<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
March 31, 1998 and December 31, 1997
------------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1998 1997
------------ -------------
INVESTMENT PROPERTIES AND EQUIPMENT:(Notes 3 and 6)
<S> <C> <C>
Land $ 7,108,073 $ 7,308,073
Buildings and improvements 12,075,525 12,075,525
Equipment 246,896 246,896
Accumulated depreciation (4,868,810) (4,781,219)
----------- -----------
Net investment properties and equipment 14,561,684 14,849,275
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES:(Note 8) 62,918 67,943
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 776,192 644,274
Cash held in Indemnification Trust (Note 10) 304,095 299,456
Rents and other receivables 54,054 147,556
Deferred rent receivable 188,309 189,494
Prepaid insurance 8,685 12,407
Deferred charges (net of accumulated amortization
of $75,352 in 1998 and $70,804 in 1997) 114,513 103,261
----------- -----------
Total other assets 1,445,848 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 1,477,537 1,434,662
Allowance for uncollectible restoration receivable (1,477,537) (1,434,662)
----------- -----------
Due from former affiliates, net 0 0
----------- -----------
Total assets $16,070,450 $16,313,666
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
March 31, 1998 and December 31, 1997
------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES:
Mortgage note payable (Note 6) $ 221,952 $ 474,396
Accounts payable and accrued expenses 86,536 57,848
Due to current General Partner 17,165 2,351
Security deposits 124,930 124,930
Real estate taxes payable 14,236 22,530
Unearned rental income 62,993 53,869
------------ ------------
Total liabilities 527,812 735,924
------------ ------------
CONTINGENT LIABILITIES: (Notes 9 and 13)
PARTNERS' CAPITAL: (Notes 1, 4 and 13)
Current General Partner -
Cumulative net income 65,171 61,758
Cumulative cash distributions (26,145) (24,773)
------------ ------------
39,026 36,985
------------ ------------
Limited Partners (25,000 interests outstanding) -
Capital contributions, net of offering costs 22,270,578 22,270,578
Cumulative net income 13,609,869 13,272,014
Cumulative cash distributions (21,166,741) (20,791,741)
Reallocation of former
general partners' capital 789,906 789,906
------------ ------------
15,503,612 15,540,757
------------ ------------
Total partners' capital 15,542,638 15,577,742
------------ ------------
Total liabilities and partners' capital $ 16,070,450 $ 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 March 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
REVENUES:
Rental income $524,548 $529,722
Interest income on direct financing leases 1,677 4,987
Interest income 10,080 9,491
Other income 307 730
Gain on sale of assets 33,752 0
Recovery of amounts previously written off 9,465 707
-------- --------
579,829 545,637
-------- --------
EXPENSES:
Partnership management fees 23,645 23,020
Restoration fees 0 28
Insurance 3,722 4,510
General and administrative 19,132 15,083
Interest 7,238 22,340
Expenses incurred due to default by lessee 3,368 12,927
Professional services 26,227 17,746
Professional services related to restoration 132 4,152
Selling commissions 14,100 3,754
Appraisal fees 45,640 1,460
Advisory Board fees and expenses 3,218 3,749
Depreciation 87,591 87,926
Amortization 4,548 2,150
-------- --------
238,561 198,845
-------- --------
NET INCOME $341,268 $346,792
======== ========
NET INCOME - GENERAL PARTNER $ 3,413 $ 3,468
NET INCOME - LIMITED PARTNERS 337,855 343,324
-------- --------
$341,268 $346,792
======== ========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST, based on 25,000 interests outstanding $ 13.51 $ 13.73
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 341,268 $ 346,792
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 92,139 90,076
Gain on sale of assets (33,752) 0
Recovery of amounts previously written off (9,465) (707)
Interest applied to Indemnification Trust Account (4,639) (4,047)
Increase in unearned rental income 9,124 2,673
Decrease in rents and other receivables 93,502 10,567
(Increase)/Decrease in deferred rent receivable 1,185 (47,087)
Withdrawals for payment of real estate taxes 0 15,868
Decrease in prepaid expenses 3,722 4,515
Increase in accounts payable and accrued expenses 28,688 1,086
Increase in payable to tenant 0 2,164
Increase/(Decrease) in due to General Partner 14,814 (24,888)
Increase in accrued interest payable 0 12,945
Increase in security deposits 0 5,000
(Decrease) in real estate taxes payable (8,294) (40,749)
--------- ----------
Net cash provided from operating activities 528,292 374,208
--------- ----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Increase in deferred charges (15,800) (18,550)
Investment in building improvements 0 (4,300)
Recoveries from former affiliates 0 707
Proceeds from sale of land 233,752 0
Principal payments received on direct financing leases 14,490 7,633
--------- ----------
Net cash provided by (used in) investing activities 232,442 (14,510)
--------- ----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Principal payments on mortgage notes (252,444) (83,020)
Cash distributions to Limited Partners (375,000) (350,000)
Cash distributions to current General Partner (1,372) (1,387)
--------- ----------
Net cash (used in) financing activities (628,816) (434,407)
--------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 131,918 (74,709)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 644,274 1,019,582
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 776,192 $ 944,873
--------- ==========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $7,238 $9,395
====== ======
</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 March 31, 1998, and the results of operations for the three-month
periods ended March 31, 1998, and 1997, and cash flows for the three-month
periods ended March 31, 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.
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 March 31, 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.
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.
6
<PAGE>
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.
The Partnership will be dissolved on November 30, 2010, or earlier upon the
prior occurrence of any of the following events: (a) the disposition of all
properties of the Partnership; (b) the written determination by the General
Partner that the Partnership's assets may constitute "plan assets" for the
purposes of ERISA; (c) the agreement of Limited Partners owning a majority of
the outstanding interests to dissolve the Partnership; or (d) the bankruptcy or
termination of the existing General Partner, unless an additional General
Partner is previously elected by a majority in interest of the Limited Partners.
No provision for Federal income taxes has been made, as any liability for such
taxes would be that of the individual partners rather than the Partnership. At
December 31, 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 $15,100,000, of which approximately
$1,955,000 has been attributed to the Partnership and is reflected as due from
former affiliates on the balance sheet at March 31, 1998. The 9% interest
accrued as of March 31, 1998, amounted to approximately $828,000 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 for
the Partnerships. Effective May 26, 1993, the Limited Partners, by written
consent of a majority of
7
<PAGE>
interests, elected The Permanent Manager, TPG, as General Partner. TPG
terminated the former general partners by accepting their tendered resignations.
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former general partners and their affiliates reflecting the
estimated $3 million receivable. This net receivable was allocated among the
Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through March 31, 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 March 31, 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.
Undeveloped land was 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, 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.
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 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 wants to be released from the lease
on this property as well as the Denny's in Beaver Dam, Wisconsin. Management had
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.
The current General Partner receives a fee for managing the Partnership equal to
4% of the gross receipts, with a maximum reimbursement for office rent and
related office overhead of $25,000 between the three
8
<PAGE>
affiliated Partnerships as provided in the Permanent Manager Agreement ("PMA").
Effective March 1, 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 original cost.
4. PARTNERSHIP AGREEMENT:
The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
General Partners. The Partnership Agreement also provided for quarterly cash
distributions from Net Cash Receipts, as defined, within 60 days after the last
day of the first full calendar quarter following the date of release of the
subscription funds from escrow and each calendar quarter thereafter, in which
such funds were available for distribution with respect to such quarter. Such
distributions were to be made 90% to Limited Partners and 10% to the former
general partners, provided, however, that quarterly distributions would be
cumulative and were not to be made to the former general partners unless and
until each Limited Partner had received a distribution from Net Cash Receipts,
as defined, in an amount equal to 10.5% annum, cumulative simple return on his
or her Adjusted Original Capital, as defined, from the Return Calculation Date,
as defined.
Net proceeds, as originally defined, were to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital, (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a 14% per annum, cumulative simple return thereon from the
Return Calculation Date, including in the calculation of such return, all prior
distributions of Net Cash Receipts and any prior distributions of Net Proceeds
of this clause, and (c) then, to Limited Partners, 88%, and to the General
Partners, 12%, of remaining Net Proceeds available for distribution.
On May 26, 1993, pursuant to the results of a solicitation of written consents
from the Limited Partners, the Partnership Agreement was amended to replace the
former general partners and amend various sections of the agreement. The former
general partners were replaced as General Partner by The Provo Group, Inc., an
Illinois corporation. Under the terms of the amendment, net profits or losses
from operations are allocated 99% to the Limited Partners and 1% to the current
General Partner. The amendment also provided for distributions from Net Cash
Receipts to be made 99% to the Limited Partners and 1% to the current General
Partner provided that quarterly distributions will be cumulative and will not be
made to the current General Partner unless and until each Limited Partner has
received a distribution from Net Cash Receipts in an amount equal to 10.5% per
annum, cumulative simple return on his or her Adjusted Original Capital, as
defined, from the Return Calculation Date, as defined except to the extent
needed by the General Partner to pay its federal and state income taxes on the
income allocated to it attributable to such year. Distributions paid to the
General Partner are based on the estimated tax liability resulting from
allocated income. Subsequent to the filing of the General Partner's income tax
returns, a true-up with actual distributions is made.
9
<PAGE>
The provisions regarding distribution of Net Proceeds, as defined, were also
amended to provide that Net Proceeds are to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a 14% per annum, cumulative simple return therein from the
Return Calculation Date, including in the calculation of such return all prior
distributions of Net Cash Receipts and any prior distributions of Net Proceeds
under this clause except to the extent needed by the General Partner to pay its
federal and state income tax on the income allocated to it attributable to such
year; and (c) then, to Limited Partners, 99%, and to the General Partner, 1%, of
remaining Net Proceeds available for distribution.
Additionally, per the amendment of the Partnership Agreement dated May 26, 1993,
the total compensation paid to all persons for the sale of the investment
properties shall be limited to a competitive real estate commission, not to
exceed 6% of the contract price for the sale of the property. The General
Partner may receive up to one-half of the competitive real estate commission,
not to exceed 3%, provided that the General Partner provides a substantial
amount of services in the sales effort. It is further provided that a portion of
the amount of such fees payable to the General Partner is subordinated to its
success at recovering the funds misappropriated by the former general partners.
(See Note 9.)
5. LEASES:
Lease terms for the majority of the investment properties are 20 years from
their inception. The leases generally provide for minimum rents and additional
rents based upon a percentage of gross sales in excess of specified breakpoints.
The lessee is responsible for occupancy costs such as maintenance, insurance,
real estate taxes, and utilities. Accordingly, these amounts are not reflected
in the statements of income, except in circumstances where, in management's
opinion, the Partnership will be required to pay such costs to preserve its
assets (i.e., payment of past-due real estate taxes). Management has determined
that the leases are properly classified as operating leases; therefore, rental
income is reported when earned and the cost of the property, excluding the cost
of the land, is depreciated over its estimated useful life.
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
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>
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 Popeye's properties were renegotiated effective April 1, 1998,
resulting in total 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.
10
<PAGE>
6. MORTGAGE NOTE PAYABLE:
At March 31, 1998, the mortgage note payable consists of the following:
<TABLE>
<CAPTION>
Outstanding
Principal Balance Interest Rate Maturity Date
-----------------------------------------------
<S> <C> <C>
a. $ 221,952 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 March 31, 1998 of $446,956.
Scheduled maturities of all notes payable, are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1998 $ 43,252
1999 60,619
2000 65,977
2001 52,104
-------
$221,952
========
</TABLE>
7. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
Amounts paid to the current General Partner for the quarters ended March 31,
1998 and 1997, are as follow:
<TABLE>
<CAPTION>
Current General Partner Incurred as of Incurred as of
----------------------- March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Management fees $23,645 $23,020
Restoration fees 0 28
Cash distribution 1,372 1,387
Overhead allowance 1,908 1,897
Leasing commissions 15,800 0
Reimbursement for out-of-pocket expenses 1,407 3,425
------- -------
$44,132 $29,757
======= =======
</TABLE>
11
<PAGE>
8. NET INVESTMENT IN DIRECT FINANCING LEASES:
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, is comprised of the following as of
March 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Minimum lease payments receivable $68,882
Less - Unearned income (5,964)
-------
Net investment in direct financing leases $62,918
=======
</TABLE>
Scheduled future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1998 $29,496
1999 37,860
2000 1,526
-------
$68,882
=======
</TABLE>
9. CONTINGENT LIABILITIES:
According to the Partnership Agreement, as amended, the current General Partner
may receive a disposition fee not to exceed 3% of the contract price of the sale
of investment properties. Fifty percent (50%) of all such disposition fees
earned by the current General Partner is to be escrowed until the aggregate
amount of recovery of the funds misappropriated from the Partnerships by the
former general partners is greater than $4,500,000. Upon reaching such recovery
level, full disposition fees will thereafter be payable and fifty percent (50%)
of the previously escrowed amount will be paid to the current General Partner.
At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining
escrowed disposition fees shall be paid to the current General Partner. If such
levels of recovery are not achieved, the current General Partner will contribute
the amounts escrowed towards the recovery. In lieu of an escrow, 50% of all such
disposition fees have been paid directly to the restoration account and then
distributed among the three Partnerships. After surpassing the $4,500,000
recovery level during March 1996, 50% of the amount previously escrowed was
refunded to the current General Partner. The remaining amount allocated to the
Partnerships may be owed to the current General Partner if the $6,000,000
recovery level is met. As of March 31, 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:
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
12
<PAGE>
March 31, 1998. Funds are invested in U.S. Treasury securities. In addition,
interest totaling $54,095 has been credited to the Trust as of March 31, 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. At such time as the indemnity
provisions expire or the full indemnity is paid, any funds remaining in the
Trust will revert back to the general funds of the Partnership.
11. RESTORATION TRUST ACCOUNT AND EXPENSE ALLOCATIONS:
Restoration costs represent expenses incurred by the Partnership in relation to
the misappropriated assets by the former general partners and their affiliates.
These costs are allocated among the Partnerships based on each partnership's
respective share of the entire misappropriation, as currently quantified. The
amount of misappropriation for each partnership is adjusted annually to reflect
new discoveries and more accurate quantification of amounts based on the
continuing investigation. Such adjustments will result in periodic adjustments
to prior allocations of recovery costs to reflect updated information.
Consequently, previous payments for restoration expenses may not be consistent
with modified allocations.
Recoveries realized by the Partnerships are being distributed to each respective
partnership on the same basis as the restoration costs are currently being
allocated. As of March 31, 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
13
<PAGE>
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 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 May 15, 1998, the Partnership made a distribution to the Limited Partners for
the First Quarter 1998 of $435,000 amounting to approximately $17.40 per limited
partnership interest.
14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources:
Investment Properties and Net Investment in Direct Financing Leases
The investment properties, including equipment held by the Partnership at March
31, 1998, were originally purchased at a price, including acquisition costs, of
approximately $20,136,000.
The Partnership sold 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 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 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 net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, amounted to $63,000 at March 31, 1998,
compared to $68,000 at December 31, 1997. The decrease of $5,000 was a result of
principal payments received during the quarter.
Other Assets
Cash and cash equivalents, held by the Partnership, were $776,000 at March 31,
1998, compared to $644,000 at December 31, 1997. The Partnership designated cash
of $435,000 to fund the First Quarter 1998 distributions to Limited Partners,
$190,000 for the payment of accounts payable and accrued expenses, and the
remainder represents reserves deemed necessary to allow the Partnership to
operate normally. Cash generated through the operations of the Partnership's
investment properties, sales of investment properties, and any recoveries of
misappropriated funds by the former general partners will provide the sources
for future fund liquidity and Limited Partner distributions.
The Partnership established an Indemnification Trust (the "Trust") during the
Fourth Quarter of 1993 and deposited $100,000 in the Trust during 1993, $90,000
during 1994, and $60,000 during 1995. The provision to establish the Trust was
included in the Permanent Manager Agreement for the indemnification of TPG, in
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.
15
<PAGE>
Due From Former Affiliates, Allowance for Uncollectible Amounts Due From Former
Affiliates and Due to Affiliated Partnerships
Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $477,000 at March
31, 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
$1,478,000 at March 31, 1998, and includes $828,000 of cumulative accrued
interest.
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former general partners and their affiliates reflecting the
estimated $3 million receivable. This net receivable was allocated among the
Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through March 31, 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.
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 $222,000
at March 31, 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.
Accounts payable and accrued expenses at March 31, 1998, amounted to
approximately $87,000. The majority of this balance represented accruals of
legal and auditing fees as well as an accrued expense for appraisals performed
on the Partnership's properties during March.
Real estate taxes payable amounted to $14,000 at March 31, 1998, compared to
$23,000 at December 31, 1997. The decrease is primarily a result of amounts
accrued for 1997 taxes on vacant properties which were paid in 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
16
<PAGE>
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 $375,000 and $1,372 respectively, have also been made in
accordance with the amended Partnership Agreement. The First Quarter 1998
distribution of $435,000 was paid to the Limited Partners on May 15, 1998.
Results of Operations:
The Partnership reported net income for the quarter ended March 31, 1998, in the
amount of $341,000 compared to $347,000 for the quarter ended March 31, 1997.
Revenues
Total revenues were $580,000 and $546,000 for the quarters ended March 31, 1998
and 1997, respectively.
Based on leases currently in place on the remaining owned properties, total
revenues should approximate $2,000,000 annually or $500,000 quarterly. Future
revenues may decrease with tenant defaults and/or sales of Partnership
properties. They may also increase with additional rents due from tenants, if
those tenants experience sales levels which require the payment of additional
rent to the Partnership.
Expenses
For the quarters ended March 31, 1998 and 1997, cash expenses amounted to
approximately 25% and 20% of total revenues, respectively. Total expenses,
including non-cash items, amounted to approximately 41% and 36% of total
revenues for the quarters ended March 31, 1998 and 1997. The 1998 expenses were
negatively impacted by $46,000 in fees incurred for appraisals on all of the
properties.
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
17
<PAGE>
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.
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 or whether any such verdicts will ultimately prove collectible.
Items 2 - 4.
Not Applicable.
Item 5. Other Information
On April 24, 1998, the Partnership filed a Definitive Consent Statement on
Schedule 14A with the Securities and Exchange Commission in connection with the
solicitation of consents by the Partnership to approve the sale of all the
Partnership's properties and to subsequently liquidate the Partnership. If the
proposed liquidation of the Partnership is approved by a majority of limited
partners, it is expected to be completed prior to the end of 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
99.0 Correspondence to the Limited Partners dated May 15, 1998, regarding
the First Quarter 1998 distribution.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the first 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: _________________________________________
Bruce A. Provo, President
Date: May 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: __________________________________________________
Bruce A. Provo, President
Date: May 14, 1998
By: __________________________________________________
Kristin J. Atkinson
Vice President - Finance and Administration
Date: May 14, 1998
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
By: The Provo Group, Inc., General Partner
By: /s/Bruce A. Provo
---------------------------------------------
Bruce A. Provo, President
Date: May 14, 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: May 14, 1998
By: /s/Kristin J. Atkinson
--------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: May 14, 1998
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the March 31, 1998 Form 10-Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 776,192
<SECURITIES> 304,095
<RECEIVABLES> 2,383,200
<ALLOWANCES> 1,954,721
<INVENTORY> 0
<CURRENT-ASSETS> 1,508,766
<PP&E> 19,430,494
<DEPRECIATION> 4,868,810
<TOTAL-ASSETS> 16,070,450
<CURRENT-LIABILITIES> 527,812
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,542,638
<TOTAL-LIABILITY-AND-EQUITY> 16,070,450
<SALES> 0
<TOTAL-REVENUES> 579,829
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 231,323
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,238
<INCOME-PRETAX> 341,268
<INCOME-TAX> 0
<INCOME-CONTINUING> 341,268
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 341,268
<EPS-PRIMARY> 13.51
<EPS-DILUTED> 13.51
</TABLE>
<PAGE>
DiVall Insured Income Fund, L.P.
QUARTERLY NEWS
================================================================================
A publication of The Provo Group, Inc. FIRST QUARTER 1998
WHY ALL THE INTEREST ... IN MY INTERESTS?
Madison, Wisconsin
Recently you may have been subject to the "feeding" frenzy occurring for your
interests in the Partnership. A common question we are hearing is "why all the
interest in my interests?"
As we have communicated to you before, it's really quite simple -- the interests
you own in the Partnership offer immediate value to recent third-party tenderers
such as U.S. Restaurant Properties, Inc., Smithtown Bay, LLC, and Whitney Year
2030.
Should you be tendering your interests to any of these parties? As your General
Partner, we don't think so, particularly if you want to be the recipient of
"full" value. We believe you should be the one receiving the final return on
your long-term investment NOT someone who buys your interests at a discount for
future profit opportunities.
In accordance with the Agreement of Limited Partnership, we have requested your
consent to sell the properties in the Partnership -- which means that the
Partnership will be dissolved following the sale of the assets and final
distribution of the proceeds to you.
If a majority of Limited Partners are in agreement that the market conditions
are favorable for producing maximized value on your interests through
liquidation now, we will proceed with the sale of the properties and make a
final distribution to you.
Although the strong interest in your interests may be causing you concern or
confusion -- think of it this way, you have something they want, and you have
control over whether they can have it or not.
-----------------------
OTHER NEWS INSIDE...
. Distributions More Than Budgeted......Distribution Highlights, pg 2
. New Tenant for Popeye's...................Property Highlights, pg 3
<PAGE>
Page 2 DiVall 1 1 Q 98
-------------------------
Distribution Highlights
. 7.6% (approx.) annualized return . $17.40 per unit (approx.) for the
from operations and other First Quarter 1998.
sources based on $23,000,000
("net" remaining initial . $909.00 to $806.00 range of
investment). distributions per unit from the first
unit sold to the last unit sold
. $435,000 "total" amount before the offering closed (March
distributed for the First 1988), respectively.
Quarter 1998 which was $55,000
more than budgeted. [NOTE: Distributions are from both
cash flow from operations and "net"
The "higher" than projected cash activity from financing and
distribution is primarily due investing activities.]
to unbudgeted rental income
received during the quarter.
(Original units were purchased for $1,000/unit.)
-------------------------
Statements of Income and Cash Flow Highlights
. 12% increase in . 22% increase in . 5% increase in net
"total" operating "total" expenses income from
revenues from from projections. projections.
projections.
. $52,000 unbudgeted rental income . Property appraisals in the amount of
was received during the quarter. $46,000 were accrued at the quarter's
The "multiple" Popeye's (Chicago, end in connection with the proposed
IL) budgeted decreased rent did liquidation of the partnership.
not occur and the tenant of the
"vacant" Hardee's (Beaver Dam,
WI) remained current on its rent.
<PAGE>
[LOGO]
Page 3 DiVall 1 1 Q98
==============================
Property Highlights
Vacancies
---------
. Denny's restaurant (Beaver Dam, WI) was vacant at March 31, 1998. Management
is currently working with the tenant to relet this property. (NOTE:
This tenant continues to make rental payments.)
Rents Receivable
----------------
There were no rental delinquencies at March 31, 1998.
Other Property Matters
----------------------
. THG Restaurant Group assumed the leases of the multiple Popeye's restaurants
located in Chicago, Illinois. The new lease terms are favorable for the
Partnership.
==============================
Return of Capital
The following table has been updated to present the breakdown of distributions
since the Partnership's first quarterly distribution, for the period ended
December 31, 1986 through March 31, 1998.
<TABLE>
<CAPTION>
================================================================================
Distribution Capital
------------- ------------
Analysis Balance
------------- ------------
<S> <C> <C>
Original Capital Balance - $25,000,000
Cash Flow From Operations Since Inception $ 19,616,789 -
Total Distributions Since Inception (21,577,732) -
------------
(Return) of Capital ($1,960,943) (1,960,943)
============ -----------
"Net" Remaining Initial Investment
by Original Partners - $23,039,057
===========
================================================================================
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
<PAGE>
Page 4 DiVall 1 1 Q 98
---------------------
Questions & Answers
. When can I expect my next distribution mailing?
Your distribution correspondence for the Second Quarter of 1998 is scheduled to
be mailed on August 14, 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>
[THE PROVO GROUP LOGO]
<TABLE>
<CAPTION>
DIVALL INSURED INCOME FUND L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998
-------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
-------------------------------------
<S> <C> <C> <C>
1ST 1ST CASH
QUARTER QUARTER BETTER
OPERATING REVENUES 3/31/98 3/31/98 (WORSE)
----------- ----------- ------------
Rental income $472,868 $524,548 $51,680
Direct financing interest 1,677 1,677 0
Interest income 11,200 10,080 (1,120)
Gain on sale of assets 33,752 33,752 0
Other income 0 9,772 9,772
----------- ----------- ------------
TOTAL OPERATING REVENUES $519,497 $579,829 $60,332
----------- ----------- ------------
OPERATING EXPENSES
Insurance $4,296 $3,722 $574
Management fees 23,755 23,645 110
Commissions 14,100 14,100 0
Overhead allowance 1,915 1,908 7
Advisory Board 3,320 3,218 102
Administrative 16,274 17,081 (807)
Professional services 3,670 4,499 (829)
Appraisal fees 0 45,640 (45,640)
Auditing 15,755 14,655 1,100
Legal 7,500 7,073 427
Real estate taxes 101 142 (41)
Defaulted tenants 8,249 3,368 4,881
----------- ----------- ------------
TOTAL OPERATING EXPENSES $98,935 $139,051 ($40,116)
----------- ----------- ------------
INTEREST EXPENSE $6,658 $7,238 ($580)
----------- ----------- ------------
INVESTIGATION AND RESTORATION EXPENSES $150 $132 $18
----------- ----------- ------------
NON-OPERATING EXPENSES
Depreciation $87,591 $87,591 $0
Amortization 2,031 4,549 (2,518)
----------- ----------- ------------
TOTAL NON-OPERATING EXPENSES $89,622 $92,140 ($2,518)
----------- ----------- ------------
TOTAL EXPENSES $195,365 $238,561 ($43,196)
----------- ----------- ------------
NET INCOME $324,132 $341,268 $17,136
OPERATING CASH RECONCILIATION: VARIANCE
------------
Depreciation and amortization 89,622 92,140 2,518
Gain on sale of assets (33,752) (33,752) 0
(Increase) Decrease in current assets 36,603 77,457 40,854
Increase (Decrease) in current liabilities (42,115) 43,175 85,290
G.P. distribution (1,297) (1,366) (69)
Cash reserved for payables 42,115 (42,800) (84,915)
Advance from (to) future cash flows for current distributions (26,500) (26,500) 0
----------- ----------- ------------
Net Cash Provided From Operating Activities $388,808 $449,622 $60,814
----------- ----------- ------------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Recoveries from former G.P. affiliates 0 0 0
Principal received on equipment leases 7,788 6,688 (1,100)
Proceeds from sale of assets 233,752 233,752 0
Decrease in mortgage notes payable (253,478) (252,444) 1,034
----------- ----------- ------------
Net Cash Provided from Investing And Financing
Activities ($11,938) ($12,004) ($66)
----------- ----------- ------------
Total Cash Flow For Quarter $376,870 $437,618 $60,748
Cash Balance Beginning of Period 561,056 644,274 83,218
Less 1st quarter distributions paid 2/98 (375,000) (375,000) 0
Less cash reserved above for payables and future distributions (15,615) 69,300 84,915
----------- ----------- ------------
Cash Balance End of Period $547,311 $776,192 $228,881
Cash reserved for 1st quarter L.P. distributions (380,000) (435,000) (55,000)
Cash reserved for payment of payables and future distributions (126,500) (191,500) (65,000)
----------- ----------- ------------
Unrestricted Cash Balance End of Period $40,811 $149,692 $108,881
=========== =========== ============
--------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
-------------------------------------
* Quarterly Distribution $380,000 $435,000 $55,000
Mailing Date 5/15/98 (enclosed) -
--------------------------------------------------------------------------------------------------------
</TABLE>
* Refer to distribution letter for detail of quarterly
distribution.
<PAGE>
<TABLE>
<CAPTION>
PROJECTIONS FOR DIVALL INSURED INCOME FUND L.P.
DISCUSSION PURPOSES 1998 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
PORTFOLIO
------------------------------- -------------------------------------------
REAL ESTATE EQUIPMENT
------------------------------- -------------------------------------------
- - ------------------------------------------- BASE % LEASE LEASE * % *
CONCEPT LOCATION COST RENT YIELD EXPIRATION COST RECEIPTS RETURN
- - ------------------------------------------- ------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RIO BRAVO GRAND FORKS, ND 984,801 100,000 10.15%
CHI CHI'S EAU CLAIRE, WI 1,042,730 136,260 13.07%
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 67,152 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 3/31/98 SERVICE RATE 3/31/98 SERVICE RATE
- - ------------------------------------------- ------------------------------- ------------------------------
- - -------------------------------------------
DENNY'S BEAVER DAM, WI 221,952 73,517 8.50%
- - ------------------------------------------- ------------------------------- ------------------------------
- - ------------------------------------------- ------------------------------- ------------------------------
TOTALS 221,952 73,517 - 0 0 -
- - ------------------------------------------- ------------------------------- ------------------------------
- - ------------------------------------------- ------------------------------- ------------------------------
NET AFTER DEBT 19,287,361 1,865,595 9.67% 626,896 75,720 12.08%
- - ------------------------------------------- ------------------------------- ------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------
PROJECTIONS FOR ORIGINAL EQUITY $25,000,000
DISCUSSION PURPOSES NET DISTRIBUTION OF CAPITAL
SINCE INCEPTION $1,960,943
------------
CURRENT EQUITY $23,039,057
--------------------------------------===========
PORTFOLIO
---------------------------------- ------------
TOTALS TOTAL %
---------------------------------- ON 23,039,057
EQUITY
CONCEPT LOCATION INVESTED RECEIPTS * RETURN * RAISE
- - -------------- --------------------- ---------------------------------- -------------
<S> <C> <C> <C> <C> <C>
RIO BRAVO GRAND FORKS, ND 984,801 100,000 10.15%
CHI CHI'S EAU CLAIRE, WI 1,042,730 136,260 13.07%
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 67,152 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% 8.75%
- - ------------------------------------------- ---------------------------------- -------------
OUTSTANDING DEBT
-----------------------
AMOUNT ANNUAL
- - ----------------------------------- OWED DEBT
MORTGAGED PROPERTIES 3/31/98 SERVICE
- - ----------------------------------- -----------------------
- - -----------------------------------
DENNY'S BEAVER DAM, WI 221,952 73,517
- - ----------------------------------- -----------------------
- - ----------------------------------- -----------------------
TOTALS 221,952 73,517
- - ----------------------------------- -----------------------
- - ----------------------------------- ---------------------------------- -------------
NET AFTER DEBT 19,914,257 1,941,315 9.75% 8.43%
- - ----------------------------------- ---------------------------------- -------------
</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.
