-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kec3Mq8o0A8JIcWySMqS/3Ke2k81V1m9le1Yo1wqtf+yrbRylpaUaE53SlfyLmaz AgvYp3kCppQFsdwdRuyzCQ== 0000950131-02-001846.txt : 20020508 0000950131-02-001846.hdr.sgml : 20020508 ACCESSION NUMBER: 0000950131-02-001846 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020508 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000825788 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 391606834 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17686 FILM NUMBER: 02637793 BUSINESS ADDRESS: STREET 1: 101 W 11TH STREET STE 1110 CITY: KANSAS CITY STATE: MO ZIP: 64105 BUSINESS PHONE: 6088292992 MAIL ADDRESS: STREET 1: 101 WEST 11TH ST STREET 2: STE 1110 CITY: KANSAS CITY STATE: MO ZIP: 64105 FORMER COMPANY: FORMER CONFORMED NAME: DIVALL INSURED INCOME FUND-2 LIMITED PARTNERSHIP DATE OF NAME CHANGE: 19880229 10-Q 1 d10q.txt FORM 10-Q 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, 2002 ---------------------------------------- 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 0-17686 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Wisconsin 39-1606834 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 101 W. 11th Street, Suite 1110, Kansas City, Missouri 64105 (Address of principal executive offices, including zip code) (816) 421-7444 (Registrant's telephone number, including area code) 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__ - PART I - FINANCIAL INFORMATION Item 1. Financial Statements DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS March 31, 2002 and December 31, 2001 ------------------------------------
ASSETS (Unaudited) March 31, December 31, 2002 2001 ------ ------ INVESTMENT PROPERTIES AND EQUIPMENT: (Note 3) Land $ 7,296,406 $ 7,296,406 Buildings 11,561,307 11,561,307 Equipment 669,778 669,778 Accumulated depreciation (5,939,174) (5,854,938) ------------ ------------ Net investment properties and equipment 13,588,317 13,672,553 ------------ ------------ OTHER ASSETS: Cash and cash equivalents 1,073,967 818,606 Cash held in Indemnification Trust (Note 8) 373,768 372,167 Property tax escrow 0 7,875 Rents and other receivables (Net of allowance of $39,878 and $39,636, respectively) 116,830 546,771 Property tax receivable 8,293 30,977 Deferred rent receivable 106,692 05,633 Prepaid insurance 15,425 22,035 Deferred charges 282,763 286,067 Note receivable 0 39,250 ------------ ------------ Total other assets 1,977,738 2,229,381 ------------ ------------ Total assets $ 15,566,055 $ 15,901,934 ============ ============
The accompanying notes are an integral part of these statements. 2 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS March 31, 2002 and December 31, 2001 ------------------------------------ LIABILITIES AND PARTNERS' CAPITAL
(Unaudited) March 31, December 31, 2002 2001 ------ ------ LIABILITIES: Accounts payable and accrued expenses $ 93,863 $ 92,802 Property taxes payable 3,735 25,105 Due to General Partner 2,987 1,795 Security deposits 109,017 109,017 Unearned rental income 44,160 172,723 ------------ ------------- Total liabilities 253,762 401,442 ------------ ------------- CONTINGENT LIABILITIES: (Note 7) PARTNERS' CAPITAL: (Notes 1, 4 and 9) Current General Partner - Cumulative net income 175,156 172,176 Cumulative cash distributions (72,133) (70,941) ------------ ------------- 103,023 101,235 Limited Partners (46,280.3 interests outstanding) Capital contributions, net of offering costs 39,358,468 39,358,468 Cumulative net income 23,706,299 23,411,286 Cumulative cash distributions (47,015,268) (46,530,268) Reallocation of former general partners' deficit capital (840,229) (840,229) ------------ ------------- 15,209,270 15,399,257 ------------ ------------- Total partners' capital 15,312,293 15,500,492 ------------ ------------- Total liabilities and partners' capital $ 15,566,055 $ 15,901,934 ============ =============
The accompanying notes are an integral part of these statements. 3 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, ---------------------------- 2002 2001 ------------- ------------ REVENUES: Rental income (Note 5) ..................................... $506,385 $589,482 Interest income ............................................ 4,013 14,173 Recovery of amounts previously written off ................. 0 2,781 Other income ............................................... 8,059 185 -------- -------- 518,457 606,621 -------- -------- EXPENSES: Partnership management fees (Note 6) ....................... 49,014 47,386 Restoration fees (Note 6) .................................. 0 111 Insurance .................................................. 6,611 4,827 General and administrative ................................. 21,551 29,835 Advisory Board fees and expenses ........................... 3,736 4,275 Ground lease payments (Note 3) ............................. 0 16,852 Professional services ...................................... 49,995 89,110 Provision for uncollectible rents and other receivables .... 2,017 0 Depreciation ............................................... 84,236 86,100 Amortization ............................................... 3,304 3,135 -------- -------- 220,464 281,631 -------- -------- NET INCOME ........................................................ $297,993 $324,990 ======== ======== NET INCOME - CURRENT GENERAL PARTNER .............................. $ 2,980 $ 3,250 NET INCOME - LIMITED PARTNERS ..................................... 295,013 321,740 -------- -------- $297,993 $324,990 ======== ======== NET INCOME PER LIMITED PARTNERSHIP INTEREST, based on 46,280.3 Interests outstanding ............... $ 6.37 $ 6.95 ======== ========
The accompanying notes are an integral part of these statements. 4 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, ---------------------------- 2002 2001 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ....................................................... $297,993 $324,990 Adjustments to reconcile net income to net cash from operating activities - Depreciation and amortization .............................. 87,540 89,235 Recovery of amounts previously written off ................. 0 (2,781) Provision for uncollectible rents and other receivables ...... 2,017 0 Interest applied to Indemnification Trust account .......... (1,601) (6,030) Decrease in rents and other receivables .................... 450,608 414,223 Decrease in property tax escrow .............................. 7,875 0 Decrease in prepaids ....................................... 6,610 4,827 (Increase) Decrease in deferred rent receivable ............ (1,059) 2,176 Increase (Decrease) in due to current General Partner ...... 1,192 (1,367) Increase (Decrease) in accounts payable and other accrued expenses ............................................... 1,061 (3,846) (Decrease) in real estate taxes payable .................... (21,370) 0 (Decrease) Increase in unearned rental income .............. (128,563) 35,588 ---------- ---------- Net cash from operating activities ...................... 702,303 857,015 ---------- ---------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Payment of note receivable ...................................... 39,250 0 Payment of deferred leasing commissions .......................... 0 (10,439) Recoveries from former affiliates ................................ 0 2,781 ---------- ---------- Net cash from (used in) investing activities ............ 39,250 (7,658) ---------- ---------- CASH FLOWS (USED IN) FINANCING ACTIVITIES: Cash distributions to Limited Partners ........................... (485,000) (575,000) Cash distributions to current General Partner .................... (1,192) (1,300) ---------- ---------- Net cash (used in) financing activities ................. (486,192) (576,300) ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. 255,361 273,057 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 818,606 752,060 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $1,073,967 $1,025,117 ========== ==========
The accompanying notes are an integral part of these statements. 5 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS These unaudited interim financial statements should be read in conjunction with DiVall Insured Income Properties 2 Limited Partnership's (the "Partnership") 2001 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, 2002, and the results of operations for the three-month periods ended March 31, 2002, and 2001, and cash flows for the three-month periods ended March 31, 2002 and 2001. Results of operations for the periods are not necessarily indicative of the results to be expected for the full year. 1. ORGANIZATION AND BASIS OF ACCOUNTING: The Partnership was formed on November 18, 1987, pursuant to the Uniform Limited Partnership Act of the State of Wisconsin. The initial capital, which was contributed during 1987, consisted of $300, representing aggregate capital contributions of $200 by the former general partners and $100 by the Initial Limited Partner. The minimum offering requirements were met and escrow subscription funds were released to the Partnership as of April 7, 1988. On January 23, 1989, the former general partners exercised their option to increase the offering from 25,000 interests to 50,000 interests and to extend the offering period to a date no later than August 22, 1989. On June 30, 1989, the general partners exercised their option to extend the offering period to a date no later than February 22, 1990. The offering closed on February 22, 1990, at which point 46,280.3 interests had been sold, resulting in total offering proceeds, net of underwriting compensation and other offering costs, of $39,358,468. 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, franchisers or franchisees of national, regional, and local retail chains under long-term leases. The lessees consist primarily of fast-food, family style, and casual/theme restaurants, but also include a video rental store and a child care center. At March 31, 2002, the Partnership owned 26 properties with specialty leasehold improvements in 10 of these properties. Rental revenue from investment properties is recognized on the straight-line basis over the life of the respective lease. Percentage rents are recorded when the tenant has reached the breakpoint stipulated in its lease. The Partnership considers its operations to be in only one segment and therefore no segment disclosure is made. 6 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 to 7 years. Deferred charges consist of leasing commissions paid when properties are leased to tenants and the negotiated extension of a lease. 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 with 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 those estimates. The Partnership previously followed Statement of Financial Accounting Standards No.121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", which required that all long-lived assets be reviewed for impairment in value whenever changes in circumstances indicated that the carrying amount of an asset may not be recoverable. In October 2001, Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144") was issued. FAS 144 supercedes FAS 121. FAS 144 primarily addresses issues relating to the implementation of FAS 121 and develops a single accounting model for long-lived assets to be disposed of, whether previously held and used or newly acquired. The provisions of FAS 144 became effective for fiscal years beginning after December 15, 2001. The Company adopted FAS 144 on January 1, 2002 with no impact on financial statements. 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 purposes of ERISA; (c) the agreement of Limited Partners owning a majority of the outstanding interests to dissolve the Partnership; or (d) the dissolution, bankruptcy, death, withdrawal, or incapacity of the last remaining General Partner, unless an additional General Partner is elected previously by a majority of the Limited Partners. During the Second Quarter of 1998, the General Partner received the consent of the Limited Partners to liquidate the Partnership's assets and dissolve the Partnership. No buyer was identified for the Partnership's assets, and Management continued normal operations. During the Second Quarter of 2001, another consent letter was sent to Limited Partners. The General Partner did not receive majority approval to sell the assets of the Partnership for purposes of liquidation. The Partnership will continue to operate as a going concern. 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, 2001, the tax basis of the Partnership's 7 assets exceeded the amounts reported in the accompanying financial statements by approximately $7,859,000. 2. REGULATORY INVESTIGATION: ------------------------ A preliminary investigation during 1992 by the Office of 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, 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 Fund Limited Partnership ("DiVall 1") (dissolved effective December 31, 1998) 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. 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 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 March 31, 2002, $5,803,000 of recoveries has been received which exceeded the original estimate of $3 million. As a result, since 1996, the Partnership has recognized $1,125,000 as income, which represents its share of the excess recovery. No further significant recoveries are anticipated. 3. INVESTMENT PROPERTIES: --------------------- As of March 31, 2002, the Partnership owned 24 fully constructed fast-food restaurants, a video store, and a preschool. The properties are composed of the following: ten (10) Wendy's restaurants, one (1) Hardee's restaurant, two (2) Denny's restaurants, one (1) Applebee's restaurant, one (1) Popeye's Famous Fried Chicken restaurant, one (1) Hooter's restaurant, one (1) Kentucky Fried Chicken restaurant, one (1) Hostetler's restaurant, one (1) Miami Subs restaurant, one (1) Omega restaurant, one (1) Blockbuster Video store, one (1) Sunrise Preschool, and four (4) vacant properties, (which were previously operated as a Village Inn restaurant, a Fiesta Time restaurant and two (2) Hardee's restaurants.) The 26 properties are located in a total of thirteen (13) states. During March 2002, Hardee's Food Systems, Inc. notified Management of its intent to close its restaurant in Fond du Lac, Wisconsin in April 2002. Hardee's lease on the Fond du Lac property is set to expire on September 30, 2009 and they will be required to continue making rent payments until the lease expiration date or until a lease termination agreement with Management is entered into. 8 During March 2001, Hardee's Food Systems, Inc. notified Management of its intent to close its restaurants in South Milwaukee and Milwaukee, Wisconsin. Hardee's lease on the South Milwaukee property expired on November 30, 2001 and they were required to continue making rent payments until the lease expiration date. This lease was not renewed, and therefore, Management continues to market the property for sale or lease to a new operator. The Hardee's lease on the Milwaukee property was not set to expire until 2009. In the Second Quarter of 2001, a lease termination agreement was executed and the tenant ceased the payment of rent as of April 30, 2001. Hardee's Food Systems agreed to pay a lease termination fee of approximately two (2) years rent or $157,000. The payments were scheduled to be received in four (4) equal installments of $39,250. The first payment was received in May 2001 upon the execution of the agreement, and the subsequent installments were reflected as Note receivable on the balance sheet in the Second Quarter of 2001. Note receivable installments were received in August and October 2001. The final installment, which is reflected in the Note receivable on the balance sheet at December 31, 2001, was received in January 2002. During May 2001, Management negotiated the re-lease of the former Hardee's-Milwaukee, Wisconsin property to Omega Restaurant in June 2001 and rent income commenced in October 2001. Commissions of $50,000 and $9,000 were paid to an unaffiliated leasing agent and to an affiliate of the General Partner, respectively, upon the execution of the new lease in the Second Quarter of 2001. During December 2001, Hardee's Food Systems, Inc. notified Management that it had vacated its restaurant in Hartford, Wisconsin. Hardee's lease on the Hartford property expires on April 30, 2009 and they will be required to continue making rent payments until the lease expiration date or until a lease termination agreement with Management is entered into. The Blockbuster Video Store lease expired on January 31, 2001. However, in the First Quarter of 2001, Management negotiated a five (5) year lease extension to January 31, 2006. A commission of $10,000 was paid to an unaffiliated leasing agent upon the negotiated extension of the lease. During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of Phoenix Restaurant Group, Inc. ("Phoenix") to reject the lease with the Partnership at the Twin Falls, Idaho location. Although Phoenix's lease on the Twin Falls property expires on April 30, 2012, due to bankruptcy proceedings of Phoenix, the lease was rejected and rent income ceased as of December 2001. The remaining balance due the Partnership of approximately $29,000 from the former tenant has been reserved. This amount is included in the Partnership's filing for damages in Bankruptcy court of approximately $85,000, or one year's rent, although it is uncertain whether the amount will be collectible. In addition, since Phoenix rejected the lease, its subtenant, Fiesta Time, presumably has no rights to the possession of the property. Therefore, Management is in the process of evicting and obtaining possession of the property from Fiesta Time, and then Management will market the property for lease or sale. During April 2001, the sub-tenant AMF Corporation notified Management of its intent to close and vacate its Mulberry Street Grill restaurant in Phoenix, Arizona. Although the lease on the property expires in 2007, monthly rental and Common Area Maintenance (CAM) income ceased as of June 1, 2001. Management is moving forward with all legal remedies to collect the remaining balance due of approximately $10,000. The entire amount due the Partnership has been reserved. Due to Management's attempt to return possession of the property to the Ground Lease landlord, the net asset value of the property was written-off in the Fourth Quarter of 2001, resulting in a loss of $157,000. As of December 31, 2001 the Partnership has withheld the payment of approximately $50,000 in accrued ground lease 9 obligations related to the property. In April 2002, an additional $43,000 will be accrued as payable to the Ground Lease Land landlord, due to the Court's granting a summary judgment against the Partnership. (See Legal Proceedings in Note 10.) During October 2001, the Village Inn Restaurant notified Management of its intent to close and vacate its restaurant in Grand Forks, North Dakota within the next few months. The lease on the property expires in 2009. In February 2002, Management was notified Village Inn had closed and vacated the restaurant. Rent income was collected from the tenant through December 2001, however; rent income has not been collected for January through April of 2002. Management will pursue all legal remedies in relation to the former tenant's past due balance of approximately $34,000, as well as future lease obligations. Management is also seeking a new tenant for the vacated property. Prior to December 31, 2001 the Partnership owned two (2) restaurants, Kentucky Fried Chicken and Mulberry Street Grill restaurant, which are located on parcels of land where it has entered into long-term ground leases. One (1) of these leases is paid by the tenant, Kentucky Fried Chicken, and one (1) is paid by the Partnership. The lease paid by the Partnership is considered an operating lease and the lease payments are expensed in the periods to which they apply. The lease requires aggregate minimum annual payments of approximately $72,000 and expires in the year 2008. Due to the Mulberry Street Grill property being vacant, Management is litigating with the ground lessor to terminate the ground lease, which would release the Partnership from its ground lease obligations and would return possession of the property to the ground lessor. Management has accrued, but has withheld payment of the May through December 2001 lease obligations totaling approximately $50,000. Due to the ground lessor obtaining it's own tenant, the Partnership wrote-off the net asset value of the vacant Mulberry Street Grill property at a loss of $157,000 in the Fourth Quarter of 2001. In April 2002, an additional $43,000 will be accrued as payable to the Ground Lease Land landlord due to the Court's granting of a summary judgment against the Partnership. (See Legal Proceedings in Note 10.) The total cost of the investment properties and specialty leasehold improvements includes the original purchase price plus acquisition fees and other capitalized costs paid to an affiliate of the former general partners. According to the Partnership Agreement, the former general partners were to commit 80% of the original offering proceeds to investment in properties. Upon full investment of the net proceeds of the offering, approximately 75% of the original proceeds were invested in the Partnership's properties. The current General Partner receives a fee for managing the Partnership equal to 4% of gross receipts, with a maximum reimbursement for office rent and related office overhead of $25,000 between the three original affiliated Partnerships as provided in the Permanent Manager Agreement ("PMA"). Effective March 1, 2002, the minimum management fee and the maximum reimbursement for office rent and overhead increased by 2.8% 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 $55,463 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 not aware of any unfavorable purchase options in relation to original cost. 10 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 were to 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 in an amount equal to 10% per 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 Liquidation Preference equal to a 13.5% per annum, cumulative simple return on Adjusted Original Capital 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; and (c) then, to Limited Partners, 90% and to the General Partners, 10%, of the 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 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% per annum, cumulative simple return on his or her Adjusted Original Capital, as defined, from the Return Calculation Date, as defined, except to the extent needed by the General Partner to pay its federal and state income taxes on the income allocated to it attributable to such year. Distributions paid to the General Partner are based on the estimated tax liability resulting from allocated income. Subsequent to the filing of the General Partner's income tax returns, a true-up with actual distributions is made. The provisions regarding distribution of Net Proceeds, as defined, were also amended to provide that Net Proceeds are to be distributed as follows: (a) to the Limited Partners, an amount equal to 100% of their Adjusted Original Capital; (b) then, to the Limited Partners, an amount necessary to provide each Limited Partner a Liquidation Preference equal to a 13.5% per annum, cumulative simple return on Adjusted Original Capital from the Return Calculation Date including in the calculation of such return on all priordistributions 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 its attributable to such year; and (c) then, to Limited Partners, 99%, and to the General Partner, 1%, of remaining Net Proceeds available for distribution. 11 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 in recovering the funds misappropriated by the former general partners. (See Note 7.) 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 percentages 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: DIIP2march01.10Q Year ending December 31, 2002 $2,042,598 2003 2,001,092 2004 2,030,311 2005 2,040,603 2006 1,964,133 Thereafter 13,131,949 ---------- $23,210,686 =========== Ten (10) of the properties are leased to Wensouth Orlando, a franchisee of Wendy's restaurants. Wensouth base rents accounted for 40% of total base rents for 2001. 12 6. TRANSACTIONS WITH CURRENT GENERAL PARTNER: ------------------------------------------ Amounts paid to the current General Partner for the three-month periods ended March 31, 2002 and 2001 are as follows. Incurred as of Incurred as of Current General Partner March 31, 2002 March 31, 2001 - ----------------------- --------------- -------------- Management fees $49,014 $47,386 Restoration fees 0 111 Overhead allowance 3,954 3,832 Reimbursement for out-of-pocket expenses 1,625 4,137 Cash distribution 1,192 1,300 ----- ----- $55,785 $56,766 ======= ======= 7. 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 in escrow 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 escrow amounts will be paid to the current General Partner. At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining escrow 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 in escrow towards the recovery. In lieu of an escrow, 50% of all such disposition fees have been paid directly to the restoration account and then distributed among the three Partnerships. Fifty percent (50%) of the total amount paid to the recovery was refunded to the current General Partner during March 1996 after surpassing the recovery level of $4,500,000. The remaining amount allocated to the Partnership may be owed to the current General Partner if the $6,000,000 recovery level is met. As of March 31, 2002, the Partnership may owe the current General Partner $16,296, which is currently reflected as a recovery, if the $6,000,000 recovery level is achieved, which is considered unlikely. 8. PMA INDEMNIFICATION TRUST: -------------------------- The 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 March 31, 2002. Funds are invested in U.S. Treasury securities. In addition, $123,768 of earnings have been credited to the Trust as of March 31, 2002. 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 13 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. 9. 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 a deficit of $840,229. At December 31, 1993, the former general partners' deficit capital account balance in the amount of $840,229 was reallocated to the Limited Partners. 10. LEGAL PROCEEDINGS: ------------------ The Partnership owned the building occupied by the Mulberry Street Grill restaurant, which was located on a parcel of land where it had entered into a long-term Ground Lease. The lease was considered an operating lease and the lease payments were paid by the Partnership and expensed in the periods to which they applied. During the Second Quarter of 2001, sub-tenant AMF Corporation ("AMF") notified Management of its intent to close its Mulberry Street Grill restaurant in Phoenix, Arizona. The Partnership ceased collecting the former tenant's rent and attempted to return possession of the Phoenix, Arizona property to the Ground Lease Landlord, Centre at 38th Street, L.L.C, ("LLC".) Beginning in May and through December 2001 the Partnership accrued but withheld payment of the ground lease obligations, and at March 31, 2002 and December 31, 2001 the total ground lease accrual approximates $50,000. The Ground Lease Landlord, LLC, has re-leased the property to a new tenant. On June 18, 2001, LLC filed a lawsuit in the Maricopa County Superior Court, against the Partnership and TPG. The Complaint alleges that the Partnership is a tenant under a Ground Lease with LLC and that the Partnership has defaulted on its obligations under that lease. The suit names TPG as a defendant because TPG is the Partnership's general partner. The complaint sought damages for unpaid rent, commissions, improvements, and unspecified other damages exceeding $120,000. The Partnership and TPG filed an answer denying any liability to LLC and intended to defend this matter vigorously. In addition, the Partnership has filed a third-party complaint against the original tenant, National Restaurant Group,("National Restaurant'), L.L.C., and its sub-tenant AMF. In the third-party complaint, the Partnership alleges that National Restaurant and AMF are liable to the Partnership for breach of the subleases and any damages for which the Partnership may be held liable to the Ground Lessor, LLC. On April 10, 2002 the Maricopa County Superior Court granted the motion for summary judgment against the Partnership and TPG. The Court granted that as of April 10, 2002 LLC is due damages in the amount of $93,000. The Partnership and TPG intends to appeal this summary judgment. As of March 31, 2002 the Partnership has accrued $50,000 in ground lease obligations payable to LLC and the remaining summary judgment balance of $43,000 will be accrued in April 2002. 14 11. SUBSEQUENT EVENTS: ------------------ On May 15, 2002, the Partnership is scheduled to make distributions to the Limited Partners for the First Quarter of 2002 of $500,000 amounting to approximately $10.80 per limited partnership interest. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources: - -------------------------------- Investment Properties - --------------------- The investment properties, including equipment held by the Partnership at March 31, 2002, were originally purchased at a price, including acquisition costs, of approximately $22,261,000. During March 2002, Hardee's Food Systems, Inc. notified Management of its intent to close its restaurant in Fond du Lac, Wisconsin in April 2002. Hardee's lease on the Fond du Lac property is set to expire on September 30, 2009 and they will be required to continue making rent payments until the lease expiration date or until a lease termination agreement with Management is entered into. During March 2001, Hardee's Food Systems, Inc. notified Management of its intent to close its restaurants in South Milwaukee and Milwaukee, Wisconsin. Hardee's lease on the South Milwaukee property expired on November 30, 2001 and they were required to continue making rent payments until the lease expiration date. This lease was not renewed, and therefore, Management continues to market the property for sale or lease to a new operator. The Hardee's lease on the Milwaukee property was not set to expire until 2009. In the Second Quarter of 2001, a lease termination agreement was executed and the tenant ceased the payment of rent as of April 30, 2001. Hardee's Food Systems agreed to pay a lease termination fee of approximately two (2) years rent or $157,000. The payments were scheduled to be received in four (4) equal installments of $39,250. The first payment was received in May 2001 upon the execution of the agreement, and the subsequent installments were reflected as Note receivable on the balance sheet. Note receivable installments were received in August and October 2001. The final installment, which is reflected in the Note receivable on the balance sheet at December 31, 2001, was received in January 2002. During May 2001, Management negotiated the re-lease of the former Hardee's- Milwaukee, Wisconsin property to Omega Restaurants, Inc. The ten (10) year lease is set to expire in 2011. The new tenant took possession of the property in June 2001 and rent income commenced in October 2001. Commissions of $50,000 and $9,000 were paid to an unaffiliated leasing agent and to an affiliate of the General Partner, respectively, upon the execution of the new lease. During December 2001, Hardee's Food Systems, Inc. notified Management that it had vacated its restaurant in Hartford, Wisconsin. Hardee's lease on the Hartford property expires on April 30, 2009 and they will be required to continue making rent payments until the lease expiration date or until a lease termination agreement with Management is entered into. 15 The Blockbuster Video Store lease expired on January 31, 2001. However, in the First Quarter of 2001, Management negotiated a five (5) year lease extension to January 31, 2006. A commission of $10,000 was paid to an unaffiliated leasing agent upon the negotiated extension of the lease. During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of Phoenix Restaurant Group, Inc. ("Phoenix") to reject the lease with the Partnership at the Twin Falls, Idaho location. Although Phoenix's lease on the Twin Falls property expires on April 30, 2012, due to bankruptcy proceedings of Phoenix, the lease was rejected and rent income ceased as of December 2001. The remaining balance due the Partnership of approximately $29,000 from the former tenant has been reserved. This amount is included in the Partnership's filing for damages in Bankruptcy court of approximately $85,000, or one year's rent, although it is uncertain whether the amount will be collectible. In addition, since Phoenix rejected the lease, its subtenant, Fiesta Time, presumably has no rights to the possession of the property. Therefore, Management is in the process of obtaining possession of the property from Fiesta Time, and then Management will market the property for lease or sale. During April 2001, the sub-tenant AMF Corporation notified Management of its intent to close and vacate its Mulberry Street Grill restaurant in Phoenix, Arizona. Although the lease on the property expires in 2007, monthly rental and Common Area Maintenance (CAM) income ceased as of June 1, 2001. Management is moving forward with all legal remedies to collect the remaining balance due of approximately $10,000. The entire amount due the Partnership has been reserved. Due to Management's attempt to return possession of the property to the Ground Lease landlord, the net asset value of the property was written-off in the Fourth Quarter of 2001, resulting in a loss of $157,000. As of March 31, 2002 the Partnership has withheld the payment of approximately $50,000 in accrued ground lease obligations related to the property. In April 2002, an additional $43,000 will be accrued as payable to the Ground Lease Land landlord due to the Court's granting of a summary judgment against the Partnership. (See Legal Proceedings in Part II- Item 1.) During October 2001, the Village Inn Restaurant notified Management of its intent to close and vacate its restaurant in Grand Forks, North Dakota within the next few months. The lease on the property expires in 2009. In February 2002, Management was notified Village Inn had closed and vacated its restaurant in Grand Forks. Rent income was collected from the tenant through December 2001, however, rent income has not been collected for January through April of 2002. Management will pursue all legal remedies in relation to the former tenant's past due balance of approximately $34,000, as well as future lease obligations. Management is also seeking a new tenant for the vacated property. Other Assets - ------------ Cash and cash equivalents were approximately $1,074,000 at March 31, 2002, compared to $818,606 at December 31, 2001. The Partnership designated cash of $500,000 to fund the First Quarter 2002 distributions to Limited Partners, $524,000 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, deposited $100,000 in the Trust during 1993 and completed funding of the Trust with $150,000 during 1994. The provision to establish the Trust was included in the PMA for the indemnification of TPG, in the absence of fraud or gross negligence, from any claims or liabilities that may arise from TPG acting as Permanent Manager. The Trust is owned by the Partnership. For additional information regarding the Trust refer to Note 8 to the financial statements. Property tax escrow at December 31, 2001, in the amount of $7,875, represented four (4) months of 2001 real estate taxes for the former Hardee's- Milwaukee tenant paid by Hardee's Food Systems, Inc. upon the lease termination agreement with Management. The property taxes were paid by the Partnership in January 2002. Property tax receivable at March 31, 2002, in the amount of $8,300 represents 2001 property taxes paid by the Partnership, which are due from the vacant Village Inn property. Property tax receivable at December 31, 2001, in the amount of $31,000 represented 2001 real estate taxes due from the former Hardee's- S. Milwaukee property and new tenant, Omega Restaurants and 2000 property taxes due from the Village Inn property. The Note receivable balance at December 31, 2001 was $39,250. In the Second Quarter of 2001, a lease termination agreement was executed with Hardee's Food Systems upon the closing of its restaurant in Milwaukee, Wisconsin. Hardee's Food Systems agreed to pay a lease termination fee of approximately two (2) years rent or $157,000. The payments were scheduled to be received in four (4) equal installments of $39,250. The first payment was received in May 2001 upon the execution of the agreement, and the subsequent installments were reflected as Note receivable on the balance sheet. Note receivable installments were received in August and October 2001. The final installment, which is reflected in the Note receivable on the balance sheet at December 31, 2001, was received in January 2002. Deferred charges totaled approximately $283,000 and $286,000, net of amortization, at March 31, 2002 and December 31, 2001, respectively. Deferred charges represent leasing commissions paid when properties are leased or upon the negotiated extension of a lease. Leasing commissions are capitalized and amortized over the life of the lease. During the Second Quarter of 2001, commissions of $50,000 and $9,000 were paid to an unaffiliated leasing agent and to an affiliate of the General Partner, respectively, upon the execution of the new Omega Restaurant lease. During the First Quarter of 2001, a commission of $10,000 was paid to an unaffiliated leasing agent upon the negotiated extension of the lease with Blockbuster Video. Also, during the Second Quarter and Fourth Quarters of 2001 deferred charges relating to the former Hardee's- Milwaukee and Mulberry Street Grill properties, respectively, were written-off. Liabilities - ----------- Accounts payable and accrued expenses at March 31, 2002, in the amount of $94,000, primarily represent the accrual of auditing, tax, legal and data processing fees, and May through December 2001 ground lease rent related to the former Mulberry Street Grill property. Due to the Current General Partner amounted to $2,987 at March 31, 2002, which represents the General Partner's portion of the Fourth Quarter 2001and First Quarter 2002 distributions, which amounted to $1,192 and $1,795, respectively. 17 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' deficit capital account balance was reallocated to the Limited Partners at December 31, 1993. Refer to Note 9 to the financial statements for additional information regarding the reallocation. Cash distributions paid to the Limited Partners and to the General Partner during 2002 of $485,000 and $1,192, respectively, have also been in accordance with the amended Partnership Agreement. The First Quarter 2002 distribution of $500,000 is scheduled to be paid to the Limited Partners on May 15, 2002. Results of Operations: - ---------------------- The Partnership reported net income for the quarter ended March 31, 2002, in the amount of $298,000 compared to net income for the quarter ended March 31, 2001, of $325,000. Revenues - -------- Total revenues were $518,000 and $607,000, for the quarters ended March 31, 2002 and 2001, respectively. The decrease in revenue in 2002 is due primarily to decreased rental income, upon the expired lease of the Hardee's- S. Milwaukee property in the Fourth Quarter of 2001, and both the rejection of the Denny's- Twin Falls lease and the non-cash disposal of the former Mulberry Street Grill Restaurant in the Fourth Quarter of 2001. Total revenues should approximate $2,043,000 annually, based on leases currently in place. 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, 2002 and 2001, cash expenses amounted to approximately 25% and 32%, of total revenues, respectively. Total expenses, including non-cash items, amounted to approximately 43% and 46%, of total revenues for the quarters ended March 31, 2002 and 2001, respectively. The decrease in total expenses in 2002 is primarily due to appraisals being performed in the First Quarter of 2001 on all the Partnership properties. In addition, the accrual of the ground lease obligations relating to the former Mulberry Street Grill Restaurant ceased as of December 2001. 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 18 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. New Accounting Pronouncement: - ----------------------------- In October 2001, Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144) was issued. FAS 144 supercedes Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (FAS 121). FAS 144 primarily addresses issues relating to the implementation of FAS 121 and develops a single accounting model for long-lived assets to be disposed of, whether previously held and used or newly acquired. The provisions of FAS 144 are effective for fiscal years beginning after December 15, 2001. The Company adopted FAS 144 on January 1, 2002 with no impact on financial statements. Critical Accounting Policies: - ----------------------------- The Partnership believes that its most significant accounting policies deal with: Depreciation methods and lives- Depreciation of the properties is provided on a straight-line basis over 31.5 years, which is the estimated useful life of the buildings and improvements. While the Partnership believes these are the appropriate lives and methods, use of different lives and methods could result in different impacts on net income. Additionally, the value of real estate is typically based on market conditions and property performance, so depreciated book value of real estate may not reflect the market value of real estate assets. Revenue recognition- Rental revenue from investment properties is recognized on the straight-line basis over the life of the respective lease. Percentage rents are accrued only when the tenant has reached the breakpoint stipulated in the lease. The Partnership periodically reviews its long-lived assets, primarily real estate, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The Partnership's review involves comparing current and future operating performance of the assets, the most significant of which is undiscounted operating cash flows, to the carrying value of the assets. Based on this analysis, a provision for possible loss to write down the asset to its fair value is recognized, if any. Item 3. Quantitative and Qualitative Disclosure About Market Risk None. 19 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Partnership owned the building occupied by the Mulberry Street Grill restaurant, which was located on a parcel of land where it had entered into a long-term Ground Lease. The lease was considered an operating lease and the lease payments were paid by the Partnership and expensed in the periods to which they applied. During the Second Quarter of 2001, sub-tenant AMF Corporation ("AMF") notified Management of its intent to close its Mulberry Street Grill restaurant in Phoenix, Arizona. The Partnership ceased collecting the former tenant's rent and attempted to return possession of the Phoenix, Arizona property to the Ground Lease Landlord, Centre at 38th Street, L.L.C, ("LLC".) Beginning in May and through December 2001 the Partnership accrued but withheld payment of the ground lease obligations, and at March 31, 2002 and December 31, 2001 the total ground lease accrual approximates $50,000. The Ground Lease Landlord, LLC, has re-leased the property to a new tenant. On June 18, 2001, LLC filed a lawsuit in the Maricopa County Superior Court, against the Partnership and TPG. The Complaint alleges that the Partnership is a tenant under a Ground Lease with LLC and that the Partnership has defaulted on its obligations under that lease. The suit names TPG as a defendant because TPG is the Partnership's general partner. The complaint sought damages for unpaid rent, commissions, improvements, and unspecified other damages exceeding $120,000. The Partnership and TPG filed an answer denying any liability to LLC and intended to defend this matter vigorously. In addition, the Partnership has filed a third-party complaint against the original tenant, National Restaurant Group,("National Restaurant'), L.L.C., and its sub-tenant AMF. In the third-party complaint, the Partnership alleges that National Restaurant and AMF are liable to the Partnership for breach of the subleases and any damages for which the Partnership may be held liable to the Ground Lessor, LLC. On April 10, 2002 the Maricopa County Superior Court granted the motion for summary judgment against the Partnership and TPG. The Court granted that as of April 10, 2002 LLC is due damages in the amount of $93,000. The Partnership and TPG intends to appeal this summary judgment. As of March 31, 2002 the Partnership has accrued $50,000 in ground lease obligations payable to LLC and the remaining summary judgment balance of $43,000 will be accrued in April 2002. Items 2 - 5. Not Applicable. 20 Item 6. Exhibits and Reports on Form 8-K (a) Listing of Exhibits: 99.0 Correspondence to the Limited Partners dated May 15, 2002, regarding the First Quarter 2002 distribution. (b) Reports on Form 8-K: The Registrant filed no reports on Form 8-K during the first quarter of fiscal year 2002. 21 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, there unto duly authorized. DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP By: The Provo Group, Inc., General Partner By: /s/Bruce A. Provo ------------------------------------------- Bruce A. Provo, President Date: May 8, 2002 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 8, 2002 By: /s/Diane R. Conley --------------------------------------- Diane R. Conley Controller Date: May 8, 2002 EX-99 3 dex99.txt CORRESPONDENCE TO LIMITED PARTNERS DATED 5/15/2002 EXHIBIT 99 DiVall Insured Income Properties 2, L.P. QUARTERLY NEWS ================================================================================ A publication of The Provo Group, Inc. FIRST QUARTER 2002 Partnership Overview As you will see in the Property Highlights section, we have a lot of activity in the Partnership right now. We currently have four vacancies, but two of the vacant properties continue to pay rent and abide by the terms of the Lease. Certainly, a vacancy can be seen as a negative (especially if the tenant is not abiding by the terms of the Lease), however in the long term a vacancy can sometimes add value to the Partnership. Here's how .. --- If the Partnership owns properties occupied by Tenants that have poor sales and/or a weak concept, this affects the value of the portfolio. If that property is replaced by a stronger restaurant, we have both increased the value of the portfolio and will likely collect higher rents. (If the sales are higher, percentage rents may be collected when they weren't previously). If this is done with no vacancy cost (keeping in mind that both of the Hardee's continue to pay the monthly rent), it is a win-win situation. We want to assure you that even given some of the less positive activity which has occurred during the First Quarter, we continue to expect to distribute two million dollars during 2002 (or $43 per unit). We feel we budget conservatively and have taken into consideration possible vacancies and legal situations. See Inside Distribution Highlights .................................................... 2 Fourth Quarter Statements of Income & Cash Flow Changes .................... 2 Property Highlights ........................................................ 2-3 Questions & Answers ........................................................ 3 Advisory Board Information ................................................. 4 Page 2 DiVall 2 1 Q 02 DISTRIBUTION HIGHLIGHTS ... $500,000 total amount distributed . $10.80 per unit (approx.) for the for the First Quarter 2002 which is First Quarter 2002. $15,000 lower than originally projected. ... The First Quarter distribution . $1,110.00 to $912.00 range of represents an approximate 8.8% distributions per unit from the annualized return from operations first unit sold to the last unit ----- ---- based on $22,680,000 (estimated net sold before the offering closed asset value as of 12/31/01). (February 1990), respectively. (NOTE: Distributions are from both ---- cash flow from operations and "net" cash activity from financing and investing activities.) Statements of Income and Cash Flow Highlights ... Operating Revenues were $22,000 higher than anticipated. We received notice from Village Inn of their intent to vacate, and therefore, we budgeted accordingly. However, we have continued to bill Village Inn for the rents as their Lease does not expire until 2009. ... Operating expenses were 7% higher than expected. This increase is primarily due to legal expenses due to the Denny's bankruptcy and the Mulberry Street Grill lawsuit. Property Highlights ... Hardee's (South Milwaukee, WI) has vacated the property. The Lease expired on November 30, 2001. We are actively seeking a new tenant for this location. ... Village Inn (Grand Forks, ND) was delinquent at December 31, 2001, in the amount of $24,921.50. This amount represents January, February and March rent and late fees. We have defaulted this tenant and retained an attorney in Grand Forks to file suit on our behalf. ... Miami Subs (Palm Beach, FL) was delinquent at March 31, 2002 in the amount of $6,921.88. A portion of this represents percentage rent which was billed in January. The remaining amount of $3,180 is the balance due for rent. The rent increased in January and the tenant has failed to pay the increase. The tenant has been defaulted. ... Denny's (Phoenix, AZ) was delinquent at March 31, 2002 in the amount of $499.78. This amount is for property repairs which the Landlord paid directly. ... Popeye's (Park Forest, IL) was delinquent at March 31, 2002 in the amount of $72,077. This amount represents percentage rent which was billed in January. The tenant has been defaulted, and we anticipate receiving the full amount during the 2/nd/ quarter consistent with prior years. Page 3 DiVall 2 1 Q 02 PROPERTY HIGHLIGHTS ... Mulberry Street Grill (Formerly Mr. Munchies, Phoenix, AZ) As indicated last quarter, the Ground Landlord has filed suit against us. Although they have re-leased the property to a new Tenant, they continue to seek damages and filed for Summary Judgement. The Court ruled in favor of the Ground Landlord and awarded damages in the amount of $92,000. We are appealing this ruling as the major issue here has not previously been decided in Arizona law; and the court awarded damages including tenant improvement contributions by the Ground Landlord which we adamantly dispute because they are effectively financed through the new tenant's rent. ... Denny's (Twin Falls, ID) has filed bankruptcy. We have received verification from the courts for our claim. However, we are an unsecured creditor in a large bankruptcy proceeding. Therefore, it is unknown how much of our claim we will receive. Denny's subtenant, Fiesta Time, continues to operate at this location. This subtenant has no rights to possession of the property. The Bankruptcy Court has previously approved Denny's "rejection" of this Lease. We have filed an Unlawful Detainer with the courts and anticipate gaining possession of the property back during the 2/nd/ quarter. ... Hardee's (Hartford, WI). We received notice from the operator that they had ceased operations in November 2001. This operator is a subtenant of Hardee's Corporate. Hardee's Corporate remains liable for all obligations under the Lease. They have continued to pay the rents and there is no balance due. ... Hardee's (Fond du Lac, WI). We received notice from the operator that they had ceased operations in April 2002. This operator is a subtenant of Hardee's Corporate. Hardee's Corporate remains liable for all obligations under the Lease. We anticipate that they will continue to pay the rents due under the Lease. QUESTIONS & ANSWERS ... When can I expect my next distribution mailing? Your distribution correspondence for the Second Quarter of 2002 is scheduled to be mailed on August 15, 2002. ... What is the new net unit value as of December 31, 2001. As indicated in the net asset value letters mailed on February 28, 2002, the value is $490 per unit as of December 31, 2002 ... If I have questions or comments, how can I reach your office? Please feel free to contact us at our toll-free number (800) 547-7686 or (816) 421-7444 or you may contact us by mail at: The Provo Group, Inc. 101 W. 11/th/ Street, Suite 1110, Kansas City, MO 64105. Finally, we can also be reached via e-mail at mevans@theprovogroup.com. Page 4 DiVall 2 1 Q 02 Advisory Board Nominations At this time we are requesting nominations for available positions on the Advisory Board. With the pending liquidation of the DiVall Income Properties 3, L.P., we will be looking for two limited partners to represent DiVall Insured Income Properties 2, L.P. If you are interested in serving on the Board or know an investor who would make a good Board member, please send in your nomination by mailing your name and the name of the nominated investor (If different); telephone number; and number of units invested in the Partnership. Nominations should be mailed or faxed to: The Provo Group, Inc., 101 West 11/th/ Street, Suite 1110, Kansas City, MO 64105. FAX: (816) 221.2130 Nominations must be submitted on or before Monday, June 10, 2002. Criteria to consider for a potential candidate should include the following: ... To serve as a member representing DiVall 2, the individual must be a Limited Partner in DiVall and own at least fifty (50) units. (Original units were sold at $1,000 each.) ... Individual has no conflict of interest by serving on the Board. (A "Conflict of Interest" Policy will be forwarded to the nominated Board member for their review.) ... Individual is available to serve on the Board for two (2) consecutive years. ... Individual is familiar with his or her investment and demonstrates a strong desire for sharing in the governance of the DiVall "Public" Partnerships -- keeping in mind all the investors' best interests. --- We will also be seeking nominations for a Broker/Dealer Representative. Please forward nominations for this person in the same fashion. Criteria include: ... Individual was originally involved in selling DiVall Public Limited Partnership interests or currently has clients who are Limited Partners in the Partnerships. ... Individual is familiar with the Partnerships; is actively involved in his or her clients' investments in the Partnerships; and demonstrates a strong desire for sharing in the governance of the Partnerships, bearing in mind the investors' best interest. ... Individual has no conflict of interest by serving on the Board. (A "Conflict of Interest" Policy will be forwarded to the nominated Board member for their review.) ... Individual is available to serve on the Board for two (2) consecutive years. Upon receipt of the written nomination requests, we will contact the nominees ------- with a follow-up letter, a Conflict of Interest Policy, and qualification form to complete. If you have served on the Board in previous years, please don't hesitate to nominate yourself again. Due to the limited response during the last few board nominations, we will be entertaining nominations of previous board members. - -------------------------------------------------------------------------------- DIVALL INSURED INCOME PROPERTIES 2 L.P. STATEMENTS OF INCOME AND CASH FLOW CHANGES FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2002 - --------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE ----------------------------------------- 1ST 1ST QUARTER QUARTER BETTER OPERATING REVENUES 03/31/2002 03/31/2002 (WORSE) ----------- ----------- ----------- Rental income $ 487,371 $ 506,385 $ 19,014 Interest income 9,000 4,013 (4,987) Other income 0 8,059 8,059 ----------- ----------- ----------- TOTAL OPERATING REVENUES $ 496,371 $ 518,457 $ 22,086 ----------- ----------- ----------- OPERATING EXPENSES Insurance $ 6,612 $ 6,611 $ 2 Management fees 48,885 49,014 (129) Overhead allowance 3,944 3,954 (10) Advisory Board 4,289 3,736 553 Administrative 17,667 16,892 775 Professional services 12,701 13,315 (614) Auditing 19,800 18,085 1,715 Legal 6,000 18,596 (12,596) Defaulted tenants 2,100 705 1,395 ----------- ----------- ----------- TOTAL OPERATING EXPENSES $ 121,998 $ 130,908 ($8,910) ----------- ----------- ----------- INVESTIGATION AND RESTORATION EXPENSES $ 0 $ 0 $ 0 ----------- ----------- ----------- NON-OPERATING EXPENSES Uncollectible Receivable $ 0 $ 2,017 ($2,017) Depreciation 86,100 84,235 1,865 Amortization 3,563 3,304 259 ----------- ----------- ----------- TOTAL NON-OPERATING EXPENSES $ 89,663 $ 89,556 $ 107 ----------- ----------- ----------- TOTAL EXPENSES $ 211,661 $ 220,464 ($8,803) ----------- ----------- ----------- NET INCOME (LOSS) $ 284,710 $ 297,993 $ 13,283 OPERATING CASH RECONCILIATION: VARIANCE ----------- Depreciation and amortization 89,663 87,539 (2,124) Recovery of amounts previously written off 0 0 0 (Increase) Decrease in current assets 283,052 458,177 175,125 Increase (Decrease) in current liabilities (8,096) (140,998) (132,902) (Increase) Decrease in cash reserved for payables 14,832 139,806 124,974 Advance from/(to) current cash flows for future distributions (184,250) (379,250) (195,000) ----------- ----------- ----------- Net Cash Provided From Operating Activities $ 479,911 $ 463,268 ($ 16,644) ----------- ----------- ----------- CASH FLOWS FROM (USED IN) INVESTING AND FINANCING ACTIVITIES Indemnification Trust (Interest earnings reinvested) (4,500) (1,601) 2,899 Principal payments received 39,250 39,250 0 ----------- ----------- ----------- Net Cash Provided From Investing And Financing Activities $ 34,750 $ 37,649 $ 2,899 ----------- ----------- ----------- Total Cash Flow For Quarter $ 514,661 $ 500,917 ($ 13,745) Cash Balance Beginning of Period 775,134 818,606 43,472 Less 4th quarter distributions paid 2/02 (500,000) (485,000) 15,000 Change in cash reserved for payables or future distributions 169,418 239,444 70,026 ----------- ----------- ----------- Cash Balance End of Period $ 959,213 $ 1,073,967 $ 114,753 Cash reserved for 1st quarter L.P. distributions (515,000) (500,000) 15,000 Cash reserved for payment of accrued expenses (196,300) (144,748) 51,552 Cash advanced from (reserved for) future distributions (184,250) (379,250) (195,000) ----------- ----------- ----------- Unrestricted Cash Balance End of Period $ 63,665 $ 49,969 ($13,695) =========== =========== =========== - ------------------------------------------------------------------------------------------------------------- PROJECTED ACTUAL VARIANCE ------------------------------------------ * Quarterly Distribution $ 515,000 $ 500,000 ($15,000) Mailing Date 5/15/02 (enclosed) - - -------------------------------------------------------------------------------------------------------------
* Refer to distribution letter for detail of quarterly distribution. PROJECTIONS FOR DISCUSSION PURPOSES DIVALL INSURED INCOME PROPERTIES 2 LP 2002 PROPERTY SUMMARY AND RELATED RECEIPTS
PORTFOLIO (Note 1) ------------------------------------- ---------------------------------------------- REAL ESTATE EQUIPMENT ------------------------------------- ---------------------------------------------- ANNUAL LEASE ANNUAL BASE % EXPIRATION LEASE % - -------------------------------------------- CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN - -------------------------------------------- ------------------------------------- ---------------------------------------------- APPLEBEE'S COLUMBUS, OH 1,059,465 135,780 12.82% 84,500 0 0.00% BLOCKBUSTER OGDEN, UT 646,425 99,000 15.32% DENNY'S PHOENIX, AZ 972,726 65,000 6.68% 183,239 0 0.00% DENNY'S PHOENIX, AZ 865,900 90,000 10.39% 221,237 0 0.00% VACANT TWIN FALLS, ID 699,032 0 0.00% 190,000 0 0.00% VACANT S MILWAUKEE, WI 808,032 0 0.00% HARDEE'S (3) HARTFORD, WI 686,563 64,000 9.32% HARDEE'S (3) (6) FOND DU LAC, WI 849,767 88,000 10.36% (2) 290,469 0 0.00% HARDEE'S (3) MILWAUKEE, WI 0 0 0.00% 780,000 0 0.00% HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62% HOSTETTLER'S DES MOINES, IA 845,000 60,000 7.10% 52,813 0 0.00% KFC SANTA FE, NM 451,230 60,000 13.30% MIAMI SUBS PALM BEACH, FL 743,625 60,000 8.07% - -------------------------------------------- ------------------------------------- ---------------------------------------------- ---------------------------------------------- TOTALS ---------------------------------------------- ANNUAL - -------------------------------------------- CONCEPT LOCATION COST RECEIPTS RETURN - -------------------------------------------- ---------------------------------------------- APPLEBEE'S COLUMBUS, OH 1,143,965 135,780 11.87% BLOCKBUSTER OGDEN, UT 646,425 99,000 15.32% DENNY'S PHOENIX, AZ 1,155,965 65,000 5.62% DENNY'S PHOENIX, AZ 1,087,137 90,000 8.28% VACANT TWIN FALLS, ID 889,032 0 0.00% VACANT S MILWAUKEE, WI 808,032 0 0.00% HARDEE'S (3) HARTFORD, WI 686,563 64,000 9.32% HARDEE'S (3) (6) FOND DU LAC, WI 1,140,236 88,000 7.72% HARDEE'S (3) MILWAUKEE, WI 780,000 0 0.00% HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62% HOSTETTLER'S DES MOINES, IA 897,813 60,000 6.68% KFC SANTA FE, NM 451,230 60,000 13.30% MIAMI SUBS PALM BEACH, FL 743,625 60,000 8.07% - -------------------------------------------- ----------------------------------------------
Note 1: This property summary includes only property and equipment held by the Partnership as of March 31, 2002. 2: The lease was terminated and the equipment sold to Hardee's Food Systems in conjunction with their assumption of the Terratron leases in November 1996. 3: These leases were assumed by Hardee's Food Systems at a reduced rental rate from that stated in the original leases. 4: The lease with Hardee's Food Systems was terminated as of April 30, 2001. A new lease with Omega Restaurants was negotiated and monthly rent commmenced in October 2001. 5: The tenant vacated the property in February 2002, however, Village Inn remains liable until a lease termination agreement with Management is executed. 6: Management received notice that Hardee's Food Systems intends to close this restaurant in April 2002. Hardee's will remain liable until a lease termination agreement with Management is executed. Page 1 of 2
PROJECTIONS FOR DISCUSSION PURPOSES DIVALL INSURED INCOME PROPERTIES 2 LP 2001 PROPERTY SUMMARY AND RELATED RECEIPTS PORTFOLIO (Note 1) --------------------------------------- ----------------------------------------- REAL ESTATE EQUIPMENT --------------------------------------- ----------------------------------------- ANNUAL LEASE ANNUAL - ------------------------------------------------ BASE % EXPIRATION LEASE % CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN - ------------------------------------------------ --------------------------------------- ----------------------------------------- OMEGA RESTAURANT (4) MILWAUKEE, WI 1,010,045 84,840 8.40% 260,000 0 0.00% " " 151,938 0 0.00% POPEYE'S PARK FOREST, IL 580,938 77,280 13.30% SUNRISE PS PHOENIX, AZ 1,084,503 123,318 11.37% 79,219 0 0.00% 19,013 0 0.00% VILLAGE INN (5) GRAND FORKS, ND 739,375 96,600 13.07% WENDY'S AIKEN, SC 633,750 90,480 14.28% WENDY'S CHARLESTION, SC 580,938 77,280 13.30% WENDY'S N. AUGUSTA, SC 660,156 87,780 13.30% WENDY'S AUGUSTA, GA 728,813 96,780 13.28% WENDY'S CHARLESTON, SC 596,781 76,920 12.89% WENDY'S AIKEN, SC 776,344 96,780 12.47% WENDY'S AUGUSTA, GA 649,594 86,160 13.26% WENDY'S CHARLESTON, SC 528,125 70,200 13.29% WENDY'S MT. PLEASANT, SC 580,938 77,280 13.30% WENDY'S MARTINEZ, GA 633,750 84,120 13.27% - ------------------------------------------------ --------------------------------------- ----------------------------------------- - ------------------------------------------------ --------------------------------------- ------------------------------- PORTFOLIO TOTALS (26 Properties) 19,658,534 2,042,598 10.39% 2,312,428 0 0.00% - ------------------------------------------------ --------------------------------------- ------------------------------- -------------------------------- TOTALS -------------------------------- - ------------------------------------------------------ TOTAL CONCEPT LOCATION COST RECEIPTS RETURN - ------------------------------------------------------ -------------------------------- OMEGA RESTAURANT (4) MILWAUKEE, WI 1,421,983 84,840 5.97% " " POPEYE'S PARK FOREST, IL 580,938 77,280 13.30% SUNRISE PS PHOENIX, AZ 1,182,735 123,318 10.43% VILLAGE INN (5) GRAND FORKS, ND 739,375 96,600 13.07% WENDY'S AIKEN, SC 633,750 90,480 14.28% WENDY'S CHARLESTION, SC 580,938 77,280 13.30% WENDY'S N. AUGUSTA, SC 660,156 87,780 13.30% WENDY'S AUGUSTA, GA 728,813 96,780 13.28% WENDY'S CHARLESTON, SC 596,781 76,920 12.89% WENDY'S AIKEN, SC 776,344 96,780 12.47% WENDY'S AUGUSTA, GA 649,594 86,160 13.26% WENDY'S CHARLESTON, SC 528,125 70,200 13.29% WENDY'S MT. PLEASANT, SC 580,938 77,280 13.30% WENDY'S MARTINEZ, GA 633,750 84,120 13.27% - ------------------------------------------------------ -------------------------------- - ------------------------------------------------------ -------------------------------- PORTFOLIO TOTALS (26 Properties) 21,970,962 2,042,598 9.30% - ------------------------------------------------------ --------------------------------
Note 1: This property summary includes only property and equipment held by the Partnership as of March 31, 2002. 2: The lease was terminated and the equipment sold to Hardee's Food Systems in conjunction with their assumption of the Terratron leases in November 1996. 3: These leases were assumed by Hardee's Food Systems at a reduced rental rate from that stated in the original leases. 4: The lease with Hardee's Food Systems was terminated as of April 30, 2001. A new lease with Omega Restaurants was negotiated and monthly rent commmenced in October 2001. 5: The tenant vacated the property in February 2002, however, Village Inn remains liable until a lease termination agreement with Management is executed. 6: Management received notice that Hardee's Food Systems intends to close this restaurant in April 2002. Hardee's will remain liable until a lease termination agreement with Management is executed. Page 2 of 2 -----END PRIVACY-ENHANCED MESSAGE-----