-----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, Ok8IHOe6e6CXkbOL7tP2ghILNvZc17BBp7c4S2UsCyla0K8SSl5Z2JNMnw2uf7pM N3UK5eL4zt1yCUIOUqytkQ== 0000950131-96-003862.txt : 19960918 0000950131-96-003862.hdr.sgml : 19960918 ACCESSION NUMBER: 0000950131-96-003862 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000825788 STANDARD INDUSTRIAL CLASSIFICATION: 6500 IRS NUMBER: 391606834 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17686 FILM NUMBER: 96610624 BUSINESS ADDRESS: STREET 1: 101 W 11TH STREET STE 1110 CITY: KANSAS CITY STATE: MO ZIP: 64105 BUSINESS PHONE: 6088292992 MAIL ADDRESS: STREET 1: 101 WEST 11TH ST STREET 2: STE 1110 CITY: KANSAS CITY STATE: MO ZIP: 64105 FORMER COMPANY: FORMER CONFORMED NAME: DIVALL INSURED INCOME FUND-2 LIMITED PARTNERSHIP DATE OF NAME CHANGE: 19880229 10-Q 1 FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 ------------------------------ 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 ___ ----- 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS JUNE 30, 1996 AND DECEMBER 31, 1995 ----------------------------------- ASSETS
(Unaudited) June 30, December 31, 1996 1995 ----------- ------------ INVESTMENT PROPERTIES AND EQUIPMENT:(NOTE 3) Land $9,637,822 $10,027,077 Buildings 17,464,905 18,153,026 Equipment 669,778 669,778 Accumulated depreciation (5,556,146) (5,491,806) ---------- ----------- Net investment properties and equipment 22,216,359 23,358,075 ---------- ----------- NET INVESTMENT IN DIRECT FINANCING LEASES:(NOTE 8) 516,004 590,527 OTHER ASSETS: Cash and cash equivalents 1,237,351 1,005,764 Cash restricted for real estate taxes 213 61,217 Restoration escrow account 900,282 0 Cash held in Indemnification Trust (NOTE 11) 282,302 275,231 Rents and other receivables (net of allowance of $141,529 in 1996 and $254,543 in 1995) 355,538 459,213 Due from current General Partner 0 275 Deferred rent receivable 278,961 296,482 Due from affiliated partnerships (NOTE 12) 0 96,088 Prepaid insurance 10,796 19,631 Unsecured notes receivable from lessees (net of allowance of $111,762 in 1996 50,000 50,000 ---------- ----------- Total other assets 3,115,443 2,263,901 ---------- ----------- DUE FROM FORMER AFFILIATED:(NOTES 2 AND 12) Due from former general partner affiliates 1,962,698 3,529,205 Allowance for uncollectible amounts due from former affiliates (1,962,698) (2,607,104) Restoration cost receivable 3,609,871 2,823,862 Allowance for uncollectible restoration receivable (3,609,871) (2,823,862) ---------- ----------- Due from former affiliates, net 0 922,101 ---------- ----------- Total assets $25,847,806 $27,134,604 =========== ===========
The accompanying notes are an integral part of these statements. 2 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS JUNE 30, 1996 AND DECEMBER 31, 1995 ----------------------------------- LIABILITIES AND PARTNERS' CAPITAL
(Unaudited) June 30, December 31, 1996 1995 ----------- --------- LIABILITIES: Equipment notes payable (NOTE 6) $ 0 $77,255 Accounts payable and accrued expenses 62,538 266,715 Due to current General Partner 2,413 496 Security deposits 225,197 250,577 Unearned rental income 25,046 18,065 Real estate taxes payable 62,328 57,018 ----------- ------------ Total liabilities 377,522 670,126 ----------- ------------ CONTINGENT LIABILITIES: (NOTE 10) PARTNERS' CAPITAL: (NOTES 1, 4 AND 14) Former general partners - Capital contributions 200 200 Cumulative net income 707,313 707,313 Cumulative cash distributions (1,547,742) (1,547,742) Reallocation of former general partners' deficit capital to Limited Partners 840,229 840,229 ----------- ------------ 0 0 ----------- ------------ Current General Partner - Cumulative net income 64,165 47,289 Cumulative cash distributions (24,995) (18,245) ----------- ------------- 39,170 29,044 ----------- ------------- Limited Partners (46,280.3 interests outstanding) Capital contributions, net of offering costs 39,358,468 39,358,468 Cumulative net income 12,718,143 11,047,463 Cumulative cash distributions (25,805,268) (23,130,268) Reallocation of former general partners' deficit capital (840,229) (840,229) ------------ ------------ 25,431,114 26,435,434 ------------ ------------ Total partners' capital 25,470,284 26,464,478 ------------ ------------ Total liabilities and partners' capital $25,847,806 $27,134,604 ============ ============
The accompanying notes are an integral part of these statements. 3 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF INCOME (UNAUDITED) -----------
Three Months Ended June 30, Six Months Ended June 30, ---------------------------- -------------------------- 1996 1995 1996 1995 -------- -------- ------- ---------- REVENUES: Rental income(NOTE 5) $796,959 $921,229 $1,614,682 $1,903,023 Interest income on direct financing leases 15,471 32,311 33,644 51,042 Other interest income 30,726 16,948 50,397 46,005 Recovery of amount previously written off 14,641 0 644,406 0 Other income 3,494 4,107 25,754 6,624 Gain on disposal of assets 0 1,729 484,225 1,729 ---------- ---------- ---------- ---------- 861,291 976,324 2,853,108 2,008,423 ---------- ---------- ---------- ---------- EXPENSES: Partnership management fees 43,098 40,219 85,414 80,985 Disposition fees 0 3,000 20,550 3,000 Disposition fees - Restoration 0 3,000 20,550 3,000 Restoration fees 585 1,706 24,638 2,131 Appraisal fees 0 0 2,268 0 Insurance 8,796 12,456 22,441 23,779 General and administrative (NOTE 9) 52,280 28,795 75,483 63,764 Advisory Board fees and expenses 4,249 4,527 8,613 8,670 Interest 1,741 10,538 3,551 22,530 Real estate taxes 0 0 (1,709) 0 Ground lease payments (NOTE 3) 30,936 31,058 61,872 61,954 Expenses incurred due to default by lease 2,589 1,980 2,468 3,716 Professional services 42,287 50,918 78,067 83,053 Professional services related to investigation (58,284) 102,964 501,968 139,422 Loss on equipment lease 0 7,273 0 7,273 Depreciation 129,488 151,915 258,976 311,785 Amortization 201 201 402 402 ---------- ---------- ---------- ---------- 257,966 450,550 1,165,552 815,464 ---------- ---------- ---------- ---------- NET INCOME $603,325 $525,774 $1,687,556 $1,192,959 ========== ========== ========== ========== NET INCOME - CURRENT GENERAL $6,033 $5,258 $16,876 $11,930 PARTNER NET INCOME - LIMITED PARTNERS 597,292 520,516 1,670,680 1,181,029 ---------- ---------- ---------- ---------- $603,325 $525,774 $1,687,556 $1,192,959 ========== ========== ========== ========== NET INCOME (LOSS) PER LIMITED PARTNERSHIP INTEREST, based on 46,280.3 $12.91 $11.25 $36.10 $25.52 ====== ====== ====== ====== Interest outstanding
The accompanying notes are an integral part of these statements. 4 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (UNAUDITED) -----------
Six Months Ended June 30, ------------------------- 1996 1995 ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $1,687,556 $1,192,959 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 259,378 312,187 Recovery of amounts previously written off (644,406) 0 Net (gain) of disposal of assets (484,225) (1,729) Loss on equipment lease 0 7,273 Interest applied to Indemnification Trust account (7,701) (14,298) (Increase) Decrease in rents and other receivables 103,950 (115,452) (Deposits) withdrawal for payment of real estate taxes 61,004 (30,691) Decrease in prepaids 8,835 5,381 Decrease in deferred rent receivable 17,521 1,198 Increase in due to current General Partner 1,917 508 (Decrease) in accounts payable and other (204,177) (60,521) (Decrease) in security deposit (25,380) (200) Increase/(Decrease) in real estate taxes payable 5,310 (39,181) Increase/(Decrease) in unearned rental income 6,980 (7,056) ------------- ------------ Net cash from operation activities 787,192 1,250,378 ------------- ------------ CASH FLOW FROM (USED IN) INVESTING ACTIVITIES: Principal payments received on direct financing leases 74,121 182,659 Proceeds from sale of investment properties 1,366,966 300,000 Recoveries from former affiliates 1,566,507 53,274 Deposit to restoration escrow accounts (900,282) 0 Payment from affiliated partnerships 96,088 23,679 ------------- ------------ Net cash from investing activities 2,203,400 559,612 ------------- ------------ CASH FLOW FROM (USED IN) FINANCING ACTIVITIES: Cash distributions to Limited Partners (2,675,000) (1,680,000) Cash distributions to current General Partner (6,750) (4,487) Payments of equipment notes (77,255) (119,715) ------------- ------------ Net cash (used in) financing activities (2,759,005) (1,804,202) ------------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 231,587 5,788 CASH AND CASH EQUIVALENT AT BEGINNING OF PERIOD 1,005,764 1,349,101 ------------- ------------ CASH AND CASH EQUIVALENT AT END OF PERIOD $1,237,351 $1,354,889 ============= =========== SUPPLEMENTAL DISCLOSURE-cash paid for interest $3,551 $22,530 ====== =======
The accompany notes are an integral part of these statements. 5 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF ACCOUNTING: ------------------------------------- DiVall Insured Income Properties 2 Limited Partnership (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 escrowed 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 and recovering the assets misappropriated by the former general partners and their affiliates. The Properties are leased on a triple net basis to, and operated by, franchisors or franchisees of national, regional, and local retail chains under long-term leases. The lessees consist primarily of fast-food, family style, and casual/theme restaurants, but also include a video rental store and a child care center. At June 30, 1996, the Partnership owned 37 properties with specialty leasehold improvements in 18 of these properties. Deferred organization costs are amortized over a 60-month period. Deferred costs on proposed acquisitions are capitalized as a cost of the properties upon acquisition. Rental revenue from investment properties is recognized on the straight-line basis over the life of the respective lease. Revenue from direct financing leases is recognized at level rates of return over the term of the lease. Depreciation of the properties is provided on a straight-line basis over 31.5 years, which is the estimated useful lives of the buildings and improvements. Equipment is depreciated on a straight-line basis over the estimated useful lives of 5 to 7 years. Real estate taxes on the Partnership's investment properties are the responsibility of the tenant. However, when a tenant fails to make the required tax payments or when a property becomes vacant, the Partnership makes the appropriate payment to avoid possible foreclosure of the property. Taxes are accrued in the period in which the liability is incurred. Cash and cash equivalents include cash on deposit with financial institutions and highly liquid temporary investments with initial maturities of 90 days or less. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Partnership 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 in interest of the Limited Partners. 6 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, 1995, the tax basis of the Partnership's assets exceeded the amounts reported in the accompanying financial statements by approximately $8,700,000. 2. REGULATORY INVESTIGATION: ------------------------- A preliminary investigation during 1992 by the Office of Commissioner of Securities for the State of Wisconsin and the Securities and Exchange Commission (the "Investigation") revealed that during at least the four years ended December 31, 1992, the former general partners of the Partnership, Gary J. DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred substantial cash assets of the Partnership and two affiliated publicly registered partnerships, DiVall Insured Income Fund Limited Partnership ("DiVall 1") and DiVall Income Properties 3 Limited Partnership ("DiVall 3") (collectively the "Partnerships") to various other entities previously sponsored by or otherwise affiliated with DiVall and Magnuson. The unauthorized transfers were in violation of the respective Partnership Agreements and resulted, in part, from material weaknesses in the internal control system of the Partnerships. The aggregate amount of the misappropriations, related costs, and 9% interest accrued since January 1, 1993, is in excess of $13,800,000, of which approximately $5,573,000 has been attributed to the Partnership and is reflected as due from former affiliates on the balance sheet at June 30, 1996. The 9% interest accrued as of June 30, 1996, amounted to approximately $1,663,000 and is not reflected in the accompanying income statement. As of December 31, 1995, approximately $6,353,000 was reflected as due from former affiliates based on estimated overall misappropriation and related costs of $15,700,000. Permanent Manager Agreement ("PMA") savings, representing cost savings to the Partnerships as a result of the implementation of the PMA, are not credited against the due from former affiliates account on the financial statements of the Partnership. 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. The current General Partner is vigorously pursuing recovery of the misappropriated funds from the various sources and initially estimated an aggregate recovery of $3 million for the Partnerships, of which approximately $1.2 million was allocated to the Partnerships. As such, an allowance has been established against amounts due from former general partner affiliates reflecting the current General Partner's best estimate of probable loss from misappropriated amounts. This allowance has been allocated among the Partnerships based on each Partnership's pro rata share of the total misappropriation. The amount of the allowance recorded by the Partnership was reduced by approximately $644,000 during the first six months of 1996 as a result of recoveries received in excess of the original estimate. Pending the outcome of resolution of all sources of potential recovery, it is not possible to determine the amount that will ultimately be recovered. As mentioned above, material weaknesses were identified in the Partnership's internal control structure. The internal control structure was not adequate to assure that all transactions of the Partnership were properly recorded and reflected in the books and records and financial statements of the Partnership. Significant transactions affecting the Partnership were apparently initiated by DiVall and Magnuson during at least the four years ended December 31, 1992, which initially either were not recorded on the books and records of the Partnership or were improperly recorded and characterized. Such transactions included unsupported disbursements or improper disbursements under the terms of the Partnership Agreement and the encumbrance of the Partnership assets. All such transactions identified during the Regulatory Investigation and concurrent reviews have been reflected in the Partnership's financial statements as of June 30, 1996. Because of the significance of the weaknesses in the internal control structure, there could be no certainty that all improper and unsupported transactions were identified and recorded and reflected in the Partnership's financial statements as of December 31, 1992. Accordingly, the Partnership's auditors were unable to render an opinion on the financial statements for the year ended December 31, 1992. Financial statements for prior periods, including 1991 and certain prior years, and quarterly reports as of September 30, 1992, and certain prior quarters, do not properly reflect such transactions, 7 but have not been restated due to the impracticality and uncertainty in attempting to make such restatements. Correspondingly, management has elected to record currently certain immaterial errors discovered during 1993, which relate to prior periods, to assure effective disclosure of amounts which have otherwise been deemed immaterial in relation to partners' capital. 3. INVESTMENT PROPERTIES: ---------------------- As of June 30, 1996, the Partnership owned 34 fully constructed fast-food restaurants, a tag agency, a video store, and a preschool. The properties are composed of the following: ten (10) Wendy's restaurants, eight (8) Hardee's restaurants, seven (7) Denny's restaurants, two (2) Applebee's restaurants, one (1) Popeye's Famous Fried Chicken restaurant, one (1) Country Kitchen restaurant, one (1) Hooter's restaurant, one (1) Kentucky Fried Chicken restaurant, one (1) Hostetler's restaurant, one (1) Miami Subs restaurant, one (1) Village Inn restaurant, one (1) Hallandale Tag Agency, one (1) Blockbuster Video store, and one (1) Sunrise Preschool. The 37 properties are located in a total of fourteen (14) states. From time to time, the Partnership experiences interruptions in rental receipts due to tenant delinquencies and vacancies. At June 30, 1996, one of the Partnership's properties was unoccupied. During 1995, the tenant of the Country Kitchen restaurant in Cedar Rapids, Iowa, vacated the property and stopped making rent payments. Management is negotiating a potential sale or lease of the property, and is pursuing collection of the past due rents. The total cost of the investment properties and specialty leasehold improvements includes the original purchase price plus acquisition fees and other capitalized costs paid to an affiliate of the former general partners. According to the Partnership Agreement, the former general partners were to commit 80% of the original offering proceeds to investment in properties. Upon full investment of the net proceeds of the offering, approximately 75% of the original proceeds was invested in the Partnership's properties. The Partnership's investment properties had been managed by an affiliate of the former general partners pursuant to a management agreement which provided for a fee equal to 1% of gross receipts amounting to approximately $8,000 through February 28, 1993. In addition, the former general partner affiliate was entitled to receive reimbursements of general and administrative costs, either direct or indirect, amounting to approximately $49,000 during 1993. As a result of the Investigation, the Partnership engaged a third party as Interim Manager in October 1992. The Interim Manager received approximately $53,000 during 1993, for management services. Subsequent to the appointment of the Permanent Manager, effective February 8, 1993, these services were being provided by the Permanent Manager for an overall fee equal to 4% of gross receipts, with a maximum reimbursement for office rent and related office overhead of $25,000 between the three affiliated Partnerships as provided in the Permanent Manager Agreement ("PMA"). On May 26, 1993, the Permanent Manager, TPG, replaced the former general partner as the new General Partner as provided for in an amendment to the Partnership Agreement dated May 26, 1993. Pursuant to amendments to the Partnership Agreement, TPG continues to provide management services for the same fee structure as provided in the PMA mentioned above. The minimum management fee and the maximum reimbursement for office rent and overhead have increased annually by the allowable annual Consumer Price Index adjustment per the PMA. For purposes of computing the 4% overall fee, gross receipts includes amounts recovered in connection with the misappropriation of assets by the former general partners and their affiliates. TPG has received fees from the Partnership totaling $36,225 to date on the amounts recovered, which has been offset against the 4% minimum fee. The Partnership currently maintains rent insurance policies with terms expiring in 1996 for 10 of the 37 leased properties. Terms of the rent insurance policies call for the Partnership to be paid 80% of gross rent due in the event of nonpayment and vacancy of the property. Under the terms of the original offering document, rent insurance was originally intended to be obtained on all leased properties unless the tenant had financial net worth in excess of $5,000,000. The Partnership did not have sufficient documentation at June 30, 1996 to substantiate whether the uninsured properties had tenants with adequate net worth at the time the leases were initiated. 8 The tenant of the Partnership's eight (8) Hardee's restaurants has experienced sales difficulties over the past two years. Management entered into a one year lease modification with the tenant for 1996 resulting in a $200,000 decrease in base rent for the year, and agreed to capitalize delinquent rents totaling $112,000 into a five year note earning 10% interest. The Partnership owns four (4) restaurants located on parcels of land where it has entered into long-term ground leases. Two (2) of these leases are paid by the tenant and two (2) are paid by the Partnership. The leases paid by the Partnership are considered operating leases and the lease payments are expensed in the periods to which they apply. The lease terms require aggregate minimum annual payments of approximately $124,000 and expire in the years ranging from 1998 to 2003. The tenant operating a Denny's restaurant on Camelback Road in Phoenix, Arizona, has not formally exercised its option to extend its lease which expired on January 30, 1993, but continues to operate the restaurant and pay rent. Management is currently negotiating a possible new lease or sale of the property to the tenant. Several of the Partnership's property leases contained 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. Apple South, Inc. the tenant of two Applebee's restaurants, notified Management of its intent to exercise an option in its lease to purchase these two properties. One sale closed in January 1996, resulting in a gain of $484,000. The other sale is expected to take place during the Third Quarter of 1996 at an expected gain of approximately $450,000. 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. Under the terms of the Partnership Agreement, the General Partners were obligated to create and contribute to an escrow fund an amount equal to 25% of Net Cash Receipts distributed to the General Partners. At December 31, 1993, the General Partner had contributed $1,641 to the fund. The fund was to be used to repurchase interests of Limited Partners that exhibited hardship, at the determination of the General Partner, and for distributions to the Limited Partners upon final dissolution of the Partnership to permit the Limited Partners to receive an amount equal to their Liquidation Preference of 13.5% per annum. During 1994, it was determined that the amounts being funded to the escrow fund were immaterial, and the fund was eliminated. Amounts paid to the fund were returned to the Partnership. 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 9 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 them attributable to such year. Distributions paid to the General Partner are based on the estimated tax liability resulting from allocated income. Subsequent to the filing of the General Partner's income tax returns, a true-up with actual distributions is made. The provisions regarding distribution of Net Proceeds, as defined, were also amended to provide that Net Proceeds are to be distributed as follows: (a) to the Limited Partners, an amount equal to 100% of their Adjusted Original Capital; (b) then, to the Limited Partners, an amount necessary to provide each Limited Partner a Liquidation Preference equal to a 13.5% per annum, cumulative simple return on Adjusted Original Capital from the Return Calculation Date including in the calculation of such return on all 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 10.) 5. LEASES: ------- Lease terms for the majority of the investment properties are 20 years from their inception. The leases generally provide for minimum rents and additional rents based upon percentages of gross sales in excess of specified breakpoints. The lessee is responsible for occupancy costs such as maintenance, insurance, real estate taxes, and utilities. Accordingly, these amounts are not reflected in the statements of income except in circumstances where, in management's opinion, the Partnership will be required to pay such costs to preserve its assets (i.e., payment of past-due real estate taxes). Management has determined that the leases are properly classified as operating leases; therefore, rental income is reported when earned and the cost of the property, excluding the cost of the land, is depreciated over its estimated useful life. Aggregate minimum lease payments to be received under the leases for the Partnership's properties are as follows:
Year ending December 31, 1996 $ 3,048,076 1997 3,221,602 1998 3,123,336 1999 3,156,936 2000 3,153,604 Thereafter 26,571,560 ---------- $42,275,114 ==========
Eight (8) of the Partnership's properties are leased to Terratron, Inc., a franchisee of Hardee's restaurants and ten (10) of the properties are leased to Wensouth, a franchisee of Wendy's restaurants. Terratron base rents accounted for 22% of total base rents for 1995, and Wensouth accounted for 25% of base rents for 1995. Due to sales difficulties experienced by Terratron, a one (1)- year lease modification was entered into, reducing 1996 base rents by approximately $200,000. Additionally, delinquent rent totaling $112,000 was capitalized into a five (5) year note accruing interest at 10% per annum. The amount of rent capitalized was also written off as uncollectible at December 31, 1995. 10 6. EQUIPMENT NOTE PAYABLE: ----------------------- In August 1992, the Partnership executed a note payable in the amount of $190,000 with Norwest Equipment Finance, Inc., for equipment placed in the Denny's restaurant located in Twin Falls, Idaho. The note was payable in monthly installments of $4,018, including interest at 9.8% through September 1997 and was secured by the equipment under a direct financing lease with an initial cost of $190,000. The note was repaid in full during April 1996. 7. TRANSACTIONS WITH CURRENT GENERAL PARTNER: ------------------------------------------ Amounts paid to the current General Partner for the six-month periods ended June 30, 1996 and 1995 are as follows.
Incurred as of Incurred as of Current General Partner June 30, 1996 June 30, 1995 - - ----------------------- -------------- -------------- Management fees $85,414 $80,985 Disposition fees 20,550 3,000 Restoration fees 24,638 2,131 Overhead allowance 7,118 6,926 Reimbursement for out-of-pocket expenses 11,148 7,906 Cash distribution 6,750 4,487 ------- ------- $155,618 $105,435 ======== ========
8. NET INVESTMENT IN DIRECT FINANCING LEASES: ------------------------------------------ The net investment in direct financing leases which includes the Partnership's specialty leasehold improvement leases, is comprised of the following as of June 30, 1996: Minimum lease payments receivable $595,806 Estimated residual values of leased property (non-recourse) 22,364 Acquisition fees, net 402 Less-Unearned income (102,568) --------- Net investment in direct financing leases $516,004 =========
At June 30, 1996, future minimum lease payments for each of the five succeeding fiscal years are as follows:
Year ending December 31, 1996 $112,893 1997 196,139 1998 177,791 1999 131,347 -------- $618,170 ========
During 1995, it was determined that the residual values of the equipment leases were overstated. Accordingly, they were written down to their estimated net realizable values as of December 31, 1995. The total amount of the write-down was approximately $72,000. 11 9. GENERAL AND ADMINISTRATIVE EXPENSES: ------------------------------------ For the periods ended June 30, 1996 and 1995, general and administrative expenses incurred by the Partnership were as follows: Three Months Ended June 30, 1996 and 1995, general and administrative expenses incurred by the partnership were as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1996 1995 1996 1995 --------- --------- -------- ---------- Communication costs $30,218 $22,693 $42,041 $35,229 Other administration 741 1,103 3,541 3,563 Travel costs 1,144 918 1,924 1,901 Overhead allowance 3,592 3,493 7,118 6,926 Registration/filing fees 3,090 588 7,364 4,942 Income taxes 13,495 0 13,495 11,203 ------- ------- ------- ------- $52,280 $28,795 $75,483 $63,764 ======= ======= ======= =======
10. CONTINGENT LIABILITIES: ----------------------- According to the Partnership Agreement, as amended, the current General Partner may receive a disposition fee not to exceed 3% of the contract price of the sale of investment properties. Fifty percent (50%) of all such disposition fees earned by the current General Partner is to be escrowed until the aggregate amount of recovery of the funds misappropriated from the Partnerships by the former general partners is greater than $4,500,000. Upon reaching such recovery level, full disposition fees will thereafter be payable and fifty percent (50%) of the previously escrowed amounts will be paid to the current General Partner. At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining escrowed disposition fees shall be paid to the current General Partner. If such levels of recovery are not achieved, the current General Partner will contribute the amounts escrowed towards the recovery. In lieu of an escrow, 50% of all such disposition fees have been paid directly to the restoration account and then distributed among the three Partnerships. Fifty percent (50%) of the total amount paid to the recovery was refunded to the current General Partner during March 1996 after exceeding the recovery level of $4,500,000. The remaining amount allocated to the Partnership may be owed to the current General Partner if the $6,000,000 recovery level is met. As of June 30, 1996, the Partnership may owe the current General Partner $16,296, which is currently reflected as a recovery, if the $6,000,000 recovery level is achieved. 11. PMA INDEMNIFICATION TRUST: -------------------------- The Permanent Manager Agreement ("PMA") provides that the Permanent Manager will be indemnified from any claims or expenses arising out of or relating to the Permanent Manager serving in such capacity or as substitute general partner, so long as such claims do not arise from fraudulent or criminal misconduct by the Permanent Manager. The PMA provides that the Partnership fund this indemnification obligation by establishing a reserve of up to $250,000 of Partnership assets which would not be subject to the claims of the Partnership's creditors. An Indemnification Trust ("Trust") serving such purposes has been established at United Missouri Bank, N.A. The Trust has been fully funded with Partnership assets as of June 30, 1996. Funds are invested in U.S. Treasury securities. In addition, $32,302 of earnings have been credited to the Trust as of June 30, 1996. 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. 12 12. RESTORATION TRUST ACCOUNT; EXPENSE ALLOCATIONS; AND RELATED INTER-PARTNERSHIP RECEIVABLES: ------------------------------------------ Restoration costs represent expenses incurred by the Partnership in relation to the misappropriated assets by the former general partners and their affiliates. These costs are allocated among the Partnerships based on each partnership's respective share of the entire misappropriation, as currently quantified. The amount of misappropriation for each partnership is adjusted annually to reflect new discoveries and more accurate quantification of amounts based on the continuing investigation. Such adjustments will result in periodic adjustments to prior allocations of recovery costs to reflect updated information. Consequently, previous payments for restoration expenses may not be consistent with modified allocations. Based on modified allocations adjusted as of December 31, 1993, the Partnership was owed $192,358 from DiVall 3 for amounts paid on its behalf. Such amounts are reflected on the balance sheet as due from affiliated partnerships. During 1994, the Partnership made an additional adjustment increasing the amount due from DiVall 3 by $9,785. These amounts have been fully repaid by DiVall 3 as of June 30, 1996. Recoveries realized by the Partnerships are being distributed to each respective partnership on the same basis as the restoration costs are currently being allocated. Any available recovery funds have been utilized first to satisfy amounts due other partnerships for amounts advanced under prior allocation methods. As of June 30, 1996, the Partnerships recovered a total of approximately $4,578,000 from the former general partners and their affiliates, accountants and attorneys. Of this amount, the Partnership received its pro-rata share in the amount of $1,852,000. Additionally, $40,347, representing 25% of all disposition fees earned by the General Partner have been paid to the recovery. Of that amount, $16,296 was allocated to the Partnership and is contingently payable to the General Partner upon achievement of the final recovery level as described in Note 10. The PMA contemplated that the Permanent Manager could establish a separate and distinct Restoration Trust Fund which would hold all recoveries until a final independent adjudication by a court of competent jurisdiction or vote of the Limited Partners ratified the allocation of proceeds to each respective partnership. Management has concluded that a fair and reasonable interim accounting for recovery proceeds can be accomplished at the partnership level in a manner similar to restoration costs which are paid directly by the Partnerships. Management reserves the right to cause the final allocation of such costs and recoveries to be determined either by a vote of the Limited Partners or a court of competent jurisdiction. Potential sources of recoveries include third party litigation, promissory notes, land contracts, and personal assets of the former general partners and their affiliates. On March 24, 1994, an affiliated partnership, DiVall 1, filed a complaint in the United States District Court for the Western District of Missouri against Boatmen's First National Bank of Kansas City ("Boatmen's) seeking a declaratory judgment that Boatmen's has no right or interest in a promissory note executed in the name of DiVall 1 by the former general partners (the "Note") secured by mortgages on five DiVall 1 properties, and further seeking an injunction against foreclosure proceedings instituted against a DiVall 1 property located in Dallas, Texas under a first deed of trust and security agreement given to secure the Note (the "Foreclosure"). The former general partners borrowed $600,000 during or before 1991 from Metro North State Bank (now Boatmen's). The proceeds of the Note were not received by DiVall 1. As of June 30, 1996, DiVall 1 had not paid debt service on the Note. DiVall 1 received a notice of default on the Note in October 1993, and the Foreclosure Action was filed in February 1994. As of June 30, 1996, interest in the amount of $200,000 had accrued but was unpaid on the Note. Interest is accrued at the face rate of the Note. If DiVall 1 loses the case against Boatmen's, additional interest totaling approximately $218,000, representing the default rate of interest may be due. Boatmen's has agreed to stay its foreclosure proceedings pending the outcome of the litigation. Boatmen's answered the complaint and filed a motion for summary judgment to which DiVall 1 responded. The District Court granted Boatmen's motion for summary judgement. DiVall 1 appealed and the Eighth Circuit Court of Appeals reversed the District Court's ruling. The case was sent back to the District Court for further discovery and trial. Pursuant 13 to the Restoration Trust Account procedures described above, all of the Partnerships are sharing the expenses of this litigation and any recoveries resulting effectively from the partial or full cancellation of the alleged indebtedness will be allocated among the three Partnerships on the same basis as the restoration costs are currently being allocated. 13. LITIGATION: ----------- As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned by them, granted the Partnership a security interest in certain promissory notes and mortgages from other DiVall related entities (the "Private Partnerships"). In the aggregate, the face amount of these notes were equal to a minimum of $8,264,932. In addition, DiVall, Magnuson, and related entities owned by them, granted the Partnership a security interest in their general partner interests in the Private Partnerships. The foregoing security interests were to secure the repayment of the funds which were diverted by DiVall and Magnuson from the Partnership. The Partnership shares such security interests with DiVall 1 and DiVall 3. These promissory notes and mortgages are not recorded on the balance sheets of the Partnerships, but are recorded as recoveries on a cash basis upon settlement. On July 23, 1993, nineteen (19) of the Private Partnerships sought the protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven (7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies were involuntary. Several of the Private Partnerships seeking bankruptcy owe promissory notes to DiVall, Magnuson, or entities owned by them, in which the Partnership has a security interest. These cases were subsequently transferred to the Western District Bankruptcy Court located in Madison, Wisconsin. The Partnership's experience in those bankruptcy cases that have concluded, either through the approval of Plans of Reorganization, dismissal of the bankruptcies, settlements or a combination of the foregoing, is that (I) the value of the obligations of the Private Partnerships assigned to the Partnership has been at a significant discount to their face amounts, and (ii) the General Partner interests in such Private Partnerships often have little economic value. The Partnership's recoveries in these bankruptcies have, to date, been on a steeply discounted basis. Management anticipates that the recoveries in the remaining unresolved bankruptcies are likely to also be on a deeply discounted basis. Plans of reorganization have been filed in some of the bankruptcies, and settlement agreements in many of the Private Partnerships have been reached. Settlements in eighteen (18) of the bankruptcies to date have resulted in cash payments to the Partnerships of a total of $573,000 and notes secured by subordinated mortgages in the aggregate amount of $625,000. The Partnership is continuing to vigorously defend its interests in the remaining bankruptcies. 14. 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. 15. SUBSEQUENT EVENTS: ------------------ On August 15, 1996, the Partnership made distributions to the Limited Partners for the Second Quarter of 1996 of $1,650,000 amounting to approximately $35.65 per limited partnership interest. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES: - - -------------------------------- INVESTMENT PROPERTIES AND NET INVESTMENT IN DIRECT FINANCING LEASES - - ------------------------------------------------------------------- The investment properties, including equipment held by the Partnership at June 30, 1996, were originally purchased at a price, including acquisition costs, of approximately $28,500,000. The tenant of the Country Kitchen restaurant in Cedar Rapids, Iowa vacated the property during 1995 and ceased paying rent. Management is negotiating a potential sale or lease of the property. Apple South, Inc. the tenant of two Applebee's restaurants in Tennessee and Florida, notified management of their intent to exercise an option in their lease to purchase those properties. The Tennessee property was sold to Apple South during January 1996, resulting in a gain of approximately $484,000. The sale of the Florida property is expected to take place in the Third Quarter of 1996 at an expected gain of approximately $450,000. Terratron, Inc., the lessee of eight (8) Hardee's restaurants has experienced sales difficulties over the past two years. Management entered into a one year lease modification with the tenant which reduces base rents for 1996 by approximately $200,000. Additionally, delinquent rent totaling $112,000 was capitalized into a five (5) year note accruing interest at 10% per annum. The amount of rent capitalized was also written off as uncollectible at December 31, 1995. The net investment in direct financing leases, which includes the Partnership's specialty leasehold improvement leases, amounted to $516,000 at June 30, 1996, compared to $591,000 at December 31, 1995. The decrease of $75,000 was a result of principal payments received. OTHER ASSETS - - ------------ Cash and cash equivalents, including cash restricted for real estate taxes and cash held in restoration escrow was approximately $2,138,000 at June 30, 1996, compared to $1,067,000 at December 31, 1995. The Partnership designated cash of $1,650,000 to fund the Second Quarter 1996 distributions to Limited Partners, $310,000 for the payment of accounts payable and accrued expenses, and the remainder represents reserves deemed necessary to allow the Partnership to operate normally. Cash generated through the operations of the Partnership's investment properties, sales of investment properties and any recoveries of misappropriated funds by the former general partners, will provide the sources for future fund liquidity and Limited Partner distributions. A restoration escrow account was established during the First Quarter of 1996, and $890,000, representing the net proceeds to the Partnership from the settlement of litigation against the former accountants and attorneys, was deposited to the account. For information regarding the settlement, refer to PART II, Item 2 of this report. Interest deposited to the account during the Second Quarter of 1996, totaled $10,000. The total balance of this account is being distributed to the limited partners as part of the Second Quarter distribution on August 15, 1996. 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 Permanent Manager Agreement for the indemnification of TPG, in the absence of fraud or gross negligence, from any claims or liabilities that may arise from TPG acting as Permanent Manager. The Trust is owned by the Partnership. For additional information regarding the Trust refer to Note 11 to the financial statements. 15 DUE FROM AFFILIATED PARTNERSHIPS, DUE FROM FORMER AFFILIATES, ALLOWANCE FOR - - --------------------------------------------------------------------------- UNCOLLECTIBLE AMOUNTS DUE FROM FORMER AFFILIATES AND DEFERRED INCOME - - -------------------------------------------------------------------- Due from former affiliates represented misappropriated assets due from the former general partners and their affiliates in the amount of $1,963,000 at June 30, 1996. The receivable decreased from December 31, 1995 due to $1,567,000 of recoveries received from the former general partners and their affiliates, including the settlement received in the litigation against the Partnerships' former accountants and attorneys. The Partnership maintains a record of costs incurred in identifying or recovering the misappropriated assets. These amounts are expensed when incurred, and then, recorded on the balance sheet as a restoration cost receivable with a corresponding allowance for such receivable deemed uncollectible. These costs are considered due from the former general partners and their affiliates. Interest has been accrued on the misappropriated funds since January 1, 1993, at a rate of 9% per annum and has been included in the restoration cost receivable. The receivable increased from approximately $2,824,000 at December 31, 1995, to $3,610,000 at June 30, 1996, and includes $1,663,000 of cumulative accrued interest. The current General Partner is vigorously pursuing recovery of the misappropriated funds from the various sources and initially estimated an aggregate recovery of $3 million for the Partnerships, of which approximately $1.2 million was allocated to the Partnership. As such, an allowance was established against amounts due from the former general partners and their affiliates reflecting the current General Partner's original estimate of probable loss from misappropriated amounts. This allowance was allocated among the Partnerships based on each Partnership's pro rata share of the total misappropriation. The amount of the allowance recorded by the Partnership was reduced by approximately $644,000 during the first six months of 1996 as a result of recoveries received in excess of the original estimates. The restoration costs are allocated among the Partnerships based on each Partnership's respective share of the misappropriation as discussed in Note 12 of the financial statements. the allocation is adjusted periodically to reflect any changes in the entire misappropriation. The Partnership's percentage of the allocation was reduced in 1993. Consequently, the Partnership had been paying more than its pro rata share of the costs. Accordingly, the Partnership recorded a receivable at December 31, 1993, in the amount of $192,000 due from DiVall 3 with a corresponding reduction reflected in professional expenses related to the Investigation, former general partner removal expenses, and interim fund manager fees and expenses. Recoveries allocated to DiVall 3 have been used to repay amounts owed to the Partnership. At December 31, 1995, the remaining amount due from DiVall 3 for restoration costs was $74,000. The total amount due was repaid by DiVall 3 during March 1996 from recoveries received. As a result of the misappropriation and material weaknesses in the internal control structure of the Partnership prior to February 8, 1993, there can be no assurance that all transactions recorded by the Partnership prior to February 8, 1993, were appropriate transactions of the Partnership and properly reflected in the accompanying financial statements of the Partnership or that all transactions of the Partnership prior to February 8, 1993, including improper and unsupported transactions, have been identified and reflected in the accompanying financial statements of the Partnership as of June 30, 1996. LIABILITIES - - ----------- Accounts payable and accrued expenses at June 30, 1996, in the amount of $63,000, primarily represented the accrual of legal and auditing fees. The decrease from December 31, 1995, is a result of the payment of out-of-pocket costs associated with the litigation against the Partnerships' former accountants and attorneys. The equipment note payable in the amount of $77,000 at December 31, 1995, was repaid during the Second Quarter of 1996 from the proceeds of the sale of the Applebee's property in Memphis, Tennessee. 16 PARTNERS' CAPITAL - - ----------------- Net income for the quarter was allocated between the General Partner and the Limited Partners, 1% and 99%, respectively, as provided in the Partnership Agreement and the Amendment to the Partnership Agreement, as discussed more fully in Note 4 of the financial statements. The former general partners' deficit capital account balance was reallocated to the Limited Partners at December 31, 1993. Refer to Note 14 to the financial statements for additional information regarding the reallocation. Cash distributions paid to the Limited Partners and to the General Partner during 1996 of $2,675,000 and $6,750, respectively, have also been in accordance with the amended Partnership Agreement. The Second Quarter 1996 distribution of $1,650,000 was paid to the Limited Partners on August 15, 1996. RESULTS OF OPERATIONS: - - ---------------------- Management believes that the financial results of the quarter are not indicative of "normal" Partnership operations. There are many events which occurred since the discovery of the misappropriations in 1992 which have had a negative impact on the financial results. Some of these events will continue to have a negative impact on the Partnership in the future. However, the settlement of litigation against the Partnership's former accountants and attorneys should result in operating results going forward which more closely represent "normal" operations than what has been experienced during the past three years. The Partnership reported net income for the quarter ended June 30, 1996, in the amount of $603,000 compared to net income for the quarter ended June 30, 1995, of $526,000. For the six months ended June 30, 1996 and 1995, net income totaled $1,688,000 and $1,193,000, respectively. Results for all periods were less than would be expected from "normal" operations, primarily because of costs associated with the misappropriation of assets by the former general partners and their affiliates and tenant defaults. The costs associated with the misappropriation increased significantly during the First Quarter of 1996 as the lawsuit against the former general partner accountants and attorneys got closer to trial and as a result of contingent fee payments made in connection with the settlement. These costs decreased during the Second Quarter of 1996 due to the settlement of the litigation. REVENUES - - -------- Total revenues were $861,000 and $976,000, for the quarters ended June 30, 1996 and 1995, respectively, and were $2,853,000 and $2,008,000 for the six months ended June 30, 1996 and 1995, respectively. 1996 revenue included a recovery of amounts due from the former general partners which had been previously written off and a gain on the sale of an Applebee's property. Total revenues should approximate $3,000,000 annually or $750,000 quarterly 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. The decrease from 1995 to 1996 is a result of property sales as well as the one (1) year lease modification entered into with Terratron, the tenant of eight (8) Hardee's restaurants. EXPENSES - - -------- For the quarters ended June 30, 1996 and 1995, cash expenses amounted to approximately 15% and 30%, of total revenues, respectively. For the six months ended June 30, 1996 and 1995, cash expenses totaled 32% and 25%, respectively. Total expenses, including non-cash items, amounted to approximately 30% and 46%, of total 17 revenues for the quarters ended June 30, 1996 and 1995, respectively, and were 41% for both of the six months ended June 30, 1996 and 1995. Items negatively impacting expenses include expenses incurred primarily in relation to the misappropriation of assets by the former general partners and their affiliates. For the six months ended June 30, 1996 and 1995, expenses incurred in relation to the misappropriated assets amounted to $502,000 and $139,000, respectively. Future expenses incurred in relation to the misappropriation should have a minimal impact on the Partnership. As noted above, management believes the Partnership's operations have yet to stabilize to what could be considered normal, due to the negative impact of the costs related to the recovery of the misappropriated assets. INFLATION: - - ---------- Inflation has a minimal effect on operating earnings and related cash flows from a portfolio of triple net leases. By their nature, such leases actually fix revenues and are not impacted by rising costs of maintenance, insurance, or real estate taxes. If inflation causes operating margins to deteriorate for lessees if expenses grow faster than revenues, then, inflation may well negatively impact the portfolio through tenant defaults. It would be misleading to associate inflation with asset appreciation for real estate, in general, and the Partnership's portfolio, specifically. Due to the "triple net" nature of the property leases, asset values generally move inversely with interest rates. PART II - OTHER INFORMATION ITEM 2. LEGAL PROCEEDINGS As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned by them, granted the Partnership a security interest in certain promissory notes and mortgages from other DiVall related entities (the "Private Partnerships"). In the aggregate, the face amount of these notes were equal to a minimum of $8,264,932. In addition, DiVall, Magnuson, and related entities owned by them, granted the Partnership a security interest in their general partner interests in the Private Partnerships. The foregoing security interests were to secure the repayment of the funds which were diverted by DiVall and Magnuson from the Partnership. The Partnership shares such security interests with DiVall 1 and DiVall 3. These promissory notes and mortgages are not recorded on the balance sheets of the Partnerships, but are recorded as recoveries on a cash basis upon settlement. On July 23, 1993, nineteen (19) of the Private Partnerships sought the protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven (7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies were involuntary. Several of the Private Partnerships seeking bankruptcy owe promissory notes to DiVall, Magnuson, or entities owned by them, in which the Partnership has a security interest. These cases were subsequently transferred to the Western District Bankruptcy Court located in Madison, Wisconsin. The Partnership's experience in those bankruptcy cases that have concluded, either through the approval of Plans of Reorganization, dismissal of the bankruptcies, settlements or a combination of the foregoing, is that (i) the value of the obligations of the Private Partnerships assigned to the Partnerships have been at a significant discount to their face amounts, and (ii) the General Partner interests in such Private Partnerships often have little economic value. The Partnership's recoveries in these bankruptcies have, to date, been on a steeply discounted basis. Management anticipates that the recoveries in the remaining unresolved bankruptcies are likely to also be on a deeply discounted basis. 18 Plans of reorganization have been filed in some of the bankruptcies, and settlement agreements in many of the Private Partnerships have been reached. Settlements in eighteen (18) of the bankruptcies to date have resulted in cash payments to the Partnerships of a total of $573,000 and notes secured by subordinated mortgages in the aggregate amount of $625,000. The Partnership is continuing to vigorously defend its interests in the remaining bankruptcies. The Partnerships have been named as defendants in certain foreclosure actions brought in state courts in Wisconsin. In each of these actions, the plaintiff seeks to foreclose on real property owned by one of the Private Partnerships. The Partnerships were named as subordinate lienholders on the properties. It is believed that none of these cases constitute a claim against the individual Public Partnerships. However, if the foreclosures are successful, the Private Partnerships' interest in the underlying real estate may be extinguished, rendering individual obligations to the Partnerships uncollectible. Such a foreclosure has occurred in one instance and is pending in at least one other situation. The Partnership is also pursuing collection actions against former tenants of the Partnership and/or guarantors of former tenants of the Partnership arising from defaults on their leases. Although the Partnership believes its claims are valid, it is currently unknown whether the Partnerships will receive favorable verdicts or whether any such verdicts will ultimately prove collectible. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Listing of Exhibits: 28.0 Correspondence to the Limited Partners dated August 15, 1996, regarding the Second Quarter 1996 distribution. (b) Reports on Form 8-K: The Registrant filed no reports on Form 10-K during the second quarter of fiscal year 1996. 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP By: The Provo Group, Inc., General Partner By: ___________________________ Bruce A. Provo, President Date: August 14, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: The Provo Group, Inc., General Partner By: ___________________________ Bruce A. Provo, President Date: August 14, 1996 By: ____________________________ Kristin J. Atkinson Vice President - Finance and Administration Date: August 14, 1996 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP By: The Provo Group, Inc., General Partner By: /s/Bruce A. Provo ---------------------------- Bruce A. Provo, President Date: August 14, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: The Provo Group, Inc., General Partner By: /s/Bruce A. Provo ---------------------------- Bruce A. Provo, President Date: August 14, 1996 By: /s/Kristin J. Atkinson ---------------------------- Kristin J. Atkinson Vice President - Finance and Administration Date: August 14, 1996 21 THE PROVO GROUP [LETTERHEAD OF The Provo Group] August 15, 1996 RE: SECOND QUARTER 1996 CORRESPONDENCE DIVALL INSURED INCOME PROPERTIES 2, L.P. (THE "PARTNERSHIP") Dear Limited Partner: ______________________________ SECOND QUARTER 1996 HIGHLIGHTS . The Wisconsin ATTORNEY GENERAL'S Office is SEEKING investor INPUT before sentencing Gary J. DiVall and Paul E. Magnuson. (See enclosed correspondence from the Office of Crime Victim Services.) . "NET" settlement PROCEEDS from the Quarles & Brady and Ernst & Young lawsuit were DISTRIBUTED this quarter. (See "Statements of Income and Cash Flow Highlights" below.) . Unauthorized "THIRD-PARTY" solicitations causing investor concern. (See Questions & Answers below.) ______________________________ SECOND QUARTER 1996 "DISTRIBUTION" HIGHLIGHTS . 7.8% (approx.) annualized return from operations and other sources and 2.3% (approx.) non-annualized return of capital from distributed "net" settlement dollars based on $38,886,000 ("net" remaining initial investment). . $1,650,000 "total" amount distributed for the SECOND QUARTER 1996 which was $1,000,000 more than budgeted, primarily due to the disbursement of "net" settlement dollars. . $35.65 per unit (approx.) for the SECOND QUARTER 1996 from both cash flow from ---- operations and "net" cash activity from financing and investing activities. . $690.00 "total" per unit (approx.) distributed SINCE INCEPTION from both cash ---- flow from operations and "net" cash activity from financing and investing activities. (NOTE: ORIGINAL UNITS WERE PURCHASED FOR $1,000/UNIT.) DIVALL INSURED INCOME PROPERTIES 2, L.P August 15, 1996 Page 2 ______________________________ STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS . 11% increase in TOTAL OPERATING REVENUES from projections. . 19% decrease in "TOTAL" EXPENSES from projections. . 31% increase in NET INCOME from projections. . $890,000 total "NET" SETTLEMENT DOLLARS from the Quarles & Brady and Ernst & Young lawsuit were distributed for the quarter ended June 30, 1996. . $106,000 reversal of RESTORATION COSTS WHICH were previously accrued for the Partnership. . $53,000 MORE in RENTAL INCOME than budgeted was recorded during the second quarter due to percentage rents. ______________________________ PROPERTY HIGHLIGHTS VACANCIES --------- . There was one vacancy at June 30, 1996; COUNTRY KITCHEN (Cedar Rapids, IA). --- Earlier this year, the Partnership had executed a sales contract with a "prospective" buyer for this property, however, the closing was delayed due to environmental issues. These environmental issues -- which are soon to be resolved -- were caused by an adjoining property and management is comfortable there is no material impact. The Partnership is, however, negotiating "new" terms to lease (with an option to buy) to the same potential buyer. OTHER PROPERTY MATTERS ---------------------- . Apple South, Inc., tenant of APPLEBEE'S restaurant (Port St. Lucie, FL), was delinquent at June 30, 1996, but has since cured this delinquency. As discussed in our last correspondence, the prior delinquency was a result of a dispute on the "final" sale price of this property. During the second quarter, the purchase price of $1,535,000 was mutually agreed upon, and the closing is scheduled to occur by third quarter. DIVALL INSURED INCOME PROPERTIES 2, L.P. August 15, 1996 Page 3 ______________________________ PROPERTY HIGHLIGHTS (CONT'D) OTHER PROPERTY MATTERS (CONT'D) ------------------------------- . (cont'd) *NOTE: Apple South, Inc. had exercised their option to purchase this APPLEBEE'S restaurant at NO LESS THAN 120% of the original costs. . Terratron, Inc., tenant of HARDEE'S restaurant (Fond du Lac, WI), remains current on its monthly rental payments; however, they continue to experience ------- difficulties with their CATCH-UP rental payments due the Partnership. ______________________________ RESTORATION HIGHLIGHTS . Recoveries received during the SECOND QUARTER 1996 totalled $14,600 (approx.) for the Partnership. . "Total" recoveries received TO DATE for the Partnership amount to approximately $1,868,000. . As previously communicated, the Partnership is in the discovery stage prior to the trial against BOATMEN'S First National Bank of Kansas City. The TRIAL has been scheduled for MARCH of 1997. . The Partnership continues to monitor and negotiate the remaining settlements as they arise with the DiVall "PRIVATE" Partnerships. ______________________________ RETURN OF CAPITAL The following table has been updated to illustrate the breakdown of distributions since the Partnership's first quarterly distribution, for the ----- period ended June 30, 1988 through June 30, 1996. DIVALL INSURED INCOME PROPERTIES 2, L.P. August 15, 1996 Page 4 ______________________________ RETURN OF CAPITAL (CONT'D)
============================================================================= DISTRIBUTION CAPITAL ------------ ------- ANALYSIS BALANCE -------- ------- Original Capital Balance - $46,280,300 Cash Flow From Operations Since Inception $20,060,743 - Total Distributions Since Inception (27,455,268) - ------------ (Return) of Capital $(7,394,525) (7,394,525) ============ ----------- "NET" REMAINING INITIAL INVESTMENT BY ORIGINAL PARTNERS - $38,885,775 =========== =============================================================================
(NOTE: For a more individualized discussion of return of capital contact Investor Relations.) ______________________________ QUESTIONS & ANSWERS 1. WHAT IS THE "CURRENT" VALUE OF MY INVESTMENT IN THE PARTNERSHIP? . According to the Partnership Agreement, we are required to provide valuation information annually which was approximately $650 per unit at December 31, 1995. It is important to understand, however, that your investment value will most likely diminish whenever "original" capital is returned to -------- you. For example, this quarter's distribution included "net" settlement proceeds which is considered return of capital. The overall impact of this $19.23 (approx.) per unit amount (reflective of "net" settlement dollars) on 1996's valuation will not be determined until early 1997. 2. HAS THERE BEEN ANY DECISION MADE REGARDING THE PARTNERSHIP'S LIQUIDATION ALTERNATIVES OR THE POSSIBILITY OF REPOSITIONING ITS ASSETS? . No decision has been made at this time. The Advisory Board has requested feedback from the investor community to assist in our decision-making process. (See enclosed letter from the Advisory Board.) DIVALL INSURED INCOME PROPERTIES 2, L.P. August 15, 1996 Page 5 ______________________________ QUESTIONS & ANSWERS (CONT'D) 3. WHAT ARE MY "IMMEDIATE" LIQUIDATION OPTIONS FOR INTERESTS IN THE PARTNERSHIP? . The only option for immediate liquidation of interests, at this time, is through the secondary market. According to current secondary market trading information provided to management, interests in the Partnership are selling between $425-$575 per unit. It is important to note that there has been a recent increase in the frequency of direct "solicitations" of your interests by third parties. Since we do not have control or support these solicitation efforts, we -- --- strongly urge you to thoroughly review all your options and understand -------- --- their motivation -- prior to any liquidation. We have no affiliation with any "third-party" solicitors of your -- interests; and, as noted above, we do not support any "unsolicited written offers" that you may receive. If you are in receipt of such offers and have questions regarding your investment, we encourage you to contact us. As always, if you have any questions or need additional information, please contact Investor Relations at 1-800-547-7686 or 1-608-829-2992. All written inquiries may be mailed or faxed to: THE PROVO GROUP, INC. Post Office Box 2137 Madison, Wisconsin 53701-2137 (FAX 608-829-2996) Sincerely, THE PROVO GROUP, INC. By: /s/ Brenda Bloesch By: /s/ Kristin Atkinson ------------------------------- ---------------------------- Brenda Bloesch Kristin Atkinson Director of Investor Relations V.P. - Finance and Administration Enclosures - - -------------------------------------------------------------------------------- DIVALL INSURED INCOME PROPERTIES 2 L.P. STATEMENTS OF INCOME AND CASH FLOW CHANGES FOR THE THREE MONTH PERIOD ENDED JUNE 30, 1996 - - --------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE ------------------------------------------------------- 2ND 2ND QUARTER QUARTER BETTER OPERATING REVENUES 6/30/96 6/30/96 (WORSE) -------------- ---------------- ------------------ Rental income $743,857 $796,959 $53,102 Direct financing interest 15,478 15,471 (7) Interest income 16,944 30,726 13,782 Recovery of amounts previously written off 0 14,641 14,641 Other income 0 3,494 3,494 -------------- ---------------- ------------------ TOTAL OPERATING REVENUES $776,279 $861,291 $85,012 -------------- ---------------- ------------------ OPERATING EXPENSES Insurance $8,009 $8,796 ($787) Management fees 43,182 43,098 84 Restoration fees 0 585 (585) Overhead allowance 3,600 3,592 8 Advisory Board 4,600 4,249 351 Administrative 30,433 48,690 (18,257) Professional services 946 1,687 (741) Auditing 12,000 13,237 (1,237) Legal 12,600 27,363 (14,763) Defaulted tenants 300 2,589 (2,289) -------------- ---------------- ------------------ TOTAL OPERATING EXPENSES $115,670 $153,886 ($38,216) -------------- ---------------- ------------------ GROUND RENT $30,945 $30,936 $9 -------------- ---------------- ------------------ INTEREST EXPENSE $0 $1,741 ($1,741) -------------- ---------------- ------------------ INVESTIGATION AND RESTORATION EXPENSES $47,257 ($58,284) $105,541 -------------- ---------------- ------------------ NON-OPERATING EXPENSES Depreciation $123,291 $129,488 ($6,197) Amortization 201 201 0 -------------- ---------------- ------------------ TOTAL NON-OPERATING EXPENSES $123,492 $129,689 ($6,197) -------------- ---------------- ------------------ TOTAL EXPENSES $317,364 $257,968 $59,396 -------------- ---------------- ------------------ NET INCOME $458,915 $603,323 $144,408 OPERATING CASH RECONCILIATION: VARIANCE ------------------ Depreciation and amortization 123,492 129,689 6,197 Recovery of amounts previously written off 0 (14,641) (14,641) (Increase) Decrease in current assets (47,661) (57,073) (9,412) Increase (Decrease) in current liabilities (8,106) (66,531) (58,425) Decrease in Security Deposits 0 (10,380) (10,380) (Increase) Decrease in cash reserved for payables 3,000 130,000 127,000 Advance from/(to) future cash flows for current distributions 80,000 60,000 (20,000) -------------- ---------------- ------------------ Net Cash Provided From Operating Activities $609,640 $774,387 $164,747 -------------- ---------------- ------------------ CASH FLOWS FROM (USED IN) INVESTING AND FINANCING ACTIVITIES Payments received from affiliated partnerships 0 0 0 Recoveries from former G.P. affiliates 0 14,641 14,641 Disbursement from Restoration Escrow 0 889,945 889,945 Principal received on equipment leases 39,011 38,412 (599) Sale of Investment Properties 0 0 0 Principal payments on mortgage notes 0 (67,010) (67,010) -------------- ---------------- ------------------ Net Cash Provided From Investing And Financing Activities $39,011 $875,988 $836,977 -------------- ---------------- ------------------ TOTAL CASH FLOW FOR QUARTER $648,651 $1,650,375 $1,001,724 Cash Balance Beginning of Period 3,740,608 2,702,470 (1,038,138) Less 1st quarter distributions paid 5/96 (3,375,000) (2,025,000) 1,350,000 Change in cash reserved for payables or future distributions (83,000) (190,000) (107,000) -------------- ---------------- ------------------ Cash Balance End of Period $931,259 $2,137,845 $1,206,586 Cash reserved for 2nd quarter L.P. distributions (650,000) (1,650,000) (1,000,000) Cash reserved for future distributions 0 (40,000) (40,000) Cash reserved for payment of payables (122,000) (270,000) (148,000) -------------- ---------------- ------------------ Unrestricted Cash Balance End of Period $159,259 $177,845 $18,586 ============== ================ ================== - - ----------------------------------------------------------------------------------------------------------------------------- PROJECTED ACTUAL VARIANCE ------------------------------------------------------ * Quarterly Distribution $650,000 $1,650,000 $1,000,000 Mailing Date 8/15/96 (enclosed) - - - -----------------------------------------------------------------------------------------------------------------------------
* Refer to distribution letter for detail of quarterly distribution. PROJECTIONS FOR DISCUSSION PURPOSES DIVALL INSURED INCOME PROPERTIES 2 LP 1996 PROPERTY SUMMARY AND RELATED ESTIMATED RECEIPTS
PORTFOLIO (Note 1) ------------------------------------- --------------------------------------------------- REAL ESTATE EQUIPMENT ------------------------------------- --------------------------------------------------- ANNUAL LEASE ANNUAL - - ------------------------------------ BASE % EXPIRATION LEASE % * CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN - - ------------------------------------ ------------------------------------- --------------------------------------------------- APPLEBEE'S PORT ST.LUCIE, FL 1,346,719 178,800 13.28% APPLEBEE'S COLUMBUS, OH 1,059,465 135,780 12.82% 06/30/97 84,500 17,438 20.64% BLOCKBUSTER OGDEN, UT 646,425 94,836 14.67% COUNTRY KIT. CEDAR RAPIDS, IA 660,156 0 0.00% DENNY'S N. SYMRNA BCH, FL 1,025,830 133,380 13.00% DENNY'S DAYTONA, FL 1,029,844 136,800 13.28% DENNY'S (2)(3) PHOENIX, AZ 295,750 39,000 13.19% 224,376 0 0.00% DENNY'S (2) PHOENIX, AZ 972,726 84,000 8.64% 183,239 0 0.00% DENNY'S (2) PHOENIX, AZ 865,900 86,000 9.93% 221,237 0 0.00% DENNY'S TWIN FALLS, ID 699,032 78,000 11.16% 04/30/99 190,000 37,860 19.93% DENNY'S (2)(3) PHOENIX, AZ 500,000 37,000 7.40% 14,259 0 0.00% HARDEE'S (5) S MILWAUKEE, WI 808,032 81,000 10.02% HARDEE'S (5) DELEVAN, WI 718,250 45,000 6.27% 12/31/99 (4) 221,813 29,420 13.26% HARDEE'S (5) HARTFORD, WI 686,563 72,000 10.49% HARDEE'S (5) MILWAUKEE, WI 1,010,045 99,000 9.80% 12/31/99 (4) 260,000 35,593 13.69% " " 12/31/99 (4) 151,938 24,205 15.93% HARDEE'S (5) OCONOMOWOC, WI 802,750 72,000 8.97% HARDEE'S (5) W JORDAN, UT 617,907 72,000 11.65% HARDEE'S (5) SANDY, UT 355,847 50,472 14.18% HARDEE'S (5) FOND DU LAC, WI 849,767 103,500 12.18% 12/31/99 (4) 290,469 50,713 17.46% HARDEE'S (5) MILWAUKEE, WI 0 0 0.00% 780,000 0 0.00% HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62% HOSTETTLER'S DES MOINES, IA 845,000 55,584 6.58% 52,813 0 0.00% KFC SANTA FE, NM 451,230 60,000 13.30% MIAMI SUBS PALM BEACH, FL 743,625 32,000 4.30% - - ------------------------------------ ------------------------------------- -------------------------------------------------- --------------------------------------------------------- ORIGINAL EQUITY $46,280,300 NET DISTRIBUTION OF CAPITAL SINCE INCEPTION $7,394,525 ---------------- CURRENT EQUITY $38,885,775 -----------------------------------------================ -------------------------------------- ---------------- TOTALS TOTAL % ON -------------------------------------- 38,885,775 ANNUAL EQUITY - - ------------------------------------ CONCEPT LOCATION COST RECEIPTS RETURN RAISE - - ------------------------------------ -------------------------------------- ---------------- APPLEBEE'S PORT ST.LUCIE, FL 1,346,719 178,800 13.28% APPLEBEE'S COLUMBUS, OH 1,143,965 153,218 13.39% BLOCKBUSTER OGDEN, UT 646,425 94,836 14.67% COUNTRY KIT. CEDAR RAPIDS, IA 660,156 0 0.00% DENNY'S N. SYMRNA BCH, FL 1,025,830 133,380 13.00% DENNY'S DAYTONA, FL 1,029,844 136,800 13.28% DENNY'S (2)(3) PHOENIX, AZ 520,126 39,000 7.50% DENNY'S (2) PHOENIX, AZ 1,155,965 84,000 7.27% DENNY'S (2) PHOENIX, AZ 1,087,137 86,000 7.91% DENNY'S TWIN FALLS, ID 889,032 115,860 13.03% DENNY'S (2)(3) PHOENIX, AZ 514,259 37,000 7.19% HARDEE'S (5) S MILWAUKEE, WI 808,032 81,000 10.02% HARDEE'S (5) DELEVAN, WI 940,063 74,420 7.92% HARDEE'S (5) HARTFORD, WI 686,563 72,000 10.49% HARDEE'S (5) MILWAUKEE, WI 1,421,983 158,798 11.17% " " HARDEE'S (5) OCONOMOWOC, WI 802,750 72,000 8.97% HARDEE'S (5) W JORDAN, UT 617,907 72,000 11.65% HARDEE'S (5) SANDY, UT 355,847 50,472 14.18% HARDEE'S (5) FOND DU LAC, WI 1,140,236 154,213 13.52% HARDEE'S (5) MILWAUKEE, WI 780,000 0 0.00% HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62% HOSTETTLER'S DES MOINES, IA 897,813 55,584 6.19% KFC SANTA FE, NM 451,230 60,000 13.30% MIAMI SUBS PALM BEACH, FL 743,625 32,000 4.30% - - ------------------------------------ -------------------------------------- ----------------
Note 1: This property summary includes only current property and equipment held by the Partnership. Equipment lease receipts shown include a return of capital. 2: Rent is based on 12.5% of monthly sales. Rent projected for 1996 is based on 1995 sales levels. 3: The Partnership entered into a long-term ground lease in which the Partnership is responsible for payment of rent. The annual base rent shown is net of the underlying ground lease rent. 4: The lease was modified effective January 1, 1996, extending the remaining lease over four years at a rate of 10% per annum. 5: A one-year lease modification was entered into with this tenant reducing base rent for 1996 by a total of approximately $200,000. Page 1 of 2 PROJECTINS FOR DISCUSSION PURPOSES DIVALL INSURED INCOME PROPERTIES 2 LP 1996 PROPERTY SUMMARY AND RELATED ESTIMATED RECEIPTS
PORTFOLIO (Note 1) -------------------------------------- -------------------------------------------------- REAL ESTATE EQUIPMENT -------------------------------------- -------------------------------------------------- ANNUAL LEASE ANNUAL - - ------------------------------------ BASE % EXPIRATION LEASE % CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN - - ------------------------------------ -------------------------------------- -------------------------------------------------- POPEYE'S PARK FOREST, IL 580,938 77,280 13.30% SUNRISE PS PHOENIX, AZ 1,084,503 127,920 11.80% 12/31/96 79,219 16,373 20.67% 06/30/97 19,013 3,930 20.67% VILLAGE INN GRAND FORKS, ND 739,375 84,000 11.36% WENDY'S AIKEN, SC 633,750 90,480 14.28% WENDY'S CHARLESTION, SC 580,938 77,280 13.30% WENDY'S N. AUGUSTA, SC 660,156 87,780 13.30% WENDY'S AUGUSTA, GA 728,813 96,780 13.28% WENDY'S CHARLESTON, SC 596,781 76,920 12.89% WENDY'S AIKEN, SC 776,344 96,780 12.47% WENDY'S AUGUSTA, GA 649,594 86,160 13.26% WENDY'S CHARLESTON, SC 528,125 70,200 13.29% WENDY'S MT. PLEASANT, SC 580,938 77,280 13.30% WENDY'S MARTINEZ, GA 633,750 84,120 13.27% HALLANDALE TAG HALLANDALE, FL 792,188 30,000 3.79% - - ------------------------------------ -------------------------------------- -------------------------------------------------- - - ------------------------------------ -------------------------------------- --------------------------------- PORTFOLIO TOTALS (37 Properties) 27,803,775 3,004,132 10.80% 2,772,876 215,531 7.77% - - ------------------------------------ -------------------------------------- --------------------------------- -------------------------------------------------------- ORIGINAL EQUITY $46,280,300 NET DISTRIBUTION OF CAPITAL SINCE INCEPTION $7,394,525 ---------------- CURRENT EQUITY $38,885,775 ------------------------------------------================ -------------------------------------- ----------------- TOTALS TOTAL % ON --------------------------------------- 38,885,775 - - ------------------------------------ TOTAL EQUITY CONCEPT LOCATION COST RECEIPTS RETURN RAISE - - ------------------------------------ --------------------------------------- ----------------- POPEYE'S PARK FOREST, IL 580,938 77,280 13.30% SUNRISE PS PHOENIX, AZ 1,182,735 148,222 12.53% VILLAGE INN GRAND FORKS, ND 739,375 84,000 11.36% WENDY'S AIKEN, SC 633,750 90,480 14.28% WENDY'S CHARLESTION, SC 580,938 77,280 13.30% WENDY'S N. AUGUSTA, SC 660,156 87,780 13.30% WENDY'S AUGUSTA, GA 728,813 96,780 13.28% WENDY'S CHARLESTON, SC 596,781 76,920 12.89% WENDY'S AIKEN, SC 776,344 96,780 12.47% WENDY'S AUGUSTA, GA 649,594 86,160 13.26% WENDY'S CHARLESTON, SC 528,125 70,200 13.29% WENDY'S MT. PLEASANT, SC 580,938 77,280 13.30% WENDY'S MARTINEZ, GA 633,750 84,120 13.27% HALLANDALE TAG HALLANDALE, FL 792,188 30,000 3.79% - - ------------------------------------ --------------------------------------- ----------------- - - ------------------------------------ --------------------------------------- ----------------- PORTFOLIO TOTALS (37 Properties) 30,576,651 3,219,664 10.53% 8.28% - - ------------------------------------ --------------------------------------- -----------------
Note 1: This property summary includes only current property and equipment held by the Partnership. Equipment lease receipts shown include a return of capital. Page 2 of 2 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from June 30, 1996 Form 10-Q and is qualified in its entirety by reference to such financial statements. 3-MOS 6-MOS DEC-31-1995 DEC-31-1995 APR-01-1996 JAN-01-1996 JUN-30-1996 JUN-30-1996 1,237,564 1,237,564 1,182,584 1,182,584 7,037,159 7,037,159 5,825,860 5,825,860 0 0 3,631,447 3,631,447 27,772,505 27,772,505 5,556,146 5,556,146 25,847,806 25,847,806 377,522 377,522 0 0 0 0 0 0 0 0 25,470,284 25,470,284 25,847,806 25,847,806 812,430 1,648,326 861,291 2,853,108 0 0 0 0 256,225 1,162,001 0 0 1,741 3,551 603,325 1,687,556 0 0 603,325 1,687,556 0 0 0 0 0 0 603,325 1,687,556 12.91 36.10 12.91 36.10
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