-----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, QCSqr0YCHpmQFCI93GHaPxdyh4Az8V5Wa9ookmrOw++vr/+yg+mtTBw3GlVtW7+X ZM+dLMpNGq3w6iEskiYMrw== 0000950131-99-001829.txt : 19990331 0000950131-99-001829.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950131-99-001829 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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: 99575760 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, 1998 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: 32 - 33 ------- 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 (collectively, the "Partnership Agreement"). As of December 31, 1998, the Partnership consisted of one General Partner and 2,608 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, 1998, the Partnership owned 29 properties with specialty leasehold improvements in 12 of these properties, as more fully discussed in Item 2. During the Second Quarter of 1998, the General Partner received the written consent of a majority of the Partners to liquidate the Partnership's assets and dissolve the Partnership. No buyer has been identified for the Partnership's assets, and Management will continue normal operations for the foreseeable future. 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 2 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 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. 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 (which was dissolved in December 1998), 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. 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 three 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 3 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. The Advisory Board currently consists of a broker dealer representative, Steven Carson of First Albany Corporation; and a Limited Partner from each of the two remaining Partnerships: 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. The Partnership has no employees. All of the Partnership's business is conducted in the United States. 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, 1998:
Lease Acquisi- Property Name Purchase Rental Per Expiration Renewal tion Date & Address Lessee Price (1) Annum Date Options - - --------- --------- ------ --------- ----- ---- ------- 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 660,156 555 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
4
Lease Acquisi- Property Name Purchase Rental Per Expiration Renewal tion Date & Address Lessee Price (1) Annum Date Options - - --------- --------- ------ --------- ----- ---- ------- 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 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 04/20/89 Hostetlers, BBQ Hickory Park, Inc. 897,813(2) 55,584 12-31-2002 (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, Inc. Phoenix, AZ 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
5
Lease Acquisi- Property Name Purchase Rental Per Expiration Renewal tion Date & Address Lessee Price (1) Annum Date Options - - --------- --------- ------ --------- ----- ---- ------- 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 05/02/90 Denny's (4) 514,259(2) 3752 E Ind School Phoenix, AZ 05/31/90 Applebee's Thomas & King, 10-31-2009 None 2770 Brice Rd Inc. 1,434,434(2) 135,780 Columbus, OH $23,955,224 $2,267,298 =========== ==========
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. In connection with the proposed liquidation of the Partnership during 1998, Management received appraisals on each of the Properties. Six of the Properties were written down to their estimated net realizable values, based on the appraisal amounts received. The write-downs approximated $685,000. During the Fourth Quarter of 1998, the tenant of the Cash-A-Check store in Hallandale, Florida, exercised their option to purchase the property for $325,000. The two Florida Denny's properties were sold to the tenant, Cypress Restaurants, Inc., during January 1998 for a total of $2,200,000, resulting in a gain of $556,000. 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 could be arranged once the environmental issues were addressed. The note was repaid in full during the Third Quarter of 1998. The Partnership is not liable for the environmental contamination. The tenant of the Red Apple Restaurant in Cedar Rapids, Iowa, vacated the property during 1998 and ceased paying rent. The uncollected rent was written off, because the tenant could not be located. Management is currently marketing the property for lease to a new tenant. The tenant of the Hostetler's Barbeque in Des Moines, Iowa, vacated the property during 1998 and has leased the property to a sub-tenant. The tenant continues to make rental payments as required under the lease. 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. However, the amounts due during 1998 have been collected. DenAmerica re-leased the property to a sub-tenant during 6 the Fourth Quarter of 1998. DenAmerica remains liable to the Partnership for all amounts due under the lease. DenAmerica did not renew its lease on the Denny's property in Phoenix, Arizona, when it expired on May 31, 1998. Management is currently marketing the property for lease to a new tenant. Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders None. 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 the Interests, and it is not anticipated that an active public market for the Interests will develop. (b) As of December 31, 1998 there were 2,608 record holders of Interests in the Partnership. (c) The Partnership does not pay dividends. However, the Partnership Agreement, 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 Partnership Agreement. During 1998 and 1997, $4,585,000 and $4,600,000, respectively, were distributed in the aggregate to the Limited Partners. The General Partner received aggregate distributions of $8,838 and $8,736 in 1998 and 1997, respectively. 7 Item 6. Selected Financial Data DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP (a Wisconsin limited partnership) December 31, 1998, 1997, 1996, 1995, and 1994 (not covered by Independent Auditor's Report)
1998 1997 1996 1995 1994 - - ----------------------------- ------------------ ----------------- ----------------- ---------------- ----------------- Total Revenue $3,622,550 $3,448,300 $5,316,853 $3,932,498 $4,190,932 - - ----------------------------- ------------------ ----------------- ----------------- ---------------- ----------------- Net Income 1,524,131 2,183,977 3,277,512 1,782,105 2,158,283 - - ----------------------------- ------------------ ----------------- ----------------- ---------------- ----------------- Net Income per Limited Partner Interest 32.60 46.72 70.11 38.12 46.17 - - ----------------------------- ------------------ ----------------- ----------------- ---------------- ----------------- Total Assets 17,693,852 20,894,198 23,379,356 27,134,604 29,455,349 - - ----------------------------- ------------------ ----------------- ----------------- ---------------- ----------------- Total Partners' Capital 17,409,414 20,479,121 22,903,880 26,464,478 28,117,453 - - ----------------------------- ------------------ ----------------- ----------------- ---------------- ----------------- Cash Distributions per Limited Partnership Interest 99.07 99.39 147.47 74.11 68.68 - - ----------------------------- ------------------ ----------------- ----------------- ---------------- -----------------
The above selected financial data should be read in conjunction with the financial statements and the related notes appearing elsewhere in this annual report. 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 Properties, including equipment held by the Partnership at December 31, 1998, were originally purchased at a price, including acquisition costs, of approximately $23,955,000. The tenant of the Red Apple Restaurant in Cedar Rapids, Iowa, vacated the property during 1998 and ceased paying rent. Management is currently marketing the property for lease to a new tenant. Cypress Restaurants, Inc., the tenant of the Denny's restaurants in New Smyrna Beach, Florida and Daytona Beach, Florida, 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 agreed to finance $550,000 of the $950,000 purchase price for a period of six months, until the environmental issues were resolved. The sale of the properties took place in January 1998, and resulted in a gain of $556,000. The note was repaid in full during the Third Quarter of 1998. During the Fourth Quarter of 1998, the tenant of the Cash-A-Check store in Hallandale, Florida, exercised their option to purchase the property for $325,000. 8 DenAmerica, Inc., the tenant of the Denny's restaurant in Twin Falls, Idaho, 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. However, all amounts due under the lease have been paid to date. DenAmerica sublet the property to Fiesta Time during 1998, but remains liable to the Partnership for all amounts due under the lease. One of the Denny's properties in Phoenix, Arizona is currently vacant. The lease expired on May 31, 1998, and the tenant did not renew. Management is pursuing other possible tenants for the property. The tenant of the Hostetler's Barbeque in Des Moines, Iowa vacated the property during 1998 and has leased the property to a sub-tenant. The tenant continues to make rental payments as required under the lease. Other Assets Cash and cash equivalents, including cash restricted for real estate taxes held by the Partnership, was approximately $1,260,000 at December 31, 1998, compared to $1,450,000 at December 31, 1997. The Partnership designated cash of $825,000 to fund the Fourth Quarter 1998 distributions to Limited Partners paid in February 1999, $182,000 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 Properties and sales of 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. Liabilities Accounts payable and accrued expenses at December 31, 1998, in the amount of $45,000, primarily represented the year-end accruals of legal and auditing fees. Due to the Current General Partner amounted to $3,000 at December 31, 1998, representing the General Partner's portion of the Fourth Quarter distribution. Real estate taxes payable increased from $58,000 at December 31, 1997 to $73,000 at December 31, 1998, primarily due to the accrual of real estate taxes for properties which became vacant during the year. 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 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 9 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 1998 of $4,585,000 and $8,838, respectively, have also been in accordance with the Partnership Agreement. The Fourth Quarter 1998 distribution of $825,000 was paid to the Limited Partners on February 15, 1999. 9 Results of Operations: The Partnership reported net income for the year ended December 31, 1998, in the amount of $1,524,000 compared to net income for the years ended December 31, 1997 and 1996, of $2,184,000 and $3,278,000, 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, property write-downs, real estate taxes on vacant properties, and property valuation costs. Results 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 decreased significantly during 1997 and 1998 as the recovery efforts have wound down. Revenues Total revenues were $3,623,000, $3,448,000, and $5,317,000, for the years ended December 31, 1998, 1997, and 1996, 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 $930,000 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. During 1998, gains totaling $639,000 were recorded on the sales of two Denny's restaurants and a Cash-A-Check store. Recoveries of receivables which had been previously written off totaled $41,000 during 1998. Total revenues should approximate $2,700,000 annually based on leases currently in place. Future revenues may decrease with tenant defaults and/or sales of 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, 1998, 1997, and 1996, cash expenses amounted to approximately 24%, 19%, and 25%, of total revenues, respectively. Total expenses, including non-cash items, amounted to approximately 58%, 37% and 38%, of total revenues for the years ended December 31, 1998, 1997, and 1996, respectively. Items negatively impacting expenses during the last three years include expenses 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. In addition, during 1998, the Partnership incurred legal fees, appraisal fees, and fees for land title surveys and environmental inspections in connection with the proposed liquidation of the Partnership. Charge-offs of uncollectible rent, losses on equipment leases, write-downs of property to their estimated net realizable values, depreciation, and amortization 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 $123,000, $67,000, and $0 at December 31, 1998, 1997, and 1996, 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 was uncertain. However, the tenant has continued to make all required rent payments. The 1998 write-off related to certain unpaid rent and notes receivable from DenAmerica. 10 During 1998, six properties were written down to their appraised value, resulting in a non-cash charge of $685,000. 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 1997, remaining equipment lease payments of $61,000 on the Twin Falls, Idaho, lease were written off. The tenant had vacated the property and future collectibility was uncertain. However, the tenant continued to make the required payments during 1998, which were recorded as recoveries of amounts previously written-off. 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. 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. Fees incurred during 1998 were a result of the sales of two Denny's properties and the Cash-A-Check property to the tenants. 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 13% of rental income for 1998. If inflation causes operating margins to deteriorate for lessees, if expenses grow faster than revenues, then, inflation may well negatively impact the portfolio through tenant defaults. It would be misleading to associate inflation with asset appreciation for real estate, in general, and the Partnership's portfolio, specifically. Due to the "triple net" nature of the property leases, asset values generally move inversely with interest rates. Year 2000: The Partnership's operations are not dependent on date sensitive software. The Partnership is not aware of any Year 2000 problems with its current software. Accounting and Partnership records software are owned and operated by third parties who provide services to the Partnership under contract and any cots to make the software Year 2000 compliant will be borne by the third parties. The Partnership is currently in the process of evaluating Year 2000 issues with these third party providers. The Partnership believes, however, that even if any Year 2000 problems are not corrected on schedule, the cost and disruption to operations of the Partnership are expected to be minimal. Tenants are responsible for the operation of any equipment located at the Partnership's properties. While the Partnership is not fully aware of the compliance attainment efforts of its tenants, tenant preparedness for the Year 2000 should have minimal impact on the Partnership and are not expected to be material to the Partnership's operations, financial condition or liquidity. The Partnership does plan to evaluate the efforts of its tenants to prepare for the Year 2000. Item 7A. Quantitative and Qualitative Disclosure About Market Risk None. 11 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 .......................... 13 Balance Sheets, December 31, 1998 and 1997 ........................ 14 - 15 Statements of Income for the Years Ended December 31, 1998, 1997, and 1996 ........................... 16 Statements of Partners' Capital for the Years Ended December 31, 1998, 1997, and 1996...................... 17 Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996 ........................... 18 - 19 Notes to Financial Statements ..................................... 20 - 28 Schedule III--Real Estate and Accumulated Depreciation ...................................................... 34 - 35 12 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, 1998 and 1997, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, 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. Chicago, Illinois February 18, 1999 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS December 31, 1998 and 1997 ASSETS
December 31, December 31, 1998 1997 INVESTMENT PROPERTIES AND EQUIPMENT:(Note 3) Land $ 7,406,721 $ 8,330,982 Buildings 12,736,444 14,930,273 Equipment 707,378 707,378 Accumulated depreciation (5,356,448) (5,472,407) ------------ ------------ Net investment properties and equipment 15,494,095 18,496,226 ------------ ------------ OTHER ASSETS: Cash and cash equivalents 1,256,165 1,438,534 Cash restricted for real estate taxes 4,404 11,251 Cash held in Indemnification Trust (Note 8) 321,207 304,753 Rents and other receivables (Net of allowance of $41,475 in 1998) 369,715 285,163 Deferred rent receivable 134,899 182,770 Prepaid insurance 19,892 19,341 Deferred charges 91,158 86,434 Unsecured notes receivable from lessees (Net of allowance of $136,863 in 1998 and $136,335 in 1997) 2,317 69,726 ------------ ------------ Total other assets 2,199,757 2,397,972 ------------ ------------ Total assets $ 17,693,852 $ 20,894,198 =========== ===========
The accompanying notes are an integral part of these statements. 14 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS December 31, 1998 and 1997 LIABILITIES AND PARTNERS' CAPITAL
December 31, December 31, 1998 1997 LIABILITIES: Accounts payable and accrued expenses $ 45,050 $ 69,837 Due to current General Partner 2,723 2,510 Security deposits 102,017 153,112 Unearned rental income 61,179 131,263 Real estate taxes payable 73,469 58,355 ------------ ------------ Total liabilities 284,438 415,077 ------------ ------------ CONTINGENT LIABILITIES: (Note 7) PARTNERS' CAPITAL: (Notes 1, 4 and 9) Current General Partner - Cumulative net income 117,145 101,904 Cumulative cash distributions (48,929) (40,091) ------------ ------------ 68,216 61,813 ------------ ------------ Limited Partners (46,280.3 interests outstanding) Capital contributions, net of offering costs 39,358,468 39,358,468 Cumulative net income 17,963,227 16,454,337 Cumulative cash distributions (39,140,268) (34,555,268) Reallocation of former general partners' deficit capital (840,229) (840,229) ------------ ------------ 17,341,198 20,417,308 ------------ ------------ Total partners' capital 17,409,414 20,479,121 ------------ ------------ Total liabilities and partners' capital $ 17,693,852 $ 20,894,198 ============ ============
The accompanying notes are an integral part of these statements. 15 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF INCOME For the Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996 ----------- ----------- ----------- REVENUES: Rental income (Note 5) $ 2,764,028 $ 2,951,174 $ 3,262,082 Interest income on direct financing leases 0 10,384 57,028 Other interest income 123,478 73,223 98,393 Net other income 55,142 63,349 105,710 Recovery of amount previously written off (Note 2) 41,015 244,561 863,643 Net gain on disposal of assets 638,887 105,609 929,997 ----------- ----------- ----------- 3,622,550 3,448,300 5,316,853 ----------- ----------- ----------- EXPENSES: Partnership management fees (Note 6) 180,450 167,350 202,587 Disposition fees (Note 6) 75,750 52,166 66,750 Disposition fees - Restoration (Note 6) 0 0 20,550 Restoration fees (Note 6) 0 9,782 33,408 Appraisal fees 58,575 6,410 2,268 Environmental inspections 48,250 0 0 Land title surveys 66,150 0 0 Insurance 23,319 26,130 36,594 General and administrative 108,569 107,992 125,634 Advisory Board fees and expenses 15,766 14,018 16,703 Interest 0 0 3,551 Real estate taxes 9,323 12,172 (880) Ground lease payments (Note 3) 126,541 125,209 123,921 Expenses incurred due to default by lessee 3,403 8,398 7,220 Professional services 150,639 99,481 141,073 Professional services related to Investigation 1,279 32,618 526,210 Loss on equipment lease 0 61,404 95,246 Depreciation 412,950 464,596 511,650 Amortization 9,252 9,186 804 Provision for uncollectible rents and other receivables 122,860 67,411 0 Write down of properties to net realizable value (Note 3) 685,343 0 126,052 ----------- ----------- ----------- 2,098,419 1,264,323 2,039,341 ----------- ----------- ----------- NET INCOME $ 1,524,131 $ 2,183,977 $ 3,277,512 =========== =========== =========== NET INCOME - CURRENT GENERAL PARTNER 15,241 21,840 32,775 NET INCOME - LIMITED PARTNERS 1,508,890 2,162,137 3,244,737 ----------- ----------- ----------- $ 1,524,131 $ 2,183,977 $ 3,277,512 ----------- =========== =========== NET INCOME PER LIMITED PARTNERSHIP INTEREST, based on 46,280.3 Interests outstanding $ 32.60 $ 46.72 $ 70.11 =========== =========== ===========
The accompanying notes are an integral part of these statements. 16 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' CAPITAL For the years ended December 31, 1998, 1997 and 1996
Current General Partner Limited Partners ---------------------------------- ------------------------------------------------------------------ Capital Cumulative Cumulative Contributions, Cumulative Net Cash Net of Cumulative Cash Income Distributions Total Offering Costs Net Income Distribution Reallocation Total ------ ------------- -------- -------------- ---------- ------------ ------------ ----------- BALANCE AT DECEMBER 31, 1995 $ 47,289 $(18,245) $ 29,044 $39,358,468 $11,047,463 $(23,130,268) $(840,229) $26,435,434 Cash Distributions ($147.47 per limited partnership interest) (13,110) (13,110) (6,825,000) (6,825,000) Net Income 32,775 32,775 3,244,737 3,244,737 -------- -------- -------- ----------- ----------- ------------ --------- ----------- BALANCE AT DECEMBER 31, 1996 $ 80,064 $(31,355) $ 48,709 $39,358,468 $14,292,200 $(29,955,268) $(840,229) $22,855,171 Cash Distributions ($99.39 per limited partnership interest) (8,736) (8,736) (4,600,000) (4,600,000) Net Income 21,840 21,840 2,162,137 2,162,137 -------- -------- -------- ----------- ----------- ------------ --------- ----------- BALANCE AT DECEMBER 31, 1997 $101,904 $(40,091) $ 61,813 $39,358,468 $16,454,337 $(34,555,268) $(840,229) $20,417,308 Cash Distributions ($99.07 per limited partnership interest) (8,838) (8,838) (4,585,000) (4,585,000) Net Income 15,241 15,241 1,508,890 1,508,890 -------- -------- -------- ----------- ----------- ------------ --------- ----------- BALANCE AT DECEMBER 31, 1998 $117,145 $(48,929) $ 68,216 $39,358,468 $17,963,227 $(39,140,268) $(840,229) $17,341,198 ======== ======== ======== =========== =========== ============ ========= ===========
The accompanying notes are an integral part of these statements. 17 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,524,131 $ 2,183,977 $ 3,277,512 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 422,202 473,782 512,454 Recovery of amount previously written off (41,015) (244,561) (863,643) Provision for uncollectible rents and other receivables 122,860 67,411 0 Property write downs to net realizable value 685,343 0 126,052 Net (gain) on disposal of assets (638,887) (105,609) (929,997) Loss on equipment leases 0 61,404 95,246 Interest applied to Indemnification Trust account (16,454) (15,116) (14,406) (Increase) Decrease in rents and other receivables (207,412) (67,112) 203,837 (Deposits) Withdrawals for payment of real estate taxes 6,847 99,374 (49,408) (Increase) Decrease in prepaids (551) 2,921 (2,631) (Increase) Decrease in deferred rent receivable 47,871 9,145 37,156 Increase (Decrease) in due to current General Partner 213 (84,217) 32,611 Increase (Decrease) in accounts payable and other (24,787) 2,248 (199,126) Increase (Decrease) in security deposits (51,095) 8,822 (38,355) Increase (Decrease) in real estate taxes payable 15,114 (60,776) 62,113 Increase (Decrease) in unearned rental income (70,084) 73,524 39,674 ----------- ----------- ----------- Net cash from operating activities 1,774,296 2,405,217 2,289,089 ----------- ----------- ----------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Principal payments received on direct financing leases 41,015 47,422 229,294 Proceeds from sale of investment properties 2,542,725 1,931,182 2,990,000 Investment in leasing commissions (13,976) (42,000) 0 Recoveries from former G.P. affiliates 0 244,561 1,785,744 Payments from affiliated partnerships 0 0 96,088 Issuance of unsecured notes 0 0 (36,288) Principal receipts from unsecured notes 67,409 16,562 0 ----------- ----------- ----------- Net cash from investing activities 2,637,173 2,197,727 5,064,838 ----------- ----------- ----------- CASH FLOWS USED IN FINANCING ACTIVITIES: Cash distributions to Limited Partners (4,585,000) (4,600,000) (6,825,000) Cash distributions to current General Partner (8,838) (8,736) (13,110) Payments on equipment notes 0 0 (77,255) ----------- ----------- ----------- Net cash (used in) financing activities (4,593,838) (4,608,736) (6,915,365) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (182,369) (5,792) 438,562 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,438,534 1,444,326 1,005,764 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,256,165 $ 1,438,534 $ 1,444,326 =========== =========== =========== SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 0 $ 0 $ 3,551 =========== =========== =========== The accompanying notes are an integral part of these statements.
18 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. 19 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 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 video rental store and a child care center. At December 31, 1998, the Partnership owned 29 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. Percentage rents are accrued throughout the year based on the tenant's actual reported year-to-date sales along with management's estimate of the tenant's sales for any remaining unreported periods during the year. The Partnership considers its operations to be in only one segment and therefore no segment disclosure is made. 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 20 makes the appropriate payment to avoid possible foreclosure of the property. Taxes are accrued in the period in which the liability is incurred. Cash and cash equivalents include cash on deposit with financial institutions and highly liquid temporary investments with initial maturities of 90 days or less. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain reclassifications have been made to the prior year financial statements to make them consistent with the current year presentation. 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. 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. The General Partner received the consent of the Limited Partners to liquidate the Partnership's assets and dissolve the Partnership during the Second Quarter of 1998. However, a buyer was not found for the Partnership's assets, and no current liquidation or dissolution plans are in effect. Management plans to continue normal operations for the Partnership for the foreseeable future. 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, 1998, the tax basis of the Partnership's assets exceeded the amounts reported in the accompanying financial statements by approximately $8,400,000. 21 The following represents a reconciliation of net income as stated on the Partnership statements of income to net income for tax reporting purposes:
1998 1997 1996 ---- ---- ---- Net income, per statements of income $1,524,131 $2,183,977 $3,277,512 Book to tax depreciation difference (32,592) (36,811) (35,161) Book over tax gain from asset disposition (506,943) (227,315) (98,501) Straight line rent adjustment 47,871 10,866 37,156 Bad debt reserve/expense 41,475 53,666 (488,777) Real estate tax expense 0 0 (65,881) Book valuation adjustment of real property 685,342 0 126,052 Book valuation adjustment of equipment leases 0 65,690 0 Other, net (69,826) 73,865 215,779 -------- ------ ----------- Net income for tax reporting purposes $1,689,458 $2,123,938 $2,968,179 ========== ========== ==========
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. 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, and restoration costs and recoveries have been allocated based on the same percentage. Through December 31, 1998, $5,766,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, in 1996 and 1997, the Partnership has recognized $1,108,000 as income, which represents its share of the excess recovery. There were no restoration activities or recoveries in 1998. The current General 22 Partner continues to pursue recoveries of the misappropriated funds, however, no further significant recoveries are anticipated. 3. INVESTMENT PROPERTIES: As of December 31, 1998, the Partnership owned 27 fully constructed fast-food restaurants, a video store, and a preschool. The properties are composed of the following: ten (10) Wendy's restaurants, four (4) Hardee's restaurants, five (5) Denny's restaurants, one (1) Applebee's restaurant, one (1) Popeye's Famous Fried Chicken restaurant, one (1) former 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) Blockbuster Video store, and one (1) Sunrise Preschool. The 29 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, 1998, three of the Partnership's properties were unoccupied. The tenant of the Hostetler's Barbeque in Des Moines, Iowa vacated the property during 1998 and has leased the property to a sub-tenant. The tenant continues to make rental payments as required under the lease. DenAmerica, the tenant of the Denny's restaurant in Twin Falls, Idaho, vacated the property during 1997, 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. However, the amounts due during 1998 have been collected. DenAmerica re-leased the property to a sub-tenant during the Fourth Quarter of 1998. DenAmerica remains liable to the Partnership for all amounts due under the lease. DenAmerica did not renew its lease on the Denny's property in Phoenix, Arizona when it expired on May 30, 1998. Management is currently marketing the property for lease to a new tenant. The tenant of the Red Apple Restaurant in Cedar Rapids, Iowa, vacated the property during 1998 and ceased paying rent. The uncollected rent was written off as uncollectible, because the tenant cannot be located. Management is currently marketing the property for lease to a new tenant. 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. 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. 23 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, 1998, the minimum management fee and the maximum reimbursement for office rent and overhead increased by 1.6% 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 Partnership owns three (3) restaurants located on parcels of land where it has entered into long-term ground leases. One (1) of these leases is 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 $126,000 and expire in the years 2003 and 2008. 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, 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 agreed to finance $550,000 of the $950,000 purchase price for a period of six months, until the environmental issues were 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. The note was repaid in full during the Third Quarter of 1998. During the Fourth Quarter of 1998, the tenant of the Cash-A-Check store in Hallandale, Florida exercised their option to purchase the property for $325,000, resulting in a gain of approximately $83,000. In connection with the proposed liquidation of the Partnership during 1998, Management received appraisals on each of the Properties. Six of the Properties were written down to their estimated net realizable values, based on the appraisal amounts received. The write-downs approximated $685,000. 4. PARTNERSHIP AGREEMENT: The Partnership Agreement, prior to an amendment effective May 26, 1993, provided that, for financial reporting and income tax purposes, net profits or losses from operations were allocated 90% to the Limited Partners and 10% to the general partners. The Partnership Agreement also provided for quarterly cash distributions from Net Cash Receipts, as defined, within 60 days after the last day of the first full calendar quarter following the date of release of the subscription funds from escrow, and each calendar quarter thereafter, in which such funds were available for distribution with respect to such quarter. Such distributions were to be made 90% to Limited Partners and 10% to the former general partners, provided, 24 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 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 it 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.) 25 5. LEASES: Lease terms for the majority of the investment properties are 20 years from their inception. The leases generally provide for minimum rents and additional rents based upon percentages of gross sales in excess of specified breakpoints. The lessee is responsible for occupancy costs such as maintenance, insurance, real estate taxes, and utilities. Accordingly, these amounts are not reflected in the statements of income except in circumstances where, in management's opinion, the Partnership will be required to pay such costs to preserve its assets (i.e., payment of past-due real estate taxes). Management has determined that the leases are properly classified as operating leases; therefore, rental income is reported when earned and the cost of the property, excluding the cost of the land, is depreciated over its estimated useful life. Aggregate minimum lease payments to be received under the leases for the Partnership's properties are as follows:
Year ending December 31, 1999 $2,196,032 2000 2,211,950 2001 2,112,947 2002 2,056,080 2003 2,014,549 Thereafter 12,229,389 ---------- $22,820,947
Percentage rentals included in rental income in 1998, 1997, and 1996 were $586,429, $608,915, and $578,747, 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 35% of total base rents for 1998. 6. TRANSACTIONS WITH CURRENT GENERAL PARTNER: Amounts incurred to the current General Partner for the years ended December 31, 1998, 1997, and 1996, are as follows:
Incurred Incurred Incurred for the year ended for the year ended for the year ended Current General Partner December 31, 1998 December 31, 1997 December 31, 1996 - - ----------------------- ----------------- ----------------- ----------------- Management fees $180,450 $167,350 $202,587 Disposition fees 75,750 52,166 66,750 Restoration fees 0 9,782 33,408 Overhead allowance 14,558 14,367 14,301 Leasing Commissions 13,976 6,000 53,620 Reimbursement for out-of-pocket expenses 28,906 21,605 21,781 Cash distribution 8,838 8,736 13,110 ----- ----- ------- $322,478 $280,006 $405,557 ======== ======== ========
26 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 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 a 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, 1998, the Partnership may owe the current General Partner $16,296, which has been 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, 1998. Funds are invested in U.S. Treasury securities. In addition, $71,207 of earnings have been credited to the Trust as of December 31, 1998. 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. 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. 27 10. SUBSEQUENT EVENTS: On February 15, 1999, the Partnership made distributions to the Limited Partners of $825,000 amounting to $17.83 per Interest. 28 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 TPG is an Illinois corporation 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. Prior to such date, 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 3. See 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 48 - 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 36 - Vice President - Finance and Administration. Ms. Atkinson joined TPG 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 29 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. Arthur and Company for one year before joining Farm & Home Savings Association. 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 - Self-Employed Investment Advisor. Mr. Carson's primary client concentration includes labor union, pension, and annuity funds. Mr. Carson worked for First Albany Corporation 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. 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 - Retired, 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 Partnership Agreement, which is filed 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. 30 Item 12. Security Ownership of Certain Beneficial Owners and Management (a) As of December 31, 1998, 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, 1998, neither the General Partner nor any of their affiliates owned any 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 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, 1998, the minimum management fee and the maximum reimbursement for office rent and overhead increased by 1.6% 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. 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 31 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 the Trust in an amount, not to exceed $250,000, solely for the purpose of funding such indemnification obligations. Once a determination has been made that no such claims can or will be made against TPG, the balance of the Trust will become unrestricted cash of the Partnership. At December 31, 1998 the Partnership had fully funded the Trust. The following fees and reimbursements from the Partnership were incurred to management in 1998:
The Provo Group, Inc. Management Fees $180,450 Disposition Fees 75,750 Leasing Commissions 13,976 Office Overhead Allowance 14,558 Direct Cost Reimbursements 28,906 --------- 1998 Total $313,640 =======
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, 1998 and 1997 Statements of Income for the Years Ended December 31, 1998, 1997, and 1996 Statements of Partners' Capital for the Years Ended December 31, 1998, 1997, and 1996 Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996 Notes to Financial Statements 2. Financial Statement Schedules 32 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. 99.0 Correspondence to the Limited Partners dated February 15, 1999 regarding the Fourth Quarter 1998 distribution. (b) Reports on Form 8-K: The Registrant filed no reports on Form 8-K during the fourth quarter of fiscal year 1998. 33 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998
Gross amount at which Initial cost to Partnership carried at end of year (A) ----------------------------- ----------------------------------------------- Costs Building capitalized and subsequent Building and Property Encumbrances Land Improvements to acquisitions Land Improvements Total - - ------------------------- ---------------------------- ------------------------------------------------------------- --------------- Palm Gardens, Florida (1) $ - $ 495,237 $ 248,388 $ - $ 325,487 $ 163,258 $ 488,745 Phoenix, Arizona - 444,224 421,676 - 444,224 421,676 865,900 Phoenix, Arizona - - 295,750 - - 295,750 295,750 N. Richland Hills, Texas (2) - 762,580 584,139 - 662,580 480,123 1,142,703 South Milwaukee, Wisconsin - 274,749 454,064 79,219 274,749 533,283 808,032 Phoenix, Arizona (2) - 482,383 490,343 - 453,433 428,676 882,109 Cedar Rapids, Iowa - 108,125 552,031 - 108,125 552,031 660,156 Santa Fe, New Mexico - - 451,230 - - 451,230 451,230 Augusta, Georgia - 215,416 434,178 - 215,416 434,178 649,594 Charleston, South Carolina - 273,619 323,162 - 273,619 323,162 596,781 Park Forest, Illinois - 187,900 393,038 - 187,900 393,038 580,938 Aiken, South Carolina - 402,549 373,795 - 402,549 373,795 776,344 Augusta, Georgia - 332,154 396,659 - 332,154 396,659 728,813 Mt. Pleasant, South Carolina - 286,060 294,878 - 286,060 294,878 580,938 Charleston, South Carolina - 273,625 254,500 - 273,625 254,500 528,125 Aiken, South Carolina - 178,521 455,229 - 178,521 455,229 633,750 Des Moines, Iowa (2) - 164,096 448,529 287,991 161,996 551,056 713,052 Hartford, Wisconsin - 201,603 484,960 - 201,603 484,960 686,563 Milwaukee, Wisconsin (2) - 409,143 600,902 - 409,143 573,871 983,014 North Augusta, Georgia - 250,859 409,297 - 250,859 409,297 660,156 Charleston, South Carolina - 286,068 294,870 - 286,068 294,870 580,938 Martinez, Georgia - 266,175 367,575 - 266,175 367,575 633,750 Grand Forks, North Dakota - 172,701 566,674 - 172,701 566,674 739,375 Phoenix, Arizona (2) - - 725,000 - - 327,357 327,357 Phoenix, Arizona - 241,371 843,132 - 241,371 843,132 1,084,503 Ogden, Utah - 194,350 452,075 - 194,350 452,075 646,425 Fond du Lac, Wisconsin - 297,418 552,349 - 297,418 552,349 849,767 Twin Falls, Idaho (2) - 155,269 483,763 60,000 155,269 353,622 508,891 Columbus, Ohio - 351,325 708,141 - 351,326 708,140 1,059,466 ---------------------------- ------------------------------------------------------------- --------------- $ 0 $ 7,707,520 $ 13,360,327 $ 427,210 $ 7,406,721 $ 12,736,444 $ 20,143,165 ============================ ============================================================= ===============
Life on which depreciation in in latest statement of operations is computed Accumulated Date of Date (years) Property depreciation construction acquired - - ------------------------- ------------------------------------ --------------- Palm Gardens, Florida (1) $ 98,189 - 3/11/88 31.5 Phoenix, Arizona 183,365 - 6/15/88 31.5 Phoenix, Arizona 128,606 - 6/15/88 31.5 N. Richland Hills, Texas (2) 222,703 - 7/15/88 31.5 South Milwaukee, Wisconsin 201,120 1986 8/1/88 31.5 Phoenix, Arizona (2) 185,109 - 8/15/88 31.5 Cedar Rapids, Iowa 206,331 - 9/9/88 31.5 Santa Fe, New Mexico 147,745 - 10/10/88 31.5 Augusta, Georgia 155,771 - 12/22/88 31.5 Charleston, South Carolina 115,941 - 12/22/88 31.5 Park Forest, Illinois 141,011 - 12/22/88 31.5 Aiken, South Carolina 132,704 - 2/21/89 31.5 Augusta, Georgia 140,821 - 2/21/89 31.5 Mt. Pleasant, South Carolina 104,687 - 2/21/89 31.5 Charleston, South Carolina 90,352 - 2/21/89 31.5 Aiken, South Carolina 161,614 - 3/14/89 31.5 Des Moines, Iowa (2) 234,052 1989 8/1/89 31.5 Hartford, Wisconsin 166,699 - 4/28/89 31.5 Milwaukee, Wisconsin (2) 206,513 - 8/2/89 31.5 North Augusta, Georgia 128,339 - 12/29/89 31.5 Charleston, South Carolina 92,459 - 12/29/89 31.5 Martinez, Georgia 115,256 - 12/29/89 31.5 Grand Forks, North Dakota 177,686 - 12/28/89 31.5 Phoenix, Arizona (2) 162,357 - 1/1/90 31.5 Phoenix, Arizona 264,372 - 1/1/90 31.5 Ogden, Utah 167,102 - 1/31/90 31.5 Fond du Lac, Wisconsin 173,194 - 1/5/90 31.5 Twin Falls, Idaho (2) 158,894 - 3/21/90 31.5 Columbus, Ohio 208,638 - 6/1/90 31.5 ------------- $ 4,671,630 =============
(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 at December 31, 1998 (A) Represents aggregate costs for federal income tax purposes. 34 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998 (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 1998 1997 Accumulated Depreciation 1998 1997 - - ---------------------------- ----------- ----------- ---------- ---------- Balance at beginning of year $23,261,255 $25,629,957 Balance at beginning of year $4,795,109 $4,881,162 Deletions: Additions charged to costs and expenses 405,430 457,076 Due to disposition (2,432,747) (2,368,702) Deletion due to real estate disposition (528,909) (543,129) Due to property write-downs (685,343) 0 ----------- ----------- ---------- ---------- Balance at end of year $20,143,165 $23,261,255 Balance at end of year $4,671,630 $4,795,109 =========== =========== ========== ==========
35 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 26, 1999 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 26, 1999 By: /s/ Kristin J. Atkinson ------------------------------------------- Kristin J. Atkinson Vice President - Finance and Administration Date: March 26, 1999 36 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the December 31, 1998 Form 10-K and is qualified in its entirety by reference to such financial statements. 12-MOS 12-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 DEC-31-1998 DEC-31-1997 1,260,569 1,449,785 321,207 304,753 796,319 779,769 178,338 136,335 0 0 2,199,757 2,397,972 20,850,543 23,968,633 5,356,448 5,472,407 17,693,852 20,894,198 284,438 415,077 0 0 0 0 0 0 0 0 17,409,414 20,479,121 17,693,852 20,894,198 2,764,028 2,961,558 3,622,550 3,448,300 0 0 0 0 1,975,559 1,196,912 122,860 67,411 0 0 1,524,131 2,183,977 0 0 1,524,131 2,183,977 0 0 0 0 0 0 1,524,131 2,183,977 32.60 46.72 32.60 46.72
EX-99 3 CORRESPONDENCE TO THE LIMITED PARTNERS DiVall Insured Income Properties 2, L.P. QUARTERLY NEWS - - -------------------------------------------------------------------------------- A publication of The Provo Group, Inc. FOURTH QUARTER 1998 To Sell or Not to Sell, That is the Question ... While the idea of management continuing to operate this Partnership is attractive to most investors (See Note1), others are asking, "Why not keep it on the market and see if we get the right offer?" First, let's review why we marketed the portfolio during 1998. The real estate market was hot and if the "supply and demand" imbalances could have created attractive values, then we wanted to seize the opportunity. The aggressive money faded away after the Russian financial meltdown in August, because of major disruptions in the securitized mortgage markets. Our window of opportunity closed for the time being ... but we still have a strong portfolio with stable earnings. Second, the continuous marketing of any asset tends to leave a "stale" impression in the marketplace. We don't have stale assets, so we won't promote a misperception of desperation or pressure to sell by keeping this portfolio "available" on the market. Third, this Partnership has a good opportunity to have its asset values enhanced in the near term. There are currently four Hardee's restaurants in this portfolio. These particular restaurants have been experiencing a decline in sales since 1992. In fact, nationwide the Hardee's restaurants are viewed as a weak and struggling concept. Good news though, change is on its way. CKE Restaurants, ("CKE") has been selected as the top restaurant stock for 1999 by several stock analysts. Why does that affect you? CKE purchased all of the Hardee's stock and is now the parent company of Hardee's Food Systems (Thus, CKE now owns all of your Hardee's). CKE now has a viable plan to turn Hardee's business around via an extensive remodeling plan, menu revisions, and improvements in national advertising. Many Hardee's restaurants are being dual branded with the popular Carl's Jr. restaurant chain also owned by CKE. A new owner with a strong balance sheet could significantly improve Hardee's operations. In the restaurant industry (like many industries) there are "hot" concepts and there are those that are known to be struggling. When this portfolio is put on the market again and if Hardee's is known as a "hot" concept again, or if there are any Carl's Jr.'s in this portfolio, potential buyers will certainly take these factors into consideration when valuing your assets. In the meantime, increased sales would improve percentage rents with the potential to impact distributions favorably. In closing, the Partnership distributed $99.07 per unit (approximately) in 1998. Since the portfolio is stable and generating consistent revenue, we have the luxury of timing any future portfolio sale to the most attractive value environment. - - -------------------------------------------------------------------------------- Note1 Based on the Expression of Interest Forms received by our offices, only 7% of investors showed any interest in selling their units. PAGE 2 DIVALL 2 4 Q 98 ----------------------------------------------------- DISTRIBUTION HIGHLIGHTS o 6.2% (approx.) annualized return from operations and 1% (approx.) non- annualized return from investing and financing activities based on $32,000,000 ("net" remaining initial investment). o $825,000 total amount distributed for the Fourth Quarter 1998 which was $315,000 more than projected. The higher than budgeted distributions are primarily due to the sale of Cash- A-Check in Hallandale, FL. o $17.83 per unit (approx.) for the Fourth Quarter 1998 from both cash flow from operations and "net" cash activity from financing and investing activities. o $961.00 to $763.00 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.) ----------------------------------------------------- (NOTE: Original units were purchased for $1,000/unit.) STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS o 58% increase in "total" operating revenues from projections. o An increase of $800,000 in "total" expenses from projections. o A $425,000 decrease in net income from projections. o Revenues were higher than anticipated due to the non-cash accrual of 1998 percentage rents which will be billed to tenants in 1999. In addition, a gain was recorded on the sale of the Partnership's Hallandale, Florida property during the quarter. o Expenses were higher than expected due to the non-cash write-down of various properties to their appraised value as well as the non-cash write-off of uncollectible receivables from defaulted tenants. PAGE 3 DIVALL 2 4 Q 98 PROPERTY HIGHLIGHTS VACANCIES o Red Apple Restaurant (Cedar Rapids, IA) unexpectedly vacated the premises on May 30, 1998. Management has written off the outstanding balance as uncollectable and will continue to pursue other tenants for this location. o Denny's (Phoenix, AZ) was vacant at December 31, 1998. The tenant did not renew their lease which expired on May 31, 1998. Management is pursuing other possible tenants for this property, including other Denny's operators. o Hostetler's BBQ (Des Moines, IA) was vacant at December 31, 1998. Management has consented to a sublease agreement between this tenant and Daytona's Inc. Hostetler's will continue to pay rent directly to the Partnership. RENTS RECEIVABLE o Denny's (Phoenix, AZ) was delinquent at December 31, 1998 in an amount of $51,800. PROPERTY ISSUES O Cash-A-Check (Hallandale, FL) exercised their Option to Purchase for $325,000. The closing occurred in December 1998, and the proceeds are included in this distribution. O Denny's (Twin Falls, ID) Management has consented to a sublease agreement between this tenant and Fiesta Time effective October 1, 1998. Denny's remains liable for all rent charges. 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, 1998.
Distribution Capital Analysis Balance Original Capital Balance -- $ 46,280,300 Cash Flow From Operations Since Inception $ 25,792,529 -- Total Distributions Since Inception (39,965,268) -- ------------ (Return) of Capital ($14,172,739) (14,172,739) ============ ------------ "Net" Remaining Initial Investment by Original Partners -- $ 32,107,561 ===========
(NOTE: For a more individualized discussion of return of capital contact Investor Relations.) PAGE 4 DIVALL 2 4 Q 98 ----------------------------------------------------- QUESTIONS & ANSWERS 1. What is the value of my units? Management is currently calculating an estimated Net Unit Value for the Partnership, as of December 31, 1998. We plan to have this information available February 26, 1999. 2. When will I receive my K-1? The 1998 K-1 will be mailed on or before February 26, 1999. 3. When can I expect my next distribution mailing? Your distribution correspondence for the First Quarter of 1999 is scheduled to be mailed on May 14, 1999. OTHER NEWS INSIDE O CASH-A-CHECK OPTION TO PURCHASE...................PROPERTY ISSUES, PG 4 O DISCUSSION OF LIQUIDATION COSTS.................QUESTION & ANSWER, PG 5
- - ---------------------------------------------------------------------------------------------------------------- DIVALL INSURED INCOME PROPERTIES 2 L.P. STATEMENTS OF INCOME AND CASH FLOW CHANGES FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 1998 - - ---------------------------------------------------------------------------------------------------------------- PROJECTED ACTUAL VARIANCE -------------------------------------------- 4TH 4TH QUARTER QUARTER BETTER OPERATING REVENUES 12/31/98 12/31/98 (WORSE) ----------- ----------- ----------- Rental income $ 639,945 $ 929,891 $ 289,946 Interest income 16,773 15,941 (832) Gain on sale of assets 0 82,660 82,660 Other income 12,740 26,474 13,734 ----------- ----------- ----------- TOTAL OPERATING REVENUES $ 669,458 $ 1,054,966 $ 385,508 ----------- ----------- ----------- OPERATING EXPENSES Insurance $ 6,628 $ 5,939 $ 689 Management fees 45,855 45,231 624 Overhead allowance 3,700 3,648 52 Advisory Board 3,600 3,743 (143) Administrative 17,967 11,256 6,711 Professional services 5,930 6,235 (305) Disposition fee 0 9,750 (9,750) Property writedowns 0 685,343 (685,343) Auditing 12,000 16,901 (4,901) Legal 7,500 4,837 2,663 Real estate taxes 7,929 5,573 2,356 Write-off of uncollectible receivables 0 122,861 (122,861) Defaulted tenants 2,100 2,144 (44) ----------- ----------- ----------- TOTAL OPERATING EXPENSES $ 113,209 $ 923,461 $ (810,252) ----------- ----------- ----------- GROUND RENT $ 31,200 $ 31,372 $ (172) ----------- ----------- ----------- INVESTIGATION AND RESTORATION EXPENSES $ 474 $ 0 $ 474 ----------- ----------- ----------- NON-OPERATING EXPENSES Depreciation $ 102,380 $ 102,384 $ (4) Amortization 2,313 2,313 0 ----------- ----------- ----------- TOTAL NON-OPERATING EXPENSES $ 104,693 $ 104,697 $ (4) ----------- ----------- ----------- TOTAL EXPENSES $ 249,576 $ 1,059,530 $ (809,954) ----------- ----------- ----------- NET INCOME (LOSS) $ 419,882 $ (4,564) $ (424,446) ----------- ----------- ----------- OPERATING CASH RECONCILIATION: VARIANCE ----------- Depreciation and amortization 104,693 104,697 4 Gain on sale of assets 0 (82,660) (82,660) Property writedowns 0 685,343 685,343 Write-off of uncollectible receivables 0 122,861 122,861 (Increase) Decrease in current assets (91,572) (393,622) (302,050) Increase (Decrease) in current liabilities 21,919 (23,389) (45,308) (Increase) Decrease in cash reserved for payables (9,055) 29,000 38,055 Advance from current cash flows for future distributions 64,300 64,300 0 ----------- ----------- ----------- Net Cash Provided From Operating Activities $ 510,167 $ 501,966 $ (8,201) ----------- ----------- ----------- CASH FLOWS FROM (USED IN) INVESTING AND FINANCING ACTIVITIES Proceeds from repayment of notes receivable 0 0 0 Proceeds from property sales 0 325,000 325,000 ----------- ----------- ----------- Net Cash Provided From Investing And Financing Activities $ 0 $ 325,000 $ 325,000 ----------- ----------- ----------- Total Cash Flow For Quarter $ 510,167 $ 826,966 $ 316,799 Cash Balance Beginning of Period 1,545,677 1,536,904 (8,773) Less 3rd quarter distributions paid 11/98 (1,060,000) (1,010,000) 50,000 Change in cash reserved for payables or future distributions (55,245) (93,300) (38,055) ----------- ----------- ----------- Cash Balance End of Period $ 940,599 $ 1,260,570 $ 319,971 Cash reserved for 4th quarter L.P. distributions (510,000) (825,000) (315,000) Cash reserved for payment of payables (149,197) (182,000) (32,803) ----------- ----------- ----------- Unrestricted Cash Balance End of Period $ 281,402 $ 253,570 $ (27,832) =========== =========== =========== - - ---------------------------------------------------------------------------------------------------------------- PROJECTED ACTUAL VARIANCE -------------------------------------------- * Quarterly Distribution $ 510,000 $ 825,000 $ 315,000 Mailing Date 2/15/99 (enclosed) -- - - ----------------------------------------------------------------------------------------------------------------
* Refer to distribution letter for detail of quarterly distribution. 5
PROJECTIONS FOR DISCUSSION PURPOSES DIVALL INSURED INCOME PROPERTIES 2 LP ------------------------------------------- 1998 PROPERTY SUMMARY ORIGINAL EQUITY $46,280,300 AND RELATED ESTIMATED RECEIPTS NET DISTRIBUTION OF CAPITAL SINCE INCEPTION $14,172,739 ------------- CURRENT EQUITY $32,107,561 -------------------------------============ 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 0.00% 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%
--------------------------------------------------------- ------------------- TOTALS TOTAL % ON --------------------------------------------------------- $32,107,561 - - ---------------------------------- ANNUAL EQUITY CONCEPT LOCATION COST RECEIPTS RETURN RAISE - - ---------------------------------- --------------------------------------------------------- ------------------- APPLEBEE'S COLUMBUS, OH 1,143,965 135,780 11.87% BLOCKBUSTER OGDEN, UT 646,425 100,554 15.56% RED APPLE REST. CEDAR RAPIDS, IA 600,156 0 0.00% DENNY'S (2) (3) PHOENIX, AZ 520,126 39,000 7.50% DENNY'S PHOENIX, AZ 1,155,965 65,000 5.62% DENNY'S (2) PHOENIX, AZ 1,087,137 86,000 7.91% DENNY'S TWIN FALLS, ID 889,032 121,060 13.62% DENNY'S (2) (3) PHOENIX, AZ 514,259 37,000 7.19% HARDEE'S (5) S. MILWAUKEE, WI 808,032 64,000 7.92% HARDEE'S (5) HARTFORD, WI 686,563 64,000 9.32% HARDEE'S (5) MILWAUKEE, WI 1,421,983 76,000 5.34% " " HARDEE'S (5) FOND DU LAC, WI 1,140,236 88,000 7.72% HARDEE'S (5) MILWAUKEE, WI 780,000 0 0.00% HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62% HOSTETTLER'S DES MOINES, IA 897,813 66,000 7.35% KFC SANTA FE, NM 451,230 60,000 13.30% MIAMI SUBS PALM BEACH, FL 743,625 39,000 5.24%
Note 1: This property summary includes only current property and equipment held by the Partnership. Equipment lease receipts shown include a return of capital. 2: Rent is based on 12.5% of monthly sales. Rent projected for 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. The annual base rent shown is net of the underlying ground lease rent. 4: The lease was terminated and the equipment sold to Hardee's Food Systems in conjunction with their assumption of the Terratron leases in November 1996. 5: These leases were assumed by Hardee's Food Systems at a reduced rental rate from that stated in the original leases. Page 1 of 2 [Logo for TheProvo Group goes here]
------------------------------------- ORIGINAL EQUITY $46,280,300 PROJECTIONS FOR NET DISTRIBUTION OF DISCUSSION PURPOSES CAPITAL SINCE INCEPTION $14,172,739 ----------- CURRENT EQUITY $32,107,561 --------------------------=========== DIVALL INSURED INCOME PROPERTIES 2 LP 1997 PROPERTY SUMMARY AND RELATED ESTIMATED RECEIPTS
PORTFOLIO (Note 1) ---------------------------------- -------------------------------------------------- REAL ESTATE EQUIPMENT ---------------------------------- -------------------------------------------------- ANNUAL LEASE ANNUAL BASE % EXPIRATION LEASE % CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN - - --------------------------------- ---------------------------------- ------------------------------------------------- POPEYE'S PARK FOREST, IL 580,938 77,280 13.30% SUNRISE PS PHOENIX, AZ 1,084,503 127,920 11.80% 79,219 0 0.00% 19,013 0 0.00% VILLAGE INN GRAND FORKS, ND 739,375 84,000 11.36% WENDY'S AIKEN, SC 633,750 90,480 14.28% WENDY'S CHARLESTON, SC 580,938 76,920 13.24% WENDY'S N. AUGUSTA, SC 660,156 87,780 13.30% WENDY'S AUGUSTA, GA 728,813 96,780 13.28% WENDY'S CHARLESTON, SC 596,781 76,920 12.89% WENDY'S AIKEN, SC 776,344 96,780 12.47% WENDY'S AUGUSTA, GA 649,594 86,160 13.26% WENDY'S CHARLESTON, SC 528,125 70,200 13.29% WENDY'S MT. PLEASANT, SC 580,938 77,280 13.30% WENDY'S MARTINEZ, GA 633,750 84,120 13.27% - - --------------------------------- ---------------------------------- ------------------------------------------------ PORTFOLIO TOTALS (29 Properties) 21,114,440 2,231,154 10.57% 2,551,063 37,860 1.48% - - --------------------------------- ----------------------------------- ------------------------------------------------
-------------------------------------------------- --------------- TOTALS TOTAL % ON -------------------------------------------------- $32,107,561 TOTAL EQUITY CONCEPT LOCATION COST RECEIPTS RETURN RAISE - - --------------------------------- -------------------------------------------------- --------------- POPEYE'S PARK FOREST, IL 580,938 77,280 13.30% SUNRISE PS PHOENIX, AZ 1,182,735 127,920 10.82% VILLAGE INN GRAND FORKS, ND 739,375 84,000 11.36% WENDY'S AIKEN, SC 633,750 90,480 14.28% WENDY'S CHARLESTON, SC 580,938 76,920 13.24% WENDY'S N. AUGUSTA, SC 660,156 87,780 13.30% WENDY'S AUGUSTA, GA 728,813 96,780 13.28% WENDY'S CHARLESTON, SC 596,781 76,920 12.89% WENDY'S AIKEN, SC 776,344 96,780 12.47% WENDY'S AUGUSTA, GA 649,594 86,160 13.26% WENDY'S CHARLESTON, SC 528,125 70,200 13.29% WENDY'S MT. PLEASANT, SC 580,938 77,280 13.30% WENDY'S MARTINEZ, GA 633,750 84,120 13.27% - - --------------------------------- -------------------------------------------------- - - --------------------------------- -------------------------------------------------- --------------- PORTFOLIO TOTALS (29 Properties) 23,665,503 2,269,015 9.59% 7.07% - - --------------------------------- -------------------------------------------------- ---------------
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