ERNST & YOUNG, the
Partnership's former attorneys and accountants.
(Refer to "Restoration Highlights" for more details.)
-----------------------------
FIRST QUARTER 1996 "DISTRIBUTION" HIGHLIGHTS
. 7.9% (approx.) annualized return on . $450,000 "total" amount distributed
$22,887,000 ("net" remaining initial for the FIRST QUARTER 1996 which was
investment). $100,000 more than budgeted.
. $773.00 "total" per unit (approx.)
distributed SINCE INCEPTION from both
. $18.00 per unit (approx.) for the cash flow from operations and "net"
FIRST QUARTER 1996 from both cash cash activity from financing and
flow from operations and "net" cash investing activities.
activity from financing and
investing activities.
(NOTE: ORIGINAL UNITS WERE PURCHASED FOR $1,000/UNIT.)
<PAGE>
DiVall Insured Income Fund, L.P.
May 15, 1996
Page 2
---------------------------------
STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS
. 41% increase in . 58% increase in . 28% increase in
OPERATING REVENUES "TOTAL" EXPENSES total
from projections. from projections. NET INCOME from
projections.
. Investigation and Restoration . $125,000 was reserved during the
costs in the amount of $179,000 quarter for potential liability of
(related to the trial and the BOATMEN'S loan. The Partnership
settlement with QUARLES & BRADY will continue to reserve monies when
and ERNST & YOUNG) were recorded available in light of the current
in March. A portion of these status of the pending litigation
costs had been budgeted to occur against Boatmen's. (See "Restoration
in April due to initial Highlights" for further information
projections of the anticipated regarding this lawsuit.)
length of the March 1996 trial.
(See "Restoration Highlights" for . The Partnership received $106,000
additional discussion.) from an affiliated partnership (for
previously advanced restoration
. RENTAL INCOME of $520,000 was costs) which was the primary reason
$16,000 higher than projected due for the higher than budgeted
to higher than expected distributions for the quarter.
PERCENTAGE RENTS.
---------------------------------
PROPERTY HIGHLIGHTS
VACANCIES
---------
. There was one vacancy at March 31, 1996; PORTERHOUSE (Chicago, IL). Last
quarter, the Partnership had executed a lease agreement* for this property
with BJ'S MARKET, however, the "prospective" tenant is still awaiting
financing approval. (*NOTE: This lease agreement is contingent upon the
tenant securing financing.)
<PAGE>
DiVall Insured Income Fund, L.P.
May 15, 1996
Page 3
---------------------------------
PROPERTY HIGHLIGHTS (CONT'D)
RENTS RECEIVABLE
----------------
. DenAmerica, tenant of the DENNY'S restaurants (Peoria and Glendale, Arizona),
was one (1) month or $18,500 delinquent in scheduled rental payments at March
31, 1996. This tenant is experiencing slight cash flow problems associated
with a recent merger.* The Partnership is currently working with the tenant
to cure this total delinquency for its two (2) restaurants.
(*NOTE: DenAmerica finalized their merger during the First Quarter of
1996. Currently these two (2) leases provide for straight percentage rents
which reduces the value of the property in the market due to greater
perceived risk. The recent MERGER allows the Partnership to secure "fixed"
rents plus percentage rents for each of the properties. Additionally,
$75,000 (principal/interest) is expected to be collected from an
outstanding promissory note with this tenant. Leases are anticipated to be
renegotiated by year-end.)
OTHER PROPERTY MATTERS
----------------------
. Chi Chi's, Inc., tenant of two (2) Chi Chi's (Eau Claire, WI and Grand
Forks, ND) restaurants continues to experience a decrease in sales and has
requested both a lease termination and a "buy-out" for its Wisconsin and
North Dakota sites, respectively.
The Partnership has declined the lease termination request, but
is currently reviewing the terms of the "buy-out" proposal.
---------------------------------
RESTORATION HIGHLIGHTS
. Recoveries received during the FIRST . "Total" recoveries received TO
QUARTER 1996 totalled $494,000 DATE for the Partnership amount to
(approx.) for the Partnership. approximately $593,000.
<PAGE>
DiVall Insured Income Fund, L.P.
May 15, 1996
Page 4
---------------------------------
RESTORATION HIGHLIGHTS (CONT'D)
. As previously communicated, the . With respect to the DiVall "PRIVATE"
Partnership and its affiliated Partnerships, we would like to
partnerships settled with QUARLES & finalize all remaining settlements
BRADY (Q&B) and ERNST & YOUNG (E&Y) with the bankruptcy courts as quickly
during the First Quarter of 1996. as possible.
The "NET" recoveries (less fees Although we have no control of the
and expenses paid upon timetable for these proceedings, we
settlement) from this lawsuit continue to monitor closely and
are currently in a separate negotiate settlements as they arise.
bank account.
We currently have only a few
We are pleased with the results remaining settlements pending.
of the settlement because it
allowed us to recapture not
only the cost of the litigation
but also all expenses
associated with the
investigation and former
general partner removal.
. Earlier this year, the Partnership WON its appeal in the Eighth Circuit
Federal Court of Appeals in St. Louis, Missouri against Boatmen's First
National Bank of Kansas City ("BOATMEN'S"). The FDIC and Boatmen's did not
pursue their option to obtain a ruling by the U.S. Supreme Court -which means
the case will now go back to the lower courts for trial.
For purposes of summarizing background information regarding this lawsuit,
please note the following:
. During 1993, it was discovered that the former general partners borrowed
$600,000 IN THE PARTNERSHIP'S NAME during or before 1991 from Metro North
State Bank (now "BOATMEN'S"). Not only were the proceeds never received by the
Partnership -- but, this loan was secured by mortgages on FIVE (5) of its
properties.
<PAGE>
DiVall Insured Income Fund, L.P.
May 15, 1996
Page 5
--------------------------------
RESTORATION HIGHLIGHTS (CONT'D)
. At the time of discovery, . On March 24, 1994, the Partnership
the Partnership and its formally disputed the loan by filing
affiliated partnerships a complaint against BOATMEN'S. Since
included the diversion of that time, various summary judgments
the BOATMEN'S loan and appeals have occurred resulting
proceeds as part of the in the final stage of discovery and
"total" misappropriation TRIAL -- which is expected to begin
-- meaning all expenses this FALL.
and recoveries of this
litigation are shared by
the Partnership and its
affiliated partnerships.
. Former general partner, Gary . Former general partner, Paul E.
J. DiVall pleaded "NO- Magnuson has NOT formally responded
CONTEST" to criminal charges to criminal charges brought against
brought against him by the him by the Wisconsin Attorney
Wisconsin Attorney General's General's Office.
Office.
. At this time we are unaware of any "criminal" charges made by the Wisconsin
Attorney General's Office against any other agent of the former general
partners.
------------------------------
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 March 31, 1996.
<PAGE>
DiVall Insured Income Fund, L.P.
May 15, 1996
Page 6
--------------------------------
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 $ 16,068,678 -
Total Distributions Since Inception (18,181,740) -
------------
(Return) of Capital $ (2,113,062) (2,113,062)
============ -----------
"NET" REMAINING INITIAL INVESTMENT
BY ORIGINAL PARTNERS - $22,886,938
===========
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
--------------------------------
QUESTIONS & ANSWERS
1. WHEN WILL THE "NET" PROCEEDS FROM THE Q&B AND E&Y SETTLEMENT BE DISTRIBUTED
TO LIMITED PARTNERS?
. We anticipate releasing the "net" settlement proceeds in accordance
with our historical allocation percentages and including the payout
with the Partnership's Second Quarter Distribution scheduled to be
mailed on August 15, 1996.
2. HAS THERE BEEN ANY DECISION MADE REGARDING THE PARTNERSHIP'S LIQUIDATION
ALTERNATIVES OR THE POSSIBILITY OF REPOSITIONING ITS ASSETS?
. We recently met with the Advisory Board to continue our discussions
regarding future alternatives for the Partnership - no decisions have
been made at this time.
There are various operating issues management would like resolve for
the Partnership prior to any plans for dissolution or repositioning
assets.
<PAGE>
DiVall Insured Income Fund, L.P.
May 15, 1996
Page 7
-------------------------------
QUESTIONS & ANSWERS
3. WHAT IS TPG'S POLICY FOR RECEIVING NOTIFICATION OF ADDRESS CHANGES FROM
LIMITED PARTNERS?
. It is our policy that all Limited Partner address changes* be
submitted in writing to our Investor Relations Department.
(*NOTE: Any change in a Limited Partner's distribution or
correspondence address should be sent to Investor Relations NO LATER
THAN THREE (3) WEEKS before each scheduled distribution mailing date
to insure that the change will be processed prior to check printing
and label processing.)
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 MARCH 31, 1996
- - -----------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
-----------------------------------
1ST 1ST CASH
QUARTER QUARTER BETTER
OPERATING REVENUES 3/31/96 3/31/96 (WORSE)
--------- ---------- ---------
<S> <C> <C> <C>
Rental income $ 503,675 $ 520,168 $ 16,493
Direct financing interest 6,309 6,310 1
Interest income 11,427 9,498 (1,929)
Recoveries of Amounts Previously Written Off 0 200,533 200,533
Other income 0 594 594
--------- ---------- ---------
TOTAL OPERATING REVENUES $ 521,411 $ 737,103 $ 215,692
--------- ---------- ---------
OPERATING EXPENSES
Insurance $ 4,357 $ 4,498 $ (141)
Management fees 22,370 22,356 14
Restoration fees 0 8,270 (8,270)
Overhead allowance 1,863 1,863 0
Advisory Board 4,251 4,212 39
Administrative 13,210 11,258 1,952
Professional services 250 367 (117)
Releasing Commissions 16,650 0 16,650
Auditing 20,000 16,212 3,788
Legal 10,500 4,484 6,016
Defaulted tenants 5,620 2,987 2,633
--------- ---------- ---------
TOTAL OPERATING EXPENSES $ 99,071 $ 76,507 $ 22,564
--------- ---------- ---------
INTEREST EXPENSE $ 27,362 $ 27,209 $ 153
--------- ---------- ---------
INVESTIGATION AND RESTORATION EXPENSES $ 20,000 $ 179,279 $(159,279)
--------- ---------- ---------
NON-OPERATING EXPENSES
Depreciation $ 87,493 $ 87,714 $ (221)
Amortization 1,068 1,065 3
--------- ---------- ---------
TOTAL NON-OPERATING EXPENSES $ 88,561 $ 88,779 $ (218)
--------- ---------- ---------
TOTAL EXPENSES $ 234,994 $ 371,774 $(136,780)
--------- ---------- ---------
NET INCOME $ 286,417 $ 365,329 $ 78,912
OPERATING CASH RECONCILIATION: VARIANCE
---------
Depreciation and amortization 88,561 88,779 218
Recovery of amounts previously written off 0 (200,533) (200,533)
(Increase) Decrease in current assets (57,985) (7,456) 50,529
Increase (Decrease) in current liabilities (161,127) (59,143) 101,984
Increase (Decrease) in G.P. distribution (1,146) (1,461) (315)
Cash reserved for payables 160,000 (65,000) (225,000)
Advance from future cash flows for current distributions 25,000 0 (25,000)
--------- ---------- ---------
Net Cash Provided From Operating Activities $ 339,720 $ 120,515 $(219,205)
--------- ---------- ---------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Payments received from affiliated partnerships 0 105,833 105,833
Recoveries from former G.P. affiliates 0 494,107 494,107
Cash invested in restoration escrow account 0 (282,736) (282,736)
Principal received on equipment leases 12,621 12,621 0
Principal payments on mortgage notes (3,142) (3,260) (118)
--------- ---------- ---------
Net Cash Provided from Investing And Financing
Activities $ 9,479 $ 326,565 $ 317,086
--------- ---------- ---------
Total Cash Flow For Quarter $ 349,199 $ 447,080 $ 97,881
Cash Balance Beginning of Period 775,934 843,730 67,796
Less 4th quarter distributions paid 2/96 (350,000) (350,000) 0
Plus cash reserved above for payables and future distributions (185,000) 65,000 250,000
--------- ---------- ---------
Cash Balance End of Period $ 590,133 $1,005,810 $ 415,677
Cash reserved for 1st quarter L.P. distributions (350,000) (450,000) (100,000)
Cash reserved for payment of payables and future distributions (115,000) (425,000) (310,000)
--------- ---------- ---------
Unrestricted Cash Balance End of Period $ 125,133 $ 130,810 $ 5,677
========= ========== =========
- - -----------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
-----------------------------------
* Quarterly Distribution $ 350,000 $ 450,000 $ 100,000
Mailing Date 5/15/96 (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
DISCUSSION PURPOSES 1996 PROPERTY SUMMARY NET DISTRIBUTION OF CAPITAL
AND RELATED ESTIMATED RECEIPTS SINCE INCEPTION $2,113,062
-----------
CURRENT EQUITY $22,886,938
--------------------------------------- ===========
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 984,801 128,700 13.07%
CHI CHI'S EAU CLAIRE, WI 1,042,730 136,260 13.07%
VACANT LAND COL. SPRINGS, CO 356,549 0 0.00%
DENNY'S ** GLENDALE, AZ 1,105,926 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 1,948,420 9.81% 626,896 75,720 12.08%
----------------------------------- ----------------------------------- -------------------------------
------------------------------------- ----------------
TOTALS TOTAL %
---------------------------------- ------------------------------------- ON 22,886,938
EQUITY
CONCEPT LOCATION INVESTED RECEIPTS * RETURN * RAISE
----------------------------------- ------------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
CHI CHI'S GRAND FORKS, ND 984,801 128,700 13.07%
CHI CHI'S EAU CLAIRE, WI 1,042,730 136,260 13.07%
VACANT LAND COL. SPRINGS, CO 356,549 0 0.00%
DENNY'S ** GLENDALE, AZ 1,174,670 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 2,024,140 9.88% 8.84%
----------------------------------- ------------------------------------- ----------------
OUTSTANDING DEBT
----------------------------------- -------------------------------
AMOUNT ANNUAL CURRENT AMOUNT ANNUAL CURRENT
----------------------------------- OWED DEBT INTEREST OWED DEBT INTEREST
MORTGAGED PROPERTIES 3/31/96 SERVICE RATE 3/31/96 SERVICE RATE
----------------------------------- ----------------------------------- -------------------------------
----------------------------------- -----------------------------------
DENNY'S HOPKINS, MN 109,045 14,783 11.50% 181,742 24,637 11.50%
DENNY'S BEAVER DAM, WI 71,682 8,726 9.50% 179,835 21,514 9.50%
MULTIPLE STORES AZ, TX 600,000 0 8.50%
----------------------------------- ----------------------------------- -------------------------------
----------------------------------- ----------------------------------- -------------------------------
TOTALS 780,727 23,509 - 361,577 46,151 -
----------------------------------- ----------------------------------- -------------------------------
----------------------------------- ----------------------------------- -------------------------------
NET AFTER DEBT 19,085,135 1,924,911 10.09% 265,319 29,569 11.14%
----------------------------------- ----------------------------------- -------------------------------
----------------
------------------------------------- TOTAL % ON
- - ----------------------------------- AMOUNT ANNUAL 22,886,938
MORTGAGED PROPERTIES OWED DEBT EQUITY
- - ----------------------------------- 3/31/96 SERVICE RETURN * RAISE
- - ----------------------------------- ------------------------------------- ----------------
DENNY'S HOPKINS, MN 290,787 39,420
DENNY'S BEAVER DAM, WI 251,517 30,240
MULTIPLE STORES AZ, TX 600,000 0
- - ----------------------------------- -------------------------------------
- - ----------------------------------- -------------------------------------
TOTALS 1,142,304 69,660
- - ----------------------------------- -------------------------------------
- - ----------------------------------- ------------------------------------- ----------------
NET AFTER DEBT 19,350,454 1,954,480 10.10% 8.54%
- - ----------------------------------- ------------------------------------- ----------------
* 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.
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