<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, 1996
-------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission file number 0-16722
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
WISCONSIN 36-6845083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 West 11th Street, Suite 1110, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 421-7444
(Registrant's telephone number, including area code)
(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: 37 - 38
-----------------
<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, 1996, the
Partnership consisted of one General Partner and 1,787 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, 1996, 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.
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 approximately $14,000,000, net of recoveries, of which
$1,808,000 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.
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.
3
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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 are 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 Nelson Witthoeft Financial; and a Limited Partner from each of the
three Partnerships: Gerhard Zoller from the Partnership, Richard Otte 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, upon the commencement of its management of the Partnerships, developed 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 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 included a mortgage on DiVall's
residence and surrounding farm land which was subsequently sold to a
third party.
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 substantially complete, but the amount of such recoveries has
been significantly discounted 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.
C. Land Contracts. The Partnerships were assigned two land contracts
--------------
from the Partnership's former general partners. These contracts were
not originally identified nor assigned in connection with the PMA, and
settlements have been received on these contracts.
4
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D. Litigation. The Partnerships have initiated lawsuits against the
----------
Partnership's former auditors, former securities counsel, former
general partners and a former affiliate. Settlements were received in
these lawsuits during 1996. Refer to Item 3, Legal Proceedings, and
Note 12 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, 1996, amounted to $5,161,000, of which
approximately $667,000 was allocated to the Partnership. Currently, there are
few potential sources of recovery remaining.
The total amounts due the Partnerships from the former general partners and
their affiliates as of December 31, 1996, as a result of the misappropriation of
assets, approximates $14,000,000, net of recoveries, 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, 1996, 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 DenAmerica, Inc. $ 849,299 $ 66,000 03-31-2013 (3)
827 Park Ave.
Beaver Dam, WI
06/30/87 BW-3 DenAmerica, Inc.(5) 985,050 66,000 01-15-2013 (3)
502 N Blake Rd
Hopkins, MN
10/08/87 Fazoli's Fazoli's Restaurants, 605,076(2) 45,504 05-29-2005 (3)
3600 Merle Hay Rd Inc.
Des Moines, IA
07/08/87 Taco Cabana TP Acquisition Corp. 1,308,153 132,000 06-30-2007 (4)
4355 Camp Wisdom
Dallas, TX
</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>
01/08/87 Taco Cabana TP Acquisition Corp. 1,474,569 132,000 06-30-2007 (4)
1505 N Collins St.
Arlington, TX
09/28/87 Taco Cabana TP Acquisition Corp. 1,257,596 132,000 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 Bysom Enterprises, 610,893 81,420 10-31-2007 None
Famous Chicken Ltd.
7430 S Stoney
Island Ave
Chicago, IL
12/01/87 Popeye's Bysom Enterprises, 579,295 77,280 10-31-2007 None
Famous Chicken Ltd.
300 E 35th St.
Chicago, IL
12/01/87 Popeye's Bysom Enterprises, 610,893 81,420 10-31-2007 None
Famous Chicken Ltd.
346 E 95th St.
Chicago, IL
12/01/87 Popeye's Bysom Enterprises, 484,501 64,620 09-30-2007 None
Famous Chicken Ltd.
111 W 75th St.
Chicago, IL
12/01/87 Popeye's Bysom Enterprises, 473,968 63,180 09-30-2007 None
Famous Chicken Ltd.
818 E 47th St.
Chicago, IL
12/01/87 Popeye's Bysom Enterprises, 631,958 84,180 10-31-2007 None
Famous Chicken Ltd.
8732 S Stoney
Island Ave
Chicago, IL
12/01/87 Popeye's Bysom Enterprises, 437,105 58,260 09-30-2007 None
Famous Chicken Ltd.
5431 S Halsted
Chicago, IL
12/23/87 Rio Bravo Manzana Grand, Inc. 984,801 100,000 10-31-2006 (3)
3000 32nd Ave, S
Grand Forks, ND
12/24/87 Denny's DenAmerica, Inc. 1,174,670 136,500 01-24-2010 (3)
10614 N 43rd Ave (2)
Glendale, AZ
</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 DenAmerica, Inc. 1,164,707 136,500 01-24-2010 (3)
87th and Grand Ave (2)
Peoria, AZ
03/18/88 Denny's DenAmerica, Inc. 1,091,710 139,980 11-06-2010 (3)
7605 E McDowell (2)
Scottsdale, AZ
03/18/88 Denny's DenAmerica, Inc. 1,067,254 139,980 11-25-2010 (3)
1231 W Baseline (2)
Mesa, AZ
03/24/88 Hardee's Hardee's Food 1,026,931 72,000 03-31-2008 (3)
838 E Johnson St Systems, Inc.
Fond du Lac, WI
03/25/88 Taco Cabana TP Acquisition Corp. 1,369,243 132,000 06-30-2007 (4)
1827 Greenville Ave
Dallas, TX
04/15/88 BJ's Market BJ's, Inc. 905,807 60,000 03-31-2000 (4)
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.
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 continued 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. During the first quarter of 1997, the tenant,
DenAmerica, notified the Partnership that it wants to be released from the lease
on this property as well as the Denny's in Beaver Dam, Wisconsin. Management is
currently working with DenAmerica to resolve the issue.
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, bankruptcy issues with the tenant
impacted the Partnership with respect to the appropriate or allowable actions in
dealing with the tenant's eviction. During January 1997, a new lease was
entered into for the property with the tenant of BJ's Market.
The tenant of the Partnership's Hardee's restaurant has experienced sales
difficulties over the past three years. Management 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
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approximately $19,000 was capitalized into a five (5) year note accruing
interest at 10% per annum. The Partnership recorded an allowance for
uncollectible rent for the amount capitalized at December 31, 1995.
During the Fourth Quarter of 1996, management terminated the lease with the
tenant and entered into a new lease with Hardee's Food Systems, Inc. In
connection with this transaction, the capitalized rent was received. The new
lease resulted in annual rents which are $57,000 lower than the previous
tenant's contract rent and $18,000 lower than the 1996 adjusted rent.
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, 1996, rent obligations and carrying costs due under this
agreement, amounted to approximately $270,000 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 and further reduced the carrying value to
$200,000 during 1996. 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
Partnerships requested the payment of damages in the amount of $9,000,000, plus
interest, attorneys fees and costs, and whatever additional relief the court
deemed just and proper. The Partnerships hired legal counsel under a contingent
fee arrangement to prosecute all of the Partnerships' claims. E & Y filed an
Answer denying that it was negligent.
E & Y also filed third-party claims alleging fraud and negligence on the part of
the Partnerships' former securities law firm, Quarles & Brady. The Partnerships
also filed claims against Magnuson, DiVall, DiVall Real Estate Investment
Corporation, David Shea, and Quarles & Brady.
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 to the Partnership, after the payment of
contingent legal fees and related costs, totaled approximately $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
9
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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 been on
a steeply discounted basis.
Plans of reorganization have been filed in the bankruptcies, and settlement
agreements in all of the Private Partnerships have been reached. Settlements in
the bankruptcies have resulted in cash payments to the Partnerships of a total
of $720,000 and notes secured by subordinated mortgages in the aggregate amount
of $625,000. The Partnerships subsequently sold the secured notes for a total
of $175,000.
The Partnerships have been named as defendants in certain foreclosure actions
brought in state courts in Wisconsin. In each of these actions, the plaintiff
seeks to foreclose on real property owned by one of the Private Partnerships.
The Partnerships were named as subordinate lienholders on the properties. It is
believed that none of these cases constitute a claim against the individual
Public Partnerships. However, if the foreclosures are successful, the Private
Partnerships' interest in the underlying real estate may be extinguished,
rendering individual obligations to the Partnerships uncollectible. Such a
foreclosure has occurred in one instance and is pending in at least one other
situation.
On March 24, 1994, the Partnership filed a complaint in the United States
District Court for the Western District of Missouri against Boatmen's First
National Bank of Kansas City ("Boatmen's") seeking a declaratory judgment that
Boatmen's has no right or interest in a promissory note executed in the name of
the Partnership by the former general partners (the "Note") secured by mortgages
on five Partnership properties, and further seeking an injunction against
foreclosure proceedings instituted against a Partnership property located in
Dallas, Texas, under a first deed of trust and security agreement given to
secure the Note (the "Foreclosure"). As further described in Note 6 to the
Financial Statements included in Part 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, 1996, the Partnership had not
paid debt service on the Note. The Partnership received a notice of default on
the Note in October 1993, and the Foreclosure Action was filed in February 1994.
As of December 31, 1996, interest in the amount of $226,000 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 $246,000 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
9
<PAGE>
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. The trial
of the case is scheduled to begin on June 23, 1997. Pursuant to the Restoration
Trust Account procedures described in Note 11 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, 1996, there were 1,787 record holders of limited
partnership interests in the Partnership.
(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 1996 and 1995, $1,835,000 and
$1,790,000, respectively, were distributed in the aggregate to the Limited
Partners. The General Partner received aggregate distributions of $6,045
in 1996 and $3,624 in 1995.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
(a Wisconsin limited partnership)
December 31, 1996, 1995, 1994, 1993 and 1992
(not covered by Independent Auditors' Report)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenue $ 2,534,391 $ 2,047,636 $ 2,767,500 $ 2,689,405 $ 2,554,921
------------------------------------------------------------------------------------------
Net Income 1,511,229 1,065,084 1,059,888 872,828 457,119
------------------------------------------------------------------------------------------
Net Income per
Limited Partner
Interest 59.84 42.18 41.97 34.64 16.46
------------------------------------------------------------------------------------------
Total Assets 17,050,623 17,593,806 18,295,553 20,482,154 20,963,059
------------------------------------------------------------------------------------------
Total Partners' Capital 15,512,827 15,842,643 16,571,183 17,055,050 17,926,985
------------------------------------------------------------------------------------------
Cash Distributions per
Limited Partnership
Interest 73.40 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
- - --------------------------------
INVESTMENT PROPERTIES AND NET INVESTMENT IN DIRECT FINANCING LEASES
- - -------------------------------------------------------------------
The investment properties, including equipment held by the Partnership at
December 31, 1996, were originally purchased at a price, including acquisition
costs, of approximately $20,136,000.
The Partnership is currently marketing for sale or lease the vacant land in
Colorado Springs, Colorado. During January 1997, the Partnership executed a
lease for the Porterhouse restaurant in Chicago, Illinois with the tenant of
BJ's Market.
During June 1996, the tenant of one of the Partnership's Chi-Chi's restaurants
vacated the property and paid a lease termination fee of $164,000, representing
one year's rent, real estate taxes and security deposit. During the Fourth
Quarter of 1996, a new lease was executed for the property with the tenant of
Rio Bravo.
11
<PAGE>
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, amounted to $204,000 at December 31,
1996, compared to $256,000 at December 31, 1995. The decrease of $52,000 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 $1,038,000 at December 31, 1996, compared to $844,000
at December 31, 1995. The Partnership designated cash of $350,000 to fund the
Fourth Quarter 1996 distributions to Limited Partners paid in February 1997,
$560,000 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 increase in cash is primarily due to recoveries received
during the Fourth Quarter of 1996 as well as the collection of capitalized rent
from Terratron, the former tenant of the Partnership's Hardee's restaurant.
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 10
to the financial statements included in Item 8 of this report.
DUE FROM AFFILIATED PARTNERSHIPS, DUE FROM FORMER AFFILIATES, ALLOWANCE FOR
- - ---------------------------------------------------------------------------
UNCOLLECTIBLE AMOUNTS DUE FROM FORMER AFFILIATES, DUE TO AFFILIATED PARTNERSHIPS
- - --------------------------------------------------------------------------------
Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $555,000 at
December 31, 1996. The receivable decreased from the prior year due to $569,000
of recoveries received during the year from the former general partners and
their affiliates, including a settlement received from the Partnership's former
accountants and attorneys.
The Partnership maintains a record of costs incurred in identifying or
recovering the misappropriated assets. These amounts are expensed when incurred,
and then, recorded on the balance sheet as a restoration cost receivable with a
corresponding allowance for such receivable deemed uncollectible. These costs
are considered due from the former general partners and their affiliates.
Interest has been accrued on the misappropriated funds since January 1, 1993, at
a rate of 9% per annum and has been included in the restoration cost receivable.
The receivable increased from approximately $908,000 at December, 31, 1995, to
$1,253,000 at December 31, 1996, and includes $616,000 of cumulative accrued
interest.
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established
against amounts due from former general partners and their affiliates reflecting
the estimated $3 million receivable. This net receivable was allocated among
the Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through December 31, 1996, $5,160,000 of recoveries have been
received which exceeded the original estimate of $3 million. As a result, the
Partnership has recognized $275,000 as income, which represents its share of the
excess recovery. The current General Partner continues to pursue recoveries of
the misappropriated funds, however no further significant recoveries are
anticipated.
12
<PAGE>
The restoration costs are allocated among the Partnerships based on each
Partnership's respective share of the misappropriation as discussed in Note 11
to the financial statements included in Item 8 of this report. The allocation
is adjusted periodically to reflect any changes in the entire misappropriation.
The Partnership's percentage of the allocation was reduced in 1993.
Consequently, the Partnership had been paying more than its pro rata share of
the costs. Accordingly, the Partnership recorded a receivable at December 31,
1993, in the amount of $295,000, due from DiVall 3 with a corresponding
reduction reflected in professional expenses relating to the Investigation,
former general partner removal expenses, and interim fund manager fees and
expenses. Recoveries allocated to DiVall 3 were used to repay amounts owed to
the Partnership. During 1996, the amount due from DiVall 3 was fully repaid.
LIABILITIES
- - -----------
Mortgage notes payable decreased from $1,146,000 at December 31, 1995, to
$1,015,000 at December 31, 1996, due to monthly principal payments made on the
notes as well as additional principal reductions made from excess cash flows.
Accounts payable and accrued expenses at December 31, 1996, amounted to
approximately $48,000. The majority of this balance represented year-end
accruals of legal and auditing fees. The decrease is primarily due to the
payment of out-of-pocket costs related to the lawsuit against the Partnership's
former accountants and attorneys, which had been accrued in 1996.
Payable to tenant of $96,000 at December 31, 1995, represented 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 used to offset
rental payments due from the tenant during 1996.
Real estate taxes payable amounted to $72,000 at December 31, 1996, compared to
$88,000 at December 31, 1995. The decrease is primarily a result of a reduction
in the real estate tax assessment on the former Porterhouse property which was
vacant during 1996.
Due to the current General Partner amounted to $26,000 at December 31, 1996,
representing a true-up of the general partner's management fee, a leasing
commission for the lease of a Hardee's restaurant, and the Fourth Quarter
distribution, all of which were paid in 1997.
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 13 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 1996 of $1,835,000 and $6,045, respectively, have also been made in
accordance with the amended Partnership Agreement. The Fourth Quarter 1996
distribution of $350,000 was paid to the Limited Partners on February 15, 1997.
13
<PAGE>
RESULTS OF OPERATIONS:
- - ----------------------
Management believes that the financial results of 1996 are not indicative of
"normal" Partnership operations. There are many events which occurred since the
discovery of the misappropriations in 1992 which have had a negative impact on
financial results. Some of these events will continue to have a negative impact
on the Partnership in the future. However, the settlement of litigation against
the Partnerships' former accountants and attorneys should result in operating
results going forward which more closely represent "normal" operations than what
has been experienced during the past four years.
The Partnership reported net income for the year ended December 31, 1996, in the
amount of $1,511,000 compared to $1,065,000 for the year ended December 31,
1995, and net income for the year ended December 31, 1994, of $1,060,000.
Results for all three years were different 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 real estate taxes. Results for 1996 were also
impacted by a lease termination fee received and the reversal of a portion of
the former general partner receivable write-off. The costs associated with the
misappropriation increased significantly during 1995 and 1996 as the lawsuit
against the former general partner accountants and attorneys got closer to trial
and as a result of contingent fee payments made in connection with the
settlement.
REVENUES
- - --------
Total revenues were $2,534,000, $2,048,000 and $2,768,000 for the years ended
December 31, 1996, 1995 and 1994. Rental revenue in 1996 and 1995 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. Revenue for 1996
includes lease modification fees in the amount of $164,000 from Chi-Chi's and a
recovery of $275,000 for a portion of the former general partner receivable
which had previously been written off.
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, 1996, 1995, and 1994, cash expenses amounted to
approximately 24%, 29% and 30% of total revenues, respectively. Total expenses,
including non-cash items, amounted to approximately 40%, 48%, and 62% of total
revenues for the years ended December 31, 1996, 1995, and 1994, 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, 1996, 1995, and 1994, expenses incurred in
relation to the misappropriated assets amounted to $169,000, $133,000, and
$73,000, respectively. Future expenses incurred in relation to the
misappropriation should have a minimal impact on the Partnership.
Interest expense for 1996 amounted to $107,000 compared to $111,000 in 1995 and
$188,000 in 1994. Three notes repaid during November 1994 had a favorable
affect on interest expense during 1996 and 1995.
14
<PAGE>
Additional expenses impacting operating results are write-offs of uncollectible
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 amounted to $9,000, $24,000,
and $73,000, during 1996, 1995, and 1994 respectively. The write-offs are the
result of defaults as well as modifications to several property leases since
inception of the Partnership.
The Partnership wrote down the carrying value of the former 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. During 1996, the Colorado land was written down to its estimated net
realizable value of $200,000, resulting in a $50,000 charge to income.
Real estate tax expenses for 1995 and 1994 were 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 $30,000, $64,000, and $130,000 for
the years ended December 31, 1996, 1995, and 1994, respectively.
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 5% of fixed rental
income for 1996. 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.
15
<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 .......... 17
Balance Sheets, December 31, 1996 and 1995 .......... 18 - 19
Statements of Income for the Years
Ended December 31, 1996, 1995, and 1994 .......... 20
Statements of Partners' Capital for the
Years Ended December 31, 1996, 1995, and
1994 .......... 21
Statements of Cash Flows for the Years
Ended December 31, 1996, 1995, and 1994 .......... 22 - 23
Notes to Financial Statements .......... 24 - 34
Schedule III--Real Estate and Accumulated
Depreciation .......... 39
</TABLE>
16
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors 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, 1996 and 1995, and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, 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 purpose of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This scheduled 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.
/s/ Arthur Andersen LLP
Chicago, Illinois
March 13, 1997
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
--------------------------
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------- -------------
<S> <C> <C>
INVESTMENT PROPERTIES AND EQUIPMENT:(NOTE 3 AND 6)
Land $ 7,308,073 $ 7,358,073
Buildings and improvements 12,070,525 12,070,525
Equipment 246,896 246,896
Accumulated depreciation (4,430,396) (4,078,904)
----------- -----------
Net investment properties and equipment 15,195,098 15,596,590
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES:(NOTE 8) 203,934 256,359
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 1,019,582 815,512
Cash restricted for real estate taxes 18,048 28,218
Cash held in Indemnification Trust(NOTE 10) 284,615 270,488
Rents and other receivables (net of allowance of
$1,320 in 1996 and $182,039 in 1995) 117,880 74,939
Deferred rent receivable 136,925 123,900
Due from affiliated partnerships(NOTE 11) 0 105,833
Due from current General Partner 0 1,754
Prepaid insurance 14,268 6,795
Deferred charges (net of accumulated amortization
of $60,086 in 1996 and $55,343 in 1995) 60,273 19,844
----------- -----------
Total other assets 1,651,591 1,447,283
----------- -----------
DUE FROM FORMER AFFILIATES:(NOTE 2)
Due from former general partner affiliates 555,052 1,123,625
Allowance for uncollectible amounts due from
former affiliates (555,052) (830,051)
Restoration cost receivable 1,252,957 907,774
Allowance for uncollectible restoration receivable (1,252,957) (907,774)
----------- -----------
Due from former affiliates, net 0 293,574
----------- -----------
Total assets $17,050,623 $17,593,806
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
--------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------ -----------
<S> <C> <C>
LIABILITIES:
Mortgage notes payable (NOTE 6) $ 1,015,429 $ 1,145,564
Accounts payable and accrued expenses 47,816 118,039
Payable to tenant 0 96,000
Due to current General Partner 26,275 959
Accrued interest payable 226,027 173,527
Security deposits 104,930 125,410
Real estate taxes payable 72,200 87,877
Unearned rental income 45,119 3,787
------------ -----------
Total liabilities 1,537,796 1,751,163
------------ -----------
CONTINGENT LIABILITIES: (NOTES 9 AND 13)
PARTNERS' CAPITAL:(NOTES 1, 4 AND 13)
Current General Partner -
Cumulative net income 45,293 30,181
Cumulative cash distributions (18,187) (12,142)
------------ -----------
27,106 18,039
------------ -----------
Limited Partners (25,000 interests outstanding) -
Capital contributions, net of offering costs 22,270,578 22,270,578
Cumulative net income 11,641,978 10,145,861
Cumulative cash distributions (19,216,741) (17,381,741)
Reallocation of former
general partners' capital 789,906 789,906
------------ ------------
15,485,721 15,824,604
------------ ------------
Total partners' capital 15,512,827 15,842,643
------------ ------------
Total liabilities and partners'
capital $17,050,623 $17,593,806
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
-----------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
REVENUES:
<S> <C> <C> <C> <C>
Rental income $1,994,422 $1,938,501 $2,367,473
Lease termination fee(NOTE 5) 164,419 0 0
Interest income on direct financing leases 23,295 28,268 32,769
Interest income 46,268 39,879 18,410
Recovery of amounts previously written off (NOTE 12) 274,999 0 0
Other Income 30,988 40,988 40,339
Net gain on sale of land and buildings 0 0 308,509
---------- ---------- ------------
2,534,391 2,047,636 2,767,500
---------- ---------- ------------
EXPENSES:
Partnership management fees (NOTE 7) 99,309 87,375 95,141
Disposition fees (NOTE 7) 0 0 30,000
Disposition fees - Restoration 0 0 30,000
Restoration fees (NOTE 7) 11,249 833 2,856
Insurance 17,725 19,066 38,957
General and administrative 61,558 55,670 86,436
Interest 107,024 111,054 187,553
Real estate taxes, including interest and penalties 29,690 64,456 129,597
Expenses incurred due to default by lessee 11,453 9,782 1,433
Professional services 85,333 92,630 144,934
Professional services related to Investigation 169,243 133,035 73,098
Advisory Board fees and expenses 15,459 14,459 19,470
Depreciation 351,492 366,302 427,075
Amortization 4,743 3,590 37,008
Provision for uncollectible rents and other receivables 8,884 24,300 73,340
Write-down of property to net realizable value 50,000 0 330,714
---------- ---------- ------------
1,023,162 982,552 1,707,612
---------- ---------- ------------
NET INCOME $1,511,229 $1,065,084 $1,059,888
========== ========== ============
NET INCOME - CURRENT GENERAL PARTNER $ 15,112 $ 10,651 $ 10,599
NET INCOME - LIMITED PARTNERS 1,496,117 1,054,433 1,049,289
---------- ---------- ------------
$1,511,229 $1,065,084 $1,059,888
========== ========== ============
NET INCOME PER LIMITED PARTNERSHIP INTEREST,
based on 25,000 interests outstanding $59.84 $42.18 $41.97
========== ========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
-----------------------------------------------------
<TABLE>
<CAPTION>
Current General Partner Limited Partners
-----------------------------------------------------------------------------------
Capital
Cumulative Cumulative Contributions Cumulative Cumulative
Net Cash Net of Net Cash
Income Distributions Total Offering Costs Income Distribution
---------- ------------- ----- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 $ 8,931 $ (4,763) $ 4,168 $22,270,578 $ 8,042,139 $(14,051,741)
Cash Distributions
($61.60 per limited
partnership interest) (3,755) (3,755) (1,540,000)
Net Income 10,599 10,599 1,049,289
------- ------- -----------
BALANCE AT DECEMBER 31, 1994 $19,530 $ (8,518) $11,012 $22,270,578 $ 9,091,428 $(15,591,741)
Cash Distributions
($71.60 per limited
partnership interest) (3,624) (3,624)
Net Income 10,651 10,651 1,054,433 (1,790,000)
------- ------- -----------
BALANCE AT DECEMBER 31, 1995 $30,181 $(12,142) $18,039 $22,270,578 $10,145,861 $(17,381,741)
Cash Distributions
($73.40 per limited
partnership interest) (6,045) (6,045) (1,835,000)
Net Income 15,112 15,112 1,496,117
------- ------- ----------- ------------
BALANCE AT DECEMBER 31, 1996 $45,293 $(18,187) $27,106 $22,270,578 $11,641,978 $(19,216,741)
======= ======== ======= =========== =========== ============
<CAPTION>
Reallocation Total
------------ -----
<S> <C> <C>
BALANCE AT DECEMBER 31, 1993 $789,906 $17,050,882
Cash Distributions
($61.60 per limited
partnership interest) (1,540,000)
Net Income 1,049,289
--------- -----------
BALANCE AT DECEMBER 31, 1994 $789,906 $16,560,171
Cash Distributions
($71.60 per limited
partnership interest) (1,790,000)
Net Income 1,054,433
--------- -----------
BALANCE AT DECEMBER 31, 1995 $789,906 $15,824,604
Cash Distributions
($73.40 per limited
partnership interest) (1,835,000)
Net Income 1,496,117
--------- -----------
BALANCE AT DECEMBER 31, 1996 $789,906 $15,485,721
========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
-----------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,511,229 $ 1,065,084 $ 1,059,888
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 356,235 369,892 464,083
Recovery of amounts previously written off (274,999) 0 0
Provision for uncollectible rents and other
receivables 8,884 24,300 73,340
Write-down of property to net realizable value 50,000 0 330,714
Gain on lease termination (26,248) 0 0
(Gain) from sale of investment properties 0 0 (308,509)
Interest applied to Indemnification Trust Account (14,127) (18,690) (1,798)
Increase/(Decrease) in unearned rental income 41,332 3,787 (99,505)
(Increase)/Decrease in rents and other receivables (51,792) (30,936) (4,933)
Increase in deferred rent receivable (13,025) (15,876) (108,024)
(Deposits)/Withdrawals for payment of real estate taxes 10,170 (21,308) 20,813
(Increase)/Decrease in prepaid expenses (7,473) 1,083 29,644
(Increase)/Decrease in due from current General Partner 1,754 (1,754) 0
Increase/(Decrease) in accounts payable and accrued expenses (99,023) 74,252 (17,605)
Increase/(Decrease) in payable to tenant (96,000) (48,000) 96,000
Increase/(Decrease) in due to current General Partner 8,944 (714) (1,239)
Increase/(Decrease) in accrued interest payable 52,500 52,501 (28,192)
(Decrease) in security deposits (9,665) 0 (9,691)
Increase/(Decrease) in real estate taxes payable (15,677) (45,069) 54,426
----------- ----------- ------------
Net cash provided from operating activities 1,433,019 1,408,552 1,549,412
----------- ----------- ------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Deposit to Indemnification Trust cash account 0 (60,000) (90,000)
Increase in deferred charges 0 (16,153) 0
Proceeds from sale of investment properties 15,400 0 2,000,000
Payments from affiliated partnerships 105,833 43,602 145,618
Recoveries from former affiliates 568,573 20,823 71,407
Principal payments received on direct financing leases 52,425 47,452 42,950
Principal receipts on notes receivable 0 5,270 26,374
----------- ----------- ------------
Net cash provided from investing activities 742,231 40,994 2,196,349
----------- ----------- ------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Principal payments on mortgage notes (130,135) (9,964) (1,460,761)
Payments to affiliated partnerships 0 0 (236,166)
Cash distributions to Limited Partners (1,835,000) (1,790,000) (1,540,000)
Cash distributions to current General Partner (6,045) (3,624) (3,755)
----------- ----------- ------------
Net cash (used in) financing activities (1,971,180) (1,803,588) (3,240,682)
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 204,070 (354,042) 505,079
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 815,512 1,169,554 664,475
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,019,582 $ 815,512 $ 1,169,554
=========== =========== ============
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 54,524 $ 58,553 $ 215,745
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
Supplemental Information to the Statements of Cash Flows
--------------------------------------------------------
The following significant noncash transactions occurred during the three years
affecting the Partnership's financial statements:
1. During 1996, the Partnership was deeded land with a value of $15,400
in satisfaction of a note receivable from a tenant.
2. During 1996, security deposits totaling $10,815 were applied to a note
receivable
from a tenant.
3. During 1996, the Partnership incurred leasing commissions totaling
$45,172 which were unpaid at year-end.
The accompanying notes are an integral part of these statements.
23
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
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, 1996, the Partnership owned 22
properties and a parcel of undeveloped land.
Rental revenue from investment properties is recognized on the straight-line
basis over the life of the respective lease. Revenue from direct financing
leases is recognized at level rates of return over the term of the lease.
Depreciation of the properties is provided on a straight-line basis over 31.5
years which is the estimated useful lives of the buildings and improvements.
Equipment is depreciated on a straight-line basis over the estimated useful
lives of 5 years.
Deferred charges primarily consist of leasing commissions paid when properties
are leased to tenants other than the original tenant. Leasing commissions are
capitalized and amortized over the life of the lease.
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.
24
<PAGE>
During 1996, the Partnership adopted Statement of Financial Accounting Standards
No.121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, which requires that all long-lived assets
be reviewed for impairment in value whenever changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. The adoption of
SFAS 121 had no impact on the Partnership's financial statements in 1996.
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, 1996, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$3,900,000.
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>
1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
Net income, per statements of income $1,511,229 $1,065,084 $1,059,888
Book to tax depreciation difference (48,172) (34,873) (3,314)
Book over tax gain from asset disposition 0 0 (63,823)
Straight line rent adjustment (13,025) (15,876) (207,529)
Affiliate receivable basis adjustment 0 0 (3,849)
Bad debt reserve/expense 216,514 44,914 (73,875)
Book valuation adjustment of real property (55,230) 0 94,711
Interest expense 39,303 52,500 (26,192)
Sales commission (30,000) 0 30,000
Prepaid rent 41,332 3,787 (48,000)
Other, net 131 220 19,325
---------- ---------- ----------
Net income(loss) for tax reporting purposes $1,662,082 $1,115,756 $ 777,342
========== ========== ==========
</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 approximately $14,000,000, of
which approximately $1,808,000 has been attributed to the Partnership and is
reflected as due from former affiliates on the balance sheet at December 31,
1996. The 9% interest accrued as of December 31, 1996, amounted to
approximately $616,000 and is not reflected in the accompanying income
statement.
25
<PAGE>
As of December 31, 1995, $2,031,000 was reflected as due from former affiliates
based on the estimated overall misappropriation and related costs of
$15,700,000.
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.
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established
against amounts due from former general partners and their affiliates reflecting
the estimated $3 million receivable. This net receivable was allocated among
the Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through December 31, 1996, $5,160,000 of recoveries have been
received which exceeded the original estimate of $3 million. As a result, the
Partnership has recognized $275,000 as income, which represents its share of the
excess recovery. The current General Partner continues to pursue recoveries of
the misappropriated funds, however no further significant recoveries are
anticipated.
3. INVESTMENT PROPERTIES:
----------------------
As of December 31, 1996, the Partnership owned 22 fully constructed fast-food
restaurants and a parcel of undeveloped land. The restaurants are comprised of
the following: one (1) Chi Chi's Mexican restaurant, 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, one (1) Rio Bravo restaurant, and one (1) BJ's Market
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, 1996 and 1995, these costs totaled approximately $270,000 and $220,000,
respectively, and are not reflected in the Partnership's financial statements.
Management is currently attempting to sell the undeveloped parcel. The land was
originally purchased for $356,549 and has an adjusted carrying value at December
31, 1996, of $200,000 which approximates the estimated net realizable value. A
$50,000 write-down was taken on the property during 1996.
From time to time, the Partnership experiences interruptions in rental receipts
due to tenant delinquencies and vacancies. During June 1996, the tenant of the
Partnerships' Chi-Chi's restaurant in Grand Forks, North Dakota paid a lease
termination fee equal to one year's rent, real estate taxes, and security
deposit, and vacated the premises. During the Fourth Quarter of 1996, this
property was leased to the tenant of Rio Bravo. 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. A new lease on this property was executed in
January 1997 with the tenant of BJ's Market.
The tenant of the Partnerships' Hardee's restaurant has experienced significant
declines in sales over the past two years. Management had 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
26
<PAGE>
December 31, 1995. During the Fourth Quarter of 1996, management terminated the
lease with the tenant and entered into a new lease with Hardee's Food Systems,
Inc. In connection with this transaction, the capitalized rent was paid. The
new lease resulted in annual rents which are $57,000 lower than the previous
tenant's contract and $18,000 lower than the 1996 adjusted rent.
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 current General Partner receives a fee for managing the Partnership equal to
4% of the gross receipts, with a maximum reimbursement for office rent and
related office overhead of $25,000 between the three affiliated Partnerships.
Effective March 1, 1996, the minimum management fee and the maximum
reimbursement for office rent and overhead increased by 2.8%, representing the
allowable annual Consumer Price Index adjustment per the Permanent Manager
Agreement ("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 $14,938 to date on the amounts recovered, which has
been offset against the 4% minimum fee.
Several of the Partnership's property leases contain purchase option provisions
with stated purchase prices in excess of the original cost of the properties.
The current General Partner is unaware of any unfavorable purchase options in
relation to original cost.
4. PARTNERSHIP AGREEMENT:
----------------------
The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
General Partners. The Partnership Agreement also provided for quarterly cash
distributions from Net Cash Receipts, as defined, within 60 days after the last
day of the first full calendar quarter following the date of release of the
subscription funds from escrow, and each calendar quarter thereafter, in which
such funds were available for distribution with respect to such quarter. Such
distributions were to be made 90% to Limited Partners and 10% to the former
general partners, provided, however, that quarterly distributions would be
cumulative and were not to be made to the former general partners unless and
until each Limited Partner had received a distribution from Net Cash Receipts,
as defined, in an amount equal to 10.5% 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.
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
27
<PAGE>
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 9.)
5. LEASES:
-------
Lease terms for the majority of the investment properties are 20 years from
their inception. The leases generally provide for minimum rents and additional
rents based upon a percentage of gross sales in excess of specified breakpoints.
The lessee is responsible for occupancy costs such as maintenance, insurance,
real estate taxes, and utilities. Accordingly, these amounts are not reflected
in the statements of income, except in circumstances where, in management's
opinion, the Partnership will be required to pay such costs to preserve its
assets (i.e., payment of past-due real estate taxes). Management has determined
that the leases are properly classified as operating leases; therefore, rental
income is reported when earned and the cost of the property, excluding the cost
of the land, is depreciated over its estimated useful life.
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1997 $ 2,052,084
1998 2,087,534
1999 2,090,284
2000 2,145,737
2001 2,147,632
Thereafter 15,172,642
-----------
$25,695,913
===========
</TABLE>
Percentage rents included in rental income in 1996, 1995, and 1994 were
$477,523, $421,932, and $479,232, respectively. The fluctuations in percentage
rental income are a result of fluctuations in sales of the tenants
28
<PAGE>
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 1996
from this tenant amounted to 28% of total base rent for the Partnership.
During June 1996, the Partnership received a cash settlement of $164,000 in
exchange for the early termination of a lease on a former Chi-Chi's restaurant
in Grand Forks, North Dakota.
6. MORTGAGE NOTES PAYABLE:
-----------------------
At December 31, 1996, mortgage notes payable consist of the following:
<TABLE>
<CAPTION>
Outstanding
Principal Balance Interest Rate Maturity Date
-------------------------------------------------------------
<S> <C> <C> <C>
a. $168,480 prime + 2.5% September 1997
b. 246,949 9.5% September 1997
c. 600,000 prime + 2.0% August 1992
----------
$1,015,429
==========
</TABLE>
a. In September 1992, the Partnership entered into a promissory note
agreement with Riverside Bank, Minnesota, in the amount of $310,000.
The note bears interest at the referenced prime rate, as defined, plus
2.5%. Principal and interest are paid in monthly installments of
$3,285 until September 1997, when all outstanding amounts are due. The
note is secured by a mortgage on a BW-3 restaurant located in Hopkins,
Minnesota, with a net book value at December 31, 1996 of $620,908. 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, 1996, of $477,825. 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, 1996, the Partnership has not
paid debt service on this note. Management met with representatives of
the bank and disputed the obligation. The Partnership received a
notice of default on this note in October 1993 and an action of
foreclosure was filed in February 1994 on one of the Partnership's
properties located in Dallas, Texas, with a net book value of
$1,194,101 at December 31, 1996. See Note 12 for further discussion of
litigation concerning this note. Interest in the amount of $226,000
was accrued, but unpaid, as of December 31, 1996. The interest accrual
has been recorded at the face rate of the note. If the Partnership
loses the dispute, additional interest amounting to approximately
$246,000, representing the default interest, may be due.
29
<PAGE>
Scheduled maturities of all notes payable, with the exception of the
$600,000 note payable mentioned above, are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1997 $415,429
--------
$415,429
========
</TABLE>
7. TRANSACTIONS WITH
CURRENT GENERAL PARTNER:
-----------------------
Amounts incurred to the current General Partner for the years ended December 31,
1996, 1995, and 1994, are as follows.
<TABLE>
<CAPTION>
Incurred Incurred Incurred
for the year ended for the year ended for the year ended
December 31, December 31, December 31,
1996 1995 1994
Current General Partner -------- -------- --------
- - -----------------------
<S> <C> <C> <C>
Management fees $ 99,309 $ 87,375 $ 95,141
Disposition fees 0 0 30,000
Restoration fees 11,249 833 2,856
Overhead allowance 7,555 7,351 7,156
Leasing Commissions 45,172 0 0
Reimbursement for out-of-pocket expenses 11,616 13,264 7,880
Cash distribution 6,045 3,624 3,755
-------- -------- --------
$180,946 $112,447 $146,788
======== ======== ========
</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, 1996:
<TABLE>
<S> <C>
Minimum lease payments receivable $238,677
Less - Unearned income (34,743)
--------
Net investment in direct financing leases $203,934
========
</TABLE>
Scheduled future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year ending
<S> <C>
December 31,
1997 $75,720
1998 75,720
1999 75,720
2000 11,517
-------
$238,677
========
</TABLE>
30
<PAGE>
9. 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. Fifty percent (50%) of the total
amount paid to the recovery was refunded to the current General Partner during
1996 after exceeding the recovery level of $4,500,000. The remaining amount
allocated to the Partnership may be owed to the current General Partner if the
$6,000,000 recovery level is met. As of December 31, 1996, the Partnership may
owe the current General Partner $5,189, which is currently reflected as a
recovery, if the $6,000,000 recovery level is achieved.
10. 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, 1996. Funds are invested in U.S. Treasury
securities. In addition, interest totaling $34,615 has been credited to the
Trust as of December 31, 1996. The rights of the Permanent Manager to the Trust
shall be terminated upon the earliest to occur of the following events: (i) the
written release by the Permanent Manager of any and all interest in the Trust;
(ii) the expiration of the longest statute of limitations relating to a
potential claim which might be brought against the Permanent Manager and which
is subject to indemnification; or (iii) a determination by a court of competent
jurisdiction that the Permanent Manager shall have no liability to any person
with respect to a claim which is subject to indemnification under the PMA. At
such time as the indemnity provisions expire or the full indemnity is paid, any
funds remaining in the Trust will revert back to the general funds of the
Partnership.
11. RESTORATION TRUST ACCOUNT; EXPENSE ALLOCATIONS;
-----------------------------------------------
AND RELATED INTER-PARTNERSHIP RECEIVABLES:
-----------------------------------------
Restoration costs represent expenses incurred by the Partnership associated with
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 may 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. During 1994, the Partnership made an additional adjustment
increasing the amount due from DiVall 3 by $5,346. As of December 31, 1996, the
Partnership has been repaid all amounts owed from DiVall 3.
31
<PAGE>
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, 1996, the
Partnerships recovered a total of $5,120,365 from the former general partners
and their affiliates, accountant and attorneys. Of this amount, the Partnership
received its pro-rata share in the amount of $661,860. Additionally, $40,346,
representing 50% of all previously escrowed disposition fees earned by the
General Partner have been paid to the recovery. Of that amount, $5,189 was
allocated to the Partnership and is contingently payable to the General Partner
upon achievement of certain recovery levels as described in Note 9.
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.
12. 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 Partnerships requested the payment of damages in the amount of $9,000,000,
plus interest, attorneys fees and costs, and whatever additional relief the
court deemed just and proper. The Partnerships hired legal counsel under a
contingent fee arrangement to prosecute all of the Partnerships' claims. E & Y
filed an Answer denying that it was negligent.
E & Y also filed third-party claims alleging fraud and negligence on the part of
the Partnerships' former law firm, Quarles & Brady. The Partnerships also filed
claims against Magnuson, DiVall, DiVall Real Estate Investment Corporation,
David Shea, and Quarles & Brady.
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 to the Partnership, after the payment of
contingent legal fees and related costs, totaled approximately, $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
32
<PAGE>
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 been on a steeply
discounted basis.
Plans of reorganization have been filed in the bankruptcies, and settlement
agreements in all of the Private Partnerships have been reached. Settlements in
the bankruptcies resulted in cash payments to the Partnerships of a total of
$720,000 and notes secured by subordinated mortgages in the aggregate amount of
$625,000. The Partnerships subsequently sold the secured notes for a total of
$175,000.
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, 1996, the Partnership had not
paid debt service on the Note. The Partnership received a notice of default on
the Note in October 1993 and the Foreclosure Action was filed in February 1994.
As of December 31, 1996, interest in the amount of $226,000 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. Trial of the case is scheduled
to begin on June 23, 1997. Pursuant to the Restoration Trust Account procedures
described in Note 11, 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.
13. FORMER GENERAL PARTNERS' CAPITAL ACCOUNTS:
------------------------------------------
The capital account balance of the former general partners as of May 26, 1993,
the date of their removal as general partners pursuant to the results of a
solicitation of written consents from the Limited Partners, was $789,906.
Because any amount payable to the former general partners with respect to their
capital accounts is subject to (a) the satisfaction of certain preferential
return requirements for the Limited Partners (See Note 4); and (b) the
assignment of such amounts to the Partnerships with respect to the amounts due
to the Partnerships from the former general partners, payment to the former
general partners with respect to their capital account balances as of May 26,
1993, is highly remote. In the unlikely event that the Partnership would owe
the former general partners any residual amount, such amounts would be due the
restoration fund for the benefit of all the Partnerships, and therefore
represent a contingent liability. At December 31, 1993, the former general
partners' capital account balance in the amount of $789,906 was reallocated to
the Limited Partners.
33
<PAGE>
14. SUBSEQUENT EVENTS:
------------------
On February 15, 1997, the Partnership made distributions to the Limited Partners
of $350,000 amounting to $14.00 per limited partnership interest.
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 46 - 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 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 34 - 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
34
<PAGE>
association, for nine 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 35 - 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 NELSON WITTHOEFT FINANCIAL. 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.
RICHARD W. OTTE - EDITORIAL WRITER. Mr. Otte is in his sixth year as an
Editorial Board Member and editorial writer for The Volusion, a DeLand,
Florida, subsidiary of the News-Journal Corporation in Daytona Beach,
Florida. Mr. Otte retired in 1988 after 34 years with the Dispatch Printing
Co., serving his last eight years as Managing Editor of the Columbus
Dispatch and as a member of its Operating Committee. He previously was the
executive sports editor of the newspaper in Ohio's capital city. Mr. Otte's
49 years in professional journalism also include news reporting, editing
and sports assignments with the Daytona Journal Herald and Springfield
News-Sun. Mr. Otte is a Limited Partner in DiVall 2.
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
35
<PAGE>
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 in 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, 1996, 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, 1996, 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, 1996, 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.
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
36
<PAGE>
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, 1996 the Partnership had fully funded the Indemnification Trust.
The following fees and reimbursements from the Partnership were incurred to
management in 1996:
<TABLE>
The Provo Group, Inc.
---------------------
<S> <C>
Management Fees $ 99,309
Restoration Fees 11,249
Leasing Commissions 45,172
Office Overhead Allowance 7,555
Direct Cost Reimbursements 11,616
--------
1996 Total $174,901
========
</TABLE>
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, 1996 and 1995
Statements of Income for the Years Ended December 31, 1996, 1995
and 1994
Statements of Partners' Capital for the Years Ended December 31,
1996, 1995 and 1994
Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994
37
<PAGE>
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.
28.0 Correspondence to the Limited Partners dated February 15,
1997 regarding the Fourth Quarter 1996 distributions.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the fourth
quarter of fiscal year 1996.
38
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Gross amount at which
Initial cost to Partnership carried at end of year (A)
--------------------------- --------------------------
Cost
Building capitalized Building
and subsequent and
Property Encumbrances Land Improvements to acquisitions Land Improvements Total
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Colorado Springs, Colorado $ - $ 356,549 $ - $ - $ 200,000 $ - $ 200,000
Beaver Dam, Wisconsin 258,589 126,854 452,445 80,000 126,854 532,445 659,299
Hopkins, Minnesota 296,939 195,755 479,295 120,000 195,755 599,295 795,050
Dallas, Texas - 797,952 510,201 - 797,952 510,201 1,308,153
Arlington, Texas - 1,002,707 471,862 - 1,002,707 471,862 1,474,569
Dallas, Texas - 729,406 528,190 - 729,406 528,190 1,257,596
Des Moines, Iowa - 197,667 367,809 - 197,667 367,809 565,476
Eau Claire, Wisconsin - 250,255 792,475 - 250,255 792,475 1,042,730
Chicago, Illinois - 151,670 427,625 - 151,670 427,625 579,295
Chicago, Illinois - 164,941 445,952 - 164,941 445,952 610,893
Chicago, Illinois - 176,948 455,010 - 176,948 455,010 631,958
Chicago, Illinois - 97,743 513,150 - 97,743 513,150 610,893
Chicago, Illinois - 133,764 340,204 - 133,764 340,204 473,968
Chicago, Illinois - 90,581 346,524 - 90,581 346,524 437,105
Chicago, Illinois - 95,847 388,654 - 95,847 388,654 484,501
Grand Forks, North Dakota - 246,200 738,601 - 246,200 738,601 984,801
Peoria, Arizona (1) 338,887 688,044 78,995 338,887 767,039 1,105,926
Glendale, Arizona (1) 400,503 626,428 78,995 400,503 705,423 1,105,926
Mesa, Arizona (1) 412,879 638,278 - 389,758 638,278 1,028,036
Scottsdale, Arizona (1) 339,151 712,006 - 339,151 712,006 1,051,157
Fond Du Lac, Wisconsin - 270,267 756,664 - 270,267 756,664 1,026,931
Chicago, Illinois (2) - 197,277 708,529 - 66,499 508,593 575,092
Dallas, Texas 600,000 844,718 524,525 - 844,718 524,525 1,369,243
--------------------------------------------------------------------------------------------------------
$1,155,528 $7,618,521 $11,912,471 $357,990 $7,308,073 $12,070,525 $19,378,598
========================================================================================================
<CAPTION>
Life on which
depreciation in
latest statement
of operations is
Accumulated Date of Date computed
Property depreciation construction acquired (years)
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Colorado Springs, Colorado $ - - 1/31/87 31.5
Beaver Dam, Wisconsin 181,474 1986 3/27/87 31.5
Hopkins, Minnesota 174,142 1985 6/30/87 31.5
Dallas, Texas 188,028 1987 7/8/87 31.5
Arlington, Texas 173,899 1987 1/8/87 31.5
Dallas, Texas 188,570 1987 9/28/87 31.5
Des Moines, Iowa 120,892 1986 10/8/87 31.5
Eau Claire, Wisconsin 279,875 1986 10/27/87 31.5
Chicago, Illinois 149,376 1982 12/1/87 31.5
Chicago, Illinois 155,779 1986 12/1/87 31.5
Chicago, Illinois 158,943 1982 12/1/87 31.5
Chicago, Illinois 179,252 1993 12/1/87 31.5
Chicago, Illinois 118,839 1980 12/1/87 31.5
Chicago, Illinois 121,047 1985 12/1/87 31.5
Chicago, Illinois 135,764 1985 12/1/87 31.5
Grand Forks, North Dakota 255,163 1984 12/23/87 31.5
Peoria, Arizona 263,712 1984 12/24/87 31.5
Glendale, Arizona 242,425 1984 12/24/87 31.5
Mesa, Arizona 213,125 1985 3/18/88 31.5
Scottsdale, Arizona 237,743 1985 3/18/88 31.5
Fond Du Lac, Wisconsin 252,655 1981 3/24/88 31.5
Chicago, Illinois (2) 218,152 1987 4/15/88 31.5
Dallas, Texas 175,142 1987 3/25/88 31.5
-------------
$ 4,183,997
=============
</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
Investments in Real Estate December 31, 1996 December 31, 1995
- - ------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $19,428,598 $19,428,598
Property write-down 50,000 0
-------------------------------------------
Balance at end of year $19,378,598 $19,428,598
===========================================
</TABLE>
<TABLE>
<CAPTION>
Year ended Year ended
Accumulated Depreciation December 31, 1996 December 31, 1995
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $3,833,774 $3,486,027
Additions charges to costs and expenses 350,223 347,747
---------------------------------------------------
Balance at end of year $4,183,997 $3,833,774
===================================================
</TABLE>
39
<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 28, 1997
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 28, 1997
By: /s/ Kristin J. Atkinson
----------------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: March 28, 1997
40
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1996 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,037,630
<SECURITIES> 284,615
<RECEIVABLES> 2,342,609
<ALLOWANCES> 1,809,329
<INVENTORY> 0
<CURRENT-ASSETS> 1,855,525
<PP&E> 19,625,494
<DEPRECIATION> 4,430,396
<TOTAL-ASSETS> 17,050,623
<CURRENT-LIABILITIES> 1,537,796
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,512,827
<TOTAL-LIABILITY-AND-EQUITY> 17,050,623
<SALES> 2,182,136
<TOTAL-REVENUES> 2,534,391
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 907,254
<LOSS-PROVISION> 8,884
<INTEREST-EXPENSE> 107,024
<INCOME-PRETAX> 1,511,229
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,511,229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,511,229
<EPS-PRIMARY> 59.84
<EPS-DILUTED> 59.84
</TABLE>
<PAGE>
DIVALL INSURED INCOME FUND, L.P.
QUARTERLY NEWS
================================================================================
- - --------------------------------------------------------------------------------
A PUBLICATION OF THE PROVO GROUP, INC. FOURTH QUARTER 1996
- - --------------------------------------------------------------------------------
PROVO REPORTS TO THE ADVISORY BOARD
Kansas City, Missouri
Bruce A. Provo was pleased to report to the DiVall Advisory Board at their
quarterly meeting, held on January 29, 1997, "that after four years of
challenges, the Partnership has been substantially returned to normal
operations."
Board members have received numerous solicitations to buy their units and the
more offers they receive the more their confidence grows in the DiVall Public
Partnerships.
Mr. Provo expressed his hope "that other Limited Partners would recognize that
solicitations are a form of flattery...they want something the investors already
have. The vultures are probably reading our correspondence more closely than
many Limited Partners."
He also wondered "where were these guys four years ago before operations
stabilized?"
______________________
OTHER NEWS INSIDE...
<TABLE>
<S> <C>
. What's Expected for 1997?..................... PROJECTION HIGHLIGHTS, PG 4
. Will There Be Special Distributions?.......... PROJECTION HIGHLIGHTS, PG 4
. More Recoveries Received..................... RESTORATION HIGHLIGHTS, PG 4
. Investors B-E-W-A-R-E........................... QUESTIONS & ANSWERS, PG 5
. Hardee's Corporate Signs New Lease.............. PROPERTY HIGHLIGHTS, PG 3
. Vacant Chi-Chi's Re-Leased...................... PROPERTY HIGHLIGHTS, PG 4
. Where are the Former GPs?................................ HIGHLIGHTS, PG 2
. I Need My Schedule K-1!......................... QUESTIONS & ANSWERS, PG 5
</TABLE>
<PAGE>
PAGE 2 DIVALL 1 4 Q 96
_______________________________
HIGHLIGHTS
. Management reports that OPERATING RESULTS for the Partnership should
stabilize during 1997 and more closely represent "normal" activities,
---------
since most of the recovery efforts are behind us.
. Former general partner, GARY J. DIVALL, was sentenced to eight (8) years in
prison along with seven (7) years of subsequent probation for his plea of
"no contest" to criminal charges brought against him by the Wisconsin
Attorney General's Office last year. Bruce Provo was the only witness
testifying at the sentencing hearing.
. The sentencing hearing date for the former general partner, PAUL E.
MAGNUSON, has been re-scheduled for MARCH 3, 1997.
. Last year he had pleaded "no-contest" to criminal charges brought against
him by the Wisconsin Attorney General's Office.
(NOTE: SEE ENCLOSED UPDATE FROM THE OFFICE OF CRIME VICTIM SERVICES.)
_______________________________
DISTRIBUTION HIGHLIGHTS
. 6.2% (approx.) annualized return from operations and other sources based on
$22,600,000 ("net" remaining initial investment).
. $14.00 per unit (approx.) for the FOURTH QUARTER 1996 from both cash flow
from operations and "net" cash activity from financing and investing
activities.
. $350,000 "total" amount distributed for the FOURTH QUARTER 1996 as
budgeted.
. $828.00 to $725.00 range of distributions per unit from the first unit sold
to the last unit sold before the offering closed (March 1988),
respectively.
Distributions are from both cash flow from operations and "net" cash
activity from financing and investing activities.
(NOTE: ORIGINAL UNITS WERE PURCHASED FOR $1,000/UNIT.)
_______________________________
STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS
. 19% increase in OPERATING REVENUES from projections.
. 1% decrease in "NET" INCOME from projections.
<PAGE>
PAGE 3 DIVALL 1 4 Q 96
___________________________
STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS (CONT'D)
. $66,000 in recoveries were received by the Partnership during the fourth
quarter as a result of settlements with the DiVall "Private" Partnerships
and the sale of the mortgage on Gary DiVall's farm.
. $27,000 of "catch-up" rental income was received in November 1996 from
Terratron, Inc., former tenant of the HARDEE'S restaurant in Fond du Lac,
Wisconsin. (NOTE: SEE "PROPERTY HIGHLIGHTS" BELOW FOR FURTHER DISCUSSION.)
. Excess cash received during the quarter was used to reduce "high-interest"
debt that the Partnership currently has with Riverside Bank in Minnesota.
. $17,000 was accrued for real estate taxes at December 31, 1996 for the
"vacant" PORTERHOUSE restaurant in Chicago, Illinois. It should be noted
that the Partnership received a substantial reduction ($38,000 to $11,000)
for this property's real estate taxes for 1996 which will be paid in 1997.
. $5,600 was paid by the Partnership during the fourth quarter for
INVESTIGATION AND RESTORATION expenses associated with the "Boatmen's"
litigation.
(This lawsuit's expenses and recoveries are shared with the Partnership's
affiliated partnerships.)
_____________________
PROPERTY HIGHLIGHTS
VACANCIES
---------
. PORTERHOUSE restaurant (Chicago, IL) was vacant at December 31, 1996. The
------
Partnership is currently working with a prospective tenant for the re-lease
of this property with final lease negotiations in progress. (Re-lease
expected to occur by the First Quarter of 1997.)
RENTS RECEIVABLE
----------------
. BW-3 restaurant (Hopkins, MN), sublet by DenAmerica, was $6,800 delinquent
in rent at December 31, 1996. DenAmerica has been working with
the Partnership to cure this delinquency.
----
OTHER PROPERTY MATTERS
----------------------
. Hardee's Food Systems, Inc. signed a new lease with the Partnership in
November 1996 for the HARDEE'S restaurant in Fond du Lac, WI.
. (cont'd) The corporate Hardee's replaced the former tenant, Terratron, Inc.
As a result of the final lease negotiations, this property's rental
delinquency was cured.
-----
<PAGE>
PAGE 4 DIVALL 1 4 Q 96
_____________________
PROPERTY HIGHLIGHTS (CONT'D)
OTHER PROPERTY MATTERS
----------------------
. Bysom Enterprises, Ltd., tenant of seven (7) POPEYE'S restaurants in
Chicago, Illinois remains current with all store rents. They also continue
to experience notable sales increases.
(In prior years, this tenant had been consistently "delinquent" in rental
payments to the Partnership.)
. Mandaza, Inc., tenant of the RIO BRAVO restaurant (Grand Forks, ND) signed
a lease with the Partnership in December replacing the vacant former CHI
CHI'S restaurant. Rent commences April 1997.
(The former Chi Chi's tenant previously paid a lease termination fee which
included one-year's payment of rental income and property taxes.)
. TP Acquisition Corporation, tenant of four (4) TACO CABANA restaurants
in Texas, continues to experience sales increases with its restaurants
and is current with all rental payments.
-------
_____________________
RESTORATION HIGHLIGHTS
. Recoveries received during the FOURTH QUARTER 1996 totalled $66,000
(approx.) for the Partnership.
. "Total" recoveries received TO DATE for the Partnership amount to
approximately $667,000.
. The Partnership is gearing up for its trial against BOATMEN'S First
-----
National Bank of Kansas City which has been scheduled for MARCH 3, 1997.
_____________________
1997 DISTRIBUTION "PROJECTION" HIGHLIGHTS
. Management expects the Partnership's operations to stabilize during 1997
excluding special distributions from non-recurring activities such as
property sales and "final" recoveries related to the misappropriation of
the former general partners and their affiliates.
(NOTE: Any special distributions made will be included in quarterly
distribution checks.)
. $15.00 per unit (approx.) from both cash flow from operations and "net"
cash activity from financing and investing activities based on the budgeted
$375,000 for each quarter during 1997.
. 6.6% (approx.) annualized return on the "net" remaining initial investment
which should approximate $22,600,000 during 1997.
<PAGE>
PAGE 5 DIVALL 1 4 Q 96
_______________________
RETURN OF CAPITAL
The following table has been updated to present the breakdown of distributions
since the Partnership's first quarterly distribution, for the period ended
-----
December 31, 1986 through December 31, 1996.
<TABLE>
<CAPTION>
================================================================================
DISTRIBUTION CAPITAL
------------- ------------
ANALYSIS BALANCE
------------- ------------
<S> <C> <C>
Original Capital Balance - $25,000,000
Cash Flow From Operations Since Inception $ 17,183,548 -
Total Distributions Since Inception (19,566,740) -
------------
(Return) of Capital $ (2,383,192) (2,383,192)
============ -----------
"NET" REMAINING INITIAL INVESTMENT
BY ORIGINAL PARTNERS - $22,616,808
===========
================================================================================
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
_______________________
QUESTIONS & ANSWERS
1. WHAT ARE MY "IMMEDIATE" LIQUIDATION OPTIONS FOR INTERESTS IN THE
PARTNERSHIP?
. The only option for "immediate" liquidation of interests, at this
time, is through the secondary market. According to current secondary
market trading information provided to management, interests in the
Partnership have sold during the last quarter between $400-$520 per
unit.
. (CONT'D) IT IS IMPORTANT TO NOTE THAT YOU MAY RECEIVE DIRECT
"SOLICITATIONS" OF YOUR INTERESTS BY THIRD PARTIES. WE DO NOT CONTROL
NOR SUPPORT THESE SOLICITATION EFFORTS. WE STRONGLY URGE YOU TO
THOROUGHLY REVIEW ALL YOUR OPTIONS AND UNDERSTAND EACH SOLICITOR'S
MOTIVATION. WE ENCOURAGE YOU TO CONTACT US IF YOU HAVE ANY QUESTIONS
ABOUT YOUR INVESTMENT.
2. WHEN CAN I EXPECT TO RECEIVE MY SCHEDULE K-1 FOR 1996?
. Our current schedule for mailing all 1996 Schedule K-1's for your
---
Partnership and its affiliated partnerships is no later than FEBRUARY
28, 1997.
<PAGE>
PAGE 6 DIVALL 1 4 Q 96
___________________________
QUESTIONS & ANSWERS (CONT'D)
3. WHEN WILL 1996 PER UNIT VALUES BE AVAILABLE FOR MY INVESTMENT IN THE
PARTNERSHIP?
4. WHEN CAN I EXPECT MY NEXT DISTRIBUTION MAILING?
. The Partnership's 1996 "year-end" valuation information is currently
scheduled to be available by March 1997. We will include this
information in our 1996 Annual Reports which will be mailed by early
APRIL 1997.
. Your next scheduled distribution correspondence for the First Quarter
of 1997 will be mailed on MAY 15, 1997.
* * *
================================================================================
For questions or additional information, please contact Investor Relations at
1-800-547-7686 or 1-608-244-7661.
All written inquiries may be mailed or faxed to:
THE PROVO GROUP, INC.
Post Office Box 2137 1410 Northport Drive
Madison, Wisconsin 53701-2137 Madison, Wisconsin 53704
(FAX 608-244-7663)
================================================================================
<PAGE>
DIVALL INSURED INCOME FUND L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 1996
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROJECTED ACTUAL VARIANCE
---------------------------------
4TH 4TH CASH
QUARTER QUARTER BETTER
OPERATING REVENUES 12/31/96 12/31/96 (WORSE)
--------- --------- ---------
<S> <C> <C> <C>
Rental income $483,879 $487,091 $ 3,212
Direct financing interest 5,330 5,330 0
Interest income 11,831 10,696 (1,135)
Recoveries of Amounts Previously Written Off 0 65,689 65,689
Other income 0 26,808 26,808
-------- -------- ---------
TOTAL OPERATING REVENUES $501,040 $595,614 $ 94,574
-------- -------- ---------
OPERATING EXPENSES
Insurance $ 4,500 $ 4,398 $ 102
Management fees 22,812 30,797 (7,985)
Restoration fees 0 2,628 (2,628)
Overhead allowance 1,900 1,896 4
Advisory Board 4,250 3,739 511
Administrative 8,113 10,657 (2,544)
Professional services 250 2,635 (2,385)
Auditing 12,000 8,568 3,432
Legal 10,500 13,886 (3,386)
Real Estate Taxes 2,800 16,663 (13,863)
Write-off of uncollectible receivable 0 8,884 (8,884)
Property write-downs 0 50,000 50,000)
Defaulted tenants 0 4,921 (4,921)
-------- -------- ---------
TOTAL OPERATING EXPENSES $ 67,125 $159,672 ($92,547)
-------- -------- ---------
INTEREST EXPENSE $ 27,255 $ 25,522 $ 1,733
-------- -------- ---------
INVESTIGATION AND RESTORATION EXPENSES $ 385 $ 5,609 ($5,224)
-------- -------- ---------
NON-OPERATING EXPENSES
Depreciation $ 87,309 $ 87,927 ($618)
Amortization 1,068 1,545 (477)
-------- -------- ---------
TOTAL NON-OPERATING EXPENSES $ 88,377 $ 89,472 ($1,095)
-------- -------- ---------
TOTAL EXPENSES $183,142 $280,275 $ 97,133)
-------- -------- ---------
NET INCOME $317,898 $315,339 ($2,559)
OPERATING CASH RECONCILIATION: VARIANCE
---------
Depreciation and amortization 88,377 89,472 1,095
Recovery of amounts previously written off 0 (65,689) (65,689)
Property write-downs 0 50,000 50,000
Write-off of uncollectible receivable 0 8,884 8,884
(Increase) Decrease in current assets (41,942) (80,453) (38,511)
Increase (Decrease) in current liabilities 42,103 46,062 3,959
G.P. distribution (1,272) (1,261) 11
Cash reserved for payables (60,000) 25,000 85,000
Advance from (to) future cash flows for current distributions (5,000) 0 5,000
-------- -------- ---------
NET CASH PROVIDED FROM OPERATING ACTIVITIES $340,164 $387,354 $ 47,190
-------- -------- ---------
CASH FLOWS FROM (USED IN) INVESTING AND FINANCING ACTIVITIES
Recoveries from former G.P. affiliates 0 65,689 65,689
Principal received on equipment leases 13,600 13,600 0
Principal payments on mortgage notes (3,392) (120,091) (116,699)
-------- -------- ---------
NET CASH PROVIDED FROM INVESTING AND FINANCING ACTIVITIES $ 10,208 ($40,802) ($51,010)
-------- -------- ---------
TOTAL CASH FLOW FOR QUARTER $350,372 $346,552 ($3,820)
CASH BALANCE BEGINNING OF PERIOD 660,605 1,066,079 405,474
Less 3rd quarter distributions paid 11/96 (350,000) (350,000) 0
Plus cash reserved above for payables and future distributions 65,000 (25,000) (90,000)
-------- ---------- --------
CASH BALANCE END OF PERIOD $725,977 $1,037,631 $311,654
Cash reserved for 4th quarter L.P. distributions (350,000) (350,000) 0
Cash reserved for payment of payables and future distributions (250,000) (560,000) (310,000)
-------- -------- ---------
UNRESTRICTED CASH BALANCE END OF PERIOD $125,977 $127,631 $ 1,654
======== ======== =========
- - -------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
---------------------------------
*QUARTERLY DISTRIBUTION $ 350,000 $350,000 $ 0
MAILING DATE 2/15/97 (ENCLOSED) -
- - -------------------------------------------------------------------------------------------------------
</TABLE>
*Refer to distribution letter for detail of quarterly distribution.
<PAGE>
The ProvoGroup
PROJECTIONS FOR DIVALL INSURED INCOME FUND L.P.
DISCUSSION PURPOSES 1996 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
PORTFOLIO
<TABLE>
<CAPTION>
---------------------------- ---------------------------------------
REAL ESTATE EQUIPMENT
---------------------------- ---------------------------------------
BASE % LEASE LEASE %
- - -------------------------------
CONCEPT LOCATION COST RENT YIELD EXPIRATION COST RECEIPTS RETURN
- - ------------------------------- ---------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RIO BRAVO GRAND FORKS, ND 984,801 100,000 10.15%
CHI CHI'S EAU CLAIRE, WI 1,042,730 136,260 13.07%
VACANT LAND COL SPRINGS, CO 356,549 0 0.00%
DENNY'S ** GLENDALE, AZ 1,105,926 90,000 8.14% 68,744 0 0.00%
DENNY'S ** SCOTTSDALE, AZ 1,051,157 90,000 8.56% 40,553 0 0.00%
DENNY'S ** MESA, AZ 1,028,036 90,000 8.75% 39,218 0 0.00%
DENNY'S ** PEORIA, AZ 1,105,926 90,000 8.14% 58,781 0 0.00%
BW-III HOPKINS, MN 795,050 66,000 8.30% 1/15/2000 190,000 37,860 19.93%
DENNY'S BEAVER DAM, WI 659,299 66,000 10.01% 3/31/2000 190,000 37,860 19.93%
FAZOLPS DES MOINES, IA 565,476 45,500 8.05% 39,600 0 0.00%
HARDEE'S FOND DU LAC, WI 1,026,931 72,000 7.01%
POPEYE'S CHICAGO, IL 473,968 63,180 13.33%
POPEYE'S CHICAGO, IL 610,893 81,420 13.33%
POPEYE'S CHICAGO, IL 484,501 64,620 13.34%
POPEYE'S CHICAGO, IL 610,893 81,420 13.33%
POPEYE'S CHICAGO, IL 437,105 58,260 13.33%
POPEYE'S CHICAGO, IL 631,958 54,180 13.32%
POPEYE'S CHICAGO, IL 579,295 77,280 13.34%
PORTERHOUSE CHICAGO, IL 905,807 0 0.00%
TACO CABANA ARLINGTON, TX 1,474,569 132,000 8.95%
TACO CABANA DALLAS, TX 1,369,243 132,000 9.64%
TACO CABANA DALLAS, TX 1,257,596 132,000 10.50%
TACO CABANA DALLAS, TX 1,308,153 132,000 10.09%
- - ------------------------------- ----------------------------- --------------------------
- - ------------------------------- ----------------------------- --------------------------
PORTFOLIO TOTAL (23 Properties) 19,865,862 1,884,120 9.48% 626,896 75,720 12.08%
- - ------------------------------- ----------------------------- --------------------------
OUTSTANDING DEBT
--------------------------------- ---------------------------
AMOUNT ANNUAL CURRENT AMOUNT ANNUAL CURRENT
OWED DEBT INTEREST OWED DEBT INTEREST
- - ------------------------------
MORTGAGED PROPERTIES 12/31/96 SERVICE RATE 12/31/96 SERVICE RATE
- - ------------------------------ ---------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
- - -----------------------------
DENNY'S HOPKINS, MIN 63,180 14,783 10,75% 105,300 24,637 10.75%
DENNY'S BEAVER DAM, WI 70,380 8,726 9.50% 176,568 21,514 9.50%
MULTIPLE STORES AZ, TX 600,000 0 8.50%
- - ------------------------------- ---------------------------------- -----------------------------
- - ------------------------------- ---------------------------------- -----------------------------
TOTALS 733,560 23,509 - 281,868 46,151 -
- - ------------------------------- ---------------------------------- -----------------------------
- - ------------------------------- ---------------------------------- -----------------------------
NET AFTER DEBT 19,132,302 1,860,611 9.72% 345,528 29,569 8.57%
- - ------------------------------- ---------------------------------- -----------------------------
<CAPTION>
- - -----------------------------------------
ORIGINAL EQUITY $25,000,000
NET DISTRIBUTION OF CAPITAL
SINCE INCEPTION 2,383,192
-----------
CURRENT EQUITY $22,616,808
===========
- - -----------------------------------------
TOTAL %
-----------------------------
ON 22,616,808
TOTALS EQUITY
----------------------------------
CONCEPT INVESTED RECEIPTS * RETURN * RAISE
- - -------------- ---------------------------------- -----------
<S> <C> <C> <C> <C>
RIO BRAVO 984,801 100,000 10.15%
CHI CHI'S 1,042,730 136,260 13.07%
VACANT LAND 356,549 0 0.00%
DENNY'S ** 1,174,670 90,000 7.66%
DENNY'S ** 1,091,710 90,000 8.24%
DENNY'S ** 1,067,254 90,000 8.43%
DENNY'S ** 1,164,707 90,000 7.73%
BW-III 985,050 103,860 10.54%
DENNY'S ** 849,299 103,860 12.23%
FAZOLPS 605,076 45,500 7.52%
HARDEE'S 1,026,931 72,000 7.01%
POPEYE'S 473,968 63,180 13.33%
POPEYE'S 610,893 81,420 13.33%
POPEYE'S 484,501 64,620 13.34%
POPEYE'S 610,893 81,420 13.33%
POPEYE'S 437,105 58,260 13.33%
POPEYE'S 631,958 84,180 13.32%
POPEYE'S 579,295 77,280 13.34%
PORTERHOUSE 905,807 0 0.00%
TACO CABANA 1,474,569 132,000 8.95%
TACO CABANA 1,369,243 132,000 9.64%
TACO CABANA 1,257,596 132,000 10.50%
TACO CABANA 1,308,153 132,000 10.09%
- - ----------- ---------------------------------------------
20,492,758 1,959,540 9.56% 8.67%
---------------------------------------------
--------------------------------
AMOUNT ANNUAL
OWED DEBT
- - ------------------------------
MORTGAGED PROPERTIES 12/31/96 SERVICE
- - ------------------------------ -------------------------------
<S> <C> <C>
- - ------------------------------
DENNY'S HOPKINS, MIN 168,480 39,420
DENNY'S BEAVER DAM, WI 246,948 30,240
MULTIPLE STORES AZ, TX 600,000 0
- - ------------------------------- ------------------------------
- - ------------------------------- ------------------------------
TOTALS 1,015,428 69,660
- - ------------------------------- ------------------------------
- - ------------------------------- -------------------------------------------------
NET AFTER DEBT 19,477,330 1,890,180 9.70% 8.36%
- - ------------------------------- ------------------------------------------------
</TABLE>
* A portion of the amounts disclosed include a return of principal.
** Rent is based on 12.5% of monthly sales. Rent projected for 1997 is based on
1996 sales levels.
