<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
--------------------------
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 West 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 No X
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
----------------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1995 1994
-------------- -------------
<S> <C> <C>
INVESTMENT PROPERTIES AND EQUIPMENT:(NOTE 3)
Land $10,218,268 $10,341,226
Buildings 18,216,715 18,449,169
Equipment 669,778 706,228
Accumulated depreciation (5,356,554) (5,001,045)
----------- -----------
Net investment properties and equipment 23,748,207 24,495,578
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES:(NOTE 8) 965,750 1,267,553
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 923,824 1,349,101
Cash restricted for real estate taxes 54,964 41,694
Certificate of Deposit restricted for security
deposit (NOTE 3) 260,000 260,000
Cash held in Indemnification Trust (NOTE 11) 267,856 253,558
Rents and other receivables (net of allowance of
$103,687 in 1995 and $89,116 in 1994) 544,664 293,614
Due from current General Partner 210 3,215
Deferred rent receivable 297,706 310,229
Due from affiliated partnerships (NOTE 12) 76,643 102,656
Prepaid insurance 22,688 40,650
Unsecured notes receivable from lessees 50,000 50,000
----------- -----------
Total other assets 2,498,555 2,704,717
----------- -----------
DUE FROM FORMER AFFILIATES: (NOTES 2 AND 12)
Due from former general partner affiliates 3,536,080 3,594,605
Allowance for uncollectible amounts
due from former affiliates (2,607,104) (2,607,104)
Restoration cost receivable 2,535,797 1,880,070
Allowance for uncollectible
restoration receivable (2,535,797) (1,880,070)
----------- -----------
Due from former affiliates, net 928,976 987,501
----------- -----------
Total assets $28,141,488 $29,455,349
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
LIABILITIES AND PARTNERS' CAPITAL
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
----------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1995 1994
-------------- -------------
<S> <C> <C>
LIABILITIES:
Equipment notes payable (NOTE 6) $ 329,230 $ 511,019
Accounts payable and accrued expenses 172,498 184,157
Due to current General Partner 2,145 1,310
Security deposits 504,513 504,713
Unearned rental income 18,065 25,121
Real estate taxes payable 54,964 111,576
------------ ------------
Total liabilities 1,081,415 1,337,896
------------ ------------
CONTINGENT LIABILITIES: (NOTE 10)
PARTNERS' CAPITAL: (NOTES 1, 4 AND 14)
Former general partners -
Capital contributions 200 200
Cumulative net income 707,313 707,313
Cumulative cash distributions (1,547,742) (1,547,742)
Reallocation of former general partners'
deficit capital to Limited Partners 840,229 840,229
------------ ------------
0 0
------------ ------------
Current General Partner -
Cumulative net income 46,761 29,468
Cumulative cash distributions (19,797) (13,165)
------------ ------------
26,964 16,303
------------ ------------
Limited Partners (46,280.3 interests outstanding)
Capital contributions, net of offering costs 39,358,468 39,358,468
Cumulative net income 10,995,138 9,283,179
Cumulative cash distributions (22,480,268) (19,700,268)
Reallocation of former general partners' deficit capital (840,229) (840,229)
------------ ------------
27,033,109 28,101,150
------------ ------------
Total partners' capital 27,060,073 28,117,453
------------ ------------
Total liabilities and partners' capital $ 28,141,488 $ 29,455,349
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income(NOTE 5) $ 916,747 $1,088,448 $2,819,770 $2,915,471
Interest income on direct financing leases 29,154 23,657 80,196 77,249
Other interest income 8,534 30,830 54,539 84,976
Other income 3,532 30,282 10,156 39,602
Net gain on disposal of assets 0 35,076 1,729 44,662
---------- ---------- ---------- ----------
957,967 1,208,293 2,966,390 3,161,960
---------- ---------- ---------- ----------
EXPENSES:
Partnership management fees paid
to current General Partner 41,714 45,235 122,699 133,648
Disposition fees - Current General Partner 0 0 3,000 3,300
Restoration fees - Current General Partner 210 1,012 2,341 2,985
Selling Commission - 1.5% restoration 0 0 3,000 0
Insurance 12,582 12,145 36,361 47,377
Selling Commissions 0 6,728 9,900 6,728
Real Estate Taxes 0 80,574 0 80,574
General and administrative (NOTE 9) 15,208 27,980 78,972 86,504
Advisory Board fees and expenses 4,924 4,263 13,594 15,466
Interest 11,103 30,086 33,633 94,445
Ground lease payments (NOTE 3) 30,936 30,945 92,890 92,813
Expenses incurred due to default by lessee 16,956 1,827 20,672 6,953
Professional services 20,727 15,753 93,880 88,400
Professional services related to Investigation 129,796 63,140 269,218 164,687
Depreciation 137,316 163,732 449,101 502,898
Amortization 201 1,286 603 4,450
Loss on Equipment lease 0 0 7,273 0
---------- ---------- ---------- ----------
421,673 484,706 1,237,137 1,331,228
---------- ---------- ---------- ----------
NET INCOME $536,294 $ 723,587 $1,729,253 $1,830,732
========== ========== ========== ==========
NET INCOME - CURRENT GENERAL PARTNER $ 5,363 $ 7,236 $ 17,293 $ 18,307
NET INCOME - LIMITED PARTNERS 530,931 716,351 1,711,960 1,812,425
---------- ---------- ---------- ----------
$ 536,294 $ 723,587 $1,729,253 $1,830,732
========== ========== ========== ==========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST, based on 46,280.3 Interests $11.47 $15.48 $36.99 $39.16
outstanding ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
4
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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1995 1994
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,729,253 $1,830,732
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 449,704 507,348
Net (gain) on disposal of assets (1,729) (44,662)
Loss on equipment lease 7,273 0
Interest applied to Indemnification Trust account (14,298) (3,558)
(Increase)/Decrease in rents and other receivables (251,050) 29,287
(Deposits) Withdrawals for payment of real estate taxes and CD (13,270) 121,199
Decrease in prepaids 17,962 42,484
(Increase)/Decrease in deferred rent receivable 12,523 (8,502)
Increase/(Decrease) in due to current General Partner 3,840 (9,766)
(Decrease) in accounts payable and other (11,659) (94,392)
(Decrease) in security deposits (200) (12,552)
Increase in accrued interest payable 0 20,393
(Decrease) in real estate taxes payable (56,612) (33,261)
(Decrease) in unearned rental income (7,056) 0
---------- ----------
Net cash from operating activities 1,864,681 2,344,750
---------- ----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Principal payments received on direct financing leases 293,925 229,254
Deposits to Indemnification Trust cash account 0 (150,000)
Recoveries from former affiliates 58,525 74,628
Payments from affiliated partnerships 26,013 23,191
Proceeds from sale of properties 300,000 0
Principal receipts from notes receivable 0 233,698
---------- ----------
Net cash from (used in) investing activities 678,463 410,771
---------- ----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Cash distributions to Limited Partners (2,780,000) (2,478,464)
Cash distributions to current General Partner (6,632) (7,011)
Principal payments on mortgage notes 0 (2,830)
Payments of equipment notes (181,789) (164,950)
---------- ----------
Net cash (used in) financing activities (2,968,421) (2,653,255)
---------- ----------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (425,277) 102,266
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,349,101 1,363,335
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 923,824 $1,465,601
========== ==========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 33,633 $ 94,445
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF ACCOUNTING:
-------------------------------------
DiVall Insured Income Properties 2 Limited Partnership (the "Partnership") was
formed on November 18, 1987, pursuant to the Uniform Limited Partnership Act of
the State of Wisconsin. The initial capital which was contributed during 1987,
consisted of $300, representing aggregate capital contributions of $200 by the
former general partners and $100 by the Initial Limited Partner. The minimum
offering requirements were met and escrowed subscription funds were released to
the Partnership as of April 7, 1988. On January 23, 1989, the former general
partners exercised their option to increase the offering from 25,000 interests
to 50,000 interests and to extend the offering period to a date no later than
August 22, 1989. On September 30, 1989, the former general partners exercised
their option to extend the offering period to a date no later than February 22,
1990. The offering closed on February 22, 1990, at which point 46,280.3
interests had been sold, resulting in total offering proceeds, net of
underwriting compensation and other offering costs, of $39,358,468.
Deferred organization costs are amortized over a 60-month period. Deferred
costs on proposed acquisitions are capitalized as a cost of the properties upon
acquisition.
Rental revenue from investment properties is recognized on the straight-line
basis over the life of the respective lease. Revenue from direct financing
leases is recognized at level rates of return over the term of the lease.
Prior to January 1, 1992, depreciation of the properties was provided on a
straight-line basis over the estimated useful lives of 14 to 25 years which
generally approximates the lease terms. Beginning January 1, 1992, the
Partnership prospectively revised the remaining lives of its properties to 31.5
years, which management believes is a better representation of the estimated
useful lives of the buildings and improvements. Equipment is depreciated on a
straight-line basis over the estimated useful lives of 5 to 7 years.
Real estate taxes on the Partnership's investment properties are the
responsibility of the tenant. However, when a tenant fails to make the required
tax payments or when a property becomes vacant, the Partnership makes the
appropriate payment to avoid possible foreclosure of the property. Taxes are
accrued in the period in which the liability is incurred.
Cash and cash equivalents include cash on deposit with financial institutions
and highly liquid temporary investments with initial maturities of 90 days or
less.
6
<PAGE>
The Partnership will be dissolved on November 30, 2010, or earlier upon the
prior occurrence of any of the following events: (a) the disposition of all
properties of the Partnership; (b) the written determination by the General
Partner that the Partnership's assets may constitute "plan assets" for purposes
of ERISA; (c) the agreement of Limited Partners owning a majority of the
outstanding interests to dissolve the Partnership; or (d) the dissolution,
bankruptcy, death, withdrawal, or incapacity of the last remaining General
Partner, unless an additional General Partner is elected previously by a
majority of the Limited Partners.
No provision for Federal income taxes has been made, as any liability for such
taxes would be that of the individual partners rather than the Partnership. At
December 31, 1994, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$8,000,000.
2. REGULATORY INVESTIGATION:
-------------------------
A preliminary investigation during 1992 by the Office of Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation") revealed that during at least the four years ended
December 31, 1992, the former general partners of the Partnership, Gary J.
DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred substantial
cash assets of the Partnership and two affiliated publicly registered
partnerships, DiVall Insured Income Fund Limited Partnership ("DiVall 1") and
DiVall Income Properties 3 Limited Partnership ("DiVall 3") (collectively the
"Partnerships") to various other entities previously sponsored by or otherwise
affiliated with DiVall and Magnuson. The unauthorized transfers were in
violation of the respective Partnership Agreements and resulted, in part, from
material weaknesses in the internal control system of the Partnerships. The
aggregate amount of the misappropriations, related costs, and 9% interest
accrued since January 1, 1993, is in excess of $15,000,000, of which
approximately $6,072,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at September 30, 1995. The
9% interest accrued as of September 30, 1995, amounted to approximately
$1,264,000 and is not reflected in the accompanying income statement. As of
December 31, 1994, approximately $5,475,000 was reflected as due from former
affiliates based on estimated overall misappropriation and related costs of
$13,500,000. As of December 31, 1994, PMA savings, representing cost savings to
the Partnerships as a result of the implementation of the Permanent Manager
Agreement, are estimated to approximate to $565,000, of which approximately
$183,000 is attributable to the Partnership. PMA savings are not credited
against the due from former affiliates account on the financial statements 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.
7
<PAGE>
The current General Partner intends to vigorously pursue recovery of the
misappropriated funds from the various sources and initially estimated a range
of recovery with an estimated floor of $3 million for the Partnerships.
Accordingly, an allowance has been established against amounts due from former
general partner affiliates reflecting the current General Partner's best
estimate of potential loss from misappropriated amounts. This allowance has
been allocated among the Partnerships based on each Partnership's pro rata share
of the total misappropriation. The amount of the allowance was unchanged at
September 30, 1995. Pending the outcome of the litigation and other matters
affecting the sources of potential recovery, it is not possible to determine the
amount that will ultimately be recovered. The ultimate recovery will likely be
for an amount different than the current estimate.
As mentioned above, material weaknesses were identified in the Partnership's
internal control structure. The internal control structure was not adequate to
assure that all transactions of the Partnership were properly recorded and
reflected in the books and records and financial statements of the Partnership.
Significant transactions affecting the Partnership were apparently initiated by
DiVall and Magnuson during at least the four years ended December 31, 1992,
which initially either were not recorded on the books and records of the
Partnership or were improperly recorded and characterized. Such transactions
included unsupported disbursements or improper disbursements under the terms of
the Partnership Agreement and the encumbrance of the Partnership assets. All
such transactions identified during the regulatory Investigation and concurrent
reviews have been reflected in the Partnership's financial statements as of
September 30, 1995. Because of the significance of the weaknesses in the
internal control structure, there could be no certainty that all improper and
unsupported transactions were identified and recorded and reflected in the
Partnership's financial statements as of December 31, 1992. Accordingly, the
Partnership's auditors were unable to render an opinion on the financial
statements for the year ended December 31, 1992. Financial statements for prior
periods, including 1991 and certain prior years, and quarterly reports as of
September 30, 1992, and certain prior quarters, do not properly reflect such
transactions, but have not been restated due to the impracticality and
uncertainty in attempting to make such restatements. Correspondingly,
management elected to record in the period discovered certain immaterial errors
discovered during 1993, which relate to prior periods, to assure effective
disclosure of amounts which have otherwise been deemed immaterial in relation to
partners' capital.
3. INVESTMENT PROPERTIES:
----------------------
As of September 30, 1995, the Partnership owned 35 fully constructed fast-food
restaurants, a video store, a preschool and a tag agency. The properties are
composed of the following: ten (10) Wendy's restaurants, eight (8) Hardee's
restaurants, seven (7) Denny's restaurants, three (3) Applebee's restaurants,
one (1) Popeye's Famous Fried Chicken restaurant, one (1) former Country Kitchen
restaurant, one (1) Hooter's restaurant, one (1) Kentucky Fried Chicken
restaurant, one (1) Hostetler's restaurant, one (1) Hallandale Tag Agency, one
(1) Miami Subs restaurant, one (1) Village Inn restaurant, one (1) Blockbuster
Video store, and one (1) Sunrise Preschool. The 38 properties are located in a
total of twelve (12) states.
8
<PAGE>
From time to time, the Partnership experiences interruptions in rental receipts
due to tenant delinquencies and vacancies. At September 30, 1995, the
Partnership had one vacancy. The tenant of the Country Kitchen restaurant was
evicted effective August 31, 1995. The property is currently under contract and
a sale is expected to take place during the Fourth Quarter of 1995. The
property located in Hallandale, Florida, and originally a Wendy's restaurant,
has been vacant since early 1990. A lease was executed on the property during
the second quarter of 1995.
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 were
invested in the Partnership's properties.
Prior to January 1, 1992, depreciation of the properties was provided on a
straight-line basis over the estimated useful lives of 14 to 25 years which
generally approximates the lease terms. Beginning January 1, 1992, the
Partnership prospectively revised the remaining lives of its properties to 31.5
years which management believes is a better representation of the estimated
useful lives of the buildings and improvements.
The Partnership's investment properties had been managed by an affiliate of the
former general partners pursuant to a management agreement which provided for a
fee equal to 1% of gross receipts. In addition, the former general partner
affiliate was entitled to receive reimbursements of general and administrative
costs, either direct or indirect. As a result of the Investigation, the
Partnership engaged a third party as Interim Manager in October 1992.
Subsequent to the appointment of the Permanent Manager, effective February 8,
1993, these services were being provided by the Permanent Manager for an overall
fee equal to 4% of gross receipts, with a maximum reimbursement for office rent
and related office overhead of $25,000 between the three affiliated Partnerships
as provided in the Permanent Manager Agreement ("PMA"). On May 26, 1993, the
Permanent Manager, TPG, replaced the former general partner as the new General
Partner as provided for in an amendment to the Partnership Agreement dated May
26, 1993. Pursuant to amendments to the Partnership Agreement, TPG continues to
provide management services for the same fee structure as provided in the PMA
mentioned above. Effective March 1, 1995, the minimum management fee and the
maximum reimbursement for office rent and overhead increased by 2.7%
representing the allowable annual Consumer Price Index adjustment per the PMA.
For purposes of computing the 4% overall fee, gross receipts includes amounts
recovered in connection with the misappropriation of assets by the former
general partners and their affiliates. TPG has received fees from the
Partnership totaling $11,312 to date on the amounts recovered.
The Partnership currently maintains rent insurance policies with terms expiring
in 1995 and 1996 for 13 of the 38 leased properties. Terms of the rent
insurance policies call for the Partnership
9
<PAGE>
to be paid 80% of gross rent due in the event of nonpayment and vacancy of the
property. Under the terms of the original offering document, rent insurance was
originally intended to be obtained on all leased properties unless the tenant
had financial net worth in excess of $5,000,000. The Partnership did not have
sufficient documentation at September 30, 1995 to substantiate whether the
uninsured properties had tenants with adequate net worth at the time the leases
were initiated.
The Partnership maintains a $260,000 certificate of deposit on behalf of
Terratron, Inc., a tenant, as a security deposit on an equipment lease. All
interest earned on the certificate of deposit belongs to the tenant. The
$260,000 will be returned to the tenant upon maturity of the certificate in
November 1996, which coincides with the expiration date of the equipment lease.
The Partnership owns four (4) restaurants located on parcels of land where it
has entered into long-term ground leases. Two (2) of these leases are paid by
the tenant and two (2) are paid by the Partnership. The leases paid by the
Partnership are considered operating leases and the lease payments are expensed
in the periods to which they apply. The lease terms require aggregate minimum
annual payments of approximately $124,000 and expire in the years ranging from
1998 to 2003.
The tenant operating a Denny's restaurant on Camelback Road in Phoenix, Arizona,
has not formally exercised its option to extend its lease which expired on
January 30, 1993, but continues to operate the restaurant and pay rent.
Management is currently negotiating a long-term lease for the property with the
tenant.
Several of the Partnership's property leases contain purchase option provisions
with stated purchase prices in excess of the original cost of the properties.
The Partnership's lease with an Arby's restaurant in Champaign, Illinois,
contained a purchase option with an option price of $300,000. The Partnership
acquired the property at a cost of $389,757. During the Fourth Quarter of 1994,
the tenant notified the Partnership of its intent to exercise the purchase
option. The property was written down to $300,000, the option price, at
December 31, 1994. The sale closed on April 11, 1995. The current General
Partner is not aware of any additional unfavorable purchase options in relation
to original cost.
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
former general partners. The Partnership Agreement also provided for quarterly
cash distributions from Net Cash Receipts, as defined, within 60 days after the
last day of the first full calendar quarter following the date of release of the
subscription funds from escrow, and each calendar quarter thereafter, in which
such funds were available for distribution with respect to such quarter. Such
distributions were to be made 90% to Limited Partners and 10% to the former
general partners, provided, however, that quarterly distributions were to be
cumulative and were not to be made to the former general
10
<PAGE>
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 former general partners, 10%, of the
remaining Net Proceeds available for distribution.
Under the terms of the Partnership Agreement, the General Partners were
obligated to create and contribute to an escrow fund an amount equal to 25% of
Net Cash Receipts distributed to the General Partners. At December 31, 1993,
the General Partner had contributed $1,641 to the fund. The fund was to be used
to repurchase interests of Limited Partners that exhibited hardship, at the
determination of the General Partner, and for distributions to the Limited
Partners upon final dissolution of the Partnership to permit the Limited
Partners to receive an amount equal to their Liquidation Preference of 13.5% per
annum. During 1994, it was determined that the amounts being funded to the
escrow fund were immaterial, and the fund was eliminated. Amounts paid to the
fund were returned to the Partnership.
On May 26, 1993, pursuant to the results of a solicitation of written consents
from the Limited Partners, the Partnership Agreement was amended to replace the
former general partners and amend various sections of the agreement. The former
general partners were replaced as General Partner by The Provo Group, Inc., an
Illinois corporation. Under the terms of the amendment, net profits or losses
from operations are allocated 99% to the Limited Partners and 1% to the current
General Partner. The amendment also provided for distributions from Net Cash
Receipts to be made 99% to Limited Partners and 1% to the current General
Partner provided, that quarterly distributions will be cumulative and will not
be made to the current General Partner unless and until each Limited Partner has
received a distribution from Net Cash Receipts in an amount equal to 10% per
annum, cumulative simple return on his or her Adjusted Original Capital, as
defined, from the Return Calculation Date, as defined, except to the extent
needed by the General Partner to pay its federal and state income taxes on the
income allocated to them attributable to such year. Distributions paid to the
General Partner are based on the estimated tax liability resulting from
allocated income. Subsequent to the filing of the General Partner's income tax
returns, a true-up of 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
11
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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 to the Partnership Agreement dated May 26, 1993,
the total compensation paid to all persons for the sale of the investment
properties shall be limited to a Competitive Real Estate commission, not to
exceed 6% of the contract price for the sale of the property. The General
Partner may receive up to one-half of the Competitive Real Estate commission,
not to exceed 3%, provided that the General Partner provides a substantial
amount of services in the sales effort. It is further provided that a portion
of the amount of such fees payable to the General Partner is subordinated to its
success in recovering the funds misappropriated by the former general partners.
(See Note 10.)
5. LEASES:
-------
Lease terms for the majority of the investment properties are 20 years from
their inception. The leases generally provide for minimum rents and additional
rents based upon percentages of gross sales in excess of specified sales levels.
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:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1995 $ 3,199,910
1996 3,180,085
1997 3,160,563
1998 3,115,652
1999 3,117,452
Thereafter 29,523,363
-----------
$45,297,025
===========
</TABLE>
12
<PAGE>
6. EQUIPMENT NOTES PAYABLE:
------------------------
At September 30, 1995, equipment notes payable consist of the following:
<TABLE>
<CAPTION>
Outstanding
Principal
Balance Interest Rate Maturity Date
----------- -------------- ---------------
<S> <C> <C> <C>
a. $ 87,253 9.80% September, 1997
b. 241,977 9.75% October, 1996
--------
$329,230
========
</TABLE>
a. In August 1992, the Partnership executed a note payable in the amount
of $190,000 with Norwest Equipment Finance, Incorporated, for
equipment placed in the Denny's restaurant located in Twin Falls,
Idaho. The note is payable in monthly installments of $4,018,
including interest at 9.8% through September 1997. The note is
secured by the equipment under a direct financing lease with an
initial cost of $190,000.
b. In October 1992, the Partnership executed a note payable in the amount
of $780,000 with Norwest Equipment Finance, Incorporated, for
equipment placed in 35 Hardee's restaurants, of which 28 restaurants
are owned independently from the Partnerships, located in Wisconsin.
The note is payable in monthly installments of $19,689, including
interest at 9.75% through October 1996. The note is secured by the
equipment under one direct financing lease with an initial cost of
$780,000.
Future maturities of the equipment notes payable are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1995 63,602
1996 230,898
1997 34,730
--------
$329,230
========
</TABLE>
13
<PAGE>
7. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the nine-month periods ended
September 30, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
Incurred as of Unpaid at Incurred as of
September 30, September 30, September 30,
Current General Partner 1995 1995 1994
----------------------- -------------- ------------- --------------
<S> <C> <C> <C>
Management fees $122,699 $ (210) $133,648
Disposition fees 3,000 0 3,300
Restoration fees 2,341 0 2,985
Overhead allowance 10,420 0 10,144
Reimbursement for out-
of-pocket expenses 13,762 0 6,066
Cash distributions 6,632 2,145 7,011
-------- ------ --------
$158,854 $1,935 $163,154
======== ====== ========
</TABLE>
8. NET INVESTMENT IN DIRECT FINANCING LEASES:
------------------------------------------
The net investment in direct financing leases which includes the Partnership's
specialty leasehold improvement leases, is composed of the following as of
September 30, 1995:
<TABLE>
<S> <C>
Minimum lease payments receivable $ 941,532
Estimated residual values of leased
property (non-recourse) 158,826
Acquisition fees, net 1,005
Less-Unearned income (135,613)
----------
Net investment in direct
financing leases $ 965,750
==========
</TABLE>
At September 30, 1995, future minimum lease payments for each of the five
succeeding fiscal years are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1995 175,019
1996 526,218
1997 271,311
1998 92,509
1999 35,301
----------
$1,100,358
==========
</TABLE>
14
<PAGE>
9. GENERAL AND ADMINISTRATIVE EXPENSES:
------------------------------------
For the periods ended September 30, 1995 and 1994, general and administrative
expenses incurred by the Partnership were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Communication costs $ 9,659 $11,513 $44,888 $48,125
Other administration (407) 8,120 3,156 15,624
Travel costs 365 3,374 2,266 8,835
Overhead allowance 3,494 3,402 10,420 10,144
Registration/Filing fees 2,097 262 7,039 2,467
Income Taxes 0 1,309 11,203 1,309
------- ------- ------- -------
$15,208 $27,980 $78,972 $86,504
======= ======= ======= =======
</TABLE>
10. CONTINGENT LIABILITIES:
-----------------------
According to the Partnership Agreement, as amended, the current General Partner
may receive a disposition fee not to exceed 3% of the contract price of the sale
of investment properties. Fifty percent (50%) of all such disposition fees
earned by the current General Partner is to be escrowed until the aggregate
amount of recovery of the funds misappropriated from the Partnerships by the
former general partners is greater than $4,500,000. Upon reaching such recovery
level, full disposition fees will thereafter be payable and fifty percent (50%)
of the previously escrowed amounts will be paid to the current General Partner.
At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining
escrowed disposition fees shall be paid to the current General Partner. If such
levels of recovery are not achieved, the current General Partner will contribute
the amounts escrowed towards the recovery. In lieu of an escrow, 50% of all
such disposition fees were paid directly to the restoration account and then
distributed among the three Partnerships. The amount allocated to the
Partnership may be owed to the current General Partner if the above noted
recovery levels are met. As of September 30, 1995, the Partnership may owe the
current General Partner $23,080, which is currently reflected as a recovery, if
certain specified recovery levels are achieved.
11. PMA INDEMNIFICATION TRUST:
--------------------------
The Permanent Manager Agreement ("PMA") provides that the Permanent Manager will
be indemnified from any claims or expenses arising out of or relating to the
Permanent Manager serving in such capacity or as substitute general partner, so
long as such claims do not arise from fraudulent or criminal misconduct by the
Permanent Manager. The PMA provides that the Partnership fund this
indemnification obligation by establishing a reserve of up to $250,000 of
Partnership assets which would not be subject to the claims of the Partnership's
creditors. An
15
<PAGE>
Indemnification Trust ("Trust") serving such purposes has been established at
United Missouri Bank, N.A. The Trust has been funded with Partnership assets
totaling $250,000 through September 30, 1995. Funds are invested in U.S.
Treasury securities. In addition, $17,856 of earnings has been credited to the
Trust. The rights of the Permanent Manager to the Trust shall be terminated
upon the earliest to occur of the following events: (i) the written release by
the Permanent Manager of any and all interest in the Trust; (ii) the expiration
of the longest statute of limitations relating to a potential claim which might
be brought against the Permanent Manager and which is subject to
indemnification; or (iii) a determination by a court of competent jurisdiction
that the Permanent Manager shall have no liability to any person with respect to
a claim which is subject to indemnification under the PMA. At such time as the
indemnity provisions expire or the full indemnity is paid, any funds remaining
in the Trust will revert back to the general funds of the Partnership.
12. RESTORATION TRUST ACCOUNT; EXPENSE ALLOCATIONS;
-----------------------------------------------
AND RELATED INTER-PARTNERSHIP RECEIVABLES:
------------------------------------------
Restoration costs represent expenses incurred by the Partnership in relation to
the misappropriated assets by the former general partners and their affiliates.
These costs are allocated among the Partnerships based on each partnership's
respective share of the entire misappropriation, as currently quantified. The
amount of misappropriation for each partnership is adjusted annually to reflect
new discoveries and more accurate quantification of amounts based on the
continuing Investigation. Such adjustments will result in periodic adjustments
to prior allocations of recovery costs to reflect updated information.
Consequently, previous payments for restoration expenses may not be consistent
with modified allocations. Based on modified allocations adjusted as of
December 31, 1993, the Partnership was owed $192,358 from DiVall 3 for amounts
paid on its behalf. Such amounts are reflected on the balance sheet as due from
affiliated partnerships. During 1994, the Partnership made an additional
adjustment increasing the amount due from DiVall 3 by $9,785, which has been
offset by $125,500 received from DiVall 3. At September 30, 1995, the
Partnership was owed $76,643 from DiVall 3.
When recoveries are realized by the Partnerships, the amounts received are
distributed to each respective partnership on the same basis as the restoration
costs are currently being allocated. Additionally, any available recovery funds
have been utilized first to satisfy amounts due other partnerships for amounts
advanced under prior allocation methods. As of September 30, 1995, the
Partnerships recovered a total of $665,295 from the former general partners and
their affiliates. Of this amount, the Partnership received its pro-rata share
in the amount of $271,523. Additionally, $57,143, representing 50% of all
disposition fees earned by the General Partner have been paid to the recovery.
Of that amount, $23,080 was allocated to the Partnership and is contingently
payable to the General Partner upon achievement of certain recovery levels as
described in Note 10.
The PMA contemplated that the Permanent Manager could establish a separate and
distinct Restoration Trust Fund which would hold all recoveries until a final
independent adjudication by a court of competent jurisdiction or vote of the
Limited Partners ratified the allocation of
16
<PAGE>
proceeds to each respective partnership. Management has concluded that a fair
and reasonable interim accounting for recovery proceeds can be accomplished at
the partnership level in a manner similar to restoration costs which are paid
directly by the Partnerships. Management reserves the right to cause the final
allocation of such costs and recoveries to be determined either by a vote of the
Limited Partners or a court of competent jurisdiction. Potential sources of
recoveries include third party litigation, promissory notes, land contracts, and
personal assets of the former general partners and their affiliates.
On March 24, 1994, an affiliated partnership, DiVall 1, filed a complaint in the
United States District Court for the Western District of Missouri against
Boatmen's First National Bank of Kansas City ("Boatmen's) seeking a declaratory
judgment that Boatmen's has no right or interest in a promissory note executed
in the name of DiVall 1 by the former general partners (the "Note") secured by
mortgages on five DiVall 1 properties, and further seeking an injunction against
foreclosure proceedings instituted against a DiVall 1 property located in
Dallas, Texas under a first deed of trust and security agreement given to secure
the Note (the "Foreclosure"). The former general partners borrowed $600,000
during or before 1991 from Metro North State Bank (the note is now held by
Boatmen's). The proceeds of the Note were not received by DiVall 1. As of
September 30, 1995, DiVall 1 had not paid debt service on the Note. DiVall 1
received a notice of default on the Note in October 1993, and the Foreclosure
Action was filed in February 1994. As of September 30, 1995, interest in the
amount of $160,000 had accrued but was unpaid on the Note. Boatmen's has agreed
to stay its foreclosure proceedings. Boatmen's answered the complaint and filed
a motion for summary judgment to which DiVall 1 responded. Boatmen's motion for
summary judgement was granted. DiVall 1 appealed the summary judgement to the
United States Court of Appeals for the Eighth Circuit, and the appeal has been
argued and submitted to the court. Pursuant to the Restoration Trust Account
procedures described above, all of the Partnerships are sharing the expenses of
this litigation and any recoveries resulting effectively from the partial or
full cancellation of the alleged indebtedness will be allocated among the three
Partnerships on the same basis as the restoration costs are currently being
allocated via appropriate payments by DiVall 1 to the Partnership and DiVall 3.
13. LITIGATION:
-----------
On March 16, 1993, the Partnership, along with DiVall 1 and DiVall 3, initiated
a lawsuit against Ernst & Young LLP ("E & Y"), a certified public accounting
firm, in the Circuit Court of Dane County, Wisconsin in connection with the
audits of the Partnerships performed by E & Y for the years 1989, 1990, and
1991. The Complaint filed in said lawsuit alleges, among other things, that
Defendant E & Y, was negligent in its audit work for the Partnerships by failing
to exercise ordinary care and failing to adhere to professional standards in the
following areas: reviewing, understanding, and auditing of compliance with the
Partnership Agreements; evaluation of the adequacy of internal controls;
identification of audit risks; selection and implementation of audit procedures
to address audit risks; identification of related party transactions;
compilation of sufficient evidential matters; resolution of improper transfers
and allocations; disclosure of related party transactions; and exercise of
appropriate audit skepticism. The Partnerships request the payment of damages
in the amount of $9,000,000, plus interest,
17
<PAGE>
attorneys fees and costs, and whatever additional relief the court deems just
and proper. The trial of the case will take place in Iowa County, Wisconsin and
has been scheduled to begin March 19, 1996. The Partnerships have hired legal
counsel under a contingent fee arrangement. E & Y filed an Answer denying that
it was negligent, and discovery is in process.
E & Y also filed third-party claims alleging fraud and negligence on the part of
the Partnerships' former law firm, Quarles & Brady. Additionally, E & Y also
filed third-party claims against Paul Magnuson, Gary DiVall, an affiliate of the
former general partners, DiVall Real Estate Investment Corporation ("DREIC"),
David Shea ("Shea") (former Acquisitions Director of DREIC) and Lisa Shatrawka
(former Controller for DREIC and former Director of Fund Management with TPG).
In turn, Quarles & Brady has filed third party claims against KPMG Peat Marwick,
the Partnerships' accountants preceding E&Y. The Partnerships have filed claims
against Magnuson, DiVall, DREIC, Shea, and Quarles & Brady. E & Y's claims
against Ms. Shatrawka were voluntarily dismissed.
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure
the repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 1 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
On July 23, 1993, nineteen (19) of the Private Partnerships sought the
protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven
(7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies
were involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest. These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.
The Partnership's experience in those bankruptcy cases that have concluded,
either through the approval of Plans of Reorganization, dismissal of the
bankruptcies, settlements or a combination of the foregoing, is that (i) the
collectibility of the obligations of the Private Partnerships assigned to the
Partnership has been significantly reduced and (ii) the General Partner
interests in such Private Partnerships often has little economic value. The
Partnership's recoveries in these bankruptcies have, to date, been on a steeply
discounted basis. Management anticipates that the recoveries in the remaining
unresolved bankruptcies are likely to also be on a deeply discounted basis.
Plans of reorganization have been filed in some of the bankruptcies, and
settlement agreements in many of the Private Partnerships have been reached.
Settlements in fourteen (14) of the bankruptcies to date have resulted in cash
payments to the Partnerships of a total of $624,000 and notes secured by
subordinated mortgages in the aggregate face amount of $625,000, the
realizability of which is uncertain. The Partnership is continuing to
vigorously defend its interests in the remaining bankruptcies.
18
<PAGE>
14. FORMER GENERAL PARTNERS' CAPITAL ACCOUNTS:
------------------------------------------
The capital account balance of the former general partners as of May 26, 1993,
the date of their removal as general partners pursuant to the results of a
solicitation of written consents from the Limited Partners, was a deficit of
$840,229. At December 31, 1993, the former general partners' deficit capital
account balance in the amount of $840,229 was reallocated to the Limited
Partners.
15. SUBSEQUENT EVENTS:
------------------
On November 15, 1995, the Partnership will make distributions to the Limited
Partners of $650,000 amounting to $14.04 per limited partnership interest.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES:
- - - --------------------------------
INVESTMENT PROPERTIES AND NET INVESTMENT IN DIRECT FINANCING LEASES
- - - -------------------------------------------------------------------
The investment properties, including equipment held by the Partnership at
September 30, 1995, were originally purchased at a price, including acquisition
costs, of approximately $33,365,000.
A lease was executed on the former Wendy's restaurant located in Hallandale,
Florida, during the Second Quarter of 1995. The property was leased to a tag
agency, and rent is scheduled to commence in December 1995. This property was
written down to its estimated net realizable value of $250,000 at December 31,
1994.
During the Fourth Quarter of 1994, the tenant of the Arby's restaurant in
Champaign, Illinois notified the Partnership of its intent to exercise an option
to purchase the property for $300,000. This property was written down to the
option price of $300,000 at December 31, 1994. The sale was finalized in April
1995. Management is not aware of any other unfavorable purchase options.
During the Third Quarter of 1995 the tenant of two Applebee's restaurants
notified the Partnership of their intent to exercise an option in their lease,
allowing them to purchase the properties for 120% of their respective
acquisition costs. The sale of these properties is expected to take place
during the Fourth Quarter of 1995. An estimated gain of $800,000 is expected to
be recognized on the sale.
Effective August 31, 1995, the tenant of the Country Kitchen restaurant agreed
to vacate the premises and cure all past defaults. The Partnership has entered
into an agreement to sell the property for $551,250, resulting in an estimated
gain of $12,000. The sale of this property is also expected to take place
during the Fourth Quarter of 1995.
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, amounted to $966,000 at September 30,
1995, compared to $1,268,000 at December 31, 1994. The decrease of $302,000 was
a result of principal payments received during the quarter along with a $7,273
charge-off of a disputed residual payment.
19
<PAGE>
OTHER ASSETS
- - - ------------
Cash and cash equivalents, including cash restricted for real estate taxes and a
certificate of deposit held by the Partnership, was approximately $1,239,000 at
September 30, 1995, compared to $1,651,000 at December 31, 1994. The
Partnership designated cash of $650,000 to fund the Third Quarter 1995
distributions to Limited Partners, $150,000 for the payment of quarter-end
accounts payable and accrued expenses, $260,000 for a tenant security deposit
held as a certificate of deposit, and the remainder represents reserves deemed
necessary to allow the Partnership to operate normally should any significant
unforeseen costs occur. Cash generated through the operations of the
Partnership's investment properties, sales of investment properties and any
recoveries of misappropriated funds by the former general partners, will provide
the sources for future fund liquidity and Limited Partner distributions.
The Partnership established an Indemnification Trust (the "Trust") during the
Fourth Quarter of 1993, deposited $100,000 in the Trust during 1993 and
completed funding of the Trust with $150,000 during 1994. The provision to
establish the Trust was included in the Permanent Manager Agreement for the
indemnification of TPG, in the absence of fraud or gross negligence, from any
claims or liabilities that may arise from TPG acting as Permanent Manager. The
Trust is owned by the Partnership. For additional information regarding the
Trust refer to Note 11 to the financial statements included in Item 1 of this
report.
Rents and other receivables increased from $294,000 at December 31, 1994 to
$545,000 at September 30, 1995. The increase is primarily due to delinquency of
a single tenant in eight restaurants. Additionally, September rent payments
from various other tenants were not received until after month-end.
DUE FROM AFFILIATED PARTNERSHIPS, DUE FROM FORMER AFFILIATES, ALLOWANCE FOR
- - - ---------------------------------------------------------------------------
UNCOLLECTIBLE AMOUNTS DUE FROM FORMER AFFILIATES AND DEFERRED INCOME
- - - --------------------------------------------------------------------
Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $3,536,000 at
September 30, 1995. The receivable decreased from December 31, 1994 due to
$59,000 of recoveries received from the former general partners and their
affiliates. Not reflected in these amounts is the PMA savings realized by the
Partnership.
The Partnership maintains a record of costs incurred in identifying or
recovering the misappropriated assets. These amounts are expensed when
incurred, and then, recorded on the balance sheet as a restoration cost
receivable with a corresponding allowance for such receivable deemed
uncollectible. These costs are considered due from the former general partners
and their affiliates. Interest has been accrued on the misappropriated funds
since January 1, 1993, at a rate of 9% per annum and has been included in the
restoration cost receivable. The receivable increased from approximately
$1,880,000 at December 31, 1994 to $2,536,000 at September 30, 1995, and
includes $1,264,000 of cumulative accrued interest.
The current General Partner intends to vigorously pursue recovery of the
misappropriated funds from the various sources and initially estimated a range
of recovery with an estimated floor of $3 million for the Partnerships.
Accordingly, an allowance has been established against amounts due from the
former general partners and their affiliates reflecting the current General
Partner's original estimate of potential loss from misappropriated amounts.
This allowance has been allocated among the Partnerships based on each
Partnership's pro rata share of the total misappropriation. The amount of the
allowance was unchanged at September 30, 1995. Pending the outcome of the
litigation and other matters affecting the sources of potential recovery, it is
not possible to determine the amount that will ultimately be recovered. The
ultimate recovery may differ from the current estimate.
20
<PAGE>
The restoration costs are allocated among the Partnerships based on each
Partnership's respective share of the misappropriation as discussed in Note 12
of the financial statements included in Item 1 of this report. The allocation
is adjusted annually to reflect any changes in the entire misappropriation. The
Partnership's percentage of the allocation was reduced in 1993. Consequently,
the Partnership had been paying more than its pro rata share of the costs.
Accordingly, the Partnership recorded a receivable at December 31, 1993, in the
amount of $192,000 due from DiVall 3 with corresponding reduction reflected in
professional expenses related to the Investigation, general partner removal
expenses, and interim fund manager fees and expenses. Recoveries allocated to
DiVall 3 were used to partially repay amounts owed to the Partnership. At
September 30, 1995, the remaining amount due from DiVall 3 was $77,000.
As a result of the misappropriation and material weaknesses in the internal
control structure of the Partnership prior to February 8, 1993, there can be no
assurance that all transactions recorded by the Partnership prior to February 8,
1993, were appropriate transactions of the Partnership and properly reflected in
the accompanying financial statements of the Partnership or that all
transactions of the Partnership prior to February 8, 1993, including improper
and unsupported transactions, have been identified and reflected in the
accompanying financial statements of the Partnership as of September 30, 1995.
LIABILITIES
- - - -----------
Equipment notes payable decreased $182,000 during the first nine months of 1995,
due to principal payments made during the period.
Accounts payable and accrued expenses at September 30, 1995, in the amount of
$172,000, primarily represented quarter-end accruals of legal and auditing fees
and includes an accrual for unbilled out-of-pocket expenses related to the Ernst
& Young litigation. These amounts are expected to be paid upon settlement of
the litigation. The decrease from $184,000 at December 31, 1994, is primarily
due to the payment of year-end accruals during the quarter.
PARTNERS' CAPITAL
- - - -----------------
Net income for the year was allocated between the current General Partner and
the Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement and the Amendment to the Partnership Agreement, as discussed more
fully in Note 4 of the financial statements included in Item 1 of this report.
The former general partners' deficit capital account balance was reallocated to
the Limited Partners at December 31, 1993. Refer to Note 14 to the financial
statements included in Item 1 of this report for additional information
regarding the reallocation.
Cash distributions paid to the Limited Partners and to the current General
Partner during 1995 of $2,780,000 and $6,632, respectively, have also been in
accordance with the amended Partnership Agreement. The Third Quarter 1995
distribution, of $650,000, will be paid to the Limited Partners on November 15,
1995.
RESULTS OF OPERATIONS:
- - - ----------------------
Management believes that the financial results of the quarter are not indicative
of "normal" Partnership operations. There are many events which occurred since
the discovery of the misappropriations in 1992 which have had a negative impact
on the financial results. Some of these events will continue to have a negative
impact on the Partnership in the future.
21
<PAGE>
The Partnership reported net income for the quarter ended September 30, 1995, in
the amount of $536,000 compared to net income for the quarter ended September
30, 1994, of $724,000. Net income for the nine months ended September 30, 1995
and 1994 amounted to $1,729,000 and $1,831,000, respectively. Results for these
periods were less 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.
REVENUES
- - - --------
Total revenues were $958,000 and $1,208,000 for the quarters ended September 30,
1995 and 1994, respectively. Revenues for the nine month periods ended
September 30, 1995 and 1994 were $2,966,000 and $3,162,000, respectively.
Rental income decreased primarily due to the catch-up accrual during the Third
Quarter of 1994 of a pro-rata share of percentage rents expected to be received
or earned during the year.
Total revenues should approximate $3,800,000 annually or $950,000 quarterly
based on leases currently in place. Future revenues may decrease with tenant
defaults and/or sales of Partnership properties. They may also increase with
additional rents due from tenants, if those tenants experience sales levels
which require the payment of additional rent to the Partnership.
EXPENSES
- - - --------
For the quarters ended September 30, 1995 and 1994, cash expenses amounted to
approximately 30% and 26% of total revenues, respectively. For the nine month
periods ended September 30, 1995 and 1994, cash expenses amounted to 26% and 26%
of total revenues, respectively. Total expenses, including non-cash items,
amounted to approximately 44% and 40% of total revenues for the quarters ended
September 30, 1995 and 1994, respectively and totaled 42% and 42% of total
revenues for the nine months ended September 30, 1995 and 1994, respectively.
Items negatively impacting expenses during both periods include expenses
incurred primarily in relation to the misappropriation of assets by the former
general partners and their affiliates.
For the quarters ended September 30, 1995 and 1994, expenses incurred in
relation to the misappropriated assets amounted to $130,000 and $63,000,
respectively. These expenses totaled $269,000 and $165,000 during the first
nine months of 1995 and 1994, respectively. The accrual of unbilled out-of-
pocket expenses related to the Ernst & Young lawsuit along with the payment of
expert witness fees during the second quarter of 1995 accounted for the
increase. Future expenses incurred in relation to the misappropriation will
continue to have a negative impact on the Partnership. Management has estimated
that these expenses will approximate $325,000 for the year ending December 31,
1995. The Partnership pays 40.39% of the total restoration costs incurred by
the Partnerships and receives the same percentage of all recoveries.
As noted above, management believes the Partnership's operations have yet to
stabilize to what could be considered normal, due to the negative impact of the
costs related to the recovery of the misappropriated assets. However, these
"recovery costs" are being minimized currently as indicated by the comparative
results of the Partnership's income statements, and will continue to be
minimized in the future.
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
22
<PAGE>
maintenance, insurance, or real estate taxes. If inflation causes operating
margins to deteriorate for lessees, then, inflation may well negatively impact
the portfolio through tenant defaults.
It would be misleading to associate inflation with asset appreciation for real
estate, in general, and the Partnership's portfolio, specifically. Due to the
"triple net" nature of the property leases, asset values generally move
inversely with interest rates.
PART II
ITEM 1. LEGAL PROCEEDINGS
On March 16, 1993, the Partnership, along with DiVall 1 and DiVall 3 initiated a
lawsuit against Ernst & Young LLP ("E & Y"), a certified public accounting firm,
in the Circuit Court of Dane County, Wisconsin, in connection with the audits of
the Partnerships performed by E &Y for the years 1989, 1990 and 1991. The
Complaint filed in said lawsuit alleges, among other things, that Defendant E &
Y was negligent in its audit work for the Partnerships by failing to exercise
ordinary care and failing to adhere to professional standards in the following
areas: reviewing, understanding, and auditing of compliance in regards to the
Partnership Agreements; evaluation of the adequacy of internal controls;
identification of audit risks; selection and implementation of audit procedures
to address audit risks; identification of related party transactions;
compilation of sufficient evidential matters; resolution of improper transfers
and allocations; disclosure of related party transactions; and exercise of
appropriate audit skepticism. The Partnerships request the payment of damages
in the amount of $9,000,000, plus interest, attorneys fees and costs, and
whatever additional relief the court deems just and proper. The trial of the
case will take place in Iowa County, Wisconsin and has been scheduled to begin
March 19, 1996. The Partnerships have hired legal counsel under a contingent
fee arrangement. E & Y filed an Answer denying that it was negligent, and
discovery is in process.
E & Y also filed third-party claims alleging fraud and negligence on the part of
the Partnerships' former law firm, Quarles & Brady. E & Y also filed third-
party claims against Paul Magnuson, Gary DiVall, an affiliate of the former
general partners, DiVall Real Estate Investment Corporation ("DREIC"), David
Shea ("Shea") (former Acquisitions Director for DREIC), and Lisa Shatrawka
(former Controller for DREIC and former Director of Fund Management with TPG).
In turn, Quarles & Brady has filed third party claims against KPMG Peat Marwick,
the Partnerships' accountants preceding E&Y. The Partnerships have filed claims
against Magnuson, DiVall, DREIC, Shea, and Quarles & Brady. E & Y's claims
against Ms. Shatrawka were voluntarily dismissed.
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure
the repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 1 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
On July 23, 1993, nineteen (19) of the Private Partnerships sought the
protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven
(7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies
were involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a
23
<PAGE>
security interest. These cases were subsequently transferred to the Western
District Bankruptcy Court located in Madison, Wisconsin.
The Partnership's experience in those bankruptcy cases that have concluded,
either through the approval of Plans of Reorganization, dismissal of the
bankruptcies, settlements or a combination of the foregoing, is that (i) the
collectibility of the obligations of the Private Partnerships assigned to the
Partnership has been significantly reduced and (ii) the General Partner
interests in such Private Partnerships often has little economic value. The
Partnership's recoveries in these bankruptcies have, to date, been on a steeply
discounted basis. Management anticipates that the recoveries in the remaining
unresolved bankruptcies are likely to also be on a deeply discounted basis.
Plans of reorganization have been filed in some of the bankruptcies, and
settlement agreements in many of the Private Partnerships have been reached.
Settlements in fourteen (14) of the bankruptcies to date have resulted in cash
payments to the partnerships of a total of $624,000 and notes secured by
subordinated mortgages in the aggregate face amount of $625,000, the
realizability of which is uncertain. The Partnership is continuing to
vigorously defend its interests in the remaining bankruptcies.
The Partnerships have been named as defendants in certain foreclosure actions
brought in state courts in Wisconsin. In each of these actions, the plaintiff
seeks to foreclose on real property owned by one of the Private Partnerships.
The Partnerships were named as subordinate lienholders on the properties. It is
believed that none of these cases constitute a claim against the individual
Public Partnerships. However, if the foreclosures are successful, the Private
Partnerships' interest in the underlying real estate may be extinguished,
rendering individual obligations to the Partnerships uncollectible. Such a
foreclosure has occurred in one instance, and is pending in at least one other
situation.
The Partnership is also pursuing collection actions against former tenants of
the Partnership and/or guarantors of former tenants of the Partnership arising
from defaults on their leases. Although the Partnership believes its claims are
valid, it is currently unknown whether the Partnerships will receive favorable
verdicts or whether any such verdicts will ultimately prove collectible.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits
28.0 Correspondence to the Limited Partners dated November 15, 1995
regarding the Third Quarter 1995 distribution.
(b) Reports on Form 8-K:
The Registrant filed no reports on Form 8-K during the Third Quarter of
fiscal year 1995.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
By: The Provo Group, Inc., General Partner
By: /s/Bruce A. Provo
--------------------------------------------
Bruce A. Provo, President
Date: November 10, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: The Provo Group, Inc., General Partner
By: /s/Bruce A. Provo
--------------------------------------------
Bruce A. Provo, President
Date: November 10, 1995
By: /s/Kristin J. Atkinson
-------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: November 10, 1995
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1994
<PERIOD-START> JUL-01-1995 JAN-01-1995
<PERIOD-END> SEP-30-1995 SEP-30-1995
<CASH> 723,354 723,354
<SECURITIES> 263,246 263,246
<RECEIVABLES> 2,708,731 2,708,731
<ALLOWANCES> 1,798,241 1,798,241
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,897,090 1,897,090
<PP&E> 19,675,494 19,675,494
<DEPRECIATION> 3,989,169 3,989,169
<TOTAL-ASSETS> 17,583,415 17,583,415
<CURRENT-LIABILITIES> 481,579 481,579
<BONDS> 1,148,531 1,148,531
<COMMON> 0 0
0 0
0 0
<OTHER-SE> 15,953,305 15,953,305
<TOTAL-LIABILITY-AND-EQUITY> 17,583,415 17,583,415
<SALES> 497,237 1,479,708
<TOTAL-REVENUES> 503,700 1,510,012
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 208,391 601,017
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 28,175 83,570
<INCOME-PRETAX> 267,134 825,425
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 267,134 825,425
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 267,134 825,425
<EPS-PRIMARY> 10.58 32.69
<EPS-DILUTED> 10.58 32.69
</TABLE>
<PAGE>
Exhibit 28
[LETTERHEAD OF The Provo Group]
November 15, 1995
RE: DIVALL INSURED INCOME PROPERTIES 2 L.P. (THE "PARTNERSHIP")
THIRD QUARTER 1995 DISTRIBUTION CORRESPONDENCE
Dear Limited Partner:
Enclosed please find the following:
1. Your Third Quarter 1995 distribution check amounting to approximately
$14.05 per unit representing both cash flow from operations as well as
"net" cash activity from financing and investing activities, as
presented on the Statements of Income and Cash Flow Changes;
2. Statements of Income and Cash Flow Changes for the three month period
ended September 30, 1995 and the projection for the remaining Fourth
Quarter of 1995 Distribution Period;
3. Property Summary with current updates as of September 30, 1995; and
4. Biographical Summaries for new Advisory Board Members.
THIRD QUARTER 1995 DISTRIBUTION
The Partnership is distributing $650,000 which represents $100,000 less
than projected for the period ended September 30, 1995. This decrease is
primarily a result of former G.P. affiliate litigation costs and multiple tenant
delinquencies.
The $650,000 total distribution paid for the third quarter represents an
annualized return of approximately 6.2% on the Partnership's "NET" REMAINING
INITIAL INVESTMENT of $42,000,000 as shown on page 7.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
The enclosed Statements of Income and Cash Flow Changes present results of
operations and related changes in cash flow for the third quarter ended
September 30, 1995. The Partnership had net income of $536,000 which was
$67,000 less than projected for the three month period ended September 30,
1995, based on revenues of $958,000 and expenses of $422,000.
<PAGE>
LETTER TO LIMITED PARTNERS IN DIVALL INSURED INCOME PROPERTIES 2 L.P.
November 15, 1995
Page 2
The most significant cash flow variances from our projections are as
follows:
1. Partnership "Investigation and Restoration Expenses" were $80,000
higher than budgeted for the three-month period ended September 30,
1995. This increase was due to the accrual of unbilled out-of-pocket
expenses and payment of expert witness fees related to the
Partnerships' lawsuit against Ernst & Young and Quarles & Brady.
The majority of these costs are expected to be paid upon final
settlement of the lawsuit, however, fees for expert witnesses are paid
as they are incurred. (It should be noted that these expert witness
fees will continue throughout our final phase of trial preparation as
well as the trial, which has recently been rescheduled to begin March
1996.)
2. The Partnership's current assets increased by $68,000 more than
projected which primarily represented the rents receivable due at
September 30, 1995. It is important to note that the rents receivable
balance due at quarter-end is reflective of late rental payments,
which in most cases were received shortly after the quarter closed.
The tenants of concern for the Partnership - referred to as delinquent
- are those tenants who are at least 30 days late with their rental
payments.
The delinquent tenants this quarter include Applesouth, Inc. (multiple
Applebee's restaurants); Wayne Wessels, Foods & Fun Ltd. (Country
Kitchen); Terratron, Inc. (multiple Hardee's restaurants); Stillman
Management Company (Popeye's); and Columbia Ventures, Inc. (Village
Inn).
Please refer to the "Property Summary" section for further discussion
on these tenants and their delinquencies.
3. There was a $13,000 operating expense incurred during this past
quarter which related to the prior defaulted tenant of the Hallandale,
Florida property. The Partnership was responsible for payment of
repairs on this property that were necessary to meet city code
standards.
4. Administrative costs (inclusive of registration fees, travel expenses
and office supplies) were $9,300 less than projected for the third
quarter.
Although operating revenues were slightly higher than budgeted during the
third quarter, the "investigation and restoration" costs combined with the
multiple tenants' delinquent rent issues prevented the Partnership from meeting
its budgeted distribution for the quarter.
<PAGE>
LETTER TO LIMITED PARTNERS IN DIVALL INSURED INCOME PROPERTIES 2 L.P.
November 15, 1995
Page 3
PROPERTY SUMMARY
VACANCIES
At September 30, 1995, the Partnership had one (1) vacancy; the Country
Kitchen restaurant in Cedar Rapids, Iowa. Please refer to "Rents Receivable"
section below for further information regarding this property.
RENTS RECEIVABLE
The Partnership had a delinquent rents receivable balance of approximately
$253,000 as of September 30, 1995 compared to $65,000 as of September 30, 1994.
This quarter's delinquent tenants are as follows:
Applebee's, Memphis, Tennessee and Port St. Lucie, Florida
- - - ----------------------------------------------------------
Applesouth, Inc., tenant of these two (2) Applebee's restaurants was
current on percentage rent, but remained one-month delinquent on scheduled rent
payments at September 30, 1995. The total amount owed to the Partnership at
quarter-end was $26,800. We are working with the tenant to cure this
delinquency.
It should also be noted that Applesouth, Inc. has exercised their option to
purchase both of these properties. Currently we are awaiting final contracts
and expect these sales transactions to close by November 30, 1995. These
properties are being sold for approximately 120% of the original acquisition
costs.
Country Kitchen, Cedar Rapids, Iowa
- - - -----------------------------------
The Partnership defaulted Wayne Wessels, Foods & Fund, Ltd. (tenant of
Country Kitchen) during the second quarter and gained possession of this
property on August 31, 1995. Prior to vacating the property, this tenant had a
rent receivable balance of $36,800 and has agreed to payment of this amount by
month-end.
In the interim, we have executed a sales contract for this property and
expect to close by mid-November 1995.
Hardee's, Wisconsin and West Jordan, Utah
- - - -----------------------------------------
Terratron, Inc., tenant of these multiple Hardee's restaurants continues to
be delinquent with their rental payments. According to a mutual rent deferral
agreement, a total catch-up
<PAGE>
LETTER TO LIMITED PARTNERS IN DIVALL INSURED INCOME PROPERTIES 2 L.P.
November 15, 1995
Page 4
payment was to be received by September 1995 -- which did not occur. At
September 30, 1995, this tenant had a rent receivable balance due in the amount
of $125,000.
We continue to monitor Terratron, Inc. very closely as it appears this
tenant's cash flow problems may be a result of Hardee's "concept" issues and
related sales difficulties. Currently we are awaiting a new rent deferral
proposal for 1996.
Popeye's, Park Forest, Illinois
- - - -------------------------------
Stillman Management Company, tenant of this restaurant, filed Chapter 11
Bankruptcy in March of 1994. Although they remain current on all scheduled rent
payments subsequent to the Bankruptcy, the tenant still owes the Partnership
$29,300 in percentage rent. We continue to work with Stillman Management Company
in an effort to resolve this delinquency.
Village Inn, Grand Forks, North Dakota
- - - --------------------------------------
During the quarter, the Partnership defaulted Columbia Ventures, Ltd.,
tenant of Village Inn. At September 30, 1995, this tenant had a rent receivable
balance of $35,000.
Currently, the Partnership has assigned the leasehold interests to another
Village Inn Franchise. We have also received a termination fee from the
previous tenant for $55,000 to be applied toward the rent receivable balance; a
portion of Village Inn's 1995 real estate taxes; and equipment lease
obligations.
ADVISORY BOARD
- - - --------------
The ninth Advisory Board meeting was held on October 31 and November 1,
1995. The new Board members who replaced Mr. Edward Dytko (DiVall 3), Mr.
Joseph Jianos (B/D) and Mr. Richard Leighton (DiVall 1) (whose terms expired
September 30, 1995) were given a comprehensive orientation of the Partnerships'
affairs. The new Board members are as follows:
. DR. ALBERT ESCHEN was nominated by the Limited Partners and selected
to represent DiVall Income Properties 3 Limited Partnership (DiVall 3)
and will serve a two (2) year term.
. MR. TODD WITTHOEFT was nominated and selected by the selling broker
firms of the DiVall Insured Income Fund, DiVall Insured Income
Properties 2, and DiVall Income Properties 3 Limited Partnerships.
Mr. Witthoeft accepted the position on the Board as a representative
of the brokerage community (B/D) and will serve a two (2) year term.
<PAGE>
LETTER TO LIMITED PARTNERS IN DIVALL INSURED INCOME PROPERTIES 2 L.P.
November 15, 1995
Page 5
. MR. GERHARD ZOLLER was nominated by the Limited Partners and selected
to represent DiVall Insured Income Fund Limited Partnership (DiVall 1)
and will serve a two (2) year term.
The members carrying over from the prior Board include Mr. Michael Bloom,
representing DiVall Insured Income Properties 2 Limited Partnership (DiVall 2),
and Mr. Robert Bourne, representing the real estate limited partnership
industry. Both will serve an additional one (1) year term.
For further information regarding the new Advisory Board members, please
refer to the enclosed biographical summaries.
Representatives from Arthur Andersen LLP and Popham, Haik, Schnobrich &
Kaufman, Ltd. were also in attendance at this meeting. Primary topics of
discussion included Analysis of Future Strategies for Partnership Operations or
Disposition; Former G.P. Affiliate Litigation; Third Quarter 1995 10-Q Review;
Overview of Funds; Results of Fund Operations for the Third Quarter of 1995;
Property Disposition Updates; Restoration Updates; and 1995 Independent Audit
and Partnership Tax Preparation.
RESTORATION
Since early 1993, when we began our restoration efforts for the
Partnerships, there has been much activity and information that we have been
unable to report to you due to discovery issues surrounding the former G.P.
affiliate litigation.
With almost 2 1/2 years into the process, we felt it appropriate at this
time to recap some of the events that have played a significant role or are
important to note. Below you will find a chronology of such events:
. February 1993 TPG, Inc. elected as Permanent Manager of the
------------- Partnerships.
. March 1993 TPG, Inc. established office in Madison, Wisconsin,
---------- exclusively for the management of the Partnerships and
records.
. March 1993 Partnerships filed formal complaint against Ernst &
---------- Young.
. May 1993 TPG, Inc. elected as General Partner of the
-------- Partnerships.
. June 1993 Public Partnerships' Advisory Board created for
--------- oversight and governance.
. July 1993 Nineteen (19) Private Partnerships filed for Chapter 11
--------- Bankruptcy -- forcing plans of reorganization.
. December 1993 Recoveries received by the Partnerships during 1993 -
------------- $4,400.
<PAGE>
LETTER TO LIMITED PARTNERS IN DIVALL INSURED INCOME PROPERTIES 2 L.P.
November 15, 1995
Page 6
. February 1994 Partnerships filed formal complaint against Quarles &
------------- Brady.
. March 1994 An affiliated partnership filed a complaint in U.S.
---------- District Court for the Western District of Missouri
against Boatmen's First National Bank of Kansas City.
. July 1994 Popham, Haik, Schnobrich & Kaufman, Ltd. replaced Foley
--------- & Lardner as the Partnerships' legal counsel for the
Ernst & Young and Quarles & Brady lawsuit.
. December 1994 Recoveries received by the Partnerships during 1994 -
------------- $494,000.
. August 1995 Over the objection of the Partnerships, the Judge
----------- granted Ernst & Young and Quarles & Brady their request
for a continuance -- moving trial date from January 1996
to March 1996.
. September 1995 Recoveries received by the Partnerships in 1995 through
-------------- September 1995 - $144,900.
. March 1996 Scheduled trial date for Ernst & Young and Quarles &
---------- Brady lawsuit.
Although these highlighted events are important, they are not an all-
inclusive list of the significant events that have occurred in this process of
recovery. As previously stated, other events specific to the upcoming trial are
currently not available for disclosure.
To the best of our knowledge there have been no formal indictments brought
against the former general partners at this time. It is our understanding that
investigations being conducted by the Wisconsin Attorney General's Office,
Securities and Exchange Commission and the United States Post Office are
continuing.
As the Partnerships approach the final phase of preparing for the upcoming
trial against Ernst & Young and Quarles & Brady, we continue to be aggressive in
our efforts at representing your best interests throughout this entire recovery
process.
RETURN OF CAPITAL
The following table has been updated to illustrate the breakdown of
distributions since the Partnership's first quarterly distribution, for the
period ended December 31, 1988 through September 30, 1995.
<PAGE>
LETTER TO LIMITED PARTNERS IN DIVALL INSURED INCOME PROPERTIES 2 L.P.
November 15, 1995
Page 7
<TABLE>
<CAPTION>
DISTRIBUTION CAPITAL
ANALYSIS BALANCE
------------ -----------
<S> <C> <C>
Original Capital Balance - $46,280,300
Cash Flow From Operations Since Inception $ 18,824,135 -
Total Distributions Since Inception (23,130,268) -
------------
(Return) of Capital $ (4,306,133) (4,306,133)
============ -----------
"NET" REMAINING INITIAL INVESTMENT
BY ORIGINAL PARTNERS - $41,974,167
===========
</TABLE>
QUESTIONS & ANSWERS
1. WHEN CAN I EXPECT TO RECEIVE MY SCHEDULE K-1 FOR 1995?
. Our current schedule for mailing all 1995 Schedule K-1's for your
Partnership and its affiliated partnerships is by no later than
February 28, 1996.
2. WHAT ARE THE 1996 PROJECTIONS FOR DISTRIBUTIONS?
. Final 1996 budgets for the Partnership, including distribution
projections, will be completed by year-end. These projections
will be included in your next correspondence for the fourth
quarter -- mailing date of February 15, 1996.
3. WHEN WILL 1995 PER UNIT VALUES BE AVAILABLE FOR MY INVESTMENT IN THE
PARTNERSHIP?
. The Partnership's 1995 "year-end" valuation information is
tentatively scheduled to be available by March 1996. We will
include this information in our 1995 Annual Reports which we plan
to mail by April 1996.
TO BETTER UNDERSTAND THE CONCEPT OF THE TERM VALUE, WE ENCOURAGE
YOU TO ONCE AGAIN READ THE ENCLOSED COPY OF THE APRIL 28, 1995
CORRESPONDENCE WHICH ACCOMPANIED YOUR 1994 ANNUAL REPORT.
<PAGE>
LETTER TO LIMITED PARTNERS IN DIVALL INSURED INCOME PROPERTIES 2 L.P.
November 15, 1995
Page 8
4. IF MY INVESTMENT IS CURRENTLY REGISTERED WITH A CUSTODIAN AND I WISH
TO CHANGE MY CUSTODIAN, WHAT DO I NEED TO DO?
. In order to change account registrations held by a custodian, we
require transfer documents provided and completed by the
custodians along with a $25 transfer fee made payable to DiVall
Insured Income Properties 2 Limited Partnership.
Although we do not specifically provide recommendations of
custodians for accounts, it is our understanding that many major
brokerage firms will also act as custodians in addition to many
financial institutions or banks.
Your next scheduled distribution correspondence for the Fourth Quarter of
1995 will be mailed on February 15, 1996. If you have any questions or need
additional information, please call Investor Relations at 1-800-547-7686 or
1-608-829-2992.
Sincerely,
THE PROVO GROUP, INC.
By: /s/ Brenda Bloesch
____________________________________
Brenda Bloesch
Director of Investor Relations
By: /s/ Kristin Atkinson
____________________________________
Kristin Atkinson
Vice President - Finance and Administration
Enclosures
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
DIVALL INSURED INCOME PROPERTIES 2 L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1995
- - - ------------------------------------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE PROJECTED
---------------------------------------------------------
3RD 3RD 4TH
QUARTER QUARTER BETTER QUARTER
09/30/95 09/30/95 (WORSE) 12/31/95
---------- ----------- --------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Rental income $ 911,850 $ 916,747 $ 4,897 $ 911,850
Direct financing interest 29,000 29,155 155 25,850
Interest income 9,000 8,534 (466) 9,000
Gain on sale of assets 0 0 0 0
Other income 0 3,533 3,533 0
---------- ----------- --------- ----------
TOTAL OPERATING REVENUES $ 949,850 $ 957,969 $ 8,119 $ 946,700
---------- ----------- --------- ----------
OPERATING EXPENSES
Insurance $ 14,510 $ 12,581 $ 1,929 $ 14,510
Management fees 41,925 41,715 210 41,925
Restoration fees 0 210 (210) 0
Disposition fees 0 0 0 0
Selling commissions -- 1.5% restoration 0 0 0 0
Overhead allowance 3,495 3,495 0 3,495
Advisory Board 3,200 4,926 (1,726) 3,200
Administrative 23,100 13,844 9,256 22,500
Professional services 600 555 45 600
Auditing 12,000 12,000 0 12,000
Legal 15,000 16,251 (1,251) 15,000
Leasing commissions 0 (8,077) 8,077 0
Selling commissions -- unaffiliate 0 0 0 0
Real Estate Taxes 0 0 0 18,000
Defaulted tenants 3,000 16,130 (13,130) 3,000
---------- ----------- --------- ----------
TOTAL OPERATING EXPENSES $ 116,830 $ 113,630 $ 3,200 $ 134,230
---------- ----------- --------- ----------
GROUND RENT $ 30,900 $ 30,936 $ (36) $ 30,900
---------- ----------- --------- ----------
INTEREST EXPENSE $ 9,000 $ 9,794 $ (794) $ 7,600
---------- ----------- --------- ----------
INVESTIGATION AND RESTORATION EXPENSES $ 50,000 $ 129,795 $ (79,795) $ 50,000
---------- ----------- --------- ----------
NON-OPERATING EXPENSES
Depreciation $ 140,070 $ 137,315 $ 2,755 $ 138,000
Amortization 210 201 9 210
Loss on equipment lease 0 0 0 0
---------- ----------- --------- ----------
TOTAL NON-OPERATING EXPENSES $ 140,280 $ 137,516 $ 2,764 $ 138,210
---------- ----------- --------- ----------
TOTAL EXPENSES $ 347,010 $ 421,671 $ (74,661) $ 360,940
---------- ----------- --------- ----------
NET INCOME $ 602,840 $ 536,298 $ (66,542) $ 585,760
VARIANCE
OPERATING CASH RECONCILIATION: ---------
Depreciation and amortization 140,280 137,516 (2,764) 138,210
Loss on equipment lease 0 0 0 0
Gain on sale of assets 0 0 0 0
(Increase) Decrease in current assets (39,585) (107,860) (68,275) (32,095)
Increase (Decrease) in current liabilities (11,851) 28,797 40,648 11,975
Repayment of advance from operating reserves for
unplanned timing differences 0 0 0 0
(Increase) Decrease in cash reserved for payables 10,000 0 (10,000) (5,000)
---------- ----------- --------- ----------
Net Cash Provided From Operating Activities $ 701,684 $ 594,751 $(106,933) $ 698,850
---------- ----------- --------- ----------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Payments received from affiliated partnerships 0 2,334 2,334 0
Recoveries from former G.P. affiliates 0 5,251 5,251 0
Proceeds from sale of property 0 0 0 0
Principal received on equipment leases 105,284 111,257 5,973 108,424
Principal payments on mortgage notes (62,074) (62,074) 0 (63,601)
---------- ----------- --------- ----------
Net Cash Provided from Investing And Financing
Activities $ 43,210 $ 56,768 $ 13,558 $ 44,823
---------- ----------- --------- ----------
Total Cash Flow For Quarter $ 744,894 $ 651,519 $ (93,375) $ 743,673
Cash Balance Beginning of Period 1,565,830 1,687,272 121,442 1,550,724
Less 2nd quarter distributions paid 8/95 (750,000) (1,100,000) (350,000) (750,000)
Change in cash reserved for payables or distributions (10,000) 0 10,000 5,000
---------- ----------- --------- ----------
Cash Balance End of Period $1,550,724 $ 1,238,791 $(311,933) $1,549,397
Cash reserved for 3rd quarter L.P. distributions (750,000) (650,000) 100,000 (750,000)
Cash reserved for CD security deposit (260,000) (260,000) 0 (260,000)
Cash reserved for payment of payables (370,000) (150,000) 220,000 (365,000)
---------- ----------- --------- ----------
Unrestricted Cash Balance End for Period $ 170,724 $ 178,791 $ 8,067 $ 174,397
========== =========== ========= ==========
- - - ------------------------------------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE PROJECTED
---------------------------------------------------------
* Quarterly Distribution $ 750,000 $ 650,000 $(100,000) $ 750,000
Mailing Date 11/15/95 (enclosed) -- 2/15/96
- - - -----------------------------------------------------------------------------------------------------------------------------------
* Refer to distribution letter for detail of quarterly distribution.
</TABLE>
<PAGE>
PROJECTIONS FOR DIVALL INSURED INCOME PROPETIES 2 LP
DISCUSSION PURPOSES 1995 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
<TABLE>
<CAPTION>
- - - ----------------------------------------------
<S> <C>
ORIGINAL EQUITY $46,280,300
NET DISTRIBUTION OF CAPITAL
SINCE INCEPTION $ 4,306,133
-----------
CURRENT EQUITY $41,974,167
- - - ----------------------------------------------
</TABLE>
PORTFOLIO (NOTE 1)
<TABLE>
<CAPTION>
------------------------------- ---------------------------------------------
REAL ESTATE EQUIPMENT
------------------------------- ---------------------------------------------
ANNUAL LEASE ANNUAL
- - - --------------------------------- BASE % EXPIRATION LEASE %*
CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN
- - - --------------------------------- ------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
APPLEBEE'S MEMPHIS, TN 1,077,375 143,040 13.28%
APPLEBEE'S PORT ST.LUCIE, FL 1,346,719 178,800 13.28%
APPLEBEE'S COLUMBUS, OH 1,059,465 135,780 12.82% 06/30/97 84,500 17,438 20.64%
BLOCKBUSTER OGDEN, UT 646,425 84,672 13.10%
COUNTRY KIT. CEDAR RAPIDS, IA 660,156 0 0.00%
DENNY'S N. SMYRNA BCH, FL 1,025,830 133,380 13.00%
DENNY'S DAYTONA, FL 1,029,844 136,800 13.28%
DENNY'S (2)(3) PHOENIX, AZ 295,750 41,000 13.86% 224,376 0 0.00%
DENNY'S (2) PHOENIX, AZ 972,726 86,000 8.84% 183,239 0 0.00%
DENNY'S (2) PHOENIX, AZ 865,900 100,000 11.55% 221,237 0 0.00%
DENNY'S TWIN FALLS, ID 699,032 78,000 11.16% 04/30/99 190,000 37,860 19.93%
DENNY'S (2)(3) PHOENIX, AZ 500,000 36,000 7.20% 14,259 0 0.00%
HARDEE'S S MILWAUKEE, WI 808,032 102,000 12.62%
HARDEE'S DELEVAN, WI 718,250 90,540 12.61% 01/31/96 (4) 221,813 12,426 5.60%
HARDEE'S HARTFORD, WI 686,563 86,100 12.54%
HARDEE'S MILWAUKEE, WI 1,010,045 126,000 12.47% 03/31/96 (4) 260,000 20,964 8.06%
" " 03/31/97 (4) 151,938 8,352 5.50%
HARDEE'S OCONOMOWOC, WI 802,750 101,160 12.60%
HARDEE'S W JORDAN, UT 617,907 77,880 12.60%
HARDEE'S SANDY, UT 355,847 55,440 15.58%
HARDEE'S FOND DU LAC, WI 849,767 105,960 12.47% 10/31/97 (4) 290,469 21,113 7.27%
HARDEE'S MILWAUKEE, WI 0 0 0.00% 11/30/96 780,000 236,272 30.29%
HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62%
HOSTETTLER'S DES MOINES, IA 845,000 55,584 6.58% 52,813 0 0.00%
KFC SANTA FE, NM 451,230 60,000 13.30%
MIAMI SUBS PALM BEACH, FL 743,625 32,000 4.30%
</TABLE>
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 1995 is
based on 1994 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 modified on April 4, 1992 with payments of interest only
until April 1, 1995, at which time full principal and interest payments
resumed.
PORTFOLIO
<TABLE>
<CAPTION>
---------------------------------- ------------------
TOTALS TOTAL %
---------------------------------- ON $41,974,167
- - - --------------------------------- ANNUAL EQUITY
COST LOCATION COST RECEIPTS RETURN RAISE
- - - --------------------------------- ---------------------------------- ------------------
<S> <C> <C> <C> <C>
APPLEBEE'S MEMPHIS, TN 1,077,375 143,040 13.28%
APPLEBEE'S PORT ST.LUCIE, FL 1,346,719 178,800 13.28%
APPLEBEE'S COLUMBUS, OH 1,143,965 153,218 13.39%
BLOCKBUSTER OGDEN, UT 646,425 84,672 13.10%
COUNTRY KIT. CEDAR RAPIDS, IA 660,156 0 0.00%
DENNY'S N. SMYRNA BCH, FL 1,025,830 133,380 13.00%
DENNY'S DAYTONA, FL 1,029,844 136,800 13.28%
DENNY'S (2)(3) PHOENIX, AZ 520,126 41,000 7.88%
DENNY'S (2) PHOENIX, AZ 1,155,965 86,000 7.44%
DENNY'S (2) PHOENIX, AZ 1,087,137 100,000 9.20%
DENNY'S TWIN FALLS, ID 889,032 115,860 13.03%
DENNY'S (2)(3) PHOENIX, AZ 514,259 36,000 7.00%
HARDEE'S S MILWAUKEE, WI 808,032 102,000 12.62%
HARDEE'S DELEVAN, WI 940,063 102,966 10.95%
HARDEE'S HARTFORD, WI 686,563 86,100 12.54%
HARDEE'S MILWAUKEE, WI 1,421,983 155,316 10.92%
HARDEE'S OCONOMOWOC, WI 802,750 101,160 12.60%
HARDEE'S W JORDAN, UT 617,907 77,880 12.60%
HARDEE'S SANDY, UT 355,847 55,440 15.58%
HARDEE'S FOND DU LAC, WI 1,140,236 127,073 11.14%
HARDEE'S MILWAUKEE, WI 780,000 236,272 30.29%
HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62%
HOSTETTLER'S DES MOINES, IA 897,813 55,584 6.19%
KFC SANTA FE, NM 451,230 60,000 13.30%
MIAMI SUBS PALM BEACH, FL 743,625 32,000 4.30%
Page 1 of 2
</TABLE>
<PAGE>
PROJECTIONS FOR DIVALL INSURED INCOME PROPERTIES 2 LP
DISCUSSION PURPOSES 1995 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
<TABLE>
<CAPTION>
- - - ----------------------------------------------
<S> <C>
ORIGINAL EQUITY $46,280,300
NET DISTRIBUTION OF CAPITAL
SINCE INCEPTION $ 4,306,133
-----------
CURRENT EQUITY $41,974,167
- - - ----------------------------------------------
</TABLE>
PORTFOLIO (Note 1)
<TABLE>
<CAPTION>
------------------------------- ---------------------------------------------
REAL ESTATE EQUIPMENT
------------------------------- ---------------------------------------------
ANNUAL LEASE ANNUAL
- - - --------------------------------- BASE % EXPIRATION LEASE %
CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN
- - - --------------------------------- ------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
POPEYE'S PARK FOREST, IL 580,938 77,280 13.30%
SUNRISE PS PHOENIX, AZ 1,084,503 131,340 12.11% 12/31/96 79,219 16,373 20.67%
06/30/97 19,013 3,930 20.67%
VILLAGE INN GRAND FORKS, ND 739,375 84,000 11.36% 12/31/96 105,625 21,798 20.64%
WENDY'S AIKEN, SC 633,750 90,480 14.28%
WENDY'S CHARLESTON, SC 580,938 77,280 13.30%
WENDY'S N. AUGUSTA, SC 660,156 87,780 13.30%
WENDY'S AUGUSTA, GA 728,813 96,780 13.28%
WENDY'S CHARLESTON, SC 596,781 76,920 12.89%
WENDY'S AIKEN, SC 776,344 96,780 12.47%
WENDY'S AUGUSTA, GA 649,594 86,160 13.26%
WENDY'S CHARLESTON, SC 528,125 70,200 13.29%
WENDY'S MT. PLEASANT, SC 580,938 77,280 13.30%
WENDY'S MARTINEZ, GA 633,750 84,120 13.27%
HALLANDALE TAG HALLANDALE, FL 792,188 30,000 3.79%
- - - --------------------------------- -------------------------------- ---------------------------------------------
- - - --------------------------------- -------------------------------- ---------------------------------------------
PORTFOLIO TOTALS (38 Properties) 28,881,150 3,307,536 11.45% 2,878,501 396,525 13.78%
- - - --------------------------------- -------------------------------- ---------------------------------------------
OUTSTANDING DEBT
-------------------------------- --------------------------------
AMOUNT ANNUAL CURRENT AMOUNT ANNUAL CURRENT
- - - --------------------------------- OWED DEBT INTEREST OWED DEBT INTEREST
MORTGAGED PROPERTIES 9/30/95 SERVICE RATE 9/30/95 SERVICE RATE
- - - --------------------------------- -------------------------------- --------------------------------
DENNY'S TWIN FALLS, ID 87,254 48,219 9.80%
HARDEE'S MILWAUKEE, WI 241,976 236,272 9.75%
- - - --------------------------------- ------------------------------- -------------------------------
- - - --------------------------------- ------------------------------- -------------------------------
TOTAL OUTSTANDING DEBT -- -- -- 329,230 284,491 --
- - - --------------------------------- ------------------------------- -------------------------------
- - - --------------------------------- -------------------------------- --------------------------------
NET AFTER DEBT 28,881,150 3,307,536 11.45% 2,549,271 112,034 4.39%
- - - --------------------------------- -------------------------------- --------------------------------
</TABLE>
Note: This property summary includes only current property and equipment held by
the Partnership. Equipment lease receipts shown include a return of
capital.
PORTFOLIO
<TABLE>
<CAPTION>
---------------------------------- ------------------
TOTALS TOTAL %
---------------------------------- ON $41,974,167
- - - --------------------------------- TOTAL EQUITY
CONCEPT LOCATION COST RECEIPTS RETURN RAISE
- - - --------------------------------- ---------------------------------- ------------------
<S> <C> <C> <C> <C>
POPEYE'S PARK FOREST, IL 580,938 77,280 13.30%
SUNRISE PS PHOENIX, AZ 1,182,735 151,642 12.82%
VILLAGE INN GRAND FORKS, ND 845,000 105,798 12.52%
WENDY'S AIKEN, SC 633,750 90,480 14.28%
WENDY'S CHARLESTON, SC 580,938 77,280 13.30%
WENDY'S N. AUGUSTA, SC 660,156 87,780 13.30%
WENDY'S AUGUSTA, GA 728,813 96,780 13.28%
WENDY'S CHARLESTON, SC 596,781 76,920 12.89%
WENDY'S AIKEN, SC 776,344 96,780 12.47%
WENDY'S AUGUSTA, GA 649,594 86,160 13.26%
WENDY'S CHARLESTON, SC 528,125 70,200 13.29%
WENDY'S MT. PLEASANT, SC 580,938 77,280 13.30%
WENDY'S MARTINEZ, GA 633,750 84,120 13.27%
HALLANDALE TAG HALLANDALE, FL 792,188 30,000 3.79%
- - - --------------------------------- -------------------------------- ------------------
- - - --------------------------------- -------------------------------- ------------------
PORTFOLIO TOTALS (38 Properties) 31,759,651 3,704,062 11.66% 8.82%
- - - --------------------------------- -------------------------------- ------------------
OUTSTANDING DEBT
------------------------
AMOUNT ANNUAL
- - - --------------------------------- OWED DEBT
MORTGAGED PROPERTIES 9/30/95 SERVICE
- - - --------------------------------- ------------------------
DENNY'S TWIN FALLS, ID 87,254 48,219
HARDEE'S MILWAUKEE, WI 241,976 236,272
- - - ------------------------------- ------------------------
- - - --------------------------------- -----------------------
TOTAL OUTSTANDING DEBT 329,230 284,491
- - - --------------------------------- -----------------------
- - - --------------------------------- -------------------------------- ------------------
NET AFTER DEBT 31,430,421 3,419,571 10.88% 8.15%
- - - --------------------------------- -------------------------------- ------------------
</TABLE>
<PAGE>
BIOGRAPHICAL SUMMARY FOR
ALBERT H. ESCHEN
CURRENT POSITION: Dr. Eschen has been an optometrist for 46 years and
currently shares the profession with one of his sons. Dr. Eschen is also
employed by New York City's Department of Health.
EXPERIENCE: Prior business background and experience include partnerships
or personal investments in Crown Nursing Home; Coronet Nursing Home; and
Sands Hotel & Casino.
AFFILIATIONS: Dr. Eschen is presently a member of the American Optometry
Association and is a member of the Board of Directors Illinois College
Alumni Association. Dr. Eschen was past-President of the Brooklyn Optometric
Society and was the FIRST optometrist to be appointed to New York City's
Department of Health.
PERSONAL: Dr. Eschen and his wife have residencies in Florida, New York,
and Vermont. He has two children, one son is his partner in the profession
of optometry and the other son was a Former Attorney General in Vermont who
was recently appointed to the Department of Justice. Dr. Eschen graduated
from Brooklyn College and Illinois College of Optometry. He received honorary
degrees for Doctor of Ocular Science and Fellow International College of
Ocular Science.
<PAGE>
BIOGRAPHICAL SUMMARY FOR
D. TODD WITTHOEFT
CURRENT POSITION: Mr. Witthoeft currently serves as Vice-President at Calton &
Associates, Inc., the fourth largest investment firm in Tampa, Florida. With
over 400 clients, Mr. Witthoeft has been an investment broker for over ten (10)
years including eight (8) years with Calton & Associates, Inc. Mr. Witthoeft is
a Senior Options Principal and General Principal and was one of the original
founders of this firm. Additionally, he oversees broker training and
compliance.
EXPERIENCE: While at Calton & Associates, Inc., Mr. Witthoeft was an instructor
at Daytona Beach Community College where he taught a personal financial planning
course. He presently is teaching a similar course throughout the public library
system.
Mr. Witthoeft also serves as part of the Calton & Associates, Inc. Due Diligence
Committee. This committee reviews the structure of public and private limited
partnerships prior to their offering to any client of Calton & Associates, Inc.
Mr. Witthoeft holds the following securities licenses: Options Principal,
Licensed Life Insurance Agent - series 4; General Securities Representative -
series 7; General Securities Principal - series 24; and State Agent - series 63.
AFFILIATIONS: Mr. Witthoeft is a member of the Tampa Rotary and serves as
International Services Chairperson.
PERSONAL: Mr. Witthoeft currently resides in Land O'Lakes, Florida. He has a
Bachelor of Science Degree from Illinois State University.
<PAGE>
BIOGRAPHICAL SUMMARY FOR
GERHARD H. ZOLLER
CURRENT POSITION: Mr. Zoller currently is involved in special training projects
at J.H. Findorff & Son, Inc., a leading construction firm in Wisconsin.
Mr. Zoller has worked for this company for 27 years.
EXPERIENCE: Mr. Zoller served as President for J.H. Findorff & Son, Inc. from
1979-1989 and then as Chairman of the Board from 1990-1993. Prior business
background and experience include positions as Project Manager, Estimator and
Chief Executive. Mr. Zoller has been actively managing personal investments for
over 25 years including numerous real estate limited partnerships.
AFFILIATIONS: Mr. Zoller is a member of the Rotary Club.
PERSONAL: Mr. Zoller and his wife reside in Poynette, Wisconsin. He received a
Master's Degree in Civil Engineering and a Master's Degree in Business.
