<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
--------------------------
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 W. 11th St., Suite 1110, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 421-7444
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Interests
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1997 and December 31, 1996
----------------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
INVESTMENT PROPERTIES AND EQUIPMENT:(Note 3 and 6)
<S> <C> <C>
Land $ 7,308,073 $ 7,308,073
Buildings and improvements 12,075,525 12,070,525
Equipment 246,896 246,896
Accumulated depreciation (4,693,628) (4,430,396)
----------- -----------
Net investment properties and equipment 14,936,866 15,195,098
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES:(Note 8) 161,041 203,934
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 933,518 1,019,582
Cash restricted for real estate taxes 0 18,048
Cash held in Indemnification Trust (Note 10) 296,376 284,615
Rents and other receivables (net of allowance of
$0 in 1997 and $1,320 in 1996) 123,098 117,880
Deferred rent receivable 236,694 136,925
Prepaid insurance 1,396 14,268
Deferred charges (net of accumulated amortization
of $67,147 in 1997 and $60,086 in 1996) 71,761 60,273
----------- -----------
Total other assets 1,662,843 1,651,591
----------- -----------
DUE FROM FORMER AFFILIATES:(Note 2)
Due from former general partner affiliates 554,344 555,052
Allowance for uncollectible amounts due from
former affiliates (554,344) (555,052)
Restoration cost receivable 1,387,360 1,252,957
Allowance for uncollectible restoration receivable (1,387,360) (1,252,957)
----------- -----------
Due from former affiliates, net 0 0
----------- -----------
Total assets $16,760,750 $17,050,623
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1997 and December 31, 1996
----------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
LIABILITIES:
Mortgage notes payable (Note 6) $ 847,998 $ 1,015,429
Accounts payable and accrued expenses 40,760 47,816
Due to current General Partner 1,457 26,275
Accrued interest payable 265,294 226,027
Security deposits 124,930 104,930
Real estate taxes payable 15,636 72,200
Unearned rental income 4,359 45,119
----------- -----------
Total liabilities 1,300,434 1,537,796
----------- -----------
CONTINGENT LIABILITIES: (Notes 9 and 13)
PARTNERS' CAPITAL:(Notes 1, 4 and 13)
Current General Partner -
Cumulative net income 55,809 45,293
Cumulative cash distributions (22,386) (18,187)
----------- -----------
33,423 27,106
----------- -----------
Limited Partners (25,000 interests outstanding) -
Capital contributions, net of offering costs 22,270,578 22,270,578
Cumulative net income 12,683,150 11,641,978
Cumulative cash distributions (20,316,741) (19,216,741)
Reallocation of former
general partners' capital 789,906 789,906
----------- -----------
15,426,893 15,485,721
----------- -----------
Total partners' capital 15,460,316 15,512,827
----------- -----------
Total liabilities and partners' capital $16,760,750 $17,050,623
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ --------------------
September 30, September 30,
------------------ --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Rental income $532,897 $480,851 $1,571,135 $1,507,332
Interest income on direct financing leases 4,274 5,664 13,896 17,965
Interest income 12,024 12,680 30,404 35,569
Other income 2,115 556 3,404 4,181
Lease termination fee 0 0 0 164,419
Recovery of amounts previously written off 0 4,115 707 209,310
-------- -------- ---------- ----------
551,310 503,866 1,619,546 1,938,776
-------- -------- ---------- ----------
EXPENSES:
Partnership management fees 23,520 22,770 70,060 67,896
Restoration fees 0 165 28 8,622
Insurance 4,142 4,053 12,867 13,326
General and administrative 10,654 11,027 51,702 48,996
Interest 20,115 27,175 63,858 81,504
Expenses incurred due to default by lessee 6,815 1,878 14,254 6,532
Real estate taxes 0 13,027 (3,628) 13,027
Professional services 24,183 20,231 68,572 60,253
Professional services related to investigation 1,363 2,833 8,658 163,634
Advisory Board fees and expenses 3,603 3,826 9,952 11,717
Depreciation 87,591 87,925 263,232 263,564
Amortization 3,076 1,066 8,303 3,197
-------- -------- ---------- ----------
185,062 195,976 567,858 742,268
-------- -------- ---------- ----------
NET INCOME $366,248 $307,890 $1,051,688 $1,196,508
======== ======== ========== ==========
NET INCOME - GENERAL PARTNER $ 3,662 $ 3,079 $ 10,517 $ 11,965
NET INCOME - LIMITED PARTNERS 362,586 304,811 1,041,171 1,184,543
-------- -------- ---------- ----------
$366,248 $307,890 $1,051,688 $1,196,508
======== ======== ========== ==========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST, based on 25,000 interests outstanding $14.50 $12.19 $41.65 $47.38
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 1,051,688 $ 1,196,508
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 271,535 263,761
Recovery of amounts previously written off (707) (209,310)
Interest applied to Indemnification Trust Account (11,761) (11,032)
Increase/(Decrease) in unearned rental income (40,760) 44,005
(Increase) in rents and other receivables (5,218) (17,347)
(Increase) in deferred rent receivable (99,769) (8,934)
Withdrawals for payment of real estate taxes 18,048 24,768
Decrease in prepaid expenses 12,872 4,567
(Decrease) in accounts payable and accrued expenses (7,056) (74,881)
(Decrease) in payable to tenant 0 (96,000)
Increase/(Decrease) in due to General Partner (24,818) 273
Increase in accrued interest payable 39,267 39,303
Increase/(Decrease) in security deposits 20,000 (9,663)
(Decrease) in real estate taxes payable (56,564) (46,612)
----------- -----------
Net cash provided by operating activities 1,166,757 1,099,406
----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Payments from affiliated partnerships 0 105,833
Increase in deferred charges (19,791) 0
Investment in building improvements (5,000) 0
Recoveries from former affiliates 707 502,884
Principal payments received on direct financing leases 42,893 38,825
----------- -----------
Net cash provided by investing activities 18,809 647,542
----------- -----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Principal payments on mortgage notes (167,431) (10,045)
Cash distributions to Limited Partners (1,100,000) (1,485,000)
Cash distributions to current General Partner (4,199) (4,786)
----------- -----------
Net cash (used in) financing activities (1,271,630) (1,499,831)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (86,064) 247,117
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,019,582 815,512
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 933,518 $ 1,062,629
=========== ===========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $24,591 $42,201
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF ACCOUNTING:
-------------------------------------
DiVall Insured Income Fund Limited Partnership (the "Partnership") was formed on
November 29, 1985, pursuant to the Uniform Limited Partnership Act of the State
of Wisconsin. The initial capital which was contributed during 1986, consisted
of $110, representing aggregate capital contributions of $100 by the former
general partners and $10 by the Initial Limited Partner. The Partnership
initially offered 15,000 additional limited partnership interests ("Interests")
at $1,000 per Interest. Subsequently, the former general partners exercised
their option to increase the offering to 25,000 Interests. The offering closed
on March 16, 1988 at which point 25,000 Interests had been sold, resulting in
the receipt by the Partnership of offering proceeds of $22,270,578, net of
offering costs and after volume discounts.
The Partnership is currently engaged in the business of owning and operating its
investment portfolio (the "Properties") of commercial real estate and recovering
the assets misappropriated by the former general partners and/or their
affiliates. The Properties are leased on a triple net basis to, and operated
by, franchisors or franchisees of national, regional and local retail chains
under long-term leases. The lessees consist of fast-food, family style, and
casual/theme restaurants. At September 30, 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.
6
<PAGE>
The Partnership will be dissolved on November 30, 2010, or earlier upon the
prior occurrence of any of the following events: (a) the disposition of all
properties of the Partnership; (b) the written determination by the General
Partner that the Partnership's assets may constitute "plan assets" for the
purposes of ERISA; (c) the agreement of Limited Partners owning a majority of
the outstanding interests to dissolve the Partnership; or (d) the bankruptcy or
termination of the existing General Partner, unless an additional General
Partner is previously elected by a majority in interest of 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.
2. REGULATORY INVESTIGATION:
-------------------------
A preliminary investigation during 1992 by the Office of the Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation"), revealed that during at least the four years ended
December 31, 1992, two of the former general partners of the Partnership, Gary
J. DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred
substantial cash assets of the Partnership and two affiliated publicly
registered partnerships, DiVall Insured Income Properties 2 Limited Partnership
("DiVall 2") and DiVall Income Properties 3 Limited Partnership ("DiVall 3")
(collectively the "Partnerships") to various other entities previously sponsored
by or otherwise affiliated with DiVall and Magnuson. The unauthorized transfers
were in violation of the respective Partnership Agreements and resulted in
part, from material weaknesses in the internal control system of the
Partnerships. The aggregate amount of the misappropriation, related costs, and
9% interest accrued since January 1, 1993, is in excess of $15,000,000, of which
approximately $1,942,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at September 30, 1997. The
9% interest accrued as of September 30, 1997, amounted to approximately $741,000
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 September 30, 1997, $5,166,000 of recoveries have
been received which exceeded the original estimate of $3 million. As a result,
the Partnership has recognized $276,000 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.
7
<PAGE>
3. INVESTMENT PROPERTIES:
----------------------
As of September 30, 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 never 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 September
30, 1997 and December 31, 1996, these costs totaled approximately $300,000 and
$270,000, respectively, and are not reflected in the Partnership's financial
statements. Management is currently negotiating a contract to sell the
undeveloped parcel. The land was originally purchased for $356,549 and has an
adjusted carrying value at September 30, 1997, of $200,000, which approximates
the estimated net realizable value.
From time to time, the Partnership experiences interruptions in rental receipts
due to tenant delinquencies and vacancies. During January 1995, the Partnership
evicted the tenant and took possession of the Porterhouse restaurant in Chicago,
Illinois. The tenant in this property had been delinquent and in bankruptcy
throughout 1994. 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 Denny's restaurant (currently BW-3) 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 wanted to be released from the
lease on this property. DenAmerica also vacated and ceased paying rent for the
Beaver Dam, Wisconsin store. Management is currently working with DenAmerica to
resolve this issue, and the tenant has begun making rental payments again, as
required by their lease.
During 1996, the tenant of the former Chi-Chi's restaurant in Grand Forks, North
Dakota, paid a lease termination fee equal to one year's rent and real estate
taxes. The property was subsequently leased to a franchise of Rio Bravo. Rent
on this lease was scheduled to commence April 1997. Due to the damaging floods
and record snowfalls in Grand Forks, North Dakota, the tenant was unable to
begin making rent payments as scheduled. Management allowed an additional three
months' rent abatement and is assisting the tenant in obtaining financing for
improvements which they are providing to the property. A reduction in 1997 real
estate taxes is also expected.
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.
8
<PAGE>
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 as
provided in the Permanent Manager Agreement ("PMA"). 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 PMA. For purposes of computing the 4% overall fee,
gross receipts include 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 $14,966 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
9
<PAGE>
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 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
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>
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.
10
<PAGE>
6. MORTGAGE NOTES PAYABLE:
-----------------------
At September 30, 1997, mortgage notes payable consist of the following:
<TABLE>
<CAPTION>
Outstanding
Principal Balance Interest Rate Maturity Date
----------------- -------------- --------------
<S> <C> <C> <C>
a. $247,998 prime September 2001
b. 600,000 prime + 2.0% August 1992
--------
$847,998
========
</TABLE>
a. In September 1997, the Partnership entered into a promissory note 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 September 30, 1997, of $466,248.
b. 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 September 30, 1997, the Partnership has not
paid debt service on this note. Management met with representatives of
the bank during 1993 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
$1,182,584 at September 30, 1997. See Note 12 for further discussion
of litigation concerning this note. Interest in the amount of $265,000
was accrued, but unpaid, as of September 30, 1997.
Scheduled maturities of the note payable, excluding the $600,000 note
payable mentioned above, are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C> <C>
1997 $ 13,202
1998 55,696
1999 60,619
2000 65,977
2001 52,504
--------
$247,998
========
</TABLE>
11
<PAGE>
7. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the nine months ended September
30, 1997 and 1996, are as follow:
<TABLE>
<CAPTION>
Current General Partner Incurred as of Incurred as of
----------------------- September 30, September 30,
1997 1996
-------------- ---------------
<S> <C> <C>
Management fees $70,060 $67,896
Restoration fees 28 8,622
Cash distribution 4,199 4,786
Overhead allowance 5,692 5,657
Reimbursement for out-of-pocket expenses 8,839 8,586
------- -------
$88,818 $95,547
======= =======
</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
September 30, 1997:
<TABLE>
<S> <C>
Minimum lease payments receivable $181,887
Less - Unearned income (20,846)
--------
Net investment in direct financing leases $161,041
========
</TABLE>
Scheduled future minimum lease payments are as follows:
<TABLE>
<S> <C> <C>
Year ending
December 31,
1997 $ 18,930
1998 75,720
1999 75,720
2000 11,517
--------
$181,887
========
</TABLE>
12
<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 of 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 amount will be paid to the current General Partner.
At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining
escrowed disposition fees shall be paid to the current General Partner. If such
levels of recovery are not achieved, the current General Partner will contribute
the amounts escrowed towards the recovery. In lieu of an escrow, 50% of all
such disposition fees have been paid directly to the restoration account and
then distributed among the three Partnerships. After surpassing the $4,500,000
recovery level during March 1996, 50% of the amount previously escrowed was
refunded to the current General Partner. The remaining amount allocated to the
Partnerships may be owed to the current General Partner if the $6,000,000
recovery level is met. As of September 30, 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.
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 September 30, 1997. Funds are invested in U.S.
Treasury securities. In addition, interest totaling $46,376 has been credited
to the Trust as of September 30, 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 AND EXPENSE ALLOCATIONS:
--------------------------------------------------
Restoration costs represent expenses incurred by the Partnership in relation to
the misappropriated assets by the former general partners and their affiliates.
These costs are allocated among the Partnerships based on each partnership's
respective share of the entire misappropriation, as currently quantified. The
amount of misappropriation for each partnership is adjusted annually to reflect
new discoveries and more accurate quantification of amounts based on the
continuing investigation. Such adjustments will result in periodic adjustments
to prior allocations of recovery costs to reflect updated information.
Consequently, previous payments for restoration expenses may not be consistent
with modified allocations.
13
<PAGE>
Recoveries realized by the Partnerships are being distributed to each respective
partnership on the same basis as the restoration costs are currently being
allocated. As of September 30, 1997, the Partnerships recovered a total of
approximately $5,126,000 from the former general partners and their affiliates.
Of this amount, the Partnership received its pro-rata share in the amount of
$662,559. Additionally, $40,347, 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 the final recovery level 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:
-----------
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure
the repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 2 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
On July 23, 1993, nineteen (19) of the Private Partnerships sought the
protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven
(7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies
were involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest. These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.
The Partnership's experience in those bankruptcy cases that have concluded,
either through the approval of Plans of Reorganization, dismissal of the
bankruptcies, settlements or a combination of the foregoing, is that (i) the
value of the obligations of the Private Partnerships assigned to the Partnership
has been at a significant discount to their face amounts, and (ii) the General
Partner interests in such Private Partnerships often have little economic value.
The Partnership's recoveries in these bankruptcies have 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
14
<PAGE>
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 September 30, 1997, 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 September 30, 1997, interest in the amount of $265,000 was accrued, but
was unpaid, on the Note. Boatmen's 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 judgement was
granted by the District Court. The Partnership appealed the summary judgement
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
took place on June 23, 1997. The judge ruled in favor of the Partnership on
August 21, 1997, that the note was not enforceable. However, Boatmen's appealed
this ruling, so no recovery was recorded during the quarter. However, the
appeal was dropped during the fourth quarter of 1997, so a recovery will be
recorded during the fourth quarter. 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 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.
14. SUBSEQUENT EVENTS:
------------------
On November 15, 1997, the Partnership made a distribution to the Limited
Partners for the Third Quarter 1997 of $475,000 amounting to approximately
$19.00 per limited partnership interest.
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources:
- - --------------------------------
Investment Properties and Net Investment in Direct Financing Leases
- - -------------------------------------------------------------------
The investment properties, including equipment held by the Partnership at
September 30, 1997, were originally purchased at a price, including acquisition
costs, of approximately $20,136,000.
The Partnership is currently negotiating a contract for sale of the vacant land
in Colorado Springs, Colorado. During January 1997, the Partnership executed a
lease for the former Porterhouse property in Chicago, Illinois with the tenant
of BJ's Market and Bakery.
The Denny's restaurant (currently BW-3) 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 wanted to be released from the
lease on this property. DenAmerica also vacated and ceased paying rent for the
Beaver Dam, Wisconsin, store. Management is currently working with DenAmerica
to resolve this issue, and the tenant has begun making lease payments again, as
required by their lease.
During 1996, the tenant of the former Chi-Chi's restaurant in Grand Forks, North
Dakota, paid a lease termination fee equal to one year's rent and real estate
taxes. The property was subsequently leased to a franchise of Rio Bravo. Rent
on this lease was scheduled to commence April 1997. Due to the damaging floods
and record snowfalls in Grand Forks, the tenant was unable to begin making rent
payments as scheduled. Management allowed an additional three months' rent
abatement and has assisted the tenant with obtaining financing for improvements
which they are providing to the property. A reduction in 1997 real estate taxes
is also expected.
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, amounted to $161,000 at September 30,
1997, compared to $204,000 at December 31, 1996. The decrease of $43,000 was a
result of principal payments received.
Other Assets
- - ------------
Cash and cash equivalents, including cash restricted for real estate taxes held
by the Partnership, were $934,000 at September 30, 1997, compared to $1,038,000
at December 31, 1996. The Partnership designated cash of $475,000 to fund the
Third Quarter 1997 distributions to Limited Partners, $325,000 for the payment
of accounts payable and accrued expenses, and the remainder represents reserves
deemed necessary to allow the Partnership to operate normally. Cash generated
through the operations of the Partnership's investment properties, sales of
investment properties, and any recoveries of misappropriated funds by the former
general partners will provide the sources for future fund liquidity and Limited
Partner distributions.
16
<PAGE>
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.
Due From Former Affiliates and Allowance for Uncollectible Amounts Due From
- - ---------------------------------------------------------------------------
Former Affiliates
- - -----------------
Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $554,000 at
September 30, 1997. The receivable decreased from December 31, 1996, due to
$1,000 of recoveries received from the former general partners and their
affiliates.
The Partnership maintains a record of costs incurred in identifying or
recovering the misappropriated assets. These amounts are expensed when
incurred, and then recorded on the balance sheet as a restoration cost
receivable with a corresponding allowance for such receivable deemed
uncollectible. These costs are considered due from the former general partners
and their affiliates. Interest has been accrued on the misappropriated funds
since January 1, 1993, at a rate of 9% per annum and has been included in the
restoration cost receivable. The receivable increased from approximately
$1,253,000 at December 31, 1996, to $1,387,000 at September 30, 1997, and
includes $741,000 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 September 30, 1997, $5,166,000 of recoveries have
been received which exceeded the original estimate of $3 million. As a result,
the Partnership has recognized $276,000 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.
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. The allocation is adjusted periodically to reflect
any changes in the entire misappropriation. The Partnership's percentage of the
allocation was reduced in 1993.
Liabilities
- - -----------
Mortgage notes payable decreased from $1,015,000 at December 31, 1996, to
$848,000 at September 30, 1997, due to monthly principal payments made on the
notes as well as additional principal reductions made from excess cash flows.
One note was paid in full during the quarter and the other undisputed note was
refinanced upon its maturity during September.
Accounts payable and accrued expenses at September 30, 1997, amounted to
approximately $41,000. The majority of this balance represented accruals of
legal and auditing fees.
17
<PAGE>
Real estate taxes payable amounted to $16,000 at September 30, 1997, compared to
$72,000 at December 31, 1996. The decrease is primarily a result of amounts
accrued for 1996 taxes on vacant properties which were paid in 1997.
Partners' Capital
- - -----------------
Net income for the quarter was allocated between the General Partner and the
Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement and the Amendment to the Partnership Agreement, as discussed more
fully in Note 4 of the financial statements. The former general partners'
capital account balance was reallocated to the Limited Partners at December 31,
1993. Refer to Note 13 to the financial statements for additional information
regarding the reallocation.
Cash distributions paid to the Limited Partners and to the General Partner
during 1997 of $1,100,000 and $4,199, respectively, have also been made in
accordance with the amended Partnership Agreement. The Third Quarter 1997
distribution of $475,000 was paid to the Limited Partners on November 15, 1997.
Results of Operations:
- - ----------------------
The Partnership reported net income for the quarter ended September 30, 1997, in
the amount of $366,000 compared to $308,000 for the quarter ended September 30,
1996. For the nine months ended September 30, 1997 and 1996, net income totaled
$1,052,000 and $1,197,000, respectively. The costs related to the
misappropriation increased significantly during 1996 as the lawsuit against the
former general partner accountants and attorneys got closer to trial and due to
the payment of contingent fees related to the settlement of the litigation.
During 1997, these costs had only a minimal impact on operations. Additionally,
1996 revenue included a recovery of amounts previously written off as a result
of settlements received from the Partnerships' former accountants and attorneys
and a $164,000 lease termination fee from the former tenant of a Chi Chi's
restaurant.
Revenues
- - --------
Total revenues were $551,000 and $504,000 for the quarters ended September 30,
1997 and 1996, respectively, and were $1,620,000 and $1,939,000 for the nine
months ended September 30, 1997 and 1996, respectively. Revenue for 1996
includes a $209,000 adjustment to the write-off of amounts due from the former
general partners and a $164,000 lease termination fee.
Based on leases currently in place on the remaining owned properties, total
revenues should approximate $2,000,000 annually or $500,000 quarterly. Future
revenues may decrease with tenant defaults and/or sales of Partnership
properties. They may also increase with additional rents due from tenants, if
those tenants experience sales levels which require the payment of additional
rent to the Partnership.
Expenses
- - --------
For the quarters ended September 30, 1997 and 1996, cash expenses amounted to
approximately 17% and 21% of total revenues, respectively. For the nine months
ended September 30, 1997 and 1996, cash expenses totaled 18% and 25%,
respectively. Total expenses, including non-cash items, amounted to
approximately 34% and 39% of total revenues for the quarters ended September 30,
1997 and 1996 and totaled 35% and 38% for the nine months ended September 30,
1997 and 1996. Items negatively
18
<PAGE>
impacting expenses during 1996 include expenses incurred primarily in relation
to the misappropriation of assets by the former general partners and their
affiliates and interest expense.
For the nine months ended September 30, 1997 and 1996, expenses incurred in
relation to the misappropriated assets amounted to $9,000 and $164,000,
respectively. Future expenses incurred in relation to the misappropriation
should have only a minimal impact on the Partnership.
Inflation:
- - ----------
Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio of triple net leases. By their nature, such leases actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes. If inflation causes operating margins to deteriorate for lessees
if expenses grow faster than revenues, then, inflation may well negatively
impact the portfolio through tenant defaults.
It would be misleading to associate inflation with asset appreciation for real
estate, in general, and the Partnership's portfolio, specifically. Due to the
"triple net" nature of the property leases, asset values generally move
inversely with interest rates.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes was equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure
the repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 2 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
On July 23, 1993, nineteen (19) of the Private Partnerships sought the
protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven
(7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies
were involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest. These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.
The Partnership's experience in those bankruptcy cases that have concluded,
either through the approval of Plans of Reorganization, dismissal of the
bankruptcies, settlements or a combination of the foregoing, is that (i) the
value of the obligations of the Private Partnerships assigned to the
Partnerships have been at a significant discount to their face amounts, and (ii)
the General Partner interests in such Private Partnerships often have little
economic value. The Partnership's recoveries in these bankruptcies have been on
a steeply discounted basis.
19
<PAGE>
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.
The Partnership is also pursuing collection actions against former tenants of
the Partnership and/or guarantors of former tenants of the Partnership arising
from defaults on their leases. Although the Partnership believes its claims are
valid, it is currently unknown whether the Partnerships will receive favorable
verdicts or whether any such verdicts will ultimately prove collectible.
On March 24, 1994, the Partnership filed a complaint in the United States
District Court for the Western District of Missouri against Boatmen's First
National Bank of Kansas City ("Boatmen's") seeking a declaratory judgment that
Boatmen's has no right or interest in a promissory note executed in the name of
the Partnership by the former general partners (the "Note") secured by mortgages
on five Partnership properties, and further seeking an injunction against
foreclosure proceedings instituted against a Partnership property located in
Dallas, Texas, under a first deed of trust and security agreement given to
secure the Note (the "Foreclosure"). As further described in Note 6 to the
Financial Statements, 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 September
30, 1997, 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 September 30, 1997,
interest in the amount of $265,000 had accrued, but was unpaid on the Note.
Boatmen's agreed to stay its foreclosure proceedings. Boatmen's answered the
complaint and filed a motion for summary judgment to which the Partnership
responded. The District Court granted Boatmen's motion for summary judgement.
The Partnership appealed and the Eighth Circuit Court of Appeals reversed the
District Court's ruling. The case was sent back to the District Court for the
completion of discovery and trial. 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. However, Boatmen's appealed this ruling, so no
recovery was recorded during the quarter. However, the appeal was dropped during
the fourth quarter of 1997, so a recovery will be recorded during the fourth
quarter. Pursuant to the Restoration Trust Account procedures described in Note
11 to the Financial Statements, all of the Partnerships are sharing the expenses
of this litigation and the recovery resulting from the 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.
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
99.0 Correspondence to the Limited Partners dated November 15, 1997,
regarding the Third Quarter 1997 distribution.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the third quarter of
fiscal year 1997.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
By: The Provo Group, Inc., General Partner
By: /s/Bruce A. Provo
---------------------------------------------
Bruce A. Provo, President
Date: November 14, 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: November 14, 1997
By: /s/Kristin J. Atkinson
--------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: November 14, 1997
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
September 30, 1997 Form 10-Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 933,518 933,518
<SECURITIES> 296,376 296,376
<RECEIVABLES> 2,535,694 2,535,694
<ALLOWANCES> 1,941,704 1,941,704
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,823,884 1,823,884
<PP&E> 19,630,494 19,630,494
<DEPRECIATION> 4,693,628 4,693,628
<TOTAL-ASSETS> 16,760,750 16,760,750
<CURRENT-LIABILITIES> 1,300,434 1,300,434
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 15,460,316 15,460,316
<TOTAL-LIABILITY-AND-EQUITY> 16,760,750 16,760,750
<SALES> 537,171 1,585,031
<TOTAL-REVENUES> 551,310 1,619,546
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 164,947 504,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 20,115 63,858
<INCOME-PRETAX> 366,248 1,051,688
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 366,248 1,051,688
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 366,248 1,051,688
<EPS-PRIMARY> 14.50 41.65
<EPS-DILUTED> 14.50 41.65
</TABLE>
<PAGE>
EXHIBIT 99
DiVall Insured Income Fund, L.P.
QUARTERLY NEWS
===============================================================================
A publication of The Provo Group, Inc. THIRD QUARTER 1997
THIRD-PARTY SOLICITORS...Are They Really "Long-Term" Investors or Merely "Quick"
Profiteers on Your Interests?
Madison, Wisconsin
Over the last year or so, a third-party solicitor may have either telephoned you
or mailed you a "teaser" piece inquiring about the purchase of your interests in
DiVall Insured Income Fund Limited Partnership (the "Partnership").
At the time, you may have either ignored the inquiry or you may have agreed to
sell your interests to this third-party solicitor -- most likely without first
discussing alternatives with a secondary market broker.
So, you ask...third-party solicitors??...secondary market brokers?? What's the
difference? Both parties want my interests for a discounted rate - what does it
matter to whom I choose to sell?
Quite simply, it is your choice, however, you may be interested in knowing that
the third-party solicitations you may receive are not regulated by the
Securities Exchange Commission (S.E.C.).
The secondary market is "highly" regulated by the S.E.C. - offering liquidation
opportunities to investors for years at competitive pricing.
Perhaps, even more interesting is that many third-party solicitors who indicate
that they are interested in your units for their own "investment purposes" (and
may offer to relieve you of the "headache" of filing Schedule K-1's or provide
you with a one time "opportunity for liquidation") are not necessarily serious
long-term investors.
It appears that many of these solicitors are merely "quick profiteers" on your
heretofore patiently held interests...selling those very same interests they
purchased from you on the secondary market within months.
How much is a third-party solicitor making on your interests? Here's an
"example" based on a single unit which was initially purchased by you for
$1,000:
Unit (Purchased) by Solicitor: $(400.00)
Distributions Paid to Solicitor: 43.00
Unit Sold by Solicitor (after 9 mos.): 483.00
-------
Profit Made by Solicitor: $126.00
=======
Could you have received a higher selling rate in the secondary
market?...Perhaps. (The above example shows an annualized return of over 40%!)
Will a secondary market broker earn a commission or make a profit?...Most
likely.
Again you ask...what's the difference?
The difference is that you always have a choice and you always have a right to
------ ------
ask for more information.
As your General Partner, we can not act as your financial advisor nor can we be
the "gatekeepers" of your interests. We simply try to keep you informed.
_____________________________________
OTHER NEWS INSIDE...
<TABLE>
<CAPTION>
<S> <C>
. Boatmen's Ruling Appealed.................. Restoration Highlights, pg 4
. Colorado Land Contract Pending................ Property Highlights, pg 3
. DenAmerica's Leases Terminating?............. Property Highlights, pg 3
. "High Interest" Debt Paid Off..... Statements of Income Highlights, pg 2
</TABLE>
<PAGE>
Page 2 DiVall 1 3 Q
=========================
Distribution Highlights
<TABLE>
<S> <C>
. 8.4% (approx.) annualized return . $19.00 per unit (approx.) for the
from operations and other sources Third Quarter 1997.
based on $22,746,000 ("net"
remaining initial investment). . $877.00 to $774.00 range of
distributions per unit from the first
. $475,000 "total" amount distributed unit sold to the last unit sold
for the Third Quarter 1997 which was before the offering closed (March
$100,000 more than budgeted 1988), respectively.
primarily due to a tenant's cured
delinquency and lower than expected [NOTE: Distributions are from both
vacancies. cash flow from operations and "net"
cash activity from financing and
investing activities.]
</TABLE>
(Original units were purchased for $1,000/unit.)
=========================
Statements of Income and Cash Flow Highlights
<TABLE>
<S> <C> <C>
. 8% increase in . 2% increase in total . 12% increase in
operating revenues expenses from "net" income from
from projections. projections. projections.
. Percentage rents . Tenant repairs were . Excess cash in the
were higher than $6,000 more than amount of $75,000
budgeted and projected for the was used to pay off
vacancies were Third Quarter 1997. the "high interest"
lower than expected note that the
which can be Partnership had with
attributed to the Riverside Bank
$39,000 increase of (Minnesota) during
rental income at the quarter.
September 30, 1997.
</TABLE>
<PAGE>
Page 3 DiVall 1 3 Q
=======================
Property Highlights
Vacancies
---------
. Denny's restaurant (Beaver Dam, WI) was vacant at September 30, 1997. The
tenant of this property, DenAmerica Corporation, vacated the property at
the end of December 1996.
(NOTE: Refer to "Other Property Matters" below for further discussion.)
Rents Receivable
----------------
There were no rental delinquencies at September 30, 1997.
Other Property Matters
----------------------
. Last quarter, the Partnership received a $235,000 offer to purchase the
vacant land in Colorado. Management has since executed a sales contract
from the prospective buyer and has scheduled the closing for the end of
November 1997.
. As mentioned above, DenAmerica Corporation vacated and closed their Beaver
Dam, Wisconsin restaurant. Subsequently, this tenant was defaulted and
management is considering DenAmerica's proposal to terminate the Beaver
Dam, Wisconsin lease and modify the remaining DenAmerica leases that
currently pay straight percentage rent versus fixed rent. The other
consideration to assign BW-3's (Hopkins, MN) restaurant sub-lease directly
to the Partnership has been withdrawn.
The status of these requests are as follows:
Denny's - Beaver Dam, WI - Lease termination agreement out for execution.
------------------------ Termination includes a payment of all charges
through 12/31/97; equipment lease buy-out;
plus, payment of 1997 real estate taxes.
Denny's - Hopkins, MN - Previous negotiations to terminate this lease
--------------------- have been withdrawn.
Denny's - Peoria, AZ - Lease modification negotiations have ceased
-------------------- until the lease termination agreements and fees
have been fully executed and paid.
Denny's Glendale, AZ - Lease modification negotiations have ceased
-------------------- until the lease termination agreements and fees
have been fully executed and paid.
<PAGE>
Page 4 DiVall 1 3 Q
========================
Restoration Highlights
<TABLE>
<S> <C>
. There were no recoveries received . The Partnership received a
during the Third Quarter 1997. "favorable" ruling for its case
against Boatmen's First National
Bank of Kansas City which went to
. "Total" recoveries received to date trial on June 23, 1997.
for the Partnership are Boatmen's has appealed this ruling.
approximately $668,000.
(NOTE: The Partnership is awaiting
the outcome of this appeal before any
recovery is recorded.)
</TABLE>
========================
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 September 30, 1997.
<TABLE>
<CAPTION>
================================================================================
Distribution Capital
------------ -------
Analysis Balance
-------- -------
<S> <C> <C>
Original Capital Balance - $25,000,000
Cash Flow From Operations Since Inception $ 18,537,378 -
Total Distributions Since Inception (20,791,740) -
------------
(Return) of Capital $ (2,254,362) (2,254,362)
============ -----------
"Net" Remaining Initial Investment
by Original Partners - $22,745,638
===========
================================================================================
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
<PAGE>
Page 5 DiVall 1 3 Q
==========================
Advisory Board
The seventeenth Advisory Board meeting was held November 4 and 5, 1997. The
following new Board members were given a comprehensive orientation of the
Partnerships' affairs.
. Mr. Robert White was nominated by the Limited Partners and selected to
represent DiVall Insured Income Fund, L.P. and will serve a two (2)
year term.
. Mr. Albert Gerritz was nominated by the Limited Partners and selected
to represent DiVall Income Properties 3, L.P. and will serve a two (2)
year term.
. Mr. Steven Carson was nominated and selected by the selling broker
firms of DiVall Insured Income Fund, L.P.; DiVall Insured Income
Properties 2, L.P.; and DiVall Income Properties 3, L.P. to represent
the brokerage community and will serve a two (2) year term.
These new members replaced Mr. Gerhard Zoller (DiVall 1); Dr. Albert Eschen
(DiVall 3); and Mr. Todd Witthoeft (Broker Dealer) whose terms expired September
30, 1997.
The member carrying over from the prior Board is Mr. Richard Otte, representing
DiVall Insured Income Properties 2, L.P. Mr. Otte will serve the remaining year
of his two (2) year term.
For further information regarding the new Advisory Board members, please refer
to the enclosed biographical summaries.
==========================
Questions & Answers
<TABLE>
<S> <C>
1. When can I expect to receive my 2. When will 1997 per unit values be
Schedule K-1 for 1997? available for my investment in the
Partnership?
Our current schedule for mailing all
1997 Schedule K-1's for your The Partnership's 1997 "year-end"
Partnership and its affiliated valuation information is tentatively
partnerships is no later than March 13, scheduled to be available by the First
1998. Quarter 1998. We will include this
information in our 1997 Annual
Report which we plan to mail by early
April 1998.
</TABLE>
<PAGE>
Page 6 DiVall 1 3 Q
=======================
Questions & Answers (contd.)
<TABLE>
<S> <C>
3. Why do I receive solicitations to 4. When can I expect my next
buy my interests? distribution mailing?
As discussed earlier in this Your next distribution correspondence
correspondence, any solicitations for the Fourth Quarter of 1997 is
that you may receive to buy your scheduled to be mailed on February
interests are a result of a 13, 1998.
third-party (not affiliated with
TPG, Inc.) who is interested in
acquiring units at a discounted
rate. As General Partner, we
encourage you to review all of your
options.
</TABLE>
* * *
================================================================================
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 8673 1410 Northport Drive
Madison, Wisconsin 53708-8673 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 SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PROJECTED ACTUAL VARIANCE
3RD 3RD CASH
QUARTER QUARTER BETTER
9/30/97 9/30/97 (WORSE)
--------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES
Rental income $ 494,194 $ 532,896 $ 38,702
Direct financing interest 4,274 4,274 0
Interest income 10,500 12,024 1,524
Recoveries of Amounts Previously Written Off 0 0 0
Other income 0 2,115 2,115
--------- --------- ---------
TOTAL OPERATING REVENUES $ 508,968 $ 551,309 $ 42,341
--------- --------- ---------
OPERATING EXPENSES
Insurance $ 4,596 $ 4,143 $ 453
Management fees 23,454 23,520 (66)
Restoration fees 0 0 0
Overhead allowance 1,953 1,897 56
Advisory Board 3,900 3,603 297
Administrative 10,366 8,754 1,612
Professional services 3,110 8,324 (5,214)
Auditing 10,755 10,755 0
Legal 7,500 5,105 2,395
Property repairs 0 6,315 (6,315)
Defaulted tenants 1,900 500 1,400
--------- --------- ---------
TOTAL OPERATING EXPENSES $ 67,534 $ 72,916 $ (5,382)
--------- --------- ---------
INTEREST EXPENSE $ 23,248 $ 20,115 $ 3,133
--------- --------- ---------
INVESTIGATION AND RESTORATION EXPENSES $ 387 $ 1,363 $ (976)
--------- --------- ---------
NON-OPERATING EXPENSES
Depreciation $ 87,555 $ 87,591 $ (36)
Amortization 2,616 3,077 (461)
--------- --------- ---------
TOTAL NON-OPERATING EXPENSES $ 90,171 $ 90,668 $ (497)
--------- --------- ---------
TOTAL EXPENSES $ 181,340 $ 185,062 $ (3,722)
--------- --------- ---------
NET INCOME $ 327,628 $ 366,247 $ 38,619
OPERATING CASH RECONCILIATION: VARIANCE
---------
Depreciation and amortization 90,171 90,668 497
(Increase) Decrease in current assets (41,336) 4,873 46,209
Increase (Decrease) in current liabilities 919 11,007 10,088
G.P. distribution (1,311) (1,449) (138)
Cash reserved for payables (1,000) 50,000 51,000
Advance from (to) future cash flows for current distributions (7,000) 0 7,000
--------- --------- ---------
Net Cash Provided From Operating Activities $ 368,071 $ 521,346 $ 153,275
--------- --------- ---------
CASH FLOWS FROM (USED IN) INVESTING AND FINANCING ACTIVITIES
Recoveries from former G.P. affiliates 0 0 0
Principal received on equipment leases 14,656 30,430 15,774
Investment in buildings and improvements 0 0 0
Principal payments on mortgage notes (382) (75,310) (74,928)
--------- --------- ---------
Net Cash Provided from Investing And Financing Activities $ 14,274 $ (44,880) $ (59,154)
--------- --------- ---------
Total Cash Flow For Quarter $ 382,345 $ 476,466 $ 94,121
Cash Balance Beginning of Period 843,895 882,052 38,157
Less 2nd quarter distributions paid 8/97 (375,000) (375,000) 0
Plus cash reserved above for payables and future distributions 8,000 (50,000) (58,000)
--------- --------- ---------
Cash Balance End of Period $ 859,240 $ 933,518 $ 74,278
Cash reserved for 3rd quarter L.P. distributions (375,000) (475,000) (100,000)
Cash reserved for payment of payables and future distributions (342,000) (325,000) 17,000
--------- --------- ---------
Unrestricted Cash Balance End of Period $ 142,240 $ 133,518 $ (8,722)
========= ========= =========
PROJECTED ACTUAL VARIANCE
--------- --------- ---------
* Quarterly Distribution $ 375,000 $ 475,000 $ 100,000
Mailing Date 11/15/97 (enclosed) -
</TABLE>
* Refer to distribution letter for detail of quarterly distribution.
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------
PROJECTIONS FOR DIVALL INSURED INCOME FUND L.P. ORIGINAL EQUITY $25,000,000
DISCUSSION PURPOSES 1997 PROPERTY SUMMARY NET DISTRIBUTION OF CAPITAL
AND RELATED ESTIMATED RECEIPTS SINCE INCEPTION $2,254,362
-----------
CURRENT EQUITY $22,745,638
PORTFOLIO -------------------------------------------
------------------------------------
REAL ESTATE EQUIPMENT
------------------------------------ ---------------------------------------------
- - -------------------------------------- BASE % LEASE LEASE * % *
CONCEPT LOCATION COST RENT YIELD EXPIRATION COST RECEIPTS RETURN
- - -------------------------------------- ----------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
FAZOLI'S DES MOINES, IA 565,476 45,500 8.05% 39,600 0 0.00%
HARDEE'S FOND DU LAC, WI 1,026,931 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 84,180 13.32%
POPEYE'S CHICAGO, IL 579,295 77,280 13.34%
BJ's MARKET CHICAGO, IL 905,807 60,000 6.62%
TACO CABANA ARLINGTON, TX 1,474,569 132,000 8.95%
TACO CABANA DALLAS, TX 1,369,243 132,000 9.64%
TACO CABANA DALLAS, TX 1,257,596 132,000 10.50%
TACO CABANA DALLAS, TX 1,308,153 132,000 10.09%
- - -------------------------------------- ------------------------------------ ----------------------------------------------
- - -------------------------------------- ------------------------------------ ----------------------------
PORTFOLIO TOTALS (23 Properties) 19,865,862 1,944,120 9.79% 626,896 75,720 12.08%
- - -------------------------------------- ------------------------------------ ----------------------------
</TABLE>
<TABLE>
<CAPTION> --------------
------------------------------------ TOTAL %
TOTALS ON $22,745,638
------------------------------------ EQUITY
- - -------------------------------------- RAISE
CONCEPT LOCATION INVESTED RECEIPTS * RETURN *
- - -------------------------------------- ------------------------------------ --------------
<S> <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 1,174,670 90,000 7.66%
DENNY'S ** SCOTTSDALE, AZ 1,091,710 90,000 8.24%
DENNY'S ** MESA, AZ 1,067,254 90,000 8.43%
DENNY'S ** PEORIA, AZ 1,164,707 90,000 7.73%
BW-III HOPKINS, MN 985,050 103,860 10.54%
DENNY'S BEAVER DAM, WI 849,299 103,860 12.23%
FAZOLI'S DES MOINES, IA 605,076 45,500 7.52%
HARDEE'S FOND DU LAC, WI 1,026,931 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 84,180 13.32%
POPEYE'S CHICAGO, IL 579,295 77,280 13.34%
BJ's MARKET CHICAGO, IL 905,807 60,000 6.62%
TACO CABANA ARLINGTON, TX 1,474,569 132,000 8.95%
TACO CABANA DALLAS, TX 1,369,243 132,000 9.64%
TACO CABANA DALLAS, TX 1,257,596 132,000 10.50%
TACO CABANA DALLAS, TX 1,308,153 132,000 10.09%
- - -------------------------------------- -----------------------------------
- - -------------------------------------- ----------------------------------- ------------
PORTFOLIO TOTALS (23 Properties) 20,492,758 2,019,840 9.86% 8.88%
- - -------------------------------------- ----------------------------------- ------------
</TABLE>
OUTSTANDING DEBT
<TABLE>
<CAPTION>
----------------------------------- ------------------------------
AMOUNT ANNUAL CURRENT AMOUNT ANNUAL CURRENT
- - ------------------------------------ OWED DEBT INTEREST OWED DEBT INTEREST
MORTGAGED PROPERTIES 9/30/97 SERVICE RATE 9/30/97 SERVICE RATE
- - ------------------------------------ ------------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
- - ------------------------------------
DENNY'S BEAVER DAM, WI 247,998 73,517 8.50%
MULTIPLE STORES***AZ, TX 600,000 0 8.50%
- - ------------------------------------ ------------------------------------ -----------------------------
- - ------------------------------------ ------------------------------------ -----------------------------
TOTALS 847,998 73,517 - 0 0 -
- - ------------------------------------ ------------------------------------ -----------------------------
- - ------------------------------------ ------------------------------------
NET AFTER DEBT 19,017,864 1,870,603 9.84% 626,896 75,720 12.08%
- - ------------------------------------ ------------------------------------ -----------------------------
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING DEBT
-----------------------
AMOUNT ANNUAL
- - ------------------------------------ OWED DEBT
MORTGAGED PROPERTIES 9/30/97 SERVICE
- - ------------------------------------
- - ------------------------------------ -----------------------
DENNY'S BEAVER DAM, WI 247,998 73,517
MULTIPLE STORES***AZ, TX 600,000 0
- - ------------------------------------ -----------------------
<S> <C> <C>
- - ------------------------------------ -----------------------
TOTALS 847,998 73,517
- - ------------------------------------ -----------------------
- - ------------------------------------ ----------------------- ---------- -------------
NET AFTER DEBT 19,644,760 1,946,323 9.91% 8.56%
- - ------------------------------------ ----------------------- ---------- -------------
</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.
***Although the Partnership won its lawsuit against the lender that the debt is
invalid, the lender, Boatmen's National Bank, has appealed the ruling.
