<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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
June 30, 1998 and December 31, 1997
-----------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, 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 (4,956,401) (4,781,219)
----------- -----------
Net investment properties and equipment 14,474,093 14,849,275
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES: (Note 8) 54,395 67,943
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 657,005 644,274
Cash held in Indemnification Trust (Note 10) 307,503 299,456
Rents and other receivables 93,900 147,556
Deferred rent receivable 187,124 189,494
Prepaid insurance 4,963 12,407
Deferred charges (net of accumulated amortization
of $78,537 in 1998 and $70,804 in 1997) 109,766 103,261
----------- -----------
Total other assets 1,360,261 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 1,521,952 1,434,662
Allowance for uncollectible restoration receivable (1,521,952) (1,434,662)
----------- -----------
Due from former affiliates, net 0 0
----------- -----------
Total assets $15,888,749 $16,313,666
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
-----------------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
LIABILITIES:
Mortgage notes payable (Note 6) $ 207,935 $ 474,396
Accounts payable and accrued expenses 71,910 57,848
Due to current General Partner 1,219 2,351
Security deposits 124,930 124,930
Real estate taxes payable 18,336 22,530
Unearned rental income 53,340 53,869
------------- -------------
Total liabilities 477,670 735,924
------------- -------------
CONTINGENT LIABILITIES: (Notes 9 and 13)
PARTNERS' CAPITAL: (Notes 1, 4 and 13)
Current General Partner -
Cumulative net income 68,217 61,758
Cumulative cash distributions (27,364) (24,773)
------------- -------------
40,853 36,985
------------- -------------
Limited Partners (25,000 interests outstanding) -
Capital contributions, net of offering costs 22,270,578 22,270,578
Cumulative net income 13,911,483 13,272,014
Cumulative cash distributions (21,601,741) (20,791,741)
Reallocation of former general partners'
capital 789,906 789,906
------------- -------------
15,370,226 15,540,757
------------- -------------
Total partners' capital 15,411,079 15,577,742
------------- -------------
Total liabilities and partners' capital $ 15,888,749 $ 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 Six Months Ended
-------------------- ------------------------
June 30, June 30,
-------------------- ------------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income $510,297 $508,516 $1,034,845 $1,038,238
Interest income on direct financing leases 1,481 4,635 3,158 9,622
Interest income 8,573 8,889 18,653 18,380
Other income 0 559 307 1,289
Gain on sale of assets 0 0 33,752 0
Recovery of amounts previously written off 9,465 0 18,930 707
-------- -------- ---------- ----------
529,816 522,599 1,109,645 1,068,236
-------- -------- ---------- ----------
EXPENSES:
Partnership management fees 23,895 23,520 47,540 46,540
Restoration fees 0 0 0 28
Insurance 3,722 4,215 7,444 8,725
General and administrative 29,360 25,965 48,492 41,048
Interest 4,362 21,403 11,600 43,743
Expenses incurred due to default by lessee (1,877) (5,488) 1,491 7,439
Real estate taxes 142 (3,628) 142 (3,628)
Professional services 34,419 21,429 60,646 44,389
Professional services related to restoration 222 3,143 354 7,295
Appraisal fees 0 0 45,640 0
Environmental inspections 36,300 0 36,300 0
Selling commissions 0 0 14,100 0
Advisory Board fees and expenses 3,835 2,600 7,053 6,349
Depreciation 87,591 87,715 175,182 175,641
Amortization 3,185 3,077 7,733 5,227
-------- -------- ---------- ----------
225,156 183,951 463,717 382,796
-------- -------- ---------- ----------
NET INCOME $304,660 $338,648 $ 645,928 $ 685,440
-------- ======== ========== ==========
NET INCOME - GENERAL PARTNER $ 3,047 $ 3,386 $ 6,459 $ 6,854
NET INCOME - LIMITED PARTNERS 301,613 335,262 639,469 678,586
-------- -------- ---------- ----------
$304,660 $338,648 $ 645,928 $ 685,440
======== ======== ========== ==========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST, based on 25,000 interests outstanding $ 12.06 $ 13.41 $ 25.58 $ 27.14
======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
----------- ----------
<S> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 645,928 $ 685,440
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 182,915 180,868
Gain on sale of assets (33,752) 0
Recovery of amounts previously written off (18,930) (707)
Interest applied to Indemnification Trust Account (8,047) (7,422)
(Decrease) in unearned rental income (529) (35,327)
(Increase)/Decrease in rents and other receivables 53,656 (28,904)
(Increase)/Decrease in deferred rent receivable 2,370 (89,155)
Withdrawals for payment of real estate taxes 0 15,872
Decrease in prepaid expenses 7,444 8,730
Increase/(Decrease) in accounts payable and accrued expenses 14,062 (6,914)
(Decrease) in due to General Partner (1,132) (22,870)
Increase in accrued interest payable 0 26,034
Increase/(Decrease) in security deposits 0 20,000
(Decrease) in real estate taxes payable (4,194) (55,107)
----------- ----------
Net cash provided from operating activities 839,791 690,538
----------- ----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Increase in deferred charges (14,238) (18,550)
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 32,478 12,463
----------- ----------
Net cash provided by (used in) investing activities 251,992 (10,380)
----------- ----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Principal payments on mortgage notes (266,461) (92,122)
Cash distributions to Limited Partners (810,000) (725,000)
Cash distributions to current General Partner (2,591) (2,742)
----------- ----------
Net cash (used in) financing activities (1,079,052) (819,864)
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 12,731 (139,706)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 644,274 1,019,582
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 657,005 $ 879,876
=========== ==========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 11,600 $ 17,709
=========== ==========
</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 June 30, 1998, and the results of operations for the three and
six-month periods ended June 30, 1998, and 1997, and cash flows for the six-
month periods ended June 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 occurred 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 June 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.
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.
6
<PAGE>
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.
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 $15,400,000, of which approximately
$1,999,000 has been attributed to the Partnership and is reflected as due from
former affiliates on the balance sheet at June 30, 1998. The 9% interest accrued
as of June 30, 1998, amounted to approximately $872,000 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.
7
<PAGE>
Subsequent to discovery, and in response to the regulatory inquiries, a third-
party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed (effective
February 8, 1993) to assume the responsibility for daily operations and assets
of the Partnerships as well as to develop and execute a plan of restoration for
the Partnerships. Effective May 26, 1993, the Limited Partners, by written
consent of a majority of interests, elected The Permanent Manager, TPG, as
General Partner. TPG terminated the former general partners by accepting their
tendered resignations.
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former general partners and their affiliates reflecting the
estimated $3 million receivable. This net receivable was allocated among the
Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through June 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 June 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.
The 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.
8
<PAGE>
The total cost of the investment properties and equipment includes the original
purchase price plus acquisition fees and other capitalized costs paid to a
former affiliate of the general partners.
The current General Partner receives a fee for managing the Partnership equal to
4% of the gross receipts, with a maximum reimbursement for office rent and
related office overhead of $25,000 between the three affiliated Partnerships 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
9
<PAGE>
Capital, as defined, from the Return Calculation Date, as defined, except to the
extent needed by the General Partner to pay its federal and state income taxes
on the income allocated to it attributable to such year. Distributions paid to
the General Partner are based on the estimated tax liability resulting from
allocated income. Subsequent to the filing of the General Partner's income tax
returns, a true-up with actual distributions is made.
The provisions regarding distribution of Net Proceeds, as defined, were also
amended to provide that Net Proceeds are to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a 14% per annum, cumulative simple return 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.
10
<PAGE>
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1998 $ 2,037,568
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 Partnerships' 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 June 30, 1998, the mortgage note payable consists of the following:
Outstanding
Principal Balance Interest Rate Maturity Date
-------------------------------------------------------
a. $207,935 prime September 2001
========
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 June 30, 1998 of $431,521.
11
<PAGE>
Scheduled maturities of the note payable are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1998 $ 29,235
1999 60,619
2000 65,977
2001 52,104
--------
$207,935
========
</TABLE>
7. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the six months ended June 30,
1998 and 1997, are as follows:
<TABLE>
<CAPTION>
Incurred as of Incurred as of
Current General Partner June 30, 1998 June 30, 1997
- - ----------------------- -------------- --------------
<S> <C> <C>
Management fees $47,540 $46,540
Restoration fees 0 28
Cash distribution 2,591 2,742
Overhead allowance 3,835 3,795
Leasing Commissions 14,238 0
Reimbursement for out-of-pocket expenses 11,045 6,603
------- -------
$79,249 $59,708
======= =======
</TABLE>
12
<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 June
30, 1998:
<TABLE>
<S>
<C>
Minimum lease payments receivable $58,879
Less - Unearned income (4,484)
-------
Net investment in direct financing leases $54,395
=======
</TABLE>
Scheduled future minimum lease payments are as follows:
<TABLE>
Year ending
December 31,
<S> <C>
1998 $19,493
1999 37,860
2000 1,526
-------
$58,879
=======
</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 June 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:
--------------------------
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
13
<PAGE>
by establishing a reserve of up to $250,000 of Partnership assets which would
not be subject to the claims of the Partnership's creditors. An Indemnification
Trust ("Trust") serving such purposes has been established at United Missouri
Bank, N.A. The Trust has been fully funded with Partnership assets as of June
30, 1998. Funds are invested in U.S. Treasury securities. In addition,
interest totaling $57,503 has been credited to the Trust as of June 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. 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 June 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
14
<PAGE>
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 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 August 15, 1998, the Partnership made a distribution to the Limited Partners
for the Second Quarter 1998 of $300,000 amounting to approximately $12.00 per
limited partnership interest.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources:
- - --------------------------------
Investment Properties and Net Investment in Direct Financing Leases
- - -------------------------------------------------------------------
The investment properties, including equipment held by the Partnership at June
30, 1998, were originally purchased at a price, including acquisition costs, of
approximately $20,136,000.
The Partnership sold the vacant land in Colorado Springs, Colorado, during
January 1998 for $235,000, 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 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 $54,000 at June 30, 1998,
compared to $68,000 at December 31, 1997. The decrease of $14,000 was a result
of principal payments received.
Other Assets
- - ------------
Cash and cash equivalents held by the Partnership, were $657,000 at June 30,
1998, compared to $644,000 at December 31, 1997. The Partnership designated
cash of $300,000 to fund the Second Quarter 1998 distributions to Limited
Partners, $203,000 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 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.
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 June
30, 1998 and December 31, 1997. It is not expected that any further material
recoveries will be received.
16
<PAGE>
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 $1,522,000 at June 30, 1998, and includes
$872,000 of cumulative accrued interest.
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established against
amounts due from former general partners and their affiliates reflecting the
estimated $3 million receivable. This net receivable was allocated among the
Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through June 30, 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 $208,000
at June 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.
Accounts payable and accrued expenses at June 30, 1998, amounted to
approximately $72,000. The majority of this balance represented accruals of
legal and auditing fees, as well as an accrual for environmental inspections
being performed on the Partnership's properties.
Real estate taxes payable amounted to $18,000 at June 30, 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 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 $810,000 and $2,591, respectively, have also been made in
accordance with the amended Partnership Agreement. The Second Quarter 1998
distribution of $300,000 was paid to the Limited Partners on August 15, 1998.
17
<PAGE>
Results of Operations:
- - ----------------------
The Partnership reported net income for the quarter ended June 30, 1998, in the
amount of $305,000 compared to $339,000 for the quarter ended June 30, 1997.
For the six months ended June 30, 1998 and 1997, net income totaled $646,000 and
$685,000, respectively.
Revenues
- - --------
Total revenues were $530,000 and $523,000 for the quarters ended June 30, 1998
and 1997, respectively, and were $1,110,000 and $1,068,000 for the six months
ended June 30, 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 June 30, 1998 and 1997, cash expenses amounted to
approximately 25% and 18% of total revenues, respectively. For the six months
ended June 30, 1998 and 1997, cash expenses totaled 25% and 19%, respectively.
Total expenses, including non-cash items, amounted to approximately 42% and 35%
of total revenues for the quarters ended June 30, 1998 and 1997 and totaled 42%
and 36% for the six months ended June 30, 1998 and 1997. The 1998 expenses were
negatively impacted by $46,000 in fees incurred for appraisals and $36,000 for
environmental inspections on all of the properties in connection with the
proposed liquidation.
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.
18
<PAGE>
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 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 2-3.
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
As outlined in the consent statement to Limited Partners dated April 24, 1998
(the "Consent Statement"), The Provo Group, Inc. ("General Partner") has
solicited on behalf of DiVall Insured Income Fund Limited Partnership (the
"Partnership"), the consent of the Limited Partners to sell the Partnership's
remaining properties and to liquidate the Partnership. Pursuant to the
Partnership's Amended and Restated Agreement of Limited Partnership (the
"Partnership Agreement"), Limited Partners holding more than 50% of the
Partnership's interests ("Units") are required to approve the liquidation. As
of May 31, 1998, the last day in which Limited Partners' responses could be
counted, the Partnership had received the following votes:
<TABLE>
<CAPTION>
VOTE UNITS PERCENT OF
TOTAL
<S> <C> <C>
For 17,066.01 68.264%
Against 336.50 1.346%
Abstain 528.00 2.112%
No Vote Received 7,069.49 28.278%
--------- ------
Total: 25,000.00 100.00%
========= ======
</TABLE>
Reference is made to the definitive Consent Statement filed with the Securities
and Exchange Commission on April 27, 1998.
Item 5.
Not Applicable
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
99.0 Correspondence to the Limited Partners dated August 15, 1998,
regarding the Second Quarter 1998 distribution.
(b) Report on Form 8-K:
The Registrant filed no reports on Form 8-K during the second quarter of
fiscal year 1998.
(c) 27 Financial data Schedule
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: __________________________________________________
Bruce A. Provo, President
Date: August 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: August 14, 1998
By: __________________________________________________
Kristin J. Atkinson
Vice President - Finance and Administration
Date: August 14, 1998
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIVALL INSURED INCOME FUND LIMITED PARTNERSHIP
By: The Provo Group, Inc., General Partner
By: /s/Bruce A. Provo
---------------------------------------------
Bruce A. Provo, President
Date: August 14, 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: August 14, 1998
By: /s/Kristin J. Atkinson
--------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: August 14, 1998
22
<PAGE>
Exhibit 99.0
DiVall Insured Income Fund, L.P.
QUARTERLY NEWS
================================================================================
A publication of The Provo Group, Inc. SECOND QUARTER 1998
Partnership Governance Continues at "20th" Advisory Board Meeting
Kansas City, Missouri
July 28, 1998
On July 28, 1998, the Advisory Board met with management in Kansas City for its
"20th" meeting since early 1993, when the Board was first established by The
Provo Group. The concept, although unique to the limited partnership industry,
has proven to be invaluable to investors.
The Board is currently comprised of representatives from both the investor and
broker communities who have not only a substantial financial interest in one or
more of the partnerships, but also a strong personal interest in providing a
level of governance for these partnerships that were mismanaged by the former
general partners.
This latest meeting, updating the status of the Second Quarter 1998, provided
the Board with the comfort and knowledge that management's efforts at
stabilizing operations to a "normal" level of performance were, once again,
visibly apparent. In addition, it was determined that management's focus was
clearly working toward the most favorable outcome for the limited partners'
investments in the partnerships.
Although the Board members' roles are strictly "advisory", their comments are
very important and respected by management to be representative of what's best
for all limited partners.
--------------------------------
OTHER NEWS INSIDE...
. Portion of Liquidation Costs Pre-Paid.........Distribution Highlights, pg 2
. Higher Rent for Popeye's..........................Property Highlights, pg 3
<PAGE>
Page 2 DiVall 1 2 Q 98
=============================
DISTRIBUTION HIGHLIGHTS
. 5.2% (approx.) annualized return from operations and other sources based on
$23,000,000 ("net" remaining initial investment).
. $300,000 "total" amount distributed for the Second Quarter 1998 which was
$80,000 less than budgeted.
. The lower than projected distribution is primarily due to the early payment
of various costs associated with the liquidation of the partnership. It
should be noted that incurring these costs now eliminates some of the
obstacles to a timely closing in the future.
. $12.00 per unit (approx.) for the Second Quarter 1998 from both cash flow
from operations and investing activities.
. $921.00 to $818.00 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
. 9% increase in "total" operating revenues from projections.
. 22% increase in "total" expenses from projections.
. 2% increase in net income from projections.
. $37,000 unbudgeted rental income was received during the quarter. The
"multiple" Popeye's (Chicago, IL) anticipated decreased rent did not occur
and the lease for Denny's (Beaver Dam, WI) was expected to be terminated
that did not occur.
. Environmental surveys in the amount of $36,000 were performed on all the
properties in connection with the proposed liquidation of the partnership.
. $15,000 budgeted tenant defaults did not occur during the quarter.
<PAGE>
Page 2 DiVall 1 2 Q 98
=============================
PROPERTY HIGHLIGHTS
VACANCIES
---------
. Denny's (Beaver Dam, WI) was vacant at June 30, 1998. Management
continues to work with the tenant to relet this property.
(NOTE: This tenant continues to make rental payments.)
RENTS RECEIVABLE
----------------
. BJ's Market (Chicago, IL) was $7,000 delinquent at June 30, 1998.
. Denny's (Beaver Dam) was $1,500 delinquent at June 30, 1998. As noted above,
this property is vacant, however, monthly payments are being received.
OTHER PROPERTY MATTERS
----------------------
. THG Restaurant Group assumed the leases of the multiple POPEYE'S restaurants
located in Chicago, Illinois. The new lease terms resulted in higher than
anticipated rent with extended terms, while maintaining
favorable rent terms.
===============================
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 June 30, 1998.
<TABLE>
<CAPTION>
===========================================================================================================
DISTRIBUTION CAPITAL
------------ -------
ANALYSIS BALANCE
-------- -------
<S> <C> <C>
Original Capital Balance - $ 25,000,000
Cash Flow From Operations Since Inception $ 19,946,291 -
Total Distributions Since Inception (21,901,740) -
-----------
(Return) of Capital ($1,955,449) (1,955,449)
=========== ------------
"NET" REMAINING INITIAL INVESTMENT
by ORIGINAL PARTNERS - $ 23,044,551
============
===========================================================================================================
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
<PAGE>
Page 4 DiVall 1 2 Q 98
===========================
QUESTIONS & ANSWERS
1. What is the status of the dissolution of the Partnership?
. Once the favorable consents were received by the majority of the
limited partners to liquidate the properties and dissolve the
Partnership, management immediately began marketing the portfolio for
sale.
The next phase was the "sealed" bid process which we are currently
unable to discuss in any detail, due to the mutual confidentiality
agreements that were signed with potential bidders. At this time, we
do not have any information to report to you regarding the final
outcome of the bidding process.
We will communicate further information surrounding the dissolution
when appropriate under the terms of the confidentiality agreements or
allowable based on the critical covenants and dates per the applicable
sales contracts.
2. When can I expect my next distribution mailing?
. Your distribution correspondence for the Third Quarter of 1998 is
scheduled to be mailed on November 13, 1998.
* * *
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 JUNE 30, 1998
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROJECTED ACTUAL VARIANCE
--------------------------------------------
2ND 2ND CASH
QUARTER QUARTER BETTER
6/30/98 6/30/98 (WORSE)
OPERATING REVENUES ---------- ---------- ----------
<S> <C> <C> <C>
Rental income $472,868 $510,297 $37,429
Direct financing interest 1,481 1,481 0
Interest income 10,950 8,573 (2,377)
Other income 0 9,465 9,465
---------- ---------- ----------
TOTAL OPERATING REVENUES $485,299 $529,816 $44,517
---------- ---------- ----------
OPERATING EXPENSES
Insurance $4,296 $3,723 $573
Management fees 24,225 23,895 330
Overhead allowance 1,953 1,927 26
Advisory Board 3,320 3,835 (515)
Administrative 20,354 26,688 (6,334)
Professional services 5,120 10,056 (4,936)
Environmental inspections 0 36,300 (36,300)
Auditing 10,755 10,755 0
Legal 7,500 14,496 (6,996)
Defaulted tenants 13,249 (1,878) 15,127
---------- ---------- ----------
TOTAL OPERATING EXPENSES $90,772 $129,797 ($39,025)
---------- ---------- ----------
INTEREST EXPENSE $4,712 $4,362 $350
---------- ---------- ----------
INVESTIGATION AND RESTORATION EXPENSES $150 $222 ($72)
---------- ---------- ----------
NON-OPERATING EXPENSES
Depreciation $87,591 $87,591 $0
Amortization 2,031 3,184 (1,153)
---------- ---------- ----------
TOTAL NON-OPERATING EXPENSES $89,622 $90,775 ($1,153)
---------- ---------- ----------
TOTAL EXPENSES $185,256 $225,156 ($39,900)
---------- ---------- ----------
NET INCOME $300,043 $304,660 $4,617
OPERATING CASH RECONCILIATION: VARIANCE
----------
Depreciation and amortization 89,622 90,775 1,153
(Increase) Decrease in current assets 31,102 (52,140) (83,242)
Increase (Decrease) in current liabilities 10,659 (20,769) (31,428)
G.P. distribution (1,200) (1,219) (19)
Cash reserved for payables (10,659) 20,000 30,659
Advance from (to) future cash flows for currect distributions (31,500) (31,500) 0
---------- ---------- ----------
Net Cash Provided From Operating Activities $388,067 $309,807 ($78,260)
---------- ---------- ----------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Principal received on equipment leases 7,985 8,523 538
Decrease in mortgage notes payable (13,668) (14,017) (349)
---------- ---------- ----------
Net Cash Provided from (Used In)
Investing and Financing Activities ($5,683) ($5,494) $189
---------- ---------- ----------
Total Cash Flow For Quarter $382,384 $304,313 ($78,071)
Cash Balance Beginning of Period 547,989 776,192 228,203
Less 1st quarter distributions paid 5/98 (380,000) (435,000) (55,000)
Less cash reserved above for payables and future distributions 42,159 11,500 (30,659)
---------- ---------- ----------
Cash Balance End of Period $592,532 $657,005 $64,473
Cash reserved for 2nd quarter L.P. distributions (380,000) (300,000) 80,000
Cash reserved for payment of payables and future distributions (168,659) (203,000) (34,341)
---------- ---------- ----------
Unrestricted Cash Balance End of Period $43,873 $154,005 $110,132
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
* Quarterly Distribution $380,000 $300,000 ($80,000)
Mailing Date 8/15/98 (enclosed) -
</TABLE>
* Refer to distribution letter for detail of quarterly distribution.
<PAGE>
[LOGO OF THE PROVO GROUP APPEARS HERE]
PROJECTIONS FOR DISCUSSION PURPOSES
----------------------------------------
DIVALL INSURED INCOME FUND L.P. ORIGINAL EQUITY $25,000,000
1998 PROPERTY SUMMARY NET DISTRIBUTION OF CAPITAL
ALL RELATED ESTIMATED RECEIPTS SINCE INCEPTION $ 1,955,449
-----------
CURRENT EQUITY $23,044,551
-----------
----------------------------------------
PORTFOLIO
<TABLE>
<CAPTION>
------------------------- --------------------------------- -------------------------- -----------
REAL ESTATE EQUIPMENT TOTALS TOTAL % ON
------------------------- --------------------------------- --------------------------- 23,044,551
- - ---------------------------- BASE % LEASE LEASE* % * EQUITY
CONCEPT LOCATION COST RENT YIELD EXPIRATION COST RECEIPTS RETURN INVESTED RECEIPTS* RETURN* RAISE
- - ---------------------------- -------------------------- --------------------------------- ----------------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RIO BRAVO GRAND FORKS, ND 984,801 100,000 10.15% 984,801 100,000 10.15%
CHI CHI'S EAU CLAIRE, WI 1,042,730 136,260 13.07% 1,042,730 136,260 13.07%
DENNY'S ** GLENDALE, AZ 1,105,926 90,000 8.14% 68,744 0 0.00% 1,174,670 90,000 7.66%
DENNY'S SCOTTSDALE, AZ 1,051,157 90,000 8.56% 40,553 0 0.00% 1,091,710 90,000 8.24%
DENNY'S MESA, AZ 1,028,036 65,000 6.32% 39,218 0 0.00% 1,067,254 65,000 6.09%
DENNY'S ** PEORIA, AZ 1,105,926 90,000 8.14% 58,781 0 0.00% 1,164,707 90,000 7.73%
BW-III HOPKINS, MN 795,050 66,000 8.30% 1/15/2000 190,000 37,860 19.93% 985,050 103,860 10.54%
DENNY'S BEAVER DAM, WI 659,299 66,000 10.01% 3/31/2000 190,000 37,860 19.93% 849,299 103,860 12.23%
FAZOLI'S DES MOINES, IA 565,476 45,500 8.05% 39,600 0 0.00% 605,076 45,500 7.52%
HARDEE'S FOND DU LAC, WI 1,026,931 72,000 7.01% 1,026,931 72,000 7.01%
POPEYE'S CHICAGO, IL 473,968 65,652 13.85% 473,968 65,652 13.85%
POPEYE'S CHICAGO, IL 610,893 84,612 13.85% 610,893 84,612 13.85%
POPEYE'S CHICAGO, IL 484,501 67,152 13.86% 484,501 67,152 13.86%
POPEYE'S CHICAGO, IL 610,893 84,612 13.85% 610,893 84,612 13.85%
POPEYE'S CHICAGO, IL 437,105 60,540 13.85% 437,105 60,540 13.85%
POPEYE'S CHICAGO, IL 631,958 87,480 13.84% 631,958 87,480 13.84%
POPEYE'S CHICAGO, IL 579,295 80,304 13.86% 579,295 80,304 13.86%
BJ's MARKET CHICAGO, IL 905,807 60,000 6.62% 905,807 60,000 6.62%
TACO CABANA ARLINGTON, TX 1,474,569 132,000 8.95% 1,474,569 132,000 8.95%
TACO CABANA DALLAS, TX 1,369,243 132,000 9.64% 1,369,243 132,000 9.64%
TACO CABANA DALLAS, TX 1,257,596 132,000 10.50% 1,257,596 132,000 10.50%
TACO CABANA DALLAS, TX 1,308,153 132,000 10.09% 1,308,153 132,000 10.09%
- - ---------------------------- -------------------------- --------------------------------- ---------------------------- ----------
- - ---------------------------- -------------------------- --------------------------------- ---------------------------- ----------
PORTFOLIO TOTALS
(22 Properties) 19,509,313 1,939,112 9.94% 626,896 75,720 12.08% 20,136,209 2,014,832 10.01% 8.74%
- - ---------------------------- -------------------------- --------------------------------- ---------------------------- ----------
</TABLE>
OUTSTANDING DEBT
<TABLE>
<CAPTION>
-------------------------- --------------------------------- -------------------
AMOUNT ANNUAL CURRENT AMOUNT ANNUAL CURRENT AMOUNT ANNUAL
- - ---------------------------- OWED DEBT INTEREST OWED DEBT INTEREST OWED DEBT
MORTGAGED PROPERTIES 3/31/98 SERVICE RATE 3/31/98 SERVICE RATE 3/31/98 SERVICE
- - ---------------------------- -------------------------- --------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- - ---------------------------- -------------------------- --------------------------------- --------------------
DENNY'S BEAVER DAM, WI 207,935 73,517 8.50% 207,935 73,517
- - ---------------------------- -------------------------- --------------------------------- --------------------
- - ---------------------------- -------------------------- --------------------------------- --------------------
TOTALS 207,935 73,517 - 0 0 - 207,935 73,517
- - ---------------------------- -------------------------- --------------------------------- --------------------
NET AFTER DEBT 19,301,378 1,865,595 9.67% 626,896 75,720 12.08% 19,928,274 1,941,315 9.74% 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
June 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 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 657,005 657,005
<SECURITIES> 307,503 307,503
<RECEIVABLES> 2,449,284 2,449,284
<ALLOWANCES> 1,999,136 1,999,136
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,414,656 1,414,656
<PP&E> 19,430,494 19,430,494
<DEPRECIATION> 4,956,401 4,956,401
<TOTAL-ASSETS> 15,888,749 15,888,749
<CURRENT-LIABILITIES> 269,735 269,735
<BONDS> 207,935 207,935
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 15,411,079 15,411,079
<TOTAL-LIABILITY-AND-EQUITY> 15,888,749 15,888,749
<SALES> 511,778 1,038,003
<TOTAL-REVENUES> 529,816 1,109,645
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 220,794 452,117
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,362 11,600
<INCOME-PRETAX> 304,660 645,928
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 304,660 645,928
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 304,660 645,928
<EPS-PRIMARY> 12.06 25.58
<EPS-DILUTED> 12.06 25.58
</TABLE>
