-----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, TbwtcH9UcpHOwqjGAFvhtL/76CfdLHgHlmkfSL4hJLY02UgF9QgiJaufB5fEeOlw 2SDp6YkNaWC0HiZaDSRrnA== 0000950131-96-005740.txt : 19961209 0000950131-96-005740.hdr.sgml : 19961209 ACCESSION NUMBER: 0000950131-96-005740 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 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: 96661247 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 September 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 ------- ------ PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS September 30, 1996 and December 31, 1995 ---------------------------------------- ASSETS
(Unaudited) September 30, December 31, 1996 1995 -------------- ------------- INVESTMENT PROPERTIES AND EQUIPMENT:(NOTE 3) Land $ 9,141,303 $10,027,077 Buildings 16,614,705 18,153,026 Equipment 669,778 669,778 Accumulated depreciation (5,427,753) (5,491,806) ----------- ----------- Net investment properties and equipment 20,998,033 23,358,075 ----------- ----------- NET INVESTMENT IN DIRECT FINANCING LEASES:(NOTE 8) 474,894 590,527 ----------- ----------- OTHER ASSETS: Cash and cash equivalents 2,976,900 1,005,764 Cash restricted for real estate taxes 184 61,217 Cash held in Indemnification Trust (NOTE 11) 286,486 275,231 Rents and other receivables (net of allowance of $64,687 in 1996 and $254,543 in 1995) 210,856 459,213 Due from current General Partner 0 275 Deferred rent receivable 259,324 296,482 Due from affiliated partnerships (NOTE 12) 0 96,088 Prepaid insurance 3,424 19,631 Unsecured notes receivable from lessees (net of allowance of $304,992 in 1996) 89,948 50,000 ----------- ----------- Total other assets 3,827,122 2,263,901 ----------- ----------- DUE FROM FORMER AFFILIATES: (NOTES 2 AND 12) Due from former general partner affiliates 1,949,773 3,529,205 Allowance for uncollectible amounts due from former affiliates (1,949,773) (2,607,104) Restoration cost receivable 3,746,234 2,823,862 Allowance for uncollectible restoration receivable (3,746,234) (2,823,862) ----------- ----------- Due from former affiliates, net 0 922,101 ----------- ----------- Total assets $25,300,049 $27,134,604 =========== ===========
The accompanying notes are an integral part of these statements. 2 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 ---------------------------------------- LIABILITIES AND PARTNERS' CAPITAL
(Unaudited) September 30, December 31, 1996 1995 -------------- ------------- LIABILITIES: Equipment notes payable (NOTE 6) $ 0 $ 77,255 Accounts payable and accrued expenses 123,927 266,715 Due to current General Partner 4,230 496 Security deposits 212,223 250,577 Unearned rental income 48,361 18,065 Real estate taxes payable 37,831 57,018 ------------ ------------ Total liabilities 426,572 670,126 ------------ ------------ 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 74,739 47,289 Cumulative cash distributions (29,225) (18,245) ------------ ------------ 45,514 29,044 ------------ ------------ Limited Partners (46,280.3 interests outstanding) Capital contributions, net of offering costs 39,358,468 39,358,468 Cumulative net income 13,764,992 11,047,463 Cumulative cash distributions (27,455,268) (23,130,268) Reallocation of former general partners' deficit capital (840,229) (840,229) ------------ ------------ 24,827,963 26,435,434 ------------ ------------ Total partners' capital 24,873,477 26,464,478 ------------ ------------ Total liabilities and partners' capital $ 25,300,049 $ 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 Nine Months Ended ------------------ ----------------- September 30, September 30, ------------- ------------- 1996 1995 1996 1995 ---- ---- ---- ---- REVENUES: Rental income (NOTE 5) $ 857,490 $916,747 $2,472,172 $2,819,770 Interest income on direct financing leases 14,426 29,154 48,070 80,196 Other interest income 20,272 8,534 70,669 54,539 Recovery of amount previously written off 12,925 0 657,331 0 Other income 35,859 3,532 61,613 10,156 Gain on disposal of assets 445,772 0 929,997 1,729 ---------- -------- ---------- ---------- 1,386,744 957,967 4,239,852 2,966,390 ---------- -------- ---------- ---------- EXPENSES: Partnership management fees 43,098 41,714 128,512 122,699 Disposition fees 46,000 0 66,550 3,000 Disposition fees - Restoration 0 0 20,550 3,000 Restoration fees 517 210 25,155 2,341 Selling Commissions 0 0 0 9,900 Appraisal fees 0 0 2,268 0 Insurance 7,371 12,582 29,812 36,361 General and administrative (NOTE 9) 26,748 15,208 102,231 78,972 Advisory Board fees and expenses 4,446 4,924 13,059 13,594 Interest 0 11,103 3,551 33,633 Real estate taxes 0 0 (1,709) 0 Ground lease payments (NOTE 3) 31,124 30,936 92,996 92,890 Expenses incurred due to default by lessee 2,269 16,956 4,737 20,672 Professional services 29,157 20,727 107,224 93,880 Professional services related to investigation 8,901 129,796 510,869 269,218 Loss on equipment lease 0 0 0 7,273 Depreciation 129,489 137,316 388,465 449,101 Amortization 201 201 603 603 ---------- -------- ---------- ---------- 329,321 421,673 1,494,873 1,237,137 ---------- -------- ---------- ---------- NET INCOME $1,057,423 $536,294 $2,744,979 $1,729,253 ========== ======== ========== ========== NET INCOME - CURRENT GENERAL PARTNER $ 10,574 $ 5,363 $ 27,450 $ 17,293 NET INCOME - LIMITED PARTNERS 1,046,849 530,931 2,717,529 1,711,960 ---------- -------- ---------- ---------- $1,057,423 $536,294 $2,744,979 $1,729,253 ========== ======== ========== ========== NET INCOME (LOSS) PER LIMITED PARTNERSHIP INTEREST, based on 46,280.3 Interests outstanding $ 22.62 $ 11.47 $ 58.72 $ 36.99 ========== ======== ========== ==========
The accompanying notes are an integral part of these statements. 4 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (UNAUDITED) -----------
Nine Months Ended September 30, -------------------------------- 1996 1995 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,744,979 $ 1,729,253 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 389,068 449,704 Recovery of amounts previously written off (657,331) 0 Net (gain) on disposal of assets (929,997) (1,729) Loss on equipment lease 0 7,273 Interest applied to Indemnification Trust account (11,255) (14,298) (Increase) Decrease in rents and other receivables 248,630 (251,050) (Deposits)withdrawals for payment of real estate taxes 61,033 (13,270) Decrease in prepaids 16,207 17,962 Decrease in deferred rent receivable 37,158 12,523 Increase in due to current General Partner 3,734 3,840 (Decrease) in accounts payable and other (142,788) (11,659) (Decrease) in security deposits (38,354) (200) (Decrease) in real estate taxes payable (19,187) (56,612) Increase/(Decrease) in unearned rental income 30,296 (7,056) ----------- ----------- Net cash from operating activities 1,732,193 1,864,681 ----------- ----------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Principal payments received on direct financing leases 115,030 293,925 Proceeds from sale of investment properties 2,901,576 300,000 Recoveries from former affiliates 1,579,432 58,525 Increase in unsecured notes from lesses (39,948) 0 Payments from affiliated partnerships 96,088 26,013 ----------- ----------- Net cash from investing activities 4,652,178 678,463 ----------- ----------- CASH FLOWS (USED IN) FINANCING ACTIVITIES: Cash distributions to Limited Partners (4,325,000) (2,780,000) Cash distributions to current General Partner (10,980) (6,632) Payments of equipment notes (77,255) (181,789) ----------- ----------- Net cash (used in) financing activities (4,413,235) (2,968,421) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,971,136 (425,277) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,005,764 1,349,101 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,976,900 $ 923,824 =========== =========== SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 3,551 $ 33,633 =========== ===========
The accompanying 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 September 30, 1996, the Partnership owned 36 properties with specialty leasehold improvements in 16 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 $14,000,000, of which approximately $5,696,000 has been attributed to the Partnership and is reflected as due from former affiliates on the balance sheet at September 30, 1996. The 9% interest accrued as of September 30, 1996, amounted to approximately $1,790,000 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 $657,000 during the first nine 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 September 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 September 30, 1996, the Partnership owned 33 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, one (1) Applebee's restaurant, 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 36 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 September 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 pursuing 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 $36,742 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 36 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 September 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. During September 1996, management began negotiating new leases with Hardee's Food Systems, Inc., whereby all payments due from Terratron for 1996 under their modified lease terms would be received. Management anticipates execution of these leases during the Fourth Quarter of 1996. 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. Several of the Partnership's property leases contain purchase option provisions with stated purchase prices in excess of the original cost of the properties. The current General Partner is not aware of any unfavorable purchase options in relation to original cost. 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 closed on September 30, 1996 at a gain of approximately $446,000. 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 9 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 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. During September 1996, management began negotiating new leases with Hardee's Food Systems, Inc., whereby all payments due from Terratron for 1996 under their modified lease terms would be received. Management anticipates execution of these leases during the Fourth Quarter of 1996. 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 nine-month periods ended September 30, 1996 and 1995 are as follows.
Incurred as of Incurred as of Current General Partner September 30, 1996 September 30, 1995 - - ----------------------- ------------------ ------------------ Management fees $128,512 $122,699 Disposition fees 66,550 3,000 Restoration fees 25,155 2,341 Overhead allowance 10,710 10,420 Reimbursement for out-of-pocket expenses 15,322 13,762 Cash distribution 10,980 6,632 -------- -------- $257,229 $158,854 ======== ========
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 September 30, 1996: Minimum lease payments receivable $540,470 Estimated residual values of leased property (non-recourse) 22,364 Acquisition fees, net 201 Less-Unearned income (88,141) -------- Net investment in direct financing leases $474,894 ========
At September 30, 1996, future minimum lease payments for each of the four succeeding fiscal years are as follows:
Year ending December 31, 1996 $ 57,557 1997 196,139 1998 177,791 1999 131,347 -------- $562,834 ========
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 September 30, 1996 and 1995, general and administrative expenses incurred by the Partnership were as follows:
Three Months Ended Nine months Ended September 30, September 30, -------------------- --------------------- 1996 1995 1996 1995 ------- ------- -------- ------- Communication costs $15,715 $ 9,659 $ 57,756 $44,888 Other administration 952 (407) 4,493 3,156 Travel costs 1,483 365 3,407 2,266 Overhead allowance 3,592 3,494 10,710 10,420 Registration/filing fees 3,056 2,097 10,420 7,039 Income taxes 1,950 0 15,445 11,203 ------- ------- -------- ------- $26,748 $15,208 $102,231 $78,972 ======= ======= ======== =======
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 September 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 September 30, 1996. Funds are invested in U.S. Treasury securities. In addition, $36,486 of earnings have been credited to the Trust as of September 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 September 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 September 30, 1996, the Partnerships recovered a total of approximately $4,609,000 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 $1,865,000. Additionally, $40,347, representing 50% of all previously escrowed disposition fees earned by the General Partner, is reflected as a 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 September 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 September 30, 1996, interest in the amount of $213,000 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 $232,000, 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 13 and trial. Pursuant 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 $580,000 and notes secured by subordinated mortgages in the aggregate amount of $625,000. Two of the settlement notes have subsequently been sold for a total of $50,000, and an option has been granted to purchase the remaining note for $125,000. 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 November 15, 1996, the Partnership made distributions to the Limited Partners for the Third Quarter of 1996 of $2,500,000 amounting to approximately $54.02 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 September 30, 1996, were originally purchased at a price, including acquisition costs, of approximately $27,000,000. 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 took place in the Third Quarter of 1996 at a gain of approximately $446,000. 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. During September 1996, management began negotiating new leases with Hardee's Food Systems, Inc., whereby all payments due from Terratron for 1996 under their modified lease terms would be received. Management anticipates execution of these leases during the Fourth Quarter of 1996. The net investment in direct financing leases, which includes the Partnership's specialty leasehold improvement leases, amounted to $475,000 at September 30, 1996, compared to $591,000 at December 31, 1995. The decrease of $116,000 was a result of principal payments received. OTHER ASSETS - - ------------ Cash and cash equivalents, including cash restricted for real estate taxes was approximately $2,977,000 at September 30, 1996, compared to $1,067,000 at December 31, 1995. The Partnership designated cash of $2,500,000 to fund the Third Quarter 1996 distributions to Limited Partners, $290,000 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. 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 an additional $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 $1,950,000 at September 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 $3,746,000 at September 30, 1996, and includes $1,790,000 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 $657,000 during the first nine 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 September 30, 1996. LIABILITIES - - ----------- Accounts payable and accrued expenses at September 30, 1996, in the amount of $124,000, 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 $4,325,000 and $10,980, respectively, have also been in accordance with the amended Partnership Agreement. The Third Quarter 1996 distribution of $2,500,000 was paid to the Limited Partners on November 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 September 30, 1996, in the amount of $1,057,000 compared to net income for the quarter ended September 30,1995, of $536,000. For the nine months ended September 30, 1996 and 1995, net income totaled $2,745,000 and $1,729,000, respectively. Results for all periods were different 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, as well as gains recorded during 1996 on the sales of two Applebee's properties. 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 remainder of 1996 due to the settlement of the litigation. REVENUES - - -------- Total revenues were $1,387,000 and $958,000, for the quarters ended September 30, 1996 and 1995, respectively, and were $4,240,000 and $2,966,000 for the nine months ended September 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 two Applebee's properties. 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 in estimated recurring revenues 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 September 30, 1996 and 1995, cash expenses amounted to approximately 14% and 30%, of total revenues, respectively. For both the nine months ended September 30, 1996 and 1995, cash expenses totaled 26%. Total expenses, including non-cash items, amounted to approximately 24% and 44%, of total 17 revenues for the quarters ended September 30, 1996 and 1995, respectively, and were 35% and 42% for the nine months ended September 30, 1996 and 1995, respectively. 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 nine months ended September 30, 1996 and 1995, expenses incurred in relation to the misappropriated assets amounted to $511,000 and $269,000, 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 $580,000 and notes secured by subordinated mortgages in the aggregate amount of $625,000. Two of the settlement notes have subsequently been sold for a total of $50,000, and an option has been granted to purchase the remaining note for $125,000. 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 November 15, 1996, regarding the Third Quarter 1996 distribution. (b) Reports on Form 8-K: The Registrant filed no reports on Form 10-K during the third 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: /s/ Bruce A. Provo -------------------------------------------- Bruce A. Provo, President Date: November 13, 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: November 13, 1996 By: /s/ Kristin J. Atkinson ------------------------------------------- Kristin J. Atkinson Vice President - Finance and Administration Date: November 13, 1996 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from September 30, 1996 Form 10-Q and is qualified in its entirety by reference to such financial statements. 3-MOS 9-MOS DEC-31-1995 DEC-31-1995 JUL-01-1996 JAN-01-1996 SEP-30-1996 SEP-30-1996 2,977,084 2,977,084 286,486 286,486 7,104,132 7,104,132 6,065,686 6,065,686 0 0 4,302,016 4,302,016 26,425,786 26,425,786 5,427,753 5,427,753 25,300,049 25,300,049 426,572 426,572 0 0 0 0 0 0 0 0 24,873,477 24,873,477 25,300,049 25,300,049 871,916 2,520,242 1,386,744 4,239,852 0 0 0 0 329,321 1,491,322 0 0 0 3,551 1,057,423 2,744,979 0 0 1,057,423 2,744,979 0 0 0 0 0 0 1,057,423 2,744,979 22.62 58.72 22.62 58.72
EX-28 3 CORRESPONDENCE TO PARTNERS [LOGO] THE PROVO GROUP November 15, 1996 RE: THIRD QUARTER 1996 CORRESPONDENCE DIVALL INSURED INCOME PROPERTIES 2, L.P. (THE "PARTNERSHIP") Dear Limited Partner: _____________________________ THIRD QUARTER 1996 HIGHLIGHTS . Former general partner, GARY J. . Former general partner, PAUL E. DIVALL, is currently scheduled MAGNUSON, recently pleaded to be sentenced on DECEMBER 2, "no-contest" to criminal charges 1996 for his plea of "no contest" brought against him by the to criminal charges brought against Wisconsin Attorney General's him by the Wisconsin Attorney Office earlier this year. A General's Office earlier this year. sentencing hearing date has been "tentatively" scheduled for JANUARY 1997. . During the quarter, the APPLEBEE'S restaurant in Port St. Lucie, Florida was SOLD. (See "Property Highlights" below.) _____________________________ THIRD QUARTER 1996 "DISTRIBUTION" HIGHLIGHTS . 10.4% (approx.) annualized return . $2,500,000 "total" amount from operations and other sources distributed for the THIRD QUARTER and 4.1% (approx.) non-annualized 1996 which was comprised of 36% return of capital from the sale of from operations and other sources the Applebee's based on $37,300,000 and 64% from the sale of the ("net" remaining initial investment). Applebee's in Port St. Lucie, Florida. ________ 1410 Northport Drive Madison, Wisconsin 53704 Post Office Box 2137 Madison, Wisconsin 53701-2137 608.244.7661 FAX 608.244.7663 [LOGO] THE PROVO GROUP DIVALL INSURED INCOME PROPERTIES 2, L.P. November 15, 1996 Page 2 _______________________________ THIRD QUARTER 1996 "DISTRIBUTION" HIGHLIGHTS (CONT'D) . $54.02 per unit (approx.) for the THIRD QUARTER 1996 from both cash flow from operations and "net" cash activity from financing and investing activities. . $744.00 to $546.00 range of distributions per unit from the first unit sold to the last unit sold before the offering closed (February 1990), respectively. Distributions are from both cash flow from operations and "net" cash activity from financing and investing activities. (NOTE: ORIGINAL UNITS WERE PURCHASED FOR $1,000/UNIT.) _______________________________ STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS . 22% increase in OPERATING REVENUES . 29% increase in "TOTAL" EXPENSES from projections. from projections. . The Partnership experienced a . Rental income was $116,000 higher $446,000 "NET" GAIN on the sale of than projected due to the an Applebee's restaurant. receipt of "non-budgeted" rental income as a result of the delay . Operating expenses were $60,000 in closing the Applebee's sale. more than budgeted primarily due In addition, percentage rents to fees related to the Applebee's were received from various sale. stores. . The Partnership received $35,000 during the quarter as a result of a bankruptcy settlement with Stillman Management Company, tenant of the Popeye's restaurant in Park Forest, Illinois. (See "Property Highlights" below.) _______________________________ PROPERTY HIGHLIGHTS VACANCIES --------- . COUNTRY KITCHEN restaurant (Cedar Rapids, IA) was vacant at September 30, 1996. The Partnership continues to work with prospective tenants for either the re-lease or sale of this property. [LOGO] THE PROVO GROUP DIVALL INSURED INCOME PROPERTIES 2, L.P. November 15, 1996 Page 3 _______________________________ PROPERTY HIGHLIGHTS (CONT'D) VACANCIES (CONT'D) ------------------ . HARDEE'S restaurant (Delavan, WI) was vacant at September 30, 1996. Terratron, Inc., tenant of this store, CLOSED its doors during the First Quarter 1996 due to poor sales. The tenant, however, continues to make monthly rental payments for the property. The Partnership is working to re- lease this restaurant to a new tenant. RENTS RECEIVABLE ---------------- . Terratron, Inc., tenant of . (cont'd) The Partnershis is currently eight (8) HARDEE'S negotiating with HARDEE's restaurants (Wisconsin and FOOD SYSTEMS, INC. as a Utah), remained current with prospective tenant for these its monthly rental payments; properties (except Utah and however, they are delinquent Delavan, Wisconsin). with their CATCH UP rental payments at September 30, 1996. Delinquencies will be cured at the time of closing which is scheduled to occur during the Fourth Quarter of 1996. SALE OF PROPERTIES ------------------ . On September 30, 1996, the Partnership sold the APPLEBEE'S restaurant (Port St. Lucie, Florida) for $1,535,000 which resulted in a net gain of $446,000. This tenant exercised their option to purchase this property at NO LESS THAN 120% of the original cost. We disputed the basis of cost and delayed closing for 11 months facilitating the collection of additional rentals in the amount of $192,000. OTHER PROPERTY MATTERS ---------------------- . Stillman Management Company, tenant of the POPEYE'S restaurant (Park Forest, IL), filed Chapter 11 Bankruptcy in March 1994. Since that time, the Partnership has been monitoring and responding to the bankruptcy proceedings. (NOTE: THIS TENANT HAS REMAINED CURRENT WITH MONTHLY RENTAL PAYMENTS SINCE FILING BANKRUPTCY.) As part of the settlement of these bankruptcy issues, the Partnership received a promissory note in the amount of $200,000 for prior delinquent rent. In addition, the Partnership also received a $43,000 promissory note for past due percentage rents. Monthly installment payments toward these obligations began this quarter and will continue over the next 4-5 years. DIVALL INSURED INCOME PROPERTIES 2, L.P. November 15, 1996 Page 4 ============================ RESTORATION HIGHLIGHTS . Recoveries received during the . The Partnership continues its THIRD QUARTER 1996 totalled "discovery" phase with respect $13,000 (approx.) for the to the Boatmen's litigation. The Partnership. trial against BOATMEN'S First National Bank of Kansas City has . "Total" recoveries received TO been "tentatively" re-scheduled DATE for the Partnership amount to occur during the SECOND to approximately $1,881,000. QUARTER OF 1997. . The Partnership is negotiating its final settlements with the DiVall "PRIVATE" Partnerships. ============================ RETURN OF CAPITAL The following table has been updated to present the breakdown of distributions since the Partnership's first quarterly distribution, for the period ended June 30, 1988 through September 30, 1996.
================================================================================ DISTRIBUTION CAPITAL ------------ ------- ANALYSIS BALANCE -------- ------- Original Capital Balance - $46,280,300 Cash Flow From Operations Since Inception $ 20,972,299 - Total Distributions Since Inception (29,955,268) - ------------ (Return) of Capital $ (8,982,969) (8,982,969) ============ ----------- "NET" REMAINING INITIAL INVESTMENT BY ORIGINAL PARTNERS - $37,297,331 =========== ================================================================================
(NOTE: For a more individualized discussion of return of capital contact Investor Relations.) DIVALL INSURED INCOME PROPERTIES 2, L.P. November 15, 1996 Page 5 ============================ ADVISORY BOARD The thirteenth Advisory Board meeting was held on October 29 and 30, 1996. The new Board member, Mr. Richard Otte, who replaced Mr. Michael Bloom (whose term expired September 30, 1996), was given a comprehensive orientation of the Partnerships' affairs. Mr. Otte was nominated by the Limited Partners and selected to represent DiVall Insured Income Properties 2, L.P. to serve a two (2) year term. The members carrying over from the prior Board include Mr. Gerhard Zoller representing DiVall Insured Income Fund, L.P., Dr. Albert Eschen representing DiVall Income Properties 3, L.P., and Mr. Todd Witthoeft representing the broker/dealer community. For further information regarding the new Advisory Board member, please refer to the enclosed biographical summary. ============================ QUESTIONS & ANSWERS 1. HAS THERE BEEN A DECISION MADE REGARDING THE PARTNERSHIP'S LIQUIDATION ALTERNATIVES OR THE POSSIBILITY OF REPOSITIONING ITS ASSETS? . As a result of the feedback we received from investors in DiVall Insured Income Properties 2, L.P. (survey results enclosed), it has been recommended that the Partnership be dissolved over the next 3-5 years. In the interim, management will continue to work aggressively to maximize the values of the Partnership's asset portfolio. WE APPRECIATE THE FEEDBACK WE RECEIVED FROM THE SURVEY. THANK YOU FOR YOUR PARTICIPATION. 2. 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 $375-$520 per unit. IT IS IMPORTANT TO NOTE THAT PERIODICALLY YOU MAY RECEIVE DIRECT "SOLICITATIONS" OF YOUR INTERESTS BY THIRD PARTIES. WE DO NOT CONTROL NOR SUPPORT THESE SOLICITATION EFFORTS. WE STRONGLY URGE YOU TO THOROUGHLY REVIEW ALL YOUR OPTIONS AND UNDERSTAND EACH SOLICITOR'S MOTIVATION. WE ENCOURAGE YOU TO CONTACT US IF YOU HAVE ANY QUESTIONS ABOUT YOUR INVESTMENT. DIVALL INSURED INCOME PROPERTIES 2, L.P. November 15, 1996 Page 6 ============================== QUESTIONS & ANSWERS (CONT'D) 3. WHEN CAN I EXPECT TO RECEIVE MY SCHEDULE K-1 FOR 1996? . Our current schedule for mailing all 1996 Schedule K-1's for your Partnership and its affiliated partnerships is no later than March 14, 1997. 4. WHEN WILL 1996 PER UNIT VALUES BE AVAILABLE FOR MY INVESTMENT IN THE PARTNERSHIP? . The Partnership's 1996 "year-end" valuation information is tentatively scheduled to be available by the First Quarter of 1997. We will include this information in our 1996 Annual Reports which we plan to mail by early April 1997. 5. WHEN CAN I EXPECT MY NEXT DISTRIBUTION MAILING? . Your next scheduled distribution correspondence for the Fourth Quarter of 1996 will be mailed on February 14, 1997. As always, if you have any questions or need additional information, please contact Investor Relations at 1-800-547-7686 or 1-608-244-7661. All written inquiries may be mailed or faxed to our "NEW" location: THE PROVO GROUP, INC. Post Office Box 2137 1410 Northport Drive Madison, Wisconsin 53701-2137 Madison, Wisconsin 53704 (FAX 608-244-7663) 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 SEPTEMBER 30, 1996
- - -------------------------------------------------------------------------------------------------------------- PROJECTED ACTUAL VARIANCE ------------------------------------------- 3RD 3RD QUARTER QUARTER BETTER 9/30/96 9/30/96 (WORSE) --------- ----------- ----------- OPERATING REVENUES Rental income $ 741,957 $ 857,490 $ 115,533 Direct financing interest 14,517 14,426 (91) Interest income 17,123 20,272 3,149 Recovery of amounts previously written off 0 12,925 12,925 Gain on sale of assets 0 445,772 445,772 Other income 0 35,859 35,859 --------- ----------- ----------- TOTAL OPERATING REVENUES $ 773,597 $ 1,386,744 $ 613,147 --------- ----------- ----------- OPERATING EXPENSES Insurance $ 7,795 $ 7,371 $ 424 Management fees 43,182 43,098 84 Restoration fees 0 517 (517) Overhead allowance 3,600 3,591 9 Advisory Board 4,600 4,446 154 Administrative 16,058 23,157 (7,099) Professional services 473 2,197 (1,724) Auditing 12,000 13,239 (1,239) Legal 11,600 13,721 (2,121) Disposition fees 0 46,000 (46,000) Defaulted tenants 300 2,269 (1,969) --------- ----------- ----------- TOTAL OPERATING EXPENSES $ 99,608 $ 159,606 $ (59,998) --------- ----------- ----------- GROUND RENT $ 30,945 $ 31,124 $ (179) --------- ----------- ----------- INTEREST EXPENSE $0 $0 $ 0 --------- ----------- ----------- INVESTIGATION AND RESTORATION EXPENSES $ 1,212 $ 8,901 $ (7,689) --------- ----------- ----------- NON-OPERATING EXPENSES Depreciation $ 123,291 $ 129,489 $ (6,198) Amortization 201 201 0 --------- ----------- ----------- TOTAL NON-OPERATING EXPENSES $ 123,492 $ 129,690 $ (6,198) --------- ----------- ----------- TOTAL EXPENSES $ 255,257 $ 329,321 $ (74,064) --------- ----------- ----------- NET INCOME $ 518,340 $ 1,057,423 $ 539,083 VARIANCE ----------- OPERATING CASH RECONCILIATION: Depreciation and amortization 123,492 129,690 6,198 Recovery of amounts previously written off 0 (12,925) (12,925) Gain on sale of assets 0 (445,772) (445,772) (Increase) Decrease in current assets (6,607) 121,304 127,911 Increase (Decrease) in current liabilities (8,236) 64,051 72,287 Decrease in Security Deposits 0 (12,975) (12,975) (Increase) Decrease in cash reserved for payables 6,000 20,000 14,000 Advance from/(to) future cash flows for current distributions (22,000) 0 22,000 --------- ----------- ----------- Net Cash Provided From Operating Activities $ 610,989 $ 920,796 $ 309,807 --------- ----------- ----------- CASH FLOWS FROM (USED IN) INVESTING AND FINANCING ACTIVITIES Payments received from affiliated partnerships 0 0 0 Recoveries from former G.P. affiliates 0 12,925 12,925 Principal received on equipment leases 39,452 40,909 1,457 Sale of Investment Properties 0 1,534,610 1,534,610 Principal payments on mortgage notes 0 0 0 --------- ----------- ----------- Net Cash Provided From Investing And Financing Activities $ 39,452 $ 1,588,444 $ 1,548,992 --------- ----------- ----------- Total Cash Flow For Quarter $ 650,441 $ 2,509,240 $ 1,858,799 Cash Balance Beginning of Period 931,259 2,137,845 1,206,586 Less 2nd quarter distributions paid 8/96 (650,000) (1,650,000) (1,000,000) Change in cash reserved for payables or future distributions 16,000 (20,000) (36,000) --------- ----------- ----------- Cash Balance End of Period $ 947,700 $ 2,977,085 $ 2,029,385 Cash reserved for 3rd quarter L.P. distributions (650,000) (2,500,000) (1,850,000) Cash reserved for future distributions 0 (40,000) (40,000) Cash reserved for payment of payables (138,000) (250,000) (112,000) --------- ----------- ----------- Unrestricted Cash Balance End of Period $ 159,700 $ 187,085 $ 27,385 ========= =========== =========== - - -------------------------------------------------------------------------------------------------------------- PROJECTED ACTUAL VARIANCE ------------------------------------------- * Quarterly Distribution $ 650,000 $ 2,500,000 $ 1,850,000 Mailing Date 11/15/96 (enclosed) - - - --------------------------------------------------------------------------------------------------------------
* Refer to distribution letter for detail of quarterly distribution.
--------------------------------------------- PROJECTIONS FOR |ORIGINAL EQUITY $25,000,000| DISCUSSION PURPOSES |NET DISTRIBUTION OF | | CAPITAL SINCE INCEPTION $ 2,423,994| | --------------| |CURRENT EQUITY $22,576,006| ------------------------------==============- DIVALL INSURED INCOME PROPERTIES L.P. 1996 PROPERTY SUMMARY AND RELATED ESTIMATED RECEIPTS PORTFOLIO ---------------------------------- ------------------------------------------- REAL ESTATE EQUIPMENT ---------------------------------- ------------------------------------------- - - -------------------------------- BASE % LEASE LEASE * % * CONCEPT LOCATION COST RENT YIELD EXPIRATION COST RECEIPTS RETURN - - -------------------------------- ---------------------------------- ------------------------------------------- CHI CHI'S GRAND FORKS, ND 984,801 0 0.00% CHI CHI'S EAU CLAIRE, WI 1,042,730 136,260 13.07% VACANT LAND COL. SPRINGS, CO 356,549 0 0.00% DENNY'S** GLENDALE, AZ 1,105,926 95,000 8.59% 68,744 0 0.00% DENNY'S** SCOTTSDALE, AZ 1,051,157 107,500 10.23% 40,553 0 0.00% DENNY'S** MESA, AZ 1,028,036 82,100 7.99% 39,218 0 0.00% DENNY'S** PEORIA, AZ 1,105,926 93,000 8.41% 58,781 0 0.00% BW-III HOPKINS, MN 795,050 66,000 8.30% 1/15/2000 190,000 37,860 19.93% DENNY'S BEAVER DAM, WI 659,299 66,000 10.01% 3/31/2000 190,000 37,860 19.93% FAZOLI'S DES MOINES, IA 565,476 45,500 8.05% 39,600 0 0.00% HARDEE'S FOND DU LAC, WI 1,026,931 90,000 8.76% POPEYE'S CHICAGO, IL 473,968 63,180 13.33% POPEYE'S CHICAGO, IL 610,893 81,420 13.33% POPEYE'S CHICAGO, IL 484,501 64,620 13.34% POPEYE'S CHICAGO, IL 610,893 81,420 13.33% POPEYE'S CHICAGO, IL 437,105 58,260 13.33% POPEYE'S CHICAGO, IL 631,958 84,180 13.32% POPEYE'S CHICAGO, IL 579,295 77,280 13.34% PORTERHOUSE CHICAGO, IL 905,807 0 0.00% TACO CABANA ARLINGTON, TX 1,474,569 132,000 8.95% TACO CABANA DALLAS, TX 1,369,243 132,000 9.64% TACO CABANA DALLAS, TX 1,257,596 132,000 10.50% TACO CABANA DALLAS, TX 1,308,153 132,000 10.09% - - -------------------------------- ---------------------------------- ------------------------------------------- - - -------------------------------- ---------------------------------- ------------------------------------------- PORTFOLIO TOTALS (23 PROPERTIES) 19,865,862 1,819,720 9.16% 626,896 75,720 12.08% - - -------------------------------- ---------------------------------- ------------------------------------------- OUTSTANDING DEBT ---------------------------------- ------------------------------------- AMOUNT ANNUAL CURRENT AMOUNT ANNUAL CURRENT - - -------------------------------- OWED DEBT INTEREST OWED DEBT INTEREST MORTGAGED PROPERTIES 9/30/96 SERVICE RATE 9/30/96 SERVICE RATE - - -------------------------------- ---------------------------------- ------------------------------------- DENNY'S HOPKINS, MN 107,613 14,783 10.75% 179,355 24,637 10.75% DENNY'S BEAVER DAM, WI 70,837 8,726 9.50% 177,714 21,514 9.50% MULTIPLE STORES AZ, TX 600,000 0 8.50% - - -------------------------------- ---------------------------------- ------------------------------------- - - -------------------------------- ---------------------------------- ------------------------------------- TOTALS 778,450 23,509 - 357,069 46,151 - - - -------------------------------- ---------------------------------- ------------------------------------- - - -------------------------------- ---------------------------------- ------------------------------------- NET AFTER DEBT 19,087,412 1,796,211 9.41% 269,827 29,569 10.96% - - -------------------------------- ---------------------------------- ------------------------------------- ---------------------------------- ------------- TOTALS TOTAL % ---------------------------------- ON 22,576,006 - - -------------------------------- EQUITY CONCEPT LOCATION INVESTED RECEIPTS * RETURN * RAISE - - -------------------------------- ---------------------------------- ------------- CHI CHI'S GRAND FORKS, ND 984,801 0 0.00% CHI CHI'S EAU CLAIRE, WI 1,042,730 136,260 13.07% VACANT LAND COL. SPRINGS, CO 356,549 0 0.00% DENNY'S** GLENDALE, AZ 1,174,670 95,000 8.09% DENNY'S** SCOTTSDALE, AZ 1,091,710 107,500 9.85% DENNY'S** MESA, AZ 1,067,254 82,100 7.69% DENNY'S** PEORIA, AZ 1,164,707 93,000 7.98% BW-III HOPKINS, MN 985,050 103,860 10.54% DENNY'S BEAVER DAM, WI 849,299 103,860 12.23% FAZOLI'S DES MOINES, IA 605,076 45,500 7.52% HARDEE'S FOND DU LAC, WI 1,026,931 90,000 8.76% POPEYE'S CHICAGO, IL 473,968 63,180 13.33% POPEYE'S CHICAGO, IL 610,893 81,420 13.33% POPEYE'S CHICAGO, IL 484,501 64,620 13.34% POPEYE'S CHICAGO, IL 610,893 81,420 13.33% POPEYE'S CHICAGO, IL 437,105 58,260 13.33% POPEYE'S CHICAGO, IL 631,958 84,180 13.32% POPEYE'S CHICAGO, IL 579,295 77,280 13.34% PORTERHOUSE CHICAGO, IL 905,807 0 0.00% TACO CABANA ARLINGTON, TX 1,474,569 132,000 8.95% TACO CABANA DALLAS, TX 1,369,243 132,000 9.64% TACO CABANA DALLAS, TX 1,257,596 132,000 10.50% TACO CABANA DALLAS, TX 1,308,153 132,000 10.09% - - -------------------------------- ---------------------------------- ------------- - - -------------------------------- ---------------------------------- ------------- PORTFOLIO TOTALS (23 PROPERTIES) 20,492,758 1,895,440 9.25% 8.40% - - -------------------------------- ---------------------------------- ------------- OUTSTANDING DEBT ---------------------- AMOUNT ANNUAL - - -------------------------------- OWED DEBT MORTGAGED PROPERTIES 9/30/96 SERVICE - - -------------------------------- ---------------------- DENNY'S HOPKINS, MN 286,968 39,420 DENNY'S BEAVER DAM, WI 248,551 30,240 MULTIPLE STORES AZ, TX 600,000 0 - - -------------------------------- ---------------------- - - -------------------------------- ---------------------- TOTALS 1,135,519 69,660 - - -------------------------------- ---------------------- - - -------------------------------- ---------------------------------- ------------- NET AFTER DEBT 19,357,239 1,825,780 9.43% 8.09% - - -------------------------------- ---------------------------------- -------------
* A portion of the amounts disclosed include a return of principal. ** Rent is based on 12.5% of monthly sales. Rent projected for 1996 is based on 1995 sales levels. PROJECTIONS FOR DISCUSSION PURPOSES
----------------------------------------------- ORIGINAL EQUITY $46,280,300 DIVALL INSURED INCOME PROPERTIES 2 LP NET DISTRIBUTION OF 1996 PROPERTY SUMMARY CAPITAL SINCE INCEPTION $8,982,969 AND RELATED ESTIMATED RECEIPTS ----------- CURRENT EQUITY $37,297,331 =========== ----------------------------------------------- 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 CHARLESTON, 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 (36 Properties) 26,457,056 2,825,332 10.68% 2,772,876 215,531 7.77% - - ---------------------------------- ------------------------------- -----------------------------
TOTALS TOTAL % ON ------------------------------ $37,297,331 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 CHARLESTON, 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 (36 Properties) 29,229,932 3,040,864 10.40% 8.15% - - ---------------------------------- ------------------------------ ----------
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 [LOGO] - - -------------------------------------------------------------------------------- BIOGRAPHICAL SUMMARY FOR ------------------------ RICHARD W. OTTE --------------- Current Position: Mr. Otte is in his sixth year as an Editorial Board member and editorial writer for The Volusian, a DeLand, Florida, subsidiary of the News-Journal Corporation in Daytona Beach, Florida. Experience: Mr. Otte retired in 1988 after 34 years with the Dispatch Printing Co., serving his last eight years as Managing Editor of the Columbus Dispatch and as a member of its Operating Committee. He previously was the executive sports editor of the newspaper in Ohio's capital city. Mr. Otte's 49 years in professional journalism also include news reporting, editing and sports assignments with the Daytona Journal Herald and Springfield News-Sun. He was co-owner of the Daytona Beach Astros professional baseball club in 1979-1980. Affiliations: Mr. Otte is a Life Member of the National Amateur Athletic Union as well as past president of the Ohio AAU, Ohio Associated Press Society and Ohio AP Sports Writers Association. He was a founder and past president of the Central Ohio Swimming Association. Personal: Mr. Otte and wife Marjory reside in the Spruce Creek Fly-In Community near Daytona Beach. Both are graduates of Wittenberg University. Mr. Otte was presented the Ohio Associated Press Special Recognition Award in 1986, Wittenberg's Distinguished Graduate Award in 1987 and a Sigma Delta Chi Professional Journalism Society Appreciation Award in 1988. - - -------------------------------------------------------------------------------- [LOGO]
- - ------------------------------------------------------------------------------------------------------------------------------------ DIVALL INSURED INCOME PROPERTIES 2, L.P. - INVESTMENT SURVEY RESPONSE SUMMARY SHEET Total Number of DiVall 2 Investors = 2,746 Total Number of DiVall 2 Investor Responses = 900 Total Number of Units in DiVall 2 = 46,280.3 Total Number of DiVall 2 Unit Responses = 15,659.75 Total Investor Response Percentage 32.77% Total Unit Response Percentage 33.84% Strongly For For No Opinion Against Strongly Against ----------------- ----------------- ----------------- ----------------- ---------------- Investors Units Investors Units Investors Units Investors Units Investors Units --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ Maximize values for future liquidation. 64.78% 65.13% 18.44% 15.82% 11.22% 11.96% 3.78% 4.58% 1.78% 2.51% Create additional current liquidity alternatives. 24.78% 19.56% 25.22% 28.40% 35.89% 37.33% 7.89% 8.80% 6.22% 5.92% Create long-term income and preserve tax advantages. 22.22% 23.13% 20.00% 19.47% 27.78% 27.57% 14.44% 17.91% 15.56% 11.93% Grow the portfolio through reinvestment of distributions; additional L.P. investment; and/or debt financing 7.22% 5.97% 6.44% 5.46% 25.56% 25.52% 21.22% 22.28% 38.56% 40.78% - - ------------------------------------------------------------------------------------------------------------------------------------
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