EX-99 3 dex99.txt CORRESPONDENCE TO THE LIMITED PARTNERS DiVall Insured Income Properties 2, L.P. QUARTERLY NEWS ================================================================================ A publication of The Provo Group, Inc. SECOND QUARTER 2002 -------------------------------------------------------------------------------- July 25, 2002 Dear Limited Partner: I'm sure all of you have been watching the carnage on Wall Street. Fortunately, your long-term returns and values have not been similarly impacted in the DiVall 2 portfolio. Unfortunately, the portfolio has recently reflected the impact of the weak economy in the short-run. We have four troublesome properties (out of 27), which I would like to address personally. After resolving issues with these properties, we will hopefully have cleansed the portfolio of chronic weak properties. Mulberry Street Grill (Phoenix, AZ) was a horrible economic deal involving a ground lease. Our exposure to loss long-term far exceeded our opportunities for any significant return. Accordingly, we chose to eliminate our long-term exposure to significant liabilities (the lease structure, negotiated by the former general partners, provided no opportunity for profitability or residual value), by proactively ceasing ground rent payments which triggered legal activities we hope will quantify and eliminate future liabilities. We have, to-date, received an unfavorable "Summary Judgment", which we are appealing because there are disputed facts. I remind you all that we had an unfavorable "Summary Judgment" handed to us in the Boatmen's Bank dispute which was reversed on appeal. We then went to trial and won - saving the Partnership $1,400,000 in principal, interest and costs, so our persistence with Boatman's paid off. We intend to pursue this litigation with equal vigor, although we realize that there is no assurance that we will prevail. Village Inn (Grand Forks, ND) is another case of distressed tenants being either unable or unwilling to accept their lease obligations. They effectively abandoned this property eight years before lease expiration and in horrid condition. We are going after the principals, but first we have to "pierce" the corporate veil that is protecting the individual owners. We will fix up this property and either lease or sell it. Bruce Provo's Letter Continued on Page 2 -------------------------------------------------------------------------------- SEE INSIDE Additional Return of Capital Distribution Expected in 3rd Qtr .................2 Distribution Highlights .......................................................3 Reconciliation of "Budgeted" Distribution to "Actual" .........................3 More Property Highlights ......................................................3 Questions & Answers ...........................................................4 Page 2 DiVall 2 2 Q 02 July 25,2002 -------------------------------------------------------------------------------- Denny's/Fiesta Time (Twin Falls, Idaho) is a situation that should make an "Outrage Hall of Fame (or Shame)". Our tenant, a Denny's franchisee known as Phoenix Foods ("Phoenix"), sub-let to a restaurant called Fiesta Time. Fiesta Time reportedly stopped paying rent to Phoenix months before Phoenix declared bankruptcy. Phoenix rejected the lease in Bankruptcy Court, so DiVall 2 cannot recover subsequent rent payments from Phoenix, but as owner of the property Divall 2 is entitled to possession of the property. Lo and behold, Fiesta Time has continued to occupy the property for more than 9 months after the lease was rejected by Phoenix. Fiesta Time has paid DiVall 2 no rent, nor have they reimbursed DiVall 2 for any damage to the property. Unfortunately, courts tend to favor the party in possession of a property, so it took eight months in court to get approval to evict Fiesta Time even though they have no lease and Phoenix rejected the lease in Bankruptcy Court. We were finally successful in evicting this tenant in July, only to have the courts turn over the decision based on a technicality. Shockingly, the judge did not notify our attorney that he was hearing arguments to have the eviction overturned, and therefore, we were not able to defend this matter. The ruling was made without our attorney even having the option of being present. We are scheduled to be in court again on Thursday, August 1. It is an extremely frustrating situation. Popeye's (Park Forest, Illinois) was a dynamite store, doing $1,650,260 in sales at its peak. We had worked through the bankruptcies with the original tenant and achieved a good rental structure with favorable percentage rent terms. The property was sold in 1999. The sales have since plummeted and the prior year percentage rents due of $72,075 are past due. The new owner thinks we should re-negotiate the lease. We will not be the "shock absorber" for the new owners bad deal nor his obviously poor management abilities. If we have to take back this store and find the right operator ... we will. In conclusion, the current economy is more difficult than it appears. Even the sales of our Wendy's stores have gone flat after years of strong annual growth. We do, however, have good long-term assets, which will weather the challenges, but in the short-term, distributions may be below expectations. Such distributions still represent strong investment yields in relationship to alternative investments in the market. Sincerely, Bruce A. Provo -------------------------------------------------------------------------------- ADDITIONAL RETURN OF CAPITAL EXPECTED IN THE 3RD QTR o Hardee's (Hartford, WI). We expect to close on the sale of this property during the 3rd Quarter. Assuming this occurs, an estimated return of capital distribution in the amount of $600,000 would be paid. -------------------------------------------------------------------------------- PAGE 3 DIVALL 2 2 Q 02 -------------------------------------------------------------------------------- DISTRIBUTION HIGHLIGHTS o $360,000 total amount distributed for the o $7.78 per unit (approx.) for Second Quarter 2002 which is $155,000 the Second Quarter 2002. lower than originally projected. (See Reconciliation of "Budgeted" distribution to "Actual", below) o The Second Quarter distribution represents o $1,117.00 to $919.00 range of an approximate 6.3% annualized return from distributions per unit from operations based on $22,680,000 the first unit sold to the (estimated net asset value as of 12/31/01). last unit sold before the offering closed (2/90) respectively. (Distributions are from both cash flow from operations and "net" cash activity from financing and investing activities.) RECONCILIATION OF "BUDGETED" DISTRIBUTION TO "ACTUAL" Budgeted Distribution ................................................ $515,000 Less Reconciling items: Popeye's Park Forest Delinquent 2001 Percentage Rent ............... (72,000) Court Judgment Relating to Mulberry Street Grill ................... (45,000) Increased Operating Expenditures (Legal Fees) ...................... (14,000) Utility Deposit for vacant property at N. 7th Street, Phoenix, AZ .. (12,000) Other Miscellaneous Items .......................................... (12,000) --------- Actual 2nd Quarter Distribution ...................................... $360,000 ========= MORE PROPERTY HIGHLIGHTS In addition to the properties outlined in Bruce's letter, please note the current activity of the following properties: o 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, however due to the location of the property and the current economy the potential re-lease or sale is taking longer than we had hoped. o Miami Subs (Palm Beach, FL) was delinquent at June 30, 2002 in the amount of $8,751. We have made several efforts to accommodate this tenant during "slow season". He has not honored our accommodations and we have defaulted the tenant and will move toward eviction. -------------------------------------------------------------------------------- PAGE 4 DIVALL 2 2 Q 02 -------------------------------------------------------------------------------- o 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. This property is currently under contract for a sale price of $618,000. Hardee's Corporate has agreed to pay all outside commissions involved. o 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. They have continued to pay the rents and there is no balance due. QUESTIONS & ANSWERS o When can I expect my next distribution mailing? Your distribution correspondence for the Third Quarter of 2002 is scheduled to be mailed on November 15, 2002. o Who are the new members of the advisory board? Unfortunately, only one limited partner was nominated for the Board. That individual never returned his qualification forms for review. Therefore, we plan to move forward with the current board members for another one year term. o If I have questions or comments, how can I reach your office? MAIL: Investor Relations, 101 W. 11th Street, Suite 1110 Kansas City, MO 64105 PHONE: 800-547-7686 OR (816) 421-7444 FAX: (816) 221.2130 E-MAIL: mevans@theprovogroup.com -------------------------------------------------------------------------------- DIVALL INSURED INCOME PROPERTIES 2 L.P. STATEMENTS OF INCOME AND CASH FLOW CHANGES FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2002 --------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE ---------- -------- -------- 2ND 2ND QUARTER QUARTER BETTER OPERATING REVENUES 6/30/02 6/30/02 (WORSE) ---------------------------------------------------- Rental income $487,869 $527,523 $39,654 Interest income 9,000 4,659 (4,341) Other income 0 232 232 ---------------------------------------------------- TOTAL OPERATING REVENUES $496,869 $532,414 $35,545 OPERATING EXPENSES Insurance $6,612 $6,611 $2 Management fees 48,561 49,911 (1,350) Overhead allowance 3,996 4,028 (32) Advisory Board 2,189 2,188 2 Administrative 25,211 22,691 2,520 Professional services 11,000 11,878 (878) Auditing 14,350 14,150 200 Legal 6,000 16,886 (10,886) Defaulted tenants 2,100 5,239 (3,139) ---------------------------------------------------- TOTAL OPERATING EXPENSES $120,019 $133,579 ($13,560) ---------------------------------------------------- INVESTIGATION AND RESTORATION EXPENSES $0 $9 ($9) ---------------------------------------------------- NON-OPERATING EXPENSES Uncollectible Receivable $0 $56,352 ($56,352) Depreciation 86,100 83,021 3,079 Amortization 3,563 3,304 259 Judgement Expense 0 45,128 (45,128) ---------------------------------------------------- TOTAL NON-OPERATING EXPENSES $89,663 $187,805 ($98,142) ---------------------------------------------------- TOTAL EXPENSES $209,682 $321,393 ($111,711) ---------------------------------------------------- NET INCOME (LOSS) $287,187 $211,021 ($76,166) OPERATING CASH RECONCILIATION: VARIANCE -------- Depreciation and amortization 89,663 86,324 (3,339) Recovery of amounts previously written off 0 (232) (232) (Increase) Decrease in current assets 277,054 6,099 (270,955) Increase (Decrease) in current liabilities (10,388) 27,864 38,252 (Increase) Decrease in cash reserved for payables 9,239 (28,708) (37,947) Advance from/(to) current cash flows for future distributions (133,600) 61,400 195,000 ---------------------------------------------------- Net Cash Provided From Operating Activities $519,155 $363,768 ($155,387) ---------------------------------------------------- CASH FLOWS FROM (USED IN) INVESTING AND FINANCING ACTIVITIES Indemnification Trust (Interest earnings reinvested) (4,500) (1,679) 2,821 Recovery of amounts previously written off 0 232 232 ---------------------------------------------------- Net Cash Provided From Investing And Financing Activities ($4,500) ($1,447) $3,053 ---------------------------------------------------- Total Cash Flow For Quarter $514,655 $362,321 ($152,334) Cash Balance Beginning of Period 959,215 1,073,967 114,752 Less 1st quarter distributions paid 5/02 (515,000) (500,000) 15,000 Change in cash reserved for payables or future distributions 124,361 (32,692) (157,053) ---------------------------------------------------- Cash Balance End of Period $1,083,231 $903,596 ($179,635) Cash reserved for 2nd quarter L.P. (515,000) (360,000) 155,000 distributions Cash reserved for payment of accrued expenses (187,061) (173,456) 13,605 Cash advanced from (reserved for) future distributions (317,850) (317,850) 0 ---------------------------------------------------- Unrestricted Cash Balance End of Period $63,321 $52,290 ($11,030) ==================================================== PROJECTED ACTUAL VARIANCE ---------------------------------------------------- Quarterly Distribution $515,000 $360,000 ($155,000) * Mailing Date 8/15/02 (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 TOTALS ---------------------------------------------------------------------------------------------- ANNUAL LEASE ANNUAL BASE % EXPIRATION LEASE % ANNUAL CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN COST RECEIPTS RETURN ------------------------------------------------------------------------------------------------------------------------------------ APPLEBEE'S COLUMBUS, OH 1,059,465 135,780 12.82% 84,500 0 0.00% 1,143,965 135,780 11.87% BLOCKBUSTER OGDEN, UT 646,425 99,000 15.32% 646,425 99,000 15.32% DENNY'S PHOENIX, AZ 972,726 65,000 6.68% 183,239 0 0.00% 1,155,965 65,000 5.62% VACANT (7) PHOENIX, AZ 865,900 37,500 4.33% 221,237 0 0.00% 1,087,137 37,500 3.45% VACANT TWIN FALLS, ID 699,032 0 0.00% 190,000 0 0.00% 889,032 0 0.00% VACANT S MILWAUKEE, WI 808,032 0 0.00% 808,032 0 0.00% HARDEE'S (3)(9) HARTFORD, WI 686,563 37,335 5.44% 686,563 37,335 5.44% HARDEE'S (3)(6) FOND DU LAC, WI 849,767 88,000 10.36% (2) 290,469 0 0.00% 1,140,236 88,000 7.72% HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62% 1,246,719 95,000 7.62% HOSTETTLER'S DES MOINES, IA 845,000 60,000 7.10% 52,813 0 0.00% 897,813 60,000 6.68% KFC SANTA FE, NM 451,230 60,000 13.30% 451,230 60,000 13.30% MIAMI SUBS (8) PALM BEACH, FL 743,625 56,000 7.53% 743,625 56,000 7.53%
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. 7: Due to the rejection of the Phoenix Restaurant Group, Inc. lease by the Bankruptcy Court in the Fourth Quarter of 2001, the sublessee does not wish to continue to lease the property. Rent charges ceased as of June 1, 2002. 8: Management agreed to reduce Miami Sub's monthly rent from $5,000 to $4,000 for the months of July-October 2002. 9: Management has entered a contract to sell the property in late July 2002 at a price of $618,000. 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 TOTALS ----------------------------------------------------------------------------------------------- ANNUAL LEASE ANNUAL BASE % EXPIRATION LEASE % TOTAL CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN COST RECEIPTS RETURN ------------------------------------------------------------------------------------------------------------------------------------ OMEGA RESTAURANT(4) MILWAUKEE, WI 1,010,045 84,840 8.40% 260,000 0 0.00% 1,421,983 84,840 5.97% " " " " 151,938 0 0.00% " " " " 780,000 0 0.00% 780,000 0 0.00% POPEYE'S PARK FOREST, IL 580,938 77,280 13.30% 580,938 77,280 13.30% SUNRISE PS PHOENIX, AZ 1,084,503 123,318 11.37% 79,219 0 0.00% 1,182,735 123,318 10.43% 19,013 0 0.00% VILLAGE INN (5) GRAND FORKS, ND 739,375 96,600 13.07% 739,375 96,600 13.07% WENDY'S AIKEN, SC 633,750 90,480 14.28% 633,750 90,480 14.28% WENDY'S CHARLESTION, SC 580,938 77,280 13.30% 580,938 77,280 13.30% WENDY'S N. AUGUSTA, SC 660,156 87,780 13.30% 660,156 87,780 13.30% WENDY'S AUGUSTA, GA 728,813 96,780 13.28% 728,813 96,780 13.28% WENDY'S CHARLESTON, SC 596,781 76,920 12.89% 596,781 76,920 12.89% WENDY'S AIKEN, SC 776,344 96,780 12.47% 776,344 96,780 12.47% WENDY'S AUGUSTA, GA 649,594 86,160 13.26% 649,594 86,160 13.26% WENDY'S CHARLESTON, SC 528,125 70,200 13.29% 528,125 70,200 13.29% WENDY'S MT. PLEASANT, SC 580,938 77,280 13.30% 580,938 77,280 13.30% WENDY'S MARTINEZ, GA 633,750 84,120 13.27% 633,750 84,120 13.27% ------------------------------------------------------------------------------------------------------------------------------------ PORTFOLIO TOTALS (26 Properties) 19,658,534 1,959,433 9.97% 2,312,42 0 0.00% 21,970,962 1,959,433 8.92% ------------------------------------------------------------------------------------------------------------------------------------
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. 7: Due to the rejection of the Phoenix Restaurant Group, Inc. lease by the Bankruptcy Court in the Fourth Quarter of 2001, the sublessee does not wish to continue to lease the property. Rent charges ceased as of June 1, 2002. 8: Management agreed to reduce Miami Sub's monthly rent from $5,000 to $4,000 for the months of July-October 2002. 9: Management has entered a contract to sell the property in late July 2002 at a price of $618,000. Page 2 of 2