<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
---------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-16722
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Wisconsin 36-6845083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 W. 11th St., Suite 1110, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 421-7444
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Interests
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1998 and December 31, 1997
----------------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
INVESTMENT PROPERTIES AND EQUIPMENT: (Notes 3 and 6)
Land $ 7,108,073 $ 7,308,073
Buildings and improvements 12,075,525 12,075,525
Equipment 246,896 246,896
Accumulated depreciation (5,043,991) (4,781,219)
----------- -----------
Net investment properties and equipment 14,386,503 14,849,275
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES: (Note 8) 45,647 67,943
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 727,639 644,274
Cash held in Indemnification Trust (Note 10) 312,782 299,456
Rents and other receivables 22,050 147,556
Deferred rent receivable 185,939 189,494
Prepaid insurance 1,241 12,407
Deferred charges (net of accumulated amortization
of $81,050 in 1998 and $70,804 in 1997) 107,253 103,261
----------- -----------
Total other assets 1,356,904 1,396,448
----------- -----------
DUE FROM FORMER AFFILIATES: (Note 2)
Due from former general partner affiliates 477,184 477,184
Allowance for uncollectible amounts due from
former affiliates (477,184) (477,184)
Restoration cost receivable 1,567,700 1,434,662
Allowance for uncollectible restoration receivable (1,567,700) (1,434,662)
----------- -----------
Due from former affiliates, net 0 0
----------- -----------
Total assets $15,789,054 $16,313,666
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1998 and December 31, 1997
----------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(Unauduted)
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
LIABILITIES:
Mortgage notes payable (Note 6) $ 193,815 $ 474,396
Accounts payable and accrued expenses 42,791 57,848
Due to current General Partner 930 2,351
Security deposits 124,930 124,930
Real estate taxes payable 26,536 22,530
Unearned rental income 57,500 53,869
------------ ------------
Total liabilities 446,502 735,924
------------ ------------
CONTINGENT LIABILITIES: (Notes 9 and 13)
PARTNERS' CAPITAL:(Notes 1, 4 and 13)
Current General Partner -
Cumulative net income 70,541 61,758
Cumulative cash distributions (28,294) (24,773)
------------ ------------
42,247 36,985
------------ ------------
Limited Partners (25,000 interests outstanding) -
Capital contributions, net of offering costs 22,270,578 22,270,578
Cumulative net income 14,141,562 13,272,014
Cumulative cash distributions (21,901,741) (20,791,741)
Reallocation of former
general partners' capital 789,906 789,906
------------ ------------
15,300,305 15,540,757
------------ ------------
Total partners' capital 15,342,552 15,577,742
------------ ------------
Total liabilities and partners' capital $ 15,789,054 $ 16,313,666
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ ----------------------
September 30, September 30,
------------- -------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income $444,590 $532,897 $1,479,435 $1,571,135
Interest income on direct financing leases 1,279 4,274 4,437 13,896
Interest income 10,867 12,024 29,520 30,404
Other income 17 2,115 324 3,404
Gain on sale of assets 0 0 33,752 0
Recovery of amounts previously written off 9,465 0 28,395 707
-------- -------- ---------- ----------
466,218 551,310 1,575,863 1,619,546
-------- -------- ---------- ----------
EXPENSES:
Partnership management fees 23,895 23,520 71,435 70,060
Restoration fees 0 0 0 28
Insurance 3,723 4,142 11,167 12,867
General and administrative 9,032 10,654 57,524 51,702
Interest 4,260 20,115 15,860 63,858
Expenses incurred due to default by lessee 7,127 6,815 8,618 14,254
Real estate taxes 0 0 142 (3,628)
Professional services 42,657 24,183 103,303 68,572
Professional services related to restoration 83 1,363 407 8,658
Appraisal fees 0 0 45,640 0
Environmental inspections 0 0 36,300 0
Land title surveys 49,600 0 49,600 0
Selling commissions 0 0 14,100 0
Advisory Board fees and expenses 3,364 3,603 10,417 9,952
Depreciation 87,591 87,591 262,773 263,232
Amortization 2,483 3,076 10,246 8,303
-------- -------- ---------- ----------
233,815 185,062 697,532 567,858
-------- -------- ---------- ----------
NET INCOME $232,403 $366,248 $ 878,331 $1,051,688
======== ======== ========== ==========
NET INCOME - GENERAL PARTNER $ 2,324 $ 3,662 $ 8,783 $ 10,517
NET INCOME - LIMITED PARTNERS 230,079 362,586 869,548 1,041,171
-------- -------- ---------- ----------
$232,403 $366,248 $ 878,331 $1,051,688
======== ======== ---------- ==========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST, based on 25,000 interests outstanding $9.20 $14.50 $34.78 $41.65
======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 878,331 $ 1,051,688
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 273,019 271,535
Gain on sale of assets (33,752) 0
Recovery of amounts previously written off (28,395) (707)
Interest applied to Indemnification Trust Account (13,326) (11,761)
Increase/(Decrease) in unearned rental income 3,631 (40,760)
(Increase)/Decrease in rents and other receivables 125,506 (5,218)
(Increase)/Decrease in deferred rent receivable 3,555 (99,769)
Withdrawals for payment of real estate taxes 0 18,048
Decrease in prepaid expenses 11,166 12,872
Increase/(Decrease) in accounts payable and accrued expenses (15,058) (7,056)
(Decrease) in due to General Partner (1,421) (24,818)
Increase in accrued interest payable 0 39,267
Increase/(Decrease) in security deposits 0 20,000
Increase/(Decrease) in real estate taxes payable 4,006 (56,564)
----------- -----------
Net cash provided from operating activities
1,207,262 1,166,757
----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Increase in deferred charges (14,238) (19,791)
Investment in building improvements 0 (5,000)
Recoveries from former affiliates 0 707
Proceeds from sale of land 233,752 0
Principal payments received on direct financing leases 50,691 42,893
----------- -----------
Net cash provided by investing activities
270,205 18,809
----------- -----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Principal payments on mortgage notes (280,581) (167,431)
Cash distributions to Limited Partners (1,110,000) (1,100,000)
Cash distributions to current General Partner (3,521) (4,199)
----------- -----------
Net cash (used in) financing activities (1,394,102) (1,271,630)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 83,365 (86,064)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 644,274 1,019,582
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 727,639 $ 933,518
=========== ===========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 15,860 $ 24,591
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
These unaudited interim financial statements should be read in conjunction with
DiVall Insured Income Fund Limited Partnership's (the "Partnership") 1997 annual
audited financial statements within Form 10-K.
These unaudited financial statements include all adjustments which are, in the
opinion of management, necessary to present a fair statement of financial
position as of September 30, 1998, and the results of operations for the three
and nine-month periods ended September 30, 1998, and 1997, and cash flows for
the nine-month periods ended September 30, 1998 and 1997. Results of operations
for the periods are not necessarily indicative of the results to be expected for
the full year.
The following significant event(s) have occured subsequent to fiscal year 1997,
which require disclosure in this interim report per Regulation S-X, Rule 10-01,
Paragraph (a) (5):
During the First Quarter of 1998, the Partnership sold undeveloped land in
Colorado Springs, Colorado for $235,000. The sale took place in January 1998,
and resulted in a gain, before disposition fees, of $34,000.
The Partnership sold all of its investment properties during October 1998, and
plans to liquidate and be dissolved by December 31, 1998.
1. ORGANIZATION AND BASIS OF ACCOUNTING:
-------------------------------------
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 has been 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 September 30, 1998, the Partnership owned 22 properties.
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.
6
<PAGE>
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.
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.
2. REGULATORY INVESTIGATION:
-------------------------
A preliminary investigation during 1992 by the Office of the Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation"), revealed that during at least the four years ended
December 31, 1992, two of the former general partners of the Partnership, Gary
J. DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred
substantial cash assets of the Partnership and two affiliated publicly
registered partnerships, DiVall Insured Income Properties 2 Limited Partnership
("DiVall 2") and DiVall Income Properties 3 Limited Partnership ("DiVall 3")
(collectively the "Partnerships") to various other entities previously sponsored
by or otherwise affiliated with DiVall and Magnuson. The unauthorized transfers
were in violation of the respective Partnership Agreements and resulted in
part, from material weaknesses in the internal control system of the
Partnerships. The aggregate amount of the misappropriation, related costs, and
9% interest accrued since January 1, 1993, is in excess of $15,800,000, of which
approximately $2,045,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at September 30, 1998. The
9% interest accrued as of September 30, 1998, amounted to approximately $918,000
and is not reflected in the accompanying income statement. As of December 31,
1997, $1,912,000 was reflected as due from former affiliates based on the
estimated overall misappropriation and related costs of $14,800,000.
Subsequent to discovery, and in response to the regulatory inquiries, a third-
party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed (effective
February 8, 1993) to assume the responsibility for daily operations and assets
of the Partnerships as well as to develop and execute a plan of restoration
7
<PAGE>
for the Partnerships. Effective May 26, 1993, the Limited Partners, by written
consent of a majority of interests, elected The Permanent Manager, TPG, as
General Partner. TPG terminated the former general partners by accepting their
tendered resignations.
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former general partners and their affiliates reflecting the
estimated $3 million receivable. This net receivable was allocated among the
Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through September 30, 1998, $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 September 30, 1998, the Partnership owned 22 fully constructed fast-food
restaurants. 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. All of the 22 investment properties were sold
during October 1998, for $17,780,000, resulting in a net gain of approximately
$3.4 million.
Undeveloped land that was located in Colorado Springs, Colorado, 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, these costs totaled approximately $310,000 and are not reflected in
the Partnership's financial statements. The land was originally purchased for
$356,549 and had an adjusted carrying value of $200,000. The property was sold
during January 1998 for $235,000, resulting in a gain, before disposition fees,
of $34,000.
The Denny's restaurant (currently BW-3) in Hopkins, Minnesota, was vacated by
the tenant in September 1994. The property's lease, however, does not expire
until 2013. During March 1995, the tenant executed a lease with a sub-tenant,
Stone Creek, Inc., for the property. During the First Quarter of 1997, the
tenant, DenAmerica, notified the Partnership that it wants to be released from
the lease on this property as well as the Denny's in Beaver Dam, Wisconsin.
Management has denied DenAmerica's request to be released from its leasehold
obligations.
The leases on the Partnership's Popeye's properties were renegotiated effective
April 1, 1998, resulting in annual rents which are $20,000 higher than the
original leases called for without adjusting existing percentage rent
breakpoints. Additionally, a five-year extension was granted on the leases.
The total cost of the investment properties and equipment includes the original
purchase price plus acquisition fees and other capitalized costs paid to a
former affiliate of the general partners.
8
<PAGE>
The current General Partner receives a fee for managing the Partnership equal to
4% of the gross receipts, with a maximum reimbursement for office rent and
related office overhead of $25,000 between the three affiliated Partnerships as
provided in the Permanent Manager Agreement ("PMA"). Effective March 1, 1998,
the minimum management fee and the maximum reimbursement for office rent and
overhead increased by 1.6%, representing the allowable annual Consumer Price
Index adjustment per the PMA. For purposes of computing the 4% overall fee,
gross receipts includes amounts recovered in connection with the
misappropriation of assets by the former general partners and their affiliates.
TPG has received fees from the Partnership totaling $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 current book value.
4. PARTNERSHIP AGREEMENT:
----------------------
The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
General Partners. The Partnership Agreement also provided for quarterly cash
distributions from Net Cash Receipts, as defined, within 60 days after the last
day of the first full calendar quarter following the date of release of the
subscription funds from escrow and each calendar quarter thereafter, in which
such funds were available for distribution with respect to such quarter. Such
distributions were to be made 90% to Limited Partners and 10% to the former
general partners, provided, however, that quarterly distributions would be
cumulative and were not to be made to the former general partners unless and
until each Limited Partner had received a distribution from Net Cash Receipts,
as defined, in an amount equal to 10.5% annum, cumulative simple return on his
or her Adjusted Original Capital, as defined, from the Return Calculation Date,
as defined.
Net proceeds, as originally defined, were to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital, (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a 14% per annum, cumulative simple return thereon from the
Return Calculation Date, including in the calculation of such return, all prior
distributions of Net Cash Receipts and any prior distributions of Net Proceeds
of this clause, and (c) then, to Limited Partners, 88%, and to the General
Partners, 12%, of remaining Net Proceeds available for distribution.
On May 26, 1993, pursuant to the results of a solicitation of written consents
from the Limited Partners, the Partnership Agreement was amended to replace the
former general partners and amend various sections of the agreement. The former
general partners were replaced as General Partner by The Provo Group, Inc., an
Illinois corporation. Under the terms of the amendment, net profits or losses
from operations are allocated 99% to the Limited Partners and 1% to the current
General Partner. The amendment also provided for distributions from Net Cash
Receipts to be made 99% to the Limited Partners and 1% to the current General
Partner provided that quarterly distributions will be cumulative and will not be
made to the current General Partner unless and until each Limited Partner has
received a distribution from Net Cash Receipts in an amount equal to 10.5% per
annum, cumulative simple return on his or her Adjusted Original Capital, as
defined, from the Return Calculation Date, as defined, except to the extent
needed by the General Partner to pay its federal and state income taxes on the
income allocated to it attributable to such year. Distributions paid to the
General Partner are based on the estimated tax liability resulting from
9
<PAGE>
allocated income. Subsequent to the filing of the General Partner's income tax
returns, a true-up with actual distributions is made.
The provisions regarding distribution of Net Proceeds, as defined, were also
amended to provide that Net Proceeds are to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a 14% per annum, cumulative simple return thereon from the
Return Calculation Date, including in the calculation of such return all prior
distributions of Net Cash Receipts and any prior distributions of Net Proceeds
under this clause except to the extent needed by the General Partner to pay its
federal and state income tax on the income allocated to it attributable to such
year; and (c) then, to Limited Partners, 99%, and to the General Partner, 1%, of
remaining Net Proceeds available for distribution.
Additionally, per the amendment of the Partnership Agreement dated May 26, 1993,
the total compensation paid to all persons for the sale of the investment
properties shall be limited to a competitive real estate commission, not to
exceed 6% of the contract price for the sale of the property. The General
Partner may receive up to one-half of the competitive real estate commission,
not to exceed 3%, provided that the General Partner provides a substantial
amount of services in the sales effort. It is further provided that a portion
of the amount of such fees payable to the General Partner is subordinated to its
success at recovering the funds misappropriated by the former general partners.
(See Note 9.)
5. LEASES:
-------
Lease terms for the majority of the investment properties are 20 years from
their inception. The leases generally provide for minimum rents and additional
rents based upon a percentage of gross sales in excess of specified breakpoints.
The lessee is responsible for occupancy costs such as maintenance, insurance,
real estate taxes, and utilities. Accordingly, these amounts are not reflected
in the statements of income, except in circumstances where, in management's
opinion, the Partnership will be required to pay such costs to preserve its
assets (i.e., payment of past-due real estate taxes). Management has determined
that the leases are properly classified as operating leases; therefore, rental
income is reported when earned and the cost of the property, excluding the cost
of the land, is depreciated over its estimated useful life.
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1998 $ 2,037,568
1999 2,045,316
2000 2,100,769
2001 2,102,664
2002 2,067,108
Thereafter 15,634,365
-----------
$25,987,790
===========
</TABLE>
10
<PAGE>
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.
The leases on the Partnership's Popeye's properties were renegotiated effective
April 1, 1998, resulting in annual rents which are $20,000 higher than the
original leases called for without adjusting existing percentage rent
breakpoints. Additionally, a five-year extension was granted on the leases.
6. MORTGAGE NOTE PAYABLE:
----------------------
At September 30, 1998, the mortgage note payable consists of the following:
<TABLE>
<CAPTION>
Outstanding
Principal Balance Interest Rate Maturity Date
-----------------------------------------------
<S> <C> <C>
a. $193,815 prime September 2001
========
</TABLE>
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 September 30, 1998 of $431,521.
Scheduled maturities of the note payable are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1998 $ 15,115
1999 60,619
2000 65,977
2001 52,104
--------
$193,815
========
</TABLE>
The note was paid in full in October 1998 with the proceeds from the
property sale.
11
<PAGE>
7. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the nine months ended September
30, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
Current General Partner Incurred as of Incurred as of
----------------------- September 30, September 30,
-------------- --------------
1998 1997
---- ----
<S> <C> <C>
Management fees $ 71,435 $70,060
Restoration fees 0 28
Cash distribution 3,521 4,199
Overhead allowance 5,763 5,692
Leasing Commissions 14,238 0
Reimbursement for out-of-pocket expenses 15,417 8,839
-------- -------
$110,374 $88,818
======== =======
</TABLE>
8. NET INVESTMENT IN DIRECT FINANCING LEASES:
------------------------------------------
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, is comprised of the following as of
September 30, 1998:
<TABLE>
<S> <C>
Minimum lease payments receivable $48,852
Less - Unearned income (3,205)
-------
Net investment in direct financing leases $45,647
=======
</TABLE>
Scheduled future minimum lease payments are as follows:
<TABLE>
<S> <C>
Year ending
December 31,
1998 $ 9,466
1999 37,860
2000 1,526
-------
$48,852
=======
</TABLE>
The direct financing leases were transferred to the buyer of the Partnership's
properties during October 1998.
12
<PAGE>
9. CONTINGENT LIABILITIES:
----------------------
According to the Partnership Agreement the current General Partner may receive a
disposition fee not to exceed 3% of the contract price of the sale of investment
properties. Fifty percent (50%) of all such disposition fees earned by the
current General Partner is to be escrowed until the aggregate amount of recovery
of the funds misappropriated from the Partnerships by the former general
partners is greater than $4,500,000. Upon reaching such recovery level, full
disposition fees will thereafter be payable and fifty percent (50%) of the
previously escrowed amount will be paid to the current General Partner. At such
time as the recovery exceeds $6,000,000 in the aggregate, the remaining escrowed
disposition fees shall be paid to the current General Partner. If such levels
of recovery are not achieved, the current General Partner will contribute the
amounts escrowed towards the recovery. In lieu of an escrow, 50% of all such
disposition fees have been paid directly to the restoration account and then
distributed among the three Partnerships. After surpassing the $4,500,000
recovery level during March 1996, 50% of the amount previously escrowed was
refunded to the current General Partner. The remaining amount allocated to the
Partnerships may be owed to the current General Partner if the $6,000,000
recovery level is met. As of September 30, 1998, 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, which is considered unlikely.
10. PMA INDEMNIFICATION TRUST:
--------------------------
PMA provides that the Permanent Manager will be indemnified from any claims or
expenses arising out of or relating to the Permanent Manager serving in such
capacity or as substitute general partner, so long as such claims do not arise
from fraudulent or criminal misconduct by the Permanent Manager. The PMA
provides that the Partnership fund this indemnification obligation by
establishing a reserve of up to $250,000 of Partnership assets which would not
be subject to the claims of the Partnership's creditors. An Indemnification
Trust ("Trust") serving such purposes has been established at United Missouri
Bank, N.A. The Trust has been fully funded with Partnership assets as of
September 30, 1998. Funds are invested in U.S. Treasury securities. In
addition, interest totaling $62,782 has been credited to the Trust as of
September 30, 1998. 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. During October 1998,
the Trust was terminated in connection with the Partnership's liquidation and
all funds were deposited into the general funds of the Partnership.
11. RESTORATION TRUST ACCOUNT AND EXPENSE ALLOCATIONS:
--------------------------------------------------
Restoration costs represent expenses incurred by the Partnership in relation to
the misappropriated assets by the former general partners and their affiliates.
These costs are allocated among the Partnerships based on each partnership's
respective share of the entire misappropriation, as currently quantified. The
amount of misappropriation for each partnership is adjusted annually to reflect
new discoveries and more accurate quantification of amounts based on the
continuing investigation. Such adjustments will result in periodic adjustments
to prior allocations of recovery costs to reflect updated information.
Consequently, previous payments for restoration expenses may not be consistent
with modified allocations.
13
<PAGE>
Recoveries realized by the Partnerships are being distributed to each respective
partnership on the same basis as the restoration costs are currently being
allocated. As of September 30, 1998, the Partnerships recovered a total of
approximately $5,726,000 from the former general partners and their affiliates.
Of this amount, the Partnership received its pro-rata share in the amount of
$739,719. Additionally, $40,347, representing 50% of all previously escrowed
disposition fees earned by the General Partner, have been paid to the recovery.
Of that amount, $5,189 was allocated to the Partnership and is contingently
payable to the General Partner upon achievement of the final recovery level as
described in Note 9.
The PMA contemplated that the Permanent Manager could establish a separate and
distinct Restoration Trust Fund which would hold all recoveries until a final
independent adjudication by a court of competent jurisdiction or vote of the
Limited Partners ratified the allocation of proceeds to each respective
partnership. Management has concluded that a fair and reasonable interim
accounting for recovery proceeds can be accomplished at the partnership level in
a manner similar to restoration costs which are paid directly by the
Partnerships. Management reserves the right to cause the final allocation of
such costs and recoveries to be determined either by a vote of the Limited
Partners or a court of competent jurisdiction. Potential sources of recoveries
include third party litigation, promissory notes, land contracts, and personal
assets of the former general partners and their affiliates.
12. LITIGATION:
-----------
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure
the repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 2 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
In 1993 nineteen (19) of the Private Partnerships sought the protection of the
Bankruptcy Court in the Eastern District of Wisconsin. Seven (7) of these
bankruptcies were voluntary and twelve (12) of these bankruptcies were
involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest. These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.
The Partnership's experience in those bankruptcy cases that have concluded,
either through the approval of Plans of Reorganization, dismissal of the
bankruptcies, settlements or a combination of the foregoing, is that (i) the
value of the obligations of the Private Partnerships assigned to the Partnership
has been at a significant discount to their face amounts, and (ii) the General
Partner interests in such Private Partnerships often have little economic value.
The Partnership's recoveries in these bankruptcies have been on a steeply
discounted basis.
Plans of reorganization have been filed in the bankruptcies, and settlement
agreements in all of the Private Partnerships have been reached. Settlements in
the bankruptcies have resulted in cash payments to the
14
<PAGE>
Partnerships of a total of $720,000 and notes secured by subordinated mortgages
in the aggregate amount of $625,000. The Partnerships subsequently sold the
secured notes for a total of $175,000.
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 October 1998, the Partnership sold all of its 22 properties to U.S.
Restaurant Properties, L.P. for $17,780,000, resulting in a net gain of
approximately $3.4 million.
On November 15, 1998, the Partnership made a distribution to the Limited
Partners for the Third Quarter 1998 of $400,000 amounting to approximately
$16.00 per limited partnership interest.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources:
- - --------------------------------
Investment Properties and Net Investment in Direct Financing Leases
- - -------------------------------------------------------------------
The investment properties, including equipment held by the Partnership at
September 30, 1998, were originally purchased at a price, including acquisition
costs, of approximately $20,136,000. The Partnership sold all of its investment
properties during October 1998, for $17,780,000, resulting in a net gain of
approximately $3.4 million.
The Partnership sold the vacant land in Colorado Springs, Colorado, during
January 1998 for $235,000, resulting in a gain of $34,000.
The Denny's restaurant (currently BW-3) in Hopkins, Minnesota, was vacated by
the tenant in September 1994. The property's lease, however, does not expire
until 2013, and the tenant continued to make all payments required by the lease.
During March 1995, the tenant executed a lease with a sub-tenant, Stone Creek,
Inc., for the property. During the First Quarter of 1997, the tenant,
DenAmerica, notified the Partnership that it wants to be released from the lease
on this property as well as the Denny's in Beaver
15
<PAGE>
Dam, Wisconsin. Management has denied DenAmerica's request to be released from
its leasehold obligations.
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, amounted to $46,000 at September 30,
1998, compared to $68,000 at December 31, 1997. The decrease of $22,000 was a
result of principal payments received. These leases were transferred to the
buyer of the Partnership's properties during October 1998.
Other Assets
- - ------------
Cash and cash equivalents held by the Partnership, were $728,000 at September
30, 1998, compared to $644,000 at December 31, 1997. The Partnership designated
cash of $400,000 to fund the Third Quarter 1998 distributions to Limited
Partners, $168,000 for the payment of accounts payable and accrued expenses, and
the remainder represents reserves deemed necessary to allow the Partnership to
operate normally. Cash generated through the operations of the Partnership's
investment properties and sales of investment properties will provide the
sources for future fund liquidity and Limited Partner distributions.
The Partnership established 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 PMA for
the indemnification of TPG, in the absence of fraud or gross negligence, from
any claims or liabilities that may arise from TPG acting as Permanent Manager.
The Trust is owned by the Partnership. For additional information regarding the
Trust, refer to Note 10 to the financial statements.
Due From Former Affiliates and Allowance for Uncollectible Amounts Due From
- - ---------------------------------------------------------------------------
Former Affiliates
- - -----------------
Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $477,000 at
September 30, 1998 and December 31, 1997. It is not expected that any further
material recoveries will be received.
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
$1,435,000 at December 31, 1997, to $1,568,000 at September 30, 1998, and
includes $918,000 of cumulative accrued interest.
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former general partners and their affiliates reflecting the
estimated $3 million receivable. This net receivable was allocated among the
Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through September 30, 1998, $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.
16
<PAGE>
The restoration costs are allocated among the Partnerships based on each
Partnership's respective share of the misappropriation as discussed in Note 11
to the financial statements. The allocation is adjusted periodically to reflect
any changes in the entire misappropriation. The Partnership's percentage of the
allocation was reduced in 1993.
Liabilities
- - -----------
Mortgage notes payable decreased from $474,000 at December 31, 1997, to $194,000
at September 30, 1998, due to monthly principal payments made on the notes as
well as the repayment of a $240,000 line of credit from the proceeds of the sale
of the land in Colorado. The remaining note payable balance was repaid during
October 1998 with the proceeds from the property sale.
Accounts payable and accrued expenses at September 30, 1998, amounted to
approximately $43,000. The majority of this balance represented accruals of
legal and auditing fees.
Real estate taxes payable amounted to $27,000 at September 30, 1998, compared to
$23,000 at December 31, 1997. The balance was paid at closing of the property
sales during October 1998.
Partners' Capital
- - -----------------
Net income for the quarter was allocated between the General Partner and the
Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement and the Amendment to the Partnership Agreement, as discussed more
fully in Note 4 of the financial statements. The former general partners'
capital account balance was reallocated to the Limited Partners at December 31,
1993. Refer to Note 13 to the financial statements for additional information
regarding the reallocation.
Cash distributions paid to the Limited Partners and to the General Partner
during 1998 of $1,110,000 and $3,521, respectively, have also been made in
accordance with the amended Partnership Agreement. The Third Quarter 1998
distribution of $400,000 was paid to the Limited Partners on November 15, 1998.
Results of Operations:
- - ----------------------
The Partnership reported net income for the quarter ended September 30, 1998, in
the amount of $232,000 compared to $366,000 for the quarter ended September 30,
1997. For the nine months ended September 30, 1998 and 1997, net income totaled
$878,000 and $1,052,000, respectively.
Revenues
- - --------
Total revenues were $466,000 and $551,000 for the quarters ended September 30,
1998 and 1997, respectively, and were $1,479,000 and $1,620,000 for the nine
months ended September 30, 1998 and 1997, respectively. The 1998 revenue was
negatively impacted by the non-recognition of percentage rents due to the
agreement with the properties' buyer that all percentage rents be paid to the
buyer for 1998. Percentage rent income for the nine months ended September 30,
1997 totaled $84,000.
There will be no further material operating revenues for the Partnership, as its
investment properties were liquidated during October 1998.
17
<PAGE>
Expenses
- - --------
For the quarters ended September 30, 1998 and 1997, cash expenses amounted to
approximately 31% and 17% of total revenues, respectively. For the nine months
ended September 30, 1998 and 1997, cash expenses totaled 27% and 18%,
respectively. Total expenses, including non-cash items, amounted to
approximately 50% and 34% of total revenues for the quarters ended September 30,
1998 and 1997 and totaled 44% and 35% for the nine months ended September 30,
1998 and 1997. The 1998 expenses were negatively impacted by $46,000 in fees
incurred for appraisals, $50,000 for surveys, and $36,000 for environmental
inspections on all of the properties in connection with the liquidation of the
Partnership. 1998 expense also includes a selling commission paid on the sale of
the Colorado land. Partially offsetting these expenses, interest expense has
decreased significantly due to the repayment of notes during 1997 and 1998.
Inflation:
- - ----------
Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio of triple net leases. By their nature, such leases actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes. If inflation causes operating margins to deteriorate for lessees
if expenses grow faster than revenues, then, inflation may well negatively
impact the portfolio through tenant defaults.
It would be misleading to associate inflation with asset appreciation for real
estate, in general, and the Partnership's portfolio, specifically. Due to the
"triple net" nature of the property leases, asset values generally move
inversely with interest rates.
Year 2000
- - ---------
The Partnership's operations are not dependent on date sensitive software. The
Partnership is not aware of any Year 2000 problems with its current software.
Accounting and Partnership records software are owned and operated by third
parties who provide services to the Partnership under contract. The Partnership
is currently in the process of evaluating Year 2000 issues with these third
party providers. The Partnership believes, however, that even if any Year 2000
problems are not corrected on schedule, the cost and disruption to operations of
the Partnership are expected to be minimal.
Tenants are responsible for the operation of any equipment located at the
Partnership's properties. While the Partnership is not fully aware of the
compliance attainment efforts of its tenants, tenant preparedness for the Year
2000 should have minimal impact on the Partnership and are not expected to be
material to the Partnership's operations, financial condition or liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Partnership is pursuing collection actions against former tenants of the
Partnership and/or guarantors of former tenants of the Partnership arising from
defaults on their leases. Although the Partnership believes its claims are
valid, it is currently unknown whether the Partnerships will receive favorable
verdicts on whether any such verdicts will ultimately prove collectible.
Items 2-5.
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
99.0 Correspondence to the Limited Partners dated November 15, 1998,
regarding the Third Quarter 1998 distribution.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the third quarter of
fiscal year 1998.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
By: The Provo Group, Inc., General Partner
By: /s/Bruce A. Provo
---------------------------------------------
Bruce A. Provo, President
Date: November 14, 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: November 14, 1998
By: /s/Kristin J. Atkinson
--------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: November 14, 1998
20
<PAGE>
DiVall Insured Income Fund, L.P.
QUARTERLY NEWS
================================================================================
A publication of The Provo Group, Inc. THIRD QUARTER 1998
THE SALE
Kansas City, MO
October 9, 1998
The Provo Group is pleased to announce the sale of the entire DiVall Insured
Income Fund, L.P., ("DiVall 1") portfolio. The net sales proceeds available for
distribution are estimated at approximately $17,200,000 compared to our
estimated proceeds based on a sale at appraised value of $17,900,000.
Partners will receive the normal operating distribution for the quarter ended
September 30, 1998, on November 15, 1998. The final liquidating distribution
will be made on or before December 15, 1998, due to an approximate 30 day delay
in closing. The sale of 22 properties with "rights of first refusal" issues (11
properties); title and survey issues, as well as the expected "contract
language" disagreements is complicated and unpredictable.
Bruce Provo, President of The Provo Group, reflecting on 1998's "journey"
indicated ... "I am proud that our organization was able to execute our strategy
to maximize asset values for the limited partners and accomplish a wind-up and
dissolution before year-end. It was a wonderful way to end almost six years of
committed efforts on behalf of the limited partners. We have come a long way
together."
Kristin Atkinson, The Provo Group's Chief Financial Officer, expects the final
liquidation distribution to approximate $690 per unit.
As you may recall, DiVall 1 investors received a registered tender offer to sell
for $575 per unit last winter. The Provo Group believed a higher value could be
achieved by an independent bid process. The successful sale, related liquidating
distribution, and three quarterly distributions which would not have been earned
by selling last winter, resulted in an additional $160 or 28% over the initial
offer.
--------------------------
OTHER NEWS INSIDE...
. Distribution Highlights ............................................. Page 2
. Return of Captial ................................................... Page 3
<PAGE>
Page 2 DiVall 1 3 Q 98
-------------------------
Distribution Highlights
. 6.9% (approx.) annualized return from operations and other sources based on
$23,000,000 ("net" remaining initial investment).
. $400,000 "total" amount distributed for the Third Quarter 1998 which was
$20,000 more than budgeted.
. $16.00 per unit (approx.) for the Third Quarter 1998 from both cash flow
from operations and investing activities.
. $937.00 to $834.00 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
. 4% decrease in "total" operating revenues from projections.
. 43% increase in "total" expenses from projections.
. 28% decrease in net income from projections.
. The decrease in revenues is primarily due to the reversal of percentage
rents, which will be paid to the new owner according to the terms of the
property sale.
. Land Title Surveys in the amount of $49,600 were performed on all of the
properties in connection with the liquidation, this was an unbudgeted
expense.
. Unbudgeted legal fees in connection with the liquidation were approximately
$16,000.
<PAGE>
Page 3 DiVall 1 2 Q 98
--------------------------
Return of Capital
The following table has been updated to present the breakdown of distributions
since the Partnership's first quarterly distribution, for the periods ended
December 31, 1986 through September 30, 1998.
<TABLE>
<CAPTION>
================================================================================
Distribution Capital
Analysis Balance
------------- ------------
<S> <C> <C>
Original Capital Balance - $25,000,000
Cash Flow From Operations Since Inception $ 20,351,663 -
Total Distributions Since Inception (22,301,740) -
------------
(Return) of Capital ($1,950,077) (1,950,077)
============ -----------
"Net" Remaining Initial Investment
by Original Partners - $23,049,923
===========
================================================================================
</TABLE>
(NOTE: For a more individualized discussion of return of capital
contact Investor Relations.)
-------------------------
Questions & Answers
1. When will I receive my final check with the sale proceeds?
. You will receive your final check on or before December 15, 1998.
2. What can I expect to receive in the future from The Provo Group?
. Your 1998 K-1 will be mailed in February 1999 and the 1998 Annual
Report will be mailed in April 1999.
* * *
<PAGE>
Page 4 DiVall 1 3 Q 98
================================================================================
For questions or additional information, please contact Investor Relations at:
1-800-547-7686 or 1-816-421-7444
All written inquiries may be mailed or faxed to:
The Provo Group, Inc.
101 West 11th Street, Suite 1110
Kansas City, Missouri 64105
(FAX 816-221-2130)
================================================================================
www.tpgdivall.com
<PAGE>
DIVALL INSURED INCOME FUND L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
--------------------------------
3RD 3RD CASH
QUARTER QUARTER BETTER
9/30/98 9/30/98 (WORSE)
--------- --------- --------
<S> <C> <C> <C>
OPERATING REVENUES
Rental income $ 472,868 $ 444,590 $(28,278)
Direct financing interest 1,279 1,279 0
Interest income 11,200 10,867 (333)
Other income 0 9,482 9,482
--------- --------- --------
TOTAL OPERATING REVENUES $ 485,347 $ 466,218 $(19,129)
--------- --------- --------
OPERATING EXPENSES
Insurance $ 4,296 $ 3,722 $ 574
Management fees 24,225 23,895 330
Overhead allowance 1,953 1,928 25
Advisory Board 3,320 3,364 (44)
Administrative 10,504 7,104 3,400
Professional services 4,170 8,026 (3,856)
Land Title Surveys 0 49,600 (49,600)
Auditing 10,755 10,755 0
Legal 7,500 23,877 (16,377)
Write-off uncollectible receivables 0 1,707 (1,707)
Defaulted tenants 2,499 5,420 (2,921)
--------- --------- --------
TOTAL OPERATING EXPENSES $ 69,222 $ 139,398 $(70,176)
--------- --------- --------
INTEREST EXPENSE $ 4,412 $ 4,259 $ 153
--------- --------- --------
INVESTIGATION AND RESTORATION EXPENSES $ 150 $ 54 $ 96
--------- --------- --------
NON-OPERATING EXPENSES
Depreciation $ 87,591 $ 87,591 $ 0
Amortization 2,031 2,513 (482)
--------- --------- --------
TOTAL NON-OPERATING EXPENSES $ 89,622 $ 90,104 $ (482)
--------- --------- --------
TOTAL EXPENSES $ 163,406 $ 233,815 $(70,409)
--------- --------- --------
NET INCOME $ 321,941 $ 232,403 $(89,538)
OPERATING CASH RECONCILIATION: VARIANCE
--------
Depreciation and amortization 89,622 90,104 482
(Increase) Decrease in current assets (37,067) 73,178 110,245
Increase (Decrease) in current liabilities 1,843 (18,749) (20,592)
G.P. distribution (1,288) (930) 358
Cash reserved for payables (1,843) 20,000 21,843
Advance from (to) future cash flows for current distributions 15,000 15,000 0
--------- --------- --------
Net Cash Provided From Operating Activities $ 388,208 $ 411,006 $ 22,798
--------- --------- --------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Principal received on equipment leases 8,186 8,748 562
Decrease in mortgage notes payable (13,969) (14,120) (151)
--------- --------- --------
Net Cash Provided from (Used In)
Investing and Financing Activities $ (5,783) $ (5,372) $ 411
--------- --------- --------
Total Cash Flow For Quarter $ 382,425 $ 405,634 $ 23,209
Cash Balance Beginning of Period 592,530 657,005 64,475
Less 2nd quarter distributions paid 8/98 (380,000) (300,000) 80,000
Less cash reserved for payables and future distributions (13,157) (35,000) (21,843)
--------- --------- --------
Cash Balance End of Period $ 581,798 $ 727,639 $145,841
Cash reserved for 3rd quarter L.P. distributions (380,000) (400,000) (20,000)
Cash reserved for payable and future distributions (155,502) (168,000) (12,498)
--------- --------- --------
Unrestricted Cash Balance End of Period $ 46,296 $ 159,639 $113,343
========= ========= ========
- - ------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
--------------------------------
* Quarterly Distribution $ 380,000 $ 400,000 $ 20,000
Mailing Date 11/15/98 (enclosed)
- - ------------------------------------------------------------------------------------------------
</TABLE>
* Refer to distribution letter for detail of quarterly distribution.
<PAGE>
PROJECTIONS OR
DISCUSSION PURPOSES
DIVALL INSURED INCOME FUND L.P.
1998 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
PORTFOLIO
<TABLE>
<CAPTION>
REAL ESTATE EQUIPMENT
------------------------------------- ----------------------------------------------
BASE % LEASE LEASE* %*
CONCEPT LOCATION COST RENT YIELD EXPIRATION COST RECEIPTS RETURN
- - ------- -------- ---------- --------- ------ ---------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RIO BRAVO GRAND FORKS, ND 984,801 100,000 10.15%
CHI CHI'S EAU CLAIRE, WI 1,042,730 136,260 13.07%
DENNY'S** GLENDALE, AZ 1,105,926 90,000 8.14% 68,744 0 0.00%
DENNY'S SCOTTSDALE, AZ 1,051,157 90,000 8.56% 40,553 0 0.00%
DENNY'S MESA, AZ 1,028,036 65,000 6.32% 39,218 0 0.00%
DENNY'S** PEORIA, AZ 1,105,926 90,000 8.14% 58,781 0 0.00%
BW-III HOPKINS, MN 795,050 66,000 8.30% 1/15/2000 190,000 37,860 19.93%
DENNY'S BEAVER DAM, WI 659,299 66,000 10.01% 3/31/2000 190,000 37,860 19.93%
FAZOLI'S DES MOINES, IA 565,476 45,500 8.05% 39,600 0 0.00%
HARDEE'S FOND DU LAC, WI 1,026,931 72,000 7.01%
POPEYE'S CHICAGO, IL 473,968 65,652 13.85%
POPEYE'S CHICAGO, IL 610,893 84,612 13.85%
POPEYE'S CHICAGO, IL 484,501 67,512 13.86%
POPEYE'S CHICAGO, IL 610,893 84,612 13.85%
POPEYE'S CHICAGO, IL 437,105 60,540 13.85%
POPEYE'S CHICAGO, IL 631,958 87,480 13.84%
POPEYE'S CHICAGO, IL 579,295 80,304 13.86%
BJ's MARKET CHICAGO, IL 905,807 60,000 6.62%
TACO CABANA ARLINGTON, TX 1,474,569 132,000 8.95%
TACO CABANA DALLAS, TX 1,369,243 132,000 9.64%
TACO CABANA DALLAS, TX 1,257,596 132,000 10.50%
TACO CABANA DALLAS, TX 1,308,153 132,000 10.09%
---------- --------- ------ ------- ------ ------
PORTFOLIO TOTALS (22 Properties) 19,509,313 1,939,112 9.94% 626,896 75,720 12.08%
========== ========= ====== ======= ====== ======
OUTSTANDING DEBT
AMOUNT ANNUAL CURRENT AMOUNT ANNUAL CURRENT
OWED DEBT INTEREST OWED DEBT INTEREST
MORTGAGED PROPERTIES 9/30/98 SERVICE RATE 9/30/98 SERVICE RATE
- - -------------------- ---------- --------- -------- ------- ------- --------
DENNY'S BEAVER DAM, WI 193,815 73,517 8.50%
---------- --------- ------ ------- ------ ------
TOTALS 193,815 73,517 -- 0 0 --
---------- --------- ------ ------- ------ ------
NET AFTER DEBT 19,315,498 1,865,595 9.66% 626,896 75,720 12.08%
========== ========= ====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
ORIGINAL EQUITY $25,000,000
NET DISTRIBUTION OF CAPITAL
SINCE INCEPTION $ 1,950,077
-----------
CURRENT EQUITY $23,049,923
===========
TOTAL %
TOTALS ON 23,049,923
------------------------------------- EQUITY
CONCEPT LOCATION INVESTED RECEIPTS* RETURN* RAISE
- - ------- -------- ---------- --------- ------- -------------
RIO BRAVO GRAND FORKS, ND 984,801 100,000 10.15%
CHI CHI'S EAU CLAIRE, WI 1,042,730 136,260 13.07%
DENNY'S** GLENDALE, AZ 1,174,670 90,000 7.66%
DENNY'S SCOTTSDALE, AZ 1,091,710 90,000 8.24%
DENNY'S MESA, AZ 1,067,254 65,000 6.09%
DENNY'S** PEORIA, AZ 1,164,707 90,000 7.73%
BW-III HOPKINS, MN 985,050 103,860 10.54%
DENNY'S BEAVER DAM, WI 849,299 103,860 12.23%
FAZOLI'S DES MOINES, IA 605,076 45,500 7.52%
HARDEE'S FOND DU LAC, WI 1,026,931 72,000 7.01%
POPEYE'S CHICAGO, IL 473,968 65,652 13.85%
POPEYE'S CHICAGO, IL 610,893 84,612 13.85%
POPEYE'S CHICAGO, IL 484,501 67,512 13.86%
POPEYE'S CHICAGO, IL 610,893 84,612 13.85%
POPEYE'S CHICAGO, IL 437,105 60,540 13.85%
POPEYE'S CHICAGO, IL 631,958 87,480 13.84%
POPEYE'S CHICAGO, IL 579,295 80,304 13.86%
BJ's MARKET CHICAGO, IL 905,807 60,000 6.62%
TACO CABANA ARLINGTON, TX 1,474,569 132,000 8.95%
TACO CABANA DALLAS, TX 1,369,243 132,000 9.64%
TACO CABANA DALLAS, TX 1,257,596 132,000 10.50%
TACO CABANA DALLAS, TX 1,308,153 132,000 10.09%
---------- --------- ------ -----
PORTFOLIO TOTALS (22 Properties) 20,136,209 2,014,832 10.01% 8.74%
========== ========= ====== =====
OUTSTANDING DEBT
AMOUNT ANNUAL
OWED DEBT
MORTGAGED PROPERTIES 9/30/98 SERVICE
- - -------------------- ---------- ---------
DENNY'S BEAVER DAM, WI 193,815 73,517
---------- ---------
TOTALS 193,815 73,517
---------- --------- ------ -----
NET AFTER DEBT 19,942,394 1,941,315 9.73% 8.42%
========== ========= ====== =====
</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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the September 30, 1998 Form 10-Q and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 727,639 727,639
<SECURITIES> 312,782 312,782
<RECEIVABLES> 2,407,014 2,407,014
<ALLOWANCES> 2,044,884 2,044,884
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,402,551 1,402,551
<PP&E> 19,430,494 19,430,494
<DEPRECIATION> 5,043,991 5,043,991
<TOTAL-ASSETS> 15,789,054 15,789,054
<CURRENT-LIABILITIES> 252,687 252,687
<BONDS> 193,815 193,815
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 15,342,552 15,342,552
<TOTAL-LIABILITY-AND-EQUITY> 15,789,054 15,789,054
<SALES> 445,869 1,483,872
<TOTAL-REVENUES> 466,218 1,575,863
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 229,555 681,672
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,260 15,860
<INCOME-PRETAX> 232,403 878,331
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 232,403 878,331
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 232,403 878,331
<EPS-PRIMARY> 9.20 34.78
<EPS-DILUTED> 9.20 34.78
</TABLE>
