-----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, I4Y3J+NNqnm0lkh34bOUrFiPk3HLNvuyUmZ3JGBB5ichtw/XL2RLzSV9sp8mFkhk aT6Uvx1dWekNBA7pDUgTKg== 0000950131-97-006757.txt : 19971117 0000950131-97-006757.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950131-97-006757 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 000-17686 FILM NUMBER: 97715880 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 QUARTERLY REPORT FOR THE PERIOD ENDED 9-30-1997 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, 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 September 30, 1997 and December 31, 1996 ---------------------------------------- ASSETS
(Unaudited) September 30, December 31, 1997 1996 ------------- ------------ INVESTMENT PROPERTIES AND EQUIPMENT:(Note 3) Land $ 8,330,982 $ 9,141,303 Buildings 14,930,272 16,488,654 Equipment 707,378 707,378 Accumulated depreciation (5,359,783) (5,550,940) ----------- ----------- Net investment properties and equipment 18,608,849 20,786,395 ----------- ----------- NET INVESTMENT IN DIRECT FINANCING LEASES: (Note 7) 63,752 108,826 ----------- ----------- OTHER ASSETS: Cash and cash equivalents 1,556,835 1,444,326 Cash restricted for real estate taxes 11,115 110,625 Cash held in Indemnification Trust (Note 9) 301,622 289,637 Rents and other receivables (net of allowance of $735 in 1997 and $0 in 1996) 224,678 218,051 Deferred rent receivable 253,254 259,326 Prepaid insurance 2,137 22,262 Deferred charges 51,597 53,620 Unsecured notes receivable from lessees 73,944 86,288 ----------- ----------- Total other assets 2,475,182 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 4,322,110 3,897,981 Allowance for uncollectible restoration receivable (4,322,110) (3,897,981) ----------- ----------- Due from former affiliates, net 0 0 ----------- ----------- Total assets $21,147,783 $23,379,356 =========== ===========
The accompanying notes are an integral part of these statements. 2 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS September 30, 1997 and December 31, 1996 ---------------------------------------- LIABILITIES AND PARTNERS' CAPITAL
(Unaudited) September 30, December 31, 1997 1996 ------------- ------------ LIABILITIES: Accounts payable and accrued expenses $ 49,461 $ 67,589 Due to current General Partner 2,112 86,727 Security deposits 131,815 144,290 Unearned rental income 19,261 57,739 Real estate taxes payable 38,105 119,131 ------------ ------------ Total liabilities 240,754 475,476 ------------ ------------ CONTINGENT LIABILITIES: (Note 8) PARTNERS' CAPITAL: (Notes 1, 4 and 12) Current General Partner - Cumulative net income 95,407 80,064 Cumulative cash distributions (37,492) (31,355) ------------ ------------ 57,915 48,709 ------------ ------------ Limited Partners (46,280.3 interests outstanding) Capital contributions, net of offering costs 39,358,468 39,358,468 Cumulative net income 15,811,143 14,292,200 Cumulative cash distributions (33,480,268) (29,955,268) Reallocation of former general partners' deficit capital (840,229) (840,229) ------------ ------------ 20,849,114 22,855,171 ------------ ------------ Total partners' capital 20,907,029 22,903,880 ------------ ------------ Total liabilities and partners' capital $ 21,147,783 $ 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 Nine Months Ended ------------------ ----------------- September 30, September 30, ------------- ------------- 1997 1996 1997 1996 -------- ---------- ---------- ---------- REVENUES: Rental income (Note 5) $726,956 $ 857,490 $2,192,632 $2,472,172 Interest income on direct financing 2,245 14,426 8,348 48,070 leases Other interest income 18,211 20,272 55,413 70,669 Recovery of amount previously written 0 12,925 2,221 657,331 off Other income 44,288 35,859 79,485 61,613 Gain on disposal of assets 3,772 445,772 76,028 929,997 -------- ---------- ---------- ---------- 795,472 1,386,744 2,414,127 4,239,852 -------- ---------- ---------- ---------- EXPENSES: Partnership management fees 44,520 43,098 132,612 128,512 Disposition fees 15,000 46,000 52,166 66,550 Disposition fees - Restoration 0 0 0 20,550 Restoration fees 0 517 89 25,155 Appraisal fees 0 0 4,597 2,268 Insurance 6,410 7,371 20,126 29,812 General and administrative 16,924 26,748 89,089 102,231 Advisory Board fees and expenses 3,628 4,446 10,316 13,059 Interest 0 0 0 3,551 Real estate taxes 0 0 0 (1,709) Ground lease payments (Note 3) 31,249 31,124 94,117 92,996 Expenses incurred due to default by 4,811 2,269 8,689 4,737 lessee Professional services 25,901 29,157 76,668 107,224 Professional services related to 4,283 8,901 31,377 510,869 investigation Depreciation 113,471 129,489 351,972 388,465 Amortization 1,163 201 8,023 603 -------- ---------- ---------- ---------- 267,360 329,321 879,841 1,494,873 -------- ---------- ---------- ---------- NET INCOME $528,112 $1,057,423 $1,534,286 $2,744,979 ======== ========== ========== ========== NET INCOME - CURRENT GENERAL PARTNER $ 5,281 $ 10,574 $ 15,343 $ 27,450 NET INCOME - LIMITED PARTNERS 522,831 1,046,849 1,518,943 2,717,529 -------- ---------- ---------- ---------- $528,112 $1,057,423 $1,534,286 $2,744,979 ======== ========== ========== ========== NET INCOME (LOSS) PER LIMITED PARTNERSHIP $11.30 $22.62 $32.82 $58.72 INTEREST, based on 46,280.3 Interests outstanding ====== ====== ====== ======
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, ------------------------------- 1997 1996 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,534,286 $ 2,744,979 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 359,995 389,068 Recovery of amounts previously written off (2,221) (657,331) Net (gain) on disposal of assets (76,028) (929,997) Interest applied to Indemnification Trust account (11,985) (11,255) (Increase)/Decrease in rents and other receivables (6,627) 248,630 Withdrawals for payment of real estate taxes 99,510 61,033 Decrease in prepaids 20,125 16,207 Decrease in deferred rent receivable 6,072 37,158 Increase (Decrease) in due to current General Partner (84,615) 3,734 (Decrease) in accounts payable and other (18,128) (142,788) (Decrease) in security deposits (12,475) (38,354) (Decrease) in real estate taxes payable (81,026) (19,187) Increase (Decrease) in unearned rental income (38,478) 30,296 ----------- ----------- Net cash from operating activities 1,688,405 1,732,193 ----------- ----------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Principal payments received on direct financing leases 45,075 115,030 Principal payments received on notes receivable 12,344 0 Proceeds from sale of investment properties 1,901,601 2,901,576 Recoveries from former affiliates 2,221 1,579,432 Increase in unsecured notes from lessees 0 (39,948) Increase in deferred lease commissions (6,000) 0 Payments from affiliated partnerships 0 96,088 ----------- ----------- Net cash from investing activities 1,955,241 4,652,178 ----------- ----------- CASH FLOWS (USED IN) FINANCING ACTIVITIES: Cash distributions to Limited Partners (3,525,000) (4,325,000) Cash distributions to current General Partner (6,137) (10,980) Payments of equipment notes 0 (77,255) ----------- ----------- Net cash (used in) financing activities (3,531,137) (4,413,235) ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 112,509 1,971,136 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,444,326 1,005,764 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,556,835 $ 2,976,900 =========== =========== SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 0 $ 3,551 =========== ===========
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 former 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, 1997, the Partnership owned 32 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 financial 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 $15,000,000, of which approximately $6,063,000 has been attributed to the Partnership and is reflected as due from former affiliates on the balance sheet at September 30, 1997. The 9% interest accrued as of September 30, 1997, amounted to approximately $2,312,000 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 September 30, 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 September 30, 1997, the Partnership owned 29 fully constructed fast-food restaurants, one (1) tag agency, one (1) video store, and one (1) preschool. The restaurant properties are comprised of the following: ten (10) Wendy's restaurants, four (4) Hardee's restaurants, seven (7) Denny's restaurants, one (1) Applebee's restaurant, one (1) Popeye's Famous Fried Chicken restaurant, one (1) former Country Kitchen restaurant, one (1) Hooter's restaurant, one (1) Kentucky Fried Chicken restaurant, one (1) Hostettler's restaurant, one (1) Miami Subs restaurant, and one (1) Village Inn restaurant. The 32 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 September 30, 1997, three 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 it has vacated the property in Twin Falls, Idaho and ceased paying rent. Management is currently working with DenAmerica to resolve the issue, and the tenant has begun making rental payments again, as required by their lease. During the First Quarter of 1997, the tenant of the Denny's in Daytona Beach vacated the property. The tenant is continuing to pay rent, and Management is negotiating a potential sale of the property to the tenant. 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 include 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 three (3) restaurants located on parcels of land where it has entered into long-term ground leases. One (1) 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 1998, 2003 and 2018. 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. Additionally, a fourth Hardee's restaurant was sold to the tenant during the Third Quarter of 1997, resulting in a gain of $3,000. 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. 8 Net Proceeds, as originally defined, were to be distributed as follows: (a) to the Limited Partners, an amount equal to 100% of their Adjusted Original Capital; (b) then, to the Limited Partners, an amount necessary to provide each Limited Partner a Liquidation Preference equal to a 13.5% per annum, cumulative simple return on Adjusted Original Capital from the Return Calculation date including in the calculation of such return all prior distributions of Net Cash Receipts and any prior distributions of Net Proceeds under this clause; and (c) then, to Limited Partners, 90% and to the General Partners, 10%, of the remaining Net Proceeds available for distribution. On May 26, 1993, pursuant to the results of a solicitation of written consents from the Limited Partners, the Partnership Agreement was amended to replace the former general partners and amend various sections of the agreement. The former general partners were replaced as General Partner by The Provo Group, Inc., an Illinois corporation. Under the terms of the amendment, net profits or losses from operations are allocated 99% to the Limited Partners and 1% to the current General Partner. The amendment also provided for distributions from Net Cash Receipts to be made 99% to Limited Partners and 1% to the current General Partner provided, that quarterly distributions will be cumulative and will not be made to the current General Partner unless and until each Limited Partner has received a distribution from Net Cash Receipts in an amount equal to 10% per annum, cumulative simple return on his or her Adjusted Original Capital, as defined, from the Return Calculation Date, as defined, except to the extent needed by the General Partner to pay its federal and state income taxes on the income allocated to 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 ===========
Four (4) 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, Ltd., 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 nine-month periods ended September 30, 1997 and 1996 are as follows.
Incurred as of Incurred as of Current General Partner September 30, 1997 September 30, 1996 - - ----------------------- ------------------ ------------------ Management fees $132,612 $128,512 Disposition fees 52,166 66,550 Restoration fees 89 25,155 Overhead allowance 10,775 10,710 Reimbursement for out-of-pocket expenses 13,988 15,322 Cash distribution 6,137 10,980 -------- -------- $215,767 $257,229 ======== ========
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 September 30, 1997: Minimum lease payments receivable $61,697 Estimated residual values of leased property (non-recourse) 11,400 Less-Unearned income (9,345) ------- Net investment in direct financing leases $63,752 =======
10 At September 30, 1997, future minimum lease payments for each of the succeeding fiscal years are as follows:
Year ending December 31, 1997 $ 7,537 1998 37,860 1999 27,700 ------- $73,097 =======
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 September 30, 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 September 30, 1997. Funds are invested in U.S. Treasury securities. In addition, $51,622 of earnings have been credited to the Trust as of September 30, 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. 11 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. 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 September 30, 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 September 30, 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 September 30, 1997, interest in the amount of $265,000 had accrued but was unpaid on the Note. Boatmen's 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 took place on June 23, 1997. The judge ruled in favor of DiVall 1 on August 21, 1997, that the note was unenforceable. However, Boatmen's appealed the ruling, so no recovery was recorded during the quarter. However, the appeal was dropped during the fourth quarter of 1997, so a recovery will be recorded during the fourth quarter. Pursuant to the Restoration Trust Account procedures described above, all of the Partnerships are sharing the expenses of this litigation and the recovery resulting from 12 the 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. 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 November 15, 1997, the Partnership made distributions to the Limited Partners for the Third Quarter of 1997 of $1,075,000 amounting to approximately $23.23 per limited partnership interest. 13 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, 1997, were originally purchased at a price, including acquisition costs, of approximately $24,305,000. 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, Idaho, and ceased paying rent. Management is currently working with DenAmerica to resolve the issue, and the tenant has begun making rental payments again, as required by their lease. During the First Quarter of 1997, the tenant of the Denny's in Daytona Beach vacated the property. The tenant continues to pay rent, and Management is negotiating a potential sale of the property to the tenant. Due to the damaging floods and record snowfalls in Grand Forks, North Dakota, the tenant of the Village Inn has experienced financial difficulties. Management worked with the tenant by abating rent on the property for two and one half months until the business was back in operation. 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. Additionally, a fourth property was purchased during the Third Quarter of 1997 at a gain of $3,000. The net investment in direct financing leases, which includes the Partnership's specialty leasehold improvement leases, amounted to $63,752 at September 30, 1997, compared to $109,000 at December 31, 1996. The decrease of $45,248 was a result of principal and residual payments received. Other Assets - - ------------ Cash and cash equivalents, including cash restricted for real estate taxes was approximately $1,568,000 at September 30, 1997, compared to $1,555,000 at December 31, 1996. The Partnership designated cash of $1,075,000 to fund the Third Quarter 1997 distributions to Limited Partners, $224,000 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. 14 Due From Former Affiliates and Allowance for Uncollectible Amounts Due From - - --------------------------------------------------------------------------- Former Affiliates - - ----------------- Due from former affiliates represented misappropriated assets due from the former general partners and their affiliates in the amount of $1,741,000 at September 30, 1997. The receivable decreased from December 31, 1996 due to $2,000 of recoveries received 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 $4,322,000 at September 30, 1997, and includes $2,312,000 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 September 30, 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. Liabilities - - ----------- Accounts payable and accrued expenses at September 30, 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 $3,525,000 and $6,137, respectively, have also been in accordance with the amended Partnership Agreement. The Third Quarter 1997 distribution of $1,075,000 was paid to the Limited Partners on November 15, 1997. Results of Operations: - - ---------------------- The Partnership reported net income for the quarter ended September 30, 1997, in the amount of $528,000 compared to net income for the quarter ended September 30, 1996, of $1,057,000. For the nine months ended September 30, 1997 and 1996, net income totaled $1,534,000 and $2,745,000, respectively. The 15 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 of the litigation. 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 and a large gain on the sale of properties. Revenues - - -------- Total revenues were $795,000 and $1,387,000, for the quarters ended September 30, 1997 and 1996, respectively, and were $2,414,000 and $4,240,000 for the nine months ended September 30, 1997 and 1996, respectively. The 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 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 September 30, 1997 and 1996, cash expenses amounted to approximately 19% and 14%, of total revenues, respectively. For the nine months ended September 30, 1997 and 1996, cash expenses totaled 22% and 26%, respectively. Total expenses, including non-cash items, amounted to approximately 34% and 24%, of total revenues for the quarters ended September 30, 1997 and 1996, respectively and totaled 36% and 35% for the nine months ended September 30, 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. The 1997 percentages are increased as a result of disposition fees paid upon the sale of properties, while gains on those sales were lower than those experienced during 1996. For the nine months ended September 30, 1997 and 1996, expenses incurred in relation to the misappropriated assets amounted to $31,000 and $511,000, respectively. Future expenses incurred in relation to the misappropriation should have a minimal impact on the Partnership. 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. 16 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. 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. 17 Item 6. Exhibits and Reports on Form 8-K (a) Listing of Exhibits: 99.0 Correspondence to the Limited Partners dated November 15, 1997, regarding the Third Quarter 1997 distribution. (b) Reports on Form 8-K: The Registrant filed no reports on Form 10-K during the third quarter of fiscal year 1997. 18 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 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: November 14, 1997 By: /s/Kristin J. Atkinson ------------------------------------------- Kristin J. Atkinson Vice President - Finance and Administration Date: November 14, 1997 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from September 30, 1997 Form 10-Q and is qualified in its entirety by reference to such financial statements. 3-MOS 9-MOS DEC-31-1996 DEC-31-1996 JUL-01-1997 JAN-01-1997 SEP-30-1997 SEP-30-1997 1,567,950 1,567,950 301,622 301,622 6,733,447 6,733,447 6,064,085 6,064,085 0 0 2,538,934 2,538,934 23,968,632 23,968,632 5,359,783 5,359,783 21,147,783 21,147,783 240,754 240,754 0 0 0 0 0 0 0 0 20,907,029 20,907,029 21,147,783 21,147,783 729,201 2,200,980 795,472 2,414,127 0 0 0 0 267,360 879,841 0 0 0 0 528,112 1,534,286 0 0 528,112 1,534,286 0 0 0 0 0 0 528,112 1,534,286 11.30 32.82 11.30 32.82
EX-99 3 CORRESPONDENCE TO LIMITED PARTNERS, DATED 11-15-1997 EXHIBIT 99 DiVall Insured Income Properties 2, L.P. QUARTERLY NEWS ================================================================================ A publication of The Provo Group, Inc. THIRD QUARTER 1997 THIRD-PARTY SOLICITORS...Are They Really "Long-Term" Investors or Merely "Quick" Profiteers on Your Interests? Madison, Wisconsin Over the last year or so, a third-party solicitor may have either telephoned you or mailed you a "teaser" piece inquiring about the purchase of your interests in DiVall Insured Income Properties 2 Limited Partnership (the "Partnership"). At the time, you may have either ignored the inquiry or you may have agreed to sell your interests to this third-party solicitor -- most likely without first discussing alternatives with a secondary market broker. So, you ask...third-party solicitors??...secondary market brokers?? What's the difference? Both parties want my interests for a discounted rate - what does it matter to whom I choose to sell? Quite simply, it is your choice, however, you may be interested in knowing that the third-party solicitations you may receive are not regulated by the Securities Exchange Commission (S.E.C.). The secondary market is "highly" regulated by the S.E.C. - offering liquidation opportunities to investors for years at competitive pricing. Perhaps, even more interesting is that many third-party solicitors who indicate that they are interested in your units for their own "investment purposes" (and may offer to relieve you of the "headache" of filing Schedule K-1's or provide you with a one time "opportunity for liquidation") are not necessarily serious long-term investors. It appears that many of these solicitors are merely "quick profiteers" on your heretofore patiently held interests...selling those very same interests they purchased from you on the secondary market within months. How much is a third-party solicitor making on your interests? Here's an "example" based on a single unit which was initially purchased by you for $1,000: Unit (Purchased) by Solicitor: $(331.00) Distributions Paid to Solicitor: 34.00 Unit Sold by Solicitor (after 7 mos.): 406.00 -------- Profit Made by Solicitor: $ 109.00 ========
Could you have received a higher selling rate in the secondary market?...Perhaps. (The above example shows an annualized return of over 55%!) Will a secondary market broker earn a commission or make a profit?...Most likely. Again you ask...what's the difference? The difference is that you always have a choice and you always have a right to ask for more information. As your General Partner, we can not act as your financial advisor nor can we be the "gatekeepers" of your interests. We simply try to keep you informed. ===================================== OTHER NEWS INSIDE... . Boatmen's Ruling Appealed ............... Restoration Highlights, pg 4 . Cypress Restaurants to Buy its Dennys ...... Property Highlights, pg 4 . DenAmerica's Leases Terminating? .......... Property Highlights, pg 3 . Village Inn Says Sales Are Up .............. Property Highlights, pg 4
Page 2 DiVall 2 3 Q ======================= Distribution Highlights . 6.6% (approx.) annualized return . $23.23 per unit (approx.) for the from operations and 1.4% (approx.) Third Quarter 1997 from both cash non-annualized return of capital flow from operations and investing from a special distribution related activities. to a property sale and principal received from equipment leases based . $844.00 to $646.00 range of on $34,900,000 ("net" remaining distributions per unit from the initial investment). first unit sold to the last unit sold before the offering closed . $1,075,000 total amount distributed (February 1990), respectively. for the Third Quarter 1997 which was $500,000 more than budgeted. Distributions are from both cash flow from operations and "net" The "higher" than budgeted distribution cash activity from financing and is primarily due to the sale of the investing activities. Hardee's restaurant (West Jordan, UT). (NOTE: Original units were purchased for $1,000/unit.) ====================== Statements of Income and Cash Flow Highlights . 5% increase in . 2% increase in total . 7% increase in "net" operating revenues expenses from income from from projections. projections. projections. . Net proceeds in . $15,000 was paid in . Equipment residuals the amount of disposition fees (previously written $470,000 were during the quarter off) in the amount received by the as a result of a of $17,000 (approx.) Partnership as a property sale. were collected during result of a the quarter. property sale. Page 3 DiVall 2 3 Q =========================== Property Highlights Vacancies --------- . Country Kitchen restaurant (Cedar Rapids, IA) was vacant at September 30, 1997. [NOTE: Management recently received a "letter of intent" to re-lease this restaurant. It is anticipated that rent will commence January 1998.] . Denny's restaurant (Twin Falls, ID) . Denny's restaurant (Daytona Beach, was vacant at September 30, 1997. FL) was vacant at September 30, 1997. The tenant of this property, The tenant of this property, Cypress DenAmerica, Corporation, vacated the Restaurants, Inc., vacated the property at the end of December property at the end of March 1997 and 1996. It should be noted, however, intends to remodel to a different this tenant continues to meet its concept. It should be noted, rental obligations. (NOTE: Refer to however, this tenant continues to "Other Property Matters" below for meet its rental obligations. (NOTE: further discussion.) Refer to "Other Property Matters" below for further discussion.) Rents Receivable ---------------- . P&T Holdings, tenant of Miami Subs . DenAmerica Corporation, tenant of (Palm Beach, FL), was $2,900 Denny's (Twin Falls, ID), was $1,600 delinquent in percentage rent at delinquent in scheduled rent at September 30, 1997. September 30, 1997. Sale of Property ---------------- . On July 31, 1997, Hardee's (West Jordan, UT) was sold for $537,200. ---- Other Property Matters ---------------------- . As noted above, DenAmerica Corporation vacated and closed their Twin Falls, Idaho restaurant. Subsequently, this tenant was defaulted and management is considering DenAmerica's proposal to terminate the Twin Falls, Idaho lease. The other consideration to modify their remaining leases that currently pay straight percentage rent versus fixed rent has been deferred until the termination agreement is finalized. Page 4 DiVall 2 3 Q ======================== Property Highlights (contd.) Other Property Matters (contd.) ------------------------------- The status of these requests are as follows: Denny's - Twin Falls, ID - Lease termination agreement out for execution. Termination includes a payment of all charges through 12/31/97; equipment lease buy-out; plus, payment of 1997 real estate taxes. Denny's (3) - Phoenix, AZ - Lease modification negotiations have ceased until the lease termination agreements and fees have been fully executed and paid. (NOTE: These negotiations are for three (3) DenAmerica restaurants located on N. 7th Street; W. Camelback Road; and Indian School Road in Phoenix, Arizona.) * * * . Cypress Restaurants, Inc., tenant . FMI, tenant of the Partnership's of Denny's (Daytona Beach, FL and Village Inn (Grand Forks, ND), New Smyrna, FL), proposed offers to notified management that another purchase both of these properties Village Inn that was "operated" by last quarter. The Partnership has this same tenant, but not "owned" agreed to the purchase offers and by the Partnership, closed its anticipates that the closings will doors. This closing has contributed occur by year-end. to a sales increase for the Village Inn owned by the Partnership. ====================== Restoration Highlights . There were no recoveries received . The Partnership received a during the Third Quarter 1997. "favorable" ruling for its case against Boatmen's First National Bank of Kansas City which went to . "Total" recoveries received to date trial on June 23, 1997. Boatmen's has for the Partnership are appealed this ruling. approximately $2,089,000. (NOTE: The Partnership is awaiting the outcome of this appeal before any recovery is recorded.) Page 5 DiVall 2 3 Q ========================= 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, 1997.
================================================================================ Distribution Capital ------------ ------- Analysis Balance -------- ------- Original Capital Balance - $ 46,280,300 Cash Flow From Operations Since Inception $ 23,237,202 - Total Distributions Since Inception (34,638,868) - ------------ (Return) of Capital $(11,401,666) (11,401,666) ============ ------------ "Net" Remaining Initial Investment by Original Partners - $ 34,878,634 ============ ================================================================================
(NOTE: For a more individualized discussion of return of capital contact Investor Relations.) ========================= Advisory Board The seventeenth Advisory Board meeting was held November 4 and 5, 1997. The following new Board members were given a comprehensive orientation of the Partnerships' affairs. . Mr. Robert White was nominated by the Limited Partners and selected to represent DiVall Insured Income Fund, L.P. and will serve a two (2) year term. . Mr. Albert Gerritz was nominated by the Limited Partners and selected to represent DiVall Income Properties 3, L.P. and will serve a two (2) year term. Page 6 DiVall 2 3 Q ======================== Advisory Board (contd.) . Mr. Steven Carson was nominated and selected by the selling broker firms of DiVall Insured Income Fund, L.P.; DiVall Insured Income Properties 2, L.P.; and DiVall Income Properties 3, L.P. to represent the brokerage community and will serve a two (2) year term. These new members replaced Mr. Gerhard Zoller (DiVall 1); Dr. Albert Eschen (DiVall 3); and Mr. Todd Witthoeft (Broker Dealer) whose terms expired September 30, 1997. The member carrying over from the prior Board is Mr. Richard Otte, representing DiVall Insured Income Properties 2, L.P. Mr. Otte will serve the remaining year of his two (2) year term. For further information regarding the new Advisory Board members, please refer to the enclosed biographical summaries. ======================== Questions & Answers 1. When can I expect to receive my 2. When will 1997 per unit values be Schedule K-1 for 1997? available for my investment in the Partnership? Our current schedule for mailing all 1997 Schedule K-1's for your The Partnership's 1997 "year-end" Partnership and its affiliated valuation information is tentatively partnerships is no later than March scheduled to be available by the 13, 1998. First Quarter 1998. We will include this information in our 1997 Annual Report which we plan to mail by early April 1998.
Page 7 DiVall 2 3 Q ======================= Questions & Answers (contd.) 3. Why do I receive solicitations to 4. When can I expect my next buy my interests? distribution mailing? As discussed earlier in this Your next distribution correspondence correspondence, any solicitations for the Fourth Quarter of 1997 is that you may receive to buy your scheduled to be mailed on February interests are a result of a 13, 1998. third-party (not affiliated with TPG, Inc.) who is interested in acquiring units at a discounted rate. As General Partner, we encourage you to review all of your options.
* * * ================================================================================ 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) ================================================================================ DIVALL INSURED INCOME PROPERTIES 2 L.P. STATEMENTS OF INCOME AND CASH FLOW CHANGES FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997
PROJECTED ACTUAL VARIANCE 3RD 3RD QUARTER QUARTER BETTER OPERATING REVENUES 9/30/97 9/30/97 (WORSE) ---------- ---------- --------- Rental income $725,818 $726,956 $1,138 Direct financing interest 2,245 2,245 0 Interest income 16,550 18,211 1,661 Other income 11,532 48,060 36,528 --------- ---------- --------- TOTAL OPERATING REVENUES $756,145 $795,472 $39,327 --------- ---------- --------- OPERATING EXPENSES Insurance $7,113 $6,409 $704 Management fees 44,391 44,520 (129) Overhead allowance 3,700 3,591 109 Advisory Board 4,400 3,628 772 Administrative 19,823 15,054 4,769 Professional services 4,992 8,418 (3,426) Disposition Fees 0 15,000 (15,000) Auditing 12,000 12,000 0 Legal 7,500 5,483 2,017 Defaulted tenants 1,920 3,090 (1,170) --------- --------- --------- TOTAL OPERATING EXPENSES $105,839 $117,193 ($11,354) --------- --------- --------- GROUND RENT $30,927 $31,250 ($323) --------- --------- --------- INVESTIGATION AND RESTORATION EXPENSES $1,215 $4,282 ($3,067) --------- --------- --------- NON-OPERATING EXPENSES Depreciation $123,186 $113,472 $9,714 Amortization 0 1,163 (1,163) --------- --------- --------- TOTAL NON-OPERATING EXPENSES $123,186 $114,635 $8,551 --------- --------- --------- TOTAL EXPENSES $261,167 $267,360 ($6,193) --------- --------- --------- NET INCOME $494,978 $528,112 $33,134 OPERATING CASH RECONCILIATION: VARIANCE --------- Depreciation and amortization 123,186 114,635 (8,551) (Increase) Decrease in current assets 7,093 27,125 20,032 Increase (Decrease) in current liabilities (44,187) (240,799) (196,612) (Increase) Decrease in cash reserved for payables (6,000) 160,000 166,000 Advance from prior cash flows for current distributions (16,000) (16,000) 0 --------- -------- --------- Net Cash Provided From Operating Activities $559,070 $573,073 $14,003 --------- -------- --------- CASH FLOWS FROM (USED IN) INVESTING AND FINANCING ACTIVITIES Recoveries from former G.P. affiliates 0 0 0 Principal received on equipment leases 13,430 31,445 18,015 Proceeds from property sales 0 470,247 470,247 --------- -------- --------- Net Cash Provided From Investing And Financing Activities $13,430 $501,692 $488,262 --------- -------- --------- Total Cash Flow For Quarter $572,500 $1,074,765 $502,265 Cash Balance Beginning of Period 920,995 1,162,185 241,190 Less 2nd quarter distributions paid 8/97 (575,000) (525,000) 50,000 Change in cash reserved for payables or future disbutions 22,000 (144,000) (166,000) --------- --------- --------- Cash Balance End of Period $940,495 $1,567,950 $627,455 Cash reserved for 3rd quarter L.P. distributions (575,000) (1,075,000) (500,000) Cash reserved for payment of payables (200,000) (224,000) (24,000) --------- --------- --------- Unrestricted Cash Balance End of Period $165,495 $268,950 $103,455 ========= ========= ========= PROJECTED ACTUAL VARIANCE * Quarterly Distribution $575,000 $1,075,000 $500,000 Mailing Date 11/15/97 (enclosed) -
* Refer to distribution letter for detail of quarterly distribution. 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 $11,401,666 ----------- CURRENT EQUITY $34,878,634 PORTFOLIO (Note 1)
REAL ESTATE EQUIPMENT ------------------------------ ------------------------------------------- ANNUAL LEASE ANNUAL BASE % EXPIRATION LEASE % * CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN - - ------------------------------------- ------------------------------ ------------------------------------------- APPLEBEE'S COLUMBUS, OH 1,059,465 135,780 12.82% 84,500 0 0.00% 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 295,750 39,000 13.19% 224,376 0 0.00% DENNY'S (2) PHOENIX, AZ 972,726 84,000 8.64% 183,239 0 0.00% DENNY'S (2) PHOENIX, AZ 865,900 86,000 9.93% 221,237 0 0.00% DENNY'S TWIN FALLS, ID 699,032 83,200 11.90% 04/30/99 190,000 37,860 19.93% DENNY'S (2)(3) PHOENIX, AZ 500,000 37,000 7.40% 14,259 0 0.00% HARDEE'S (5) S MILWAUKEE, WI 808,032 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 0.00% " " 151,938 0 0.00% HARDEE'S (5) FOND DU LAC, WI 849,767 88,000 10.36% (4) 290,469 0 0.00% HARDEE'S (5) MILWAUKEE, WI 0 0 0.00% 780,000 0 0.00% HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62% HOSTETTLER'S DES MOINES, IA 845,000 55,584 6.58% 52,813 0 0.00% KFC SANTA FE, NM 451,230 60,000 13.30% MIAMI SUBS PALM BEACH, FL 743,625 39,000 5.24% TOTALS TOTAL % ON ------------------------------- $34,878,634 ANNUAL EQUITY CONCEPT LOCATION COST RECEIPTS RETURN RAISE - - ------------------------------------- -------------------------------- ----------- APPLEBEE'S COLUMBUS, OH 1,143,965 135,780 11.87% 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 520,126 39,000 7.50% DENNY'S (2) PHOENIX, AZ 1,155,965 84,000 7.27% DENNY'S (2) PHOENIX, AZ 1,087,137 86,000 7.91% DENNY'S TWIN FALLS, ID 889,032 121,060 13.62% DENNY'S (2)(3) PHOENIX, AZ 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 1,421,983 76,000 5.34% " " HARDEE'S (5) FOND DU LAC, WI 1,140,236 88,000 7.72% HARDEE'S (5) MILWAUKEE, WI 780,000 0 0.00% HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62% HOSTETTLER'S DES MOINES, IA 897,813 55,584 6.19% KFC SANTA FE, NM 451,230 60,000 13.30% MIAMI SUBS PALM BEACH, FL 743,625 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
--------------------------------------- PROJECTIONS FOR ORIGINAL EQUITY $46,280,300 DISCUSSION PURPOSES DIVALL INSURED INCOME PROPERTIES 2 LP NET DISTRIBUTION OF 1997 PROPERTY SUMMARY CAPITAL SINCE INCEPTION $11,401,666 AND RELATED ESTIMATED RECEIPTS ----------- CURRENT EQUITY $34,878,634 --------------------------------------- PORTFOLIO (Note 1) --------------------------- ------------------------------------ --------------------------- ----------- REAL ESTATE EQUIPMENT TOTALS TOTAL % --------------------------- ------------------------------------ --------------------------- ON ANNUAL LEASE ANNUAL $34,878,634 - - --------------------------- 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% 1,182,735 127,920 10.82% 19,013 0 0.00% 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 (32 Properties) 23,962,302 2,539,918 10.60% 2,551,063 37,860 1.48% 26,513,365 2,577,779 9.72% 7.39% - - --------------------------- -------------------------- ------------------------- --------------------------- ------------
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 -----END PRIVACY-ENHANCED MESSAGE-----