<PAGE>
FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 0-16722
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
WISCONSIN 36-6845083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 West 11th Street, Suite 1110, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 421-7444
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Interests
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ___X___ No_______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting securities held by nonaffiliates
of the Registrant: The aggregate market value of limited partnership interests
held by nonaffiliates is not determinable since there is no public trading
market for the limited partnership interests.
Index to Exhibits located on page: _____42_____
<PAGE>
PART I
ITEM 1. BUSINESS
BACKGROUND
- ----------
The Registrant, DiVall Insured Income Fund Limited Partnership (the
"Partnership"), is a limited partnership organized under the Wisconsin Uniform
Limited Partnership Act pursuant to an Agreement of Limited Partnership dated as
of November 29, 1985, and amended as of September 15, 1986, June 16, 1987,
February 8, 1993, May 26, 1993, and June 30, 1994. As of December 31, 1995, the
Partnership consisted of one General Partner and 1,797 Limited Partners owning
an aggregate of 25,000 Limited Partnership Interests (the "Interests") acquired
at a public offering price of $1,000 per Interest before volume discounts. The
Interests were sold commencing September 17, 1986, pursuant to a Registration
Statement on Form S-11 filed under the Securities Act of 1933 (Registration 33-
2552) as amended. On March 16, 1988, the Partnership closed the offering at the
maximum offering amount of 25,000 Interests ($25,000,000), providing net
proceeds to the Partnership after volume discounts and offering costs of
$22,270,578.
The Partnership is currently engaged in the business of owning and operating its
investment portfolio (the "Properties") of commercial real estate and recovering
the assets misappropriated by the former general partners and/or their
affiliates. The misappropriation is more fully discussed under Recent
Developments. The Properties are leased on a triple net basis to, and operated
by, franchisors or franchisees of national, regional and local retail chains
under long-term leases. The lessees consist of fast-food, family style, and
casual/theme restaurants. At December 31, 1995, the Partnership owned 22
properties and a parcel of undeveloped land, as more fully described in Item 2.
Prior to the disposal of the Properties, the Partnership's return on its
investment will be derived principally from rental payments received from its
lessees. Therefore, the Partnership's return on its investment is largely
dependent, among other factors, upon the business success of its lessees. The
business success of the Partnership's individual lessees can be adversely
affected on three general levels. First, the tenants rely heavily on the
management contributions of a few key entrepreneurial owners. The business
operations of such entrepreneurial tenants can be adversely affected by death,
disability or divorce of a key owner, or by such owner's poor business decisions
such as an undercapitalized business expansion. Second, changes in a local
market area can adversely affect a lessee's business operation. A local economy
can suffer a downturn with high unemployment. Socioeconomic neighborhood
changes can affect retail demand at specific sites and traffic patterns may
change, or stronger competitors may enter a market. These and other local
market factors can potentially adversely affect the lessees of Partnership
properties. Finally, despite an individual lessee's solid business plans in a
strong local market, the chain concept itself can suffer reversals or changes in
management policy which in turn can affect the profitability of operations for
Partnership properties. Therefore, there can be no assurance that any specific
lessee will have the ability to pay its rent over the entire term of its lease
with the Partnership.
Since 98% of the Partnership's investment in properties and equipment involves
restaurant tenants, the restaurant market is the major market segment with a
material impact on Partnership operations. It would appear that the management
skill and potential operating efficiencies realized by Partnership lessees will
be a major ingredient for their future operating success in a very competitive
restaurant and food service marketplace.
2
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There is no way to determine, with any certainty, which, if any, tenants will
succeed or fail in their business operations over the term of their respective
leases with the Partnership. It can be reasonably anticipated that some lessees
will default on future lease payments to the Partnership which will result in
the loss of expected lease income for the Partnership. Management will use its
best efforts to vigorously pursue collection of any defaulted amounts and to
protect the Partnership's assets and future rental income potential by trying to
re-lease any properties with rental defaults. External events which could
impact the Partnership's liquidity are the entrance of other competitors into
the market areas of our tenants; liquidity and working capital needs of the
leaseholders; and failure or withdrawal of any of the national franchises held
by the Partnership's tenant. Each of these events, alone or in combination,
would affect the liquidity level of leaseholders resulting in possible default
by the tenant. Since the information regarding plans for future liquidity and
expansion of closely held organizations, which are tenants of the Partnership,
tend to be of a private and proprietary nature, anticipation of individual
liquidity problems is difficult, and prediction of future events is nearly
impossible.
RECENT DEVELOPMENTS
- -------------------
A preliminary investigation during 1992 by the Office of the Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation"), revealed that during at least the four years ended
December 31, 1992, two of the former general partners of the Partnership, Gary
J. DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred
substantial cash assets of the Partnership and two affiliated publicly
registered partnerships, DiVall Insured Income Properties 2 Limited Partnership
("DiVall 2") and DiVall Income Properties 3 Limited Partnership ("DiVall 3")
(collectively the "Partnerships") to various other entities previously sponsored
by or otherwise affiliated with DiVall and Magnuson. The unauthorized transfers
were in violation of the respective Partnership Agreements. The aggregate
amount of the misappropriation, related costs and 9% interest accrued since
January 1, 1993, is in excess of $15,700,000, of which $2,031,000 has been
allocated to the Partnership.
Subsequent to discovery, and in response to the regulatory inquiries, a third-
party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed (effective
February 8, 1993) to assume the responsibility for daily operations and assets
of the Partnerships as well as to develop and execute a plan of restoration to
the Partnerships. As reported in the Partnership's report on Form 8-K dated May
26, 1993, effective as of that date, the Limited Partners, by written consent of
a majority of interests, elected the Permanent Manager, TPG, as General Partner.
Additional results of the solicitation included the approval of the Permanent
Manager Agreement ("PMA"), the acceptance of the resignations of the former
general partners, amendments to certain provisions of the Partnership Agreement
pertaining to general partner interests and compensation, and an amendment of
the Partnership Agreement providing for an Advisory Board (the "Board").
THE PERMANENT MANAGER AGREEMENT
- -------------------------------
The PMA was entered into on February 8, 1993, between the Partnership, DiVall 2,
DiVall 3, the now former general partners DiVall and Magnuson, their controlled
affiliates, and TPG, naming TPG as the Permanent Manager. The PMA contains
provisions allowing the Permanent Manager to submit the PMA, the issue of
electing the Permanent Manager as General Partner, and the issue of acceptance
of the resignations of the former general partners to a vote of the Limited
Partners through a solicitation of written consents.
3
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TPG, as the new General Partner, has been operating and managing the affairs of
the Partnership in accordance with the provisions of the PMA and the Partnership
Agreement, as amended.
ADVISORY BOARD
- --------------
The concept of the Advisory Board was first introduced by TPG during the
solicitation of written consents for the Partnerships and is the only type of
oversight body known to exist for similar partnerships at this time. The first
Advisory Board was appointed in October 1993, and held its first meeting in
November 1993. The four person Board is empowered to, among other functions,
review operational policies and practices, review extraordinary transactions,
and advise and serve as an audit committee to the Partnership and the General
Partner. The Advisory Board does not have the authority to direct management
decisions or policies or remove the General Partner. The powers of the Board
are advisory only. The Board has full and free access to the Partnership's
books and records, and individual Board members have the right to communicate
directly with the Limited Partners concerning Partnership business. Members of
the Board will be compensated $3,000 annually and $1,200 for each quarterly
meeting attended.
The Board currently consists of a broker dealer representative, D. Todd
Witthoeft of Calton and Associates, Inc.; and a Limited Partner from each of the
three Partnerships: Gerhard Zoller from the Partnership, Michael Bloom from
DiVall 2, and Dr. Albert Eschen from DiVall 3. The position of industry
representative was created for approximately a three (3) year period which ended
January 31, 1996. For a brief description of each Board member, refer to Item
10, Directors and Executive Officers of the Registrant.
RESTORATION PLAN
- ----------------
TPG, since the commencement of its management of the Partnerships, has been
developing and implementing a strategy (the "Restoration Plan" or "Plan") for
recovering as much of the amounts misappropriated by the former general partners
and their affiliates as possible. The Plan currently focuses on recovery from
the following sources: (a) personal property, (b) promissory notes, (c) land
contracts, (d) litigation, and (e) PMA savings.
A. Personal Property. DiVall and Magnuson appear to have very few
unencumbered personal assets which would materially benefit the
Partnerships. The Partnerships have obtained security interests in
substantially all of DiVall and Magnuson's assets which have been
identified. The security interests include a mortgage on DiVall's
residence and surrounding farm land.
B. Promissory Notes. Pursuant to the PMA, DiVall, Magnuson, and entities
owned by them, granted the Partnership a security interest in certain
promissory notes and mortgages due from other DiVall related entities
(the "Private Partnerships"). Recovery of amounts due under these
notes is being vigorously pursued, but the amount of potential
recovery remains uncertain because many of the Private Partnerships
are currently involved in bankruptcy proceedings. See Item 3, Legal
Proceedings, for additional information regarding the bankruptcy
proceedings of the Private Partnerships.
4
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C. Land Contracts. The Partnerships have been assigned two land
contracts from the Partnership's former general partners. These
contracts were not originally identified nor assigned in connection
with the PMA.
D. Litigation. The Partnerships have initiated lawsuits against the
Partnership's former auditors, former securities counsel, former
general partners and a former affiliate. Refer to Item 3, Legal
Proceedings, and Note 13 to the financial statements included in Item
8 below for additional information concerning the settlement of these
lawsuits.
E. PMA Savings. Pursuant to the terms of the PMA, The Provo Group, Inc.
is to account to the former general partners for all of the following
which are avoided or reduced by implementation of the PMA: (i) Fees
payable to the general partner or entities controlled by the general
partner, (ii) brokerage commissions, and (iii) residuals. Under the
PMA, all such savings shall be credited against the amount owed the
Partnership by the former general partners.
Total amounts recovered at December 31, 1995, amounted to $739,000, of which
approximately $98,000 was allocated to the Partnership.
The total amounts due the Partnerships from the former general partners and
their affiliates as of December 31, 1995, as a result of the misappropriation
of assets, approximates $15,700,000 which includes the amount of the
misappropriation discovered to date, related costs, and 9% interest accrued
since January 1, 1993.
ITEM 2. PROPERTIES
The Partnership's properties are leased under long-term leases, generally with
terms of approximately 20 years. All leases are triple net which require the
tenant to pay all property operating costs including maintenance, repairs,
utilities, property taxes, and insurance. A majority of the leases contain
percentage rent provisions which require the tenant to pay a specified
percentage (3% to 8%) of gross sales above a threshold amount.
At December 31, 1995, the Partnership owned the following restaurant Properties:
<TABLE>
<CAPTION>
Lease
Acquisi- Property Name & Purchase Rental Per Expiration Renewal
tion Date Address Lessee Price (1) Annum Date Options
- --------- ------------------------ -------------------------- ---------- ---------- ---------- -------
<C> <S> <C> <C> <C> <C> <C>
03/27/87 Denny's L&H Restaurants, Inc. $ 849,299 $ 66,000 03-31-2013 (3)
827 Park Ave.
Beaver Dam, WI
06/30/87 BW-3 L&H Restaurants, Inc.(5) 985,050 66,000 01-15-2013 (3)
502 N Blake Rd
Hopkins, MN
10/08/87 Fazoli's Fazoli's Restaurants, Inc. 605,076(2) 45,504 05-29-2005 (3)
3600 Merle Hay Rd
Des Moines, IA
</TABLE>
5
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<TABLE>
<CAPTION>
Lease
Acquisi- Property Name & Purchase Rental Per Expiration Renewal
tion Date Address Lessee Price (1) Annum Date Options
- --------- ------------------------ -------------------------- ---------- ---------- ---------- -------
<C> <S> <C> <C> <C> <C> <C>
07/08/87 Taco Cabana TP Acquisition Corp. 1,308,153 108,000 06-30-2007 (4)
4355 Camp Wisdom
Dallas, TX
01/08/87 Taco Cabana TP Acquisition Corp. 1,474,569 108,000 06-30-2007 (4)
1505 N Collins St.
Arlington, TX
09/28/87 Taco Cabana TP Acquisition Corp. 1,257,596 108,000 06-30-2007 (4)
12475 NW Hwy & Shiloh Rd
Dallas, TX
10/27/87 Chi-Chi's Mexican Chi Chi's, Inc. 1,042,730 136,260 10-31-2007 None
1030 Clairemont Ave.
Eau Claire, WI
12/01/87 Popeye's Famous Chicken Bysom Enterprises, Ltd. 610,893 81,420 10-31-2007 None
7430 S Stoney Island Ave
Chicago, IL
12/01/87 Popeye's Famous Chicken Bysom Enterprises, Ltd. 579,295 77,280 10-31-2007 None
300 E 35th St.
Chicago, IL
12/01/87 Popeye's Famous Chicken Bysom Enterprises, Ltd. 610,893 81,420 10-31-2007 None
346 E 95th St.
Chicago, IL
12/01/87 Popeye's Famous Chicken Bysom Enterprises, Ltd. 484,501 64,620 09-30-2007 None
111 W 75th St.
Chicago, IL
12/01/87 Popeye's Famous Chicken Bysom Enterprises, Ltd. 473,968 63,180 09-30-2007 None
818 E 47th St.
Chicago, IL
12/01/87 Popeye's Famous Chicken Bysom Enterprises, Ltd. 631,958 84,180 10-31-2007 None
8732 S Stoney Island Ave
Chicago, IL
12/01/87 Popeye's Famous Chicken Bysom Enterprises, Ltd. 437,105 58,260 09-30-2007 None
5431 S Halsted
Chicago, IL
12/23/87 Chi-Chi's Mexican Chi Chi's, Inc. 984,801 128,700 10-31-2007 None
3000 32nd Ave, S
Grand Forks, ND
</TABLE>
6
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<TABLE>
<CAPTION>
Lease
Acquisi- Property Name & Purchase Rental Per Expiration Renewal
tion Date Address Lessee Price (1) Annum Date Options
- --------- ------------------------ -------------------------- ---------- ---------- ---------- -------
<C> <S> <C> <C> <C> <C> <C>
12/24/87 Denny's Phoenix Foods, Inc. 1,174,670(2) 101,830 01-24-2010 (3)
10614 N 43rd Ave
Glendale, AZ
12/24/87 Denny's Phoenix Foods, Inc. 1,164,707(2) 99,464 01-24-2010 (3)
87th and Grand Ave
Peoria, AZ
03/18/88 Denny's JML Foods, Inc. 1,091,710(2) 109,351 11-06-2010 (3)
7605 E McDowell
Scottsdale, AZ
03/18/88 Denny's TCB Management 1,067,254(2) 103,207 11-25-2010 (3)
1231 W Baseline
Mesa, AZ
03/24/88 Hardee's Terratron, Inc. 1,026,931 129,780(6) 03-31-2008 None
838 E Johnson St
Fond du Lac, WI
03/25/88 Taco Cabana TP Acquisition Corp. 1,369,243 108,000 06-30-2007 (4)
1827 Greenville Ave
Dallas, TX
04/15/88 Vacant 905,807 0 --- ---
8736 S Stoney Island Ave
Chicago, IL
</TABLE>
Footnotes:
(1) Purchase price includes all costs incurred to acquire the property.
(2) Purchase price includes the cost of equipment.
(3) Two five-year renewal options available.
(4) One five-year renewal option available.
(5) This tenant has subleased the property to Stone Canyon, Inc., the operator
of BW-3.
(6) This rent amount has been reduced for 1996 by a one-year lease modification
entered into with the tenant.
During February 1995, a lease was executed for the Fazoli's property in Des
Moines, Iowa. The property was vacated by the former tenant during March 1994.
The BW-3 restaurant (formerly Denny's) in Hopkins, Minnesota, was vacated by the
tenant in September, 1994. The property's lease, however, does not expire until
2013, and the tenant is continuing to make all payments required by the lease.
During March 1995, the tenant executed a lease with a sub-tenant, Stone Creek,
Inc. for the property.
On January 26, 1995, the Partnership evicted the tenant and took possession of
the Porterhouse restaurant in Chicago, Illinois. The tenant of this property
had been delinquent throughout 1994. However,
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bankruptcy issues with the tenant impacted the Partnership with respect to the
appropriate or allowable actions in dealing with the tenant's eviction. The
Partnership is currently negotiating a potential lease for this property.
The tenant of the Partnership's Hardees's restaurant has experienced sales
difficulties over the past two years. Management has entered into a one-year
lease modification in an effort to avoid having the tenant vacate the property,
which reduced 1996 rents by approximately $40,000. Additionally, delinquent
rent totaling 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.
In addition to the 22 restaurant properties, the Partnership also owns a vacant
parcel of land in Colorado Springs, Colorado. This land was acquired in 1987
for an original acquisition cost of $356,549, from Rocky Mountain Investment
Corporation ("RMIC"), an affiliate of the former general partners. The
Partnership had intended to build a Rocky Rococo restaurant on the land and
lease it back to RMIC, but RMIC, as the result of subsequent financial
difficulties, did not meet conditions for a lease. In connection with the
Partnership's purchase, RMIC executed an agreement whereby it promised to pay
the Partnership an amount equal to a 14.5% per annum return on the purchase
price of the property, from the date of purchase. RMIC's obligations under the
agreement were personally guaranteed by Gary DiVall, a former general partner.
As of December 31, 1995, rent obligations and carrying costs due under this
agreement, amounted to approximately $220,000 and are not reflected in the
Partnership's financial statements as they are deemed uncollectible. The
Partnership wrote down the cost of the land to its estimated net realizable
value at December 31, 1993 of $250,000. Management is currently attempting to
sell the undeveloped parcel.
ITEM 3. LEGAL PROCEEDINGS
On March 16, 1993, the Partnership, along with DiVall 2 and DiVall 3 initiated a
lawsuit against Ernst & Young LLP ("E&Y"), a certified public accounting firm,
in the Circuit Court of Dane County, Wisconsin, in connection with the audits of
the Partnerships performed by E & Y for the years 1989, 1990 and 1991. The
Complaint filed in said lawsuit alleges, among other things, that Defendant E &
Y was negligent in its audit work for the Partnerships by failing to exercise
ordinary care and failing to adhere to professional standards in the following
areas: reviewing, understanding, and auditing of compliance in regards to the
Partnership Agreements; evaluation of the adequacy of internal controls;
identification of audit risks; selection and implementation of audit procedures
to address audit risks; identification of related party transactions;
compilation of sufficient evidential matters; resolution of improper transfers
and allocations; disclosure of related party transactions; and exercise of
appropriate audit skepticism. The Partnerships request the payment of damages
in the amount of $9,000,000, plus interest, attorneys fees and costs, and
whatever additional relief the court deems just and proper. 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.
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
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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 schedules 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 available for deposit in the partnership's
restoration escrow account approximate $300,000.
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure
the repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 2 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
On July 23, 1993, nineteen (19) of the Private Partnerships sought the
protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven
(7) of these bankruptcies were voluntary and twelve (12) of these 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 $525,000 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.
9
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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 II, Item 8 of this report, the former
general partners borrowed $600,000 during or before 1991 from Metro North State
Bank (the note is now held by Boatmen's). The proceeds of the Note were not
received by the Partnership. As of December 31, 1995, the Partnership had not
paid debt service on the Note. The Partnership received a notice of default on
the Note in October 1993, and the Foreclosure Action was filed in February 1994.
As of December 31, 1995, interest in the amount of $174,000 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 $190,000 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. Boatmen's has until April 25, 1996 to
seek leave to take the Eighth Circuit's ruling to the United States Supreme
Court. Pursuant to the Restoration Trust Account procedures described in Note
12 to the Financial Statements, included in Part II, Item 8 of this report, all
of the Partnerships are sharing the expenses of this litigation and any
recoveries resulting effectively from the partial or full cancellation of the
alleged indebtedness will be allocated among the three Partnerships on the same
basis as the restoration costs are currently being allocated via appropriate
payments by the Partnership to its affiliated Partnerships.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Although some interests have been traded, there is no active public market
for limited partnership interests and it is not anticipated that an active
public market for limited partnership interests will develop.
(b) As of December 31, 1995, there were 1,797 record holders of limited
partnership interests in the Partnership.
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(c) The Partnership Agreement, as amended, provides for distributable net
cash receipts of the Partnership to be distributed on a quarterly basis,
99% to the Limited Partners and 1% to the General Partner, subject to the
limitations on distributions to the General Partner described in the
Amended Partnership Agreement. During 1995 and 1994, $1,790,000 and
$1,540,000, respectively, were distributed in the aggregate to the Limited
Partners. The General Partner received aggregate distributions of $3,624
in 1995 and $3,755 in 1994.
ITEM 6. SELECTED FINANCIAL DATA
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
(a Wisconsin limited partnership)
December 31, 1995, 1994, 1993, and 1992
(not covered by Independent Auditors' Report)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1995 1994 1993 1992
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total
Revenue $ 2,047,636 $ 2,767,500 $ 2,689,405 $ 2,554,921
- --------------------------------------------------------------------
Net Income
1,065,084 1,059,888 872,828 457,119
- --------------------------------------------------------------------
Net Income
per
Limited
Partner
Interest 42.18 41.97 34.64 16.46
- --------------------------------------------------------------------
Total Assets
17,593,806 18,295,553 20,482,154 20,963,059
- --------------------------------------------------------------------
Total
Partners'
Capital 15,842,643 16,571,183 17,055,050 17,926,985
- --------------------------------------------------------------------
Cash
Distributions
per Limited
Partnership
Interest 71.60 61.60 69.90 67.17
- --------------------------------------------------------------------
</TABLE>
(a) The above selected financial data should be read in conjunction with the
financial statements and the related notes appearing elsewhere in this
annual report.
(b) Data prior to 1992 is not shown due to the data being unreliable and a
comparison would not be meaningful. The Partnership's prior auditors
withdrew their report on such financial statements.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For comparative purposes, it should be noted that the three years presented
in the financial statements reflect the results of management of different
general partners. Until February 8, 1993, the Partnership was under the
management of an interim manager, Barry A. Soble. On February 8, 1993, The
Provo Group, Inc. replaced Mr. Soble as Permanent Manager. On May 26,
1993, TPG was elected as General Partner as a result of a solicitation of
written consents of the Limited Partners.
LIQUIDITY AND CAPITAL RESOURCES:
--------------------------------
INVESTMENT PROPERTIES AND NET INVESTMENT IN DIRECT FINANCING LEASES
-------------------------------------------------------------------
The investment properties, including equipment held by the Partnership at
December 31, 1995, 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. The Partnership executed a lease on the former
Happy Joe's restaurant in Des Moines, Iowa with the tenant of Fazoli's
restaurant during February 1995 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 $256,000
at December 31, 1995, compared to $304,000 at December 31, 1994. The
decrease of $48,000 was a result of principal payments received during the
year.
OTHER ASSETS
------------
Cash and cash equivalents, including cash restricted for real estate taxes
held by the Partnership, were $844,000 at December 31, 1995, compared to
$1,176,000 at December 31, 1994. The Partnership designated cash of
$350,000 to fund the Fourth Quarter 1995 distributions to Limited Partners,
$360,000 for the payment of year-end accounts payable and accrued expenses,
and the remainder represents reserves deemed necessary to allow the
Partnership to operate normally. The decrease in cash is primarily due to
the distribution of proceeds from Fourth Quarter 1994 property sales during
the First Quarter of 1995. Cash generated through the operations of the
Partnership's investment properties, sales of investment properties, and
any recoveries of misappropriated funds by the former general partners will
provide the sources for future fund liquidity and Limited Partner
distributions.
The Partnership established an Indemnification Trust (the "Trust") during
the Fourth Quarter of 1993 and deposited $100,000 in the Trust during 1993,
$90,000 during 1994, and $60,000 during 1995. The provision to establish
the Trust was included in the Permanent Manager Agreement for the
indemnification of TPG, in the absence of fraud or gross negligence, from
any claims or liabilities that may arise from TPG acting as Permanent
Manager. The Trust is owned by the Partnership. For additional
information regarding the Trust, refer to Note 11 to the financial
statements included in Item 8 of this report.
12
<PAGE>
DUE FROM AFFILIATED PARTNERSHIPS, DUE FROM FORMER AFFILIATES, ALLOWANCE FOR
UNCOLLECTIBLE AMOUNTS DUE FROM FORMER AFFILIATES, DUE TO AFFILIATED
PARTNERSHIPS AND DEFERRED INCOME
Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $1,124,000 at
December 31, 1995. The receivable decreased from the prior year due to
$20,000 of recoveries received during the year from the former general
partners and their affiliates.
The Partnership maintains a record of costs incurred in identifying or
recovering the misappropriated assets. These amounts are expensed when
incurred, and then, recorded on the balance sheet as a restoration cost
receivable with a corresponding allowance for such receivable deemed
uncollectible. These costs are considered due from the former general
partners and their affiliates. Interest has been accrued on the
misappropriated funds since January 1, 1993, at a rate of 9% per annum and
has been included in the restoration cost receivable. The receivable
increased from approximately $606,000 at December, 31, 1994, to $908,000 at
December 31, 1995, and includes $451,000 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. 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 was unchanged at December 31, 1995. Pending the outcome of
litigation and other matters affecting the sources of potential recovery,
it is not possible to determine the amount that will ultimately be
recovered. The ultimate recovery may differ from the current estimate.
The restoration costs are allocated among the Partnerships based on each
Partnership's respective share of the misappropriation as discussed in Note
12 to the financial statements included in Item 8 of this report. The
allocation is adjusted annually to reflect any changes in the entire
misappropriation. The Partnership's percentage of the allocation was
reduced in 1993. Consequently, the Partnership had been paying more than
its pro rata share of the costs. Accordingly, the Partnership recorded a
receivable at December 31, 1993, in the amount of $295,000, due from DiVall
3 with a corresponding reduction reflected in professional expenses
relating to the Investigation, former general partner removal expenses, and
interim fund manager fees and expenses. During 1994 and 1995, recoveries
allocated to DiVall 3 were used to partially repay amounts owed to the
Partnership. At December 31, 1995, the remaining amount due from DiVall 3
was $106,000.
The Partnership also recorded a payable at December 31, 1993, due to DiVall
2 in the amount of $236,000, and recorded a reversal of prior year revenue
in a corresponding amount in connection with a prior tenant (DeDan)
default. The amount was repaid during November, 1994, from proceeds from
the sale of three (3) Wendy's restaurants in Florida.
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
13
<PAGE>
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 December 31, 1994 and 1995.
LIABILITIES
-----------
Mortgage notes payable decreased from $1,156,000 at December 31, 1994, to
$1,146,000 at December 31, 1995, due to monthly principal payments made on
the notes.
Accounts payable and accrued expenses at December 31, 1995, amounted to
approximately $118,000. The majority of this balance represented year-end
accruals of restoration costs related to the litigation against the former
legal counsel, former auditors and a former general partner affiliate as
well as legal and auditing fees.
Payable to tenant of $96,000 at December 31, 1995, represents a portion of
the monthly payments received from a tenant which must be refunded to them,
due to their not achieving specified sales goals. This amount was returned
to the tenant during 1996.
Real estate taxes payable amounted to $88,000 at December 31, 1995,
compared to $133,000 at December 31, 1994. The decrease is primarily a
result of amounts accrued for 1994 taxes on vacant properties which were
paid in 1995. The decrease in vacancies during 1995 resulted in the
decreased accrual.
PARTNERS' CAPITAL
-----------------
Net income for the year was allocated between the General Partner and the
Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement and the Amendment to the Partnership Agreement, as discussed more
fully in Note 4 of the financial statements included in Item 8 of this
report. The former general partners' capital account balance was
reallocated to the Limited Partners at December 31, 1993. Refer to Note 14
to the financial statements included in Item 8 of this report for
additional information regarding the reallocation.
Cash distributions paid to the Limited Partners and to the General Partner
during 1995 of $1,790,000 and $3,624, respectively, have also been made in
accordance with the amended Partnership Agreement. The Fourth Quarter 1995
distribution of $350,000 was paid to the Limited Partners on February 15,
1996.
RESULTS OF OPERATIONS:
----------------------
Management believes that the financial results of 1995 are not indicative
of "normal" Partnership operations. There are many events which occurred
since the discovery of the misappropriations in 1992 which have had a
negative impact on financial results. Some of these events will continue
to have a negative impact on the Partnership in the future.
The Partnership reported net income for the year ended December 31, 1995,
in the amount of $1,065,000 compared to $1,060,000 for the year ended
December 31, 1994, and an even lower net income for the year ended December
31, 1993, of $873,000. Results for all three years 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, modifications to leases, non-cash write-offs, and
14
<PAGE>
real estate taxes. The costs related to the misappropriation increased
significantly during 1995 as the lawsuit against the former general partner
accountants and attorneys got closer to trial.
REVENUES
--------
Total revenues were $2,048,000, $2,768,000 and $2,689,000 for the years
ended December 31, 1995, 1994 and 1993. 1995 rental revenue reflects a
decline of approximately $400,000 compared with 1994 as a result of three
(3) Wendy's properties sold in 1994. Revenue for 1994 includes a gain of
$309,000 on the sales of three (3) Wendys restaurants in Florida. 1993
revenue included lease modification fees in the amount of $500,000 from Two
Pesos/Taco Cabana. As a result of these lease modifications, rental income
decreased during 1993, 1994, and 1995.
Based on leases currently in place on the remaining owned properties, total
revenues should approximate $2,000,000 annually. Future revenues may
decrease with tenant defaults and/or sales of Partnership properties. They
may also increase with additional rents due from tenants, if those tenants
experience sales levels which require the payment of additional rent to the
Partnership.
EXPENSES
--------
For the years ended December 31, 1995, 1994, and 1993, cash expenses
amounted to approximately 29%, 30% and 39% of total revenues, respectively.
Total expenses, including non-cash items, amounted to approximately 48%,
62%, and 65% of total revenues for the years ended December 31, 1995, 1994,
and 1993, respectively. Items negatively impacting expenses during the
last three years include expenses incurred primarily in relation to the
misappropriation of assets by the former general partners and their
affiliates, interest expense, non-cash write offs, property write-downs,
and real estate taxes.
For the years ended December 31, 1995, 1994, and 1993, expenses incurred in
relation to the misappropriated assets amounted to $133,000, $76,000, and
$154,000, respectively. Future expenses incurred in relation to the
misappropriation will continue to have a negative impact on the
Partnership. Management has estimated that these expenses will approximate
$36,000 for the year ending December 31, 1996. The Partnership also
recorded a reversal of prior year revenue in 1993 of $236,000 relative to
an affiliate transaction previously discussed.
Interest expense for 1995 amounted to $111,000 compared to $188,000 in 1994
and $385,000 in 1993. During 1993, interest was accrued at the default
rate on the Boatmen's note. During 1994, a portion of this accrual was
reversed to more accurately reflect the Partnership's potential liability.
Additionally, the three notes repaid during November 1994 had a favorable
affect on interest expense during 1995.
Additional expenses impacting operating results are the allowance for
uncollectible amounts due from the former general partners and their
affiliates, write-offs of straight-line rent, and write-downs of property
to their estimated net realizable values. All of these items, including
depreciation, are non-cash items and do not affect current operating cash
flow of the Partnership or distributions to the Limited Partners.
Write-offs for uncollectible rents and receivables are non-cash items and
amounted to $24,000, $73,000, and $141,000, during 1995, 1994, and 1993
respectively. The write-offs are the result of defaults as well as
modifications to several property leases since inception of the
Partnership. Adjustments will generally occur as a result of lease
modifications that affect future increases in rental income previously
straight-lined.
15
<PAGE>
The Partnership wrote down the carrying value of the Porterhouse restaurant
in Chicago, Illinois, during 1994 by $331,000 to a new carrying value of
$380,000 which management believes is more reflective of its net realizable
value.
The Partnership also wrote down the carrying value of the vacant land in
Colorado by $107,000 during 1993. The write-down reduced the investment on
the land to a carrying value of $250,000 which management believes more
appropriately reflects its estimated net realizable value.
Real estate tax expenses for the last three years have been inordinately
high as former management allowed these taxes to become delinquent for
several years while interest and penalties accumulated, along with new
liabilities incurred on vacant properties and defaulted tenants. The
Partnership incurred real estate taxes on behalf of tenants in the amounts
of $64,000, $130,000, and $193,000 for the years ended December 31, 1995,
1994, and 1993, respectively.
Management fees declined from $137,000 in 1993 to $95,000 in 1994 because
of payments made to the interim fund manager during the first two months of
1993. The compensation arrangement for the Permanent Manager which went
into effect in February 1993, was at a much lower rate. Management fees
further declined to $87,000 during 1995 due to the sale of three (3)
properties at the end of 1994. For additional information, refer to Note 3
to the financial statements included in Item 8 of this report.
As noted above, management believes the Partnership's operations have yet
to stabilize to what could be considered normal, due to the negative impact
of the costs related to the recovery of the misappropriated assets.
However, these "recovery costs" are being minimized currently as indicated
by the comparative results of the Partnership's statements of income and
will continue to be minimized in the future.
INFLATION:
----------
Inflation has a minimal effect on operating earnings and related cash flows
from a portfolio of triple net leases. By their nature, such leases
actually fix revenues and are not impacted by rising costs of maintenance,
insurance, or real estate taxes. Although the majority of the
Partnership's leases have percentage rent clauses, revenues from percentage
rents represented only 1% of fixed rental income for 1995. Percentage
rents earned in 1995 were actually 68% lower than in 1994. 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.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
----------------------------------------------
(a Wisconsin limited partnership)
---------------------------------
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
-------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants . . . . . . . . . 18
Balance Sheets, December 31, 1995 and 1994 . . . . . . . . . 19 - 20
Statements of Income for the Years
Ended December 31, 1995, 1994, and 1993 . . . . . . . . . 21
Statements of Partners' Capital for the
Years Ended December 31, 1995, 1994, and
1993 . . . . . . . . . 22
Statements of Cash Flows for the Years
Ended December 31, 1995, 1994, and 1993 . . . . . . . . . 23 - 24
Notes to Financial Statements . . . . . . . . . 25 - 38
Schedule III--Real Estate and Accumulated
Depreciation . . . . . . . . . 43
</TABLE>
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Divall Insured Income Fund Limited Partnership:
We have audited the accompanying balance sheets of DIVALL INSURED INCOME FUND
LIMITED PARTNERSHIP (the Partnership) as of December 31, 1995 and 1994 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Divall Insured Income Fund
Limited Partnership as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commissions rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 25, 1996
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
--------------------------
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------- -------------
INVESTMENT PROPERTIES AND EQUIPMENT:(NOTE 3 AND 6)
<S> <C> <C>
Land $ 7,358,073 $ 7,358,073
Buildings and improvements 12,070,525 12,070,525
Equipment 246,896 246,896
Accumulated depreciation (4,078,904) (3,712,602)
----------- -----------
Net investment properties and equipment 15,596,590 15,962,892
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES:(NOTE 8) 256,359 303,811
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 815,512 1,169,554
Cash restricted for real estate taxes 28,218 6,910
Cash held in Indemnification Trust(NOTE 11) 270,488 191,798
Rents and other receivables (net of allowance of
$182,039 in 1995 and $151,161 in 1994) 74,939 68,303
Deferred rent receivable 123,900 108,024
Due from affiliated partnerships(NOTE 12) 105,833 149,435
Due from current General Partner 1,754 0
Prepaid insurance 6,795 7,878
Unsecured notes receivable from lessees 0 5,270
Deferred charges (net of accumulated amortization
of $55,343 in 1995 and $51,753 in 1994) 19,844 7,281
----------- -----------
Total other assets 1,447,283 1,714,453
----------- -----------
DUE FROM FORMER AFFILIATES:(NOTE 2)
Due from former general partner affiliates 1,123,625 1,144,448
Allowance for uncollectible amounts due from
former affiliates (830,051) (830,051)
Restoration cost receivable 907,774 606,430
Allowance for uncollectible restoration receivable (907,774) (606,430)
----------- -----------
Due from former affiliates, net 293,574 314,397
----------- -----------
Total assets $17,593,806 $18,295,553
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
--------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------- ------------
<S> <C> <C>
LIABILITIES:
Mortgage notes payable (NOTE 6) $ 1,145,564 $ 1,155,528
Accounts payable and accrued expenses 118,039 43,787
Payable to tenant 96,000 144,000
Due to current General Partner 959 1,673
Accrued interest payable 173,527 121,026
Security deposits 125,410 125,410
Real estate taxes payable 87,877 132,946
Unearned rental income 3,787 0
------------ ------------
Total liabilities 1,751,163 1,724,370
------------ ------------
CONTINGENT LIABILITIES: (NOTES 10, 13 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) (789,609)
------------ ------------
0 0
------------ ------------
Current General Partner -
Cumulative net income 30,181 19,530
Cumulative cash distributions (12,142) (8,518)
------------ ------------
18,039 11,012
------------ ------------
Limited Partners (25,000 interests outstanding) -
Capital contributions, net of offering costs 22,270,578 22,270,578
Cumulative net income 10,145,861 9,091,428
Cumulative cash distributions (17,381,741) (15,591,741)
Reallocation of former
general partners' capital 789,906 789,609
----------- -----------
15,824,604 16,560,171
------------ ------------
Total partners' capital 15,842,643 16,571,183
------------ ------------
Total liabilities and partners' capital $ 17,593,806 $ 18,295,553
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
-----------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Rental income $1,938,501 $2,367,473 $2,349,540
Lease termination fee (NOTE 5) 0 0 500,000
Interest income on direct financing leases 28,268 32,769 30,967
Interest income 39,879 18,410 27,555
Other Income 40,988 40,339 17,509
Net gain on sale of land and buildings 0 308,509 0
Reversal of prior year revenue (NOTE 12) 0 0 (236,166)
---------- ---------- ----------
2,047,636 2,767,500 2,689,405
---------- ---------- ----------
EXPENSES:
Property management and administrative fees
paid to former general partner affiliate 0 0 30,360
Partnership management fees paid
to current General Partner 87,375 95,141 106,994
Disposition fees - current General Partner 0 30,000 0
Disposition fees - Restoration 0 30,000 0
Restoration fees - current General Partner 833 2,856 0
Insurance 19,066 38,957 39,358
General and administrative 55,670 86,436 81,663
Interest 111,054 187,553 385,484
Real estate taxes, including interest and penalties 64,456 129,597 192,615
Expenses incurred due to default by lessee 9,782 1,433 15,926
Professional services 92,630 144,934 81,752
Professional services related to Investigation 133,035 73,098 84,971
General partner removal expenses 0 0 33,455
Interim fund manager fees and expenses 0 0 (9,425)
Advisory board fees and expenses 14,459 19,470 4,936
Depreciation 366,302 427,075 439,688
Amortization 3,590 37,008 7,227
Provision for uncollectible rents and other receivables 24,300 73,340 140,514
Write-down of property to net realizable value 0 330,714 106,549
---------- ---------- ----------
982,552 1,707,612 1,742,067
---------- ---------- ----------
Income before provision for uncollectible
amounts due from former affiliates 1,065,084 1,059,888 947,338
PROVISION FOR UNCOLLECTIBLE AMOUNTS
DUE FROM FORMER AFFILIATES 0 0 74,510
---------- ---------- ----------
NET INCOME $1,065,084 $1,059,888 $ 872,828
========== ========== ==========
NET INCOME (LOSS) - FORMER GENERAL PARTNERS $ 0 $ 0 $ (2,030)
NET INCOME - CURRENT GENERAL PARTNER 10,651 10,599 8,931
NET INCOME - LIMITED PARTNERS 1,054,433 1,049,289 865,927
---------- ---------- ----------
$1,065,084 $1,059,888 $ 872,828
========== ========== ==========
NET INCOME PER LIMITED PARTNERSHIP INTEREST,
based on 25,000 interests outstanding $42.18 $41.97 $34.64
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
<TABLE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
-----------------------------------------------------
<CAPTION>
Former General Partners Current General Partner
--------------------------------------------------------------- ---------------------------------
Cumulative Cumulative Cumulative Cumulative
Capital Net Cash Net Cash
Contributions Income Distributions Reallocation Total Income Distributions Total
-------------- ---------- ------------- ------------ ----- ----------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 $100 $791,836 $0 $0 $791,936 $0 $0 $0
(unaudited)
Cash Distributions
($69.90 per limited
partnership interest) (4,763) (4,763)
Net Income (Loss) (2,030) (2,030) 8,931 8,931
Reallocation of former
general partners' capital
to the Limited Partners (789,906) (789,906)
-------------- ---------- ------------- ----------- -------- ----------- ----------- -------
BALANCE AT DECEMBER 31, 1993 $100 $789,806 $0 $(789,906) $0 $8,931 $(4,763) $4,168
Cash Distributions
($61.60 per limited
partnership interest) (3,755) (3,755)
Net Income 10,599 10,599
-------------- ---------- ------------- ----------- -------- ----------- ----------- -------
BALANCE AT DECEMBER 31, 1994 $100 $789,806 $0 $(789,906) $0 $19,530 $ (8,518) $11,012
Cash Distributions
($71.60 per limited
partnership interest) (3,624) (3,624)
Net Income 10,651 10,651
-------------- ---------- ------------- ----------- -------- ----------- ----------- -------
BALANCE AT DECEMBER 31, 1995 $100 $789,806 $0 $(789,906) $0 $30,181 $(12,142) $18,039
============== ========= ============= =========== ======== =========== =========== =======
</TABLE>
<TABLE>
<CAPTION>
Limited Partners
--------------------------------------------------------------------------
Capital
Contributions Cumulative Cumulative
Net of Net Cash
Offering Costs Income Distributions Reallocation Total
--------------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 $22,270,578 $7,176,212 $(12,311,741) $0 $17,135,049
(unaudited)
Cash Distributions
($69.90 per limited
partnership interest) (1,740,000) (1,740,000)
Net Income (Loss) 865,927 865,927
Reallocation of former
general partners' capital
to the Limited Partners 789,906 789,906
--------------- ---------- ------------- ------------ ------------
BALANCE AT DECEMBER 31, 1993 $22,270,578 $8,042,139 $(14,051,741) $789,906 $17,050,882
Cash Distributions
($61.60 per limited
partnership interest) (1,540,000) (1,540,000)
Net Income 1,049,289 1,049,289
--------------- ----------- ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1994 $22,270,578 $9,091,428 $(15,591,741) $789,906 $16,560,171
Cash Distributions
($71.60 per limited
partnership interest) (1,790,000) (1,790,000)
Net Income 1,054,433 1,054,433
--------------- ----------- ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1995 $22,270,578 $10,145,861 $(17,381,741) $789,906 $15,824,604
=============== =========== ============ ============ ============
The accompaning notes are an integral part of these statements.
22
</TABLE>
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
-----------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,065,084 $ 1,059,888 $ 872,828
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization 369,892 464,083 446,915
Provision for uncollectible amounts due from
former affiliates 0 0 74,510
Provision for uncollectible rents and other
receivables 24,300 73,340 140,514
Write-down of property to net realizable value 0 330,714 106,549
(Gain)/Loss from sale of investment properties 0 (308,509) 0
Interest applied to Indemnification Trust Account (18,690) (1,798) 0
Increase/(Decrease) in unearned rental income 3,787 (99,505) 2,135
(Increase)/Decrease in rents and other receivables (30,936) (4,933) 15,805
Increase in deferred rent receivable (15,876) (108,024) 0
(Deposits)/Withdrawals for payment of real estate taxes (21,308) 20,813 (27,723)
Decrease in prepaid expenses 1,083 29,644 23,570
Increase in due from current General Partner (1,754) 0 0
Increase/(Decrease) in accounts payable and
accrued expenses 74,252 (17,605) 53,821
Increase/(Decrease) in payable to tenant (48,000) 96,000 48,000
Increase/(Decrease) in due to current General Partner (714) (1,239) 2,912
Increase/(Decrease) in accrued interest payable 52,501 (28,192) 149,218
(Decrease) in security deposits 0 (9,691) 0
Increase/(Decrease) in real estate taxes payable (45,069) 54,426 (22,526)
----------- ----------- -----------
Net cash provided from operating activities 1,408,552 1,549,412 1,886,528
----------- ----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of property and equipment 0 0 (430,000)
Deposit to Indemnification Trust cash account (60,000) (90,000) (100,000)
Increase in deferred charges (16,153) 0 0
Proceeds from sale of investment properties 0 2,000,000 0
Payments (to) from affiliated partnerships 43,602 145,618 (282,041)
Recoveries from former affiliates 20,823 71,407 0
Principal payments received on direct financing leases 47,452 42,950 38,993
Principal receipts on notes receivable 5,270 26,374 63,913
----------- ----------- -----------
Net cash (used in) investing activities 40,994 2,196,349 (709,135)
----------- ----------- -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Principal payments on mortgage notes (9,964) (1,460,761) (53,713)
Payments to affiliated partnerships 0 (236,166) 236,166
Cash distributions to Limited Partners (1,790,000) (1,540,000) (1,740,000)
Cash distributions to current General Partner (3,624) (3,755) (4,763)
----------- ----------- -----------
Net cash (used in) financing activities (1,803,588) (3,240,682) (1,562,310)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (354,042) 505,079 (384,917)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,169,554 664,475 1,049,392
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 815,512 $ 1,169,554 $ 664,475
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 58,553 $ 215,745 $ 236,266
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
Supplemental Information to the Statements of Cash Flows
--------------------------------------------------------
The following significant noncash transaction occurred during the three years
affecting the Partnership's financial statements:
1. The former general partners' capital account balance in the
amount of $789,906 was reallocated to the Limited Partners at
December 31, 1993.
The accompanying notes are an integral part of these statements.
24
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
1. ORGANIZATION AND BASIS OF ACCOUNTING:
DiVall Insured Income Fund Limited Partnership (the "Partnership") was formed on
November 29, 1985, pursuant to the Uniform Limited Partnership Act of the State
of Wisconsin. The initial capital which was contributed during 1986, consisted
of $110, representing aggregate capital contributions of $100 by the former
general partners and $10 by the Initial Limited Partner. The Partnership
initially offered 15,000 additional limited partnership interests ("Interests")
at $1,000 per Interest. Subsequently, the former general partners exercised
their option to increase the offering to 25,000 Interests. The offering closed
on March 16, 1988 at which point 25,000 Interests had been sold, resulting in
the receipt by the Partnership of offering proceeds of $22,270,578, net of
offering costs and after volume discounts.
The Partnership is currently engaged in the business of owning and operating its
investment portfolio (the "Properties") of commercial real estate and recovering
the assets misappropriated by the former general partners and/or their
affiliates. The Properties are leased on a triple net basis to, and operated by,
franchisors or franchisees of national, regional and local retail chains under
long-term leases. The lessees consist of fast-food, family style, and
casual/theme restaurants. At December 31, 1995, the Partnership owned 22
properties and a parcel of undeveloped land.
Rental revenue from investment properties is recognized on the straight-line
basis over the life of the respective lease. Revenue from direct financing
leases is recognized at level rates of return over the term of the lease.
Depreciation of the properties is provided on a straight-line basis over 31.5
years which is the estimated useful lives of the buildings and improvements.
Equipment is depreciated on a straight-line basis over the estimated useful
lives of 5 years.
Real estate taxes on the Partnership's investment properties are the
responsibility of the tenant. However, when a tenant fails to make the required
tax payments or when a property becomes vacant, the Partnership makes the
appropriate payment to avoid possible foreclosure of the property. Taxes are
accrued in the period in which the liability is incurred.
Cash and cash equivalents include cash on deposit in financial institutions and
highly liquid temporary investments with initial maturities of 90 days or less.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities (and disclosure of
contingent assets and liabilities) at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
25
<PAGE>
The Partnership will be dissolved on November 30, 2010, or earlier upon the
prior occurrence of any of the following events: (a) the disposition of all
properties of the Partnership; (b) the written determination by the General
Partner that the Partnership's assets may constitute "plan assets" for the
purposes of ERISA; (c) the agreement of Limited Partners owning a majority of
the outstanding interests to dissolve the Partnership; or (d) the bankruptcy or
termination of the existing General Partner, unless an additional General
Partner is previously elected by the Limited Partners.
No provision for Federal income taxes has been made, as any liability for such
taxes would be that of the individual partners rather than the Partnership. At
December 31, 1995, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$4,000,000.
The following represents a reconciliation of net income as stated on the
Partnership's statements of income to net income for tax reporting purposes:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net income, per statements of income $1,065,084 $1,059,888 $ 872,828
Book to tax depreciation difference (34,873) (3,314) 7,635
Book over tax gain from asset disposition 0 (63,823) 0
Straight line rent adjustment (15,876) (207,529) 132,518
Affiliate receivable basis adjustment 0 (3,849) (220,363)
Bad debt reserve/expense 44,914 (73,875) 0
Real estate tax expense 0 0 (68,725)
Book valuation adjustment of real property 0 94,711 342,715
DeDan receivable 0 0 0
Interest expense 52,500 (26,192) 149,218
Sales commission not recognized for tax 0 30,000 0
Prepaid rent 3,787 (48,000) 48,000
Other, net 220 19,325 (11,260)
---------- ---------- ----------
Net income(loss) for tax reporting purposes $1,115,756 $ 777,342 $1,252,566
========== ========== ==========
</TABLE>
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 $15,700,000, of which approximately
$2,031,000 has been attributed to the Partnership and is reflected as due from
former affiliates on the balance sheet at
26
<PAGE>
December 31, 1995. The 9% interest accrued as of December 31, 1995, amounted to
approximately $451,000 and is not reflected in the accompanying income
statement. As of December 31, 1994, $1,751,000 was reflected as due from former
affiliates based on the estimated overall misappropriation and related costs of
$13,500,000.
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. 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 was unchanged at December 31,
1995. Pending the resolution of all sources of potential recovery, it is not
possible to determine the amount, if any, that will ultimately be recovered. The
ultimate recovery will likely be for an amount different than the current
estimate.
As mentioned above, material weaknesses were identified in the Partnership's
internal control structure. The internal control structure was not adequate to
assure that all transactions of the Partnership were properly recorded and
reflected in the books and records and financial statements of the Partnership.
Significant transactions affecting the Partnership were apparently initiated by
DiVall and Magnuson during at least the four years ended December 31, 1992,
which initially either were not recorded on the books and records of the
Partnership or were improperly recorded and characterized. Such transactions
included unsupported disbursements or improper disbursements under the terms of
the Partnership Agreement and the encumbrance of Partnership assets. All
transactions identified during the Regulatory Investigation and concurrent
reviews have been reflected in the Partnership's financial statements as of
December 31, 1995. Because of the significance of the weaknesses in the internal
control structure, there could be no certainty that all improper and unsupported
transactions were identified and recorded and reflected in the Partnership's
financial statements as of December 31, 1992. Accordingly, the Partnership's
auditors were unable to render an opinion on the financial statements for the
year ended December 31, 1992. Financial statements for prior periods, including
1991 and certain prior years and 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.
27
<PAGE>
3. INVESTMENT PROPERTIES:
As of December 31, 1995, the Partnership owned 22 fully constructed fast-food
restaurants and a parcel of undeveloped land. The restaurants are comprised of
the following: two (2) Chi Chi's Mexican restaurants, four (4) Taco Cabana
restaurants, five (5) Denny's restaurants, seven (7) Popeye's Famous Fried
Chicken restaurants, one (1) Hardee's restaurant, one (1) 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 December
31, 1995 and 1994, these costs totalled approximately $220,000 and $169,000,
respectively, and are not reflected in the Partnership's financial statements.
Management is currently attempting to sell the undeveloped parcel. The land was
originally purchased for $356,549 and has an adjusted carrying value at December
31, 1995, of $250,000 which approximates the estimated net realizable value.
From time to time, the Partnership experiences interruptions in rental receipts
due to tenant delinquencies and vacancies. During March 1994, the Partnership's
Happy Joe's restaurant located in Des Moines, Iowa, became vacant. Management
executed a new lease on the property during February 1995. 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 a
former affiliate of the general partners.
The Partnership's investment properties had been managed by an affiliate of the
former general partners pursuant to a management agreement which provided for a
fee equal to 1% of gross receipts amounting to approximately $3,700 through
February 28, 1993. In addition, the former general partner affiliate was
entitled to receive reimbursements of general and administrative costs, either
direct or indirect, amounting to approximately $26,000 through February 28,
1993. As a result of the Investigation, the Partnership engaged a third party as
Interim Manager in October 1992. The Interim Manager received approximately
$28,000 through February 28,
28
<PAGE>
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, 1995, the minimum management fee and the maximum
reimbursement for office rent and overhead increased by 2.7%, representing the
allowable annual Consumer Price Index adjustment per the PMA. For purposes of
computing the 4% overall fee, gross receipts includes amounts recovered in
connection with the misappropriation of assets by the former general partners
and their affiliates. TPG has received fees from the Partnership totaling $3,689
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.
In November 1994, the Partnership sold three (3) Wendy's restaurants in Florida,
to the tenant for $2,000,000.
4. PARTNERSHIP AGREEMENT:
The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
General Partners. The Partnership Agreement also provided for quarterly cash
distributions from Net Cash Receipts, as defined, within 60 days after the last
day of the first full calendar quarter following the date of release of the
subscription funds from escrow, and each calendar quarter thereafter, in which
such funds were available for distribution with respect to such quarter. Such
distributions were to be made 90% to Limited Partners and 10% to the former
general partners, provided, however, that quarterly distributions would be
cumulative and were not to be made to the former general partners unless and
until each Limited Partner had received a distribution from Net Cash Receipts,
as defined, in an amount equal to 10.5% annum, cumulative simple return on his
or her Adjusted Original Capital, as defined, from the Return Calculation Date,
as defined.
Net proceeds, as originally defined, were to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital, (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a 14% per annum, cumulative simple return thereon from the
Return Calculation Date, including in the calculation of such return, all prior
distributions of Net Cash Receipts and any prior distributions of Net Proceeds
of this clause, and (c) then, to Limited Partners, 88%, and to the General
Partners, 12%, of remaining Net Proceeds available for distribution.
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
29
<PAGE>
fund. The fund was to be used to repurchase interests of Limited Partners that
exhibited hardship, at the determination of the General Partner, and for
distributions to the Limited Partners upon final dissolution of the Partnership
to permit the Limited Partners to receive an amount equal to their Liquidation
Preference of 14% per annum. During 1994, it was determined that the amounts
being funded to the escrow fund were immaterial, and the fund was eliminated.
Amounts paid to the escrow fund were returned to the Partnership.
On May 26, 1993, pursuant to the results of a solicitation of written consents
from the Limited Partners, the Partnership Agreement was amended to replace the
former general partners and amend various sections of the agreement. The former
general partners were replaced as General Partner by The Provo Group, Inc., an
Illinois corporation. Under the terms of the amendment, net profits or losses
from operations are allocated 99% to the Limited Partners and 1% to the current
General Partner. The amendment also provided for distributions from Net Cash
Receipts to be made 99% to the Limited Partners and 1% to the current General
Partner provided that quarterly distributions will be cumulative and will not be
made to the current General Partner unless and until each Limited Partner has
received 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
30
<PAGE>
not reflected in the statements of income, except in circumstances where,
in management's opinion, the Partnership will be required to pay such costs
to preserve its assets (i.e., payment of past-due real estate taxes).
Management has determined that the leases are properly classified as
operating leases; therefore, rental income is reported when earned and the
cost of the property, excluding the cost of the land, is depreciated over
its estimated useful life.
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1996 2,123,784
1997 2,163,564
1998 2,174,014
1999 2,176,764
2000 2,232,217
Thereafter 18,663,588
-----------
$29,533,931
===========
</TABLE>
Percentage rents included in rental income in 1995, 1994, and 1993 were
$421,932, $479,232, and $471,080, respectively. The fluctuations in
percentage rental income are a result of fluctuations in sales of the
tenants in the Partnership's properties. Seven of these properties are
leased to a single Popeye's franchisee in the Chicago, Illinois area. Base
rent for 1995 from this tenant amounted to 27% of total base rent for the
Partnership.
During July 1993, the Partnership received a cash settlement of $500,000 in
exchange for allowing an assignment and modification of four leases with TP
Acquisitions Corp. in the Dallas, Texas area.
6. MORTGAGE NOTES PAYABLE:
-----------------------
At December 31, 1995, mortgage notes payable consist of the following:
<TABLE>
<CAPTION>
Outstanding
Principal Balance Interest Rate Maturity Date
----------------- -------------- ---------------
<S> <C> <C> <C>
a. $292,553 prime + 2.5% September, 1997
b. 253,011 9.5% September, 1997
c. 600,000 prime + 2.0% August, 1992
--------
$1,145,564
==========
</TABLE>
a. In September 1992, the Partnership entered into a promissory note
agreement with Riverside Bank, Minnesota, in the amount of $310,000. The
note bears interest at the referenced prime rate, as defined, plus 2.5%.
Principal and interest are paid in monthly installments of $3,285 until
September 1997, when all outstanding amounts are due. The note is
secured by a mortgage on a BW-3
31
<PAGE>
restaurant located in Hopkins, Minnesota, with a net book value
at December 31, 1995 of $639,274. The proceeds of the note were
used to convert a Rocky Rococo restaurant to a Denny's
restaurant.
b. In September 1992, the Partnership entered into a loan agreement
with Bank One, Beaver Dam, Wisconsin, in the amount of $270,000.
The loan bears interest at 9.5% and is payable in monthly
installments of $2,520 through September 1997, with a lump-sum
amount of $239,747 due at that time. The loan is secured by a
mortgage on a Denny's restaurant located in Beaver Dam,
Wisconsin, with a net book value at December 31, 1995, of
$493,261. The proceeds of the loan were used to convert a Rocky
Rococo restaurant to a Denny's restaurant.
c. During the Investigation, discussed in Note 2, it was discovered
that the former general partners borrowed $600,000 during or
before 1991 from Metro North State Bank in Missouri (this loan is
now held by Boatmen's First National Bank of Kansas City) secured
by mortgages on five (5) Partnership properties. The mortgage
note bears interest at the referenced prime rate, as defined,
plus 2% and was due August 15, 1992. The proceeds of the note
were not received by the Partnership and, accordingly, a
corresponding amount due from former affiliates was recorded in
1992. As of December 31, 1995, the Partnership has not paid debt
service on this note. Management met with representatives of the
bank and disputed the obligation. The Partnership received a
notice of default on this note in October 1993 and an action of
foreclosure was filed in February 1994 on one of the
Partnership's properties located in Dallas, Texas, with a net
book value of $1,209,459 at December 31, 1995. See Note 13 for
further discussion of litigation concerning this note. Interest
in the amount of $174,000 was accrued, but unpaid, as of December
31, 1995. The interest accrual has been recorded at the face
rate of the note. If the Partnership loses the dispute,
additional interest amounting to approximately 190,000,
representing the default interest, may be due.
Scheduled maturities of all notes payable, with the exception of
the $600,000 note payable mentioned above, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending
December 31,
1996 $ 13,183
1997 532,381
---------
$ 545,564
===========
</TABLE>
32
<PAGE>
7. TRANSACTIONS WITH FORMER AFFILIATES
AND CURRENT GENERAL PARTNER:
---------------------------
Amounts paid to the former general partners and their affiliates and the
current General Partner for the years ended December 31, 1995, 1994, and
1993, are as follows. The amounts paid to the Interim Manager during 1993
were for approximately two (2) months of services.
<TABLE>
<CAPTION>
Former General Partners Amounts
and Interim Manager Paid in 1993
----------------------- ------------
<S> <C>
Allocations of salaries and expenses $54,637
Property management fees 3,723
Reimbursement for out-of-pocket expenses 5,818
-------
$64,178
=======
</TABLE>
<TABLE>
<CAPTION>
Incurred Incurred Incurred
as of as of as of
December 31, December 31, December 31,
Current General Partner 1995 1994 1993
----------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Management fees $ 87,375 $ 95,141 $106,994
Disposition fees 0 30,000 0
Restoration fees 833 2,856 0
Overhead allowance 7,351 7,156 5,833
Reimbursement for out-of-pocket expenses 13,264 7,880 14,109
Cash distribution 3,624 3,755 4,763
-------- -------- --------
$112,447 $146,788 $131,699
======== ======== ========
</TABLE>
8. NET INVESTMENT IN DIRECT FINANCING LEASES:
------------------------------------------
The net investment in direct financing leases which includes the
Partnership's specialty leasehold improvement leases, is comprised of the
following as of December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Minimum lease payments receivable $314,397
Estimated residual values of leased property 0
Less - Unearned income (58,038)
--------
Net investment in direct financing leases $256,359
========
</TABLE>
Scheduled future minimum lease payments are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending
December 31,
1996 $ 75,720
1997 75,720
1998 75,720
1999 75,720
2000 11,517
--------
$314,397
========
</TABLE>
33
<PAGE>
9. GENERAL AND ADMINISTRATIVE EXPENSES:
------------------------------------
For the years ended December 31, 1995, 1994, and 1993, general and
administrative expenses incurred by the Partnership were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Communication costs $37,613 $35,591 $38,692
Travel costs 2,434 6,940 13,616
Partnership equipment 0 92 12,142
Overhead allowance 7,351 7,156 5,833
Accounting services 0 1,023 2,495
Registration and filing fees 3,012 21,144 0
Other administration 5,260 14,490 8,885
------- ------- -------
$55,670 $86,436 $81,663
======= ======= =======
</TABLE>
10. CONTINGENT LIABILITIES:
-----------------------
According to the Partnership Agreement, as amended, the current General Partner
may receive a disposition fee not to exceed 3% of the contract price of the sale
of investment properties. Fifty percent (50%) of all such disposition fees
earned by the current General Partner is to be escrowed until the aggregate
amount of recovery for the funds misappropriated from the Partnerships by the
former general partners is greater than $4,500,000. Upon reaching such recovery
level, full disposition fees will thereafter be payable and fifty percent (50%)
of the previously escrowed amounts will be paid to the current General Partner.
At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining
escrowed disposition fees shall be paid to the current General Partner. If such
levels of recovery are not achieved, the current General Partner will contribute
the amounts escrowed towards the recovery. In lieu of an escrow, 50% of all such
disposition fees have been paid directly to the restoration account and then
distributed among the three Partnerships. The amount allocated to the
Partnership may be owed to the current General Partner if the above noted
recovery levels are met. As of December 31, 1995, the Partnership may owe the
current General Partner $7,734, which is currently reflected as a recovery, if
certain specified recovery levels are achieved.
11. PMA INDEMNIFICATION TRUST:
--------------------------
The Permanent Manager Agreement ("PMA") provides that the Permanent Manager will
be indemnified from any claims or expenses arising out of or relating to the
Permanent Manager serving in such capacity or as substitute general partner, so
long as such claims do not arise from fraudulent or criminal misconduct by the
Permanent Manager. The PMA provides that the Partnership fund this
indemnification obligation by establishing a reserve of up to $250,000 of
Partnership assets which would not be subject to the claims of the Partnership's
creditors. An Indemnification Trust ("Trust") serving such purposes has been
established at United Missouri Bank, N.A. The Trust has been fully funded with
Partnership assets as of December 31, 1995. Funds are invested in U.S. Treasury
securities. In addition, interest totaling $20,488 has been credited to the
Trust as of December 31, 1995. The rights of the Permanent Manager to the Trust
shall be terminated upon the earliest to occur of the following events: (i) the
written release by the Permanent Manager of any and all interest in the Trust;
(ii) the expiration of the
34
<PAGE>
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 offset by $194,566 received from DiVall 3. At December 31, 1995, the
Partnership was owed $105,833 from DiVall 3.
When recoveries are realized by the Partnerships, the amounts received are
distributed to each respective partnership on the same basis as the restoration
costs are currently being allocated. Additionally, any available recovery funds
have been utilized first to satisfy amounts due other partnerships for amounts
advanced under prior allocation methods. As of December 31, 1995, the
Partnerships recovered a total of $679,315 from the former general partners and
their affiliates. Of this amount, the Partnership received its pro-rata share in
the amount of $90,732. Additionally, $60,143, representing 50% of all
disposition fees earned by the General Partner have been paid to the recovery.
Of that amount, $7,734 was allocated to the Partnership and is contingently
payable to the General Partner upon achievement of certain recovery levels as
described in Note 10.
The PMA contemplated that the Permanent Manager could establish a separate and
distinct Restoration Trust Fund which would hold all recoveries until a final
independent adjudication by a court of competent jurisdiction or vote of the
Limited Partners ratified the allocation of proceeds to each respective
partnership. Management has concluded that a fair and reasonable interim
accounting for recovery proceeds can be accomplished at the partnership level in
a manner similar to restoration costs which are paid directly by the
Partnerships. Management reserves the right to cause the final allocation of
such costs and recoveries to be determined either by a vote of the Limited
Partners or a court of competent jurisdiction. Potential sources of recoveries
include third party litigation, promissory notes, land contracts, and personal
assets of the former general partners and their affiliates.
The Partnership recorded a payable to an affiliated partnership, DiVall 2, at
December 31, 1993 in connection with the DeDan default. As previously reported,
DeDan was the former tenant in four (4) of the Partnership's Denny's restaurants
and three (3) Denny's restaurants in DiVall 2, all of which were located in the
Phoenix, Arizona area. Both partnerships brought a lawsuit against DeDan and
were awarded an additional Denny's restaurant located in Phoenix, Arizona, in
1990. It was determined under management of the former general partners that
DiVall 2
35
<PAGE>
would take title to the restaurant and buy out the Partnership for its share
based on an appraised value. Current management has determined that the property
was overstated to enhance reported earnings. Comparable properties indicate the
awarded property's value was overstated by approximately $225,000. Accordingly,
at December 31, 1993, the Partnership recorded a payable in the amount of
$236,166 due to DiVall 2 and a corresponding reversal of prior year revenue, as
the Partnership recorded income at the time of the original inter-partnership
purchase. During the Fourth Quarter of 1994, proceeds from the sale of three (3)
Wendy's restaurants in Florida were used to repay this obligation.
13. LITIGATION:
-----------
On March 16, 1993, the Partnership, along with DiVall 2 and DiVall 3, initiated
a lawsuit against Ernst & Young LLP ("E & Y"), a certified public accounting
firm, in the Circuit Court of Dane County, Wisconsin in connection with the
audits of the Partnerships performed by E & Y for the years 1989, 1990 and 1991.
The Complaint filed in said lawsuit alleges, among other things, that Defendant
E & Y, was negligent in its audit work for the Partnerships by failing to
exercise ordinary care and failing to adhere to professional standards in the
following areas: reviewing, understanding, and auditing of compliance with the
Partnership Agreements; evaluation of the adequacy of internal controls;
identification of audit risks; selection and implementation of audit procedures
to address audit risks; identification of related party transactions;
compilation of sufficient evidential matters; resolution of improper transfers
and allocations; disclosure of related party transactions; and exercise of
appropriate audit skepticism. The Partnerships request the payment of damages in
the amount of $9,000,000, plus interest, attorneys fees and costs, and whatever
additional relief the court deems just and proper. 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.
E & Y also filed third-party claims alleging fraud and negligence on the part of
the Partnerships' former law firm, Quarles & Brady. Additionally, E & Y also
filed third-party claims against Paul Magnuson, Gary DiVall, an affiliate of the
former general partners, DiVall Real Estate Investment Corporation ("DREIC"),
David Shea ("Shea") (former Acquisitions Director of DREIC), and Lisa Shatrawka
(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 available for deposit in the partnership's restoration
escrow account approximate $300,000.
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure the
repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 2 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
36
<PAGE>
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 $525,000 and notes secured by
subordinated mortgages in the aggregate amount of $625,000. The Partnership is
continuing to vigorously defend its interests in the remaining bankruptcies.
On March 24, 1994, the Partnership filed a complaint in the United States
District Court for the Western District of Missouri against Boatmen's First
National Bank of Kansas City ("Boatmen's") seeking a declaratory judgment that
Boatmen's has no right or interest in a promissory note executed in the name of
the Partnership by the former general partners (the "Note") secured by mortgages
on five Partnership properties, and further seeking an injunction against
foreclosure proceedings instituted against a Partnership property located in
Dallas, Texas, under a first deed of trust and security agreement given to
secure the Note (the "Foreclosure"). As further described in Note 6, the former
general partners borrowed $600,000 during or before 1991 from Metro North State
Bank (the note is now held by Boatmen's). The proceeds of the Note were not
received by the Partnership. As of December 31, 1995, the Partnership had not
paid debt service on the Note. The Partnership received a notice of default on
the Note in October 1993 and the Foreclosure Action was filed in February 1994.
As of December 31, 1995, interest in the amount of $174,000 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. Boatmen's has until April 25,
1996 to seek leave to take the Eighth Circuit's ruling to the United State
Supreme Court. 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
37
<PAGE>
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 February 15, 1996, the Partnership made distributions to the Limited
Partners of $350,000 amounting to $14.00 per limited partnership interest.
On March 14, 1996 the Partnerships reached a resolution of the claims
against Quarles & Brady and on March 22, 1996 a resolution of the claims
against Ernst & Young was reached in relation to litigation disclosed in
Item 3. As a result of these settlements, net proceeds, available for
deposit into the Partnership's restoration escrow account approximate
$300,000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The General Partner of the Partnership is The Provo Group, Inc., an
Illinois corporation ("TPG") with its principal office at 101 West 11th
Street, Suite 1110, Kansas City, Missouri 64105. TPG was elected General
Partner by vote of the Limited Partners effective May 26, 1993. TPG had
been managing the Partnership since February 8, 1993 under the terms of the
Permanent Manager Agreement ("PMA"), which remains in effect. TPG also
serves as the corporate general partner for DiVall 2 and DiVall 3. See
Items 1 and 13 hereof for additional information about the PMA and the
election of TPG as the General Partner.
The executive officers and director of the General Partner who control the
affairs of the Partnership are as follows:
BRUCE A. PROVO, AGE 45 - PRESIDENT, FOUNDER AND DIRECTOR. Mr. Provo
has been involved in the management of real estate and other asset
portfolios since 1979. Since he founded the company in 1985, Mr. Provo
has been President and Chief Executive Officer of TPG. From 1982 to
1986, Mr. Provo served as President and Chief Operating Officer of the
North Kansas City Development Company ("NKCDC"), North Kansas City,
Missouri. NKCDC was founded in 1903 and the assets of the company were
sold in December, 1985 for $102,500,000. NKCDC owned commercial and
industrial properties, including an office park and a retail district,
as well as apartment complexes, motels, recreational facilities, fast
food restaurants, and other properties. NKCDC's holdings consisted of
over 100 separate properties and constituted approximately 20% of the
privately held real property in North Kansas City, Missouri (a four
square mile municipality). Following the sale of the company's real
estate, Mr. Provo served as the President and Chief Executive Officer
and Liquidating Trustee of NKCDC from 1986 to 1991.
Mr. Provo graduated from the Miami University, Oxford, Ohio in 1972
with a B.S. in Accounting. He became a Certified Public Accountant in
1974 and was a manager in the banking and financial services division
of Arthur Andersen LLP prior to joining Rubloff Development
Corporation in 1979. From 1979 through 1985, Mr. Provo served as Vice
38
<PAGE>
President - Finance and Administration and then as President of
Rubloff Development Corporation. Mr. Provo has previously served on
the Board of Directors of the National Realty Committee, a legislative
"watchdog" organization for the commercial real estate industry
headquartered in Washington, DC.
Kristin J. Atkinson, Age 33 - Vice President - Finance and
Administration. Ms. Atkinson joined The Provo Group, Inc. in
September, 1994, to provide management expertise in the areas of
financial controls and management accounting services for four limited
partnerships managed by TPG. Prior to joining TPG, Ms. Atkinson was
Manager of Financial Reporting for Farm & Home Savings Association, a
$4 billion savings and loan association, for seven years where she was
responsible for supervision of the preparation of internal and
external financial documentation, including regulatory filings for the
savings association and its parent company. Ms. Atkinson graduated
Magna Cum Laude with a B.S. in Accounting from Missouri Southern State
College in Joplin, Missouri and worked as an accountant for James P.
Arthur and Company for one year before joining Farm & Home Savings
Association.
BRENDA BLOESCH, AGE 34 - DIRECTOR OF INVESTOR RELATIONS. Ms. Bloesch
joined The Provo Group, Inc. in March 1993, to oversee and provide
various levels of client support for more than 8,000 broker dealers,
registered representatives, custodians and investors. Primarily
responsible for all communications regarding four limited partnerships
managed by TPG, Ms. Bloesch is also involved with database management
and partnership compliance issues. Prior to joining TPG, Ms. Bloesch
was Manager of Investment Services at DiVall Real Estate Investment
Corporation ("DREIC") for four years and Publisher Services Manager at
NewsNet, Inc. for five years. Her role at DREIC allowed Ms. Bloesch
to obtain extensive knowledge of limited partnerships and gain
familiarity with the broker and investor communities. Ms. Bloesch is
a graduate of Lock Haven University in Lock Haven, Pennsylvania, where
she received her B.A. in Journalism and Media Studies.
The Advisory Board, although its members are not "Directors" or "Executive
Officers" of the Partnership, provides advisory oversight to management of
the Partnership and consists of:
D.TODD WITTHOEFT - VICE PRESIDENT OF CALTON AND ASSOCIATES. Mr.
Witthoeft has been an investment broker for over ten (10) years and
was one of the original founders of Calton and Associates. Mr.
Witthoeft serves as part of the firm's due diligence committee which
reviews the structure of public and private limited partnerships prior
to offering to clients. Mr. Witthoeft has over 400 clients and has
taught personal financial planning courses. Mr. Witthoeft holds the
following securities licenses: Options Principal, Licensed Life
Insurance Agent - series 4; General Securities Representative - series
7; General Securities Principal - series 24; and State Agent - series
63.
GERHARD ZOLLER - ADVISOR. Mr. Zoller is currently involved in special
training projects at J.H. Findorff & Son, Inc., a leading construction
firm in Wisconsin. Mr. Zoller has worked for this company for 27
years and served as both President and then Chairman of the Board in
more recent years. Prior business background and experience include
positions as Project Manager, Estimator and Chief Executive. Mr.
Zoller has also been actively managing personal investments for over
25 years including several real estate limited partnerships. Mr.
Zoller is a Limited Partner in DiVall 1.
MICHAEL M. BLOOM - PRESIDENT OF DAVCON, INC. Mr. Bloom has owned this
multi-state General Contracting firm for 25 years in addition to two
(2) other companies, Bloom Architects and Nordic Springwater, Inc.
Mr. Bloom has been active in the construction industry for the last 27
years and has served as both a developer and architect. He has been
the principal in charge of projects ranging in size from $100,000 to
$10,000,000. Mr. Bloom has also been the founder of two (2) start up
corporations, Intel Security
39
<PAGE>
Corp. and Nordic Springwater, Inc. Mr. Bloom is a Limited Partner of
DiVall 2. Mr. Bloom is presently a member of National Council of
Architectural Registration Boards, American Institute of Architects
and West Jersey Institute of Architects.
ALBERT H. ESCHEN - OPTOMETRIST. Dr. Eschen has been an optometrist
for 46 years and is also employed by New York City's Department of
Health. Prior business experience include partnerships or personal
investments in Crown Nursing Home; Coronet Nursing Home; and Sands
Hotel & Casino. Dr. Eschen is currently a member of the American
Optometry Association and is a member of the Board of Directors
Illinois College Alumni Association. Dr. Eschen was past-President of
the Brooklyn Optometric Society and was the first optometrist to be
appointed to New York City's Department of Health. Dr. Eschen is a
Limited Partner of DiVall 3.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has not paid any "executive compensation" to the corporate
General Partner or to the directors and officers of the General Partner.
The General Partner's participation in the income of the Partnership is set
forth in the Agreement of Limited Partnership and amendments thereto, which
are filed as Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 hereto. The current
General Partner received management fees and expense reimbursements during
the year.
See Item 13, below, and Note 7 to the financial statements in Item 8 hereof
for further discussion of payments by the Partnership to the General
Partner and the former general partners.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) As of December 31, 1995, no one person or group is known by the
Partnership to own beneficially more than 5% of the outstanding interests
of the Partnership.
(b) As of December 31, 1995, neither the General Partner nor any of its
affiliates owned any Limited Partner Interests in the Partnership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The compensation to be paid to TPG is governed by the Partnership
Agreement, as amended by vote of the Limited Partners to reflect the terms
of the PMA. TPG's compensation includes a base fee equal to 4% of the
Partnership's gross collected receipts, subject to a minimum of $84,000 per
year. For this purpose, "gross collected receipts" means all cash revenues
arising from operations and reserves of the Partnerships, including any
proceeds recovered with respect to the obligations of the former general
partners. The portion of such fee resulting from recoveries from former
general partners is designated as restoration fees. TPG is also entitled
to reimbursement for office rent and utilities not to exceed $7,000 per
year. TPG is entitled to reimbursement of reasonable direct costs and
expenses, such as travel, lodging, overnight delivery and postage, but has
no right to be reimbursed for administrative expenses such as payroll,
payroll taxes, insurance, retirement and other benefits, base phone and fax
charges, office furniture and equipment, copier rent, and the like.
Between the three Partnerships, TPG is entitled to an aggregate minimum
base management fee of $300,000 per year and reimbursement for office rent
in the maximum amount of $25,000 per year. The Partnership shall only be
responsible for its allocable share of such minimum and maximum amounts as
indicated above ($84,000 minimum base fee and $7,000 maximum rent
reimbursement). TPG is entitled to an annual increase in the minimum base
management fee and maximum office overhead reimbursement in an amount not
to exceed the percentage increase in the Consumer Price Index ("CPI") for
the immediately preceding calendar year. Effective March 1, 1995, the
minimum management fee and the maximum reimbursement for office rent and
overhead increased by 2.7% representing the allowable annual CPI
adjustment. Additionally, TPG is allowed up to one-half of the competitive
Real Estate Commission, not to exceed 3% upon the disposition of assets.
The payment of a portion of such fees is subordinated to TPG's success at
recovering the funds misappropriated by the former general partners.
40
<PAGE>
The PMA has an expiration date of December 31, 2002, but may be terminated
earlier (a) by a vote at any time by a majority in interest of the Limited
Partners, (b) upon the dissolution and winding up of the Partnership, (c)
upon the entry of an order of a court finding that the Permanent Manager
has engaged in fraud or other like misconduct or has shown itself to be
incompetent in carrying out its duties under the Partnership Agreement, or
(d) upon sixty (60) days written notice from the Permanent Manager to the
Limited Partners of the Partnership. Upon termination of the PMA, other
than by the voluntary action of TPG, TPG shall be paid a termination fee of
one month's Base Fee allocable to the Partnership, subject to a minimum of
$7,000. In the event that TPG is terminated by action of a substitute
general partner, TPG shall also receive, as part of this termination fee,
4% of any proceeds recovered with respect to the obligations of the former
general partners, whenever such proceeds are collected.
Under the PMA, TPG shall be indemnified by the Partnership, DiVall and
Magnuson, and their controlled affiliates, and shall be held harmless from
all claims of any party to the PMA and from any third party including,
without limitation, the Limited Partners of the Partnership, for any and
all liabilities, damages, costs and expenses, including reasonable
attorneys' fees, arising from or related to claims relating to or arising
from the PMA or its status as Permanent Manager. The indemnification does
not extend to claims arising from fraud or criminal misconduct of TPG as
established by court findings. To the extent possible, the Partnership is
to provide TPG with appropriate errors and omissions, officers liability or
similar insurance coverage, at no cost to TPG. In addition, TPG is granted
the right to establish and segregate Partnership assets in an amount, not
to exceed $250,000, solely for the purpose of funding such indemnification
obligations (the "Indemnification Trust"). Once a determination has been
made that no such claims can or will be made against TPG, the balance of
the Indemnification Trust will become unrestricted cash of the Partnership.
At December 31, 1995 the Partnership had fully funded the Indemnification
Trust.
The following fees and reimbursements from the Partnership were paid to
management in 1995:
<TABLE>
<CAPTION>
The Provo Group, Inc.
---------------------
<S> <C>
Management Fees $ 87,375
Restoration Fees 833
Office Overhead Allowance 7,351
Direct Cost Reimbursements 13,264
--------
1995 Total $108,823
========
</TABLE>
41
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of DiVall Insured Income Fund
Limited Partnership are included in Part II, Item 8:
Report of Independent Public Accountants
Balance Sheets, December 31, 1995 and 1994
Statements of Income for the Years Ended December 31, 1995, 1994
and 1993
Statements of Partners' Capital for the Years Ended December 31,
1995, 1994 and 1993
Statements of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993
Notes to Financial Statements
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instruction or are inapplicable and,
therefore, have been omitted.
3. Listing of Exhibits
3.1 Agreement of Limited Partnership dated as of November 25,
1985, amended as of September 15, 1986, filed as Exhibit 3A
to Amendment No. 1 to the Partnership's Registration
Statement on Form S-11 as filed on July 22, 1986,
incorporated herein by reference.
3.2 Amendments to Amended Agreement of Limited Partnership dated
as of June 16, 1987, included as part of Supplement dated
September 25, 1987, filed under Rule 424(b)(3), incorporated
herein by reference.
3.3 Amendment to Amended Agreement of Limited Partnership dated
as of February 8, 1993, filed as Exhibit 3.3 to the
Partnership's 10-K for the year ended December 31, 1992, and
incorporated herein by reference.
3.4 Amendment to Amended Agreement of Limited Partnership dated
as of May 26, 1993, filed as Exhibit 3.4 to the
Partnership's 10-K for the year ended December 31, 1993, and
incorporated herein by reference.
3.5 Amendment to Amended Agreement of Limited Partnership dated
as of June 30, 1994, files as Exhibit 3.5 to the
Partnership's 10-K for the year ended December 31, 1994, and
incorporated herein by reference.
10.0 Permanent Manager Agreement filed as an exhibit to the
Current Report on Form 8-K dated January 22, 1993,
incorporated herein by reference.
27.0 Financial Data Schedule for the years ended December 31,
1995 and 1994.
28.0 Correspondence to the Limited Partners dated February 15,
1996 regarding the Fourth Quarter 1995 distributions.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the fourth quarter
of fiscal year 1995.
42
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
<TABLE>
<CAPTION>
Initial cost to Partnership
---------------------------------
Costs
Building capitalized
and subsequent
Property Encumbrances Land Improvements to acquisitions
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Colorado Springs, Colorado $ - $ 356,549 $ - $ -
Beaver Dam, Wisconsin 258,589 126,854 452,445 80,000
Hopkins, Minnesota 296,939 195,755 479,295 120,000
Dallas, Texas - 797,952 510,201 -
Arlington, Texas - 1,002,707 471,862 -
Dallas, Texas - 729,406 528,190 -
Des Moines, Iowa - 197,667 367,809 -
Eau Claire, Wisconsin - 250,255 792,475 -
Chicago, Illinois - 151,670 427,625 -
Chicago, Illinois - 164,941 445,952 -
Chicago, Illinois - 176,948 455,010 -
Chicago, Illinois - 97,743 513,150 -
Chicago, Illinois - 133,764 340,204 -
Chicago, Illinois - 90,581 346,524 -
Chicago, Illinois - 95,847 388,654 -
Grand Forks, North Dakota - 246,200 738,601 -
Peoria, Arizona (1) 338,887 688,044 78,995
Glendale, Arizona (1) 400,503 626,428 78,995
Mesa, Arizona (1) 412,879 638,278 -
Scottsdale, Arizona (1) 339,151 712,006 -
Fond Du Lac, Wisconsin - 270,267 756,664 -
Chicago, Illinois (2) - 197,277 708,529 -
Dallas, Texas 600,000 844,718 524,525 -
---------------------------------------------------------------------------
$1,155,528 $7,618,521 $11,912,471 $357,990
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross amount at which
carried at end of year (A)
----------------------------------------------
Building
and Accumulated
Property Land Improvements Total depreciation
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Colorado Springs, Colorado $ 250,000 $ - $ 250,000 $ -
Beaver Dam, Wisconsin 126,854 532,445 659,299 166,038
Hopkins, Minnesota 195,755 599,295 795,050 155,777
Dallas, Texas 797,952 510,201 1,308,153 173,384
Arlington, Texas 1,002,707 471,862 1,474,569 160,355
Dallas, Texas 729,406 528,190 1,257,596 173,306
Des Moines, Iowa 197,667 367,809 565,476 109,710
Eau Claire, Wisconsin 250,255 792,475 1,042,730 256,923
Chicago, Illinois 151,670 427,625 579,295 136,964
Chicago, Illinois 164,941 445,952 610,893 142,834
Chicago, Illinois 176,948 455,010 631,958 145,736
Chicago, Illinois 97,743 513,150 610,893 164,357
Chicago, Illinois 133,764 340,204 473,968 108,964
Chicago, Illinois 90,581 346,524 437,105 110,988
Chicago, Illinois 95,847 388,654 484,501 124,483
Grand Forks, North Dakota 246,200 738,601 984,801 233,677
Peoria, Arizona 338,887 767,039 1,105,926 241,384
Glendale, Arizona 400,503 705,423 1,105,926 221,890
Mesa, Arizona 389,758 638,278 1,028,036 194,437
Scottsdale, Arizona 339,151 712,006 1,051,157 216,896
Fond Du Lac, Wisconsin 270,267 756,664 1,026,931 230,500
Chicago, Illinois (2) 66,499 508,593 575,092 205,386
Dallas, Texas 844,718 524,525 1,369,243 159,785
----------------------------------------------------------------------------
$7,358,073 $12,070,525 $19,428,598 $3,833,774
============================================================================
</TABLE>
<TABLE>
<CAPTION>
Life on which
depreciation in
latest
statement of
operations is
Date of Date computed
construction acquired (years)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Colorado Springs, Colorado - 1/31/87 31.5
Beaver Dam, Wisconsin 1986 3/27/87 31.5
Hopkins, Minnesota 1985 6/30/87 31.5
Dallas, Texas 1987 7/8/87 31.5
Arlington, Texas 1987 1/8/87 31.5
Dallas, Texas 1987 9/28/87 31.5
Des Moines, Iowa 1986 10/8/87 31.5
Eau Claire, Wisconsin 1986 10/27/87 31.5
Chicago, Illinois 1982 12/1/87 31.5
Chicago, Illinois 1986 12/1/87 31.5
Chicago, Illinois 1982 12/1/87 31.5
Chicago, Illinois 1993 12/1/87 31.5
Chicago, Illinois 1980 12/1/87 31.5
Chicago, Illinois 1985 12/1/87 31.5
Chicago, Illinois 1985 12/1/87 31.5
Grand Forks, North Dakota 1984 12/23/87 31.5
Peoria, Arizona 1984 12/24/87 31.5
Glendale, Arizona 1984 12/24/87 31.5
Mesa, Arizona 1985 3/18/88 31.5
Scottsdale, Arizona 1985 3/18/88 31.5
Fond Du Lac, Wisconsin 1981 3/24/88 31.5
Chicago, Illinois (2) 1987 4/15/88 31.5
Dallas, Texas 1987 3/25/88 31.5
</TABLE>
(1) These properties also serve as collateral on the $600,000 Dallas, Texas
encumbrance.
(2) This property is currently vacant, and was written down to its estimated net
realizable value of $480,000 at December 31, 1994.
(A) Represents aggregate costs for federal income tax purposes.
(B) Reconciliation of "Real Estate and Accumulated Depreciation":
<TABLE>
<CAPTION>
Year ended Year ended Year ended Year ended
Investments in Real Estate December 31, 1995 December 31, 1994 Accumulated Depreciation December 31, 1995 December 31, 1994
- ----------------------------------------------------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of Balance at beginning of
year $19,428,598 $21,732,677 year $3,486,027 $3,382,280
Additions due to Additions charged to costs
additions/improv. 0 0 and expenses 347,747 385,616
Deletions due to real Deletions due to real
estate sold 0 (1,973,365) estate sold 0 (281,869)
Property write-down 0 (330,714)
------------------------------ -----------------------------
Balance at end of year $19,428,598 $19,428,598 Balance at end of year $3,833,774 $3,486,027
============================== =============================
</TABLE>
43
<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: March 29, 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: March 29, 1996
By: /s/Kristin J. Atkinson
-------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: March 29, 1996
44
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1995 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1995 JAN-01-1994
<PERIOD-END> DEC-31-1995 DEC-31-1994
<CASH> 843,730 1,176,464
<SECURITIES> 270,488 191,798
<RECEIVABLES> 2,802,862 2,552,041
<ALLOWANCES> 1,919,864 1,587,642
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,997,216 2,332,661
<PP&E> 19,675,494 19,675,494
<DEPRECIATION> 4,078,904 3,712,602
<TOTAL-ASSETS> 17,593,806 18,295,553
<CURRENT-LIABILITIES> 605,599 568,842
<BONDS> 1,145,564 1,155,528
<COMMON> 0 0
0 0
0 0
<OTHER-SE> 15,842,604 16,571,183
<TOTAL-LIABILITY-AND-EQUITY> 17,593,806 18,295,553
<SALES> 1,966,769 2,400,242
<TOTAL-REVENUES> 2,047,636 2,767,500
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 847,198 1,116,005
<LOSS-PROVISION> 24,300 404,054
<INTEREST-EXPENSE> 111,054 187,553
<INCOME-PRETAX> 1,065,084 1,059,888
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 1,065,084 1,059,888
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,065,084 1,059,888
<EPS-PRIMARY> 42.18 41.97
<EPS-DILUTED> 42.18 41.97
</TABLE>
