-----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, TsyzgnNCfkF0AOF5N3xkA3ZLGh0z+JtWxH8V7lCIgnsCMEyXjp2zlAZEMQudhiI9 zfBRw/woLve5g3zYqXX38w== 0000950131-97-003407.txt : 19970520 0000950131-97-003407.hdr.sgml : 19970520 ACCESSION NUMBER: 0000950131-97-003407 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 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: 97604187 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 March 31, 1997 ---------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to _____________________ Commission file number 0-17686 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Wisconsin 39-1606834 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 101 W. 11th Street, Suite 1110, Kansas City, Missouri 64105 (Address of principal executive offices, including zip code) (816) 421-7444 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Interests Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS March 31, 1997 and December 31, 1996 ------------------------------------ ASSETS
(Unaudited) March 31, December 31, 1997 1996 ----------- ------------ INVESTMENT PROPERTIES AND EQUIPMENT: (Note 3) Land $ 8,605,185 $ 9,141,303 Buildings 15,273,975 16,488,654 Equipment 707,378 707,378 Accumulated depreciation (5,245,204) (5,550,940) ----------- ----------- Net investment properties and equipment 19,341,334 20,786,395 ----------- ----------- NET INVESTMENT IN DIRECT FINANCING LEASES: (Note 7) 101,200 108,826 ----------- ----------- OTHER ASSETS: Cash and cash equivalents 2,523,401 1,444,326 Cash restricted for real estate taxes 16,808 110,625 Cash held in Indemnification Trust (Note 9) 293,766 289,637 Rents and other receivables (net of allowance of $2,975 in 1997 and $0 in 1996) 152,694 218,051 Deferred rent receivable 259,339 259,326 Prepaid insurance 15,138 22,262 Deferred charges 47,923 53,620 Unsecured notes receivable from lessees 82,224 86,288 ----------- ----------- Total other assets 3,391,293 2,484,135 ----------- ----------- DUE FROM FORMER AFFILIATES: (Notes 2 and 10) Due from former general partner affiliates 1,741,240 1,743,461 Allowance for uncollectible amounts due from former affiliates (1,741,240) (1,743,461) Restoration cost receivable 4,040,675 3,897,981 Allowance for uncollectible restoration receivable (4,040,675) (3,897,981) ----------- ----------- Due from former affiliates, net 0 0 ----------- ----------- Total assets $22,833,827 $23,379,356 =========== ===========
The accompanying notes are an integral part of these statements. 2 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS March 31, 1997 and December 31, 1996 ------------------------------------ LIABILITIES AND PARTNERS' CAPITAL
(Unaudited) March 31, December 31, 1997 1996 ------------ ------------ LIABILITIES: Accounts payable and accrued expenses $ 49,328 $ 67,589 Due to current General Partner 30,301 86,727 Security deposits 139,670 144,290 Unearned rental income 132,182 57,739 Real estate taxes payable 46,908 119,131 ------------ ------------ Total liabilities 398,389 475,476 ------------ ------------ CONTINGENT LIABILITIES: (Note 8) PARTNERS' CAPITAL: (Notes 1, 4 and 12) Current General Partner - Cumulative net income 85,401 80,064 Cumulative cash distributions (33,490) (31,355) ------------ ------------ 51,911 48,709 ------------ ------------ Limited Partners (46,280.3 interests outstanding) Capital contributions, net of offering costs 39,358,468 39,358,468 Cumulative net income 14,820,556 14,292,200 Cumulative cash distributions (30,955,268) (29,955,268) Reallocation of former general partners' deficit capital (840,229) (840,229) ------------ ------------ 22,383,527 22,855,171 ------------ ------------ Total partners' capital 22,435,438 22,903,880 ------------ ------------ Total liabilities and partners' capital $ 22,833,827 $ 23,379,356 ============ ============
The accompanying notes are an integral part of these statements. 3 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF INCOME (Unaudited) -----------
Three Months Ended March 31, ---------------------- 1997 1996 -------- ---------- REVENUES: Rental income (Note 5) $761,332 $ 817,723 Interest income on direct financing leases 3,226 18,173 Other interest income 18,014 19,671 Recovery of amount previously written off 2,221 629,765 Other income 12,015 22,260 Gain on disposal of assets 72,256 484,225 -------- ---------- 869,064 1,991,817 -------- ---------- EXPENSES: Partnership management fees 43,572 42,316 Disposition fees 37,166 20,550 Disposition fees - Restoration 0 20,550 Restoration fees 89 24,053 Appraisal fees 4,597 2,268 Insurance 7,124 13,645 General and administrative 30,744 23,203 Advisory Board fees and expenses 4,088 4,364 Interest 0 1,810 Real estate taxes 0 (1,709) Ground lease payments (Note 3) 31,785 30,936 Expenses incurred due to default by lessee 2,156 (121) Professional services 27,799 35,780 Professional services related to investigation 17,219 560,252 Depreciation 123,335 129,488 Amortization 5,697 201 -------- ---------- 335,371 907,586 -------- ---------- NET INCOME $533,693 $1,084,231 ======== ========== NET INCOME - CURRENT GENERAL PARTNER $ 5,337 $ 10,842 NET INCOME - LIMITED PARTNERS 528,356 1,073,389 -------- ---------- $533,693 $1,084,231 ======== ========== NET INCOME (LOSS) PER LIMITED PARTNERSHIP INTEREST, based on 46,280.3 Interests outstanding $ 11.42 $ 23.19 ======== ==========
The accompanying notes are an integral part of these statements. 4 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS (Unaudited) ___________
Three Months Ended March 31, ------------------------- 1997 1996 ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 533,693 $1,084,231 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 129,032 129,689 Recovery of amounts previously written off (2,221) (629,765) Net (gain) on disposal of assets (72,256) (484,225) Interest applied to Indemnification Trust account (4,129) (3,518) Decrease in rents and other receivables 65,357 165,917 (Deposits) Withdrawals for payment of real estate taxes 93,817 (448) Decrease in prepaids 7,124 3,852 (Increase) Decrease in deferred rent receivable (13) 17,051 Increase (Decrease) in due to current General Partner (56,426) 3,841 (Decrease) in accounts payable and other (18,261) (110,724) (Decrease) in security deposits (4,620) (15,000) (Decrease) in real estate taxes payable (72,223) (21,962) Increase (Decrease) in unearned rental income 74,443 0 ----------- ---------- Net cash from operating activities 673,317 138,939 ----------- ---------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Principal payments received on direct financing leases 7,626 35,709 Principal payments received on notes receivable 4,064 0 Proceeds from sale of investment properties 1,393,982 1,366,966 Recoveries from former affiliates 2,221 1,551,866 Deposit to restoration escrow 0 (889,945) Payments from affiliated partnerships 0 96,088 ----------- ---------- Net cash from investing activities 1,407,893 2,160,684 ----------- ---------- CASH FLOWS (USED IN) FINANCING ACTIVITIES: Cash distributions to Limited Partners (1,000,000) (650,000) Cash distributions to current General Partner (2,135) (4,337) Payments of equipment notes 0 (10,245) ----------- ---------- Net cash (used in) financing activities (1,002,135) (664,582) ----------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,079,075 1,635,041 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,444,326 1,005,764 ----------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,523,401 $2,640,805 =========== ========== SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 0 $ 1,810 =========== ==========
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 March 31, 1997, the Partnership owned 33 properties with specialty leasehold improvements in 15 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. Deferred charges consist of leasing commissions paid when properties are leased to tenants other than the original tenant. Leasing commissions are capitalized and amortized over the life of the lease. Real estate taxes on the Partnership's investment properties are the responsibility of the tenant. However, when a tenant fails to make the required tax payments or when a property becomes vacant, the Partnership makes the appropriate payment to avoid possible foreclosure of the property. Taxes are accrued in the period in which the liability is incurred. Cash and cash equivalents include cash on deposit with financial institutions and highly liquid temporary investments with initial maturities of 90 days or less. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the finanacial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 6 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. 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, 1996, the tax basis of the Partnership's assets exceeded the amounts reported in the accompanying financial statements by approximately $8,300,000. 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 $14,300,000, of which approximately $5,782,000 has been attributed to the Partnership and is reflected as due from former affiliates on the balance sheet at March 31, 1997. The 9% interest accrued as of March 31, 1997, amounted to approximately $2,044,000 and is not reflected in the accompanying income statement. As of December 31, 1996, approximately $5,641,000 was reflected as due from former affiliates based on estimated overall misappropriation and related costs of $14,000,000. Subsequent to discovery, and in response to the regulatory inquiries, a third- party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed (effective February 8, 1993) to assume responsibility for daily operations and assets of the Partnerships as well as to develop and execute a plan of restoration for the Partnerships. Effective May 26, 1993, the Limited Partners, by written consent of a majority of interests, elected the Permanent Manager, TPG, as General Partner. TPG terminated the former general partners by accepting their tendered resignations. In 1993, the current General Partner estimated an aggregate recovery of $3 million for the Partnerships. At that time, an allowance was established against amounts due from former general partners and their affiliates reflecting the estimated $3 million receivable. This net receivable was allocated among the Partnerships based on each Partnership's pro rata share of the total misappropriation. Through March 31, 1997, $5,166,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, the Partnership has recognized $866,000 as income, which represents its share of the excess recovery. The current General Partner continues to pursue recoveries of the misappropriated funds, however, no further significant recoveries are anticipated. 3. INVESTMENT PROPERTIES: ---------------------- As of March 31, 1997, the Partnership owned 30 fully constructed fast-food restaurants, a tag agency, a video store, and a preschool. The properties are comprised of the following: ten (10) Wendy's restaurants, five (5) 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) Hostettler'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 33 properties are located in a total of thirteen (13) states. From time to time, the Partnership experiences interruptions in rental receipts due to tenant delinquencies and vacancies. At March 31, 1997, two of the Partnership's properties were unoccupied. During 1995, the tenant of the Country Kitchen restaurant in Cedar Rapids, Iowa, vacated the property and stopped making rent payments. 7 Management is currently marketing the property for lease. During the First Quarter of 1997, DenAmerica, the tenant of the Partnership's Denny's restaurants, notified the Partnership that is has vacated the property in Twin Falls, North Dakota and ceased paying rent. Management is currently working with DenAmerica to resolve the issue. 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 current General Partner receives a fee for managing the Partnership equal to 4% of gross receipts, with a maximum reimbursement for office rent and related office overhead of $25,000 between the three affiliated Partnerships as provided in the Permanent Manager Agreement ("PMA"). Effective March 1, 1997, the minimum management fee and the maximum reimbursement for office rent and overhead increased by 3.3% representing the allowable annual Consumer Price Index adjustment per the PMA. For purposes of computing the 4% overall fee, gross receipts includes amounts recovered in connection with the misappropriation of assets by the former general partners and their affiliates. TPG has received fees from the Partnership totaling $45,084 to date on the amounts recovered, which has been offset against the 4% minimum fee. The Partnership owns four (4) restaurants located on parcels of land where it has entered into long-term ground leases. Two (2) of these leases are paid by the tenant and two (2) are paid by the Partnership. The leases paid by the Partnership are considered operating leases and the lease payments are expensed in the periods to which they apply. The lease terms require aggregate minimum annual payments of approximately $124,000 and expire in the years ranging from 1998 to 2003. The tenant operating a Denny's restaurant on Camelback Road in Phoenix, Arizona, has not formally exercised its option to extend its lease which expired on January 30, 1993, but continues to operate the restaurant and pay rent. Management is currently negotiating a possible new lease or sale of the property to the tenant. Several of the Partnership's property leases contained purchase option provisions with stated purchase prices in excess of the original cost of the properties. The current General Partner is not aware of any unfavorable purchase options in relation to original cost. The tenant of the Parnership's Hardee's restaurants exercised their negotiated options to purchase three of their properties during the First Quarter of 1997. These sales resulted in gross proceeds to the Partnership of $1,394,000 with a net gain of $72,000. 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 8 Capital from the Return Calculation date including in the calculation of such return all prior distributions of Net Cash Receipts and any prior distributions of Net Proceeds under this clause; and (c) then, to Limited Partners, 90% and to the General Partners, 10%, of the remaining Net Proceeds available for distribution. On May 26, 1993, pursuant to the results of a solicitation of written consents from the Limited Partners, the Partnership Agreement was amended to replace the former general partners and amend various sections of the agreement. The former general partners were replaced as General Partner by The Provo Group, Inc., an Illinois corporation. Under the terms of the amendment, net profits or losses from operations are allocated 99% to the Limited Partners and 1% to the current General Partner. The amendment also provided for distributions from Net Cash Receipts to be made 99% to Limited Partners and 1% to the current General Partner provided, that quarterly distributions will be cumulative and will not be made to the current General Partner unless and until each Limited Partner has received a distribution from Net Cash Receipts in an amount equal to 10% per annum, cumulative simple return on his or her Adjusted Original Capital, as defined, from the Return Calculation Date, as defined, except to the extent needed by the General Partner to pay its federal and state income taxes on the income allocated to 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 8.) 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. 9 Aggregate minimum lease payments to be received under the leases for the Partnership's properties are as follows: Year ending December 31, 1997 $ 2,908,582 1998 2,810,316 1999 2,804,916 2000 2,801,584 2001 2,692,654 Thereafter 20,617,293 ----------- $34,635,345 ===========
Five (5) of the Partnership's properties are leased to Hardee's Food Systems, Inc. The corporate owner of Hardee's restaurants and ten (10) of the properties are leased to Wensouth Orlando, a franchisee of Wendy's restaurants. Hardee's base rent accounts for 12% of total base rents and Wensouth accounts for 26% of base rents. 6. TRANSACTIONS WITH CURRENT GENERAL PARTNER: ------------------------------------------ Amounts paid to the current General Partner for the three-month periods ended March 31, 1997 and 1996 are as follows.
Incurred as of Incurred as of Current General Partner March 31, 1997 March 31, 1996 - - ----------------------- -------------- -------------- Management fees $43,572 $42,316 Disposition fees 37,166 20,550 Restoration fees 89 24,053 Overhead allowance 3,592 3,526 Reimbursement for out-of-pocket expenses 5,885 4,872 Cash distribution 2,135 4,337 ------- ------- $92,439 $99,654 ======= =======
7. 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 March 31, 1997: Minimum lease payments receivable $ 93,304 Estimated residual values of leased property (non-recourse) 22,364 Less-Unearned income (14,468) -------- Net investment in direct financing leases $101,200 ========
At March 31, 1997, future minimum lease payments for each of the succeeding fiscal years are as follows:
Year ending December 31, 1997 $ 50,108 1998 37,860 1999 27,700 -------- $115,668 ========
10 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. 8. 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 surpassing the recovery level of $4,500,000. The remaining amount allocated to the Partnership may be owed to the current General Partner if the $6,000,000 recovery level is met. As of March 31, 1997, 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. 9. 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 March 31, 1997. Funds are invested in U.S. Treasury securities. In addition, $43,766 of earnings have been credited to the Trust as of March 31, 1997. 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. 10. RESTORATION TRUST ACCOUNT AND EXPENSE ALLOCATIONS; -------------------------------------------------- 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. 11 Recoveries realized by the Partnerships are being distributed to each respective partnership on the same basis as the restoration costs are currently being allocated. As of March 31, 1997, the Partnerships recovered a total of approximately $5,126,000 from the former general partners and their affiliates. Of this amount, the Partnership received its pro-rata share in the amount of $2,073,000. Additionally, $40,347, representing 50% of all previously escrowed disposition fees earned by the General Partner have been paid to the recovery. Of that amount, $16,296 was allocated to the Partnership and is contingently payable to the General Partner upon achievement of the final recovery level as described in Note 8. 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 March 31, 1997, 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 March 31, 1997, interest in the amount of $239,000 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 $260,000, representing the default rate of interest may be due. Boatmen's has agreed to stay its foreclosure proceedings pending the outcome of the litigation. Boatmen's answered the complaint and filed a motion for summary judgment to which DiVall 1 responded. The District Court granted Boatmen's motion for summary judgement. DiVall 1 appealed and the Eighth Circuit Court of Appeals reversed the District Court's ruling. The case was sent back to the District Court for further discovery and trial. Trial of the case is scheduled to begin on June 23, 1997. 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. 11. 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. 12 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 been on a steeply discounted basis. Plans of reorganization have been filed in the bankruptcies, and settlement agreements in all of the Private Partnerships have been reached. Settlements in the bankruptcies have resulted in cash payments to the Partnerships of a total of $720,000 and notes secured by subordinated mortgages in the aggregate amount of $625,000. The Partnerships subsequently sold the secured notes for a total of $175,000. 12. 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. 13. SUBSEQUENT EVENTS: ------------------ On May 15, 1997, the Partnership made distributions to the Limited Partners for the First Quarter of 1997 of $2,000,000 amounting to approximately $43.21 per limited partnership interest. 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 March 31, 1997, were originally purchased at a price, including acquisition costs, of approximately $27,629,000. The tenant of the Country Kitchen restaurant in Cedar Rapids, Iowa vacated the property during 1995 and ceased paying rent. Management is currently marketing the property for lease. During the First Quarter of 1997, DenAmerica, the tenant of the Partnership's Denny's restaurants, notified the Partnership that is has vacated the property in Twin Falls, North Dakota, and ceased paying rent. Management is currently working with DenAmerica to resolve the issue. Due to the damaging floods and record snowfalls in Grand Forks, North Dakota, the tenant of the Village Inn has experienced financial difficulties. Management intends to work with the tenant by abating rent on the property until the business is back in operation. 13 The tenant of the Partnership's Hardee's restaurants exercised their negotiated option to purchase three (3) of their properties during the First Quarter of 1997, resulting in a net gain of approximately $72,000. The net investment in direct financing leases, which includes the Partnership's specialty leasehold improvement leases, amounted to $101,000 at March 31, 1997, compared to $109,000 at December 31, 1996. The decrease of $8,000 was a result of principal payments received during the quarter. Other Assets - - ------------ Cash and cash equivalents, including cash restricted for real estate taxes was approximately $2,540,000 at March 31, 1997, compared to $1,555,000 at December 31, 1996. The Partnership designated cash of $2,000,000 to fund the First Quarter 1997 distributions to Limited Partners, $270,000 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 $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 9 to the financial statements. 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 $1,741,000 at March 31, 1997. The receivable decreased from December 31, 1996 due to $2,000 of recoveries received during the quarter from the former general partners and their affiliates. 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 $3,898,000 at December 31, 1996, to $4,041,000 at March 31, 1997, and includes $2,044,000 of cumulative accrued interest. In 1993, the current General Partner estimated an aggregate recovery of $3 million for the Partnerships. At that time, an allowance was established against amounts due from former general partners and their affiliates reflecting the estimated $3 million receivable. This net receivable was allocated among the Partnerships based on each Partnership's pro rata share of the total misappropriation. Through March 31, 1997, $5,166,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, the Partnership has recognized $866,000 as income, which represents its share of the excess recovery. The current General Partner continues to pursue recoveries of the misappropriated funds, however no further significant recoveries are anticipated. The restoration costs are allocated among the Partnerships based on each Partnership's respective share of the misappropriation as discussed in Note 10 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. 14 Liabilities - - ----------- Accounts payable and accrued expenses at March 31, 1997, in the amount of $49,000, primarily represented the accrual of legal and auditing fees. 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 12 to the financial statements for additional information regarding the reallocation. Cash distributions paid to the Limited Partners and to the General Partner during 1997 of $1,000,000 and $2,135, respectively, have also been in accordance with the amended Partnership Agreement. The First Quarter 1997 distribution of $2,000,000 was paid to the Limited Partners on May 15, 1997. Results of Operations: - - ---------------------- The Partnership reported net income for the quarter ended March 31, 1997, in the amount of $534,000 compared to net income for the quarter ended March 31, 1996, of $1,084,000. The costs associated with the misappropriation increased significantly during 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. During 1997, these costs had a minimal impact on operations. Additionally, 1996 revenue included a recovery of amounts previously written off from the Partnership's former accountants and attorneys. Revenues - - -------- Total revenues were $869,000 and $1,992,000, for the quarters ended March 31, 1997 and 1996, respectively. 1996 revenue included a recovery of amounts due from the former general partners which had been previously written off and a gain on the sale of an Applebee's property. Total revenues should approximate $3,000,000 annually or $750,000 quarterly based on leases currently in place. Future revenues may decrease with tenant defaults and/or sales of Partnership properties. They may also increase with additional rents due from tenants, if those tenants experience sales levels which require the payment of additional rent to the Partnership. The decrease from 1996 to 1997 is a result of property sales as well as the reduction in rents on the remaining Hardee's restaurants. Expenses - - -------- For the quarters ended March 31, 1997 and 1996, cash expenses amounted to approximately 24% and 39%, of total revenues, respectively. Total expenses, including non-cash items, amounted to approximately 39% and 46%, of total revenues for the quarters ended March 31, 1997 and 1996, respectively. Items negatively impacting expenses during 1996, include expenses incurred primarily in relation to the misappropriation of assets by the former general partners and their affiliates. For the quarters ended March 31, 1997 and 1996, expenses incurred in relation to the misappropriated assets amounted to $17,000 and $560,000, respectively. Future expenses incurred in relation to the misappropriation should have a minimal impact on the Partnership. 15 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 been on a steeply discounted basis. Plans of reorganization have been filed in the bankruptcies, and settlement agreements in all the Private Partnerships have been reached. Settlements in the bankruptcies have resulted in cash payments to the Partnerships of a total of $720,000 and notes secured by subordinated mortgages in the aggregate amount of $625,000. The Partnerships subsequently sold the secured notes for a total of $175,000. 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. 16 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: 99.0 Correspondence to the Limited Partners dated May 15, 1997, regarding the First Quarter 1997 distribution. (b) Reports on Form 8-K: The Registrant filed no reports on Form 10-K during the first quarter of fiscal year 1997. 17 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: May 14, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: The Provo Group, Inc., General Partner By: /s/ Bruce A. Provo -------------------------------------------- Bruce A. Provo, President Date: May 14, 1997 By: /s/ Kristin J. Atkinson ------------------------------------------- Kristin J. Atkinson Vice President - Finance and Administration Date: March 14, 1997 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from March 31, 1997 Form 10-Q and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1996 JAN-01-1997 MAR-31-1997 2,540,209 293,766 6,443,408 5,784,890 0 3,492,493 24,586,538 5,245,204 22,833,827 398,389 0 0 0 0 22,435,438 22,833,827 764,558 869,064 0 0 335,371 0 0 533,693 0 533,693 0 0 0 533,693 11.42 11.42
EX-28 3 CORRESPONDENCE TO PARTNERS The ProvoGroup DiVall Insured Income Properties 2, L.P. QUARTERLY NEWS - - -------------------------------------------------------------------------------- A publication of The Provo Group, Inc. FIRST QUARTER 1997 NORTH DAKOTA FLOOD SPARES VILLAGE INN Grand Forks, North Dakota The Partnership's Village Inn (Grand Forks, ND) fortunately sustained minimal flood damage in April, but the winter was still a disaster after being hit with a record snowfall of 120 inches which paralyzed the economy for months. Bruce Provo met with our Village Inn tenant on April 29th...one day after they were finally allowed by the National Guard to inspect their property. The Partnership granted the tenant 2 1/2 months of rent abatement because of their inability to operate through the dual weather disasters...snow and floods. We do expect to apply to FEMA (Federal Emergency Management Agency) to recover our imputation of lost rents via abatement. We also expect a reduction of the property's 1997 real estate taxes. The ability to re-open this restaurant may give the tenant a competitive market advantage in the Grand Forks area as many other restaurants will not open for months...if ever, including another Village Inn (not in this portfolio) that apparently was ruined beyond repair. -------------------------- OTHER NEWS INSIDE... . Hardee's Corporate Sells to CKE!.............. Property Highlights, pg 4 . New Leases for DenAmerica?.................... Property Highlights, pg 4 . Three More Hardee's Sold...................... Property Highlights, pg 4 . Cypress Closes Its Denny's................... Property Highlights, pg 4 . Third-Party Solicitations................... Questions and answers, pg 6 . What's My Investment Worth?................. Questions and answers, pg 6 . Are the Former GPs in Jail?................. Questions and answers, pg 6 The ProvoGroup Page 2 DiVall 2 1 Q 97 ----------------------- DISTRIBUTION HIGHLIGHTS . 6.7% (approx.) annualized return from operations and 4.0% (approx.) non- annualized return of capital from a special distribution related to property sales, equipment leases and recoveries based on $35,500,000 ("net" remaining initial investment). . $2,000,000 total amount distributed for the First Quarter 1997 which was $1,425,000 more than budgeted. The higher than budgeted distributions are primarily due to the sale of three (3) Hardee's restaurants. . $43.21 per unit (approx.) for the First Quarter 1997 from both cash flow from operations and investing activities. . $809.00 to $611.00 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 . 14% increase in operating revenues from projections. . 7% increase in total expenses from projections. . 19% increase in "net" income from projections. . The Partnership experienced a $73,000 "net" gain on three (3) Hardee's property sales during the quarter. (Refer to "Sale of Properties" below for further discussion.) . Rental income was $35,000 higher than projected due to the accrual of higher than budgeted percentage rents. There were also budgeted vacancies which did not occur. The ProvoGroup Page 3 DiVall 2 1 Q 97 ------------------------- Statements of Income and Cash Flow Highlights (cont'd) . Investigation and restoration expenses were $15,000 lower than projected for the quarter ended March 31, 1997, due to the delay of the Boatmen's trial. . Professional and auditing expenses were in "total" $12,000 lower than budgeted for the quarter ended March 31, 1997. ------------------------- Property Highlights Vacancies --------- . Country Kitchen restaurant (Cedar Rapids, IA) remains vacant at March 31, 1997. The Partnership continues to work with prospective tenants for either the re-lease or sale of this property. . Hardee's restaurant (West Jordan, UT) was vacant at March 31, 1997. The tenant, Terratron, Inc., remains responsible for this lease while pursuing its sales opportunities. . Denny's restaurant (Twin Falls, ID) was vacant at March 31, 1997. The tenant of this property, DenAmerica, Corp., vacated the property at the end of the December 1996 and notified management that they were ceasing all rental payments. (NOTE: Refer to "Other Property Matters" below for further discussion.) Rents Receivable ---------------- The following restaurants were delinquent at March 31, 1997. . Denny's restaurant (Twin Falls, ID) - DenAmerica, Corp. - $19,900 for scheduled rent, equipment rent, sales tax, and late charges. Hardee's restaurant (West Jordan, UT) - Terratron, Inc. - $24,000 for scheduled rent and property tax escrow payments. The ProvoGroup Page 4 DiVall 2 1 Q 97 ------------------------- Property Highlights (cont'd) Rents Receivable (cont'd) ------------------------- . Miami Subs restaurant (Palm Beach, FL) - P & T Holdings - $2,200 for scheduled rent, percentage rent, sales tax, and late fees. Sale of Properties ------------------ . On March 28, 1997, Hardee's (Delavan, WI) was sold for $520,000. . On March 28, 1997, Hardee's (Oconomowoc, WI) was sold for $570,000. . On January 28, 1997, Hardee's (South Milwaukee, WI) was sold for $300,000. NOTE: All three (3) of these Hardee's restaurant sales were a result of prior lease negotiations the Partnership made with the former tenant, Terratron, Inc. and the new tenant, Hardee's Food Systems, Inc. As previously mentioned, the Partnership experienced a net gain of $73,000 in total from these property sales. The Hardee's restaurant (West Jordan, UT) sale is currently pending. Other Property Matters ---------------------- . As noted above, DenAmerica Corporation notified management during the quarter that they were ceasing rental payments on their Twin Falls, Idaho restaurant in the Partnership. This tenant was defaulted and has since requested that management consider their proposal for terminating the Twin Falls, Idaho lease and consider modifying their remaining leases that currently pay straight percentage rent versus fixed rent. The Partnership has countered these proposals and is currently awaiting a response from the tenant. . Cypress Restaurant, Inc., tenant of Denny's (Daytona Beach, FL) notified the Partnership at the end of April 1997 that it closed this restaurant on March 31, 1997. The Partnership is pursuing its legal options with respect to this lease. . Hardee's Food Systems, Inc. was recently acquired by CKE Restaurants, owner of Carl's Jr. restaurants. Closing is expected to occur July 1997. The Partnership anticipates the buy out and the marriage of Hardee's breakfast menu and Carl's Jr.'s lunch/dinner menus may "boost" sales nationwide. Hardee's Food Systems, Inc. is the new tenant for most of the Partnership's Hardee's restaurants. Page 5 DiVall 2 1 Q 97 ------------------------------ Restoration Highlights . Recoveries received during the First Quarter 1997 were slightly over $2,000 for the Partnership. . "Total" recoveries received to date for the Partnership are approximately $2,089,000. . The trial against Boatmen's First National Bank of Kansas City has been re- scheduled for June 23, 1997. ------------------------------ 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 March 31, 1997.
Distribution Capital Analysis Balance ------------- ------------- Original Capital Balance - $ 46,280,300 Cash Flow From Operations Since Inception $ 22,128,498 - Total Distributions Since Inception (32,955,268) - ------------ (Return) of Capital $(10,826,770) (10,826,770) ============ ------------ "Net" Remaining Initial Investment by Original Partners - $ 35,453,530 ============
(NOTE: For a more individualized discussion of return of capital contact Investor Relations.) The Provo Group Page 6 DiVall 2 1 Q 97 ------------------------- Questions & Answers 1. Why am I receiving solicitations to buy my units? Any solicitations that you receive to buy your units are a result of a third-party (not affiliated with TPG, Inc.) who is interested in acquiring units at a discounted rate. As General Partner, we encourage you to thoroughly review all your options. 2. What is the 1996 per unit value for my investment in the Partnership? As we reported in your 1996 Annual Report, the estimated value of your investment in the Partnership at December 31, 1996 was $470 per unit. 3. Are the former general partners in jail? Former general partner, Gary J. DiVall, was sentenced last year to eight (8) years in prison with seven (7) years of subsequent probation. Former general partner, Paul E. Magnuson received the same sentence on March 3, 1997. 4. When can I expect my next distribution mailing? Your next scheduled distribution correspondence for the Second Quarter of 1997 will be mailed on August 15, 1997. * * * For questions or 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: The Provo Group, Inc. Post Office Box 8673 1410 Northport Drive Madison, Wisconsin 53708-8673 Madison, Wisconsin 53704 (FAX 608-244-7663)
- - -------------------------------------------------------------------------------------------------------------------- TheProvoGroup DIVALL INSURED INCOME PROPERTIES 2 L.P. STATEMENTS OF INCOME AND CASH FLOW CHANGES FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1997 - - -------------------------------------------------------------------------------------------------------------------- PROJECTED ACTUAL VARIANCE ----------------------------------------------- 1ST 1ST QUARTER QUARTER BETTER 3/31/97 3/31/97 (WORSE) ----------- ----------- ----------- OPERATING REVENUES Rental income $ 726,059 $ 761,332 $ 35,273 Direct financing interest 3,226 3,226 0 Interest income 19,703 18,013 (1,690) Recovery of amounts previously written off 0 2,221 2,221 Gain on sale of assets 0 72,894 72,894 Other income 11,081 12,016 935 ----------- ----------- ----------- TOTAL OPERATING REVENUES $ 760,069 $ 869,702 $ 109,633 ----------- ----------- ----------- OPERATING EXPENSES Insurance $ 7,097 $ 7,124 $ (27) Management fees 43,530 43,572 (42) Restoration fees 0 89 (89) Overhead allowance 3,627 3,592 35 Advisory Board 7,300 4,088 3,212 Administrative 25,997 26,532 (535) Professional services 7,476 657 6,819 Auditing 21,000 16,171 4,829 Legal 7,500 10,508 (3,008) Disposition fees 0 37,166 (37,166) Appraisals 0 4,597 (4,597) Write-off of uncollectible rent 0 1,721 (1,721) Defaulted tenants 2,670 2,156 514 ----------- ----------- ----------- TOTAL OPERATING EXPENSES $ 126,197 $ 157,973 $ (31,776) ----------- ----------- ----------- GROUND RENT $ 30,927 $ 31,785 $ (858) ----------- ----------- ----------- INVESTIGATION AND RESTORATION EXPENSES $ 32,635 $ 17,219 $ 15,416 ----------- ----------- ----------- NON-OPERATING EXPENSES Depreciation $ 123,186 $ 123,335 $ (149) Amortization 0 5,697 (5,697) ----------- ----------- ----------- TOTAL NON-OPERATING EXPENSES $ 123,186 $ 129,032 $ (5,846) ----------- ----------- ----------- TOTAL EXPENSES $ 312,945 $ 336,009 $ (23,064) ----------- ----------- ----------- NET INCOME $ 447,124 $ 533,693 $ 86,569 OPERATING CASH RECONCILIATION: VARIANCE ---------- Depreciation and amortization 123,186 129,032 5,846 Recovery of amounts previously written off 0 (2,221) (2,221) Gain on sale of assets 0 (72,894) (72,894) Write-off of uncollectible rent 0 1,721 1,721 (Increase) Decrease in current assets 42,247 68,876 26,629 Increase (Decrease) in current liabilities (84,230) (72,798) 11,432 Decrease in Security Deposits 0 (4,620) (4,620) (Increase) Decrease in cash reserved for payables 30,000 30,000 0 Advance from prior cash flows for current distributions (2,000) 0 2,000 ----------- ----------- ----------- Net Cash Provided From Operating Activities $ 556,327 $ 610,789 $ 54,462 ----------- ----------- ----------- CASH FLOWS FROM (USED IN) INVESTING AND FINANCING ACTIVITIES Recoveries from former G.P. affiliates 0 2,221 2,221 Principal received on equipment leases 16,334 7,626 (8,708) Proceeds from property sales 0 1,394,620 1,394,620 Investment in equipment 0 0 0 ----------- ----------- ----------- Net Cash Provided From Investing And Financing Activities $ 16,334 $ 1,404,467 $ 1,388,133 ----------- ----------- ----------- Total Cash Flow For Quarter $ 572,661 $ 2,015,256 $ 1,442,595 Cash Balance Beginning of Period 1,264,693 1,554,953 290,260 Less 4th quarter distributions paid 2/97 (925,000) (1,000,000) (75,000) Change in cash reserved for payables or future distributions (28,000) (30,000) (2,000) ----------- ----------- ----------- Cash Balance End of Period $ 884,354 $ 2,540,209 $ 1,655,855 Cash reserved for 1st quarter L.P. distributions (575,000) (2,000,000) (1,425,000) Cash reserved for payment of payables (140,000) (270,000) (130,000) ----------- ----------- ----------- Unrestricted Cash Balance End of Period $ 169,354 $ 270,209 $ 100,855 =========== =========== =========== - - -------------------------------------------------------------------------------------------------------------------- PROJECTED ACTUAL VARIANCE ----------------------------------------------- * Quarterly Distribution $ 575,000 $ 2,000,000 $ 1,425,000 Mailing Date 5/15/97 (enclosed) - - - --------------------------------------------------------------------------------------------------------------------
* Refer to distribution letter for detail of quarterly distribution.
[The Provo Group Logo] ------------------------------------------- PROJECTIONS FOR DIVALL INSURED INCOME PROPERTIES 2 LP ORIGINAL EQUITY $46,280,300 DISCUSSION PURPOSES 1997 PROPERTY SUMMARY NET DISTRIBUTION OF AND RELATED ESTIMATED RECEIPTS CAPITAL SINCE INCEPTION $10,826,770 ----------- CURRENT EQUITY $35,453,530 -------------------------------===========
PORTFOLIO (Note 1)
--------------------------------- --------------------------------------------- REAL ESTATE EQUIPMENT --------------------------------- --------------------------------------------- ANNUAL LEASE ANNUAL - - ------------------------------------------ BASE % EXPIRATION LEASE CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS - - ------------------------------------------ -------------------------------- ------------------------------------------ APPLEBEE'S COLUMBUS, OH 1,059,465 135,780 12.82% 06/30/97 84,500 17,438 BLOCKBUSTER OGDEN, UT 646,425 100,554 15.56% COUNTRY KIT. CEDAR RAPIDS, IA 660,156 0 0.00% DENNY'S N. SYMRNA BCH, FL 1,025,830 133,380 13.00% 0 DENNY'S DAYTONA, FL 1,029,844 136,800 13.28% 0 DENNY'S (2) (3) PHOENIX, AZ 295,750 39,000 13.19% 224,376 0 DENNY'S (2) PHOENIX, AZ 972,726 84,000 8.64% 183,239 0 DENNY'S (2) PHOENIX, AZ 865,900 86,000 9.93% 221,237 0 DENNY'S TWIN FALLS, ID 699,032 83,200 11.90% 04/30/99 190,000 37,860 DENNY'S (2) (3) PHOENIX, AZ 500,000 37,000 7.40% 14,259 0 HARDEE'S (5) S. MILWAUKEE, WI 808,032 64,000 7.92% HARDEE'S (5) HARTFORD, WI 686,563 64,000 9.32% HARDEE'S (5) MILWAUKEE, WI 1,010,045 76,000 7.52% (4) 260,000 0 " " 151,938 0 HARDEE'S W. JORDAN, UT 617,907 77,880 12.60% HARDEE'S (5) FOND DU LAC, WI 849,767 88,000 10.36% (4) 290,469 0 HARDEE'S (5) MILWAUKEE, WI 0 0 0.00% 780,000 0 HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62% HOSTETTLER'S DES MOINES, IA 845,000 55,584 6.58% 52,813 0 KFC SANTA FE, NM 451,230 60,000 13.30% MIAMI SUBS PALM BEACH, FL 743,625 39,000 5.24% - - --------------------------------------- --------------------------------- --------- -------------------------
----------- TOTAL % ON $35,453,530 --------- ------------------------------------ EQUITY EQUIPMENT TOTALS RAISE --------- ------------------------------------ ----------- - - --------------------------------------- % * ANNUAL CONCEPT LOCATION RETURN COST RECEIPTS RETURN - - --------------------------------------- --------- ------------------------------------ APPLEBEE'S COLUMBUS, OH 20.64% 1,143,965 153,218 13.39% BLOCKBUSTER OGDEN, UT 646,425 100,554 15.56% COUNTRY KIT. CEDAR RAPIDS, IA 660,156 0 0.00% DENNY'S N. SYMRNA BCH, FL 1,025,830 133,380 13.00% DENNY'S DAYTONA, FL 1,029,844 136,800 13.28% DENNY'S (2) (3) PHOENIX, AZ 0.00% 520,126 39,000 7.50% DENNY'S (2) PHOENIX, AZ 0.00% 1,155,965 84,000 7.27% DENNY'S (2) PHOENIX, AZ 0.00% 1,087,137 86,000 7.91% DENNY'S TWIN FALLS, ID 19.93% 889,032 121,060 13.62% DENNY'S (2) (3) PHOENIX, AZ 0.00% 514,259 37,000 7.19% HARDEE'S (5) S. MILWAUKEE, WI 808,032 64,000 7.92% HARDEE'S (5) HARTFORD, WI 686,563 64,000 9.32% HARDEE'S (5) MILWAUKEE, WI 0.00% 1,421,983 76,000 5.34% " " 0.00% HARDEE'S W. JORDAN, UT 617,907 77,880 12.60% HARDEE'S (5) FOND DU LAC, WI 0.00% 1,140,236 88,000 7.72% HARDEE'S (5) MILWAUKEE, WI 0.00% 780,000 0 0.00% HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62% HOSTETTLER'S DES MOINES, IA 0.00% 897,813 55,584 6.19% KFC SANTA FE, NM 451,230 60,000 13.30% MIAMI SUBS PALM BEACH, FL 743,625 39,000 5.24% - - ----------------------------------- ------ ------------------------------------
Note 1: This property summary includes only current property and equipment held by the Partnership. Equipment lease receipts shown include a return of capital. 2: Rent is based on 12.5% of monthly sales. Rent projected for 1997 is based on 1996 sales levels. 3: The Partnership entered into a long-term ground lease in which the Partnership is responsible for payment of rent. The annual base rent shown is net of the underlying ground lease rent. 4: The lease was terminated and the equipment sold to Hardee's Food Systems in conjunction with their assumption of the Terratron leases in November 1996. 5: These leases were assumed by Hardee's Food Systems at a reduced rental rate from that stated in the original leases. Page 1 of 2 [LOGO OF THE PROVO GROUP] PROJECTIONS FOR DISCUSSION PURPOSES DIVALL INSURED INCOME PROPERTIES 2 LP 1997 PROPERTY SUMMARY AND RELATED ESTIMATED RECEIPTS
------------------------------------------- ORIGINAL EQUITY $46,280,300 NET DISTRIBUTION OF CAPITAL SINCE INCEPTION $10,826,770 ----------- CURRENT EQUITY $35,453,530 =========== ------------------------------------------- PORTFOLIO (Note 1) REAL ESTATE EQUIPMENT TOTALS ---------------------------- --------------------------------------- ----------------------------- TOTAL % ON ANNUAL LEASE ANNUAL $35,453,530 BASE % EXPIRATION LEASE % TOTAL EQUITY CONCEPT/LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN COST RECEIPTS RETURN RAISE - - ----------------- ---------------------------- --------------------------------------- ----------------------------- ----------- POPEYE'S PARK FOREST, IL 580,938 77,280 13.30% 580,938 77,280 13.30% SUNRISE PS PHOENIX, AZ 1,084,503 127,920 11.80% 79,219 0 0.00% 1,182,735 131,850 11.15% 06/30/97 19,013 3,930 20.67% VILLAGE INN GRAND FORKS, ND 739,375 84,000 11.36% 739,375 84,000 11.36% WENDY'S AIKEN, SC 633,750 90,480 14.28% 633,750 90,480 14.28% WENDY'S CHARLESTON, SC 580,938 76,920 13.24% 580,938 76,920 13.24% WENDY'S N. AUGUSTA, SC 660,156 87,780 13.30% 660,156 87,780 13.30% WENDY'S AUGUSTA, GA 728,813 96,780 13.28% 728,813 96,780 13.28% WENDY'S CHARLESTON, SC 596,781 76,920 12.89% 596,781 76,920 12.89% WENDY'S AIKEN, SC 776,344 96,780 12.47% 776,344 96,780 12.47% WENDY'S AUGUSTA, GA 649,594 86,160 13.26% 649,594 86,160 13.26% WENDY'S CHARLESTON, SC 528,125 70,200 13.29% 528,125 70,200 13.29% WENDY'S MT. PLEASANT, SC 580,938 77,280 13.30% 580,938 77,280 13.30% WENDY'S MARTINEZ, GA 633,750 84,120 13.27% 633,750 84,120 13.27% HALLANDALE TAG HALLANDALE, FL 792,188 30,000 3.79% 792,188 30,000 3.79% - - ----------------- ---------- --------- ----- --------- ------ ---- ---------- --------- ----- ---- PORTFOLIO TOTALS (33 Properties) 24,580,209 2,617,798 10.65% 2,551,063 59,228 2.32% 27,131,272 2,677,027 9.87% 7.55% - - ----------------- ========== ========= ===== ========= ====== ==== ========== ========= ===== ====
Note 1: This property summary includes only current property and equipment held by the Partnership. Equipment lease receipts shown include a return of capital. -----END PRIVACY-ENHANCED MESSAGE-----