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, 1997, the Partnership consisted of one General Partner and 1,759 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. 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, 1997, the Partnership owned 22 properties and a parcel of undeveloped land, as more fully described in Item 2.
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, 1997, the Partnership owned the following restaurant Properties:
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, DenAmerica, in September 1994. The property's lease, however, does not expire until 2013, and the tenant continues 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 wanted to be released from the lease on this property as well as the Denny's in Beaver Dam, Wisconsin which it has also vacated. 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 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 exchange for the decrease in fixed rents, percentage rents were increased once the tenant reaches sales breakpoints stated in the revised leases.
In addition to the 22 restaurant properties, the Partnership owned a vacant parcel of land in Colorado Springs, Colorado at December 31, 1997. 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, 1997, rent obligations and carrying costs due under this agreement, amounted to approximately $319,000 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. The property was sold during January 1998 for $235,000.
Item 3.
Item 3. Legal Proceedings
In 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 connection with the audits of the Partnerships performed by E & Y for the years 1989, 1990, and 1991. The Partnerships also filed claims against Magnuson, DiVall, DiVall Real Estate Investment Corporation, David Shea, and the Partnerships' former securities law firm, Quarles & Brady.
These matters were settled in 1996 yielding net proceeds to the Partnership, after the payment of contingent legal fees and related costs, of 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.
In 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 in the amount 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.
In 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"). The trial of the case took place on June 23, 1997. The judge ruled in favor of the Partnership on August 21, 1997, that the note was not enforceable. An appeal by Boatmen's was subsequently dropped, so the full $600,000 recovery has been recorded. 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 the recovery resulting from the full cancellation of the alleged indebtedness was allocated among the three Partnerships on the same basis as the restoration costs were being allocated via appropriate payments by the Partnership to its affiliated Partnerships. The Partnership recognized approximately $265,000 of income during 1997, for the reversal of interest which had previously been accrued on the note.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
Item 5. Market Price and Dividends on the 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, 1997, there were 1,759 record holders of limited partnership interests in the Partnership.
(c) The Partnership does not pay dividends. However, 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 1997 and 1996, $1,575,000 and $1,835,000, respectively, were distributed in the aggregate to the Limited Partners The General Partner received aggregate distributions of $6,586 in 1997 and $6,045 in 1996.
Item 6.
Item 6. Selected Financial Data
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP (a Wisconsin limited partnership)
December 31, 1997, 1996, 1995, 1994 and 1993 (not covered by Independent Auditors' Report)
(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.
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, 1997, were originally purchased at a price, including acquisition costs, of approximately $20,136,000.
The Partnership sold the vacant land in Colorado Springs, Colorado during January 1998, for $235,000. During January 1997, the Partnership executed a lease for the Porterhouse restaurant in Chicago, Illinois with the tenant of BJ's Market and Bakery.
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. Rent commenced on the lease in June 1997.
The BW-3 restaurant (formerly Denny's) in Hopkins, Minnesota, was vacated by the tenant, DenAmerica, in September 1994. The property's lease, however, does not expire until 2013, and the tenant continues 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 wanted to be released from the lease on this property as well as the Denny's in Beaver Dam, Wisconsin which it has also vacated. Management is currently working with DenAmerica to resolve the issue.
The net investment in direct financing leases, which includes the Partnership's specialty leasehold improvement leases, amounted to $68,000 at December 31, 1997, compared to $204,000 at December 31, 1996. The decrease of $136,000 was a result of principal payments received during the year, as well as the write-off of approximately $78,000 of lease payments which were deemed uncollectible.
Other Assets - - ------------
Cash and cash equivalents, including cash restricted for real estate taxes held by the Partnership, were $644,000 at December 31, 1997, compared to $1,038,000 at December 31, 1996. The Partnership designated cash of $375,000 to fund the Fourth Quarter 1997 distributions to Limited Partners paid in February 1998, $140,000 for the payment of year-end accounts payable and accrued expenses, and the remainder represents reserves deemed necessary to allow the Partnership to operate normally. The decrease in cash is primarily due to 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 and sales of investment properties 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
Item 8. Financial Statements and Supplementary Data
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP ----------------------------------------------
(a Wisconsin limited partnership) ---------------------------------
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES -------------------------------------------
Page ----
Report of Independent Public Accountants ....... 16
Balance Sheets, December 31, 1997 and 1996 ....... 17 - 18
Statements of Income for the Years Ended December 31, 1997, 1996, and 1995 ....... 19
Statements of Partners' Capital for the Years Ended December 31, 1997, 1996, and 1995 ....... 20
Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995 ....... 21 - 22
Notes to Financial Statements ....... 23 - 32
Schedule III--Real Estate and Accumulated Depreciation ....... 38
Arthur Andersen LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Divall Insured Income Fund Limited Partnership:
We have audited the accompanying balance sheets of Divall Insured Income Fund Limited Partnership (the Partnership) as of December 31, 1997 and 1996, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Chicago, Illinois February 26, 1998
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1997 and 1996 --------------------------
ASSETS
The accompanying notes are an integral part of these statements.
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1997 and 1996 --------------------------
LIABILITIES AND PARTNERS' CAPITAL
The accompanying notes are an integral part of these statements.
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the Years Ended December 31, 1997, 1996, and 1995 -----------------------------------------------------
The accompanying notes are an integral part of these statements.
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
For the years ended December 31, 1997, 1996, and 1995 -----------------------------------------------------
The accompanying notes are an integral part of these statements.
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996, and 1995 -----------------------------------------------------
The accompanying notes are an integral part of these statements.
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 amount was paid in full during 1997.
The accompanying notes are an integral part of these statements.
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
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. 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, 1997, 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.
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 and 1997.
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, 1997, 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:
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 $14,800,000, of which approximately $1,912,000 has been attributed to the Partnership and is reflected as due from former affiliates on the balance sheet at December 31, 1997. The 9% interest accrued as of December 31, 1997, amounted to approximately $785,000 and is not reflected in the accompanying income statement. As of December 31, 1996, $1,808,000 was reflected as due from former affiliates based on the estimated overall misappropriation and related costs of $14,000,000.
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, 1997, $5,766,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, the Partnership has recognized $353,000 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, 1997, 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 and Bakery. 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, 1997 and 1996, these costs totaled approximately $310,000 and $270,000, respectively, and are not reflected in the Partnership's financial statements. The land was originally purchased for $356,549 and has an adjusted carrying value at December 31, 1997, of $200,000 which approximates the estimated net realizable value. A $50,000 write-down was taken on the property during 1996. The property was sold during January 1998, for $235,000.
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, and rent commenced under the lease in June 1997. 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 and Bakery. Rent commenced August 1, 1997.
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 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 BW-3 restaurant (formerly Denny's) in Hopkins, Minnesota, was vacated by the tenant, DenAmerica, in September 1994. The property's lease, however, does not expire until 2013, and the tenant continues 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 wanted to be released from the lease on this property as well as the Denny's in Beaver Dam, Wisconsin which it has also vacated. Management is currently working with DenAmerica to resolve the issue.
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, 1997, the minimum management fee and the maximum reimbursement for office rent and overhead increased by 3.3%, 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 $18,052 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 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:
Percentage rents included in rental income in 1997, 1996, and 1995 were $506,674, $477,523, and $421,932, respectively. The fluctuations in percentage rental income are a result of fluctuations in sales of the tenants in the Partnership's properties. Seven of these properties are leased to a single Popeye's franchisee in the Chicago, Illinois area. Base rent for 1997 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, 1997, mortgage notes payable consist of the following:
$474,396 ========
a. In September 1997, the Partnership entered into a promissory note agreement with Missouri Bank and Trust Company of Kansas City, in the amount of $247,998. The proceeds of the loan were used to repay a loan from Bank One which had matured. The note bears interest at the referenced prime rate, as defined. Principal and interest are paid in monthly installments of $6,126 until September 2001. The note is secured by a mortgage on a Denny's restaurant located in Beaver Dam, Wisconsin, with a net book value at December 31, 1997 of $462,391.
b. In December 1997, the Partnership entered into a loan agreement with Missouri Bank and Trust Company of Kansas City, in the amount of $240,000. The loan bears interest at the prime rate as referenced and is a revolving line of credit. The loan is secured by a mortgage on a Popeye's restaurant located in Chicago, Illinois, with a net book value at December 31, 1997, of $345,253. The proceeds of the loan were used to distribute a portion of a recovery resulting from cancellation of indebtedness in a disputed $600,000
loan with Boatmen's First National Bank of Kansas City among the Partnership's related Partnerships. The balance of the note was paid in full during January 1998.
Scheduled maturities of all notes payable, are as follows:
7. TRANSACTIONS WITH CURRENT GENERAL PARTNER: -----------------------
Amounts incurred to the current General Partner for the years ended December 31, 1997, 1996, and 1995, are as follows.
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, 1997:
Minimum lease payments receivable $77,246 Less - Unearned income (9,303) ------- Net investment in direct financing leases $67,943 =======
Scheduled future minimum lease payments are as follows:
During 1997, the Partnership recorded an allowance in the amount of $78,071 for the remaining equipment lease payments due on the Denny's property in Beaver Dam, Wisconsin. The tenant of the property, DenAmerica, Inc., vacated the property and future collectibility is uncertain.
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, 1997, 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. Management believes it is unlikely that such recovery level will be 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, 1997. Funds are invested in U.S. Treasury securities. In addition, interest totaling $49,456 has been credited to the Trust as of December 31, 1997. 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 periodically 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.
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. As of December 31, 1997, the Partnerships recovered a total of approximately $5,726,000 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 $739,719. 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 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: -----------
In 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 connection with the audits of the Partnerships performed by E & Y for the years 1989, 1990 and 1991. The Partnerships also filed claims against Magnuson, DiVall, DiVall Real Estate Investment Corporation, David Shea, and the Partnerships' former securities law firm, Quarles & Brady.
These matters were settled in 1996, yielding net proceeds to the Partnership, after the payment of contingent legal fees and related costs, of 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.
In 1993, nineteen (19) of the Private Partnerships sought the protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven (7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies were involuntary. Several of the Private Partnerships seeking bankruptcy owe promissory notes to DiVall, Magnuson, or entities owned by them, in which the Partnership has a security interest. These cases were subsequently transferred to the Western District Bankruptcy Court located in Madison, Wisconsin. The Partnership's experience in those bankruptcy cases that have concluded, either through the approval of Plans of Reorganization, dismissal of the bankruptcies, settlements or a combination of the foregoing, is that (i) the value of the obligations of the Private Partnerships assigned to the Partnership has been at a
significant discount to their face amounts, and (ii) the General Partner interests in such Private Partnerships often have little economic value. The Partnership's recoveries in these bankruptcies have 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.
In 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"). Trial of the case took place on June 23, 1997. The judge ruled in favor of the Partnership on August 21, 1997, that the note was not enforceable. An appeal by Boatmen's was subsequently dropped, so the full $600,000 recovery has been recorded. Pursuant to the Restoration Trust Account procedures described in Note 11, all of the Partnerships are sharing the expenses of this litigation, and the recovery resulting from the full cancellation of the alleged indebtedness was allocated among the three Partnerships on the same basis as the restoration costs are being allocated via appropriate payments by the Partnership to its affiliated Partnerships. The Partnership recognized approximately $265,000 of income during 1997, for the reversal of interest which had previously been accrued on the note.
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.
14. SUBSEQUENT EVENTS: ------------------
On February 13, 1998, the Partnership made distributions to the Limited Partners of $375,000 amounting to $15.00 per limited partnership interest.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
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 47 - 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 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 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 35 - Vice President - Finance and Administration. Ms. Atkinson joined The Provo Group, Inc. in September 1994, to provide management expertise in the areas of financial controls and management accounting services for four limited partnerships managed by TPG. Prior to joining TPG, Ms. Atkinson was Manager of Financial Reporting for Farm & Home Savings Association (a $4 billion savings and loan association) for 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 36 - 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:
Steve Carson - Vice President/Investments at First Albany Corporation. Mr. Carson's primary client concentration includes labor union, pension, and annuity funds. Mr. Carson has worked for First Albany for 11 years. He began his career as a retail broker at E.F. Hutton & Company and served as Vice President, Shearson American Express from 1980-1986. Mr. Carson attended Northrup University in Los Angeles, California. He has served as Board Member and President on various Civic Boards in Syracuse, New York. Mr. Carson represents the broker-dealer community.
Robert White - President of Chevron, TCI. Mr. White has worked for Chevron in various positions over the past 38 years. This company specializes in acquiring real estate that has been allocated as either Low-Income Housing or Historic Rehabilitation tax credits. Most of the acquisitions are made using limited partnership structures -- with TCI as the limited partner. Mr. White started his career as a research chemist with Chevron Research Company in 1959, after receiving a B.S Degree in Chemistry from the University of California at Berkeley. In 1977, Mr. White received a M.B.A Degree in Financial Analysis and subsequently transferred to Chevron Corporation's Planning and Analysis Department in San Francisco. In 1991, Mr. White became Vice-President of Chevron Land. After this company was sold in 1995, he assumed the position as President of the new Chevron subsidiary, Chevron TCI, Inc. Mr. White is a Limited Partner representing 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 representing DiVall 2.
Albert Gerritz - Perinton Volunteer Ambulance Corps. Mr. Gerritz has held various offices in Finance and Administration, including President. Mr. Gerritz retired in 1986 after 36 years with Eastman Kodak Co. where he was Supervisor of Engineering Services, Research Labs. Mr. Gerritz was instrumental in identifying the need and pursuing the
development of a unique research complex for Kodak, which became the case study for his consulting activities on research facilities nationwide. Mr. Gerritz also worked for forty years in the Bushnell's Basin Fire Department and served five years as Chief. Mr. Gerritz has a life membership in National Society of Professional Engineers. Mr. Gerritz is a Limited Partner representing DiVall 3.
Item 11.
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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) As of December 31, 1997, 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, 1997, neither the General Partner nor any of its affiliates owned any Limited Partner Interests in the Partnership.
Item 13.
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, 1997, the minimum management fee and the maximum reimbursement for office rent and overhead increased by 3.3% 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 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, 1997 the Partnership had fully funded the Indemnification Trust.
The following fees and reimbursements from the Partnership were incurred to management in 1997:
PART IV
Item 14.
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, 1997 and 1996
Statements of Income for the Years Ended December 31, 1997, 1996 and
Statements of Partners' Capital for the Years Ended December 31, 1997, 1996 and 1995
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995
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 13, 1998 regarding the Fourth Quarter 1997 distributions.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the fourth quarter of fiscal year 1997.
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997
(A) Represents aggregate costs for federal income tax purposes. (B) Reconciliation of "Real Estate and Accumulated Depreciation":
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 27, 1998
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 27, 1998
By: /s/Kristin J. Atkinson ------------------------------------------- Kristin J. Atkinson Vice President - Finance and Administration
Date: March 27, 1998