-----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, BJXKaifJtZaIovEt55T/MXvz3QlXRtZNdj1dappPsNLZwOleL2dFrPPkd6Wk3r3/ CxbagrgXJLoOccTuOs1uKA== 0000950131-98-002044.txt : 19980402 0000950131-98-002044.hdr.sgml : 19980402 ACCESSION NUMBER: 0000950131-98-002044 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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-K405 SEC ACT: SEC FILE NUMBER: 000-17686 FILM NUMBER: 98575274 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-K405 1 FORM 10-K FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting securities held by nonaffiliates of the Registrant: The aggregate market value of limited partnership interests held by nonaffiliates is not determinable since there is no public trading market for the limited partnership interests. Index to Exhibits located on page: 35 - 36 -------------- PART I Item 1. Business Background - - ---------- The Registrant, DiVall Insured Income Properties 2 Limited Partnership (the "Partnership"), is a limited partnership organized under the Wisconsin Uniform Limited Partnership Act pursuant to an Agreement of Limited Partnership dated as of November 18, 1987, and amended as of November 25, 1987, February 20, 1988, June 21, 1988, February 8, 1993, May 26, 1993 and June 30, 1994. As of December 31, 1997, the Partnership consisted of one General Partner and 2,671 Limited Partners owning an aggregate of 46,280.3 Limited Partnership Interests (the "Interests") acquired at a public offering price of $1,000 per Interest before volume discounts. The Interests were sold commencing February 23, 1988, pursuant to a Registration Statement on Form S-11 filed under the Securities Act of 1933 (Registration 33-18794) as amended. 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. On February 22, 1990, the Partnership closed the offering at 46,280.3 Interests ($46,280,300), providing net proceeds to the Partnership after volume discounts and offering costs of $39,358,468. The Partnership is currently engaged in the business of owning and operating its investment portfolio (the "Properties") of commercial real estate. The Properties are leased on a triple net basis to, and operated by, franchisors or franchisees of national, regional and local retail chains under long-term leases. The lessees consist of primarily fast-food, family style, and casual/theme restaurants, but also include an auto tag agency, a video rental store and a child care center. At December 31, 1997, the Partnership owned 32 properties with specialty leasehold improvements in 12 of these properties, as more fully discussed in Item 2. Prior to the disposal of the Properties, the Partnership's return on its investment will be derived principally from rental payments received from its lessees. Therefore, the Partnership's return on its investment is largely dependent, among other factors, upon the business success of its lessees. The business success of the Partnership's individual lessees can be adversely affected on three general levels. First, the tenants rely heavily on the management contributions of a few key entrepreneurial owners. The business operations of such entrepreneurial tenants can be adversely affected by death, disability or divorce of a key owner, or by such owner's poor business decisions such as an undercapitalized business expansion. Second, changes in a local market area can adversely affect a lessee's business operation. A local economy can suffer a downturn with high unemployment. Socioeconomic neighborhood changes can affect retail demand at specific sites and traffic patterns may change, or stronger competitors may enter a market. These and other local market factors can potentially adversely affect the lessees of Partnership properties. Finally, despite an individual lessee's solid business plans in a strong local market, the chain concept itself can suffer reversals or changes in management policy which in turn can affect the profitability of operations for Partnership properties. Therefore, there can be no assurance that any specific lessee will have the ability to pay its rent over the entire term of its lease with the Partnership. Since over 90% of the Partnership's investment in properties and equipment involves restaurant tenants, the restaurant market is the major market segment with a material impact on Partnership operations. It would appear that the management skill and potential operating efficiencies realized by Partnership lessees will be a major ingredient for their future operating success in a very competitive restaurant and food service marketplace. There is no way to determine, with any certainty, which, if any, tenants will succeed or fail in their business operations over the term of their respective leases with the Partnership. It can be reasonably anticipated that some lessees will default on future lease payments to the Partnership which will result in the loss of expected lease income for the Partnership. Management will use its best efforts to vigorously pursue collection of any defaulted amounts and to protect the Partnership's assets and future rental income potential by trying to re-lease any properties with rental defaults. External events which could impact the Partnership's liquidity are the entrance of other competitors into the market areas of our tenants; liquidity 2 and working capital needs of the leaseholders; and failure or withdrawal of any of the national franchises held by the Partnership's tenant. Each of these events, alone or in combination, would affect the liquidity level of leaseholders resulting in possible default by the tenant. Since the information regarding plans for future liquidity and expansion of closely held organizations, which are tenants of the Partnership, tend to be of a private and proprietary nature, anticipation of individual liquidity problems is difficult, and prediction of future events is nearly impossible. A preliminary investigation during 1992 by the Office of the 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, two of 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. The aggregate amount of the misappropriation, related costs and 9% interest accrued since January 1, 1993, is approximately $14,800,000, net of recoveries, of which $5,969,000 has been allocated to the Partnership. Subsequent to discovery, and in response to the regulatory inquiries, a third- party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed (effective February 8, 1993) to assume the responsibility for daily operations and assets of the Partnerships as well as to develop and execute a plan of restoration to the Partnerships. As reported in the Partnership's report on Form 8-K dated May 26, 1993, effective as of that date, the Limited Partners, by written consent of a majority of interests, elected the Permanent Manager, TPG, as General Partner. Additional results of the solicitation included the approval of the Permanent Manager Agreement ("PMA"), the acceptance of the resignations of the former general partners, amendments to certain provisions of the Partnership Agreement pertaining to general partner interests and compensation, and an amendment of the Partnership Agreement providing for an Advisory Board (the "Board"). The Permanent Manager Agreement - - ------------------------------- The PMA was entered into on February 8, 1993, between the Partnership, DiVall 1, DiVall 3, the now former general partners DiVall and Magnuson, their controlled affiliates, and TPG, naming TPG as the Permanent Manager. The PMA contains provisions allowing the Permanent Manager to submit the PMA, the issue of electing the Permanent Manager as General Partner, and the issue of acceptance of the resignations of the former general partners to a vote of the Limited Partners through a solicitation of written consents. TPG, as the new General Partner, has been operating and managing the affairs of the Partnership in accordance with the provisions of the PMA and the Partnership Agreement, as amended. Advisory Board - - -------------- The concept of the Advisory Board was first introduced by TPG during the solicitation of written consents for the Partnerships and is the only type of oversight body known to exist for similar partnerships at this time. The first Advisory Board was appointed in October 1993, and held its first meeting in November 1993. The four person Advisory Board is empowered to, among other functions, review operational policies and practices, review extraordinary transactions, and advise and serve as an audit committee to the Partnership and the General Partner. The Advisory Board does not have the authority to direct management decisions or policies of the Partnership or remove the General Partner. The powers of the Advisory Board are advisory only. The Advisory Board has full and free access to the Partnership's books and records, and individual Advisory Board members have the right to communicate directly with the Limited Partners concerning Partnership business. Members of the Advisory Board are compensated $3,000 annually and $1,200 for each quarterly meeting attended. 3 The Advisory Board currently consists of a broker dealer representative, Steven Carson of First Albany Corporation; and a Limited Partner from each of the three Partnerships: Robert White from DiVall 1, Richard Otte from the Partnership, and Albert Gerritz from DiVall 3. For a brief description of each Advisory Board member, refer to Item 10, Directors and Executive Officers of the Registrant. Restoration Plan - - ---------------- TPG, upon commencement of its management of the Partnerships, developed a strategy (the "Restoration Plan" or "Plan") for recovering as much of the amounts misappropriated by the former general partners and their affiliates as possible. The Plan focused on recovery from the following sources: (a) personal property, (b) promissory notes, (c) land contracts, (d) litigation, and (e) PMA savings. A. Personal Property. DiVall and Magnuson appear to have very few unencumbered personal assets which would materially benefit the Partnerships. The Partnerships have obtained security interests in substantially all of DiVall and Magnuson's assets which have been identified. The security interests included a mortgage on DiVall's residence and surrounding farm land which was subsequently sold to a third party. B. Promissory Notes. Pursuant to the PMA, DiVall, Magnuson, and entities owned by them, granted the Partnerships a security interest in certain promissory notes and mortgages due from other DiVall related entities (the "Private Partnerships"). Recovery of amounts due under these notes is substantially complete, but the amount of such recoveries has been significantly discounted because many of the Private Partnerships are involved in bankruptcy proceedings. See Item 3, Legal Proceedings, for additional information regarding the bankruptcy proceedings of the Private Partnerships. C. Land Contracts. The Partnerships were assigned two land contracts from the Partnership's former general partners. These contracts were not originally identified nor assigned in connection with the PMA, and settlements have been received on these contracts. D. Litigation. The Partnerships initiated lawsuits against the Partnership's former auditors, former securities counsel, former general partners and a former affiliate. Settlements were received in these lawsuits during 1996. Refer to Item 3, Legal Proceedings, and Note 10 to the financial statements included in Item 8 below for additional information concerning the settlement of these lawsuits. E. PMA Savings. Pursuant to the terms of the PMA, The Provo Group, Inc. is to account to the former general partners for all of the following which are avoided or reduced by implementation of the PMA: (i) Fees payable to the general partner or entities controlled by the general partner, (ii) brokerage commissions, and (iii) residuals. Under the PMA, all such savings shall be credited against the amount owed the Partnership by the former general partners. Total amounts recovered at December 31, 1997, amounted to $5,766,000, of which approximately $2,332,000 was allocated to the Partnership. Currently, there are few potential sources of recovery remaining. The total amount due the Partnerships from the former general partners and their affiliates as of December 31, 1997, as a result of the misappropriation of assets, approximates $14,800,000, net of recoveries, which includes the amount of the misappropriation discovered to date, related costs, and 9% interest accrued since January 1, 1993. The Partnership has no employees. All of the Partnership's business is conducted in the United States. 4 Item 2. Properties The Partnership's properties are leased under long-term leases, generally with terms of approximately 20 years. All leases are triple net which require the tenant to pay all property operating costs including maintenance, repairs, utilities, property taxes, and insurance. A majority of the leases contain percentage rent provisions which require the tenant to pay a specified percentage (3% to 8%) of gross sales above a threshold amount. The Partnership owned the following properties (including specialty leasehold improvements for use in some of these properties) as of December 31, 1997:
Lease Acquisi- Property Name Purchase Rental Per Expiration Renewal tion Date & Address Lessee Price (1) Annum Date Options - - --------- --------- ------ --------- ---------- ----------- -------- 03/11/88 Cash-A-Check MBA, Inc. $ 792,188 $ 30,000 5/31/00 (3) 601 W Hallandale Beach Blvd Hallandale, FL 03/11/88 Miami Subs QSR, Inc. 743,625 39,000 03-31-2016 None US-1 Near PGA Blvd Palm Beach, FL 06/15/88 Denny's DenAmerica, Inc. 1,087,137(2) 115,200 08-20-2009 (3) 8801 N 7th St Phoenix, AZ 06/15/88 Denny's (4) DenAmerica, Inc. 520,126(2) 93,000 01-30-1993 (3) 2201 W Camelback Phoenix, AZ 07/15/88 Hooter's TWI X, Inc. 1,346,719 95,000 07-14-2008 None 7669 Grapevine Hwy N Richland Hills, TX 08/01/88 Hardee's Hardee's Food 1,091,190(2) 64,000 10-31-2001 (3) 106 N Chicago Ave Systems, Inc. S Milwaukee, WI 08/15/88 Denny's First Foods, Inc. 1,155,965(2) 65,000 10-31-2007 (3) 2360 W Northern Ave Phoenix, AZ 09/09/88 Red Apple Restaurant Selman Alieu 660,156 60,000 12-31-2007 (3) 555 33rd Ave Cedar Rapids, IA 10/10/88 Kentucky Fried Chicken (5) KFC National 451,230 60,000 06-30-2018 None 1014 S St Francis Dr Management Co. Santa Fe, NM 12/22/88 Wendy's WenSouth 596,781 76,920 12-31-2008 None 1721 Sam Rittenburg Blvd Orlando, Ltd. Charleston, SC 12/22/88 Wendy's WenSouth 649,594 86,160 12-31-2008 None 3013 Peach Orchard Rd Orlando, Ltd. Augusta, GA 12/29/88 Popeye's Stillman Mgmt. 580,938 77,280 12-31-2009 None 2562 Western Ave Co., Inc. Park Forest, IL 02/21/89 Wendy's WenSouth 776,344 96,780 01-31-2009 None 1901 Whiskey Rd Orlando, Ltd. Aiken, SC
5
Lease Acquisi- Property Name Purchase Rental Per Expiration Renewal tion Date & Address Lessee Price (1) Annum Date Options - - --------- ------------------------------ ------------------- ------------- ---------- ----------- -------- 02/21/89 Wendy's WenSouth 728,813 96,780 01-31-2009 None 1730 Walton Way Orlando, Ltd. Augusta, GA 02/21/89 Wendy's WenSouth 528,125 70,200 01-31-2009 None 347 Folly Rd Orlando, Ltd. Charleston, SC 02/21/89 Wendy's WenSouth 580,938 77,280 01-31-2009 None 361 Hwy 17 Bypass Orlando, Ltd. Mount Pleasant, SC 03/14/89 Wendy's WenSouth 633,750 90,480 01-31-2009 None 1004 Richland Ave Orlando, Ltd. Aiken, SC 04/04/89 Denny's Cypress 1,029,844 136,800 11-30-2008 None 607 Internatl Speedway Restaurants, Inc. Daytona Beach, FL 04/20/89 Hostetlers, BBQ Hickory Park, Inc. 897,813(2) 55,584 12-31-1997 (3) 4875 Merle Hay Des Moines, IA 04/28/89 Hardee's Hardee's Food 686,563 64,000 04-30-2009 None 1570 E Sumner St Systems, Inc. Hartford, WI 10/18/89 Hardee's Hardee's Food 1,421,983(2) 76,000 04-30-2009 None 4000 S 27th St Systems, Inc. Milwaukee, WI 12/28/89 Village Inn Columbia VI, 845,000(2) 84,000 11-30-2009 None 2451 Columbia Rd L.L.C. Grand Forks, ND 12/29/89 Wendy's WenSouth 660,156 87,780 12-31-2009 None 1717 Martintown Rd Orlando, Ltd. N Augusta, SC 12/29/89 Wendy's WenSouth 580,938 77,280 12-31-2009 None 1515 Savannah Hwy Orlando, Ltd. Charleston, SC 12/29/89 Wendy's WenSouth 633,750 84,120 12-31-2009 None 3869 Washington Rd Orlando, Ltd. Martinez, GA 01/01/90 Sunrise Preschool Sunrise 1,182,735(2) 127,920 05-31-2009 None 4111 E Ray Rd Preschools, Phoenix, AZ Inc. 01/05/90 Denny's Cypress 1,025,830 133,380 09-30-2009 None 1820 State Road 44 Restaurants, Inc. New Smyrna Beach, FL 01/05/90 Hardee's Hardee's Food 1,140,236(2) 88,000 11-30-2009 None 20 N Pioneer Rd Systems, Inc. Fond du lac, WI 01/31/90 Blockbuster Video Blockbuster 646,425 100,554 01-31-2001 (3) 336 E 12th St Videos, Inc. Ogden, UT 03/21/90 Denny's DenAmerica, Inc. 1,179,501(2) 83,200 04-30-2012 (3) 688 N Blue Lakes Blvd Twin Falls, ID
6
Lease Acquisi- Property Name Purchase Rental Per Expiration Renewal tion Date & Address Lessee Price (1) Annum Date Options - - --------- ----------------- ---------------- ------------- ---------- ----------- -------- 05/02/90 Denny's (4) DenAmerica, Inc. 514,259(2) 90,000 05-30-1998 (3) 3752 E Ind School Phoenix, AZ 05/31/90 Applebee's Thomas & King, 1,434,434(2) 135,780 10-31-2009 None 2770 Brice Rd Inc. ----------- ---------- Columbus, OH $26,803,086 $2,657,478 =========== ==========
Footnotes: (1) Purchase price includes all costs incurred to acquire the property. (2) Purchase price includes cost of specialty leasehold improvements. (3) Renewal option available. (4) Ownership of lessee's interest under a ground lease. The Partnership is responsible for payment of all rent obligations under the ground lease. (5) Ownership of lessee's interest under a ground lease. The tenant is responsible for payment of all rent obligations under the ground lease. Terratron, Inc., the lessee of eight (8) Hardee's restaurants has experienced sales difficulties over the past three years. Effective December 31, 1995, management entered into a one-year lease modification with the tenant which reduced base rents for 1996 by approximately $200,000. Additionally, delinquent rent totaling $112,000 was capitalized into a five (5)-year note accruing interest at 10% per annum. The amount of rent capitalized was also written off as uncollectible. During the Fourth Quarter of 1996, management terminated the leases in six (6) of the properties with Terratron and entered into new leases on five (5) of the properties with Hardee's Food Systems, Inc. In connection with this transaction, the capitalized rent was received. The new leases resulted in annual rents which were $255,000 lower than Terratron's contract rent and $106,000 lower than 1996 adjusted rents. In connection with the transaction, Terratron terminated their equipment leases in three of the properties and the equipment was sold to the new tenant for $80,000, resulting in a loss to the Partnership of $95,000. Additionally, purchase options were granted on three of the properties. Those properties were written down to the option price at December 31, 1996. Four (4) of the properties were sold (three of which were in accordance with the option agreements) during 1997. The two Florida Denny's properties were sold to the tenant, Cypress Restaurants, Inc., during January 1998 for a total of $2,200,000. Environmental contamination from an adjacent property was detected on the Daytona Beach property. Therefore, the Partnership accepted a note for $550,000 of the sale price to be paid in full in six months, when permanent financing can be arranged once the environmental issues have been addressed. The $400,000 down payment is non-refundable. The Partnership is not liable for the environmental contamination. The tenant of the Country Kitchen restaurant in Cedar Rapids, Iowa, vacated the property during 1995 and ceased paying rent. Management entered into a lease agreement for the property beginning on January 1, 1998. DenAmerica, Inc., the tenant of the Denny's restaurant in Twin Falls, Idaho, has vacated the property, but is continuing to make rental payments. During 1997, the deferred rental income and remaining equipment lease balances were written off, due to uncertainty regarding their collectibility. 7 Item 3. Legal Proceedings In 1993, the Partnership, along with DiVall 1 and DiVall 3, initiated a lawsuit against Ernst & Young LLP ("E&Y"), a certified public accounting firm, in connection with the audits of the Partnerships performed by E &Y for the years 1989, 1990 and 1991. The Partnerships also filed claims against Magnuson, DiVall, DiVall Real Estate Investment Corporation, David Shea, and the Partnerships' former securities law firm, Quarles & Brady. These matters were settled in 1996, yielding net proceeds to the Partnership, after the payment of contingent legal fees and related expenses, of approximately $900,000. 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. In 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 of the Private Partnerships have been reached. Settlements in the bankruptcies resulted in cash payments to the Partnerships in the amount 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. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 8 PART II Item 5. Market Price and Dividends on the Registrant's Common Equity and Related Stockholder Matters (a) Although some interests have been traded, there is no active public market for limited partnership interests, and it is not anticipated that an active public market for limited partnership interests will develop. (b) As of December 31, 1997 there were 2,671 record holders of limited partnership interests in the Partnership. (c) The Partnership does not pay dividends. However, the Partnership Agreement, as amended, provides for distributable net cash receipts of the Partnership to be distributed on a quarterly basis, 99% to the Limited Partners and 1% to the General Partner, subject to the limitations on distributions to the General Partner described in the amended Partnership Agreement. During 1997 and 1996, $4,600,000 and $6,825,000, respectively, were distributed in the aggregate to the Limited Partners. The General Partner received aggregate distributions of $8,736 and $13,110 in 1997 and 1996, respectively. Item 6. Selected Financial Data DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP (a Wisconsin limited partnership) December 31, 1997, 1996, 1995, 1994, and 1993 (not covered by Independent Auditor's Report)
- - ------------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 - - ------------------------------------------------------------------------------------------ Total Revenue $ 3,448,300 $ 5,316,853 $ 3,932,498 $ 4,190,932 $ 4,133,668 - - ------------------------------------------------------------------------------------------ Net Income 2,183,977 3,277,512 1,782,105 2,158,283 804,920 - - ------------------------------------------------------------------------------------------ Net Income per Limited Partner Interest 46.72 70.11 38.12 46.17 17.19 - - ------------------------------------------------------------------------------------------ Total Assets 20,894,198 23,379,356 27,134,604 29,455,349 31,288,856 - - ------------------------------------------------------------------------------------------ Total Partners' Capital 20,479,121 22,903,880 26,464,478 28,117,453 29,146,593 - - ------------------------------------------------------------------------------------------ Cash Distributions per Limited Partnership Interest 99.39 147.47 74.11 68.68 50.76 - - ------------------------------------------------------------------------------------------
(a) The above selected financial data should be read in conjunction with the financial statements and the related notes appearing elsewhere in this annual report. 9 Item 7. 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 December 31, 1997, were originally purchased at a price, including acquisition costs, of approximately $26,803,000. The tenant of the Country Kitchen restaurant in Cedar Rapids, Iowa, vacated the property during 1995 and ceased paying rent. Management entered into a lease agreement for the property beginning on January 1, 1998. Apple South, Inc., the tenant of two Applebee's restaurants in Tennessee and Florida, notified management of their intent to exercise an option in their lease to purchase those properties. The Tennessee property was sold to Apple South during January 1996. The sale of the Florida property took place during September 1996. Cypress Restaurants, Inc., the tenant of the Denny's restaurants in New Smyrna Beach, Florida and Daytona Beach, Florida, have negotiated a purchase contract for their properties in the amount of $1,250,000 and $950,000, respectively, from the Partnership. The Daytona Beach property, however, was found to have environmental contamination from an adjoining property, which impacted their ability to obtain financing. Therefore, the Partnership has agreed to finance $550,000 of the $950,000 purchase price for a period of six months, until the environmental issues can be resolved. The sale of the properties took place in January 1998, and resulted in a gain of $556,000. Terratron, Inc., the lessee of eight (8) Hardee's restaurants has experienced sales difficulties over the past three years. Effective December 31, 1995, management entered into a one-year lease modification with the tenant which reduced base rents for 1996 by approximately $200,000. Additionally, delinquent rent totaling $112,000 was capitalized into a five (5)-year note accruing interest at 10% per annum. The amount of rent capitalized was also written off as uncollectible. During the Fourth Quarter of 1996, management terminated the leases in six (6) of the properties with Terratron and entered into new leases on five (5) of the properties with Hardee's Food Systems, Inc. In connection with this transaction, the capitalized rent was received. The new leases resulted in annual rents which are $255,000 lower than Terratron's contract rents and $106,000 lower than 1996 adjusted rents. In exchange for lower fixed rent on the properties, percentage rent of 8% is allowed on sales breakpoints which were lower than the original leases called for. In connection with the transaction, Terratron terminated their equipment leases in three of the properties and the equipment was sold to the new tenant for $80,000, resulting in a loss to the Partnership of $95,000. Additionally, purchase options were granted on three of the properties. Those properties were written down to the option price at December 31, 1996. The three option properties and a fourth Hardee's property were sold to the former tenant during 1997, resulting in a net gain, before disposition fees, of $106,000. DenAmerica, Inc., the tenant of the Denny's restaurant in Twin Falls, Idaho, has vacated the property, but is continuing to make rental payments. During 1997, the deferred rental income and remaining equipment lease balances were written off, due to uncertainty regarding their collectibility. The net investment in direct financing leases, which includes the Partnership's specialty leasehold improvement leases, were fully extinguished or reserved at December 31, 1997, compared to $109,000 outstanding at December 31, 1996. The decrease was a result of principal and residual payments received during the year as well as an allowance recorded for remaining equipment lease payments on the Twin Falls, Idaho property. The tenant has vacated the property and future collectablility is uncertain. 10 Other Assets Cash and cash equivalents, including cash restricted for real estate taxes held by the Partnership, was approximately $1,450,000 at December 31, 1997, compared to $1,555,000 at December 31, 1996. The Partnership designated cash of $875,000 to fund the Fourth Quarter 1997 distributions to Limited Partners paid in February 1998, $300,000 for the payment of year-end 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 and sales of investment properties will provide the sources for future fund liquidity and Limited Partner distributions. The Partnership established an Indemnification Trust (the "Trust") during the Fourth Quarter of 1993, deposited $100,000 in the Trust during 1993 and completed funding of the Trust with $150,000 during 1994. The provision to establish the Trust was included in the 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 8 to the financial statements included in Item 8 of this report. Due From Affiliated Partnerships, Due From Former Affiliates, 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 $1,499,000 at December 31, 1997. The receivable decreased from the prior year due to $245,000 of recoveries received during the year from the former general partners and their affiliates including a settlement received from DiVall 1 resulting from the favorable outcome of a disputed note with Boatmen's First National Bank of Kansas City. 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 $4,470,000 at December 31, 1997, and includes $2,447,000 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 December 31, 1997, $5,766,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, the Partnership has recognized $1,108,000 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 9 of the financial statements included in Item 8 of this report. 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 December 31, 1997, in the amount of $70,000, primarily represented the year-end accruals of legal and auditing fees. Due to the Current General Partner amounted to $87,000 at December 31, 1996, representing a true-up of the general partner's management fee, leasing commissions for the lease of the Hardee's restaurants, 11 and the Fourth Quarter distribution, all of which were paid in 1997. The December 31, 1997 amount of $2,510 represents the General Partner's portion of the Fourth Quarter distribution. Real estate taxes payable decreased from $119,000 at December 31, 1996, to $58,000 at December 31, 1997, primarily due to the collection of all 1996 real estate taxes due in 1997 from Terratron, the former tenant of the Partnership's Hardee's restaurants which were paid during 1997. Partners' Capital Net income for the year 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 included in Item 8 of this report. The former general partners' deficit capital account balance was reallocated to the Limited Partners at December 31, 1993. Refer to Note 11 to the financial statements included in Item 8 of this report for additional information regarding the reallocation. Cash distributions paid to the Limited Partners and to the General Partner during 1997 of $4,600,000 and $8,736, respectively, have also been in accordance with the amended Partnership Agreement. The Fourth Quarter 1997 distribution of $875,000 was paid to the Limited Partners on February 15, 1998. Results of Operations: The Partnership reported net income for the year ended December 31, 1997, in the amount of $2,184,000 compared to net income for the years ended December 31, 1996 and 1995, of $3,278,000 and $1,782,000, respectively. Results for all three years were different than would be expected from "normal" operations, primarily because of costs associated with the misappropriation of assets by the former general partners and their affiliates, tenant defaults, non-cash write- offs, and real estate taxes on vacant properties. Results for 1997 and 1996 were also impacted by gains on the sales of properties and the reversal of a portion of the former general partner receivable write-off. The costs associated with the misappropriation increased significantly during 1995 and 1996 as the lawsuit against the former general partners' 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 only a minimal impact on operations. Revenues Total revenues were $3,448,000, $5,317,000, and $3,932,000, for the years ended December 31, 1997, 1996, and 1995, respectively. A decrease in fixed rents resulted from tenant turnover, property sales, and modified leases. The unusually high revenues in 1996 were primarily a result of a $930,00 gain on the sale of two Applebee's restaurants, and an $864,000 recovery for a portion of the former general partner receivable which had previously been written-off due to recoveries received in excess of original estimates. During 1997, a $106,000 gain was recognized on the sales of four Hardee's restaurants and a $245,000 recovery was recorded. Total revenues should approximate $3,000,000 annually based on leases currently in place. Future revenues may decrease with tenant defaults and/or sales of Partnership properties. They may also increase with additional rents due from tenants, if those tenants experience sales levels which require the payment of additional rent to the Partnership. Expenses For the years ended December 31, 1997, 1996, and 1995, cash expenses amounted to approximately 19%, 25%, and 29%, of total revenues, respectively. Total expenses, including non-cash items, amounted to approximately 37%, 38%, and 55%, of total revenues for the years ended December 31, 1997, 1996, and 1995, respectively. Items negatively impacting expenses during the last three years include expenses 12 incurred primarily in relation to the misappropriation of assets by the former general partners and their affiliates, non-cash write-offs, property write- downs, real estate taxes, and equipment losses. For the years ended December 31, 1997, 1996, and 1995, expenses incurred in relation to the misappropriated assets amounted to $33,000, $526,000, and $417,000, respectively. Future expenses incurred in relation to the misappropriation should have a minimal impact on the Partnership. Additional expenses impacting operating results are provisions for uncollectible rent, losses on equipment leases, and write-downs of property to their estimated net realizable values. All of these items, including depreciation, are non-cash items and do not affect current operating cash flow of the Partnership or distributions to the Limited Partners. Write-offs for uncollectible rents and receivables amounted to $67,000, $0, and $112,000 at December 31, 1997, 1996, and 1995, respectively. The write-offs are the result of defaults as well as modifications to several property leases since inception of the Partnership. The 1997 write-off is primarily a result of an allowance recorded for deferred rent on the Denny's in Twin Falls, Idaho. The tenant of the property, DenAmerica, Inc., has vacated the property and future collectibility is uncertain. During 1996, two Hardee's properties were written down to their estimated net realizable values based on purchase option prices granted to the tenant of the properties. During 1995, the Miami Subs restaurant in Palm Beach, Florida, was written down $255,000 to its estimated net realizable value of $400,000. The poor location of this property has required lease modifications for the tenant. During 1997, remaining equipment lease payments of $61,000 on the Twin Falls, Idaho, lease were written off. The tenant has vacated the property and future collectibility is uncertain. Equipment lease terminations created losses during 1996, in the amount of $95,000. The equipment leases were terminated by the tenant of eight (8) Hardee's restaurants which had been experiencing sales difficulties. During 1995, write-downs were taken on the residual values of all equipment leases to more closely reflect their estimated fair market value. Partnership management fees increased during 1996 primarily due to the prepayment of rent in connection with the lease terminations on the Hardee's properties. Disposition fees were incurred during 1996 as a result of the sale of two of the Partnership's Applebee's properties. Fees incurred during 1997 were a result of the sales of four Hardee's properties. Real estate tax expenses for 1995 were inordinately high as former management allowed these taxes to become delinquent for several years while interest and penalties accumulated along with new liabilities incurred on vacant properties and defaulted tenants. During 1997, real estate tax expense was recorded on the vacant former Country Kitchen property. The Partnership incurred real estate taxes on behalf of tenants in the amounts of $12,000, and $30,000, for the years ended December 31, 1997, and 1995, respectively. 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. Although the majority of the Partnership's leases have percentage rent clauses, revenues from percentage rents represented only 9% of rental income for 1997. 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. 13 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. Year 2000 - - --------- Since the Partnership's accounting and investor relations software are not owned by the Partnership and tenants are responsible for the operation of any equipment located at the Partnership's properties, issues regarding preparedness for the year 2000 should have a minimal impact on the Partnership. Item 8. Financial Statements and Supplementary Data DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP ------------------------------------------------------ (a Wisconsin limited partnership) --------------------------------- INDEX TO FINANCIAL STATEMENTS AND SCHEDULES -------------------------------------------
Page ---- Report of Independent Public Accountants ........... 15 Balance Sheets, December 31, 1997 and 1996 ........... 16 - 17 Statements of Income for the Years Ended December 31, 1997, 1996, and 1995 ........... 18 Statements of Partners' Capital for the Years Ended December 31, 1997, 1996, and 1995 ........... 19 Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995 ........... 20 - 21 Notes to Financial Statements ........... 22 - 31 Schedule III--Real Estate and Accumulated Depreciation ........... 37 - 38
14 [LETTERHEAD OF ARTHUR ANDERSEN LLP] REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Partners of Divall Insured Income Properties 2 Limited Partnership: We have audited the accompanying balance sheets of Divall Insured Income Properties 2 Limited Partnership (the Partnership) as of December 31, 1997 and 1996, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Divall Insured Income Properties 2 Limited Partnership as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Chicago, Illinois February 26, 1998 15 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS December 31, 1997 and 1996 -------------------------- ASSETS
December 31, December 31, 1997 1996 ------------ ------------ INVESTMENT PROPERTIES AND EQUIPMENT:(Note 3) Land $ 8,330,982 $ 9,141,303 Buildings 14,930,273 16,488,654 Equipment 707,378 707,378 Accumulated depreciation (5,472,407) (5,550,940) ----------- ----------- Net investment properties and equipment 18,496,226 20,786,395 ----------- ----------- NET INVESTMENT IN DIRECT FINANCING LEASES: 0 108,826 ----------- ----------- OTHER ASSETS: Cash and cash equivalents 1,438,534 1,444,326 Cash restricted for real estate taxes 11,251 110,625 Cash held in Indemnification Trust (Note 8) 304,753 289,637 Rents and other receivables 285,163 218,051 Deferred rent receivable 182,770 259,326 Prepaid insurance 19,341 22,262 Deferred charges 86,434 53,620 Unsecured notes receivable from lessees 69,726 86,288 ----------- ----------- Total other assets 2,397,972 2,484,135 ----------- ----------- DUE FROM FORMER AFFILIATES: (Notes 2 and 9) Due from former general partner affiliates 1,498,900 1,743,461 Allowance for uncollectible amounts due from former affiliates (1,498,900) (1,743,461) Restoration cost receivable 4,469,873 3,897,981 Allowance for uncollectible restoration receivable (4,469,873) (3,897,981) ----------- ----------- Due from former affiliates, net 0 0 ----------- ----------- Total assets $20,894,198 $23,379,356 =========== ===========
The accompanying notes are an integral part of these statements. 16 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS December 31, 1997 and 1996 -------------------------- LIABILITIES AND PARTNERS' CAPITAL
December 31, December 31, 1997 1996 ------------- ------------- LIABILITIES: Accounts payable and accrued expenses $ 69,837 $ 67,589 Due to current General Partner 2,510 86,727 Security deposits 153,112 144,290 Unearned rental income 131,263 57,739 Real estate taxes payable 58,355 119,131 ------------ ------------ Total liabilities 415,077 475,476 ------------ ------------ CONTINGENT LIABILITIES: (Note 7) PARTNERS' CAPITAL: (Notes 1, 4 and 11) Current General Partner - Cumulative net income 101,904 80,064 Cumulative cash distributions (40,091) (31,355) ------------ ------------ 61,813 48,709 ------------ ------------ Limited Partners (46,280.3 interests outstanding) Capital contributions, net of offering costs 39,358,468 39,358,468 Cumulative net income 16,454,337 14,292,200 Cumulative cash distributions (34,555,268) (29,955,268) Reallocation of former general partners' deficit capital (840,229) (840,229) ------------ ------------ 20,417,308 22,855,171 ------------ ------------ Total partners' capital 20,479,121 22,903,880 ------------ ------------ Total liabilities and partners' capital $ 20,894,198 $ 23,379,356 ============ ============
The accompanying notes are an integral part of these statements. 17 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF INCOME For the Years Ended December 31, 1997, 1996, and 1995 -----------------------------------------------------
1997 1996 1995 ---------- ---------- ---------- REVENUES: Rental income (Note 5) $2,951,174 $3,262,082 $3,770,280 Interest income on direct financing leases 10,384 57,028 102,101 Other interest income 73,223 98,393 69,287 Net other income (Note 3) 63,349 105,710 (10,899) Recovery of amount previously written off (Notes 9 & 10) 244,561 863,643 0 Net gain on disposal of assets 105,609 929,997 1,729 ---------- ---------- ---------- 3,448,300 5,316,853 3,932,498 ---------- ---------- ---------- EXPENSES: Partnership management fees (Note 6) 167,350 202,587 164,350 Disposition fees (Note 6) 52,166 66,750 3,000 Disposition fees - Restoration 0 20,550 3,000 Restoration fees (Note 6) 9,782 33,408 2,616 Selling commissions - Nonaffiliate 0 0 9,900 Appraisal fees 6,410 2,268 2,500 Insurance 26,130 36,594 48,180 General and administrative 107,992 125,634 103,142 Advisory Board fees and expenses 14,018 16,703 17,351 Interest 0 3,551 42,893 Real estate taxes 12,172 (880) 30,203 Ground lease payments (Note 3) 125,209 123,921 123,825 Expenses incurred due to default by lessee 8,398 7,220 24,748 Professional services 99,481 141,073 133,189 Professional services related to Investigation (Note 9) 32,618 526,210 417,433 Loss on equipment lease 61,404 95,246 72,264 Depreciation 464,596 511,650 584,352 Amortization 9,186 804 804 Provision for uncollectible rents and other receivables 67,411 0 111,762 Write down of properties to net realizable value 0 126,052 254,881 ---------- ---------- ---------- 1,264,323 2,039,341 2,150,393 ---------- ---------- ---------- NET INCOME $2,183,977 $3,277,512 $1,782,105 ========== ========== ========== NET INCOME - CURRENT GENERAL PARTNER 21,840 32,775 17,821 NET INCOME - LIMITED PARTNERS 2,162,137 3,244,737 1,764,284 ---------- ---------- ---------- $2,183,977 $3,277,512 $1,782,105 ========== ========== ========== NET INCOME PER LIMITED PARTNERSHIP INTEREST, based on 46,280.3 Interests outstanding $46.72 $70.11 $38.12 ========== ========== ==========
The accompanying notes are an integral part of these statements. 18 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' CAPITAL For the years ended December 31, 1997, 1996 and 1995 ----------------------------------------------------
Current General Partner ------------------------------------------ Cumulative Cumulative Net Cash Income Distributions Total ---------- -------------- ----- BALANCE AT DECEMBER 31, 1994 $ 29,468 $(13,165) $ 16,303 Cash Distributions ($74.11 per limited partnership interest) (5,080) (5,080) Net Income 17,821 17,821 -------- -------- -------- BALANCE AT DECEMBER 31, 1995 $ 47,289 $(18,245) $ 29,044 Cash Distributions ($147.47 per limited partnership interest) (13,110) (13,110) Net Income 32,775 32,775 -------- -------- -------- BALANCE AT DECEMBER 31, 1996 $ 80,064 $(31,355) $ 48,709 Cash Distributions ($99.39 per limited partnership interest) (8,736) (8,736) Net Income 21,840 21,840 -------- -------- -------- BALANCE AT DECEMBER 31, 1997 $101,904 $(40,091) $ 61,813 ======== ======== ========
Limited Partners -------------------------------------------------------------------------- Capital Contributions, Cumulative Net of Cumulative Cash Offering Costs Net Income Distribution Reallocation Total -------------- ----------- ------------ ------------ ---- BALANCE AT DECEMBER 31, 1994 $39,358,468 $ 9,283,179 $(19,700,268) $(840,229) $28,101,150 Cash Distributions ($74.11 per limited partnership interest) (3,430,000) (3,430,000) Net Income 1,764,284 1,764,284 ----------- ----------- ------------ --------- ----------- BALANCE AT DECEMBER 31, 1995 $39,358,468 $11,047,463 $(23,130,268) $(840,229) $26,435,434 Cash Distributions ($147.47 per limited partnership interest) (6,825,000) (6,825,000) Net Income 3,244,737 3,244,737 ----------- ----------- ------------ --------- ----------- BALANCE AT DECEMBER 31, 1996 $39,358,468 $14,292,200 $(29,955,268) $(840,229) $22,855,171 Cash Distributions ($99.39 per limited partnership interest) (4,600,000) (4,600,000) Net Income 2,162,137 2,162,137 ----------- ----------- ------------ --------- ----------- BALANCE AT DECEMBER 31, 1997 $39,358,468 $16,454,337 $(34,555,268) $(840,229) $20,417,308 =========== =========== ============ ========= ===========
The accompanying notes are an integral part of these statements. 19 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,183,977 $ 3,277,512 $ 1,782,105 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 473,782 512,454 585,156 Recovery of amount previously written off (244,561) (863,643) 0 Provision for uncollectible rents and other receivables 67,411 0 111,762 Property write downs to net realizable value 0 126,052 254,881 Net (gain) on disposal of assets (105,609) (929,997) (1,729) Loss on equipment leases 61,404 95,246 72,264 Interest applied to Indemnification Trust account (15,116) (14,406) (21,673) (Increase) Decrease in rents and other receivables (67,112) 203,837 (296,921) (Deposits) Withdrawals for payment of real estate taxes and CD 99,374 (49,408) 240,477 (Increase) Decrease in prepaids 2,921 (2,631) 21,020 (Increase) Decrease in deferred rent receivable 9,145 37,156 13,747 Increase (Decrease) in due to current General Partner (84,217) 32,611 (814) Increase (Decrease) in accounts payable and other 2,248 (199,126) 82,558 Increase (Decrease) in security deposits 8,822 (38,355) (254,136) Increase (Decrease) in real estate taxes payable (60,776) 62,113 (54,558) Increase (Decrease) in unearned rental income 73,524 39,674 (7,056) ----------- ----------- ----------- Net cash from operating activities 2,405,217 2,289,089 2,527,083 ----------- ----------- ----------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Principal payments received on direct financing leases 47,422 229,294 603,956 Proceeds from sale of investment properties 1,931,182 2,990,000 300,000 Investment in leasing commissions (42,000) 0 0 Recoveries from former G.P. affiliates 244,561 1,785,744 65,400 Payments from affiliated partnerships 0 96,088 29,068 Issuance of unsecured notes 0 (36,288) 0 Principal receipts from unsecured notes 16,562 0 0 ----------- ----------- ----------- Net cash from investing activities 2,197,727 5,064,838 998,424 ----------- ----------- ----------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Cash distributions to Limited Partners (4,600,000) (6,825,000) (3,430,000) Cash distributions to current General Partner (8,736) (13,110) (5,080) Payments on equipment notes 0 (77,255) (433,764) ----------- ----------- ----------- Net cash (used in) financing activities (4,608,736) (6,915,365) (3,868,844) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,792) 438,562 (343,337) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 1,444,326 1,005,764 1,349,101 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,438,534 $ 1,444,326 $ 1,005,764 =========== =========== =========== SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 0 $ 3,551 $ 30,203 =========== =========== ===========
The accompanying notes are an integral part of these statements. 20 Supplemental Information to the Statements of Cash Flows -------------------------------------------------------- The following significant noncash transactions occurred during the three years affecting the Partnership's financial statements: 1. During 1996, the Partnership was deeded land with a value of $88,424 in exchange for a note receivable from a tenant. 2. During 1996, equipment was transferred to the Partnership with an estimated value of $37,600 in exchange for delinquent rent from a tenant. 3. During 1996, security deposits totaling $67,932 were applied as equipment lease payments for a tenant. 4. During 1996, the Partnership incurred leasing commissions totaling $53,520 which were unpaid at year-end. The amount was paid in full during 1997. The accompanying notes are an integral part of these statements. 21 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 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. 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 cash-a-check store, a video rental store and a child care center. At December 31, 1997, the Partnership owned 32 properties with specialty leasehold improvements in 12 of these properties. 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 represent 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. 22 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. During 1996, the Partnership adopted Statement of Financial Accounting Standards No.121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, which requires that all long-lived assets be reviewed for impairment in value whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS 121 had no impact on the Partnership's financial statements in 1996 or 1997. The Partnership will be dissolved on November 30, 2010, or earlier upon the prior occurrence of any of the following events: (a) the disposition of all properties of the Partnership; (b) the written determination by the General Partner that the Partnership's assets may constitute "plan assets" for purposes of ERISA; (c) the agreement of Limited Partners owning a majority of the outstanding interests to dissolve the Partnership; or (d) the dissolution, bankruptcy, death, withdrawal, or incapacity of the last remaining General Partner, unless an additional General Partner is elected previously by a majority of the Limited Partners. 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, 1997, the tax basis of the Partnership's assets exceeded the amounts reported in the accompanying financial statements by approximately $8,200,000. The following represents a reconciliation of net income as stated on the Partnership statements of income to net income for tax reporting purposes:
1997 1996 1995 ---------- ---------- ---------- Net income, per statements of income $2,183,977 $3,277,512 $1,782,105 Book to tax depreciation difference (36,811) (35,161) (6,450) Book over tax gain from asset disposition (227,315) (98,501) (82,904) Straight line rent adjustment 10,866 37,156 13,747 Affiliate receivable basis adjustment 0 0 Bad debt reserve/expense 53,666 (488,777) 111,762 Real estate tax expense 0 (65,881) 16,804 Book valuation adjustment of real property 0 126,052 254,881 Book valuation adjustment of equipment leases 65,690 0 50,820 Other, net 73,865 215,779 (6,437) ---------- ---------- ---------- Net income for tax reporting purposes $2,123,938 $2,968,179 $2,134,328 ========== ========== ==========
23 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 approximately $14,800,000, of which approximately $5,969,000 has been attributed to the Partnership and is reflected as due from former affiliates on the balance sheet at December 31, 1997. The 9% interest accrued as of December 31, 1997, amounted to approximately $2,447,000 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 December 31, 1997, $5,766,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, the Partnership has recognized $1,108,000 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 December 31, 1997, the Partnership owned 29 fully constructed fast-food restaurants, an auto tag agency, a video store, and a preschool. The properties are composed 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) Red Apple Restaurant, one (1) Hooter's restaurant, one (1) Kentucky Fried Chicken restaurant, one (1) Hostetler's restaurant, one (1) Miami Subs restaurant, one (1) Village Inn restaurant, one (1) Cash-A-Check operation, one (1) Blockbuster Video store, and one (1) Sunrise Preschool. 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 December 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 ceased 24 making rent payments. Management entered into a lease on the property which became effective January 1, 1998. The tenant of the Denny's restaurant in Twin Falls, Idaho, has vacated the property, but is continuing to make rental payments. During 1997, the deferred rental income and remaining equipment lease balances were written off due to uncertainty regarding their collectibility. 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 the close 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 the gross receipts, with a maximum reimbursement for office rent and related office overhead of $25,000 between the three affiiliated Partnerships. 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 Permanent Manager Agreement ("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 $54,777 to date on the amounts recovered, which has been offset against the 4% minimum fee. The tenant of the Partnership's Hardee's restaurants has experienced sales difficulties over the past three years. Effective December 31, 1995, management entered into a one-year lease modification with the tenant for 1996 resulting in a $200,000 decrease in base rent for the year and agreed to capitalize delinquent rents totaling $112,000 into a five-year note earning 10% interest. During the Fourth Quarter of 1996, management terminated six (6) of the leases and entered into new leases on five (5) of the properties with Hardee's Food Systems, Inc. In connection with the transaction, the capitalized rent was received. The new leases resulted in annual rents which are $255,000 lower than the former tenant's contract rent and $106,000 lower than the 1996 adjusted rents. In connection with the transaction, the original tenant terminated their equipment leases in three of the properties and the equipment was sold to the new tenant for $80,000, resulting in a loss to the Partnership of $95,000. Additionally, purchase options were granted on three of the properties. Those properties were written down to the option price at December 31, 1996. Four of the properties (three of which were subject to option agreements) were sold to the former tenant during 1997, resulting in a net gain of $106,000. 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 ranging from 2003 to 2008. 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. 25 Several of the Partnership's property leases contained purchase option provisions with stated purchase prices in excess of the original cost of the properties. The current General Partner is not aware of any unfavorable purchase options in relation to original cost. Apple South, Inc. the tenant of two Applebee's restaurants, notified Management of its intent to exercise an option in its lease to purchase those properties. One sale closed in January 1996, resulting in an approximate gain of $484,000. The other sale took place during September 1996 and resulted in an approximate gain of $446,000. Cypress Restaurants, Inc., the tenant of the Denny's restaurants in New Smyrna Beach, Florida and Daytona Beach, Florida, have negotiated a purchase contract for their properties in the amount of $1,250,000 and $950,000 respectively, from the Partnership. The Daytona Beach property, however, was found to have environmental contamination from an adjoining property, which impacted their ability to obtain financing. Therefore, the Partnership has agreed to finance $550,000 of the $950,000 purchase price for a period of six months, until the environmental issues can be addressed. The sale of the properties took place in January 1998, resulting in a gain of $556,000. The Partnership is not liable for the environmental contamination. 4. PARTNERSHIP AGREEMENT: The Partnership Agreement, prior to an amendment effective May 26, 1993, provided that, for financial reporting and income tax purposes, net profits or losses from operations were allocated 90% to the Limited Partners and 10% to the general partners. The Partnership Agreement also provided for quarterly cash distributions from Net Cash Receipts, as defined, within 60 days after the last day of the first full calendar quarter following the date of release of the subscription funds from escrow, and each calendar quarter thereafter, in which such funds were available for distribution with respect to such quarter. Such distributions were to be made 90% to Limited Partners and 10% to the former general partners, provided, however, that quarterly distributions were to be cumulative and were not to be made to the former general partners unless and until each Limited Partner had received a distribution from Net Cash Receipts in an amount equal to 10% per annum, cumulative simple return on his or her Adjusted Original Capital, as defined, from the Return Calculation Date, as defined. Net Proceeds, as originally defined, were to be distributed as follows: (a) to the Limited Partners, an amount equal to 100% of their Adjusted Original Capital; (b) then, to the Limited Partners, an amount necessary to provide each Limited Partner a Liquidation Preference equal to a 13.5% per annum, cumulative simple return on Adjusted Original Capital from the Return Calculation date including in the calculation of such return all prior distributions of Net Cash Receipts and any prior distributions of Net Proceeds under this clause; and (c) then, to Limited Partners, 90% and to the General Partners, 10%, of the remaining Net Proceeds available for distribution. On May 26, 1993, pursuant to the results of a solicitation of written consents from the Limited Partners, the Partnership Agreement was amended to replace the former general partners and amend various sections of the agreement. The former general partners were replaced as General Partner by The Provo Group, Inc., an Illinois corporation. Under the terms of the amendment, net profits or losses from operations are allocated 99% to the Limited Partners and 1% to the current General Partner. The amendment also provided for distributions from Net Cash Receipts to be made 99% to Limited Partners and 1% to the current General Partner provided, that quarterly distributions will be cumulative and will not be made to the current General Partner unless and until each Limited Partner has received a distribution from Net Cash Receipts in an amount equal to 10% per annum, cumulative simple return on his or her Adjusted Original 26 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 7.) 5. LEASES: Lease terms for the majority of the investment properties are 20 years from their inception. The leases generally provide for minimum rents and additional rents based upon percentages of gross sales in excess of specified breakpoints. The lessee is responsible for occupancy costs such as maintenance, insurance, real estate taxes, and utilities. Accordingly, these amounts are not reflected in the statements of income except in circumstances where, in management's opinion, the Partnership will be required to pay such costs to preserve its assets (i.e., payment of past-due real estate taxes). Management has determined that the leases are properly classified as operating leases; therefore, rental income is reported when earned and the cost of the property, excluding the cost of the land, is depreciated over its estimated useful life. 27 Aggregate minimum lease payments to be received under the leases for the Partnership's properties are as follows: Year ending December 31, 1998 $ 2,310,028 1999 2,304,628 2000 2,301,296 2001 2,197,033 2002 2,134,166 Thereafter 14,778,980 ----------- $26,026,131 ===========
Percentage rentals included in rental income in 1997, 1996, and 1995 were $608,915, $578,747, and $719,407, respectively. The decrease in percentage rental income is a result of the sale of various properties subject to percentage rent. Ten (10) of the properties are leased to Wensouth Orlando, a franchisee of Wendy's restaurants. Wensouth base rents accounted for 31% of total base rents for 1997. 6. TRANSACTIONS WITH CURRENT GENERAL PARTNER: ------------------------------------------ Amounts incurred to the current General Partner for the years ended December 31, 1997, 1996, and 1995, are as follows:
Incurred Incurred Incurred for the year ended for the year ended for the year ended Current General Partner December 31, 1997 December 31, 1996 December 31, 1995 - - ----------------------- ------------------ ------------------ ------------------ Management fees $167,350 $202,587 $164,350 Disposition fees 52,166 66,750 3,000 Restoration fees 9,782 33,408 2,616 Overhead allowance 14,367 14,301 13,914 Leasing Commissions 6,000 53,620 0 Reimbursement for out-of-pocket 21,605 21,781 19,148 expenses Cash distribution 8,736 13,110 5,080 -------- -------- -------- $280,006 $405,557 $208,108 ======== ======== ========
7. CONTINGENT LIABILITIES: ----------------------- According to the Partnership Agreement, as amended, the current General Partner may receive a disposition fee not to exceed 3% of the contract price of the sale of investment properties. Fifty percent (50%) of all such disposition fees earned by the current General Partner is to be 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 28 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 1996 after exceeding the recovery level of $4,500,000. The remaining amount allocated to the Partnership may be owed to the current General Partner if the $6,000,000 recovery level is met. As of December 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. Management believes it is unlikely that such a recovery level will be achieved. 8. 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 December 31, 1997. Funds are invested in U.S. Treasury securities. In addition, $54,753 of earnings have been credited to the Trust as of December 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. 9. RESTORATION TRUST ACCOUNT; EXPENSE ALLOCATIONS; AND RELATED INTER-PARTNERSHIP RECEIVABLES: ------------------------------------------ Restoration costs represent expenses incurred by the Partnership associated with 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 may 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. When recoveries are realized by the Partnerships, the amounts received are distributed to each respective partnership on the same basis as the restoration costs are currently being allocated. As of December 31, 1997, the Partnerships recovered a total of $5,726,000 from the former general partners and their affiliates, accountants and attorneys. Of this amount, the Partnership received its pro-rata share in the amount of $2,315,485. Additionally, $40,347, representing 50% of all previously escrowed disposition fees earned 29 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 certain recovery levels as described in Note 7. 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 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. In 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"). 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 not enforceable. An appeal by Boatmen's was subsequently dropped, so the full $600,000 recovery has been recorded. 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 the full cancellation of the alleged indebtedness was allocated among the three Partnerships on the same basis as the restoration costs are being allocated. The Partnership's portion of the recovery was $242,340. 10. LITIGATION: ----------- In 1993, the Partnership, along with DiVall 1 and DiVall 3, initiated a lawsuit against Ernst & Young LLP ("E & Y"), a certified public accounting firm, in connection with the audits of the Partnerships performed by E & Y for the years 1989, 1990, and 1991. The Partnerships also filed claims against Magnuson, DiVall, DiVall Real Estate Investment Corporation, David Shea, and the Partnerships' former securities law firm, Quarles & Brady. These matters were settled in 1996, yielding net proceeds to the Partnership, after the payment of contingent legal fees and related costs, of approximately $900,000. 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. 30 In 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. 11. 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. 12. SUBSEQUENT EVENTS: ------------------ On February 15, 1998, the Partnership made distributions to the Limited Partners of $875,000 amounting to $18.91 per limited partnership interest. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None PART III Item 10. Directors and Executive Officers of the Registrant The General Partner of the Partnership is The Provo Group, Inc., an Illinois corporation ("TPG") with its principal office at 101 West 11th Street, Suite 1110, Kansas City, Missouri 64105. TPG was elected General Partner by vote of the Limited Partners effective on May 26, 1993. TPG had been managing the Partnership since February 8, 1993, under the terms of the Permanent Manager Agreement ("PMA"), which remains in effect. TPG also serves as the corporate general partner for DiVall 1 and DiVall 3. See 31 Items 1 and 13 hereof for additional information about the PMA and the election of TPG as General Partner. The executive officers and director of the General Partner who control the affairs of the Partnership are as follows: Bruce A. Provo, Age 47 - President, Founder and Director. Mr. Provo has been involved in the management of real estate and other asset portfolios since 1979. Since he founded the company in 1985, Mr. Provo has been President of TPG. From 1982 to 1986, Mr. Provo served as President and Chief Operating Officer of the North Kansas City Development Company ("NKCDC"), North Kansas City, Missouri. NKCDC was founded in 1903 and the assets of the company were sold in December, 1985 for $102,500,000. NKCDC owned commercial and industrial properties, including an office park and a retail district, as well as apartment complexes, motels, recreational facilities, fast food restaurants, and other properties. NKCDC's holdings consisted of over 100 separate properties and constituted approximately 20% of the privately held real property in North Kansas City, Missouri (a four square mile municipality). Following the sale of the company's real estate, Mr. Provo served as the President, Chief Executive Officer and Liquidating Trustee of NKCDC from 1986 to 1991. Mr. Provo graduated from Miami University, Oxford, Ohio in 1972 with a B.S. in Accounting. He became a Certified Public Accountant in 1974 and was a manager in the banking and financial services division of Arthur Andersen LLP prior to joining Rubloff Development Corporation in 1979. From 1979 through 1985, Mr. Provo served as Vice President - Finance and then as President of Rubloff Development Corporation. Mr. Provo has previously served on the Board of Directors of the National Realty committee, a legislative "watchdog" organization for the commercial real estate industry headquartered in Washington, DC. Kristin J. Atkinson, Age 35 - Vice President - Finance and Administration. Ms. Atkinson joined The Provo Group, Inc. in September 1994 to provide management expertise in the areas of financial controls and management accounting services for four limited partnerships managed by TPG. Prior to joining TPG, Ms. Atkinson was Manager of Financial Reporting for Farm & Home Savings Association (a $4 billion savings and loan association) for nine years where she was responsible for supervision of the preparation of internal and external financial documentation, including regulatory filings for the savings association and its parent company. Ms. Atkinson graduated Magna Cum Laude with a B.S. in Accounting from Missouri Southern State College in Joplin, Missouri and worked as an accountant for James P. Arthus and Company for one year before joining Farm & Home Savings Association. Brenda Bloesch, Age 36 - Director of Investor Relations. Ms. Bloesch joined The Provo Group, Inc. in March 1993, to oversee and provide various levels of client support for more than 8,000 broker dealers, registered representatives, custodians and investors. Primarily responsible for all communications regarding four limited partnerships managed by TPG, Ms. Bloesch is also involved with database management and partnership compliance issues. Prior to joining TPG, Ms. Bloesch was Manager of Investment Services at DiVall Real Estate Investment Corporation ("DREIC") for four years and Publisher Services Manager at NewsNet, Inc. for five years. Her role at DREIC allowed Ms. Bloesch to obtain extensive knowledge of limited partnerships and gain familiarity 32 with the broker and investor communities. Ms. Bloesch is a graduate of Lock Haven University in Lock Haven, Pennsylvania, where she received her B.A. in Journalism and Media Studies. The Advisory Board, although its members are not "Directors" or "Executive Officers" of the Partnership, provides advisory oversight to management of the Partnership and consists of: Steven Carson - Vice President/Investments at First Albany Corporation. Mr. Carson's primary client concentration includes labor union, pension, and annuity funds. Mr. Carson has worked for First Albany for 11 years. He began his career as a retail broker at E.F Hutton & Company and served as Vice President, Shearson American Express from 1980-1986. Mr. Carson attended Northrup University in Los Angeles, California. He has served as Board Member and President on various Civic Boards in Syracuse, New York. Mr. Carson represents the broker-dealer community. Robert White - President of Chevron, TCI. Mr. White has worked for Chevron in various positions over the past 38 years. This company specializes in acquiring real estate that has been allocated as either Low-Income Housing or Historic Rehabilitation tax credits. Most of the acquisitions are made using limited partnership structures -- with TCI as the limited partner. Mr. White started his career as a research chemist with Chevron Research Company in 1959, after receiving a B.S Degree in Chemistry from the University of California at Berkeley. In 1977, Mr. White received a M.B.A Degree in Financial Analysis and subsequently transferred to Chevron Corporation's Planning and Analysis Department in San Francisco. In 1991, Mr. White became Vice-President of Chevron Land. After this company was sold in 1995, he assumed the position as President of the new Chevron subsidiary, Chevron TCI, Inc. Mr. White is a Limited Partner representing DiVall 1. Richard W. Otte - Editorial Writer. Mr. Otte is in his sixth year as an Editorial Board Member and editorial writer for The Volusion, a DeLand, Florida, subsidiary of the News-Journal Corporation in Daytona Beach, Florida. Mr. Otte retired in 1988 after 34 years with the Dispatch Printing Co., serving his last eight years as Managing Editor of the Columbus Dispatch and as a member of its Operating Committee. He previously was the executive sports editor of the newspaper in Ohio's capital city. Mr. Otte's 49 years in professional journalism also include news reporting, editing and sports assignments with the Daytona Journal Herald and Springfield News-Sun. Mr. Otte is a Limited Partner representing DiVall 2. Albert Gerritz - Perinton Volunteer Ambulance Corps. Mr. Gerritz has held various offices in Finance and Administration, including President. Mr. Gerritz retired in 1986 after 36 years with Eastman Kodak Co. where he was Supervisor of Engineering Services, Research Labs. Mr. Gerritz was instrumental in identifying the need and pursuing the development of a unique research complex for Kodak, which became the case study for his consulting activities on research facilities nationwide. Mr. Gerritz also worked for forty years in the Bushnell's Basin Fire Department and served five years as Chief. Mr. Gerritz has a life membership in National Society of Professional Engineers. Mr. Gerritz is a Limited Partner representing DiVall 3. Item 11. Executive Compensation The Partnership has not paid any "executive compensation" to the corporate General Partner or to the directors and officers of the General Partner. The General Partner's participation in the income of the Partnership is set forth in the Agreement of Limited Partnership and amendments thereto, which are filed 33 as Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 hereto. The current General Partner received management fees and expense reimbursements during the year. See Item 13, below, and Note 6 to the financial statements in Item 8 hereof for further discussion of payments by the Partnership to the General Partner and the former general partners. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) As of December 31, 1997, no one person or group is known by the Partnership to own beneficially more than 5% of the outstanding interests of the Partnership. (b) As of December 31, 1997, neither the General Partner nor any of their affiliates owned any Limited Partner Interests in the Partnership. Item 13. Certain Relationships and Related Transactions The compensation to be paid to TPG is governed by the Partnership Agreement, as amended by vote of the Limited Partners to reflect the terms of the PMA. TPG's compensation includes a base fee equal to 4% of the Partnership's gross collected receipts, subject to a minimum of $159,000 per year. For this purpose, "gross collected receipts" means all cash revenues arising from operations and reserves of the Partnerships, including any proceeds recovered with respect to the obligations of the former general partners. The portion of such fee resulting from recoveries from former general partners is designated as restoration fees. TPG is also entitled to reimbursement for office rent and utilities not to exceed $13,250 per year. TPG is entitled to reimbursement of reasonable direct costs and expenses, such as travel, lodging, overnight delivery and postage, but has no right to be reimbursed for administrative expenses such as payroll, payroll taxes, insurance, retirement and other benefits, base phone and fax charges, office furniture and equipment, copier rent, and the like. Between the three Partnerships, TPG is entitled to an aggregate minimum base management fee of $300,000 per year and reimbursement for office rent in the maximum amount of $25,000 per year. The Partnership shall only be responsible for its allocable share of such minimum and maximum amounts as indicated above ($159,000 minimum base fee and $13,250 maximum rent reimbursement). TPG is entitled to an annual increase in the minimum base management fee and maximum office overhead reimbursement in an amount not to exceed the percentage increase in the Consumer Price Index ("CPI") for the immediately preceding calendar year. 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 CPI adjustments. Additionally, TPG is allowed up to one-half of the Competitive Real Estate Commission, not to exceed 3% upon the disposition of assets. The payment of a portion of such fees is subordinated to TPG's success at recovering the funds misappropriated by the former general partners. The PMA has an expiration date of December 31, 2002, but may be terminated earlier (a) by a vote at any time by a majority in interest of the Limited Partners, (b) upon the dissolution and winding up of the Partnership, (c) upon the entry of an order of a court finding that the Permanent Manager has engaged in fraud or other like misconduct or has shown itself to be incompetent in carrying out its duties under the Partnership Agreement, or (d) upon sixty (60) days written notice from the Permanent Manager to the Limited Partners of the Partnership. Upon termination of the PMA, other than by the voluntary action of TPG, TPG shall be paid a termination fee of one month's Base Fee allocable to the Partnership, subject to a minimum of $13,250. In the event that TPG is terminated by action of a substitute general partner, TPG shall also receive, as part of this termination fee, 4% of any proceeds recovered with respect to the obligations of the former general partners, whenever such proceeds are collected. 34 Under the PMA, TPG shall be indemnified by the Partnership, DiVall and Magnuson, and their controlled affiliates, and shall be held harmless from all claims of any party to the Partnership Agreement and from any third party including, without limitation, the Limited Partners of the Partnership, for any and all liabilities, damages, costs and expenses, including reasonable attorneys' fees, arising from or related to claims relating to or arising from the PMA or its status as Permanent Manager. The indemnification does not extend to claims arising from fraud or criminal misconduct of TPG as established by court findings. To the extent possible, the Partnership is to provide TPG with appropriate errors and omissions, officers liability or similar insurance coverage, at no cost to TPG. In addition, TPG is granted the right to establish and segregate Partnership assets in an amount, not to exceed $250,000, solely for the purpose of funding such indemnification obligations (the "Indemnification Trust"). Once a determination has been made that no such claims can or will be made against TPG, the balance of the Indemnification Trust will become unrestricted cash of the Partnership. At December 31, 1997 the Partnership had fully funded the Indemnification Trust. The following fees and reimbursements from the Partnership were incurred to management in 1997:
The Provo Group, Inc. --------------------- Management Fees $167,350 Disposition Fees 52,166 Restoration Fees 9,782 Leasing Commissions 6,000 Office Overhead Allowance 14,367 Direct Cost Reimbursements 21,605 -------- 1997 Total $271,270 ========
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements The following financial statements of DiVall Insured Income Properties 2 Limited Partnership are included in Part II, Item 8: Report of Independent Public Accountants Balance Sheets, December 31, 1997 and 1996 Statements of Income for the Years Ended December 31, 1997, 1996, and 1995 Statements of Partners' Capital for the Years Ended December 31, 1997, 1996, and 1995 Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995 35 Notes to Financial Statements 2. Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and, therefore, have been omitted. 3. Listing of Exhibits 3.1 Agreement of Limited Partnership dated as of November 18, 1987, amended as of November 25, 1987, and February 20, 1988, filed as Exhibit 3A to Amendment No. 1 to the Partnership's Registration Statement on Form S-11 as filed on February 22, 1988, and incorporated herein by reference. 3.2 Amendments to Amended Agreement of Limited Partnership dated as of June 21, 1988, included as part of Supplement dated August 15, 1988, filed under Rule 424(b)(3), incorporated herein by reference. 3.3 Amendment to Amended Agreement of Limited Partnership dated as of February 8, 1993, filed as Exhibit 3.3 to the Partnership's 10-K for the year ended December 31, 1992, and incorporated herein by reference. 3.4 Amendment to Amended Agreement of Limited Partnership dated as of May 26, 1993, filed as Exhibit 3.4 to the Partnership's 10-K for the year ended December 31, 1993, and incorporated herein by reference. 3.5 Amendment to Amended Agreement of Limited Partnership dated as of June 30, 1994, filed as Exhibit 3.5 to the Partnership's 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.0 Permanent Manager Agreement filed as an exhibit to the Current Report on Form 8-K dated January 22, 1993, incorporated herein by reference. 28.0 Correspondence to the Limited Partners dated February 15, 1998 regarding the Fourth Quarter 1997 distribution. (b) Reports on Form 8-K: The Registrant filed no reports on Form 8-K during the fourth quarter of fiscal year 1997. 36 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997
Initial cost to Partnership ---------------------------- Costs Building capitalized and Subsequent Property Encumbrances Land Improvements to acquisitions Land - - ------------------------------------------------------------------------------------------------------------- Palm Gardens, Florida (1) $ - $ 495,237 $ 248,388 $ - $ 325,487 Hallandale, Florida (2) - 502,578 289,610 - 198,084 Phoenix, Arizona - 444,224 421,676 - 444,224 Phoenix, Arizona - - 295,750 - - N. Richland Hills, Texas - 762,580 584,139 - 662,580 South Milwaukee, Wisconsin - 274,749 454,064 79,219 274,749 Phoenix, Arizona - 482,383 490,343 - 482,383 Cedar Rapids, Iowa - 108,125 552,031 - 108,125 Santa Fe, New Mexico - - 451,230 - - Augusta, Georgia - 215,416 434,178 - 215,416 Charleston, South Carolina - 273,619 323,162 - 273,619 Park Forest, Illinois - 187,900 393,038 - 187,900 Aiken, South Carolina - 402,549 373,795 - 402,549 Augusta, Georgia - 332,154 396,659 - 332,154 Mt. Pleasant, South Carolina - 286,060 294,878 - 286,060 Charleston, South Carolina - 273,625 254,500 - 273,625 Aiken, South Carolina - 178,521 455,229 - 178,521 Des Moines, Iowa - 164,096 448,529 287,991 164,096 Daytona Beach, Florida - 291,356 738,488 - 291,356 Hartford, Wisconsin - 201,603 484,960 - 201,603 Milwaukee, Wisconsin - 409,143 600,902 - 409,143 North Augusta, Georgia - 250,859 409,297 - 250,859 Charleston, South Carolina - 286,068 294,870 - 286,068 Martinez, Georgia - 266,175 367,575 - 266,175 Grand Forks, North Dakota - 172,701 566,674 - 172,701 Phoenix, Arizona - - 725,000 - - Phoenix, Arizona - 241,371 843,132 - 241,371 New Smyrna Beach, Florida - 403,771 622,059 - 403,771 Ogden, Utah - 194,350 452,075 - 194,350 Fond du Lac, Wisconsin - 297,418 552,349 - 297,418 Twin Falls, Idaho - 155,269 483,763 60,000 155,269 Columbus, Ohio - 351,325 708,141 - 351,326 --------------------------------------------------------------------- $0 $8,905,225 $15,010,484 $427,210 $8,330,982 =====================================================================
Gross amount at which Life on which carried at end of year (A) depreciation in ------------------------------ in latest statement of operations Building and Accumulated Date of Date is computed Improvements Total depreciation construction acquired (years) - - ------------------------------------------------------------------------------------------------------------------------ Palm Gardens, Florida (1) $ 163,258 $ 488,745 $ 95,040 - 3/11/88 31.5 Hallandale, Florida (2) 147,937 346,021 101,541 - 3/11/88 31.5 Phoenix, Arizona 421,676 865,900 171,972 - 6/15/88 31.5 Phoenix, Arizona 295,750 295,750 120,616 - 6/15/88 31.5 N. Richland Hills, Texas 584,139 1,246,719 205,492 - 7/15/88 31.5 South Milwaukee, Wisconsin 533,283 808,032 185,393 1986 8/1/88 31.5 Phoenix, Arizona 490,343 972,726 170,632 - 8/15/88 31.5 Cedar Rapids, Iowa 552,031 660,156 189,999 - 9/9/88 31.5 Santa Fe, New Mexico 451,230 451,230 133,520 - 10/10/88 31.5 Augusta, Georgia 434,178 649,594 142,822 - 12/22/88 31.5 Charleston, South Carolina 323,162 596,781 106,303 - 12/22/88 31.5 Park Forest, Illinois 393,038 580,938 129,289 - 12/22/88 31.5 Aiken, South Carolina 373,795 776,344 121,533 - 2/21/89 31.5 Augusta, Georgia 396,659 728,813 128,967 - 2/21/89 31.5 Mt. Pleasant, South Carolina 294,878 580,938 95,875 - 2/21/89 31.5 Charleston, South Carolina 254,500 528,125 82,747 - 2/21/89 31.5 Aiken, South Carolina 455,229 633,750 148,010 - 3/14/89 31.5 Des Moines, Iowa 680,902 844,998 213,586 1989 8/1/89 31.5 Daytona Beach, Florida 738,488 1,029,844 245,739 - 4/4/89 31.5 Hartford, Wisconsin 484,960 686,563 152,122 - 4/28/89 31.5 Milwaukee, Wisconsin 600,902 1,010,045 188,465 - 8/2/89 31.5 North Augusta, Georgia 409,297 660,156 115,852 - 12/29/89 31.5 Charleston, South Carolina 294,870 580,938 83,463 - 12/29/89 31.5 Martinez, Georgia 367,575 633,750 104,042 - 12/29/89 31.5 Grand Forks, North Dakota 566,674 739,375 160,398 - 12/28/89 31.5 Phoenix, Arizona 500,000 500,000 147,152 - 1/1/90 31.5 Phoenix, Arizona 843,132 1,084,503 238,649 - 1/1/90 31.5 New Smyrna Beach, Florida 622,059 1,025,830 176,074 - 1/5/90 31.5 Ogden, Utah 452,075 646,425 154,483 - 1/31/90 31.5 Fond du Lac, Wisconsin 552,349 849,767 156,343 - 1/5/90 31.5 Twin Falls, Idaho 543,763 699,032 142,150 - 3/21/90 31.5 Columbus, Ohio 708,140 1,059,466 186,840 - 6/1/90 31.5 ---------------------------------------- $14,930,273 $23,261,255 $4,795,109 ========================================
(1) This property was written down to its estimated net realizable value of $400,000 at December 31, 1995. (2) This property was written down to its estimated net realizable value of $250,000 at December 31, 1994. (A) Represents aggregate costs for federal income tax purposes. 37 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (B) Reconciliation of "Real Estate and Accumulated Depreciation":
Year Ended Year Ended Year Ended Year Ended December 31, December 31, December 31, December 31, Investment in Real Estate 1997 1996 Accumulated Depreciation 1997 1996 - - ------------------------- ------------- ------------- ------------------------ ------------ ------------ Balance at beginning of year $25,629,957 $28,180,103 Balance at beginning of year $4,881,162 $4,822,028 Deletions: Additions charged to costs and 457,076 511,650 expenses Due to disposition (2,368,702) (2,424,094) Deletion due to real estate disposition (543,129) (452,516) Due to property write-downs 0 (126,052) ----------- ----------- ---------- ---------- Balance at end of year $23,261,255 $25,629,957 Balance at end of year $4,795,109 $4,881,162 =========== =========== ========== ==========
38 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: March 27, 1998 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: March 27, 1998 By: /s/Kristin J. Atkinson -------------------------------------------- Kristin J. Atkinson Vice President - Finance and Administration Date: March 27, 1998 39 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1997 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 1,449,785 1,554,951 304,753 289,637 6,612,207 6,389,815 5,968,773 5,641,442 0 0 2,397,972 2,592,961 23,968,633 26,337,335 5,472,407 5,550,940 20,894,198 23,379,356 415,077 475,476 0 0 0 0 0 0 0 0 20,479,121 22,903,880 20,894,198 23,379,356 0 0 3,448,300 5,316,853 0 0 0 0 1,196,912 2,039,341 67,411 0 0 0 2,183,977 3,277,512 0 0 2,183,977 3,277,512 0 0 0 0 0 0 2,183,977 3,277,512 46.72 70.11 46.72 70.11
EX-28 3 CORRESPONDENCE TO THE LTD PARTNERS DATED 2/13/1998 DiVall Insured Income Properties 2, L.P. QUARTERLY NEWS ================================================================================ A publication of The Provo Group, Inc. FOURTH QUARTER 1997 DISSOLUTION...IS IT A DISILLUSION? Madison, Wisconsin You may recall that management communicated to you over a year ago about the feedback that we had received from our survey to limited partners which indicated a strong interest in the dissolution of the Partnership over the next 3-5 years. Since that time, management has been working aggressively to maximize the value of the Partnership's asset portfolio and satisfy all potential recovery efforts of the misappropriated funds by the former general partners and their affiliates. In addition, management has investigated the specifics surrounding a partnership dissolution with an emphasis on understanding all continuing liability and tax issues. As we understand it today, once we are successful in finding the appropriate buyer(s) for the properties in the Partnership's portfolio, we are faced with complying with the terms of the sales lease agreement(s); resolving or reserving for any pending or potential liability issues with the Partnership or the General Partner; soliciting and receiving limited partners' approval on the liquidation proposal; and administratively managing the limited partners' accounts until such time as a final distribution can be made; and the statute of limitations runs out on liabilities or tax matters, including the preparation/mailing of annual Schedule K-1s. At this time, it appears that the 3-5 year plan is still feasible, pending no litigation issues, if we begin our marketing efforts within the next 2 years and allow at least a year or so for the final wind-down of the Partnership, including the final distribution and K-1 preparations. Management fully appreciates the investment period that the Partnership's original limited partners have endured over the years and will be working to make the dissolution process as efficient as possible. Interestingly, the comparative rates of return available in the market (ie: bank rates and bond yields) are becoming less competitive with the "stabilized" returns available from your partnership. -------------------------- OTHER NEWS INSIDE... . Country Kitchen Released..........................Property Highlights, pg 3 . First Quarter 1998 Property Sales.................Property Highlights, pg 3 . Restoration Efforts Concluded..................Restoration Highlights, pg 4 . Schedule K-1s/Year-End Values................Questions and Answers, pgs 5/6 Page 2 DiVall 2 4 Q 97 -------------------------- Distribution Highlights . 7.3% (approx.) annualized return from operations and 0.7% (approx.) non- annualized return of capital from a special distribution related to recoveries from the former general partners and their affiliates as well as principal received from equipment leases based on $34,600,000 ("net" remaining initial investment). . $18.91 per unit (approx.) for the Fourth Quarter 1997 from both cash flow from operations and investing activities. (NOTE: Original units were purchased for $1,000/unit.) . $875,000 total amount distributed for the Fourth Quarter 1997 which was $300,000 more than projected. The "higher" than budgeted distribution is primarily due to the recoveries received from the Boatmen's lawsuit. . $863.00 to $665.00 range of distributions per unit from the first unit sold to the last unit sold before the offering closed (February 1990), respectively. (NOTE: Distributions are from both cash flow from operations and "net" cash activity from financing and investing activities.) -------------------------- Statements of Income and Cash Flow Highlights . 39% increase in operating revenues from projections. . Total "annual" sales for Applebee's and Wendy's restaurants were higher than expected, and accordingly, $43,000 of additional rental income (percentage rent accruals only) was recognized for the quarter ended December 31, 1997. . 9% decrease in total expenses from projections. . $13,000 in real estate taxes that were previously budgeted to occur during the Fourth Quarter 1997 were no longer necessary since the property responsible for the taxes was sold early last year. Page 3 DiVall 2 4 Q 97 ----------------------- Property Highlights Vacancies --------- . Country Kitchen restaurant (Cedar Rapids, IA) was vacant at December 31, 1997. However, the Partnership has since executed a new lease with Red Apple Kitchen for this property. Rental payments began January 1, 1998. The new tenant is also expected to invest $100,000 in tenant and building improvements. . Denny's restaurant (Twin Falls, ID) was vacant at December 31, 1997. The tenant of this property, DenAmerica Corporation, vacated the property at the end of December 1996. It should be noted, however, this tenant continues to meet its rental obligations. (NOTE: Refer to "Other Property Matters" below for further discussion.) Rents Receivable ---------------- . There were no rental delinquencies at December 31, 1997. Sale of Property ---------------- . Denny's restaurants located in Daytona Beach and New Smyrna, Florida, were both sold during the First Quarter 1998. Other Property Matters ---------------------- . The Partnership has ceased any further lease termination or modification negotiations with DenAmerica Corporation at this time for the multiple Denny's restaurants in Arizona and Idaho. The tenant is current on all rental payments, including the Twin Falls vacancy, and must remain in compliance with the existing lease terms. . The tenant of another Denny's restaurant (Phoenix, AZ), First Foods, has signed a new lease with the Partnership to include value-oriented emphasis on fixed rent versus percentage rent. (NOTE: This property was previously percentage rent only.) Page 4 DiVall 2 4 Q 97 -------------------------- Property Highlights (contd.) Other Property Matters (contd.) ------------------------------- . Applebee's restaurant (Columbus, OH) received over $280,000 more in store sales from 1996 to 1997. The impact of this sales increase for the Partnership resulted in $16,000 more in percentage rents for the 1997 year. -------------------------- Restoration Highlights . The Partnership received $242,000 in recoveries during the Fourth Quarter 1997. . "Total" recoveries received to date for the Partnership are approximately $2,332,000. . As communicated last quarter, an affiliated partnership received a "favorable" ruling in the case against Boatmen's First National Bank of Kansas City which went to trial on June 23, 1997. Following the judge's ruling, Boatmen's appealed, but subsequently dropped their appeal. . This disputed Boatmen's liability has always been included as part of the "total" misappropriation of funds by the former general partners and their affiliates -- for all three (3) partnerships, DiVall Insured Income Fund, L.P., DiVall Insured Income Properties 2, L.P., and DiVall Income Properties 3, L.P. Consequently, all expenses, potential default interest, and recoveries have been shared by each of these partnerships. . With the resolution of the disputed Boatmen's liability, the Partnership's restoration activities are substantially complete. Accordingly, we do not expect any further recoveries or related restoration costs of any significance that would be associated with the funds misappropriated by the former general partners and their affiliates. Page 5 DiVall 2 4 Q 97 -------------------------- 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 December 31, 1997.
================================================================================ Distribution Capital Analysis Balance ------------ ------------ Original Capital Balance - $ 46,280,300 Cash Flow From Operations Since Inception $ 23,867,515 - Total Distributions Since Inception (35,513,868) - ------------ (Return) of Capital $(11,646,353) (11,646,353) ============ ------------ "Net" Remaining Initial Investment by Original Partners - $ 34,633,947 ============
================================================================================ (NOTE: For a more individualized discussion of return of capital contact Investor Relations.) -------------------------- Questions & Answers 1. When will 1997 per unit values be available for my investment in the Partnership? The Partnership's 1997 "year-end" valuation information is scheduled to be available by the end of February by contacting Investor Relations. A mailing to all qualified plan holders is scheduled to occur at that time as well. We will also include this information in our 1997 Annual Report which we plan to mail by early April 1998. Page 6 DiVall 2 4 Q 97 -------------------------- Questions & Answers (contd.) 2. When can I expect to receive my Schedule K-1 for 1997? Our current schedule for mailing all 1997 Schedule K-1's for your Partnership and its affiliated partnerships is by the end of February 1998. 3. When can I expect my next distribution mailing? Your distribution correspondence for the First Quarter of 1998 is scheduled to be mailed on May 15, 1998. * * * ================================================================================ 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 DECEMBER 31, 1997 - - -------------------------------------------------------------------------------------------------------------- PROJECTED ACTUAL VARIANCE ----------- ----------- ----------- 4TH 4TH QUARTER QUARTER BETTER OPERATING REVENUES 12/31/97 12/31/97 (WORSE) ----------- ----------- ----------- Rental income $715,123 $758,542 $43,419 Direct financing interest 2,036 2,036 0 Interest income 16,266 17,810 1,544 Recovery of amounts previously written off 0 242,340 242,340 Other income 11,764 13,445 1,681 ----------- ----------- ----------- TOTAL OPERATING REVENUES $745,189 $1,034,173 $288,984 ----------- ----------- ----------- OPERATING EXPENSES Insurance $7,114 $6,005 $1,109 Management fees 44,391 34,738 9,653 Restoration fees 0 9,694 (9,694) Overhead allowance 3,700 3,592 108 Advisory Board 4,400 2,702 1,698 Administrative 17,348 15,482 1,866 Professional services 4,442 7,286 (2,844) Disposition fees 0 0 0 Auditing 12,000 12,000 0 Legal 7,500 5,336 2,164 Real estate taxes 25,589 12,172 13,417 Defaulted tenants 1,920 2,259 (339) ----------- ----------- ----------- TOTAL OPERATING EXPENSES $128,404 $111,266 $17,138 ----------- ----------- ----------- GROUND RENT $30,927 $31,093 $166 ----------- ----------- ----------- INVESTIGATION AND RESTORATION EXPENSES $1,215 $1,241 ($26) ----------- ----------- ----------- NON-OPERATING EXPENSES Depreciation $123,186 $112,625 $10,561 Amortization 0 1,163 (1,163) ----------- ----------- ----------- TOTAL NON-OPERATING EXPENSES $123,186 $113,788 $9,398 ----------- ----------- ----------- TOTAL EXPENSES $283,732 $257,388 $26,344 ----------- ----------- ----------- NET INCOME $461,457 $776,785 $315,328 OPERATING CASH RECONCILIATION: VARIANCE ----------- Depreciation and amortization $123,186 $113,788 (9,398) Recovery of amounts previously written off 0 (242,340) (242,340) (Increase) Decrease in current assets (80,771) (113,845) (33,074) Increase (Decrease) in current liabilities 36,920 177,762 140,842 (Increase) Decrease in cash reserved for payables (36,000) (135,000) (99,000) Advance from prior cash flows for current distributions 61,000 59,000 (2,000) ----------- ----------- ----------- Net Cash Provided From Operating Activities $565,792 $636,150 $70,358 ----------- ----------- ----------- CASH FLOWS FROM (USED IN) INVESTING AND FINANCING ACTIVITIES Recoveries from G.P. affiliates 0 242,340 242,340 Principal received on equipment leases 7,429 2,347 (5,082) Proceeds from property sales 0 0 0 ----------- ----------- ----------- Net Cash Provided From Investing And Financing Activities $7,429 $244,687 $237,258 ----------- ----------- ----------- Total Cash Flow For Quarter $573,221 $880,837 $307,616 Cash Balance Beginning of Period 940,496 1,567,950 627,454 Less 3rd quarter distributions paid 11/97 (575,000) (1,075,000) (500,000) Change in cash reserved for payables or future distributions (25,000) 76,000 101,000 ----------- ----------- ----------- Cash Balance End of Period $913,717 $1,449,787 $536,070 Cash reserved for 4th quarter L.P. distributions (575,000) (875,000) (300,000) Cash reserved for payment of payables (175,000) (300,000) (125,000) ----------- ----------- ----------- Unrestricted Cash Balance End of Period $163,717 $274,787 $111,070 =========== =========== =========== - - -------------------------------------------------------------------------------------------------------------- PROJECTED ACTUAL VARIANCE ---------------------------------------- * Quarterly Distribution $575,000 $875,000 $300,000 Mailing Date 2/15/98 (enclosed) -- - - --------------------------------------------------------------------------------------------------------------
*Refer to distribution letter for detail of quarterly distribution. The ProvoGroup DIVALL INSURED INCOME PROPERTIES 2 LP 1997 PROPERTY SUMMARY AND RELATED ESTIMATED RECEIPTS PROJECTIONS FOR DISCUSSION PURPOSES 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% RED APPLE REST. CEDAR RAPIDS, IA 660,156 54,000 8.18% 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 PHOENIX, AZ 972,726 65,000 6.68% 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 66,000 7.81% 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%
- - ---------------------------------------------------------- ORIGINAL EQUITY $46,280,300 NET DISTRIBUTION OF CAPITAL SINCE INCEPTION $11,646,353 ----------- CURRENT EQUITY $34,633,947 =========== - - ----------------------------------------------------------
- - --------------------------------------- ----------- TOTALS - - --------------------------------------- TOTAL % ON $34,633,947 ANNUAL % * EQUITY COST RECEIPTS RETURN RAISE - - ------------------------------------------ ----------- 1,143,965 135,780 11.87% 646,425 100,554 15.56% 660,156 54,000 8.18% 1,025,830 133,380 13.00% 1,029,844 136,800 13.28% 520,126 39,000 7.50% 1,155,965 65,000 5.62% 1,087,137 86,000 7.91% 889,032 121,060 13.62% 514,259 37,000 7.19% 808,032 64,000 7.92% 686,563 64,000 9.32% 1,421,983 76,000 5.34% 1,140,236 88,000 7.72% 780,000 0 0.00% 1,246,719 95,000 7.62% 897,813 66,000 7.35% 451,230 60,000 13.30% 743,625 39,000 5.24% - - ------------------------------------------
Note 1: This property summary includes only current property and equipment held by the Partnership. 2: Rent is based on 12.5% of monthly sales. Rent projected for 1998 is based on 1997 sales levels. 3: The Partnership entered into a long-term ground lease in which the Partnership is responsible for payment of 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 The Provo Group DIVALL INSURED INCOME PROPERTIES 2 LP 1997 PROPERTY SUMMARY AND RELATED ESTIMATED RECEIPTS ----------------------------------------- PROJECTIONS FOR ORIGINAL EQUITY $46,280,300 DISCUSSION PURPOSES NET DISTRIBUTION OF CAPITAL SINCE INCEPTION $11,646,353 ----------- CURRENT EQUITY $34,633,947 =========== ----------------------------------------- PORTFOLIO (Note 1)
--------------------------- --------------------------------- --------------------------- --------- REAL ESTATE EQUIPMENT TOTALS --------------------------- --------------------------------- --------------------------- TOTAL % LEASE ON ANNUAL EXPIRA- ANNUAL $34,633,947 - - ----------- --------------- BASE % TION LEASE % TOTAL EQUITY CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN COST RECEIPTS RETURN RAISE - - ----------- --------------- ------------ --------- ------ ------- --------- -------- ------ ---------- -------- ------ ----------- POPEYES 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 649,954 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 2,585,334 10.79% 2,551,063 37,860 1.48% 26,513,365 2,623,195 9.89% 7.57% - - --------------------------- ----------- --------- ----- ------- --------- -------- ------ ---------- -------- ------ ---------
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 TheProvoGroup DIVALL INSURED INCOME PROPERTIES 2, L.P.
Acquisition Original Current Tenant Sold Date Property Building Size Trade Name Date ----------- -------- ------------- -------------- ---- 1. 03/11/88 Wendy's 2,117 MBA, Inc. 601 W. Hallandale Beach Blvd. Cash-A-Check Hallandale, Florida 2. 03/11/88 Wendy's P & T Holdings US-1 Near PGA Boulevard Miami Subs Palm Beach Country, Florida 3. 05/09/88 Hardee's 3,640 SOLD 03/28/97 662 East Wisconsin Avenue Oconomowoc, Wisconsin 4. 06/15/88 Denny's 5,415 DenAmerica Corp. 8801 7th Street Denny's Phoenix, Arizona 5. 06/15/88 Denny's 5,848 DenAmerica Corp. 2201 West Camelback Road Denny's Phoenix, Arizona 6. 07/15/88 Two Peso's TWIX, Inc. 7769 Grapevine Highway Hooter's North Richland Hills, Texas 7. 07/22/88 Hardee's 3,731 SOLD 01/28/97 9400 South 2000 East Sandy, Utah 8. 08/01/88 Hardee's 3,828 Hardee's Food Systems, Inc. 106 North Chicago Avenue Hardee's South Milwaukee, Wisconsin 9. 08/15/88 Denny's 6,500 First Foods, Inc. 2360 West Northern Avenue Denny's Phoenix, Arizona 10. 08/22/88 Hardee's 3,870 SOLD 07/31/97 9039 South Redwood West Jordan, Utah 11. 09/09/88 Country Kitchen 4,433 Red Apple Kitchen 555 33rd Avenue Cedar Rapids, Iowa 12. 09/19/88 Applebee's 4,632 SOLD 09/30/96 U.S. Highway 1 & Port St. Lucie Port St. Lucie, Florida 13. 10/10/88 Kentucky Fried Chicken 2,771 KFC Nat'l Mgt. Co. 1014 South St. Francis Drive KFC Santa Fe, New Mexico
DIVALL INSURED INCOME PROPERTIES 2, L.P.
Acquisition Original Current Tenant Sold Date Property Building Size Trade Name Date ----------- -------- ------------- -------------- ---- 14. 10/14/88 Applebee's 3,875 SOLD 01/31/96 2114 Union Street Memphis, Tennessee 15. 12/22/88 Wendy's 2,808 WenSouth Orlando, Ltd. 1721 Sam Rittenberg Boulevard Wendy's Charleston, South Carolina 16. 12/22/88 Wendy's 2,117 WenSouth Orlando, Ltd. 3013 Peach Orchard Road Wendy's Augusta, Georgia 17. 12/29/88 Popeye's 2,574 WenSouth Orlando, Ltd. 2562 Western Avenue Wendy's Park Forest, Illinois 18. 02/21/89 Wendy's 2,137 WenSouth Orlando, Ltd. 1901 Whiskey Road Wendy's Aiken, South Carolina 19. 02/21/89 Wendy's 2,117 WenSouth Orlando, Ltd. 1730 Walton Way Wendy's Augusta, Georgia 20. 02/21/89 Wendy's 2,280 WenSouth Orlando, Ltd. 347 Folly Road Wendy's Charleston, South Carolina 21. 02/21/89 Arby's SOLD 04/01/95 1502 North Prospect Road Champaign, Illinois 22. 02/21/89 Imperial Express SOLD 08/04/93 1102 West University Urbana, Illinois 23. 02/21/89 Wendy's 2,712 WenSouth Orlando, Ltd. 361 Highway 17 Bypass Wendy's Mount Pleasant, South Carolina 24. 03/14/89 Wendy's 2,137 WenSouth Orlando, Ltd. 1004 Richland Avenue Wendy's Aiken, South Carolina 25. 04/04/89 Denny's 7,550 SOLD 607 Broadway Avenue Daytona Beach, Florida 26. 04/20/89 Country Kitchen 3,052 Hickory Park, Inc. 4875 Merle Hay Road Hosteller's Des Moines, Iowa
DIVALL INSURED INCOME PROPERTIES 2, L.P.
Acquisition Original Current Tenant Sold Date Property Building Size Trade Name Date ----------- -------- ------------- -------------- ---- 27. 04/28/89 Hardee's 3,592 Hardee's Food Systems, Inc. 1570 East Sumner Street Hardee's Hartford, Wisconsin 28. 05/05/89 Hardee's 3,638 SOLD 03/28/97 1265 East Geneva Street Delavan, Wisconsin 29. 10/18/89 Hardee's 5,040 Hardee's Food Systems, Inc. 4000 South 27th Street Hardee's Milwaukee, Wisconsin 30. 12/28/89 Village Inn 7,600 FMI, Inc. 2451 Columbia Road Village Inn Grand Forks, North Dakota 31. 12/29/89 Wendy's 2,116 WenSouth Orlando, Ltd. 7171 Martintown Road Wendy's North Augusta, South Carolina 32. 12/29/89 Wendy's 2,808 WenSouth Orlando, Ltd. 1515 Savannah Highway Wendy's Charleston, South Carolina 33. 12/29/89 Wendy's 2,135 WenSouth Orlando, Ltd. 3869 Washington Road Wendy's Martinez, Georgia 34. 01/01/90 Sunrise Preschool 9,746 Sunrise Preschools, Inc. 4111 East Ray Road Sunrise Preschool Phoenix, Arizona 35. 01/05/90 Hardee's SOLD 08/12/94 85 Gateway Boulevard Rock Springs, Wyoming 36. 01/05/90 Denny's 4,329 SOLD 01/23/98 Route 44 West New Smyrna Beach, Florida 37. 01/01/90 Hardee's 5,374 Hardee's Food Systems, Inc. South Main & Pioneer Road Hardee's Fond du Lac, Wisconsin 38. 01/31/90 Blockbuster Video 6,000 Blockbuster, Inc. 366 East 12th Street Blockbuster Video Ogden, Utah 39. 03/21/90 Denny's 3,840 DenAmerica Corp. 688 North Blue Lakes Blvd Denny's Twin Falls, Idaho
TheProvoGroup DIVALL INSURED INCOME PROPERTIES 2, L.P.
Acquisition Original Current Tenant Sold Date Property Building Size Trade Name Date ----------- -------- ------------- -------------- ---- 40. 05/02/90 Denny's 3,410 DenAmerica Corp. 3752 E. Indian School Road Denny's Phoenix, Arizona 41. 05/30/90 Applebee's 4,340 Thomas & King, Inc. 2770 Brice Road Applebee's Columbus, Ohio
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