<PAGE>
FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 West 11th Street, Suite 1110, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 421-7444
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Interests
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting securities held by nonaffiliates
of the Registrant: The aggregate market value of limited partnership interests
held by nonaffiliates is not determinable since there is no public trading
market for the limited partnership interests.
Index to Exhibits located on page: 36 - 37
-------------
<PAGE>
PART I
Item 1. Business
Background
- - ----------
The Registrant, DiVall Insured Income Fund Limited Partnership (the
"Partnership"), is a limited partnership organized under the Wisconsin Uniform
Limited Partnership Act pursuant to an Agreement of Limited Partnership dated as
of November 29, 1985, and amended as of September 15, 1986, June 16, 1987,
February 8, 1993, May 26, 1993, and June 30, 1994. As of December 31, 1997, the
Partnership consisted of one General Partner and 1,759 Limited Partners owning
an aggregate of 25,000 Limited Partnership Interests (the "Interests") acquired
at a public offering price of $1,000 per Interest before volume discounts. The
Interests were sold commencing September 17, 1986, pursuant to a Registration
Statement on Form S-11 filed under the Securities Act of 1933 (Registration 33-
2552) as amended. On March 16, 1988, the Partnership closed the offering at the
maximum offering amount of 25,000 Interests ($25,000,000), providing net
proceeds to the Partnership after volume discounts and offering costs of
$22,270,578.
The Partnership is currently engaged in the business of owning and operating its
investment portfolio (the "Properties") of commercial real estate. The
Properties are leased on a triple net basis to, and operated by, franchisors or
franchisees of national, regional and local retail chains under long-term
leases. The lessees consist of fast-food, family style, and casual/theme
restaurants. At December 31, 1997, the Partnership owned 22 properties and a
parcel of undeveloped land, as more fully described in Item 2.
Prior to the disposal of the Properties, the Partnership's return on its
investment will be derived principally from rental payments received from its
lessees. Therefore, the Partnership's return on its investment is largely
dependent upon, among other factors, the business success of its lessees. The
business success of the Partnership's individual lessees can be adversely
affected on three general levels. First, the tenants rely heavily on the
management contributions of a few key entrepreneurial owners. The business
operations of such entrepreneurial tenants can be adversely affected by death,
disability or divorce of a key owner, or by such owner's poor business decisions
such as an undercapitalized business expansion. Second, changes in a local
market area can adversely affect a lessee's business operation. A local economy
can suffer a downturn with high unemployment. Socioeconomic neighborhood changes
can affect retail demand at specific sites and traffic patterns may change, or
stronger competitors may enter a market. These and other local market factors
can potentially adversely affect the lessees of Partnership properties. Finally,
despite an individual lessee's solid business plans in a strong local market,
the chain concept itself can suffer reversals or changes in management policy
which in turn can affect the profitability of operations for Partnership
properties. Therefore, there can be no assurance that any specific lessee will
have the ability to pay its rent over the entire term of its lease with the
Partnership.
Since 98% of the Partnership's investment in properties and equipment involves
restaurant tenants, the restaurant market is the major market segment with a
material impact on Partnership operations. It would appear that the management
skill and potential operating efficiencies realized by Partnership lessees will
be a major ingredient for their future operating success in a very competitive
restaurant and food service marketplace.
There is no way to determine, with any certainty, which, if any, tenants will
succeed or fail in their business operations over the term of their respective
leases with the Partnership. It can be reasonably
2
<PAGE>
anticipated that some lessees will default on future lease payments to the
Partnership which will result in the loss of expected lease income for the
Partnership. Management will use its best efforts to vigorously pursue
collection of any defaulted amounts and to protect the Partnership's assets and
future rental income potential by trying to re-lease any properties with rental
defaults. External events which could impact the Partnership's liquidity are the
entrance of other competitors into the market areas of our tenants; liquidity
and working capital needs of the leaseholders; and failure or withdrawal of any
of the national franchises held by the Partnership's tenant. Each of these
events, alone or in combination, would affect the liquidity level of
leaseholders resulting in possible default by the tenant. Since the information
regarding plans for future liquidity and expansion of closely held
organizations, which are tenants of the Partnership, tend to be of a private and
proprietary nature, anticipation of individual liquidity problems is difficult,
and prediction of future events is nearly impossible.
A preliminary investigation during 1992 by the Office of the Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation"), revealed that during at least the four years ended
December 31, 1992, two of the former general partners of the Partnership, Gary
J. DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred
substantial cash assets of the Partnership and two affiliated publicly
registered partnerships, DiVall Insured Income Properties 2 Limited Partnership
("DiVall 2") and DiVall Income Properties 3 Limited Partnership ("DiVall 3")
(collectively the "Partnerships") to various other entities previously sponsored
by or otherwise affiliated with DiVall and Magnuson. The unauthorized transfers
were in violation of the respective Partnership Agreements. The aggregate amount
of the misappropriation, related costs and 9% interest accrued since January 1,
1993, is approximately $14,800,000, net of recoveries, of which $1,912,000 has
been allocated to the Partnership.
Subsequent to discovery, and in response to the regulatory inquiries, a third-
party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed (effective
February 8, 1993) to assume the responsibility for daily operations and assets
of the Partnerships as well as to develop and execute a plan of restoration to
the Partnerships. As reported in the Partnership's report on Form 8-K dated May
26, 1993, effective as of that date, the Limited Partners, by written consent of
a majority of interests, elected the Permanent Manager, TPG, as General Partner.
Additional results of the solicitation included the approval of the Permanent
Manager Agreement ("PMA"), the acceptance of the resignations of the former
general partners, amendments to certain provisions of the Partnership Agreement
pertaining to general partner interests and compensation, and an amendment of
the Partnership Agreement providing for an Advisory Board (the "Board").
The Permanent Manager Agreement
- - -------------------------------
The PMA was entered into on February 8, 1993, between the Partnership, DiVall 2,
DiVall 3, the now former general partners DiVall and Magnuson, their controlled
affiliates, and TPG, naming TPG as the Permanent Manager. The PMA contains
provisions allowing the Permanent Manager to submit the PMA, the issue of
electing the Permanent Manager as General Partner, and the issue of acceptance
of the resignations of the former general partners to a vote of the Limited
Partners through a solicitation of written consents.
TPG, as the new General Partner, has been operating and managing the affairs of
the Partnership in accordance with the provisions of the PMA and the Partnership
Agreement, as amended.
3
<PAGE>
Advisory Board
- - --------------
The concept of the Advisory Board was first introduced by TPG during the
solicitation of written consents for the Partnerships and is the only type of
oversight body known to exist for similar partnerships at this time. The first
Advisory Board was appointed in October 1993, and held its first meeting in
November 1993. The four person Advisory Board is empowered to, among other
functions, review operational policies and practices, review extraordinary
transactions, and advise and serve as an audit committee to the Partnership and
the General Partner. The Advisory Board does not have the authority to direct
management decisions or policies or remove the General Partner. The powers of
the Advisory Board are advisory only. The Advisory Board has full and free
access to the Partnership's books and records, and individual Advisory Board
members have the right to communicate directly with the Limited Partners
concerning Partnership business. Members of the Advisory Board are compensated
$3,000 annually and $1,200 for each quarterly meeting attended.
The Advisory Board currently consists of a broker dealer representative, Steven
Carson of First Albany Corporation; and a Limited Partner from each of the three
Partnerships: Robert White from the Partnership, Richard Otte from DiVall 2, and
Albert Gerritz from DiVall 3. For a brief description of each Board member,
refer to Item 10, Directors and Executive Officers of the Registrant.
Restoration Plan
- - ----------------
TPG, upon the commencement of its management of the Partnerships, developed a
strategy (the "Restoration Plan" or "Plan") for recovering as much of the
amounts misappropriated by the former general partners and their affiliates as
possible. The Plan focused on recovery from the following sources: (a) personal
property, (b) promissory notes, (c) land contracts, (d) litigation, and (e) PMA
savings.
A. Personal Property. DiVall and Magnuson appear to have very few
unencumbered personal assets which would materially benefit the
Partnerships. The Partnerships have obtained security interests in
substantially all of DiVall and Magnuson's assets which have been
identified. The security interests included a mortgage on DiVall's
residence and surrounding farm land which was subsequently sold to a
third party.
B. Promissory Notes. Pursuant to the PMA, DiVall, Magnuson, and entities
owned by them, granted the Partnership a security interest in certain
promissory notes and mortgages due from other DiVall related entities
(the "Private Partnerships"). Recovery of amounts due under these
notes is substantially complete, but the amount of such recoveries has
been significantly discounted because many of the Private Partnerships
are currently involved in bankruptcy proceedings. See Item 3, Legal
Proceedings, for additional information regarding the bankruptcy
proceedings of the Private Partnerships.
C. Land Contracts. The Partnerships were assigned two land contracts from
the Partnership's former general partners. These contracts were not
originally identified nor assigned in connection with the PMA, and
settlements have been received on these contracts.
D. Litigation. The Partnerships initiated lawsuits against the
Partnership's former auditors, former securities counsel, former
general partners and a former affiliate. Settlements were received in
these lawsuits during 1996. Refer to Item 3, Legal Proceedings, and
Note 12
4
<PAGE>
to the financial statements included in Item 8 below for additional
information concerning the settlement of these lawsuits.
E. PMA Savings. Pursuant to the terms of the PMA, The Provo Group, Inc.
is to account to the former general partners for all of the following
which are avoided or reduced by implementation of the PMA: (i) Fees
payable to the general partner or entities controlled by the general
partner, (ii) brokerage commissions, and (iii) residuals. Under the
PMA, all such savings shall be credited against the amount owed the
Partnership by the former general partners.
Total amounts recovered at December 31, 1997, amounted to $5,766,000 of which
approximately $745,000 was allocated to the Partnership. Currently, there are
few potential sources of recovery remaining.
The total amounts due the Partnerships from the former general partners and
their affiliates as of December 31, 1997, as a result of the misappropriation of
assets, approximates $14,800,000, net of recoveries, which includes the amount
of the misappropriation discovered to date, related costs, and 9% interest
accrued since January 1, 1993.
The Partnership has no employees.
All of the Partnership's business is conducted in the United States.
Item 2. Properties
The Partnership's properties are leased under long-term leases, generally with
terms of approximately 20 years. All leases are triple net which require the
tenant to pay all property operating costs including maintenance, repairs,
utilities, property taxes, and insurance. A majority of the leases contain
percentage rent provisions which require the tenant to pay a specified
percentage (3% to 8%) of gross sales above a threshold amount.
At December 31, 1997, the Partnership owned the following restaurant Properties:
<TABLE>
<CAPTION>
Lease
Acquisi- Property Name & Purchase Rental Per Expiration Renewal
tion Date Address Lessee Price (1) Annum Date Options
- - --------- --------------- ------ --------- ---------- ----------- -------
<C> <S> <C> <C> <C> <C> <C>
03/27/87 Denny's DenAmerica, Inc. $ 849,299 $ 66,000 03-31-2013 (3)
827 Park Ave.
Beaver Dam, WI
06/30/87 BW-3 DenAmerica, Inc.(5) 985,050 66,000 01-15-2013 (3)
502 N Blake Rd
Hopkins, MN
10/08/87 Fazoli's Fazoli's Restaurants, 605,076(2) 45,504 05-29-2005 (3)
3600 Merle Hay Rd Inc.
Des Moines, IA
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Lease
Acquisi- Property Name & Purchase Rental Per Expiration Renewal
tion Date Address Lessee Price (1) Annum Date Options
- - --------- --------------- ------ --------- ---------- ----------- -------
<C> <S> <C> <C> <C> <C> <C>
07/08/87 Taco Cabana TP Acquisition Corp. 1,308,153 132,000 06-30-2007 (4)
4355 Camp Wisdom
Dallas, TX
01/08/87 Taco Cabana TP Acquisition Corp. 1,474,569 132,000 06-30-2007 (4)
1505 N Collins St.
Arlington, TX
09/28/87 Taco Cabana TP Acquisition Corp. 1,257,596 132,000 06-30-2007 (4)
12475 NW Hwy &
Shiloh Rd
Dallas, TX
10/27/87 Chi-Chi's Mexican Chi Chi's, Inc. 1,042,730 136,260 10-31-2007 None
1030 Clairemont Ave.
Eau Claire, WI
12/01/87 Popeye's Bysom Enterprises, 610,893 81,420 10-31-2007 None
Famous Chicken Ltd.
7430 S Stoney
Island Ave
Chicago, IL
12/01/87 Popeye's Bysom Enterprises, 579,295 77,280 10-31-2007 None
Famous Chicken Ltd.
300 E 35th St.
Chicago, IL
12/01/87 Popeye's Bysom Enterprises, 610,893 81,420 10-31-2007 None
Famous Chicken Ltd.
346 E 95th St.
Chicago, IL
12/01/87 Popeye's Bysom Enterprises, 484,501 64,620 09-30-2007 None
Famous Chicken Ltd.
111 W 75th St.
Chicago, IL
12/01/87 Popeye's Bysom Enterprises, 473,968 63,180 09-30-2007 None
Famous Chicken Ltd.
818 E 47th St.
Chicago, IL
12/01/87 Popeye's Bysom Enterprises, 631,958 84,180 10-31-2007 None
Famous Chicken Ltd.
8732 S Stoney
Island Ave
Chicago, IL
12/01/87 Popeye's Bysom Enterprises, 437,105 58,260 09-30-2007 None
Famous Chicken Ltd.
5431 S Halsted
Chicago, IL
12/23/87 Rio Bravo Manzana Grand, Inc. 984,801 100,000 10-31-2006 (3)
3000 32nd Ave, S
Grand Forks, ND
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Lease
Acquisi- Property Name & Purchase Rental Per Expiration Renewal
tion Date Address Lessee Price (1) Annum Date Options
- - --------- --------------- ------ --------- ---------- ----------- -------
<C> <S> <C> <C> <C> <C> <C>
12/24/87 Denny's DenAmerica, Inc. 1,174,670 136,500 01-24-2010 (3)
10614 N 43rd Ave (2)
Glendale, AZ
12/24/87 Denny's DenAmerica, Inc. 1,164,707 136,500 01-24-2010 (3)
87th and Grand Ave (2)
Peoria, AZ
03/18/88 Denny's DenAmerica, Inc. 1,091,710 90,000 10-31-2007 (3)
7605 E McDowell (2)
Scottsdale, AZ
03/18/88 Denny's DenAmerica, Inc. 1,067,254 65,000 1-30-2007 (3)
1231 W Baseline (2)
Mesa, AZ
03/24/88 Hardee's Hardee's Food 1,026,931 72,000 03-31-2008 (3)
838 E Johnson St Systems, Inc.
Fond du Lac, WI
03/25/88 Taco Cabana TP Acquisition Corp. 1,369,243 132,000 06-30-2007 (4)
1827 Greenville Ave
Dallas, TX
04/15/88 BJ's Market BJ's, Inc. 905,807 60,000 03-31-2000 (4)
8736 S Stoney ----------- ----------
Island Ave
Chicago, IL
$20,136,209 $2,012,124
=========== ==========
</TABLE>
Footnotes:
(1) Purchase price includes all costs incurred to acquire the property.
(2) Purchase price includes the cost of equipment.
(3) Two five-year renewal options available.
(4) One five-year renewal option available.
(5) This tenant has subleased the property to Stone Canyon, Inc., the operator
of BW-3.
The BW-3 restaurant (formerly Denny's) in Hopkins, Minnesota, was vacated by the
tenant, DenAmerica, in September 1994. The property's lease, however, does not
expire until 2013, and the tenant continues to make all payments required by the
lease. During March 1995, the tenant executed a lease with a sub-tenant, Stone
Creek, Inc. for the property. During the First Quarter of 1997, the tenant,
DenAmerica, notified the Partnership that it wanted to be released from the
lease on this property as well as the Denny's in Beaver Dam, Wisconsin which it
has also vacated. Management is currently working with DenAmerica to resolve
the issue.
On January 26, 1995, the Partnership evicted the tenant and took possession of
the Porterhouse restaurant in Chicago, Illinois. The tenant of this property
had been delinquent throughout 1994. However, bankruptcy issues with the tenant
impacted the Partnership with respect to the appropriate or allowable actions in
dealing with the tenant's eviction. During January 1997, a new lease was
entered into for the property with the tenant of BJ's Market.
7
<PAGE>
The tenant of the Partnership's Hardee's restaurant has experienced sales
difficulties over the past three years. Management entered into a one-year lease
modification, in an effort to avoid having the tenant vacate the property, which
reduced 1996 rents by approximately $40,000. Additionally, delinquent rent
totaling approximately $19,000 was capitalized into a five (5) year note
accruing interest at 10% per annum. The Partnership recorded an allowance for
uncollectible rent for the amount capitalized at December 31, 1995.
During the Fourth Quarter of 1996, management terminated the lease with the
tenant and entered into a new lease with Hardee's Food Systems, Inc. In
connection with this transaction, the capitalized rent was received. The new
lease resulted in annual rents which are $57,000 lower than the previous
tenant's contract rent and $18,000 lower than the 1996 adjusted rent. In
exchange for the decrease in fixed rents, percentage rents were increased once
the tenant reaches sales breakpoints stated in the revised leases.
In addition to the 22 restaurant properties, the Partnership owned a vacant
parcel of land in Colorado Springs, Colorado at December 31, 1997. This land was
acquired in 1987 for an original acquisition cost of $356,549, from Rocky
Mountain Investment Corporation ("RMIC"), an affiliate of the former general
partners. The Partnership had intended to build a Rocky Rococo restaurant on the
land and lease it back to RMIC, but RMIC, as the result of subsequent financial
difficulties, did not meet conditions for a lease. In connection with the
Partnership's purchase, RMIC executed an agreement whereby it promised to pay
the Partnership an amount equal to a 14.5% per annum return on the purchase
price of the property, from the date of purchase. RMIC's obligations under the
agreement were personally guaranteed by Gary DiVall, a former general partner.
As of December 31, 1997, rent obligations and carrying costs due under this
agreement, amounted to approximately $319,000 and are not reflected in the
Partnership's financial statements as they are deemed uncollectible. The
Partnership wrote down the cost of the land to its estimated net realizable
value at December 31, 1993, of $250,000, and further reduced the carrying value
to $200,000 during 1996. The property was sold during January 1998 for $235,000.
Item 3. Legal Proceedings
In 1993, the Partnership, along with DiVall 2 and DiVall 3, initiated a lawsuit
against Ernst & Young LLP ("E&Y"), a certified public accounting firm, in
connection with the audits of the Partnerships performed by E & Y for the years
1989, 1990, and 1991. The Partnerships also filed claims against Magnuson,
DiVall, DiVall Real Estate Investment Corporation, David Shea, and the
Partnerships' former securities law firm, Quarles & Brady.
These matters were settled in 1996 yielding net proceeds to the Partnership,
after the payment of contingent legal fees and related costs, of approximately
$300,000.
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure the
repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 2 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
8
<PAGE>
In 1993, nineteen (19) of the Private Partnerships sought the protection of the
Bankruptcy Court in the Eastern District of Wisconsin. Seven (7) of these
bankruptcies were voluntary and twelve (12) of these bankruptcies were
involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest. These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.
The Partnership's experience in those bankruptcy cases that have concluded,
either through the approval of Plans of Reorganization, dismissal of the
bankruptcies, settlements or a combination of the foregoing, is that (i) the
value of the obligations of the Private Partnerships assigned to the
Partnerships have been at a significant discount to their face amounts, and (ii)
the General Partner interests in such Private Partnerships often have little
economic value. The Partnership's recoveries in these bankruptcies have been on
a steeply discounted basis.
Plans of reorganization have been filed in the bankruptcies, and settlement
agreements in all of the Private Partnerships have been reached. Settlements in
the bankruptcies have resulted in cash payments to the Partnerships in the
amount of $720,000 and notes secured by subordinated mortgages in the aggregate
amount of $625,000. The Partnerships subsequently sold the secured notes for a
total of $175,000.
In 1994, the Partnership filed a complaint in the United States District Court
for the Western District of Missouri against Boatmen's First National Bank of
Kansas City ("Boatmen's") seeking a declaratory judgment that Boatmen's has no
right or interest in a promissory note executed in the name of the Partnership
by the former general partners (the "Note") secured by mortgages on five
Partnership properties, and further seeking an injunction against foreclosure
proceedings instituted against a Partnership property located in Dallas, Texas,
under a first deed of trust and security agreement given to secure the Note (the
"Foreclosure"). The trial of the case took place on June 23, 1997. The judge
ruled in favor of the Partnership on August 21, 1997, that the note was not
enforceable. An appeal by Boatmen's was subsequently dropped, so the full
$600,000 recovery has been recorded. Pursuant to the Restoration Trust Account
procedures described in Note 11 to the Financial Statements, included in Part
II, Item 8 of this report, all of the Partnerships are sharing the expenses of
this litigation, and the recovery resulting from the full cancellation of the
alleged indebtedness was allocated among the three Partnerships on the same
basis as the restoration costs were being allocated via appropriate payments by
the Partnership to its affiliated Partnerships. The Partnership recognized
approximately $265,000 of income during 1997, for the reversal of interest which
had previously been accrued on the note.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market Price and Dividends on the Registrant's Common Equity and
Related Stockholder Matters
(a) Although some interests have been traded, there is no active public market
for limited partnership interests and it is not anticipated that an active
public market for limited partnership interests will develop.
9
<PAGE>
(b) As of December 31, 1997, there were 1,759 record holders of limited
partnership interests in the Partnership.
(c) The Partnership does not pay dividends. However, the Partnership Agreement,
as amended, provides for distributable net cash receipts of the Partnership
to be distributed on a quarterly basis, 99% to the Limited Partners and 1%
to the General Partner, subject to the limitations on distributions to the
General Partner described in the Amended Partnership Agreement. During 1997
and 1996, $1,575,000 and $1,835,000, respectively, were distributed in the
aggregate to the Limited Partners The General Partner received aggregate
distributions of $6,586 in 1997 and $6,045 in 1996.
Item 6. Selected Financial Data
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
(a Wisconsin limited partnership)
December 31, 1997, 1996, 1995, 1994 and 1993
(not covered by Independent Auditors' Report)
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- - -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenue $ 2,513,009 $ 2,534,391 $ 2,047,636 $ 2,767,500 $ 2,689,405
- - -----------------------------------------------------------------------------------
Net Income 1,646,501 1,511,229 1,065,084 1,059,888 872,828
- - -----------------------------------------------------------------------------------
Net Income per
Limited Partner
Interest 65.20 59.84 42.18 41.97 34.64
- - -----------------------------------------------------------------------------------
Total Assets 16,313,666 17,050,623 17,593,806 18,295,553 20,482,154
- - -----------------------------------------------------------------------------------
Total Partners'
Capital 15,577,742 15,512,827 15,842,643 16,571,183 17,055,050
- - -----------------------------------------------------------------------------------
Cash
Distributions
per Limited
Partnership
Interest 63.00 73.40 71.60 61.60 69.90
- - -----------------------------------------------------------------------------------
</TABLE>
(a) The above selected financial data should be read in conjunction with the
financial statements and the related notes appearing elsewhere in this
annual report.
10
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources:
- - --------------------------------
Investment Properties and Net Investment in Direct Financing Leases
- - -------------------------------------------------------------------
The investment properties, including equipment held by the Partnership at
December 31, 1997, were originally purchased at a price, including acquisition
costs, of approximately $20,136,000.
The Partnership sold the vacant land in Colorado Springs, Colorado during
January 1998, for $235,000. During January 1997, the Partnership executed a
lease for the Porterhouse restaurant in Chicago, Illinois with the tenant of
BJ's Market and Bakery.
During June 1996, the tenant of one of the Partnership's Chi-Chi's restaurants
vacated the property and paid a lease termination fee of $164,000, representing
one year's rent, real estate taxes and security deposit. During the Fourth
Quarter of 1996, a new lease was executed for the property with the tenant of
Rio Bravo. Rent commenced on the lease in June 1997.
The BW-3 restaurant (formerly Denny's) in Hopkins, Minnesota, was vacated by the
tenant, DenAmerica, in September 1994. The property's lease, however, does not
expire until 2013, and the tenant continues to make all payments required by the
lease. During March 1995, the tenant executed a lease with a sub-tenant, Stone
Creek, Inc. for the property. During the First Quarter of 1997, the tenant,
DenAmerica, notified the Partnership that it wanted to be released from the
lease on this property as well as the Denny's in Beaver Dam, Wisconsin which it
has also vacated. Management is currently working with DenAmerica to resolve the
issue.
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, amounted to $68,000 at December 31,
1997, compared to $204,000 at December 31, 1996. The decrease of $136,000 was a
result of principal payments received during the year, as well as the write-off
of approximately $78,000 of lease payments which were deemed uncollectible.
Other Assets
- - ------------
Cash and cash equivalents, including cash restricted for real estate taxes held
by the Partnership, were $644,000 at December 31, 1997, compared to $1,038,000
at December 31, 1996. The Partnership designated cash of $375,000 to fund the
Fourth Quarter 1997 distributions to Limited Partners paid in February 1998,
$140,000 for the payment of year-end accounts payable and accrued expenses, and
the remainder represents reserves deemed necessary to allow the Partnership to
operate normally. The decrease in cash is primarily due to recoveries received
during the Fourth Quarter of 1996 as well as the collection of capitalized rent
from Terratron, the former tenant of the Partnership's Hardee's restaurant. Cash
generated through the operations of the Partnership's investment properties and
sales of investment properties will provide the sources for future fund
liquidity and Limited Partner distributions.
The Partnership established an Indemnification Trust (the "Trust") during the
Fourth Quarter of 1993 and deposited $100,000 in the Trust during 1993, $90,000
during 1994, and $60,000 during 1995. The provision to establish the Trust was
included in the Permanent Manager Agreement for the indemnification
11
<PAGE>
of TPG, in the absence of fraud or gross negligence, from any claims or
liabilities that may arise from TPG acting as Permanent Manager. The Trust is
owned by the Partnership. For additional information regarding the Trust, refer
to Note 10 to the financial statements included in Item 8 of this report.
Due From Affiliated Partnerships, Due From Former Affiliates, Allowance for
- - ---------------------------------------------------------------------------
Uncollectible Amounts Due From Former Affiliates, Due to Affiliated Partnerships
- - --------------------------------------------------------------------------------
Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $477,000 at
December 31, 1997. The receivable decreased from the prior year due to $78,000
of recoveries received during the year from the former general partners and
their affiliates, including a favorable ruling in the litigation with Boatmen's
Bank.
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
$1,435,000 at December 31, 1997, and includes $785,000 of cumulative accrued
interest.
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former general partners and their affiliates reflecting the
estimated $3 million receivable. This net receivable was allocated among the
Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through December 31, 1997, $5,766,000 of recoveries have been
received which exceeded the original estimate of $3 million. As a result, the
Partnership has recognized $353,000 as income, which represents its share of the
excess recovery. The current General Partner continues to pursue recoveries of
the misappropriated funds, however, no further significant recoveries are
anticipated.
The restoration costs are allocated among the Partnerships based on each
Partnership's respective share of the misappropriation as discussed in Note 11
to the financial statements included in Item 8 of this report. The allocation is
adjusted periodically to reflect any changes in the entire misappropriation. The
Partnership's percentage of the allocation was reduced in 1993.
Liabilities
- - -----------
Mortgage notes payable decreased from $1,015,000 at December 31, 1996, to
$474,000 at December 31, 1997, due to monthly principal payments made on the
notes as well as additional principal reductions made from excess cash flows and
the refinancing of one note upon its maturity. Additionally, the note payable to
Boatmen's Bank, in the amount of $600,000, was determined to be unenforceable
and was recorded as a recovery among the Partnership and its affiliated
Partnerships. A note in the amount of $240,000 was entered into, in order to
fund a portion of the recovery payment to the affiliated Partnerships.
Accounts payable and accrued expenses at December 31, 1997, amounted to
approximately $58,000. The majority of this balance represented year-end
accruals of auditing fees.
12
<PAGE>
Real estate taxes payable amounted to $23,000 at December 31, 1997, compared to
$72,000 at December 31, 1996. The decrease is primarily a result of a reduction
in the real estate tax assessment on the BJ's Market property, which was vacant
during 1996, and the payment during 1997 of taxes collected in 1996 from the
former tenant of the Hardee's property in Wisconsin.
Due to the current General Partner amounted to $26,000 at December 31, 1996,
representing a true-up of the general partner's management fee, a leasing
commission for the lease of the Hardee's restaurant, and the Fourth Quarter
distribution, all of which were paid in 1997. The December 31, 1997 balance of
$2,351 represents the General Partner's portion of the Fourth Quarter
distribution.
Partners' Capital
- - -----------------
Net income for the year was allocated between the General Partner and the
Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement and the Amendment to the Partnership Agreement, as discussed more
fully in Note 4 of the financial statements included in Item 8 of this report.
The former general partners' capital account balance was reallocated to the
Limited Partners at December 31, 1993. Refer to Note 13 to the financial
statements included in Item 8 of this report for additional information
regarding the reallocation.
Cash distributions paid to the Limited Partners and to the General Partner
during 1997 of $1,575,000 and $6,586, respectively, have also been made in
accordance with the amended Partnership Agreement. The Fourth Quarter 1997
distribution of $375,000 was paid to the Limited Partners on February 15, 1998.
Results of Operations:
- - ----------------------
The Partnership reported net income for the year ended December 31, 1997, in the
amount of $1,647,000 compared to $1,511,000 for the year ended December 31,
1996, and net income for the year ended December 31, 1995, of $1,065,000.
Results for all three years were different than would be expected from "normal"
operations, primarily because of costs associated with the misappropriation of
assets by the former general partners and their affiliates, modifications to
leases, non-cash write-offs, and real estate taxes. Results for 1996 were also
impacted by a lease termination fee received and the reversal of a portion of
the former general partner receivable write-off. The costs associated with the
misappropriation increased significantly during 1995 and 1996 as the lawsuit
against the former general partners' accountants and attorneys got closer to
trial and as a result of contingent fee payments made in connection with the
settlement. During 1997, these costs had only a minimal impact on operations.
Revenues
- - --------
Total revenues were $2,513,000, $2,534,000 and $2,048,000 for the years ended
December 31, 1997, 1996 and 1995. Revenue for 1996 includes lease modification
fees in the amount of $164,000 from Chi-Chi's and a recovery of $275,000 for a
portion of the former general partner receivable which had previously been
written off. Revenue for 1997 includes a recovery of $78,000 which had
previously been written off and a reversal of $265,000 of previous interest
accruals for the Boatmen's note which was ruled unenforceable.
Based on leases currently in place on the remaining owned properties, total
revenues should approximate $2,000,000 annually. Future revenues may decrease
with tenant defaults and/or sales of Partnership
13
<PAGE>
properties. They may also increase with additional rents due from tenants, if
those tenants experience sales levels which require the payment of additional
rent to the Partnership.
Expenses
- - --------
For the years ended December 31, 1997, 1996, and 1995, cash expenses amounted to
approximately 15%, 24% and 29% of total revenues, respectively. Total expenses,
including non-cash items, amounted to approximately 34%, 40%, and 48% of total
revenues for the years ended December 31, 1997, 1996, and 1995, respectively.
Items negatively impacting expenses during the last three years include expenses
incurred primarily in relation to the misappropriation of assets by the former
general partners and their affiliates, interest expense, non-cash write offs,
property write-downs, and real estate taxes.
For the years ended December 31, 1997, 1996, and 1995, expenses incurred in
relation to the misappropriated assets amounted to $9,000, $169,000, and
$133,000, respectively. Future expenses incurred in relation to the
misappropriation should have a minimal impact on the Partnership.
Interest expense for 1997 amounted to $69,000 compared to $107,000 in 1996, and
$111,000 in 1995. No interest was accrued on the Boatmen's note, which was ruled
unenforceable, during the Fourth Quarter of 1997.
Additional expenses impacting operating results are write-offs of uncollectible
rent, and write-downs of property to their estimated net realizable values. All
of these items, including depreciation, are non-cash items and do not affect
current operating cash flow of the Partnership or distributions to the Limited
Partners.
Write-offs for uncollectible rents and receivables amounted to $128,000, $9,000,
and $24,000, during 1997, 1996, and 1995 respectively. The write-offs are the
result of defaults as well as modifications to several property leases since
inception of the Partnership. The 1997 allowance represents deferred rent and
equipment payments on the Denny's property in Beaver Dam, Wisconsin. The tenant,
DenAmerica, Inc., has vacated the property and future collectibility is
uncertain.
During 1996, the Colorado land was written down to its estimated net realizable
value of $200,000, resulting in a $50,000 charge to income.
Real estate tax expenses for 1995 were inordinately high as former management
allowed these taxes to become delinquent for several years while interest and
penalties accumulated, along with new liabilities incurred on vacant properties
and defaulted tenants. The Partnership incurred real estate taxes on behalf of
tenants in the amounts of $3,000, $30,000, and $64,000 for the years ended
December 31, 1997, 1996, and 1995, respectively.
Inflation:
- - ----------
Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio of triple net leases. By their nature, such leases actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes. Although the majority of the Partnership's leases have percentage
rent clauses, revenues from percentage rents represented only 6% of rental
income for 1997.
14
<PAGE>
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.
Year 2000
- - ---------
Since the Partnership's accounting and investor relations software are not owned
by the Partnership and tenants are responsible for the operation of any
equipment located at the Partnership's properties, issues regarding preparedness
for the year 2000 should have a minimal impact on the Partnership.
Item 8. Financial Statements and Supplementary Data
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
----------------------------------------------
(a Wisconsin limited partnership)
---------------------------------
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
-------------------------------------------
Page
----
Report of Independent Public Accountants ....... 16
Balance Sheets, December 31, 1997 and 1996 ....... 17 - 18
Statements of Income for the Years
Ended December 31, 1997, 1996, and 1995 ....... 19
Statements of Partners' Capital for the
Years Ended December 31, 1997, 1996, and
1995 ....... 20
Statements of Cash Flows for the Years
Ended December 31, 1997, 1996, and 1995 ....... 21 - 22
Notes to Financial Statements ....... 23 - 32
Schedule III--Real Estate and Accumulated
Depreciation ....... 38
15
<PAGE>
Arthur Andersen LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Divall Insured Income Fund Limited Partnership:
We have audited the accompanying balance sheets of Divall Insured Income Fund
Limited Partnership (the Partnership) as of December 31, 1997 and 1996, and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Partnership's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
we believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Divall Insured Income Fund
Limited Partnership as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Chicago, Illinois
February 26, 1998
16
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1997 and 1996
--------------------------
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------- -------------
<S> <C> <C> <C>
INVESTMENT PROPERTIES AND EQUIPMENT: (Notes 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 (4,781,219) (4,430,396)
----------- -----------
Net investment properties and equipment 14,849,275 15,195,098
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES: (Note 8) 67,943 203,934
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 644,274 1,019,582
Cash restricted for real estate taxes 0 18,048
Cash held in Indemnification Trust (Note 10) 299,456 284,615
Rents and other receivables (net of allowance of
$1,320 in 1996) 147,556 117,880
Deferred rent receivable 189,494 136,925
Prepaid insurance 12,407 14,268
Deferred charges (net of accumulated amortization
of $70,804 in 1997 and $60,086 in 1996) 103,261 60,273
----------- -----------
Total other assets 1,396,448 1,651,591
----------- -----------
DUE FROM FORMER AFFILIATES: (Note 2)
Due from former general partner affiliates 477,184 555,052
Allowance for uncollectible amounts due from
former affiliates (477,184) (555,052)
Restoration cost receivable 1,434,662 1,252,957
Allowance for uncollectible restoration receivable (1,434,662) (1,252,957)
----------- -----------
Due from former affiliates, net 0 0
----------- -----------
Total assets $16,313,666 $17,050,623
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1997 and 1996
--------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES:
Mortgage notes payable (Note 6) $ 474,396 $ 1,015,429
Accounts payable and accrued expenses 57,848 47,816
Due to current General Partner 2,351 26,275
Accrued interest payable 0 226,027
Security deposits 124,930 104,930
Real estate taxes payable 22,530 72,200
Unearned rental income 53,869 45,119
------------ ------------
Total liabilities 735,924 1,537,796
------------ ------------
CONTINGENT LIABILITIES: (Notes 9 and 13)
PARTNERS' CAPITAL: (Notes 1, 4 and 13)
Current General Partner -
Cumulative net income 61,758 45,293
Cumulative cash distributions (24,773) (18,187)
------------ ------------
36,985 27,106
------------ ------------
Limited Partners (25,000 interests outstanding) -
Capital contributions, net of offering costs 22,270,578 22,270,578
Cumulative net income 13,272,014 11,641,978
Cumulative cash distributions (20,791,741) (19,216,741)
Reallocation of former
general partners' capital 789,906 789,906
------------ ------------
15,540,757 15,485,721
------------ ------------
Total partners' capital 15,577,742 15,512,827
------------ ------------
Total liabilities and partners' capital $ 16,313,666 $ 17,050,623
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the Years Ended December 31, 1997, 1996, and 1995
-----------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Rental income $2,106,163 $1,994,422 $1,938,501
Lease termination fee (Note 5) 0 164,419 0
Interest income on direct financing leases 17,800 23,295 28,268
Interest income 41,196 46,268 39,879
Recovery of amounts previously written off (Note 12) 77,867 274,999 0
Reversal of interest accrual (Note 12) 265,294 0 0
Other Income 4,689 30,988 40,988
---------- ---------- ----------
2,513,009 2,534,391 2,047,636
---------- ---------- ----------
EXPENSES:
Partnership management fees (Note 7) 90,465 99,309 87,375
Restoration fees (Note 7) 3,115 11,249 833
Insurance 16,744 17,725 19,066
General and administrative 62,251 61,558 55,670
Interest 68,637 107,024 111,054
Real estate taxes, including interest and penalties 3,267 29,690 64,456
Expenses incurred due to default by lessee 21,994 11,453 9,782
Professional services 87,855 85,333 92,630
Professional services related to Investigation (Note 11) 9,053 169,243 133,035
Advisory Board fees and expenses 13,134 15,459 14,459
Depreciation 350,823 351,492 366,302
Amortization 10,796 4,743 3,590
Provision for uncollectible rents and other receivables 128,374 8,884 24,300
Write-down of property to net realizable value 0 50,000 0
---------- ---------- ----------
866,508 1,023,162 982,552
---------- ---------- ----------
NET INCOME $1,646,501 $1,511,229 $1,065,084
========== ========== ==========
NET INCOME - CURRENT GENERAL PARTNER $ 16,465 $ 15,112 $ 10,651
NET INCOME - LIMITED PARTNERS 1,630,036 1,496,117 1,054,433
---------- ---------- ----------
$1,646,501 $1,511,229 $1,065,084
========== ========== ==========
NET INCOME PER LIMITED PARTNERSHIP INTEREST,
based on 25,000 interests outstanding $ 65.20 $ 59.84 $ 42.18
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
For the years ended December 31, 1997, 1996, and 1995
-----------------------------------------------------
<TABLE>
<CAPTION>
Current General Partner Limited Partners
----------------------------------- ---------------------------------------------------------------------
Capital
Cumulative Cumulative Contributions Cumulative Cumulative
Net Cash Net of Net Cash
Income Distributions Total Offering Costs Income Distribution Reallocation Total
---------- -------------- ------- -------------- ----------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994 $ 19,530 $ (8,518) $11,012 $ 22,270,578 $ 9,091,428 $(15,591,741) $ 789,906 $16,560,171
Cash Distributions
($71.60 per limited
partnership interest) (3,624) (3,624) (1,790,000) (1,790,000)
Net Income 10,651 10,651 1,054,433 1,054,433
--------- ---------- ------- ------------ ----------- ------------ --------- -----------
BALANCE AT DECEMBER 31, $ 30,181 $ (12,142) $18,039 $ 22,270,578 $10,145,861 $(17,381,741) $ 789,906 $15,824,604
1995
Cash Distributions
($73.40 per limited
partnership interest) (6,045) (6,045) (1,835,000) (1,835,000)
Net Income 15,112 15,112 1,496,117 1,496,117
--------- --------- ------- ------------ ----------- ------------ --------- -----------
BALANCE AT DECEMBER 31,
1996 $ 45,293 $ (18,187) $27,106 $ 22,270,578 $11,641,978 $(19,216,741) $ 789,906 $15,485,721
Cash Distributions
($63.00 per limited
partnership interest) (6,586) (6,586) (1,575,000) (1,575,000)
Net Income 16,465 16,465 1,630,036 1,630,036
--------- --------- ------- ------------ ----------- ------------ --------- -----------
BALANCE AT DECEMBER 31, $ 61,758 $ (24,773) $36,985 $ 22,270,578 $13,272,014 $(20,791,741) $ 789,906 $15,540,757
1997 ========= ========= ======= ============ =========== ============ ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996, and 1995
-----------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 1,646,501 $ 1,511,229 $ 1,065,084
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 361,619 356,235 369,892
Recovery of amounts previously written off (77,867) (274,999) 0
Provision for uncollectible rents and other
receivables 128,374 8,884 24,300
Write-down of property to net realizable value 0 50,000 0
Reversal of interest accrual (265,294) 0 0
Gain on lease termination 0 (26,248) 0
Interest applied to Indemnification Trust Account (14,841) (14,127) (18,690)
Increase/(Decrease) in unearned rental income 8,750 41,332 3,787
(Increase)/Decrease in rents and other receivables (29,676) (51,792) (30,936)
Increase in deferred rent receivable (102,873) (13,025) (15,876)
(Deposits)/Withdrawals for payment of real estate taxes 18,048 10,170 (21,308)
(Increase)/Decrease in prepaid expenses 1,861 (7,473) 1,083
(Increase)/Decrease in due from current General Partner 0 1,754 (1,754)
Increase/(Decrease) in accounts
payable and accrued expenses 10,032 (99,023) 74,252
Increase/(Decrease) in payable to tenant 0 (96,000) (48,000)
Increase/(Decrease) in due to current General Partner (23,924) 8,944 (714)
Increase in accrued interest payable 39,267 52,500 52,501
Increase/(Decrease) in security deposits 20,000 (9,665) 0
Increase/(Decrease) in real estate taxes payable (49,670) (15,677) (45,069)
----------- ----------- -----------
Net cash provided from operating activities 1,670,307 1,433,019 1,408,552
----------- ----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Deposit to Indemnification Trust cash account 0 0 (60,000)
Increase in deferred charges (53,783) 0 (16,153)
Proceeds from sale of investment properties 0 15,400 0
Investment in building improvements (5,000) 0 0
Payments from affiliated partnerships 0 105,833 43,602
Recoveries from former affiliates 77,867 568,573 20,823
Principal payments received on direct financing leases 57,920 52,425 47,452
Principal receipts on notes receivable 0 0 5,270
----------- ----------- -----------
Net cash provided from investing activities 77,004 742,231 40,994
----------- ----------- -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Principal payments on mortgage notes (429,031) (130,135) (9,964)
Payments to Restoration Trust (600,000) 0 0
Proceeds from mortgage notes 487,998 0 0
Cash distributions to Limited Partners (1,575,000) (1,835,000) (1,790,000)
Cash distributions to current General Partner (6,586) (6,045) (3,624)
----------- ----------- -----------
Net cash (used in) financing activities (2,122,619) (1,971,180) (1,803,588)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (375,308) 204,070 (354,042)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,019,582 815,512 1,169,554
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 644,274 $ 1,019,582 $ 815,512
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 29,370 $ 54,524 $ 58,553
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
Supplemental Information to the Statements of Cash Flows
--------------------------------------------------------
The following significant noncash transactions occurred during the three years
affecting the Partnership's financial statements:
1. During 1996, the Partnership was deeded land with a value of $15,400
in satisfaction of a note receivable from a tenant.
2. During 1996, security deposits totaling $10,815 were applied to a note
receivable from a tenant.
3. During 1996, the Partnership incurred leasing commissions totaling
$45,172 which were unpaid at year-end. The amount was paid in full
during 1997.
The accompanying notes are an integral part of these statements.
22
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
1. ORGANIZATION AND BASIS OF ACCOUNTING:
-------------------------------------
DiVall Insured Income Fund Limited Partnership (the "Partnership") was formed on
November 29, 1985, pursuant to the Uniform Limited Partnership Act of the State
of Wisconsin. The initial capital which was contributed during 1986, consisted
of $110, representing aggregate capital contributions of $100 by the former
general partners and $10 by the Initial Limited Partner. The Partnership
initially offered 15,000 additional limited partnership interests ("Interests")
at $1,000 per Interest. Subsequently, the former general partners exercised
their option to increase the offering to 25,000 Interests. The offering closed
on March 16, 1988 at which point 25,000 Interests had been sold, resulting in
the receipt by the Partnership of offering proceeds of $22,270,578, net of
offering costs and after volume discounts.
The Partnership is currently engaged in the business of owning and operating its
investment portfolio (the "Properties") of commercial real estate. The
Properties are leased on a triple net basis to, and operated by, franchisors or
franchisees of national, regional and local retail chains under long-term
leases. The lessees consist of fast-food, family style, and casual/theme
restaurants. At December 31, 1997, the Partnership owned 22 properties and a
parcel of undeveloped land.
Rental revenue from investment properties is recognized on the straight-line
basis over the life of the respective lease. Revenue from direct financing
leases is recognized at level rates of return over the term of the lease.
Depreciation of the properties is provided on a straight-line basis over 31.5
years which is the estimated useful lives of the buildings and improvements.
Equipment is depreciated on a straight-line basis over the estimated useful
lives of 5 years.
Deferred charges primarily consist of leasing commissions paid when properties
are leased to tenants other than the original tenant. Leasing commissions are
capitalized and amortized over the life of the lease.
Real estate taxes on the Partnership's investment properties are the
responsibility of the tenant. However, when a tenant fails to make the required
tax payments or when a property becomes vacant, the Partnership makes the
appropriate payment to avoid possible foreclosure of the property. Taxes are
accrued in the period in which the liability is incurred.
Cash and cash equivalents include cash on deposit in financial institutions and
highly liquid temporary investments with initial maturities of 90 days or less.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities (and disclosure of
contingent assets and liabilities) at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
23
<PAGE>
During 1996, the Partnership adopted Statement of Financial Accounting Standards
No.121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, which requires that all long-lived assets
be reviewed for impairment in value whenever changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. The adoption of
SFAS 121 had no impact on the Partnership's financial statements in 1996 and
1997.
The Partnership will be dissolved on November 30, 2010, or earlier upon the
prior occurrence of any of the following events: (a) the disposition of all
properties of the Partnership; (b) the written determination by the General
Partner that the Partnership's assets may constitute "plan assets" for the
purposes of ERISA; (c) the agreement of Limited Partners owning a majority of
the outstanding interests to dissolve the Partnership; or (d) the bankruptcy or
termination of the existing General Partner, unless an additional General
Partner is previously elected by the Limited Partners.
No provision for Federal income taxes has been made, as any liability for such
taxes would be that of the individual partners rather than the Partnership. At
December 31, 1997, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$3,900,000.
The following represents a reconciliation of net income as stated on the
Partnership's statements of income to net income for tax reporting purposes:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Net income, per statements of income $1,646,501 $1,511,229 $1,065,084
Book to tax depreciation difference (37,139) (48,172) (34,873)
Straight line rent adjustment (52,569) (13,025) (15,876)
Bad debt reserve/expense 84,390 111,284 44,914
Book valuation adjustment of real property 0 50,000 0
Interest expense (214,829) 39,303 52,500
Sales commission 0 (30,000) 0
Prepaid rent 8,750 41,332 3,787
Other, net 1,888 131 220
---------- ---------- ----------
Net income(loss) for tax reporting purposes $1,436,992 $1,662,082 $1,115,756
========== ========== ==========
</TABLE>
2. REGULATORY INVESTIGATION:
-------------------------
A preliminary investigation during 1992 by the Office of the Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation"), revealed that during at least the four years ended
December 31, 1992, two of the former general partners of the Partnership, Gary
J. DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred
substantial cash assets of the Partnership and two affiliated publicly
registered partnerships, DiVall Insured Income Properties 2 Limited Partnership
("DiVall 2") and DiVall Income Properties 3 Limited Partnership ("DiVall 3")
(collectively the "Partnerships") to various other entities previously sponsored
by or otherwise affiliated with DiVall and Magnuson. The unauthorized transfers
were in violation of the respective Partnership Agreements and resulted in
part, from material weaknesses in the internal control system of the
Partnerships. The aggregate amount of the misappropriation, related costs, and
9% interest accrued since January 1, 1993, is approximately $14,800,000, of
which approximately $1,912,000 has been attributed to the Partnership and is
reflected as due from former affiliates on the balance sheet at December 31,
1997. The 9% interest accrued as of December 31, 1997, amounted to
approximately $785,000 and is not reflected in the accompanying income
statement. As of December 31, 1996, $1,808,000 was reflected as due from former
affiliates based on the estimated overall misappropriation and related costs of
$14,000,000.
24
<PAGE>
Subsequent to discovery, and in response to the regulatory inquiries, a third-
party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed (effective
February 8, 1993) to assume the responsibility for daily operations and assets
of the Partnerships as well as to develop and execute a plan of restoration for
the Partnerships. Effective May 26, 1993, the Limited Partners, by written
consent of a majority of interests, elected The Permanent Manager, TPG, as
General Partner. TPG terminated the former general partners by accepting their
tendered resignations.
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former general partners and their affiliates reflecting the
estimated $3 million receivable. This net receivable was allocated among the
Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through December 31, 1997, $5,766,000 of recoveries have been
received which exceeded the original estimate of $3 million. As a result, the
Partnership has recognized $353,000 as income, which represents its share of the
excess recovery. The current General Partner continues to pursue recoveries of
the misappropriated funds, however, no further significant recoveries are
anticipated.
3. INVESTMENT PROPERTIES:
----------------------
As of December 31, 1997, the Partnership owned 22 fully constructed fast-food
restaurants and a parcel of undeveloped land. The restaurants are comprised of
the following: one (1) Chi Chi's Mexican restaurant, four (4) Taco Cabana
restaurants, five (5) Denny's restaurants, seven (7) Popeye's Famous Fried
Chicken restaurants, one (1) Hardee's restaurant, one (1) BW-3 restaurant, one
(1) Fazoli's restaurant, one (1) Rio Bravo restaurant, and one (1) BJ's Market
and Bakery. The 22 properties are located in seven (7) states.
The undeveloped land is located in Colorado Springs, Colorado, and was
originally purchased in contemplation of constructing and leasing a Rocky
Rococo's restaurant. The land was purchased from a former affiliate of the
Partnership in 1987. As part of the purchase, the former affiliate agreed to
reimburse the Partnership for any costs to carry the property while the land
remained unimproved and nonearning. The construction never commenced and the
former affiliate has not fully reimbursed the Partnership for its costs. The
unreimbursed costs include guaranteed monthly rent, real estate taxes,
insurance, and additional items required to maintain the property. At December
31, 1997 and 1996, these costs totaled approximately $310,000 and $270,000,
respectively, and are not reflected in the Partnership's financial statements.
The land was originally purchased for $356,549 and has an adjusted carrying
value at December 31, 1997, of $200,000 which approximates the estimated net
realizable value. A $50,000 write-down was taken on the property during 1996.
The property was sold during January 1998, for $235,000.
From time to time, the Partnership experiences interruptions in rental receipts
due to tenant delinquencies and vacancies. During June 1996, the tenant of the
Partnerships' Chi-Chi's restaurant in Grand Forks, North Dakota paid a lease
termination fee equal to one year's rent, real estate taxes, and security
deposit, and vacated the premises. During the Fourth Quarter of 1996, this
property was leased to the tenant of Rio Bravo, and rent commenced under the
lease in June 1997. During January 1995, the Partnership evicted the tenant and
took possession of the Porterhouse restaurant in Chicago, Illinois. The tenant
in this property had been delinquent and in bankruptcy throughout 1994. A new
lease on this property was executed in January 1997 with the tenant of BJ's
Market and Bakery. Rent commenced August 1, 1997.
The tenant of the Partnerships' Hardee's restaurant has experienced significant
declines in sales over the past two years. Management had modified the rent for
this tenant for 1996 in an effort to avoid having the tenant vacate the property
resulting in a decrease in base rent for 1996 of approximately $40,000.
Additionally, delinquent rent totaling approximately $19,000 was capitalized
into a five (5)-year note accruing interest at 10% per annum. The Partnership
recorded an allowance for uncollectible rent for the
25
<PAGE>
amount capitalized at December 31, 1995. During the Fourth Quarter of 1996,
management terminated the lease with the tenant and entered into a new lease
with Hardee's Food Systems, Inc. In connection with this transaction, the
capitalized rent was paid. The new lease resulted in annual rents which are
$57,000 lower than the previous tenant's contract and $18,000 lower than the
1996 adjusted rent.
The BW-3 restaurant (formerly Denny's) in Hopkins, Minnesota, was vacated by the
tenant, DenAmerica, in September 1994. The property's lease, however, does not
expire until 2013, and the tenant continues to make all payments required by the
lease. During March 1995, the tenant executed a lease with a sub-tenant, Stone
Creek, Inc. for the property. During the First Quarter of 1997, the tenant,
DenAmerica, notified the Partnership that it wanted to be released from the
lease on this property as well as the Denny's in Beaver Dam, Wisconsin which it
has also vacated. Management is currently working with DenAmerica to resolve the
issue.
The total cost of the investment properties and equipment includes the original
purchase price plus acquisition fees and other capitalized costs paid to a
former affiliate of the general partners.
The current General Partner receives a fee for managing the Partnership equal to
4% of the gross receipts, with a maximum reimbursement for office rent and
related office overhead of $25,000 between the three affiliated Partnerships.
Effective March 1, 1997, the minimum management fee and the maximum
reimbursement for office rent and overhead increased by 3.3%, representing the
allowable annual Consumer Price Index adjustment per the Permanent Manager
Agreement ("PMA"). For purposes of computing the 4% overall fee, gross receipts
includes amounts recovered in connection with the misappropriation of assets by
the former general partners and their affiliates. TPG has received fees from the
Partnership totaling $18,052 to date on the amounts recovered, which has been
offset against the 4% minimum fee.
Several of the Partnership's property leases contain purchase option provisions
with stated purchase prices in excess of the original cost of the properties.
The current General Partner is unaware of any unfavorable purchase options in
relation to original cost.
4. PARTNERSHIP AGREEMENT:
----------------------
The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
General Partners. The Partnership Agreement also provided for quarterly cash
distributions from Net Cash Receipts, as defined, within 60 days after the last
day of the first full calendar quarter following the date of release of the
subscription funds from escrow, and each calendar quarter thereafter, in which
such funds were available for distribution with respect to such quarter. Such
distributions were to be made 90% to Limited Partners and 10% to the former
general partners, provided, however, that quarterly distributions would be
cumulative and were not to be made to the former general partners unless and
until each Limited Partner had received a distribution from Net Cash Receipts,
as defined, in an amount equal to 10.5% annum, cumulative simple return on his
or her Adjusted Original Capital, as defined, from the Return Calculation Date,
as defined.
Net proceeds, as originally defined, were to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital, (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a 14% per annum, cumulative simple return thereon from the
Return Calculation Date, including in the calculation of such return, all prior
distributions of Net Cash Receipts and any prior distributions of Net Proceeds
of this clause, and (c) then, to Limited Partners, 88%, and to the General
Partners, 12%, of remaining Net Proceeds available for distribution.
26
<PAGE>
On May 26, 1993, pursuant to the results of a solicitation of written consents
from the Limited Partners, the Partnership Agreement was amended to replace the
former general partners and amend various sections of the agreement. The former
general partners were replaced as General Partner by The Provo Group, Inc., an
Illinois corporation. Under the terms of the amendment, net profits or losses
from operations are allocated 99% to the Limited Partners and 1% to the current
General Partner. The amendment also provided for distributions from Net Cash
Receipts to be made 99% to the Limited Partners and 1% to the current General
Partner provided that quarterly distributions will be cumulative and will not be
made to the current General Partner unless and until each Limited Partner has
received a distribution from Net Cash Receipts in an amount equal to 10.5% per
annum, cumulative simple return on his or her Adjusted Original Capital, as
defined, from the Return Calculation Date, as defined except to the extent
needed by the General Partner to pay its federal and state income taxes on the
income allocated to it attributable to such year. Distributions paid to the
General Partner are based on the estimated tax liability resulting from
allocated income. Subsequent to the filing of the General Partner's income tax
returns, a true-up with actual distributions is made.
The provisions regarding distribution of Net Proceeds, as defined, were also
amended to provide that Net Proceeds are to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a 14% per annum, cumulative simple return therein from the
Return Calculation Date, including in the calculation of such return all prior
distributions of Net Cash Receipts and any prior distributions of Net Proceeds
under this clause except to the extent needed by the General Partner to pay its
federal and state income tax on the income allocated to it attributable to such
year; and (c) then, to Limited Partners, 99%, and to the General Partner, 1%, of
remaining Net Proceeds available for distribution.
Additionally, per the amendment of the Partnership Agreement dated May 26, 1993,
the total compensation paid to all persons for the sale of the investment
properties shall be limited to a competitive real estate commission, not to
exceed 6% of the contract price for the sale of the property. The General
Partner may receive up to one-half of the competitive real estate commission,
not to exceed 3%, provided that the General Partner provides a substantial
amount of services in the sales effort. It is further provided that a portion of
the amount of such fees payable to the General Partner is subordinated to its
success at recovering the funds misappropriated by the former general partners.
(See Note 9.)
5. LEASES:
-------
Lease terms for the majority of the investment properties are 20 years from
their inception. The leases generally provide for minimum rents and additional
rents based upon a percentage of gross sales in excess of specified breakpoints.
The lessee is responsible for occupancy costs such as maintenance, insurance,
real estate taxes, and utilities. Accordingly, these amounts are not reflected
in the statements of income, except in circumstances where, in management's
opinion, the Partnership will be required to pay such costs to preserve its
assets (i.e., payment of past-due real estate taxes). Management has determined
that the leases are properly classified as operating leases; therefore, rental
income is reported when earned and the cost of the property, excluding the cost
of the land, is depreciated over its estimated useful life.
27
<PAGE>
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>
1998 $ 2,022,574
1999 2,025,324
2000 2,080,777
2001 2,082,672
2002 2,047,176
Thereafter 12,260,325
-----------
$22,518,848
===========
</TABLE>
Percentage rents included in rental income in 1997, 1996, and 1995 were
$506,674, $477,523, and $421,932, respectively. The fluctuations in percentage
rental income are a result of fluctuations in sales of the tenants in the
Partnership's properties. Seven of these properties are leased to a single
Popeye's franchisee in the Chicago, Illinois area. Base rent for 1997 from this
tenant amounted to 28% of total base rent for the Partnership.
During June 1996, the Partnership received a cash settlement of $164,000 in
exchange for the early termination of a lease on a former Chi-Chi's restaurant
in Grand Forks, North Dakota.
6. MORTGAGE NOTES PAYABLE:
-----------------------
At December 31, 1997, mortgage notes payable consist of the following:
<TABLE>
<CAPTION>
Outstanding
Principal Balance Interest Rate Maturity Date
----------------- ------------- --------------
<S> <C> <C> <C>
a. $234,396 prime September 2001
b. 240,000 prime December 1998
--------
</TABLE>
$474,396
========
a. In September 1997, the Partnership entered into a promissory note
agreement with Missouri Bank and Trust Company of Kansas City, in the
amount of $247,998. The proceeds of the loan were used to repay a loan
from Bank One which had matured. The note bears interest at the
referenced prime rate, as defined. Principal and interest are paid in
monthly installments of $6,126 until September 2001. The note is
secured by a mortgage on a Denny's restaurant located in Beaver Dam,
Wisconsin, with a net book value at December 31, 1997 of $462,391.
b. In December 1997, the Partnership entered into a loan agreement with
Missouri Bank and Trust Company of Kansas City, in the amount of
$240,000. The loan bears interest at the prime rate as referenced and
is a revolving line of credit. The loan is secured by a mortgage on a
Popeye's restaurant located in Chicago, Illinois, with a net book
value at December 31, 1997, of $345,253. The proceeds of the loan were
used to distribute a portion of a recovery resulting from cancellation
of indebtedness in a disputed $600,000
28
<PAGE>
loan with Boatmen's First National Bank of Kansas City among the
Partnership's related Partnerships. The balance of the note was paid
in full during January 1998.
Scheduled maturities of all notes payable, are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1998 $295,696
1999 60,619
2000 65,977
2001 52,104
--------
$474,396
========
</TABLE>
7. TRANSACTIONS WITH
CURRENT GENERAL PARTNER:
-----------------------
Amounts incurred to the current General Partner for the years ended December 31,
1997, 1996, and 1995, are as follows.
<TABLE>
<CAPTION>
Incurred Incurred Incurred
for the year ended for the year ended for the year ended
December 31, December 31, December 31,
Current General Partner 1997 1996 1995
- - ---------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Management fees $ 90,465 $ 99,309 $ 87,375
Restoration fees 3,115 11,249 833
Overhead allowance 7,590 7,555 7,351
Leasing Commissions 31,938 45,172 0
Reimbursement for out-of-pocket expenses 12,274 11,616 13,264
Cash distribution 6,586 6,045 3,624
-------- -------- --------
$151,968 $180,946 $112,447
======== ======== ========
</TABLE>
8. NET INVESTMENT IN DIRECT FINANCING LEASES:
------------------------------------------
The net investment in direct financing leases which includes the Partnership's
specialty leasehold improvement leases, is comprised of the following as of
December 31, 1997:
Minimum lease payments receivable $77,246
Less - Unearned income (9,303)
-------
Net investment in direct financing leases $67,943
=======
Scheduled future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1998 $37,860
1999 37,860
2000 1,526
-------
$77,246
=======
</TABLE>
29
<PAGE>
During 1997, the Partnership recorded an allowance in the amount of $78,071 for
the remaining equipment lease payments due on the Denny's property in Beaver
Dam, Wisconsin. The tenant of the property, DenAmerica, Inc., vacated the
property and future collectibility is uncertain.
9. CONTINGENT LIABILITIES:
----------------------
According to the Partnership Agreement, as amended, the current General Partner
may receive a disposition fee not to exceed 3% of the contract price of the sale
of investment properties. Fifty percent (50%) of all such disposition fees
earned by the current General Partner is to be escrowed until the aggregate
amount of recovery for the funds misappropriated from the Partnerships by the
former general partners is greater than $4,500,000. Upon reaching such recovery
level, full disposition fees will thereafter be payable and fifty percent (50%)
of the previously escrowed amounts will be paid to the current General Partner.
At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining
escrowed disposition fees shall be paid to the current General Partner. If such
levels of recovery are not achieved, the current General Partner will contribute
the amounts escrowed towards the recovery. In lieu of an escrow, 50% of all
such disposition fees have been paid directly to the restoration account and
then distributed among the three Partnerships. Fifty percent (50%) of the total
amount paid to the recovery was refunded to the current General Partner during
1996 after exceeding the recovery level of $4,500,000. The remaining amount
allocated to the Partnership may be owed to the current General Partner if the
$6,000,000 recovery level is met. As of December 31, 1997, the Partnership may
owe the current General Partner $5,189, which is currently reflected as a
recovery, if the $6,000,000 recovery level is achieved. Management believes it
is unlikely that such recovery level will be achieved.
10. PMA INDEMNIFICATION TRUST:
--------------------------
The Permanent Manager Agreement ("PMA") provides that the Permanent Manager will
be indemnified from any claims or expenses arising out of or relating to the
Permanent Manager serving in such capacity or as substitute general partner, so
long as such claims do not arise from fraudulent or criminal misconduct by the
Permanent Manager. The PMA provides that the Partnership fund this
indemnification obligation by establishing a reserve of up to $250,000 of
Partnership assets which would not be subject to the claims of the Partnership's
creditors. An Indemnification Trust ("Trust") serving such purposes has been
established at United Missouri Bank, N.A. The Trust has been fully funded with
Partnership assets as of December 31, 1997. Funds are invested in U.S. Treasury
securities. In addition, interest totaling $49,456 has been credited to the
Trust as of December 31, 1997. The rights of the Permanent Manager to the Trust
shall be terminated upon the earliest to occur of the following events: (i) the
written release by the Permanent Manager of any and all interest in the Trust;
(ii) the expiration of the longest statute of limitations relating to a
potential claim which might be brought against the Permanent Manager and which
is subject to indemnification; or (iii) a determination by a court of competent
jurisdiction that the Permanent Manager shall have no liability to any person
with respect to a claim which is subject to indemnification under the PMA. At
such time as the indemnity provisions expire or the full indemnity is paid, any
funds remaining in the Trust will revert back to the general funds of the
Partnership.
11. RESTORATION TRUST ACCOUNT; EXPENSE ALLOCATIONS;
-----------------------------------------------
AND RELATED INTER-PARTNERSHIP RECEIVABLES:
------------------------------------------
Restoration costs represent expenses incurred by the Partnership associated with
the misappropriated assets by the former general partners and their affiliates.
These costs are allocated among the Partnerships based on each partnership's
respective share of the entire misappropriation, as currently quantified. The
amount of misappropriation for each partnership is adjusted periodically to
reflect new discoveries and more accurate quantification of amounts based on the
continuing Investigation. Such adjustments may result in
30
<PAGE>
periodic adjustments to prior allocations of recovery costs to reflect updated
information. Consequently, previous payments for restoration expenses may not be
consistent with modified allocations.
When recoveries are realized by the Partnerships, the amounts received are
distributed to each respective partnership on the same basis as the restoration
costs are currently being allocated. As of December 31, 1997, the Partnerships
recovered a total of approximately $5,726,000 from the former general partners
and their affiliates, accountant and attorneys. Of this amount, the Partnership
received its pro-rata share in the amount of $739,719. Additionally, $40,346,
representing 50% of all previously escrowed disposition fees earned by the
General Partner have been paid to the recovery. Of that amount, $5,189 was
allocated to the Partnership and is contingently payable to the General Partner
upon achievement of certain recovery levels as described in Note 9.
The PMA contemplated that the Permanent Manager could establish a separate and
distinct Restoration Trust Fund which would hold all recoveries until a final
independent adjudication by a court of competent jurisdiction or vote of the
Limited Partners ratified the allocation of proceeds to each respective
partnership. Management has concluded that a fair and reasonable accounting for
recovery proceeds can be accomplished at the partnership level in a manner
similar to restoration costs which are paid directly by the Partnerships.
Management reserves the right to cause the final allocation of such costs and
recoveries to be determined either by a vote of the Limited Partners or a court
of competent jurisdiction. Potential sources of recoveries include third party
litigation, promissory notes, land contracts, and personal assets of the former
general partners and their affiliates.
12. LITIGATION:
-----------
In 1993, the Partnership, along with DiVall 2 and DiVall 3, initiated a lawsuit
against Ernst & Young LLP ("E & Y"), a certified public accounting firm, in
connection with the audits of the Partnerships performed by E & Y for the years
1989, 1990 and 1991. The Partnerships also filed claims against Magnuson,
DiVall, DiVall Real Estate Investment Corporation, David Shea, and the
Partnerships' former securities law firm, Quarles & Brady.
These matters were settled in 1996, yielding net proceeds to the Partnership,
after the payment of contingent legal fees and related costs, of approximately,
$300,000.
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure
the repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 2 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
In 1993, nineteen (19) of the Private Partnerships sought the protection of the
Bankruptcy Court in the Eastern District of Wisconsin. Seven (7) of these
bankruptcies were voluntary and twelve (12) of these bankruptcies were
involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest. These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.
The Partnership's experience in those bankruptcy cases that have concluded,
either through the approval of Plans of Reorganization, dismissal of the
bankruptcies, settlements or a combination of the foregoing, is that (i) the
value of the obligations of the Private Partnerships assigned to the Partnership
has been at a
31
<PAGE>
significant discount to their face amounts, and (ii) the General Partner
interests in such Private Partnerships often have little economic value. The
Partnership's recoveries in these bankruptcies have been on a steeply discounted
basis.
Plans of reorganization have been filed in the bankruptcies, and settlement
agreements in all of the Private Partnerships have been reached. Settlements in
the bankruptcies resulted in cash payments to the Partnerships of a total of
$720,000 and notes secured by subordinated mortgages in the aggregate amount of
$625,000. The Partnerships subsequently sold the secured notes for a total of
$175,000.
In 1994, the Partnership filed a complaint in the United States District Court
for the Western District of Missouri against Boatmen's First National Bank of
Kansas City ("Boatmen's) seeking a declaratory judgment that Boatmen's has no
right or interest in a promissory note executed in the name of the Partnership
by the former general partners (the "Note") secured by mortgages on five
Partnership properties, and further seeking an injunction against foreclosure
proceedings instituted against a Partnership property located in Dallas, Texas,
under a first deed of trust and security agreement given to secure the Note (the
"Foreclosure"). Trial of the case took place on June 23, 1997. The judge ruled
in favor of the Partnership on August 21, 1997, that the note was not
enforceable. An appeal by Boatmen's was subsequently dropped, so the full
$600,000 recovery has been recorded. Pursuant to the Restoration Trust Account
procedures described in Note 11, all of the Partnerships are sharing the
expenses of this litigation, and the recovery resulting from the full
cancellation of the alleged indebtedness was allocated among the three
Partnerships on the same basis as the restoration costs are being allocated via
appropriate payments by the Partnership to its affiliated Partnerships. The
Partnership recognized approximately $265,000 of income during 1997, for the
reversal of interest which had previously been accrued on the note.
13. FORMER GENERAL PARTNERS' CAPITAL ACCOUNTS:
------------------------------------------
The capital account balance of the former general partners as of May 26, 1993,
the date of their removal as general partners pursuant to the results of a
solicitation of written consents from the Limited Partners, was $789,906.
Because any amount payable to the former general partners with respect to their
capital accounts is subject to (a) the satisfaction of certain preferential
return requirements for the Limited Partners (See Note 4); and (b) the
assignment of such amounts to the Partnerships with respect to the amounts due
to the Partnerships from the former general partners, payment to the former
general partners with respect to their capital account balances as of May 26,
1993, is highly remote. In the unlikely event that the Partnership would owe
the former general partners any residual amount, such amounts would be due the
restoration fund for the benefit of all the Partnerships, and therefore
represent a contingent liability. At December 31, 1993, the former general
partners' capital account balance in the amount of $789,906 was reallocated to
the Limited Partners.
14. SUBSEQUENT EVENTS:
------------------
On February 13, 1998, the Partnership made distributions to the Limited Partners
of $375,000 amounting to $15.00 per limited partnership interest.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
32
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The General Partner of the Partnership is The Provo Group, Inc., an Illinois
corporation ("TPG") with its principal office at 101 West 11th Street, Suite
1110, Kansas City, Missouri 64105. TPG was elected General Partner by vote of
the Limited Partners effective May 26, 1993. TPG had been managing the
Partnership since February 8, 1993 under the terms of the Permanent Manager
Agreement ("PMA"), which remains in effect. TPG also serves as the corporate
general partner for DiVall 2 and DiVall 3. See Items 1 and 13 hereof for
additional information about the PMA and the election of TPG as the General
Partner.
The executive officers and director of the General Partner who control the
affairs of the Partnership are as follows:
Bruce A. Provo, Age 47 - President, Founder and Director. Mr. Provo has
been involved in the management of real estate and other asset portfolios
since 1979. Since he founded the company in 1985, Mr. Provo has been
President and Chief Executive Officer of TPG. From 1982 to 1986, Mr. Provo
served as President and Chief Operating Officer of the North Kansas City
Development Company ("NKCDC"), North Kansas City, Missouri. NKCDC was
founded in 1903 and the assets of the company were sold in December, 1985
for $102,500,000. NKCDC owned commercial and industrial properties,
including an office park and a retail district, as well as apartment
complexes, motels, recreational facilities, fast food restaurants, and
other properties. NKCDC's holdings consisted of over 100 separate
properties and constituted approximately 20% of the privately held real
property in North Kansas City, Missouri (a four square mile municipality).
Following the sale of the company's real estate, Mr. Provo served as the
President and Chief Executive Officer and Liquidating Trustee of NKCDC from
1986 to 1991.
Mr. Provo graduated from Miami University, Oxford, Ohio in 1972 with a B.S.
in Accounting. He became a Certified Public Accountant in 1974 and was a
manager in the banking and financial services division of Arthur Andersen
LLP prior to joining Rubloff Development Corporation in 1979. From 1979
through 1985, Mr. Provo served as Vice President - Finance and then as
President of Rubloff Development Corporation. Mr. Provo has previously
served on the Board of Directors of the National Realty Committee, a
legislative "watchdog" organization for the commercial real estate industry
headquartered in Washington, DC.
Kristin J. Atkinson, Age 35 - Vice President - Finance and Administration.
Ms. Atkinson joined The Provo Group, Inc. in September 1994, to provide
management expertise in the areas of financial controls and management
accounting services for four limited partnerships managed by TPG. Prior to
joining TPG, Ms. Atkinson was Manager of Financial Reporting for Farm &
Home Savings Association (a $4 billion savings and loan association) for
nine years where she was responsible for supervision of the preparation of
internal and external financial documentation, including regulatory filings
for the savings association and its parent company. Ms. Atkinson graduated
Magna Cum Laude with a B.S. in Accounting from Missouri Southern State
College in Joplin, Missouri and worked as an accountant for James P. Arthur
and Company for one year before joining Farm & Home Savings Association.
33
<PAGE>
Brenda Bloesch, Age 36 - Director of Investor Relations. Ms. Bloesch joined
The Provo Group, Inc. in March 1993, to oversee and provide various levels
of client support for more than 8,000 broker dealers, registered
representatives, custodians and investors. Primarily responsible for all
communications regarding four limited partnerships managed by TPG, Ms.
Bloesch is also involved with database management and partnership
compliance issues. Prior to joining TPG, Ms. Bloesch was Manager of
Investment Services at DiVall Real Estate Investment Corporation ("DREIC")
for four years and Publisher Services Manager at NewsNet, Inc. for five
years. Her role at DREIC allowed Ms. Bloesch to obtain extensive knowledge
of limited partnerships and gain familiarity with the broker and investor
communities. Ms. Bloesch is a graduate of Lock Haven University in Lock
Haven, Pennsylvania, where she received her B.A. in Journalism and Media
Studies.
The Advisory Board, although its members are not "Directors" or "Executive
Officers" of the Partnership, provides advisory oversight to management of
the Partnership and consists of:
Steve Carson - Vice President/Investments at First Albany Corporation. Mr.
Carson's primary client concentration includes labor union, pension, and
annuity funds. Mr. Carson has worked for First Albany for 11 years. He
began his career as a retail broker at E.F. Hutton & Company and served as
Vice President, Shearson American Express from 1980-1986. Mr. Carson
attended Northrup University in Los Angeles, California. He has served as
Board Member and President on various Civic Boards in Syracuse, New York.
Mr. Carson represents the broker-dealer community.
Robert White - President of Chevron, TCI. Mr. White has worked for Chevron
in various positions over the past 38 years. This company specializes in
acquiring real estate that has been allocated as either Low-Income Housing
or Historic Rehabilitation tax credits. Most of the acquisitions are made
using limited partnership structures -- with TCI as the limited partner.
Mr. White started his career as a research chemist with Chevron Research
Company in 1959, after receiving a B.S Degree in Chemistry from the
University of California at Berkeley. In 1977, Mr. White received a M.B.A
Degree in Financial Analysis and subsequently transferred to Chevron
Corporation's Planning and Analysis Department in San Francisco. In 1991,
Mr. White became Vice-President of Chevron Land. After this company was
sold in 1995, he assumed the position as President of the new Chevron
subsidiary, Chevron TCI, Inc. Mr. White is a Limited Partner representing
DiVall 1.
Richard W. Otte - Editorial Writer. Mr. Otte is in his sixth year as an
Editorial Board Member and editorial writer for The Volusion, a DeLand,
Florida, subsidiary of the News-Journal Corporation in Daytona Beach,
Florida. Mr. Otte retired in 1988 after 34 years with the Dispatch Printing
Co., serving his last eight years as Managing Editor of the Columbus
Dispatch and as a member of its Operating Committee. He previously was the
executive sports editor of the newspaper in Ohio's capital city. Mr. Otte's
49 years in professional journalism also include news reporting, editing
and sports assignments with the Daytona Journal Herald and Springfield
News-Sun. Mr. Otte is a Limited Partner representing DiVall 2.
Albert Gerritz - Perinton Volunteer Ambulance Corps. Mr. Gerritz has held
various offices in Finance and Administration, including President. Mr.
Gerritz retired in 1986 after 36 years with Eastman Kodak Co. where he was
Supervisor of Engineering Services, Research Labs. Mr. Gerritz was
instrumental in identifying the need and pursuing the
34
<PAGE>
development of a unique research complex for Kodak, which became the case
study for his consulting activities on research facilities nationwide. Mr.
Gerritz also worked for forty years in the Bushnell's Basin Fire Department
and served five years as Chief. Mr. Gerritz has a life membership in
National Society of Professional Engineers. Mr. Gerritz is a Limited
Partner representing DiVall 3.
Item 11. Executive Compensation
The Partnership has not paid any "executive compensation" to the corporate
General Partner or to the directors and officers of the General Partner. The
General Partner's participation in the income of the Partnership is set forth in
the Agreement of Limited Partnership and amendments thereto, which are filed as
Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 hereto. The current General Partner received
management fees and expense reimbursements during the year.
See Item 13, below, and Note 7 to the financial statements in Item 8 hereof for
further discussion of payments by the Partnership to the General Partner and the
former general partners.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) As of December 31, 1997, no one person or group is known by the Partnership
to own beneficially more than 5% of the outstanding interests of the
Partnership.
(b) As of December 31, 1997, neither the General Partner nor any of its
affiliates owned any Limited Partner Interests in the Partnership.
Item 13. Certain Relationships and Related Transactions
The compensation to be paid to TPG is governed by the Partnership Agreement, as
amended by vote of the Limited Partners to reflect the terms of the PMA. TPG's
compensation includes a base fee equal to 4% of the Partnership's gross
collected receipts, subject to a minimum of $84,000 per year. For this purpose,
"gross collected receipts" means all cash revenues arising from operations and
reserves of the Partnerships, including any proceeds recovered with respect to
the obligations of the former general partners. The portion of such fee
resulting from recoveries from former general partners is designated as
restoration fees. TPG is also entitled to reimbursement for office rent and
utilities not to exceed $7,000 per year. TPG is entitled to reimbursement of
reasonable direct costs and expenses, such as travel, lodging, overnight
delivery and postage, but has no right to be reimbursed for administrative
expenses such as payroll, payroll taxes, insurance, retirement and other
benefits, base phone and fax charges, office furniture and equipment, copier
rent, and the like. Between the three Partnerships, TPG is entitled to an
aggregate minimum base management fee of $300,000 per year and reimbursement for
office rent in the maximum amount of $25,000 per year. The Partnership shall
only be responsible for its allocable share of such minimum and maximum amounts
as indicated above ($84,000 minimum base fee and $7,000 maximum rent
reimbursement). TPG is entitled to an annual increase in the minimum base
management fee and maximum office overhead reimbursement in an amount not to
exceed the percentage increase in the Consumer Price Index ("CPI") for the
immediately preceding calendar year. Effective March 1, 1997, the minimum
management fee and the maximum reimbursement for office rent and overhead
increased by 3.3% representing the allowable annual CPI adjustment.
Additionally, TPG is allowed up to one-half of the competitive Real Estate
Commission, not to exceed 3% upon the disposition of assets. The payment of a
portion of such fees is subordinated to TPG's success at recovering the funds
misappropriated by the former general partners.
The PMA has an expiration date of December 31, 2002, but may be terminated
earlier (a) by a vote at any time by a majority in interest of the Limited
Partners, (b) upon the dissolution and winding up of the
35
<PAGE>
Partnership, (c) upon the entry of an order of a court finding that the
Permanent Manager has engaged in fraud or other like misconduct or has shown
itself to be incompetent in carrying out its duties under the Partnership
Agreement, or (d) upon sixty (60) days written notice from the Permanent Manager
to the Limited Partners of the Partnership. Upon termination of the PMA, other
than by the voluntary action of TPG, TPG shall be paid a termination fee of one
month's Base Fee allocable to the Partnership, subject to a minimum of $7,000.
In the event that TPG is terminated by action of a substitute general partner,
TPG shall also receive, as part of this termination fee, 4% of any proceeds
recovered with respect to the obligations of the former general partners,
whenever such proceeds are collected.
Under the PMA, TPG shall be indemnified by the Partnership, DiVall and Magnuson,
and their controlled affiliates, and shall be held harmless from all claims of
any party to the PMA and from any third party including, without limitation, the
Limited Partners of the Partnership, for any and all liabilities, damages, costs
and expenses, including reasonable attorneys' fees, arising from or related to
claims relating to or arising from the PMA or its status as Permanent Manager.
The indemnification does not extend to claims arising from fraud or criminal
misconduct of TPG as established by court findings. To the extent possible, the
Partnership is to provide TPG with appropriate errors and omissions, officers
liability or similar insurance coverage, at no cost to TPG. In addition, TPG is
granted the right to establish and segregate Partnership assets in an amount,
not to exceed $250,000, solely for the purpose of funding such indemnification
obligations (the "Indemnification Trust"). Once a determination has been made
that no such claims can or will be made against TPG, the balance of the
Indemnification Trust will become unrestricted cash of the Partnership. At
December 31, 1997 the Partnership had fully funded the Indemnification Trust.
The following fees and reimbursements from the Partnership were incurred to
management in 1997:
<TABLE>
<CAPTION>
The Provo Group, Inc.
---------------------------
<S> <C>
Management Fees $ 90,465
Restoration Fees 3,115
Leasing Commissions 31,938
Office Overhead Allowance 7,590
Direct Cost Reimbursements 12,274
--------
1997 Total $145,382
========
</TABLE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The following financial statements of DiVall Insured Income Fund
Limited Partnership are included in Part II, Item 8:
Report of Independent Public Accountants
Balance Sheets, December 31, 1997 and 1996
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995
Statements of Partners' Capital for the Years Ended December 31,
1997, 1996 and 1995
Statements of Cash Flows for the Years Ended December 31, 1997, 1996
and 1995
36
<PAGE>
Notes to Financial Statements
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instruction or are inapplicable and,
therefore, have been omitted.
3. Listing of Exhibits
3.1 Agreement of Limited Partnership dated as of November 25, 1985,
amended as of September 15, 1986, filed as Exhibit 3A to
Amendment No. 1 to the Partnership's Registration Statement on
Form S-11 as filed on July 22, 1986, incorporated herein by
reference.
3.2 Amendments to Amended Agreement of Limited Partnership dated as
of June 16, 1987, included as part of Supplement dated
September 25, 1987, filed under Rule 424(b)(3), incorporated
herein by reference.
3.3 Amendment to Amended Agreement of Limited Partnership dated as
of February 8, 1993, filed as Exhibit 3.3 to the Partnership's
10-K for the year ended December 31, 1992, and incorporated
herein by reference.
3.4 Amendment to Amended Agreement of Limited Partnership dated as
of May 26, 1993, filed as Exhibit 3.4 to the Partnership's
10-K for the year ended December 31, 1993, and incorporated
herein by reference.
3.5 Amendment to Amended Agreement of Limited Partnership dated as
of June 30, 1994, files as Exhibit 3.5 to the Partnership's
10-K for the year ended December 31, 1994, and incorporated
herein by reference.
10.0 Permanent Manager Agreement filed as an exhibit to the Current
Report on Form 8-K dated January 22, 1993, incorporated herein
by reference.
28.0 Correspondence to the Limited Partners dated February 13, 1998
regarding the Fourth Quarter 1997 distributions.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the fourth
quarter of fiscal year 1997.
37
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Initial cost to Gross amount at which
Partnership carried at end of year (A)
-------------------- -----------------------------
Costs
Building capitalized Building
and subsequent to and
Property Encumbrances Land Improvements acquisitions Land Improvements Total
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Colorado Springs, Colorado $ - $ 356,549 $ - $ - $ 200,000 $ - $ 200,000
Beaver Dam, Wisconsin 247,998 126,854 452,445 80,000 126,854 532,445 659,299
Hopkins, Minnesota - 195,755 479,295 120,000 195,755 599,295 795,050
Dallas, Texas - 797,952 510,201 - 797,952 510,201 1,308,153
Arlington, Texas - 1,002,707 471,862 - 1,002,707 471,862 1,474,569
Dallas, Texas - 729,406 528,190 - 729,406 528,190 1,257,596
Des Moines, Iowa - 197,667 367,809 - 197,667 367,809 565,476
Eau Claire, Wisconsin - 250,255 792,475 - 250,255 792,475 1,042,730
Chicago, Illinois - 151,670 427,625 - 151,670 427,625 579,295
Chicago, Illinois - 164,941 445,952 - 164,941 445,952 610,893
Chicago, Illinois - 176,948 455,010 - 176,948 455,010 631,958
Chicago, Illinois - 97,743 513,150 - 97,743 513,150 610,893
Chicago, Illinois 240,000 133,764 340,204 - 133,764 340,204 473,968
Chicago, Illinois - 90,581 346,524 - 90,581 346,524 437,105
Chicago, Illinois - 95,847 388,654 - 95,847 388,654 484,501
Grand Forks, North Dakota - 246,200 738,601 - 246,200 738,601 984,801
Peoria, Arizona - 338,887 688,044 78,995 338,887 767,039 1,105,926
Glendale, Arizona - 400,503 626,428 78,995 400,503 705,423 1,105,926
Mesa, Arizona - 412,879 638,278 - 389,758 638,278 1,028,036
Scottsdale, Arizona - 339,151 712,006 - 339,151 712,006 1,051,157
Fond Du Lac, Wisconsin - 270,267 756,664 - 270,267 756,664 1,026,931
Chicago, Illinois - 197,277 708,529 5,000 66,499 513,593 580,092
Dallas, Texas - 844,718 524,525 - 844,718 524,525 1,369,243
----------------------------------------------------------------------------------------
$487,998 $7,618,521 $11,912,471 $362,990 $7,308,073 $12,075,525 $19,383,598
========================================================================================
</TABLE>
(A) Represents aggregate costs for federal income tax purposes.
(B) Reconciliation of "Real Estate and Accumulated Depreciation":
<TABLE>
<CAPTION>
Year ended Year ended
Investments in Real Estate December 31, 1997 December 31, 1996
- - -----------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $19,378,598 $19,428,598
Additions 5,000
Property write-down 50,000
-------------------------------------
Balance at end of year $19,383,598 $19,378,598
=====================================
</TABLE>
<TABLE>
<CAPTION>
Year ended Year ended
Accumulated Depreciation December 31, 1997 December 31, 1996
- - ----------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 4,183,997 $3,833,774
Additions charged to costs
and expenses 350,328 350,223
-------------------------------------
Balance at end of year $4,534,325 $4,183,997
=====================================
</TABLE>
<TABLE>
<CAPTION>
Life on which
depreciation in
latest statement
of operations is
computed (years)
Accumulated Date of Date
Property depreciation construction acquired
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Colorado Springs, Colorado $ - - 1/31/87 31.5
Beaver Dam, Wisconsin 196,908 1986 3/27/87 31.5
Hopkins, Minnesota 192,505 1985 6/30/87 31.5
Dallas, Texas 202,671 1987 7/8/87 31.5
Arlington, Texas 187,445 1987 1/8/87 31.5
Dallas, Texas 203,834 1987 9/28/87 31.5
Des Moines, Iowa 132,074 1986 10/8/87 31.5
Eau Claire, Wisconsin 302,829 1986 10/27/87 31.5
Chicago, Illinois 161,787 1982 12/1/87 31.5
Chicago, Illinois 168,725 1986 12/1/87 31.5
Chicago, Illinois 172,153 1982 12/1/87 31.5
Chicago, Illinois 194,146 1993 12/1/87 31.5
Chicago, Illinois 128,715 1980 12/1/87 31.5
Chicago, Illinois 131,104 1985 12/1/87 31.5
Chicago, Illinois 147,045 1985 12/1/87 31.5
Grand Forks, North Dakota 276,651 1984 12/23/87 31.5
Peoria, Arizona 286,040 1984 12/24/87 31.5
Glendale, Arizona 262,963 1984 12/24/87 31.5
Mesa, Arizona 231,811 1985 3/18/88 31.5
Scottsdale, Arizona 258,589 1985 3/18/88 31.5
Fond Du Lac, Wisconsin 274,808 1981 3/24/88 31.5
Chicago, Illinois 231,028 1987 4/15/88 31.5
Dallas, Texas 190,494 1987 3/25/88 31.5
------------
$ 4,534,325
============
</TABLE>
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
By: The Provo Group, Inc., General Partner
By: /s/Bruce A. Provo
-------------------------------------------------
Bruce A. Provo, President
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: The Provo Group, Inc., General Partner
By: /s/Bruce A. Provo
-------------------------------------------
Bruce A. Provo, President
Date: March 27, 1998
By: /s/Kristin J. Atkinson
-------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: March 27, 1998
39
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1997 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 644,274 1,037,630
<SECURITIES> 299,456 284,615
<RECEIVABLES> 2,432,507 2,342,609
<ALLOWANCES> 1,911,846 1,809,329
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,464,391 1,855,525
<PP&E> 19,630,494 19,625,494
<DEPRECIATION> 4,781,219 4,430,396
<TOTAL-ASSETS> 16,313,666 17,050,623
<CURRENT-LIABILITIES> 735,924 1,537,796
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 15,577,742 15,512,827
<TOTAL-LIABILITY-AND-EQUITY> 16,313,666 17,050,623
<SALES> 0 0
<TOTAL-REVENUES> 2,513,009 2,534,391
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 669,497 907,254
<LOSS-PROVISION> 128,374 8,884
<INTEREST-EXPENSE> 68,637 107,024
<INCOME-PRETAX> 1,646,501 1,511,229
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 1,646,501 1,511,229
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,646,501 1,511,229
<EPS-PRIMARY> 65.20 59.84
<EPS-DILUTED> 65.20 59.84
</TABLE>
<PAGE>
DiVall Insured Income Fund, L.P.
QUARTERLY NEWS
================================================================================
A publication of The Provo Group, Inc. FOURTH QUARTER 1997
DISSOLUTION...IS IT A DISILLUSION?
Madison, Wisconsin
You may recall that management communicated to you over a year ago about the
feedback that we had received from our survey to limited partners which
indicated a strong interest in the dissolution of the Partnership over the next
3-5 years.
Since that time, management has been working aggressively to maximize the value
of the Partnership's asset portfolio and satisfy all potential recovery efforts
of the misappropriated funds by the former general partners and their
affiliates. In addition, management has investigated the specifics surrounding a
partnership dissolution with an emphasis on understanding all continuing
liability and tax issues.
As we understand it today, once we are successful in finding the appropriate
buyer(s) for the properties in the Partnership's portfolio, we are faced with
complying with the terms of the sales lease agreement(s); resolving or reserving
for any pending or potential liability issues with the Partnership or the
General Partner; soliciting and receiving limited partners' approval of the
liquidation proposal; and administratively managing the limited partners'
accounts until such time as a final distribution can be made; and the statute of
limitations runs out on liabilities or tax matters, including the
preparation/mailing of annual Schedule K-1s.
At this time, it appears that the 3-5 year plan is still feasible, pending no
litigation issues, if we begin our marketing efforts within the next two (2)
years and allow at least a year or so for the final wind-down of the
Partnership, including the final distribution and K-1 preparations.
Management fully appreciates the investment period that the Partnership's
original limited partners have endured over the years and will be working to
make the dissolution process as efficient as possible.
Interestingly, the comparative rates of return available in the market (ie: bank
rates and bond yields) are becoming less competitive with the "stabilized"
returns available from your partnership.
OTHER NEWS INSIDE...
<TABLE>
<CAPTION>
<S> <C>
. Denny's Leases Update.............................Property Highlights, pg 3
. First Quarter 1998 Property Sale..................Property Highlights, pg 3
. Restoration Efforts Concluded..................Restoration Highlights, pg 4
. Schedule K-1s/Year-End Values...................Questions and Answers, pg 5
</TABLE>
<PAGE>
Page 2 DiVall 1 4 Q 97
------------------------------------------------
Distribution Highlights
. 6.5% (approx.) annualized return from operations and other sources based on
$23,000,000 ("net" remaining initial investment).
. $375,000 "total" amount distributed for the Fourth Quarter 1997 as
budgeted.
. $15.00 per unit (approx.) for the Fourth Quarter 1997.
. $892.00 to $789.00 range of distributions per unit from the first unit sold
to the last unit sold before the offering closed (March 1988),
respectively.
[NOTE: Distributions are from both cash flow from operations and "net"
cash activity from financing and investing activities.]
(Original units were purchased for $1,000/unit.)
------------------------------------------------
Statements of Income and Cash Flow Highlights
. 24% increase in operating revenues from projections.
. Total "annual" sales for Rio Bravo and Popeye's restaurants were higher
than expected, and accordingly, $41,000 of additional rental income
(percentage rent accruals only) was recognized for the quarter ended
December 31, 1997.
. 32% decrease in operating expenses from projections.
. Tenant real estate taxes were $35,000 lower than budgeted for the Fourth
Quarter 1997. This decrease was due to an unplanned payment by one tenant
and a lower than anticipated tax bill for another tenant. (NOTE: This
latter tenant's lease terms included payment of its 1996 real estate taxes
by the Partnership.)
Property Highlights
Vacancies
---------
. DenAmerica's Denny's restaurant (Beaver Dam, WI) was vacant at December 31,
1997.
<PAGE>
Page 3 DiVall 1 4 Q 97
----------------------------
Property Highlights (contd.)
Rents Receivable
----------------
There were no rental delinquencies at December 31, 1997.
Sale of property
----------------
. The Partnership's vacant land in Colorado was sold for $235,000. Sales
proceeds were received and recorded during the First Quarter 1998. The
book value on this property was $200,000.
Other Property Matters
----------------------
. The Partnership has ceased any further lease termination or modification
negotiations with DenAmerica Corporation at this time for the multiple
Denny's restaurants in Wisconsin, Minnesota, and Arizona. The tenant is
current on all rental payments, including the Beaver Dam vacancy, and must
remain in compliance with the existing lease terms.
. The tenants of two (2) other Denny's restaurants located in Arizona, (TCB
Management and JML Foods) have both signed new leases with the Partnership
to include a value-oriented emphasis on fixed rents versus percentage
rents.
(NOTE: These two (2) properties were previously percentage rents only.)
. Rio Bravo restaurant (Grand Forks, ND) is expected to reach over 2 million
dollars in sales since its opening last year. You may recall this property
had struggled several months last year as a result of the damaging floods
in the area and new construction costs. The potential sales are an all time
"high" for this property and its location since it was first acquired by
the Partnership in 1987. Percentage rents for this property begin when
sales exceed $2,000,000.
----------------------
Restoration Highlights
. The Partnership received $77,000 in recoveries during the Fourth Quarter
1997.
. "Total" recoveries received to date for the Partnership are approximately
$745,000.
<PAGE>
Page 4 DiVall 1 4 Q 97
-------------------------------
Restoration Highlights (contd.)
. As communicated last quarter, the Partnership received a "favorable" ruling
in its case against Boatmen's First National Bank of Kansas City which went
to trial on June 23, 1997. Following the judge's ruling, Boatmen's
appealed, but subsequently dropped their appeal.
This disputed Boatmen's liability has always been included as part of the
"total" misappropriation of funds by the former general partners and their
affiliates -- for all three (3) partnerships, DiVall Insured Income Fund,
L.P., DiVall Insured Income Properties 2, L.P., and DiVall Income
Properties 3, L.P. Consequently, all expenses, potential default interest,
and recoveries have been shared by each of these partnerships.
. With the resolution of the disputed Boatmen's liability, the Partnership's
restoration activities are substantially complete. Accordingly, we do not
expect any further recoveries or related restoration costs of any
significance that would be associated with the funds misappropriated by the
former general partners and their affiliates.
-------------------------------
Return of Capital
The following table has been updated to present the breakdown of distributions
since the Partnership's first quarterly distribution, for the period ended
December 31, 1986 through December 31, 1997.
<TABLE>
<CAPTION>
================================================================================
Distribution Capital
------------- -----------
Analysis Balance
------------- -----------
<S> <C> <C>
Original Capital Balance - $25,000,000
Cash Flow From Operations Since Inception $ 19,193,793 -
Total Distributions Since Inception (21,166,740) -
------------
(Return) of Capital $ (1,972,947) (1,972,947)
============ -----------
"Net" Remaining Initial Investment
by Original Partners - $23,027,053
===========
================================================================================
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
<PAGE>
Page 5 DiVall 1 4 Q 97
------------------------
Questions & Answers
1. When will 1997 per unit values be available for my investment in the
Partnership?
The Partnership's 1997 "year-end" valuation information is scheduled to be
available by the end of February by contacting Investor Relations. A
mailing to all qualified plan holders is scheduled to occur at that time as
well.
We will also include this information in our 1997 Annual Report which we
plan to mail by early April 1998.
2. When can I expect to receive my Schedule K-1 for 1997?
Our current schedule for mailing all 1997 Schedule K-1's for your
Partnership and its affiliated partnerships is by the end of February
1998.
3. When can I expect my next distribution mailing?
Your distribution correspondence for the First Quarter of 1998 is scheduled
to be mailed on May 15, 1998.
* * *
================================================================================
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>
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------
DIVALL INSURED INCOME FUND L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 1997
- - --------------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
----------- ----------- ------------
4TH 4TH CASH
QUARTER QUARTER BETTER
OPERATING REVENUES 12/31/97 12/31/97 (WORSE)
----------- ----------- ------------
<S> <C> <C> <C>
Rental income $ 494,183 $ 535,029 $ 40,846
Direct financing interest 3,905 3,904 (1)
Interest income 10,500 10,792 292
Recovery of Amounts Previously Written Off 0 77,160 77,160
Other income 0 1,285 1,285
----------- ----------- -----------
TOTAL OPERATING REVENUES $ 508,588 $ 628,170 $ 119,582
----------- ----------- -----------
OPERATING EXPENSES
Insurance $ 4,596 $ 3,877 $ 719
Management fees 23,454 20,405 3,049
Restoration fees 0 3,086 (3,086)
Overhead allowance 1,953 1,897 56
Advisory Board 3,900 3,181 719
Administrative 11,666 8,656 3,010
Professional services 3,110 3,864 (754)
Auditing 10,755 10,735 20
Legal 7,500 4,684 2,816
Real estate taxes 42,000 6,894 35,106
Defaulted tenants 1,800 7,741 (5,941)
----------- ----------- -----------
TOTAL OPERATING EXPENSES $ 110,734 $ 75,020 $ 35,714
----------- ----------- -----------
INTEREST EXPENSE $ 24,066 $ (260,515) $ 284,581
----------- ----------- -----------
INVESTIGATION AND RESTORATION EXPENSES $ 387 $ 394 $ (7)
----------- ----------- -----------
NON-OPERATING EXPENSES
Depreciation $ 87,555 $ 87,591 $ (36)
Amortization 2,352 2,493 (141)
----------- ----------- -----------
TOTAL NON-OPERATING EXPENSES $ 89,907 $ 90,084 $ (177)
----------- ----------- -----------
TOTAL EXPENSES $ 225,094 $ (95,017) $ 320,111
----------- ----------- -----------
NET INCOME $ 283,494 $ 723,187 $ 439,693
OPERATING CASH RECONCILIATION: VARIANCE
-----------
Depreciation and amortization $ 89,907 $ 90,084 177
Recovery of amounts previously written off 0 (77,160) (77,160)
(Increase) Decrease in current assets (35,837) (83,916) (48,079)
Increase (Decrease) in current liabilities 65,808 (182,121) (247,929)
G.P. distribution (1,134) (2,901) (1,767)
Cash reserved for payables (66,000) 185,000 251,000
Advance from (to) further cash flows for current distributions 37,000 0 (37,000)
----------- ----------- -----------
Net Cash Provided From Operating Activities $ 373,238 $ 652,173 $ 278,935
----------- ----------- -----------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Recoveries from G.P. affiliates 0 77,160 77,160
Principal received on equipment leases 15,025 15,027 2
Investment in buildings and improvements 0 0 0
Decrease in mortgage notes payable (7,167) (373,602) (366,435)
----------- ----------- -----------
Net Cash Provided From Investing And Financing
Activities $ 7,858 $ (281,415) $(289,273)
----------- ----------- -----------
Total Cash Flow For Quarter $ 381,096 $ 370,758 $ (10,338)
Cash Balance Beginning of Period 859,240 933,518 74,278
Less 3rd quarter distributions paid 11/97 (375,000) (475,000) (100,000)
Less cash reserved above for payables and future distributions 29,000 (185,000) (214,000)
----------- ----------- -----------
Cash Balance End of Period $ 894,336 $ 644,276 $(250,060)
Cash reserved for 4th quarter L.P. distributions (375,000) (375,000) 0
Cash reserved for payment of payables and future distributions (371,000) (140,000) (231,000)
----------- ----------- -----------
Unrestricted Cash Balance End of Period $ 148,336 $ 129,276 $ (19,060)
=========== =========== ===========
- - --------------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
----------------------------------------
* Quarterly Distribution $ 375,000 $ 375,000 $0
Mailing Date 2/15/98 (enclosed) --
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
*Refer to distribution letter for detail of quarterly distribution.
<PAGE>
The Provo Group
DIVALL INSURED INCOME FUND L.P.
1997 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
PROJECTIONS FOR ORIGINAL EQUITY $25,000,000
DISCUSSION PURPOSES NET DISTRIBUTION OF CAPITAL
SINCE INCEPTION $1,972,947
-----------
CURRENT EQUITY $23,027,053
===========
PORTFOLIO
<TABLE>
<CAPTION>
REAL ESTATE EQUIPMENT TOTALS TOTAL %
--------------------------- ----------------------------------- ---------------------------- ON
LEASE 23,027,053
BASE % EXPIRA- LEASE* %* EQUITY
CONCEPT LOCATION COST RENT YIELD TION COST RECEIPTS RETURN INVESTED RECEIPTS* RETURN* RAISE
- - ------------- -------------- ---------- --------- ------ --------- --------- -------- ------ ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RIO BRAVO GRAND FORKS,ND 984,801 100,000 10.15% 984,801 100,000 10.15%
CHI CHI'S EAU CLAIRE,WI 1,042,730 136,260 13.07% 1,042,730 136,260 13.07%
VACANT LAND COL. SPRINGS,CO 356,549 0 0.00% 356,549 0 0.00%
DENNY'S** GLENDALE,AZ 1,105,926 90,000 8.14% 68,744 0 0.00% 1,174,670 90,000 7.66%
DENNY'S SCOTTSDALE,AZ 1,051,157 90,000 8.56% 40,554 0 0.00% 1,091,710 90,000 8.24%
DENNY'S MESA,AZ 1,028,036 65,000 6.32% 39,218 0 0.00% 1,067,254 65,000 6.09%
DENNY'S** PEORIA,AZ 1,105,926 90,000 8.14% 58,781 0 0.00% 1,164,707 90,000 7.73%
BW-III HOPKINS,MN 795,050 66,000 8.30% 1/15/2000 190,000 37,860 19.93% 985,050 103,860 10.54%
DENNY'S BEAVER DAM,WI 659,299 66,000 10.01% 3/31/2000 190,000 37,860 19.93% 849,299 103,860 12.23%
FAZOLI'S DES MOINES,IA 565,476 45,500 8.05% 39,600 0 0.00% 605,076 45,500 7.52%
HARDEE'S FON DU LAC,WI 1,026,931 72,000 7.01% 1,026,931 72,000 7.01%
POPEYE'S CHICAGO,IL 473,968 63,180 13.33% 473,968 63,180 13.33%
POPEYE'S CHICAGO,IL 610,893 81,420 13.33% 610,893 81,420 13.33%
POPEYE'S CHICAGO,IL 484,501 64,620 13.34% 484,501 64,620 13.34%
POPEYE'S CHICAGO,IL 610,893 81,420 13.33% 610,893 81,420 13.33%
POPEYE'S CHICAGO,IL 437,105 58,260 13.33% 437,105 58,260 13.33%
POPEYE'S CHICAGO,IL 631,958 84,180 13.32% 631,958 84,180 13.32%
POPEYE'S CHICAGO,IL 579,295 77,280 13.34% 579,295 77,280 13.34%
BJ's MARKET CHICAGO,IL 905,807 60,000 6.62% 905,807 60,000 6.62%
TACO CABANA ARLINGTON,TX 1,474,569 132,000 8.95% 1,474,569 132,000 8.95%
TACO CABANA DALLAS,TX 1,369,243 132,000 9.64% 1,369,243 132,000 9.64%
TACO CABANA DALLAS,TX 1,257,596 132,000 10.50% 1,257,596 132,000 10.50%
TACO CABANA DALLAS,TX 1,308,153 132,000 10.09% 1,308,153 132,000 10.09%
- - ---------------------------- --------------------------- ----------------------------------- ---------------------------- ----------
PORTFOLIO TOTALS
(23 Properties) 19,865,862 1,919,120 9.66% 626,896 75,720 12.08% 20,492,758 1,994,840 9.73% 8.66%
- - ---------------------------- --------------------------- ------------------------- ---------------------------- ----------
</TABLE>
OUTSTANDING DEBT
<TABLE>
<CAPTION>
AMOUNT ANNUAL CURRENT AMOUNT ANNUAL CURRENT AMOUNT ANNUAL
OWED DEBT INTEREST OWED DEBT INTEREST OWED DEBT
MORTGAGED PROPERTIES 12/31/97 SERVICE RATE 12/31/97 SERVICE RATE 12/31/97 SERVICE
- - ---------------------------- ----------------------------- ----------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DENNY'S BEAVER DAM,WI 234,396 73,517 8.50% 234,396 73,517
POPEYE'S CHICAGO,IL 240,000 21,700 8.50% 240,000 21,700
- - ---------------------------- ----------------------------- ----------------------------- ----------------------
TOTALS 474,396 95,217 - 0 0 - 474,396 95,217
- - ---------------------------- ----------------------------- ----------------------------- ---------------------- ----- -----
NET AFTER DEBT 19,391,466 1,823,903 9.41% 626,896 75,720 12.08% 20,018,362 1,899,623 9.49% 8.25%
- - ---------------------------- ----------------------------- ----------------------------- ---------------------- ----- -----
</TABLE>
* A portion of the amounts disclosed include a return of principal.
** Rent is based on 12.5% of monthly sales. Rent projected for 1998 is based on
1997 sales levels.
<PAGE>
The Provo Group
DIVALL INSURED INCOME FUND, L.P.
<TABLE>
<CAPTION>
Acquisition Original Building Size/ Current Tenant Sold
Date Property Land Area Trade Name Date
----------- -------- ------------- -------------- ----
<S> <C> <C> <C> <C> <C>
1. 01/13/87 Colorado Land SOLD 01/09/89
2510 Academy Blvd.
Colorado Springs, Colorado
2. 03/27/87 Rocky Rococo Pizza 3,850 s.f. DenAmerica Corp.
827 Park Avenue 28,265 s.f. Denny's
Beaver Dam, Wisconsin
3. 07/10/87 Rocky Rococo Pizza 3,250 s.f. DenAmerica Corp.
502 North Blake Road 40,488 s.f. BW-3
Hopkins, Minnesota
4. 10/09/87 Happy Joes' Pizza 3,052 s.f. Fazoli's Restaurants, Inc.
3600 Merle Hay Road 34,967 s.f. Fazoli's
Des Moines, Iowa
5. 07/08/87 Two Pesos Mexican 3,986 s.f. TP Acquisition Corp.
4355 Camp Wisdom 29,818 s.f. Taco Cabana
Dallas, Texas
6. 07/08/87 Two Pesos Mexican 3,986 s.f. TP Acquisition Corp.
1505 North Collins Street 38,862 s.f. Taco Cabana
Arlington, Texas
7. 09/28/87 Two Pesos Mexican 4,250 s.f. TP Acquisition Corp.
N.W. Highway & Shiloh Road 40,000 s.f. Taco Cabana
Dallas, Texas
8. 10/26/87 Chi Chi's Mexican 7,688 s.f. Chi Chi's Inc.
1030 Clairmont Avenue 92,000 s.f. Chi Chi's
Eau Claire, Wisconsin
9. 12/01/87 Popeye's Famous Chicken 2,195 s.f. Bysom Enterprises
7430 South Stoney Island 15,625 s.f. Popeye's
Chicago, Illinois
10. 12/01/87 Popeye's Famous Chicken 1,925 s.f. Bysom Enterprises
300 East 35th Street 28,875 s.f. Popeye's
Chicago, Illinois
11. 12/01/87 Popeye's Famous Chicken 2,461 s.f. Bysom Enterprises
346 East 95th Street 14,250 s.f. Popeye's
Chicago, Illinois
12. 12/01/87 Popeye's Famous Chicken 1,752 s.f. Bysom Enterprises
5431 South Halsted Street 15,600 s.f. Popeye's
Chicago, Illinois
13. 12/01/87 Popeye's Famous Chicken 2,020 s.f. Bysom Enterprises
111 West 75th Street 15,162 s.f. Popeye's
Chicago, Illinois
</TABLE>
<PAGE>
The Provo Group
DIVALL INSURED INCOME FUND, L.P.
<TABLE>
<CAPTION>
Acquisition Original Building Size/ Current Tenant Sold
Date Property Land Area Trade Name Date
----------- -------- ------------- -------------- ----
<S> <C> <C> <C> <C> <C>
14. 12/01/87 Popeye's Famous Chicken 1,752 s.f. Bysom Enterprises
818 East 47th Street 25,388 s.f. Popeye's
Chicago, Illinois
15. 12/01/87 Popeye's Famous Chicken 2,435 s.f. Bysom Enterprises
8732 South Stoney Island 16,623 s.f. Popeye's
Chicago, Illinois
16. 12/23/87 Chi Chi's Mexican 7,600 s.f. Manzana Grande, Inc.
3000 32nd Avenue South 78,000 s.f. Rio Bravo
Grand Forks, North Dakota
17. 12/23/87 Denny's 4,265 s.f. DenAmerica Corp.
10614 North 43rd Street 30,000 s.f. Denny's
Glendale, Arizona
18. 12/23/87 Denny's 4,300 s.f. DenAmerica Corp.
8737 N.W. Grand Avenue 20,400 s.f. Denny's
Peoria, Arizona
19. 03/17/88 Wendy's 2,414 s.f. SOLD 10/31/94
1100 U.S. 41 South 54,025 s.f.
Brooksville, Florida
20. 03/17/88 Wendy's 2,409 s.f. SOLD 10/31/94
941 North Coca Boulevard 30,000 s.f.
Cocoa, Florida
21. 03/17/88 Wendy's 2,590 s.f. SOLD 11/01/89
395 EauGallie Causeway Blvd. 37,500 s.f.
Eau Gallie, Florida
22. 03/17/88 Wendy's 2,695 s.f. SOLD 10/31/94
2817 South Bay Street 35,365 s.f.
Eustis, Florida
23. 03/18/88 Denny's 4,200 s.f. JML Foods, Inc.
7605 East McDowell Road 21,400 s.f. Denny's Restaurant
Scottsale, Arizona
24. 03/18/88 Denny's 4,100 s.f. TCB Management, Inc.
1231 West Baseline Road 26,000 s.f. Denny's Restaurant
Mesa, Arizona
25. 03/24/88 Hardee's 4,158 s.f. Hardee's Food Systems, Inc.
838 East Johnson Street 40,313 s.f. Hardee's
Fond du Lac, Wisconsin
26. 03/25/88 Two Peso's Mexican 4,100 s.f. TP Acquisition Corp.
1827 Greenville Avenue 40,313 s.f. Taco Cabana
Dallas, Texas
</TABLE>
<PAGE>
The Provo Group
DIVALL INSURED INCOME FUND, L.P.
<TABLE>
<CAPTION>
Acquisition Original Building Size/ Current Tenant Sold
Date Property Land Area Trade Name Date
----------- -------- -------------- -------------- ----
<S> <C> <C> <C> <C> <C>
27. 04/15/88 Bonanza/Porterhouse 6,518 s.f. BJ's Market, Inc.
8736 S. Stoney Island Avenue 16,625 s.f. BJ's Market & Bakery
Chicago, Illinois
</TABLE>
