<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
March 31, 1997 and December 31, 1996
------------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
INVESTMENT PROPERTIES AND EQUIPMENT:(Note 3 and 6)
Land $ 7,308,073 $ 7,308,073
Buildings and improvements 12,074,825 12,070,525
Equipment 246,896 246,896
Accumulated depreciation (4,518,322) (4,430,396)
----------- -----------
Net investment properties and equipment 15,111,472 15,195,098
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES:(Note 8) 196,301 203,934
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 944,873 1,019,582
Cash restricted for real estate taxes 2,180 18,048
Cash held in Indemnification Trust (Note 10) 288,662 284,615
Rents and other receivables (net of allowance of
$1,815 in 1997 and $1,320 in 1996) 107,313 117,880
Deferred rent receivable 184,012 136,925
Prepaid insurance 9,753 14,268
Deferred charges (net of accumulated amortization
of $62,235 in 1997 and $60,086 in 1996) 76,673 60,273
----------- -----------
Total other assets 1,613,466 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 1,297,569 1,252,957
Allowance for uncollectible restoration receivable (1,297,569) (1,252,957)
----------- -----------
Due from former affiliates, net 0 0
----------- -----------
Total assets $16,921,239 $17,050,623
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
March 31, 1997 and December 31, 1996
------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1997 1996
----------- ------------
LIABILITIES:
<S> <C> <C>
Mortgage notes payable (Note 6) $ 932,409 $ 1,015,429
Accounts payable and accrued expenses 48,902 47,816
Payable to tenant 2,164 0
Due to current General Partner 1,387 26,275
Accrued interest payable 238,972 226,027
Security deposits 109,930 104,930
Real estate taxes payable 31,451 72,200
Unearned rental income 47,792 45,119
----------- -----------
Total liabilities 1,413,007 1,537,796
----------- -----------
CONTINGENT LIABILITIES: (Notes 9 and 13)
PARTNERS' CAPITAL: (Notes 1, 4 and 13)
Current General Partner -
Cumulative net income 48,761 45,293
Cumulative cash distributions (19,574) (18,187)
----------- -----------
29,187 27,106
----------- -----------
Limited Partners (25,000 interests outstanding) -
Capital contributions, net of offering costs 22,270,578 22,270,578
Cumulative net income 11,985,302 11,641,978
Cumulative cash distributions (19,566,741) (19,216,741)
Reallocation of former
general partners' capital 789,906 789,906
15,479,045 15,485,721
----------- -----------
Total partners' capital 15,508,232 15,512,827
----------- -----------
Total liabilities and partners' capital $16,921,239 $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 March 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
REVENUES:
Rental income $529,722 $520,168
Interest income on direct financing leases 4,987 6,310
Interest income 9,491 9,498
Other income 730 594
Recovery of amounts previously written off 707 200,533
-------- --------
545,637 737,103
-------- --------
EXPENSES:
Partnership management fees 23,020 22,356
Restoration fees 28 8,270
Insurance 4,510 4,499
General and administrative 15,083 13,121
Interest 22,340 27,209
Expenses incurred due to default by lessee 12,927 2,987
Professional services 22,960 21,063
Professional services related to investigation 4,152 179,279
Advisory Board fees and expenses 3,749 4,212
Depreciation 87,926 87,714
Amortization 2,150 1,065
-------- --------
198,845 371,775
-------- --------
NET INCOME $346,792 $365,328
======== ========
NET INCOME - GENERAL PARTNER $ 3,468 $ 3,653
NET INCOME - LIMITED PARTNERS 343,324 361,675
-------- --------
$346,792 $365,328
======== ========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST, based on 25,000 interests outstanding $ 13.73 $ 14.47
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1996
----------- ------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 346,792 $ 365,328
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 90,076 88,779
Recovery of amounts previously written off (707) (200,533)
Interest applied to Indemnification Trust Account (4,047) (3,443)
Increase/(Decrease) in unearned rental income 2,673 (3,787)
Decrease in rents and other receivables 10,567 5,454
(Increase) in deferred rent receivable (47,087) (3,930)
Withdrawals for payment of real estate taxes 15,868 26,145
(Increase)/Decrease in prepaid expenses 4,515 (1,784)
Increase/(Decrease) in accounts payable and accrued expenses 1,086 (55,745)
Increase in payable to tenant 2,164 0
Increase/(Decrease) in due to General Partner (24,888) 502
Increase in accrued interest payable 12,945 13,053
Increase in security deposits 5,000 0
(Decrease) in real estate taxes payable (40,749) (16,915)
---------- ----------
Net cash provided from operating activities
374,208 213,124
---------- ----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Payments from affiliated partnerships 0 105,833
Increase in deferred charges (18,550) 0
Investment in building improvements (4,300) 0
Recoveries from former affiliates 707 494,107
Deposit to restoration escrow account 0 (282,736)
Principal payments received on direct financing leases 7,633 12,621
---------- ----------
Net cash provided by (used in) investing activities
(14,510) 329,825
---------- ----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Principal payments on mortgage notes (83,020) (3,260)
Cash distributions to Limited Partners (350,000) (350,000)
Cash distributions to current General Partner (1,387) (1,461)
---------- ----------
Net cash (used in) financing activities
(434,407) (354,721)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (74,709) 188,228
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,019,582 815,512
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 944,873 $1,003,740
========== ==========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 9,395 $ 14,156
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF ACCOUNTING:
-------------------------------------
DiVall Insured Income Fund Limited Partnership (the "Partnership") was formed on
November 29, 1985, pursuant to the Uniform Limited Partnership Act of the State
of Wisconsin. The initial capital which was contributed during 1986, consisted
of $110, representing aggregate capital contributions of $100 by the former
general partners and $10 by the Initial Limited Partner. The Partnership
initially offered 15,000 additional limited partnership interests ("Interests")
at $1,000 per Interest. Subsequently, the former general partners exercised
their option to increase the offering to 25,000 Interests. The offering closed
on March 16, 1988 at which point 25,000 Interests had been sold, resulting in
the receipt by the Partnership of offering proceeds of $22,270,578, net of
offering costs and after volume discounts.
The Partnership is currently engaged in the business of owning and operating its
investment portfolio (the "Properties") of commercial real estate and recovering
the assets misappropriated by the former general partners and/or their
affiliates. The Properties are leased on a triple net basis to, and operated
by, franchisors or franchisees of national, regional and local retail chains
under long-term leases. The lessees consist of fast-food, family style, and
casual/theme restaurants. At March 31, 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 $14,300,000, of which
approximately $1,852,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at March 31, 1997. The 9%
interest accrued as of March 31, 1997, amounted to approximately $657,000 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 March 31, 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 March 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 March 31,
1997 and December 31, 1996, these costs totaled approximately $280,000 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 March 31, 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 commences 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 wants to be released from the lease
on this property. DenAmerica also vacated and ceased paying rent in the Beaver
Dam, Wisconsin store. Management is currently working with DenAmerica to
resolve this issue.
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 in April 1997. Due to the damaging
floods and record snowfalls in Grand Forks, North Dakota, the tenant is unable
to begin making rent payments as scheduled. Management intends to work with the
tenant by allowing additional rent abatement. The Partnership has applied for
financial assistance with the Federal Emergency Management Agency ("FEMA"). We
also expect a reduction in 1997 real estate taxes.
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
8
<PAGE>
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 includes amounts recovered in
connection with the misappropriation of assets by the former general partners
and their affiliates. TPG has received fees from the Partnership totaling
$14,966 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
allocated income. Subsequent to the filing of the General Partner's income tax
returns, a true-up with actual distributions is made.
9
<PAGE>
The provisions regarding distribution of Net Proceeds, as defined, were also
amended to provide that Net Proceeds are to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a 14% per annum, cumulative simple return therein from the
Return Calculation Date, including in the calculation of such return all prior
distributions of Net Cash Receipts and any prior distributions of Net Proceeds
under this clause except to the extent needed by the General Partner to pay its
federal and state income tax on the income allocated to it attributable to such
year; and (c) then, to Limited Partners, 99%, and to the General Partner, 1%, of
remaining Net Proceeds available for distribution.
Additionally, per the amendment of the Partnership Agreement dated May 26, 1993,
the total compensation paid to all persons for the sale of the investment
properties shall be limited to a competitive real estate commission, not to
exceed 6% of the contract price for the sale of the property. The General
Partner may receive up to one-half of the competitive real estate commission,
not to exceed 3%, provided that the General Partner provides a substantial
amount of services in the sales effort. It is further provided that a portion
of the amount of such fees payable to the General Partner is subordinated to its
success at recovering the funds misappropriated by the former general partners.
(See Note 9.)
5. LEASES:
-------
Lease terms for the majority of the investment properties are 20 years from
their inception. The leases generally provide for minimum rents and additional
rents based upon a percentage of gross sales in excess of specified breakpoints.
The lessee is responsible for occupancy costs such as maintenance, insurance,
real estate taxes, and utilities. Accordingly, these amounts are not reflected
in the statements of income, except in circumstances where, in management's
opinion, the Partnership will be required to pay such costs to preserve its
assets (i.e., payment of past-due real estate taxes). Management has determined
that the leases are properly classified as operating leases; therefore, rental
income is reported when earned and the cost of the property, excluding the cost
of the land, is depreciated over its estimated useful life.
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1997 $ 2,052,084
1998 2,087,534
1999 2,090,284
2000 2,145,737
2001 2,147,632
Thereafter 15,172,642
-----------
$25,695,913
===========
</TABLE>
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 March 31, 1997, mortgage notes payable consist of the following:
<TABLE>
<CAPTION>
Outstanding
Principal Balance Interest Rate Maturity Date
------------------------------------------------
<S> <C> <C> <C>
a. $ 87,166 prime + 2.5% September 1997
b. 245,243 9.5% September 1997
c. 600,000 prime + 2.0% August 1992
--------
$932,409
========
</TABLE>
a. In September 1992, the Partnership entered into a promissory note
agreement with Riverside Bank, Minnesota, in the amount of $310,000. The
note bears interest at the referenced prime rate, as defined, plus 2.5%.
Principal and interest are paid in monthly installments of $3,285 until
September 1997, when all outstanding amounts are due. The note is
secured by a mortgage on a BW-3 restaurant located in Hopkins,
Minnesota, with a net book value at March 31, 1997 of $616,317. The
proceeds of the note were used to convert a Rocky Rococo restaurant to a
Denny's restaurant.
b. In September 1992, the Partnership entered into a loan agreement with
Bank One, Beaver Dam, Wisconsin, in the amount of $270,000. The loan
bears interest at 9.5% and is payable in monthly installments of $2,520
through September 1997, with a lump-sum amount of $239,747 due at that
time. The loan is secured by a mortgage on a Denny's restaurant located
in Beaver Dam, Wisconsin, with a net book value at March 31, 1997, of
$473,966. The proceeds of the loan were used to convert a Rocky Rococo
restaurant to a Denny's restaurant.
c. During the Investigation, discussed in Note 2, it was discovered that
the former general partners borrowed $600,000 during or before 1991 from
Metro North State Bank in Missouri (this loan is now held by Boatmen's
First National Bank of Kansas City) secured by mortgages on five (5)
Partnership properties. The mortgage note bears interest at the
referenced prime rate, as defined, plus 2% and was due August 15, 1992.
The proceeds of the note were not received by the Partnership and,
accordingly, a corresponding amount due from former affiliates was
recorded in 1992. As of March 31, 1997, the Partnership has not paid
debt service on this note. Management met with representatives of the
bank and disputed the obligation. The Partnership received a notice of
default on this note in October 1993 and an action of foreclosure was
filed in February 1994 on one of the Partnership's properties located in
Dallas, Texas, with a net book value of $1,190,262 at March 31, 1997.
See Note 12 for further discussion of litigation concerning this note.
Interest in the amount of $239,000 was accrued, but unpaid, as of March
31, 1997. The interest accrual has been recorded at the face rate of the
note. If the Partnership loses the dispute, additional interest
amounting to approximately $204,000, representing the default interest,
may be due and payment would be shared by the Partnership and its
affiliated Partnerships.
11
<PAGE>
Scheduled maturities of all notes payable, with the exception of the
$600,000 note payable mentioned above, are as follows:
Year ending
December 31,
1997 $332,409
========
7. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the quarters ended March 31,
1997 and 1996, are as follow:
<TABLE>
<CAPTION>
Current General Partner Incurred as of Incurred as of
- - ----------------------- March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Management fees $23,020 $22,356
Restoration fees 28 8,270
Cash distribution 1,387 1,461
Overhead allowance 1,897 1,863
Reimbursement for out-of-pocket expenses 3,425 2,620
------- -------
$29,757 $36,570
======= =======
</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
March 31, 1997:
<TABLE>
<S> <C>
Minimum lease payments receivable $226,057
Less - Unearned income (29,756)
--------
Net investment in direct financing leases $196,301
========
</TABLE>
Scheduled future minimum lease payments are as follows:
<TABLE>
<S> <C> <C>
Year ending
December 31,
1997 $ 63,100
1998 75,720
1999 75,720
2000 11,517
--------
$226,057
========
</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 March 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.
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 March 31, 1997. Funds are invested in U.S. Treasury
securities. In addition, interest totaling $38,662 has been credited to the
Trust as of March 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 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 March 31, 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 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.
14
<PAGE>
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 March 31, 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
March 31, 1997, interest in the amount of $239,000 was accrued, but was unpaid,
on the Note. Boatmen's has agreed to stay its foreclosure proceedings.
Boatmen's answered the complaint and filed a motion for summary judgment to
which the Partnership responded. Boatmen's motion for summary judgement was
granted by the District Court. The Partnership appealed the summary judgement
to the United States Court of Appelas for the Eighth Circuit which overturned
the ruling of the District Court. The case has been remanded back to the
District Court for the completion of discovery and trial. Trial of the case is
scheduled to begin on June 23, 1997. Pursuant to the Restoration Trust Account
procedures described in Note 11, all of the Partnerships are sharing the
expenses of this litigation and any recoveries resulting effectively from the
partial or full cancelation 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 May 15, 1997, the Partnership made a distribution to the Limited Partners for
the First Quarter 1997 of $375,000 amounting to approximately $15.00 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 March
31, 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 wants to be released from the lease
on this property. DenAmerica also vacated and ceased paying rent in the Beaver
Dam, Wisconsin store. Management is currently working with DenAmerica to
resolve this issue.
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 in April 1997. Due to the damaging
floods and record snowfalls in Grand Forks, the tenant is unable to begin making
rent payments as scheduled. Management intends to work with the tenant by
allowing additional rent abatement. The Partnership has applied for financial
assistance with the Federal Emergency Management Agency ("FEMA"). We also
expect a reduction in 1997 real estate taxes.
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, amounted to $196,000 at March 31, 1997,
compared to $204,000 at December 31, 1996. The decrease of $8,000 was a result
of principal payments received during the quarter.
Other Assets
- - ------------
Cash and cash equivalents, including cash restricted for real estate taxes held
by the Partnership, were $947,000 at March 31, 1997, compared to $1,038,000 at
December 31, 1996. The Partnership designated cash of $375,000 to fund the
First Quarter 1997 distributions to Limited Partners, $450,000 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.
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
16
<PAGE>
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, Allowance for Uncollectible Amounts Due From Former
- - -------------------------------------------------------------------------------
Affiliates and Due to Affiliated Partnerships
- - ---------------------------------------------
Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $554,000 at March
31, 1997. The receivable decreased from December 31, 1996, due to $1,000 of
recoveries received during the quarter 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
$1,298,000 at March 31, 1997, and includes $656,000 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 March 31, 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
$932,000 at March 31, 1997, due to monthly principal payments made on the notes
as well as additional principal reductions made from excess cash flows.
Accounts payable and accrued expenses at March 31, 1997, amounted to
approximately $49,000. The majority of this balance represented accruals of
legal and auditing fees.
Real estate taxes payable amounted to $31,000 at March 31, 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.
17
<PAGE>
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 $350,000 and $1,387, respectively, have also been made in
accordance with the amended Partnership Agreement. The First Quarter 1997
distribution of $375,000 was paid to the Limited Partners on May 15, 1997.
Results of Operations:
- - ----------------------
The Partnership reported net income for the quarter ended March 31, 1997, in the
amount of $347,000 compared to $365,000 for the quarter ended March 31, 1996.
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
Partnership's former accountants and attorneys.
Revenues
- - --------
Total revenues were $546,000 and $737,000 for the quarters ended March 31, 1997
and 1996, respectively. Revenue for 1996 includes a $200,000 adjustment to the
write-off of amounts due from the former general partners.
Based on leases currently in place on the remaining owned properties, total
revenues should approximate $2,000,000 annually or $500,000 quarterly. Future
revenues may decrease with tenant defaults and/or sales of Partnership
properties. They may also increase with additional rents due from tenants, if
those tenants experience sales levels which require the payment of additional
rent to the Partnership.
Expenses
- - --------
For the quarters ended March 31, 1997 and 1996, cash expenses amounted to
approximately 20% and 38% of total revenues, respectively. Total expenses,
including non-cash items, amounted to approximately 36% and 50% of total
revenues for the quarters ended March 31, 1997 and 1996. Items negatively
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 quarters ended March 31, 1997 and 1996, expenses incurred in relation to
the misappropriated assets amounted to $4,000 and $179,000, respectively. Future
expenses incurred in relation to the misappropriation should have only a minimal
impact on the Partnership.
18
<PAGE>
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.
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
19
<PAGE>
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 March 31, 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 March 31, 1997, interest in the amount of $239,000
had accrued but was unpaid on the Note. Interest is accrued at the face rate of
the Note. If the Partnership loses the dispute, additional interest totaling
approximately $260,000, representing the default interest, may be due. Boatmen's
has agreed to stay its foreclosure proceedings. Boatmen's answered the complaint
and filed a motion for summary judgment to which the Partnership responded. 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 is scheduled to begin on June 23, 1997.
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 any recoveries resulting effectively from the partial or full
cancellation of the alleged indebtedness will be allocated among the three
Partnerships on the same basis as the restoration costs are currently being
allocated via appropriate payments by the Partnership to its affiliated
Partnerships.
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
99.0 Correspondence to the Limited Partners dated May 15, 1997, regarding
the First Quarter 1997 distribution.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the first quarter of
fiscal year 1997.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
By: The Provo Group, Inc., General Partner
By: /s/ Bruce A. Provo
--------------------------------------------
Bruce A. Provo, President
Date: May 14, 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: May 14, 1997
By: /s/ Kristin J. Atkinson
--------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: May 14, 1997
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
March 31, 1997 Form 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 947,053
<SECURITIES> 288,662
<RECEIVABLES> 2,427,780
<ALLOWANCES> 1,853,728
<INVENTORY> 0
<CURRENT-ASSETS> 1,809,767
<PP&E> 19,629,794
<DEPRECIATION> 4,518,322
<TOTAL-ASSETS> 16,921,239
<CURRENT-LIABILITIES> 480,598
<BONDS> 932,409
0
0
<COMMON> 0
<OTHER-SE> 15,508,232
<TOTAL-LIABILITY-AND-EQUITY> 16,921,239
<SALES> 534,709
<TOTAL-REVENUES> 545,637
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 176,505
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,340
<INCOME-PRETAX> 346,792
<INCOME-TAX> 0
<INCOME-CONTINUING> 346,792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 346,792
<EPS-PRIMARY> 13.73
<EPS-DILUTED> 13.73
</TABLE>
<PAGE>
DiVall Insured Income Fund, L.P.
QUARTERLY NEWS
A publication of The Provo Group, Inc. FIRST QUARTER 1997
NORTH DAKOTA FLOOD SPARES RIO BRAVO RESTAURANT
Grand Forks, North Dakota
The Partnership's Rio Bravo restaurant (Grand Forks, ND) fortunately sustained
minimal flood damage. However, the new tenant was unable to commence
construction this winter as the area also suffered through a record snowfall of
120 inches which paralyzed the economy for months.
Bruce Provo met with our new Rio Bravo tenant on April 29th...one day after they
were finally allowed by the National Guard to inspect their property. The
Partnership granted the tenant three additional months of rent abatement for
construction. We are anxious to be one of the first commitments form available
building contractors.
The additional period of rent abatement coincides exactly with the expiration
of our previously negotiated lease termination fee from Chi Chi's. Accordingly,
there will effectively be no interruption of our revenue stream from this
property.
We do, however, expect to apply to FEMA (Federal Emergency Management Agency) to
recover our imputation of lost rents via abatement. We also expect a reduction
of the property's 1997 real estate taxes. The tenant is expected to put
approximately $500,000 of tenant improvements and $200,000 of equipment into the
property.
----------
OTHER NEWS INSIDE...
. NEW LEASES FOR DEN-AMERICA?.................... Property Highlights, PG 3
. HARDEE'S CORPORATE SELLS TO CKE!............... Property Highlights, PG 4
. CONTRACT PENDING FOR COLORADO LAND............. Property Highlights, PG 4
. THIRD-PARTY SOLICITATIONS...................... Questions and answers, PG 5
. ARE THE FORMER GPS IN JAIL?.................... Questions and answers, PG 5
. WHAT'S MY INVESTMENT WORTH?.................... Questions and answers, PG 6
<PAGE>
TheProvoGroup
Page 2 DiVall 1 1 Q 97
=======================
Distribution Highlights
. 6.6% (approx.) annualized return from operations and other sources based on
$22,700,000 ("net" remaining initial investment).
. $15.00 per unit (approx.) for the First Quarter 1997 from both cash flow
from operations and "net" cash activity from financing and investing
activities.
. $375,000 "total" amount distributed for the First Quarter 1997 as budgeted.
. $843.00 to $740.00 range of distributions per unit from the first unit sold
to the last unit sold before the offering closed (March 1988),
respectively.
Distributions are from both cash flow from operations and "net" cash
activity from financing and investing activities.
(NOTE: Original units were purchased for $1,000/unit.)
=======================
Statements of Income and Cash Flow Highlights
. 7% increase in operating revenues from projections.
. 6% decrease in total expenses from projections.
. 16% increase in "net" income from projections.
. $75,000 reserved from last quarter's excess cash (percentage rents and
lease termination fee) was used to reduce the "high interest" debt that the
Partnership has with Riverside Bank in Minnesota.
. (cont'd) The balloon note matures in September 1997 at which time the
Partnership anticipates being able to completely pay off with additional
reserves.
. (cont'd) The Partnership entered into this promissory note agreement in
September 1992. The original proceeds were used to convert a Rocky Rococo
restaurant into a Denny's restaurant.
<PAGE>
TheProvoGroup
Page 3 DiVall 1 1 Q 97
===========================
Statements of Income and Cash Flow Highlights
(cont'd)
. $15,000 was paid in property repairs for the Rio Bravo restaurant located
in Grand Forks, North Dakota. (NOTE: These repairs were "severe" winter-
weather related. Insurance reimbursement is expected.)
. Administrative, professional and auditing expenses were in "total" $12,000
lower than budgeted for the quarter ended March 31, 1997.
===========================
Property Highlights
Vacancies
---------
. Denny's restaurant (Beaver Dam, WI) was vacant at March 31, 1997. The
tenant of this property, DenAmerica Corp., vacated the property at the end
of December 1996 and notified management during the quarter that they were
ceasing all rental payments on this property. (NOTE: Refer to "Other
Property Matters" below for further discussion.)
Rents Receivable
----------------
The following restaurant was delinquent at March 31, 1997.
. Denny's restaurant (Beaver Dam, WI) - DenAmerica Corp. - $17,300 for
scheduled rent and equipment.
Other Property Matters
----------------------
. As mentioned above, DenAmerica Corporation notified management that they
were ceasing rental payments on their Beaver Dam, Wisconsin restaurant
which they have closed. This tenant was defaulted and has since requested
that management consider their proposal for terminating the Beaver Dam,
Wisconsin lease; consider assigning BW-3's (Hopkins, MN) restaurant lease
directly with the Partnership; and consider modifying their remaining
leases that currently pay straight percentage rent versus fixed rent. The
Partnership has countered these proposals and is currently awaiting a
response from the tenant.
<PAGE>
TheProvoGroup
Page 4 DiVall 1 1 Q 97
=============================
Property Highlights (cont'd)
Other Property Matters (cont'd)
-------------------------------
. Bysom Enterprises, Ltd., tenant of seven (7) Popeye's restaurants in
Chicago, Illinois is current with scheduled monthly rental payment,
however, they have recently become delinquent on a portion of their annual
percentage rent. As reported previously, their sales have been increasing
steadily.
. BJ's Market & Bakery (Chicago, IL) who recently replaced the previous
Porterhouse restaurant tenant began their lease April 1997. Business is
scheduled for opening on May 15, 1997 with rent commencing August 1, 1997.
. The Partnership has received a sales contract from a prospective buyer for
the vacant land in Colorado. Management is currently awaiting final terms
of the contract.
. Chi Chi's, Inc., tenant of Chi Chi's restaurant has been experiencing a
sales decline which is closely being monitored by the Partnership.
. TP Acquisition Corporation, tenant of four (4) Taco Cabana restaurants in
Texas, continues to experience sales increases with its restaurants. They
also remain current on all rental payments with the Partnership.
. Hardee's Food Systems, Inc. was recently acquired by CKE Restaurants, owner
of Carl's Jr. restaurants. Closing is expected to occur July 1997. The
Partnership anticipates the buy out and the marriage of Hardee's breakfast
menu and Carl's Jr.'s lunch/dinner menus may "boost" sales nationwide.
Hardee's Food Systems, Inc. is the new tenant of the Partnership's Hardee's
restaurant in Fond du Lac, Wisconsin.
=============================
Restoration Highlights
. Recoveries received during the First Quarter 1997 were slightly under
$1,000 for the Partnership.
. "Total" recoveries received to date for the Partnership are $668,000.
(approx.)
. The trial against Boatmen's First National Bank of Kansas City has been re-
scheduled for June 23, 1997.
<PAGE>
TheProvoGroup
Page 5 DiVall 1 1 Q 97
-------------------------------
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 March 31, 1997.
<TABLE>
<CAPTION>
========================================================================
Distribution Capital
Analysis Balance
------------ -------
<S> <C> <C>
Original Capital Balance - $25,000,000
Cash Flow From Operations Since Inception $ 17,637,528 -
Total Distributions Since Inception (19,941,740) -
------------
(Return) of Capital $ (2,304,212) (2,304,212)
============ -----------
"Net" Remaining Initial Investment
by Original Partners - $22,695,788
===========
========================================================================
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
-------------------------------
Questions & Answers
1. Why am I receiving solicitations to buy my units?
Any solicitations that you may receive to buy your units are a result of a
third-party (not affiliated with TPG, Inc.) who is interested in acquiring
units at a discounted rate. As General Partner, we encourage you to
thoroughly review all your options.
2. Are the former general partners in jail?
Former general partner, Gary J. DiVall, was sentenced last year to eight
(8) years in prison with seven (7) years of subsequent probation. Former
general partner, Paul E. Magnuson, received the same sentence on March 3,
1997.
<PAGE>
TheProvoGroup
Page 6 DiVall 1 1 Q 97
------------------------------
Questions & Answers (cont'd)
3. What is the 1996 per unit value for my investment in the Partnership?
As we reported in your 1996 Annual Report, the estimated value of your
investment in the Partnership at December 31, 1996 was $550 per unit.
4. When can I expect my next distribution mailing?
Your next scheduled distribution correspondence for the Second Quarter of
1997 will be mailed on August 15, 1997.
* * *
================================================================================
For questions or additional information, please contact Investor Relations at
1-800-547-7686 or 1-608-244-7661.
All written inquiries may be mailed or faxed to:
The Provo Group, Inc.
Post Office Box 8673 1410 Northport Drive
Madison, Wisconsin 53708-8673 Madison, Wisconsin 53704
(FAX 608-244-7663)
================================================================================
<PAGE>
- - -------------------------------------------------------------------------------
TheProvoGroup
DIVALL INSURED INCOME FUND L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1997
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROJECTED ACTUAL VARIANCE
--------------------------------
1ST 1ST CASH
QUARTER QUARTER BETTER
3/31/97 3/31/97 (WORSE)
--------- ---------- ---------
<S> <C> <C> <C>
OPERATING REVENUES
Rental income $ 494,194 $ 529,722 $ 35,528
Direct financing interest 4,987 4,987 0
Interest income 10,500 9,491 (1,009)
Recoveries of Amounts Previously Written
Off 0 707 707
Other income 0 730 730
--------- ---------- ---------
TOTAL OPERATING REVENUES $ 509,681 $ 545,637 $ 35,956
--------- ---------- ---------
OPERATING EXPENSES
Insurance $ 4,600 $ 4,510 $ 90
Management fees 23,098 23,020 78
Restoration fees 0 28 (28)
Overhead allowance 1,915 1,897 18
Advisory Board 3,900 3,749 151
Administrative 17,762 13,769 3,993
Professional services 5,572 362 5,210
Auditing 15,755 12,955 2,800
Legal 7,500 7,600 (100)
Real Estate Taxes 0 (3,627) 3,627
Appraisals 0 1,460 (1,460)
Property repairs 0 15,026 (15,026)
Defaulted tenants 7,550 1,528 6,022
--------- ---------- ---------
TOTAL OPERATING EXPENSES $ 87,652 $ 82,277 $ 5,375
--------- ---------- ---------
INTEREST EXPENSE $ 23,390 $ 22,340 $ 1,050
--------- ---------- ---------
INVESTIGATION AND RESTORATION EXPENSES $ 10,391 $ 4,152 $ 6,239
--------- ---------- ---------
NON-OPERATING EXPENSES
Depreciation $ 87,927 $ 87,926 $ 1
Amortization 2,615 2,150 465
--------- ---------- ---------
TOTAL NON-OPERATING EXPENSES $ 90,542 $ 90,076 $ 466
--------- ---------- ---------
TOTAL EXPENSES $ 211,975 $ 198,845 $ 13,130
--------- ---------- ---------
NET INCOME $ 297,706 $ 346,792 $ 49,086
<CAPTION>
VARIANCE
---------
OPERATING CASH RECONCILIATION:
Depreciation and amortization 90,542 90,076 (466)
Recovery of amounts previously written off 0 (707) (707)
(Increase) Decrease in current assets (45,917) (51,617) (5,700)
Increase (Decrease) in current liabilities (70,189) (44,754) 25,435
G.P. distribution (1,191) (1,387) (196)
Cash reserved for payables 112,000 110,000 (2,000)
Advance from (to) future cash flows for
current distributions (7,000) 0 7,000
--------- ---------- ---------
Net Cash Provided From Operating Activities $ 375,951 $ 448,403 $ 72,452
--------- ---------- ---------
CASH FLOWS FROM (USED IN) INVESTING AND
FINANCING ACTIVITIES
Recoveries from former G.P. affiliates 0 707 707
Principal received on equipment leases 13,943 7,633 (6,310)
Investment in buildings and improvements 0 (4,300) (4,300)
Principal payments on mortgage notes (7,114) (83,020) (75,906)
--------- ---------- ---------
Net Cash Provided from Investing And
Financing Activities $ 6,829 $ (78,980) $ (85,809)
--------- ---------- ---------
Total Cash Flow For Quarter $ 382,780 $ 369,423 $ (13,357)
Cash Balance Beginning of Period 913,738 1,037,631 123,893
Less 4th quarter distributions paid 2/97 (350,000) (350,000) 0
Plus cash reserved above for payables and
future distributions (105,000) (110,000) (5,000)
--------- ---------- ---------
Cash Balance End of Period $ 841,518 $ 947,054 $ 105,536
--------- ---------- ---------
Cash reserved for 1st quarter L.P.
distributions (375,000) (375,000) 0
Cash reserved for payment of payables and
future distributions (340,000) (450,000) (110,000)
--------- ---------- ---------
Unrestricted Cash Balance End of Period $ 126,518 $ 122,054 $ (4,464)
========= ========== =========
</TABLE>
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROJECTED ACTUAL VARIANCE
--------------------------------
<S> <C> <C> <C>
* Quarterly Distribution $ 375,000 $ 375,000 $ 0
Mailing Date 5/15/97 (enclosed) --
</TABLE>
- - --------------------------------------------------------------------------------
* Refer to distribution letter for detail of quarterly distribution.
<PAGE>
------------------------------------------
TheProvoGroup ORIGINAL EQUITY $25,000,000
NET DISTRIBUTION OF CAPITAL
PROJECTIONS FOR SINCE INCEPTION $ 2,304,212
-----------
DISCUSSION PURPOSES CURRENT EQUITY $22,695,788
===========
------------------------------------------
DIVALL INSURED INCOME FUND L.P.
1997 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
PORTFOLIO
<TABLE>
<CAPTION>
-------------------------------
REAL ESTATE
-------------------------------
- - --------------------------------- BASE %
CONCEPT LOCATION COST RENT YIELD
- - --------------------------------- -------------------------------
<S> <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%
VACANTLAND COL. SPRINGS, CO 356,549 0 0.00%
DENNY'S ** GLENDALE, AZ 1,105,926 90,000 8.14%
DENNY'S ** SCOTTSDALE, AZ 1,051,157 90,000 8.56%
DENNY'S ** MESA, AZ 1,028,036 90,000 8.75%
DENNY'S ** PEORIA, AZ 1,105,926 90,000 8.14%
BW-III HOPKINS, MN 795,050 66,000 8.30%
DENNY'S BEAVER DAM, WI 659,299 66,000 10.01%
FAZOLI'S DES MOINES, IA 565,476 45,500 8.05%
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%
- - -------------------------------- -------------------------------
</TABLE>
OUTSTANDING DEBT
<TABLE>
<CAPTION>
-------------------------------
AMOUNT ANNUAL CURRENT
- - -------------------------------- OWNED DEBT INTEREST
MORTGAGED PROPERTIES 3/31/97 SERVICE RATE
- - -------------------------------- -------------------------------
<S> <C> <C> <C> <C>
DENNY'S HOPKINS, MN 32,687 14,783 10.75%
DENNY'S BEAVER DAM, WI 69,894 8,726 9.50%
MULTIPLE STORES AZ, TX 600,000 0 8.50%
- - -------------------------------- -------------------------------
- - -------------------------------- -------------------------------
TOTALS 702,581 23,509 -
- - -------------------------------- -------------------------------
- - -------------------------------- -------------------------------
NET AFTER DEBT 19,163,281 1,920,611 10.02%
- - -------------------------------- -------------------------------
</TABLE>
<TABLE>
<CAPTION>
- - --------------------------------------------
EQUIPMENT
- - --------------------------------------------
LEASE LEASE* % *
EXPIRATION COST RECEIPTS RETURN
- - --------------------------------------------
<S> <C> <C> <C>
68,744 0 0.00%
40,553 0 0.00%
39,218 0 0.00%
58,781 0 0.00%
1/15/2000 190,000 37,860 19.93%
3/31/2000 190,000 37,860 19.93%
39,600 0 0.00%
- - --------------------------------------------
--------------------------------
626,896 75,720 12.08%
--------------------------------
--------------------------------
AMOUNT ANNUAL CURRENT
OWNED DEBT INTEREST
3/31/97 SERVICE RATE
--------------------------------
54,479 24,637 10.75%
175,348 21,514 9.50%
--------------------------------
--------------------------------
229,827 46,151 -
--------------------------------
--------------------------------
397,069 29,569 7.45%
--------------------------------
</TABLE>
<TABLE>
<CAPTION>
--------------
- - -------------------------------- TOTAL %
TOTALS ON 22, 695,788
- - -------------------------------- EQUITY
INVESTED RECEIPTS* RETURN* RAISE
- - -------------------------------- --------------
<S> <C> <C> <C>
984,801 100,000 10.15%
1,042,730 136,260 13.07%
356,549 0 0.00%
1,174,670 90,000 7.66%
1,091,710 90,000 8.24%
1,067,254 90,000 8.43%
1,164,707 90,000 7.73%
985,050 103,860 10.54%
849,299 103,860 12.23%
605,076 45,500 7.52%
1,026,931 72,000 7.01%
473,968 63,180 13.33%
610,893 81,420 13.33%
484,501 64,620 13.34%
610,893 81,420 13.33%
437,105 58,260 13.33%
631,958 84,180 13.32%
579,295 77,280 13.34%
905,807 60,000 6.62%
1,474,569 132,000 8.95%
1,369,243 132,000 9.64%
1,257,596 132,000 10.50%
1,308,153 132,000 10.09%
- - -------------------------------- -------------
- - -------------------------------- -------------
20,492,758 2,019,840 9.86% 8.90%
- - -------------------------------- -------------
</TABLE>
<TABLE>
<CAPTION>
- - ------------------------
AMOUNT ANNUAL
OWNED DEBT
3/31/97 SERVICE
- - ------------------------
<S> <C>
87,166 39,420
245,242 30,240
600,000 0
- - ------------------------
- - ------------------------
932,408 69,660
- - ------------------------
- - ----------------------------------- ----------
19,560,350 1,950,180 9.97% 8.59%
- - ----------------------------------- ----------
</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.
