-----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, WrhQKloCMAu0sFCnqSEeUzta2lphYT4Z/HLKa3tREM3OHsTlk74rt75YiI+aTHB4 vOa2iI81n/ytRGiD5FGHow== 0000950131-03-002929.txt : 20030515 0000950131-03-002929.hdr.sgml : 20030515 20030515123813 ACCESSION NUMBER: 0000950131-03-002929 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20030515 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-17686 FILM NUMBER: 03702583 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/A 1 d10qa.txt FORM 10-Q/A FORM 10-Q/A AMENDMENT NO. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 __ EXPLANATORY NOTE Note: This amendment is filed to restate the accounting for the operations of assets held for sale as discontinued operations as required by Statement of Financial Accounting Standards No. 144, " Accounting for the Impairment or Disposal of Long-Lived Assets." During the three months and nine months ended September 30, 2002, the Partnership originally recognized income from discontinued operations of $16,000 and $48,000, respectively, which reduced income from continuing operations by these same amounts. The restated condensed financial statements for the three and nine months ended September 30, 2002 appropriately reflect income from discontinued operations of $16,000 and $41,000, respectively. Income from continuing operations for the three and nine month periods ended September 30, 2002 has been reduced by an additional $43,000 relating to an asset write down related to the Partnership's South Milwaukee property. In Note 5 to the Notes to the condensed financial statements, the aggregate minimum lease payments to be received under the leases for the Partnership's properties as of September 30, 2002 decreased by approximately $515,000 to correct for an error in the amounts previously disclosed. 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP CONDENSED BALANCE SHEETS September 30, 2002 and December 31, 2001 ASSETS (Unaudited)
September 30, 2002 (As Restated, December 31, see Note 12 2001 ---------------- ---------------- INVESTMENT PROPERTIES AND EQUIPMENT: (Note 3) Land $ 7,264,553 $ 7,296,406 Buildings 10,808,597 11,561,307 Equipment 669,778 669,778 Accumulated depreciation (5,886,282) (5,854,938) ---------------- ---------------- Net investment properties and equipment 12,856,646 13,672,553 OTHER ASSETS: Property held for sale (Note 3) 470,060 0 Cash and cash equivalents 725,380 818,606 Cash held in Indemnification Trust (Note 8) 377,204 372,167 Deposit - Clerk of the Court (Note 10) 140,000 0 Property tax escrow 0 7,875 Rents and other receivables (Net of allowance of $140,590 And $39,636, respectively) 340,553 546,771 Property tax receivable 15,449 30,977 Deferred rent receivable 115,936 105,633 Prepaid insurance 2,203 22,035 Deferred charges 324,456 286,067 Note receivable (Note 3) 0 39,250 ---------------- ---------------- Total other assets 2,511,241 2,229,381 ---------------- ---------------- Total assets $ 15,367,887 $ 15,901,934 ================ ================
The accompanying notes are an integral part of these statements. 2 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP CONDENSED BALANCE SHEETS September 30, 2002 and December 31, 2001 LIABILITIES AND PARTNERS' CAPITAL (Unaudited)
September 30, 2002 (As Restated, December 31, see Note 12 2001 ---------------- ---------------- LIABILITIES: Accounts payable and accrued expenses $ 144,023 $ 92,802 Property taxes payable 0 25,105 Due to General Partner 2,334 1,795 Security deposits 127,017 109,017 Unearned rental income 61,551 172,723 ---------------- ---------------- Total liabilities 334,925 401,442 PARTNERS' CAPITAL: (Notes 1, 4 and 9) Current General Partner - Cumulative net income 180,990 172,176 Cumulative cash distributions (74,858) (70,941) ---------------- ---------------- 106,132 101,235 Limited Partners (46,280.3 interests outstanding) Capital contributions, net of offering costs 39,358,468 39,358,468 Cumulative net income 24,283,859 23,411,286 Cumulative cash distributions (47,875,268) (46,530,268) Reallocation of former general partners' deficit capital (840,229) (840,229) ---------------- ---------------- 14,926,830 15,399,257 ---------------- ---------------- Total partners' capital 15,032,962 15,500,492 ---------------- ---------------- Total liabilities and partners' capital $ 15,367,887 $ 15,901,934 ================ ================
The accompanying notes are an integral part of these statements. 3 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP CONDENSED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------------- --------------------------------- 2002 2001 2002 2001 (As Restated, (As Restated, (As Restated, (As Restated, see Note 12) see Note 12) see Note 12) see Note 12) --------------- --------------- --------------- --------------- CONTINING OPERATIONS: REVENUES: Rental income (Note 5) $ 728,654 $ 698,777 $ 1,730,562 $ 1,833,903 Interest income 4,403 9,286 13,075 35,043 Lease termination fee (Note 3) 0 0 0 157,000 Recovery of amount previously written off (Note 2) 2,031 0 2,263 4,172 Other income 168 26 8,227 344 --------------- --------------- --------------- --------------- TOTAL REVENUES 735,256 708,089 1,754,127 2,030,462 --------------- --------------- --------------- --------------- EXPENSES: Partnership management fees (Note 6) 49,839 48,561 148,764 144,452 Insurance 6,611 4,827 19,832 14,482 General and administrative 18,116 20,796 65,681 67,539 Advisory Board fees and expenses 1,688 2,188 7,611 8,650 Write-off non-collectible receivables 31,306 10,127 89,675 25,688 Property write-down 98,000 0 98,000 0 Ground lease payments (Note 3) 0 17,902 0 53,705 Maintenance 30,104 8,208 34,964 9,413 Expenses incurred due to default by lessee 9,481 0 10,565 0 Professional services 49,762 37,484 142,672 167,570 Restoration fees (Note 6) 81 0 90 167 Judgment expense (Note 10) 0 0 45,128 0 Depreciation 80,591 82,456 241,773 247,367 Amortization 3,026 27,994 9,078 42,521 --------------- --------------- --------------- --------------- TOTAL EXPENSES 378,605 260,543 913,833 781,554 --------------- --------------- --------------- --------------- INCOME FROM CONTINUING OPERATIONS 356,651 447,546 840,294 1,248,908 INCOME FROM DISCONTINUED OPERATIONS 15,722 12,078 41,093 36,234 --------------- --------------- --------------- --------------- NET INCOME $ 372,373 $ 459,624 $ 881,387 $ 1,285,142 --------------- --------------- --------------- --------------- NET INCOME-CURRENT GENERAL PARTNER $ 3,724 $ 4,596 $ 8,814 $ 12,851 NET INCOME-LIMITED PARTNERS 368,649 455,028 872,573 1,272,291 --------------- --------------- --------------- --------------- $ 372,373 $ 459,624 $ 881,387 $ 1,285,142 =============== =============== =============== =============== PER LIMITED PARTNERSHIP INTEREST, based on 46,280.3 Interests outstanding: INCOME FROM CONTINUING OPERATIONS $ 7.63 $ 9.57 $ 17.97 $ 26.72 INCOME FROM DISCONTINUED OPERATIONS .34 .26 .88 .77 --------------- --------------- --------------- --------------- NET INCOME $ 7.97 $ 9.83 $ 18.85 $ 27.49 =============== =============== =============== ===============
The accompanying notes are an integral part of these statements 4 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, ---------------------------------- 2002 2001 (As Restated, (As Restated, see Note 12) see Note 12) --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 881,387 $ 1,285,142 Adjustments to reconcile net income to net cash from operating activities - Depreciation and amortization 257,758 301,654 Recovery of amounts previously written off (2,263) (4,172) Provision for non-collectible rents and receivables 89,675 25,688 Interest applied to Indemnification Trust account (5,037) (13,792) Lease termination fee 0 (117,750) Property write-down 98,000 0 (Increase) Decrease in due from Clerk of the Court (140,000) 0 Decrease (Increase) in property tax escrow 7,875 (7,875) Decrease in rents and other receivables 132,071 238,122 Decrease in prepaid assets 19,832 14,482 (Increase) Decrease in deferred rent receivable (10,303) 1,115 Payment of deferred leasing commissions (48,300) (69,509) Increase (Decrease) in due to current General Partner 539 (829) Increase in accounts 26,116 69,885 Increase in security deposits 18,000 7,000 (Decrease) in unearned rental income (111,172) (43,286) --------------- --------------- Net cash from operating activities 1,214,178 1,685,875 --------------- --------------- CASH FLOWS PROVIDED FROM INVESTING ACTIVITIES: Collection of Note receivable 39,250 39,250 Recoveries from former affiliates 2,263 4,172 --------------- --------------- Net cash provided from investing activities 41,513 43,422 --------------- --------------- CASH FLOWS (USED IN) FINANCING ACTIVITIES: Cash distributions to Limited Partners (1,345,000) (1,680,000) Cash distributions to current General Partner (3,917) (5,140) --------------- --------------- Net cash (used in) financing activities (1,348,917) (1,685,140) --------------- --------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (93,226) 44,157 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 818,606 752,060 --------------- --------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 725,380 $ 796,217 =============== ===============
The accompanying notes are an integral part of these statements 5 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP NOTES TO CONDENSED FINANCIAL STATEMENTS These unaudited interim financial statements should be read in conjunction with DiVall Insured Income Properties 2 Limited Partnership' (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 September 30, 2002, and the results of operations for the three and nine-month periods ended September 30, 2002 and 2001, and cash flows for the nine-month periods ended September 30, 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 September 30, 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. Depreciation of the properties and improvements is provided on a straight-line basis over 31.5 years, which is the estimated useful life of the buildings and improvements. Equipment is depreciated on a straight-line basis over the estimated useful lives of 5 to 7 years. 6 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 accounting principles generally accepted in the United States of America 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. See Note 3 for a discussion of the effect of adopting FAS 144. 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, therefore, continues 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 assets exceeded the amounts reported in the accompanying financial statements by approximately $7,859,000. 7 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 September 30, 2002, $5,808,000 of recoveries has been received which exceeded the original estimate of $3 million. As a result, since 1996, the Partnership has recognized $1,127,000 as income as recovery of amounts previously written-off in the statements of income, which represents its share of the excess recovery. No further significant recoveries are anticipated. 3. INVESTMENT PROPERTIES: 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. As of September 30, 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) Denny's restaurant, 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) Daytona's Bar and Grill restaurant, one (1) Hardee's restaurant, one (1) Miami Subs restaurant, one (1) Omega restaurant, one (1) Blockbuster Video store, one (1) Sunrise Preschool, one (1) Chinese restaurant, one (1) Village Inn restaurant and three (3) vacant properties, (which were previously operated as a Fiesta Time restaurant, and two (2) Hardee's restaurants.) The 26 properties are located in a total of thirteen (13) states. On January 1, 2002, the Partnership adopted FAS 144. This statement requires current and historical results from operations for disposed properties and assets classified as held for sale that occur subsequent to January 1, 2002 to be reclassified separately as discontinued operations. During the three and nine months ended 8 September 30, 2002, the Partnership recognized income from discontinued operations of $16,000 and $41,000, respectively. Results of discontinued operations for the three and nine months ended September 30, 2002, relate to the classification of the Hardee's- Hartford property as held for sale. The components of discontinued operations for the three-months and nine-months ended September 30, 2002 and 2001 are outlined below and include the results of operations for the Hardee's- Hartford property, as it was classified as property held for sale as of September 30, 2002.
Nine months Nine months Three months ended Three months ended ended ended September 30, September 30, September 30, September 30, 2002 2001 2002 2001 -------------------- -------------------- --------------- --------------- Revenues Rental Income $ 16,000 $ 16,000 $ 48,000 $ 48,000 Expenses Depreciation 0 3,644 6,074 10,933 Amortization 278 278 833 833 -------------------- -------------------- --------------- --------------- Income from Discontinued Operations $ 15,722 $ 12,078 $ 41,093 $ 36,234 ==================== ==================== =============== ===============
In October 2002 Management entered into a contract to sell the vacant Hardee's- South Milwaukee property at a sales price of $450,000. The South Milwaukee property closing date is anticipated to be in the First Quarter of 2003. In the Third Quarter of 2002 the net asset value of the South Milwaukee property was written-down by $98,000 to reflect the fair market value of the property at September 30, 2002 of approximately $450,000. During March 2001, Hardee's Food Systems, Inc. had notified Management of its intent to close its restaurant in South Milwaukee, Wisconsin. Hardee's lease on the South Milwaukee property expired on November 30, 2001 and they continued making rent payments until the lease expiration date. During the Second Quarter of 2002, Management entered a contract to sell the vacant Hardee's restaurant in Hartford at a sales price of $618,000. During December 2001, Hardee's Food Systems, Inc. had notified Management that it had vacated its restaurant in Hartford, Wisconsin. Hardee's lease on the Hartford property was set to expire on April 30, 2009 and they continued making rent payments until the closing date of October 2002. The net asset value of the property at September 30, 2002 was approximately $470,000, which includes $202,000 related to land and $268,000 related to buildings and equipment, and is included in property held for sale on the balance sheet. The gain on the sale of the property in October is anticipated to be approximately $143,000. The Partnership intends to pay TPG a sales commission in the Fourth Quarter of 2002 amounting to $18,500. No commissions are to be paid to unaffiliated brokers by the Partnership. 9 During the Second Quarter of 2002, Mountain Range Restaurants, the sub-lessee of the Denny's- N. 7th Street property in Phoenix, Arizona, notified Management that it would vacate the property at the end of May 2002. During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of Lessee, Phoenix Restaurant Group, Inc. ("Phoenix"), to reject the lease with the Partnership at the Phoenix, Arizona location. Following the rejection of this lease by Phoenix, the Mountain Range Restaurants declined the Partnership's offer to lease the property directly to them. Therefore, the property was vacated and rent ceased as of May 31, 2002. During August 2002, a ten (10) year lease was negotiated with new tenant, Jun Cheng Pan, at the vacant N. 7th Street property in Phoenix, Arizona. The new tenant took possession of the property in August 2002 and rent is scheduled to commence in January 2003. The restaurant is to be operated as a Chinese buffet. Commissions of $34,500 and $13,800 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 Third Quarter of 2002. Contrary to information in our last quarterly report, the Hardee's- Fond du Lac, Wisconsin restaurant has not been closed by Hardee's Food Systems, Inc. The property lease continues to be in good standing. During March 2001, Hardee's Food Systems, Inc. notified Management of its intent to close its restaurant in Milwaukee, Wisconsin. 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 payment schedule included four (4) equal installments of $39,250. The first payment was received in May 2001 upon the execution of the agreement, and the remaining balance represented a Note Receivable of $117,750. The first and second Note receivable installments were received in August and October 2001. The final installment, which is reflected as a Note receivable on the balance sheet at December 31, 2001, was received in January 2002. During May 2001, Management negotiated a re-lease of the vacant 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. 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 in the Fourth Quarter of 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, in Management's opinion, since Phoenix rejected the lease, its subtenant, Fiesta Time, is not entitled to possession of the property. Therefore, Management is in the process of evicting and obtaining possession of the property from Fiesta Time, after which Management intends to market the property for lease or sale. 10 During April 2001, the sub-tenant AMF Corporation ("AMF) notified Management of its intent to close and vacate its Mulberry Street Grill restaurant in Phoenix, Arizona. Although the lease on the property was not set to expire until 2007, monthly rental and Common Area Maintenance (CAM) income ceased as of June 1, 2001. The past due rent amount of $10,000 has been reserved. Management moved forward with all legal remedies to collect the balances due from AMF, however, Management learned in the Third Quarter of 2002 that AMF had filed for bankruptcy. Due to Management's return of 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 had withheld the May through December 2001 accrued ground lease obligations totaling approximately $50,000 related to the property. In the Second Quarter of 2001, the Ground Lease landlord filed suit against the Partnership and TPG (as General Partner) seeking possession of the property and damages for breach of the Ground Lease. In April 2002, an additional $43,000 was accrued as payable to the Ground Lease landlord, due to the Court's granting a summary judgment of $93,000 against the Partnership. The Partnership is appealing this judgment. In September 2002, the Partnership was required to escrow a $140,000 cash bond at the clerk of the court during the appeal process. (See Legal Proceedings in Part II. - Item 1 and 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. 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 September of 2002. In addition, in March 2002 and September 2002, the Partnership paid the properties' first and second installments of 2001 real estate taxes. Management has begun legal action in relation to the former tenant's past due balance of approximately $90,000, as well as future lease and other obligations. Management is also seeking a new tenant for the vacated property. The Partnership incurred expenditures of approximately $27,000 to replace the roof on the property in the Third Quarter of 2002. Other repairs may also be needed, however, specifics and amounts are not known as of the end of the Third Quarter. As of September 30, 2002 the Partnership owns one (1) restaurant, Kentucky Fried Chicken, which is located on a parcel of land where it has entered into a long-term ground lease. The tenant, Kentucky Fried Chicken, pays the lease obligations under the ground lease. 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 annual 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 annual reimbursement for office rent and overhead increased by 2.8%, representing the allowable annual Consumer Price Index adjustment per the PMA. Therefore, as of March 1, 2002 the current minimum monthly management fee is $16,640. 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 $55,553 to date on the amounts recovered, which includes 2002 fees of $90. The fees 11 received from the Partnership on the amounts recovered reduce the 4% minimum fee by that same amount. Two 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. 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 12 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 prior distributions of Net Cash Receipts and any prior distributions of Net Proceeds under this clause, except to the extent needed by the General Partner to pay its federal and state income tax on the income allocated to 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. 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. As of September 30, 2002 aggregate minimum lease payments to be received under the leases for the Partnership's properties are as follows: Year ending December 31, 2002 $ 1,986,098 2003 1,975,463 2004 2,006,311 2005 2,016,603 2006 1,940,133 Thereafter 12,872,756 -------------- $ 22,797,364 ============== The above aggregate minimum lease payments include rent applicable to the Village Inn property. The tenant is currently in default in relation to its January through September 2002 lease payments. Management has begun legal action to collect these past due payments, however, due to the uncertainty of collection these past due rents totaling approximately $72,000 have been 100% reserved. Village Inn is responsible for lease 13 payments until the lease expiration date of 2009, however, due to the uncertainty of collection future lease charges will continue to be reserved until a lease termination agreement is consummated. 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. 6. TRANSACTIONS WITH CURRENT GENERAL PARTNER AND ITS AFFILIATES: Amounts paid and or accrued to the current General Partner and its affiliates for the three and nine-month periods ended September 30, 2002 and 2001 are as follows.
Incurred for the Incurred for the Incurred for the Incurred for the three-month three-month nine-month nine-month period ended period ended period ended period ended September 30, September 30, September 30, September 30, Current General Partner 2002 2001 2002 2001 - ----------------------------------- ------------------ ------------------ ------------------ ------------------ Management fees $ 49,839 $ 48,561 $ 148,764 $ 144,452 Restoration fees 81 0 90 167 Overhead allowance 4,028 3,918 12,010 11,668 Reimbursement for out-of-pocket 2,766 3,039 6,468 7,835 expenses Leasing Commissions 13,800 0 13,800 8,644 Cash distribution 1,881 1,838 3,917 5,140 ------------------ ------------------ ------------------ ------------------ $ 72,395 $ 57,356 $ 185,049 $ 177,906 ================== ================== ================== ==================
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 General Partner does not expect any future refunds, as achieving the $6,000,000 recovery threshold appears remote. 14 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 September 30, 2002. Funds are invested in U.S. Treasury securities. In addition, $127,204 of earnings has been credited to the Trust as of September 30, 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 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 in Phoenix, Arizona occupied by the Mulberry Street Grill restaurant, which was located on a parcel of land leased to the Partnership pursuant to a long-term ground lease (the "Ground Lease.") The Ground 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. Although the sub-lease had not expired, since such notification the Partnership has received no rent from the former tenant and has returned possession of the Phoenix, Arizona property to the Ground Lease Landlord, Centre at 38th Street, L.L.C, ("Centre".) Beginning in May and through December 2001 the Partnership accrued but withheld payment of the ground lease obligations, and on March 31, 2002 and December 31, 2001 the total ground lease accrual approximated $50,000. On June 12, 2001 Centre leased the property to a new tenant. On June 18, 2001, Centre filed a lawsuit (the "Complaint") 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 Centre 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. 15 The Partnership and TPG filed an answer denying any liability to Centre. In addition, the Partnership has filed a third-party complaint against 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 pursuant to the Ground Lease. Currently AMF has filed for bankruptcy and therefore the Partnership has learned that AMF has been dissolved. Therefore, the third party complaint was dropped during the Third Quarter of 2002. On April 10, 2002 the Maricopa County Superior Court granted the motion for summary judgment against the Partnership and TPG. The Court entered a final judgment (the "Judgment") on May 22, 2002, awarding approximately $93,000 in damages to Centre. As of December 31, 2001the Partnership had accrued $50,000 in ground lease obligations payable to Centre and the remaining summary Judgment balance of $43,000 was accrued in April 2002. On June 20, 2002 the Partnership and TPG filed a Notice of Appeal with respect to such judgment. In order to prevent Centre from enforcing the Judgment while the appeal is pending, in August 2002 the Partnership deposited a $140,000 cashier's check with the Clerk of the Maricopa County Superior Court to serve as a bond. By law, the amount of the bond must be sufficient to cover the amount of the judgment, plus interest, and any additional costs that may be incurred during the appeal. As of September 30, 2002 the Partnership was waiting for the Court of Appeals to set a court date for the appeal. 11. SUBSEQUENT EVENTS: The Hardee's- Hartford property was sold at a sale price of $618,000 on October 1, 2002. The gain on sale of the property was $143,000. A sales commission of $18,500 was paid to an affiliate of the General Partner upon the sale in October 2002. In October 2002 Management entered a contract to sell the vacant Hardee's- South Milwaukee property at a sales price of $450,000. The South Milwaukee property closing date is anticipated to be in the First Quarter of 2003. In the Third Quarter of 2002 the net asset value of the South Milwaukee property was written-down by $98,000 to reflect the fair market value of the property at September 30, 2002 of approximately $450,000. The lease on the property in Des Moines, Iowa is set to expire on December 31, 2002. In October 2002 Hickory Park, Inc. informed Management that they would not be renewing the property lease. Management has begun marketing the property for sale. On November 15, 2002, the Partnership intends to make distributions to the Limited Partners for the Third Quarter of 2002 of $365,000 amounting to approximately $7.89 per limited partnership interest. 12. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS Subsequent to the filing of the Partnership's condensed financial statements on Form 10-Q for the three and nine-month periods ended September 30, 2002, the Partnership's management determined that the financial 16 statements did not properly present discontinued operations under Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), and the appropriate market value for the South Milwaukee property. In addition, the vacant South Milwaukee property was written-down an additional $43,000 to reflect the fair market value of the property at September 30, 2002. As a result, the Partnership's condensed financial statements for the three and nine-month periods ended September 30, 2002 and 2001 have been restated from amounts previously reported to properly reflect discontinued operations as required by FAS 144 and the appropriate market value for the South Milwaukee property. The following is a summary of the impact of the restatements to the condensed financial statements.
As Previously Reported As Restated For September 30, 2002 September 30, 2002 ---------------------- ---------------------- Net Investment Properties and Equipment $ 12,899,646 $ 12,856,646 Total Assets $ 15,410,887 $ 15,367,887 Partners' Capital $ 15,075,962 $ 15,032,962
As Previously As Previously Reported For the As Restated For the Reported For the As Restated For the Three Month Three Month Nine Month Nine Month Period Ended Period Ended Period Ended Period Ended September 30, 2002 September 30, 2002 September 30, 2002 September 30, 2002 -------------------- -------------------- -------------------- -------------------- Property Write-down $ 55,000 $ 98,000 $ 55,000 $ 98,000 Depreciation $ 80,591 $ 80,591 $ 247,847 $ 241,773 Amortization $ 3,304 $ 3,026 $ 9,911 $ 9,078 Expenses incurred due to default by lessee $ 39,585 $ 9,481 $ 45,529 $ 10,565 Maintenance $ 0 $ 30,104 $ 0 $ 34,964 Income from Continuing Operations $ 399,373 $ 356,651 $ 876,387 $ 840,294 Income from Discontinued Operations $ 16,000 $ 15,722 $ 48,000 $ 41,093 Net Income $ 415,373 $ 372,373 $ 924,387 $ 881,387 Net Income per Limited Partnership Interest $ 8.88 $ 7.97 $ 19.77 $ 18.85
As Previously As Previously Reported For the As Restated For the Reported For the As Restated For the Three Month Three Month Nine Month Nine Month Period Ended Period Ended Period Ended Period Ended September 30, 2001 September 30, 2001 September 30, 2001 September 30, 2001 -------------------- -------------------- -------------------- -------------------- Depreciation $ 86,100 $ 82,456 $ 258,300 $ 247,367 Amortization $ 28,272 $ 27,994 $ 43,354 $ 42,521 Expenses incurred due to default by lessee $ 8,208 $ 0 $ 9,413 $ 0 Maintenance $ 0 $ 8,208 $ 0 $ 9,413
17 Income from Continuing Operations $ 443,624 $ 447,546 $ 1,237,142 $ 1,248,908 Income from Discontinued Operations $ 16,000 $ 12,078 $ 48,000 $ 36,234 Net Income $ 459,624 $ 459,624 $ 1,285,142 $ 1,285,142 Net Income per Limited Partnership Interest $ 9.83 $ 9.83 $ 27.49 $ 27.49
The Partnership also determined that it had incorrectly reported the aggregate minimum lease payments to be received under the leases. The aggregate lease amounts were originally reported as $23,312,890 and have been restated to $22,797,364. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As discussed in Note 12, the Partnership has restated its condensed financial statements for the three and nine- month periods ended September 30, 2002 and 2001. This management's discussion and analysis gives effect to this restatement. LIQUIDITY AND CAPITAL RESOURCES: INVESTMENT PROPERTIES The investment properties, including equipment held by the Partnership at September 30, 2002, were originally purchased at a price, including acquisition costs, of approximately $22,261,000. On January 1, 2002, the Partnership adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement requires current and historical results from operations for disposed properties and assets classified as held for sale that occur subsequent to January 1, 2002 to be reclassified separately as discontinued operations. During the three and nine months ended September 30, 2002, the Partnership recognized income from discontinued operations of $16,000 and $41,000, respectively. Results of discontinued operations for the three and nine months ended September 30, 2002, relate to the classification of the Hardee's- Hartford property as held for sale. In October 2002 Management entered a contract to sell the vacant Hardee's- South Milwaukee property at a sales price of $450,000. The South Milwaukee property closing date is anticipated to be in the First Quarter of 2003. In the Third Quarter of 2002 the net asset value of the South Milwaukee property was written-down by $98,000 to reflect the fair market value of the property at September 30, 2002 of approximately $450,000. During March 2001, Hardee's Food Systems, Inc. notified Management of its intent to close its restaurant in South Milwaukee, Wisconsin. Hardee's lease on the South Milwaukee property expired on November 30, 2001 and they continued making rent payments until the lease expiration date. During the Second Quarter of 2002, Management entered into a contract to sell the vacant Hardee's restaurant in Hartford at a sales price of $618,000. The Hartford property closing date was October 2002. The net asset 18 value of the property at September 30, 2002 was approximately $470,000, which includes $202,000 related to land and $268,000 related to buildings and equipment, and is included in property held for sale on the balance sheet. The gain on the sale of the property in October is anticipated to be approximately $143,000. The Partnership intends to pay TPG a sales commission in the Fourth Quarter of 2002 amounting to $18,500. No commissions are to be paid to unaffiliated brokers by the Partnership. During the Second Quarter of 2002, Mountain Range Restaurants, the sub-lessee of the Denny's- N. 7th Street property in Phoenix, Arizona, notified Management that it would vacate the property at the end of May 2002. During the Fourth Quarter of 2001, the Bankruptcy court granted the motion of Lessee, Phoenix Restaurant Group, Inc. ("Phoenix"), to reject the lease with the Partnership at the Phoenix, Arizona location. Following the rejection of this lease by Phoenix, the Mountain Range Restaurants declined the Partnership's offer to lease the property directly to them. Therefore, the property was vacated and rent ceased as of May 31, 2002. During August 2002, a ten (10) year lease was negotiated with new tenant, Jun Cheng Pan, at the vacant N. 7th Street property in Phoenix, Arizona. The new tenant took possession of the property in August 2002 and rent is scheduled to commence in January 2003. The restaurant is to be operated as a Chinese buffet. Commissions of $34,500 and $13,800 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 Third Quarter of 2002. Contrary to information in our last quarterly report, the Hardee's- Fond du Lac, Wisconsin restaurant has not been closed by Hardee's Food Systems, Inc. The property lease continues to be in good standing. During March 2001, Hardee's Food Systems, Inc. had notified Management of its intent to close its restaurant in Milwaukee, Wisconsin. 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 payment schedule included four (4) equal installments of $39,250. The first payment was received in May 2001 upon the execution of the agreement, and the remaining balance represented a Note receivable of $117,750. The first and second Note receivable installments were received in August and October 2001. The final installment, which is reflected as a Note receivable on the balance sheet at December 31, 2001, was received in January 2002. During May 2001, Management negotiated a re-lease of the vacant 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. 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 19 lease was rejected and rent income ceased in the Fourth Quarter of 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, in Management's opinion, since Phoenix rejected the lease, its subtenant, Fiesta Time, is not entitled to possession of the property. Therefore, Management is in the process of evicting and obtaining possession of the property from Fiesta Time, after which Management intends to market the property for lease or sale. During April 2001, the sub-tenant AMF Corporation ("AMF) notified Management of its intent to close and vacate its Mulberry Street Grill restaurant in Phoenix, Arizona. Although the lease on the property was not set to expire until 2007, monthly rental and Common Area Maintenance (CAM) income ceased as of June 1, 2001. The past due rent amount of $10,000 has been reserved. Management moved forward with all legal remedies to collect the balances due from AMF, however, Management learned in the Third Quarter of 2002 that AMF had filed for bankruptcy. Due to Management's return of 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 had withheld the May through December 2001 accrued ground lease obligations totaling approximately $50,000 related to the property. In the Second Quarter of 2001, the Ground Lease landlord filed suit against the Partnership and TPG (as General Partner) seeking possession of the property and damages for breach of the Ground Lease. In April 2002, an additional $43,000 was accrued as payable to the Ground Lease landlord, due to the Court's granting a summary judgment of $93,000 against the Partnership. The Partnership is appealing this judgment. In September 2002, the Partnership was required to escrow a $140,000 cash bond at the clerk of the court during the appeal process. (See Legal Proceedings in Part II. - Item 1 and 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. 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 September of 2002. In addition, in March 2002 and September 2002, the Partnership paid the properties' first and second installments of 2001 real estate taxes. Management has begun legal action in relation to the former tenant's past due balance of approximately $90,000, as well as future lease and other obligations. Management is also seeking a new tenant for the vacated property. The Partnership incurred expenditures of approximately $27,000 to replace the roof on the property in the Third Quarter of 2002. Other repairs may also be needed, however, specifics and amounts are not known as of the end of the Third Quarter. OTHER ASSETS Property held for sale amounted to $470,000 as of September 30, 2002 and related to the classification of the Hardee's- Hartford property as held for sale. The Hartford property closing date was scheduled for early October 2002. On January 1, 2002, the Partnership adopted FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement requires current and historical results from operations for disposed properties and assets classified as held for sale that occur subsequent to January 1, 2002 to be reclassified separately as discontinued operations. 20 Cash and cash equivalents were approximately $725,000 at September 30, 2002, compared to $818,606 at December 31, 2001. Cash of $365,000 is anticipated to be used to fund the Third Quarter 2002 distributions to Limited Partners, $306,000 for the payment of accounts payable, accrued expenses, and future distributions. The remainder represents amounts 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 condensed financial statements. Deposit- Clerk of the Court amounted to $140,000 at September 30, 2002. In September 2002, the Partnership was required to escrow a $140,000 cash bond at the clerk of the court during the appeal process related to the Phoenix, Arizona property. (See Legal Proceedings in Part II. - Item 1 and Note 10.) Rents and other receivables amounted to $341,000 (net of allowance of $141,000) as of September 30, 2002. Village Inn is currently in default in relation to its January through September 2002 lease payments. Management has begun legal action to collect these past due payments, however, due to the uncertainty of collection these past due rents totaling approximately $72,000 have been 100% reserved. Village Inn is responsible for lease payments until the lease expiration date of 2009, however, due to the uncertainty of collection future lease charges will continue to be reserved until a lease termination agreement is consummated. In addition, Management has charged Village Inn late fees totaling $3,000 in relation to the past balance due. The late fee charges have been 100% reserved as Management is uncertain of collection. The tenant Popeye's- Park Forest is delinquent on its January 2002 percentage rent billing for 2001. Management intends to pursue legal remedies in relation to the collection of the tenant's percentage rent past due balance of approximately $72,000. In addition, Management has charged Popeye's late fees totaling $11,000 in relation to the percentage rent balance due. The late fee charges have been 100% reserved as Management is uncertain of collection of these fees. 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 September 30, 2002, in the amount of $15,500 represented 2001 property taxes paid by the Partnership, which are due from the tenant of 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 tenant of the Hardee's- S. Milwaukee property and new tenant, Omega Restaurants and 2000 property taxes due from the tenant of the Village Inn property. 21 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 payment schedule included four (4) equal installments of $39,250. The first payment was received in May 2001 upon the execution of the agreement, and the remaining balance represented a Note receivable of $117,750. The first and second Note receivable installments were received in August and October 2001. The final installment, which is reflected as a Note receivable on the balance sheet at December 31, 2001, was received in January 2002. Deferred charges totaled approximately $324,000 and $286,000, net of amortization, at September 30, 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 Third Quarter of 2002, commissions of $34,500 and $13,800 were paid to an unaffiliated leasing agent and to an affiliate of the General Partner, respectively, upon the execution of the new Chinese Buffet 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 September 30, 2002, in the amount of $144,00, primarily represents the accrual of auditing, tax, legal and data processing fees, and the summary judgment related to the former Mulberry street Grill property. Due to the Current General Partner amounted to $2,334 at September 30, 2002, of which $1,881 represents the General Partner's Third Quarter 2002 distribution. 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 condensed 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 condensed financial statements for additional information regarding the reallocation. Cash distributions paid to the Limited Partners and to the General Partner during 2002 of $1,345,000 and $3,917, respectively, have also been in accordance with the amended Partnership Agreement. The Third Quarter 2002 Limited Partner distribution of $365,000 is scheduled for November 15, 2002. 22 RESULTS OF OPERATIONS: The Partnership reported income from continuing operations for the quarter ended September 30, 2002, in the amount of $357,000 compared to income from continuing operations for the quarter ended September 30, 2001, of $448,000. For the nine-months ended September 30, 2002 and 2001, income from continuing operations totaled $840,000 and $1,249,000, respectively. The decrease in income from continuing operations in 2002 is due primarily to decreased rental income, relating to the expired lease of the Hardee's- S. Milwaukee property in the Fourth Quarter of 2001, the bankruptcy rejections of the Denny's- Twin Falls and N. 7th Street leases and the non-cash disposal of the former Mulberry Street Grill Restaurant in the Fourth Quarter of 2001. The decrease in income from continuing operations in 2002 is also due to the property write-down related to the vacant S. Milwaukee property in the Third Quarter of 2002, the summary judgment related to the former Mulberry Street Grill property in the Second Quarter of 2002, the write-off of non-collectible receivables, increased tenant default expenditures, and increased legal expenditures due to tenant defaults, eviction proceedings at the Twin Falls property, court proceedings related to the former Mulberry Street Grill property. In addition, the Partnership received a lease termination fee of $157,000 in the Second Quarter of 2001 due to the termination of the Hardee's- Milwaukee lease, which is a non-recurring item. DISCONTINUED OPERATIONS: Income from discontinued operations was $16,000 and $12,000, respectively, for the quarters ended September 30, 2002 and 2001. For the nine-months ended September 30, 2002 and 2001 income from discontinued operations totaled $41,000 and $36,000, respectively. In accordance with FAS 144, discontinued operations represent the operations of properties disposed of or classified as held for sale subsequent to January 1, 2002 as well as any gain or loss recognized in their disposition. One property, Hardee's- Hartford, was classified as held for sale as of September 30, 2002, therefore, the operating results of this property are reflected as income from discontinued operations for the three and nine month periods ended September 30, 2002 and 2001. REVENUES Total operating revenues were $735,000 and $708,000, for the quarters ended September 30, 2002 and 2001, respectively, and were $1,754,000 and $2,030,000, for the nine-months ended September 30, 2002 and 2001, respectively The decrease in revenues 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, the bankruptcy rejections of the Denny's- Twin Falls lease and N. 7th Street leases, and the non-cash disposal of the former Mulberry Street Grill Restaurant in the Fourth Quarter of 2001. In addition, the Partnership received a lease termination fee of $157,000 in the Second Quarter of 2001 due to the termination of the Hardee's- Milwaukee lease, which is a non-recurring item. As of September 30, 2002 total revenues should approximate $1,975,000, 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. Village Inn is currently in default in relation to its January through September 2002 lease payments. Management has begun legal action to collect these past due payments, however, due to the uncertainty of 23 collection these past due rents totaling approximately $72,000 have been 100% reserved. Village Inn is responsible for lease payments until the lease expiration date of 2009, however, due to the uncertainty of collection future lease charges will continue to be reserved until a lease termination agreement is consummated. EXPENSES For the quarters ended September 30, 2002 and 2001, operating cash expenses (which do not include non-cash items such as depreciation, amortization, property write-downs, and write of non-collectible receivables) amounted to approximately 23% and 20%, of total revenues, respectively. For the nine-months ended September 30, 2002 and 2001, operating cash expenses totaled 27% and 23%, respectively. Total operating expenses, including non-cash items, amounted to approximately 51% and 37%, of total revenues for the quarters ended September 30, 2002 and 2001, respectively, and totaled 52% and 38% for the nine-months ended September 30, 2002 and 2001, respectively. The increase in expenditures in 2002 is due to the Third Quarter 2002 property write-down of the vacant Hardee's- S. Milwaukee property, the Second Quarter 2002 summary judgment accrual related to the former Mulberry Street Grill property, the write-off of non-collectible receivables, increased tenant default expenditures, increased legal expenditures due to tenant defaults, eviction proceedings at the Twin Falls property, and court proceedings related to the former Mulberry Street Grill property. Total expenditures in 2001 included non-recurring appraisals, which were performed in the First Quarter of 2001 on all the Partnership properties, and ground lease obligations relating to the former Mulberry Street Grill Restaurant. INFLATION: Inflation has a minimal effect on operating earnings and related cash flows from a portfolio of triple net leases. By their nature, such leases actually fix revenues and are not impacted by rising costs of maintenance, insurance, or real estate taxes. If inflation causes operating margins to deteriorate for lessees and 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. The 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 and the result was that assets disposed of or deemed to be classified as held for sale required the reclassification of current and previous years' operations to be discontinued operations. 24 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 The Partnership is not subject to market risk. 25 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Partnership owned the building in Phoenix, Arizona occupied by the Mulberry Street Grill restaurant, which was located on a parcel of land leased to the Partnership pursuant to a long-term ground lease (the "Ground Lease.") The Ground 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. Although the sub-lease had not expired, since such notification the Partnership has received no rent from the former tenant and has returned possession of the Phoenix, Arizona property to the Ground Lease Landlord, Centre at 38th Street, L.L.C, ("Centre".) Beginning in May and through December 2001 the Partnership accrued but withheld payment of the ground lease obligations, and on March 31, 2002 and December 31, 2001 the total ground lease accrual approximated $50,000. On June 12, 2001 Centre leased the property to a new tenant. On June 18, 2001, Centre filed a lawsuit (the "Complaint") 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 Centre 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 Centre. In addition, the Partnership has filed a third-party complaint against 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 pursuant to the Ground Lease. Currently AMF has filed for bankruptcy and therefore the Partnership has learned that AMF has been dissolved. Therefore the third party complaint was dropped during the Third Quarter of 2002. On April 10, 2002 the Maricopa County Superior Court granted the motion for summary judgment against the Partnership and TPG. The Court entered a final judgment (the "Judgment") on May 22, 2002, awarding approximately $93,000 in damages to Centre. As of December 31, 2001 the Partnership had accrued $50,000 in ground lease obligations payable to Centre and the remaining summary Judgment balance of $43,000 was accrued in April 2002. On June 20, 2002 the Partnership and TPG filed a Notice of Appeal with respect to such judgment. In order to prevent Centre from enforcing the Judgment while the appeal is pending, in August 2002 the Partnership deposited a $140,000 cashier's check with the Clerk of the Maricopa County Superior Court to serve as a bond. By law, the amount of the bond must be sufficient to cover the amount of the judgment, plus interest, and any additional costs that may be incurred during the appeal. As of September 30, 2002 the Partnership was waiting for the Court of Appeals to set a court date for the appeal. ITEMS 2 - 3. Not Applicable. 26 ITEM 4. CONTROLS AND PROCEDURES Within the 90-day period prior to the filing of this report, the Partnership carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO")/Financial Officer ("CFO"), of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures. Based on that evaluation, the CEO/CFO has concluded that the Partnership's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Partnership in the reports it files under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the securities and Exchange Commission rules and forms. There have been no significant changes in the Partnership's internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation referred to above. ITEM 5. OTHER INFORMATION Registrant's interim financial statements in this Form 10-Q/A have been revised from the Form 10-Q filed for the quarterly period ended September 30, 2002 on November 13, 2002. The Partnership adopted FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement requires current and historical results from operations for disposed properties and assets classified as held for sale that occur subsequent to January 1, 2002 to be reclassified separately as discontinued operations. Therefore, during the three months and nine months ended September 30, 2002, the Partnership recognized income from discontinued operations of $15,722 and $41,093, respectively. The original 10-Q stated income from discontinued operations of $16,000 and $48,000, respectively for the three and nine month periods ended September 30, 2002. Results of discontinued operations for the three months and nine month periods ended September 30, 2002, relate to the classification of the vacant Colorado Springs property as held for sale at its net value. Income from continuing operations for the three and nine month periods ended September 30, 2002 was reduced by $43,000 due to an increased property write-down in the Third Quarter of 2002 relating to the vacant South Milwaukee property. In Note 5 to the Notes to the condensed financial statements, the aggregate minimum lease payments to be received under the leases for the Partnership's properties as of September 30, 2002 decreased by approximately $515,000 to correct for an error in the amounts previously disclosed. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND FORM 8-K/A (a) Listing of Exhibits: 99.0 Correspondence to the Limited Partners dated November 15, 2002, regarding the Third Quarter 2002 distribution. 27 99.1 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350 99.2 302 Certifications (b) Reports on Form 8-K: The Registrant filed Form 8-K on August 14, 2002. The Registrant filed Form 8-K/A on August 27, 2002. 28 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 15, 2003 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 15, 2003 By: /s/ Bruce A. Provo --------------------- Bruce A. Provo, Chief Executive Officer and Chief Financial Officer Date: May 15, 2003 29 EX-99.0 3 dex990.txt CORRESPONDENCE TO THE LIMITED PARTNERS DATED NOVEMBER 15, 2002 Exhibit 99.0 DiVall Insured Income Properties 2, L.P. QUARTERLY NEWS A publication of The Provo Group, Inc. THIRD QUARTER 2002 $12.67 Per Unit Return Of Capital To Be Paid February 15, 2003 We sold the Hardee's (Hartford, Wisconsin) property on October 1, 2002. This was one day too late to include in the November 15, 2002 distribution based on operating cash flow through September 30, 2002. Therefore, this "return of capital" distribution will be included with the fourth quarter 2002 operating distribution payable February 15, 2003. Distribution Highlights .. $365,000 total amount distributed for the Third Quarter 2002 which is $150,000 lower than originally projected. (See Reconciliation of "Budgeted" distribution to "Actual", Page 2). .. $7.89 per unit (approx.) for the Third Quarter 2002. .. The Third Quarter distribution represents an approximate 6.4% annualized return from operations based on $22,680,000 (estimated net asset value as of 12/31/01). .. $1,125 to $927 range of distributions per unit from the first unit sold to the 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). See Inside Letter to the Investors from Bruce Provo ................................. 2 Reconciliation of "Budgeted" Distribution to "Actual" .................... 2 Property Highlights New Leases & Sales ..................................................... 3 Litigation Issues ...................................................... 3 Leasing & Other Miscellaneous Issues ................................... 4 Questions & Answers ...................................................... 4
Page 2 DiVall 2 2 Q 02 October 24, 2001 Dear Limited Partner: Although there continues to be uncertainty in today's economy, we are noticing a strengthening of sales particularly in our portfolio's primary franchise component, Wendy's. As discussed later in this Newsletter, we are working through a few difficult tenant or property situations. Pursuant to recent discussions with your Advisory Board, we will aggressively market properties with occupancy issues most significantly impacted by either demographics or location. We would like to take advantage of this low interest rate environment to eliminate the two or three less stable properties from our portfolio and return the capital to the limited partners as quickly as possible. If successful, we will have a remaining portfolio more marketable because of its efficiency and lower risk. This equates to higher value. Sincerely, /s/ Bruce A. Provo Bruce A. Provo Reconciliation Of "Budgeted" Distribution To "Actual" Budgeted Distribution............................................................. $515,000 Less Reconciling items: Leasing Commission (N. 7/th/ Street Property).................................. (48,000) *Mulberry Street Grill Litigation Issues....................................... (47,000) Increased Legal Expenditures................................................... (15,000) Vacant Property Expenses (Utilities, Roof Repairs, Maintenance)................ (38,000) Other Miscellaneous Items...................................................... (2,000) -------- Actual 3/rd/ Quarter Distribution................................................. $365,000 ========
*Note: The plaintiff's claim in this case has been fully funded with the court and should have no further adverse cash impact on the Partnership. Page 3 DiVall 2 3 Q 02 Property Highlights New Leases & Sales .. Former Hardee's (S. Milwaukee, WI). We have an executed contract with QSRE, L.L.C. (operator of Pizza Hut, Taco Bell and KFC) for a purchase price of $445,000. This property has been vacant since last November. We hope to close on this sale on January 2003 and distribute the net proceeds in the May 15, 2003 distribution. .. Former Denny's (N. 7/th/ Street, Phoenix, AZ). We have a new tenant. The property will be operated as a Chinese Buffet. The tenant has paid an $18,000 security deposit. It is a ten year lease and rents will commence January 2003. Rents during the first five years will be $66,000 and the final five years $72,000 with percentage rents of 7% over sales of $942,857. Litigation Issues .. Mulberry Street Grill (Phoenix, AZ). To refresh your memory, our tenant, Mulberry Street Grill, vacated the property and filed bankruptcy. We returned the property to the Ground Lessor, who re-leased the property but sued us for related leasing costs and ground rent. We filed our appeal with the courts on September 11, 2002. The Partnership is required to escrow $140,000 at the clerk of court during this appeal process. Management and counsel for the Partnership continue to believe the merits of our case are strong. .. Village Inn (Grand Forks, ND). This tenant vacated the property and ceased paying rent, although the Lease does not expire until November 2009. This case has not yet been set for trial. The facts in this case cannot be disputed. The defendant clearly defaulted on the terms of the Lease when they vacated the premises and ceased paying rent prior to the expiration date of the Lease. .. Denny's/Fiesta Time (Twin Falls, ID). Phoenix Foods, Inc. filed bankruptcy and rejected this Lease. The Bankruptcy court approved that rejection on 11/6/02. (Thus, the Lease and any subsequent subleases were effectively terminated). Phoenix Food's subtenant, Fiesta Time has not only refused to vacate the premises, they have never paid us rent. Unfortunately, we have been unable to evict this tenant (they appealed the court's decision). However, they are required to hold monthly rent in escrow with the clerk of court until this matter is resolved. .. Popeye's (Park Forest, Illinois) was delinquent at September 30, 2002 in the amount of $82, 887. We have defaulted the tenant and the case was scheduled for October 10, 2002. However, the tenant's attorney contacted us in an effort to settle this matter outside of the courts. We offered this tenant the ability to pay the past due percentage rent ($72,075 plus late fees) in installments. (This is something we offered before attorneys were involved, however the tenant continued to insist that we "forgive" the charge). Page 4 DiVall 2 3 Q 02 Leasing & Other Miscellaneous Issues .. Hostetler's (Des Moines, Iowa). This lease expires December 31, 2002. We have already hired a local broker who feels the property is in a favorable location and that it has great potential for other uses besides a restaurant. We are listing it for sale. .. KFC (Santa Fe, NM) was delinquent at September 30, 2002 in the amount of $15,430. The amount was for percentage rents and has since been paid in full. Leasing & Other Miscellaneous Issues Continued .. Miami Subs (Palm Beach, FL) was delinquent at September 30, 2002 in the amount of $10,582. We have been in contact with the corporate office. They have found a new operator for the store and we have negotiated a new lease with more favorable terms to us. Additionally, the new owner will sign a personal guarantee. Finally, prior to the execution of the new Lease, the past due balance will be paid in full. Questions & Answers .. When can I expect my next distribution mailing? Your distribution correspondence for the Fourth Quarter of 2002 is scheduled to be mailed on February 15, 2003. .. When can I expect to receive my Schedule K-1? The K-1's will be mailed on or before February 28, 2003. .. When will the December 31, 2002 net asset value be calculated? The revised net asset valuation will be ready sometime in mid-February 2003. The net asset valuation letters will be mailed on February 28, 2003. .. When will we "vote" again to either liquidate or continue the Partnership? The last proxy statement was sent in May 2001. In that mailing we advised investors that we would send out a proxy every other year (in May). Therefore, as promised a revised proxy will be sent out sometime in May 2003. .. If I have questions or comments, how can I reach your office? MAIL: Investor Relations, 101 W. 11/th/ Street, Suite 1110 Kansas City, MO 64105 PHONE: 800-547-7686 OR (816) 421-7444 EXTENSION 224 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 SEPTEMBER 30, 2002 - --------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE ---------------------------------------------------- 3RD 3RD QUARTER QUARTER BETTER OPERATING REVENUES 09/30/2002 09/30/2002 (WORSE) ----------- ----------- ----------- Rental income $ 708,922 $ 744,654 $ 35,732 Interest income 9,000 4,404 (4,596) Other income 0 2,199 2,199 ----------- ----------- ----------- TOTAL OPERATING REVENUES $ 717,922 $ 751,256 $ 33,334 ----------- ----------- ----------- OPERATING EXPENSES Insurance $ 6,612 $ 6,611 $ 2 Management fees 49,533 49,839 (306) Overhead allowance 3,996 4,028 (32) Advisory Board 2,189 1,688 502 Administrative 16,067 14,090 1,977 Professional services 11,751 15,399 (3,648) Auditing 14,350 13,250 1,100 Legal 6,000 21,113 (15,113) Defaulted tenants 2,100 39,585 (37,485) ----------- ----------- ----------- TOTAL OPERATING EXPENSES $ 112,598 $ 165,601 ($53,003) ----------- ----------- ----------- INVESTIGATION AND RESTORATION EXPENSES $ 0 $ 81 ($81) ----------- ----------- ----------- NON-OPERATING EXPENSES Uncollectible Receivable $ 0 $ 31,306 ($31,306) Depreciation 86,100 80,591 5,509 Amortization 3,563 3,304 259 Judgement Expense 0 0 0 ----------- ----------- ----------- TOTAL NON-OPERATING EXPENSES $ 89,663 $ 115,201 ($25,538) ----------- ----------- ----------- TOTAL EXPENSES $ 202,261 $ 280,883 ($78,622) ----------- ----------- ----------- NET INCOME $ 515,661 $ 470,373 ($45,288) OPERATING CASH RECONCILIATION: VARIANCE ----------- Depreciation and amortization 89,663 83,895 (5,768) Recovery of amounts previously written off 0 (2,031) (2,031) (Increase) Decrease in current assets (210,499) (280,133) (69,634) Increase (Decrease) in current liabilities 13,602 (60,292) (73,894) (Increase) Decrease in cash reserved for payables (15,665) 58,410 74,075 Current cash flows advanced from (reserved for) future distributions 126,400 126,400 0 ----------- ----------- ----------- Net Cash Provided From Operating Activities $ 519,163 $ 396,620 ($122,540) ----------- ----------- ----------- CASH FLOWS (USED IN) FROM INVESTING AND FINANCING ACTIVITIES Indemnification Trust (Interest earnings reinvested) (4,500) (1,758) 2,742 Leasing Commissions paid 0 (48,300) (48,300) Security Deposits received 0 18,000 18,000 Recovery of amounts previously written off 0 2,031 2,031 ----------- ----------- ----------- Net Cash (Used In) From Investing And Financing Activities ($4,500) ($30,027) ($25,527) ----------- ----------- ----------- Total Cash Flow For Quarter $ 514,663 $ 366,594 ($148,066) Cash Balance Beginning of Period 1,083,231 903,596 (179,635) Less 2nd quarter distributions paid 8/02 (515,000) (360,000) 155,000 Change in cash reserved for payables or future distributions (110,735) (184,810) (74,075) ----------- ----------- ----------- Cash Balance End of Period $ 972,159 $ 725,380 ($246,776) Cash reserved for 3rd quarter L.P. distributions (515,000) (365,000) 150,000 Cash reserved for payment of accrued expenses (202,726) (115,046) 87,680 Cash advanced from (reserved for) future distributions (191,450) (191,450) 0 ----------- ----------- ----------- Unrestricted Cash Balance End of Period $ 62,984 $ 53,884 ($9,096) =========== =========== =========== - ----------------------------------------------------------------------------------------------------------------------------------- PROJECTED ACTUAL VARIANCE ---------------------------------------------------- * Quarterly Distribution $ 515,000 $ 365,000 ($150,000) Mailing Date 11/15/2002 (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)
- -------------------------------------------------------- CONCEPT LOCATION - -------------------------------------------------------- APPLEBEE'S COLUMBUS, OH BLOCKBUSTER OGDEN, UT DENNY'S PHOENIX, AZ FORMER DENNY'S (7) PHOENIX, AZ CHINESE RESTAURANT (10) PHOENIX, AZ VACANT TWIN FALLS, ID VACANT (11) S MILWAUKEE, WI HARDEE'S (3) (9) HARTFORD, WI HARDEE'S (3) (6) FOND DU LAC, WI HOOTER'S R. HILLS, TX HOSTETTLER'S DES MOINES, IA KFC SANTA FE, NM MIAMI SUBS (8) PALM BEACH, FL - -------------------------------------------------------- - ----------------------------------------------------- REAL ESTATE - ----------------------------------------------------- ANNUAL BASE % COST RENT YIELD - ----------------------------------------------------- 1,059,465 135,780 12.82% 646,425 99,000 15.32% 972,726 65,000 6.68% 865,900 37,500 4.33% 865,900 0 0.00% 699,032 0 0.00% 808,032 0 0.00% 686,563 48,000 6.99% 849,767 88,000 10.36% 1,246,719 95,000 7.62% 845,000 60,000 7.10% 451,230 60,000 13.30% 743,625 56,000 7.53% - ----------------------------------------------------- - -------------------------------------------------------------------------------- EQUIPMENT - -------------------------------------------------------------------------------- LEASE ANNUAL EXPIRATION LEASE % DATE COST RECEIPTS RETURN - -------------------------------------------------------------------------------- 84,500 0 0.00% 183,239 0 0.00% 221,237 0 0.00% 221,237 0.00% 190,000 0 0.00% (2) 290,469 0 0.00% 52,813 0 0.00% - -------------------------------------------------------------------------------- - -------------------------------------------- TOTALS - -------------------------------------------- ANNUAL COST RECEIPTS RETURN - -------------------------------------------- 1,143,965 135,780 11.87% 646,425 99,000 15.32% 1,155,965 65,000 5.62% 1,087,137 37,500 3.45% 1,087,137 0 0.00% 889,032 0 0.00% 808,032 0 0.00% 686,563 48,000 6.99% 1,140,236 88,000 7.72% 1,246,719 95,000 7.62% 897,813 60,000 6.68% 451,230 60,000 13.30% 743,625 56,000 7.53% - --------------------------------------------
Note 1: This property summary includes only property and equipment held by the Partnership during 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 is executed. 6: Management received notice that Hardee's Food Systems closed this restaurant in April 2002. Hardee's will remain liable until a lease termination agreement 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 chose not to continue to lease the property. Rent charges ceased as of May 31, 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: The property was sold in early October 2002 at a sale price of $618,000. 10: A new lease has been accepted at the vacant N. 7th property. The new tenant obtained possession of the property in August 2002 and monthly rent of $5,500 begins in January 2003. Page 1 of 2 PROJECTIONS FOR DISCUSSION PURPOSES DIVALL INSURED INCOME PROPERTIES 2 LP 2002 PROPERTY SUMMARY AND RELATED RECEIPTS PORTFOLIO (Note 1)
- -------------------------------------------------------------------------------- CONCEPT LOCATION - -------------------------------------------------------------------------------- OMEGA RESTAURANT (4) MILWAUKEE, WI " " " " " " " " POPEYE'S PARK FOREST, IL SUNRISE PS PHOENIX, AZ VILLAGE INN (5) GRAND FORKS, ND WENDY'S AIKEN, SC WENDY'S CHARLESTION, SC WENDY'S N. AUGUSTA, SC WENDY'S AUGUSTA, GA WENDY'S CHARLESTON, SC WENDY'S AIKEN, SC WENDY'S AUGUSTA, GA WENDY'S CHARLESTON, SC WENDY'S MT. PLEASANT, SC WENDY'S MARTINEZ, GA - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PORTFOLIO TOTALS - -------------------------------------------------------------------------------- - ----------------------------------------------------- REAL ESTATE - ----------------------------------------------------- ANNUAL BASE % COST RENT YIELD - ----------------------------------------------------- 1,010,045 84,840 8.40% 580,938 77,280 13.30% 1,084,503 123,318 11.37% 739,375 96,600 13.07% 633,750 90,480 14.28% 580,938 77,280 13.30% 660,156 87,780 13.30% 728,813 96,780 13.28% 596,781 76,920 12.89% 776,344 96,780 12.47% 649,594 86,160 13.26% 528,125 70,200 13.29% 580,938 77,280 13.30% 633,750 84,120 13.27% - ----------------------------------------------------- - ----------------------------------------------------- 19,658,534 1,970,098 10.02% - ----------------------------------------------------- - -------------------------------------------------------------------------------- EQUIPMENT - -------------------------------------------------------------------------------- LEASE ANNUAL EXPIRATION LEASE % DATE COST RECEIPTS RETURN - -------------------------------------------------------------------------------- 260,000 0 0.00% 151,938 0 0.00% 780,000 0 0.00% 79,219 0 0.00% 19,013 0 0.00% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2,312,428 0 0.00% - -------------------------------------------------------------------------------- - ---------------------------------------------------- TOTALS - ---------------------------------------------------- TOTAL COST RECEIPTS RETURN - ---------------------------------------------------- 1,421,983 84,840 5.97% 780,000 0 0.00% 580,938 77,280 13.30% 1,182,735 123,318 10.43% 739,375 96,600 13.07% 633,750 90,480 14.28% 580,938 77,280 13.30% 660,156 87,780 13.30% 728,813 96,780 13.28% 596,781 76,920 12.89% 776,344 96,780 12.47% 649,594 86,160 13.26% 528,125 70,200 13.29% 580,938 77,280 13.30% 633,750 84,120 13.27% - ---------------------------------------------------- - ---------------------------------------------------- 21,970,962 1,970,098 8.97% - ----------------------------------------------------
Note 1: This property summary includes only property and equipment held by the Partnership during 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 is executed. 6: Management received notice that Hardee's Food Systems closed this restaurant in April 2002. Hardee's will remain liable until a lease termination agreement 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 chose not to continue to lease the property. Rent charges ceased as of May 31, 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: The property was sold in early October 2002 at a sale price of $618,000. 10: A new lease has been accepted at the vacant N. 7th property. The new tenant obtained possession of the property in August 2002 and monthly rent of $5,500 begins in January 2003. Page 2 of 2 EX-99.1 4 dex991.txt CERTIFICATION OF PERIODIC FINANCIAL REPORT PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 99.1 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP CERTIFICATION OF PERIODIC FINANCIAL REPORT PURSUANT TO 18 U.S.C. SECTION 1350 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Divall Insured Income Properties 2 Limited Partnership (the "Company") certifies that the Quarterly Report on Form 10-Q/A of the Company for the quarter ended September 30, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in that Form 10-Q/A fairly presents, in all material respects, the financial condition and results of operations of the Company. THE PROVO GROUP, INC., General Partner Dated: May 15, 2003 By /s/ Bruce A. Provo ----------------------------------------------- President, Chief Executive Officer and Chief Financial Officer This certification is made solely for the purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose. EX-99.2 5 dex992.txt 302 CERTIFICATIONS EXHIBIT 99.2 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP CERTIFICATIONS I, Bruce A. Provo, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of DiVall Insured Income Properties 2 Limited Partnership; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. THE PROVO GROUP, INC., General Partner Dated: May 15, 2003 By /s/ Bruce A. Provo ----------------------------------------------- President, Chief Executive Officer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----