<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 June 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
June 30, 1997 and December 31, 1996
-----------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, 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 12,075,525 12,070,525
Equipment 246,896 246,896
Accumulated depreciation (4,606,037) (4,430,396)
----------- -----------
Net investment properties and equipment 15,024,457 15,195,098
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES: (Note 8) 191,471 203,934
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 879,876 1,019,582
Cash restricted for real estate taxes 2,176 18,048
Cash held in Indemnification Trust (Note 10) 292,037 284,615
Rents and other receivables (net of allowance of
$2,113 in 1997 and $1,320 in 1996) 146,784 117,880
Deferred rent receivable 226,080 136,925
Prepaid insurance 5,538 14,268
Deferred charges (net of accumulated amortization
of $67,462 in 1997 and $60,086 in 1996) 73,596 60,273
----------- -----------
Total other assets 1,626,087 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 1,342,608 1,252,957
Allowance for uncollectible restoration receivable (1,342,608) (1,252,957)
----------- -----------
Due from former affiliates, net 0 0
----------- -----------
Total assets $16,842,015 $17,050,623
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
June 30, 1997 and December 31, 1996
-----------------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1997 1996
----------- ------------
<S> <C> <C>
LIABILITIES:
Mortgage notes payable (Note 6) $ 923,307 $ 1,015,429
Accounts payable and accrued expenses 40,902 47,816
Due to current General Partner 3,405 26,275
Accrued interest payable 252,061 226,027
Security deposits 124,930 104,930
Real estate taxes payable 17,093 72,200
Unearned rental income 9,792 45,119
---------- -----------
Total liabilities 1,371,490 1,537,796
---------- -----------
CONTINGENT LIABILITIES: (Notes 9 and 13)
PARTNERS' CAPITAL: (Notes 1, 4 and 13)
Current General Partner -
Cumulative net income 52,147 45,293
Cumulative cash distributions (20,929) (18,187)
---------- -----------
31,218 27,106
---------- -----------
Limited Partners (25,000 interests outstanding) -
Capital contributions, net of offering costs 22,270,578 22,270,578
Cumulative net income 12,320,564 11,641,978
Cumulative cash distributions (19,941,741) (19,216,741)
Reallocation of former
general partners' capital 789,906 789,906
----------- -----------
15,439,307 15,485,721
----------- -----------
Total partners' capital 15,470,525 15,512,827
----------- -----------
Total liabilities and partners' capital $16,842,015 $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 Six Months Ended
June 30, June 30,
------------------- -----------------------
1997 1996 1997 1996
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income $508,516 $506,313 $1,038,238 $1,026,481
Interest income on direct financing leases 4,635 5,991 9,622 12,301
Interest income 8,889 13,391 18,380 22,889
Other income 559 3,031 1,289 3,625
Lease termination fee 0 164,419 0 164,419
Recovery of amounts previously written off 0 4,662 707 205,195
-------- -------- ---------- ----------
522,599 697,807 1,068,236 1,434,910
-------- -------- ---------- ----------
EXPENSES:
Partnership management fees 23,520 22,770 46,540 45,126
Restoration fees 0 187 28 8,457
Insurance 4,215 4,774 8,725 9,273
General and administrative 25,965 24,848 41,048 37,969
Interest 21,403 27,120 43,743 54,329
Expenses incurred due to default by lessee (5,488) 1,667 7,439 4,654
Real estate taxes (3,628) 0 (3,628) 0
Professional services 21,429 18,959 44,389 40,022
Professional services related to investigation 3,143 (18,478) 7,295 160,801
Advisory Board fees and expenses 2,600 3,679 6,349 7,891
Depreciation 87,715 87,925 175,641 175,639
Amortization 3,077 1,066 5,227 2,131
-------- -------- ---------- ----------
183,951 174,517 382,796 546,292
-------- -------- ---------- ----------
NET INCOME $338,648 $523,290 $ 685,440 $ 888,618
======== ======== ========== ==========
NET INCOME - GENERAL PARTNER $ 3,386 $ 5,233 $ 6,854 $ 8,886
NET INCOME - LIMITED PARTNERS 335,262 518,057 678,586 879,732
-------- -------- ---------- ----------
$338,648 $523,290 $ 685,440 $ 888,618
======== ======== ========== ==========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST, based on 25,000 interests outstanding $ 13.41 $ 20.72 $ 27.14 $ 35.19
======== ======== ========== ==========
</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>
Six Months Ended June 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 685,440 $ 888,618
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 180,868 177,770
Recovery of amounts previously written off (707) (205,195)
Interest applied to Indemnification Trust Account (7,422) (6,921)
Increase/(Decrease) in unearned rental income (35,327) 5
(Increase) in rents and other receivables (28,904) (21,325)
(Increase) in deferred rent receivable (89,155) (4,965)
Withdrawals for payment of real estate taxes 15,872 24,757
Decrease in prepaid expenses 8,730 515
(Decrease) in accounts payable and accrued expenses (6,914) (89,187)
(Decrease) in payable to tenant 0 (88,000)
Increase/(Decrease) in due to General Partner (22,870) 1,134
Increase in accrued interest payable 26,034 26,106
Increase/(Decrease) in security deposits 20,000 (9,663)
(Decrease) in real estate taxes payable (55,107) (27,803)
---------- ----------
Net cash provided from operating activities 690,538 665,846
---------- ----------
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 (5,000) 0
Recoveries from former affiliates 707 498,769
Deposit to restoration escrow account 0 (285,926)
Principal payments received on direct financing leases 12,463 25,559
---------- ----------
Net cash provided by (used in) investing activities (10,380) 344,235
---------- ----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Principal payments on mortgage notes (92,122) (6,608)
Cash distributions to Limited Partners (725,000) (800,000)
Cash distributions to current General Partner (2,742) (3,554)
---------- ----------
Net cash (used in) financing activities (819,864) (810,162)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (139,706) 199,919
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,019,582 815,512
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 879,876 $1,015,431
========== ==========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 17,709 $ 28,223
========== ==========
</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 June 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 $14,800,000, of which
approximately $1,897,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at June 30, 1997. The 9%
interest accrued as of June 30, 1997, amounted to approximately $698,000 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 June 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 June 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 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 June 30,
1997 and December 31, 1996, these costs totaled approximately $290,000 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 June 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 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 is allowing an
additional three months' rent abatement and is assisting the tenant in obtaining
financing for improvements which they are providing to the property. 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 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 June 30, 1997, mortgage notes payable consist of the following:
<TABLE>
<CAPTION>
Outstanding
Principal Balance Interest Rate Maturity Date
-------------------------------------------------------
<S> <C> <C>
a. $ 79,679 prime + 2.5% September 1997
b. 243,628 9.5% September 1997
c. 600,000 prime + 2.0% August 1992
--------
$923,307
========
</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 June 30, 1997 of $611,726. 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
June 30, 1997, of $470,107. 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 June 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 $1,186,423 at June 30, 1997. See Note 12 for further
discussion of litigation concerning this note. Interest in the amount
of $252,000 was accrued, but unpaid, as of June 30, 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 $274,000, 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:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1997 $323,307
========
</TABLE>
7. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the six months ended June 30,
1997 and 1996, are as follow:
<TABLE>
<CAPTION>
Incurred as of Incurred as of
Current General Partner June 30, 1997 June 30, 1996
----------------------- -------------- --------------
<S> <C> <C>
Management fees $46,540 $45,126
Restoration fees 28 8,457
Cash distribution 2,742 3,554
Overhead allowance 3,795 3,760
Reimbursement for out-of-pocket expenses 6,603 6,190
------- -------
$59,708 $67,087
======= =======
</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 June
30, 1997:
<TABLE>
<S> <C>
Minimum lease payments receivable $216,592
Less - Unearned income (25,121)
--------
Net investment in direct financing leases $191,471
========
</TABLE>
Scheduled future minimum lease payments are as follows:
<TABLE>
<S> <C>
Year ending
December 31,
1997 $ 53,635
1998 75,720
1999 75,720
2000 11,517
--------
$216,592
========
</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 June 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 June 30, 1997. Funds are invested in U.S. Treasury
securities. In addition, interest totaling $42,037 has been credited to the
Trust as of June 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 June 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 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 June 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
June 30, 1997, interest in the amount of $252,000 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
took place on June 23, 1997. The Partnership is currently awaiting the judge's
ruling. Pursuant to the Restoration Trust Account procedures described in Note
11, all of the Partnerships are sharing the expenses of this litigation and any
recoveries resulting effectively from the partial or full cancellation of the
alleged indebtedness will be allocated among the three Partnerships on the same
basis as the restoration costs are currently being allocated via appropriate
payments by the Partnership to its affiliated Partnerships.
13. FORMER GENERAL PARTNERS' CAPITAL ACCOUNTS:
------------------------------------------
The capital account balance of the former general partners as of May 26, 1993,
the date of their removal as general partners pursuant to the results of a
solicitation of written consents from the Limited Partners, was $789,906.
Because any amount payable to the former general partners with respect to their
capital accounts is subject to (a) the satisfaction of certain preferential
return requirements for the Limited Partners (See Note 4); and (b) the
assignment of such amounts to the Partnerships with respect to the amounts due
to the Partnerships from the former general partners, payment to the former
general partners with respect to their capital account balances as of May 26,
1993, is highly remote. In the unlikely event that the Partnership would owe
the former general partners any residual amount, such amounts would be due the
restoration fund for the benefit of all the Partnerships, and therefore
represent a contingent liability. At December 31, 1993, the former general
partners' capital account balance in the amount of $789,906 was reallocated to
the Limited Partners.
14. SUBSEQUENT EVENTS:
------------------
On August 15, 1997, the Partnership made a distribution to the Limited Partners
for the Second 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
June 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 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 is allowing an additional three months'
rent abatement and has assisted the tenant with obtaining financing for
improvements which they are providing to the property. 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 $191,000 at June 30, 1997,
compared to $204,000 at December 31, 1996. The decrease of $13,000 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 $882,000 at June 30, 1997, compared to $1,038,000 at
December 31, 1996. The Partnership designated cash of $375,000 to fund the
Second Quarter 1997 distributions to Limited Partners, $385,000 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 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 June
30, 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
$1,343,000 at June 30, 1997, and includes $698,000 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 June 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
$923,000 at June 30, 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 June 30, 1997, amounted to
approximately $41,000. The majority of this balance represented accruals of
legal and auditing fees.
Real estate taxes payable amounted to $17,000 at June 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.
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 $725,000 and $2,742, respectively, have also been made in
accordance with the amended Partnership Agreement. The Second Quarter 1997
distribution of $375,000 was paid to the Limited Partners on August 15, 1997.
Results of Operations:
- - ----------------------
The Partnership reported net income for the quarter ended June 30, 1997, in the
amount of $339,000 compared to $523,000 for the quarter ended June 30, 1996.
For the six months ended June 30, 1997 and 1996, net income totaled $685,000 and
$889,000, 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 $523,000 and $698,000 for the quarters ended June 30, 1997
and 1996, respectively, and were $1,068,000 and $1,435,000 for the six months
ended June 30, 1997 and 1996, respectively. Revenue for 1996 includes a
$200,000 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 June 30, 1997 and 1996, cash expenses amounted to
approximately 18% and 12% of total revenues, respectively. For the six months
ended June 30, 1997 and 1996, cash expenses totaled 19% and 26%, respectively.
Total expenses, including non-cash items, amounted to approximately 35% and 25%
of total revenues for the quarters ended June 30, 1997 and 1996 and totaled 36%
and 38% for the six months ended June 30, 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 six months ended June 30, 1997 and 1996, expenses incurred in relation
to the misappropriated assets amounted to $7,000 and $161,000, 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 June 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 June 30, 1997, interest in the amount
of $252,000 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 $274,000, 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 took place
on June 23, 1997. The Partnership is currently awaiting the judge's ruling.
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 August 15, 1997,
regarding the Second Quarter 1997 distribution.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the second 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: August 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: August 14, 1997
By: /s/Kristin J. Atkinson
--------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: August 14, 1997
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
June 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 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 882,052 882,052
<SECURITIES> 292,037 292,037
<RECEIVABLES> 2,542,534 2,542,534
<ALLOWANCES> (1,899,065) 1,899,065
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,817,558 1,817,558
<PP&E> 19,630,494 19,630,494
<DEPRECIATION> 4,606,037 4,606,037
<TOTAL-ASSETS> 16,842,015 16,842,015
<CURRENT-LIABILITIES> 1,371,490 1,371,490
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 15,470,525 15,470,525
<TOTAL-LIABILITY-AND-EQUITY> 16,842,015 16,842,015
<SALES> 513,151 1,047,860
<TOTAL-REVENUES> 522,599 1,068,236
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 162,548 339,053
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 21,403 43,743
<INCOME-PRETAX> 338,648 685,440
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 338,648 685,440
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 338,648 685,440
<EPS-PRIMARY> 13.41 27.14
<EPS-DILUTED> 13.41 27.14
</TABLE>
<PAGE>
DiVall Insured Income Fund, L.P.
QUARTERLY NEWS
A publication of The Provo Group, Inc. SECOND QUARTER 1997
BOATMEN'S LITIGATION AWAITS RULING FROM JUDGE
Kansas City, Missouri
The Partnership went to trial on June The former general partners had
23, 1997 against Boatmen's First borrowed $600,000 during or before
National Bank of Kansas City 1991 from Metro North State Bank (the
(Boatmen's). The trial was over note is now held by Boatmen's ). The
within two days, however, no proceeds of the Note were never
judgment has been made at this time. received by the Partnership.
The Partnership had previously filed To date, the Partnership has shared
a complaint during March 1994 in the the expenses of this litigation with
United States District Court for the its affiliated partnerships. It will
Western District of Missouri against also share any recoveries resulting
Boatmen's seeking a declaratory from a partial or full cancellation
judgment that Boatmen's had no right of the alleged indebtedness in
or interest in a promissory note accordance with the allocation
executed in the name of the percentages previously defined for
Partnership by the former general the Restoration Trust.
partners secured by mortgages on
five Partnership properties. The Partnership awaits the judge's
ruling.
------------------------------
OTHER NEWS INSIDE...
. BJ's Market's Sales Look Favorable.........Property Highlights, pg 3
. "CKE" Acquires Hardee's Restaurants........Property Highlights, pg 4
. Colorado Land Contract Pending.............Property Highlights, pg 3
. DenAmerica Lease Negotiations Continue.....Property Highlights, pg 3
. Rio Bravo's Construction Underway..........Property Highlights, pg 3
. Third-Party Solicitations................Questions and Answers, pg 5
<PAGE>
Page 2 DiVall 1 2 Q 97
--------------------------
Distribution Highlights
. 6.6% (approx.) annualized return . $858.00 to $755.00 range of
from operations and other sources distributions per unit from the
based on $22,700,000 ("net" first unit sold to the last unit
remaining initial investment). sold before the offering closed
(March 1988), respectively.
. $15.00 per unit (approx.) for the
Second Quarter 1997 from both cash Distributions are from both cash
flow from operations and "net" cash flow from operations and "net" cash
activity from financing and activity from financing and
investing activities. investing activities.
. $375,000 "total" amount distributed (NOTE: Original units were
for the Second Quarter 1997 as purchased for $1,000/unit.)
budgeted.
--------------------------
Statements of Income and Cash Flow Highlights
. 3% increase in . 11% decrease in . 12% increase in
operating revenues total expenses from "net" income from
from projections. projections. projections.
. Expenses related to . $14,000 increase . $9,000 reserved
either tenant in rental income from the Fourth
improvements or was due to higher Quarter of 1996
repairs were than budgeted was used to reduce
$22,000 lower than percentage rents. the "high interest"
expected as a result debt that the
of insurance Partnership has
reimbursements or with Riverside Bank
repairs which did in Minnesota.
not yet occur.
<PAGE>
Page 3 DiVall 1 2 Q 97
--------------------------
Property Highlights
Vacancies
---------
. Denny's restaurant (Beaver Dam, WI) was vacant at June 30, 1997. The tenant
of this property, DenAmerica Corp., vacated the property at the end of
December 1996 and notified management during the First Quarter of 1997 that
they were ceasing all rental payments on this property. (NOTE: Refer to
"Other Property Matters" below for further discussion.)
Rents Receivable
----------------
There were no rental delinquencies at June 30, 1997.
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 sub-lease directly
to the Partnership; and consider modifying their remaining leases that
currently pay straight percentage rent versus fixed rent. The Partnership
has countered these proposals and currently awaits a response from the
tenant.
. BJ's Market & Bakery (Chicago, . The Partnership has received a
IL) who recently replaced the sales contract from a prospective
previous Porterhouse restaurant buyer for the vacant land in
tenant began their lease April 1997. Colorado. Management is currently
Business opened on May 15, 1997, awaiting final terms of the
and rent commenced on August 1, contract.
1997. The tenant reports to
management that sales since mid-May . Mandaza, Inc., tenant of Rio Bravo
have been very favorable. restaurant, finally began
construction during the Second
. Chi Chi's, Inc., tenant of Chi Chi's Quarter of 1997 following their
restaurant has been experiencing a setback last quarter which was
sales decline which continues to be related to the severe winter
monitored by the Partnership. weather and flooding. The tenant
began paying rent in July.
<PAGE>
Page 4 DiVall 1 2 Q 97
--------------------------
Property Highlights (cont'd)
. Hardee's Food Systems, Inc. was formally acquired in July 1997 by CKE
Restaurants, owner of Carl's Jr. restaurants. 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. This acquisition impacts
the Partnership's Hardee's restaurant in Fond du Lac, Wisconsin.
--------------------------
Restoration Highlights
. There were no recoveries received . The trial against Boatmen's First
during the Second Quarter 1997. National Bank of Kansas City was
held on June 23 and 24, 1997.
. "Total" recoveries received to date
for the Partnership are No ruling has been issued.
approximately $668,000.
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 June 30, 1997.
<TABLE>
<CAPTION>
================================================================================
Distribution Capital
------------ -------
Analysis Balance
-------- -------
<S> <C> <C>
Original Capital Balance - $25,000,000
Cash Flow From Operations Since Inception $ 18,017,498 -
Total Distributions Since Inception (20,316,740) -
------------
(Return) of Capital $ (2,299,242) (2,299,242)
============ -----------
"Net" Remaining Initial Investment
by Original Partners - $22,700,758
===========
================================================================================
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
<PAGE>
Page 5 DiVall 1 2 Q 97
--------------------------
Questions & Answers
1. Why am I receiving solicitations 2. When can I expect my next
to buy my units? distribution mailing?
Any solicitations that you may Your next scheduled distribution
receive to buy your units are a correspondence for the Third
result of a third-party (not Quarter of 1997 will be mailed on
affiliated with TPG, Inc.) who is November 15, 1997.
interested in acquiring units at a
discounted rate. As General Partner,
we encourage you to thoroughly
review all your options.
* * *
================================================================================
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 JUNE 30, 1997
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
----------------------------------
2ND 2ND CASH
QUARTER QUARTER BETTER
6/30/97 6/30/97 (WORSE)
--------- --------- --------
<S> <C> <C> <C>
OPERATING REVENUES
Rental income $ 494,194 $ 508,517 $ 14,323
Direct financing interest 4,635 4,635 0
Interest income 10,500 8,889 (1,611)
Recoveries of Amounts Previously Written Off 0 0 0
Other income 0 2,609 2,609
--------- --------- --------
TOTAL OPERATING REVENUES $ 509,329 $ 524,650 $ 15,321
--------- --------- --------
OPERATING EXPENSES
Insurance $ 4,600 $ 4,215 $ 385
Management fees 23,754 23,520 234
Restoration fees 0 0 0
Overhead allowance 1,953 1,897 56
Advisory Board 3,900 2,600 1,300
Administrative 20,962 24,071 (3,109)
Professional services 4,360 2,587 1,773
Auditing 10,755 10,755 0
Legal 7,500 8,087 (587)
Property repairs 0 (10,026) 10,026
Defaulted tenants 12,550 907 11,643
--------- --------- --------
TOTAL OPERATING EXPENSES $ 90,334 $ 68,613 $ 21,721
--------- --------- --------
INTEREST EXPENSE $ 23,298 $ 21,403 $ 1,895
--------- --------- --------
INVESTIGATION AND RESTORATION EXPENSES $ 1,673 $ 3,144 $ (1,471)
--------- --------- --------
NON-OPERATING EXPENSES
Depreciation $ 87,679 $ 87,715 $ (36)
Amortization 2,616 3,077 (461)
--------- --------- --------
TOTAL NON-OPERATING EXPENSES $ 90,295 $ 90,792 $ (497)
--------- --------- --------
TOTAL EXPENSES $ 205,600 $ 183,952 $ 21,648
--------- --------- --------
NET INCOME $ 303,729 $ 340,698 $ 36,969
OPERATING CASH RECONCILIATION: VARIANCE
--------
Depreciation and amortization 90,295 90,792 497
(Increase) Decrease in current assets (20,415) (113,359) (92,944)
Increase (Decrease) in current liabilities (2,107) (1,800) 307
G.P. distribution (1,215) (1,363) (148)
Cash reserved for payables 28,000 65,000 37,000
Advance from (to) future cash flows for current distributions (23,000) 0 23,000
--------- --------- --------
Net Cash Provided From Operating Activities $ 375,287 $ 379,968 $ 4,681
--------- --------- --------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Recoveries from former G.P. affiliates 0 0 0
Principal received on equipment leases 14,295 4,830 (9,465)
Investment in buildings and improvements 0 (700) (700)
Principal payments on mortgage notes (7,206) (9,100) (1,894)
--------- --------- --------
Net Cash Provided from Investing And Financing
Activities $ 7,089 $ (4,970) $(12,059)
--------- --------- --------
Total Cash Flow For Quarter $ 382,376 $ 374,998 $ (7,378)
Cash Balance Beginning of Period 841,518 947,054 105,536
Less 1st quarter distributions paid 5/97 (375,000) (375,000) 0
Plus cash reserved above for payables and future distributions (5,000) (65,000) (60,000)
--------- --------- --------
Cash Balance End of Period $ 843,894 $ 882,052 $ 38,158
Cash reserved for 2nd quarter L.P. distributions (375,000) (375,000) 0
Cash reserved for payment of payable and future distributions (335,000) (385,000) (50,000)
--------- --------- --------
Unrestricted Cash Balance End of Period $ 133,894 $ 122,052 $(11,842)
========= ========= ========
- - ---------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
----------------------------------
* Quarterly Distribution $ 375,000 $ 375,000 $ 0
Mailing Date 8/15/97 (enclosed) -
- - ---------------------------------------------------------------------------------------------------
* Refer to distribution letter for detail of quarterly distribution.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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 $2,299,242
-----------
CURRENT EQUITY $22,700,758
===========
</TABLE>
PORTFOLIO
<TABLE>
<CAPTION>
--------------------------------- -------------------------------------------
REAL ESTATE EQUIPMENT
--------------------------------- -------------------------------------------
- - ------------------------------- BASE % LEASE LEASE * % *
CONCEPT LOCATION COST RENT YIELD EXPIRATION COST RECEIPTS RETURN
- - ------------------------------- --------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RIO BRAVO GRAND FORKS, ND 984,801 100,000 10.15%
CHI CHI'S EAU CLAIRE, WI 1,042,730 136,260 13.07%
VACANT LAND COL. SPRINGS, CO 356,549 0 0.00%
DENNY'S ** GLENDALE, AZ 1,105,926 90,000 8.14% 68,744 0 0.00%
DENNY'S ** SCOTTSDALE, AZ *1,051,157 90,000 8.56% 40,553 0 0.00%
DENNY'S ** MESA, AZ 1,028,036 90,000 8.75% 39,218 0 0.00%
DENNY'S ** PEORIA, AZ 1,105,926 90,000 8.14% 58,781 0 0.00%
BW-III HOPKINS, MN 795,050 66,000 8.30% 1/15/2000 190,000 37,860 19.93%
DENNY'S BEAVER DAM, WI 659,299 66,000 10.01% 3/31/2000 190,000 37,860 19.93%
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>
------------------------------------ -------------
TOTALS TOTAL %
- - ------------------------------ ------------------------------------ ON 22,700,758
CONCEPT LOCATION INVESTED RECEIPTS * RETURN * EQUITY RAISE
- - ------------------------------ ------------------------------------ -------------
<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% 8.90%
- - ------------------------------ ------------------------------------ -------------
</TABLE>
OUTSTANDING DEBT
<TABLE>
<CAPTION>
------------------------------- -------------------------- --------------------
AMOUNT ANNUAL CURRENT AMOUNT ANNUAL CURRENT AMOUNT ANNUAL
- - ------------------------------- OWED DEBT INTEREST OWED DEBT INTEREST OWED DEBT
MORTGAGED PROPERTIES 6/30/97 SERVICE RATE 6/30/97 SERVICE RATE 6/30/97 SERVICE
- - ------------------------------- ------------------------------- -------------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DENNY'S HOPKINS, MN 29,880 14,783 10.75% 49,800 24,637 10.75% 79,680 39,420
DENNY'S BEAVER DAM, WI 69,434 8,726 9.50% 174,194 21,514 9.50% 243,628 30,240
MULTIPLE STORES AZ, TX 600,000 0 8.50% 600,000 0
- - ------------------------------- ------------------------------- -------------------------- ---------------------
TOTALS 699,314 23,509 -- 223,994 46,151 -- 923,308 69,660
- - ------------------------------- ------------------------------- -------------------------- ----------------------------- -----
NET AFTER DEBT 19,166,548 1,920,611 10.02% 402,902 29,569 7.34% 19,569,450 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.
