<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 June 30, 1996
------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________ to ___________
Commission file number 0-17686
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1606834
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 W. 11th Street, Suite 1110, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 421-7444
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Interests
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
-----
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
-----------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1996 1995
----------- ------------
<S> <C> <C>
INVESTMENT PROPERTIES AND EQUIPMENT:(NOTE 3)
Land $9,637,822 $10,027,077
Buildings 17,464,905 18,153,026
Equipment 669,778 669,778
Accumulated depreciation (5,556,146) (5,491,806)
---------- -----------
Net investment properties and equipment 22,216,359 23,358,075
---------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES:(NOTE 8) 516,004 590,527
OTHER ASSETS:
Cash and cash equivalents 1,237,351 1,005,764
Cash restricted for real estate taxes 213 61,217
Restoration escrow account 900,282 0
Cash held in Indemnification Trust (NOTE 11) 282,302 275,231
Rents and other receivables (net of allowance of
$141,529 in 1996 and $254,543 in 1995) 355,538 459,213
Due from current General Partner 0 275
Deferred rent receivable 278,961 296,482
Due from affiliated partnerships (NOTE 12) 0 96,088
Prepaid insurance 10,796 19,631
Unsecured notes receivable from lessees (net of
allowance of $111,762 in 1996 50,000 50,000
---------- -----------
Total other assets 3,115,443 2,263,901
---------- -----------
DUE FROM FORMER AFFILIATED:(NOTES 2 AND 12)
Due from former general partner affiliates 1,962,698 3,529,205
Allowance for uncollectible amounts
due from former affiliates (1,962,698) (2,607,104)
Restoration cost receivable 3,609,871 2,823,862
Allowance for uncollectible
restoration receivable (3,609,871) (2,823,862)
---------- -----------
Due from former affiliates, net 0 922,101
---------- -----------
Total assets $25,847,806 $27,134,604
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
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DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
-----------------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1996 1995
----------- ---------
<S> <C> <C>
LIABILITIES:
Equipment notes payable (NOTE 6) $ 0 $77,255
Accounts payable and accrued expenses 62,538 266,715
Due to current General Partner 2,413 496
Security deposits 225,197 250,577
Unearned rental income 25,046 18,065
Real estate taxes payable 62,328 57,018
----------- ------------
Total liabilities 377,522 670,126
----------- ------------
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 64,165 47,289
Cumulative cash distributions (24,995) (18,245)
----------- -------------
39,170 29,044
----------- -------------
Limited Partners (46,280.3 interests outstanding)
Capital contributions, net of offering costs 39,358,468 39,358,468
Cumulative net income 12,718,143 11,047,463
Cumulative cash distributions (25,805,268) (23,130,268)
Reallocation of former general partners' deficit capital (840,229) (840,229)
------------ ------------
25,431,114 26,435,434
------------ ------------
Total partners' capital 25,470,284 26,464,478
------------ ------------
Total liabilities and partners' capital $25,847,806 $27,134,604
============ ============
</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 June 30, Six Months Ended June 30,
---------------------------- --------------------------
1996 1995 1996 1995
-------- -------- ------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income(NOTE 5) $796,959 $921,229 $1,614,682 $1,903,023
Interest income on direct financing leases 15,471 32,311 33,644 51,042
Other interest income 30,726 16,948 50,397 46,005
Recovery of amount previously written off 14,641 0 644,406 0
Other income 3,494 4,107 25,754 6,624
Gain on disposal of assets 0 1,729 484,225 1,729
---------- ---------- ---------- ----------
861,291 976,324 2,853,108 2,008,423
---------- ---------- ---------- ----------
EXPENSES:
Partnership management fees 43,098 40,219 85,414 80,985
Disposition fees 0 3,000 20,550 3,000
Disposition fees - Restoration 0 3,000 20,550 3,000
Restoration fees 585 1,706 24,638 2,131
Appraisal fees 0 0 2,268 0
Insurance 8,796 12,456 22,441 23,779
General and administrative (NOTE 9) 52,280 28,795 75,483 63,764
Advisory Board fees and expenses 4,249 4,527 8,613 8,670
Interest 1,741 10,538 3,551 22,530
Real estate taxes 0 0 (1,709) 0
Ground lease payments (NOTE 3) 30,936 31,058 61,872 61,954
Expenses incurred due to default by lease 2,589 1,980 2,468 3,716
Professional services 42,287 50,918 78,067 83,053
Professional services related to investigation (58,284) 102,964 501,968 139,422
Loss on equipment lease 0 7,273 0 7,273
Depreciation 129,488 151,915 258,976 311,785
Amortization 201 201 402 402
---------- ---------- ---------- ----------
257,966 450,550 1,165,552 815,464
---------- ---------- ---------- ----------
NET INCOME $603,325 $525,774 $1,687,556 $1,192,959
========== ========== ========== ==========
NET INCOME - CURRENT GENERAL $6,033 $5,258 $16,876 $11,930
PARTNER
NET INCOME - LIMITED PARTNERS 597,292 520,516 1,670,680 1,181,029
---------- ---------- ---------- ----------
$603,325 $525,774 $1,687,556 $1,192,959
========== ========== ========== ==========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP INTEREST, based on 46,280.3 $12.91 $11.25 $36.10 $25.52
====== ====== ====== ======
Interest 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>
Six Months Ended June 30,
-------------------------
1996 1995
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1,687,556 $1,192,959
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 259,378 312,187
Recovery of amounts previously written off (644,406) 0
Net (gain) of disposal of assets (484,225) (1,729)
Loss on equipment lease 0 7,273
Interest applied to Indemnification Trust account (7,701) (14,298)
(Increase) Decrease in rents and other receivables 103,950 (115,452)
(Deposits) withdrawal for payment of real estate taxes 61,004 (30,691)
Decrease in prepaids 8,835 5,381
Decrease in deferred rent receivable 17,521 1,198
Increase in due to current General Partner 1,917 508
(Decrease) in accounts payable and other (204,177) (60,521)
(Decrease) in security deposit (25,380) (200)
Increase/(Decrease) in real estate taxes payable 5,310 (39,181)
Increase/(Decrease) in unearned rental income 6,980 (7,056)
------------- ------------
Net cash from operation activities 787,192 1,250,378
------------- ------------
CASH FLOW FROM (USED IN) INVESTING ACTIVITIES:
Principal payments received on direct financing leases 74,121 182,659
Proceeds from sale of investment properties 1,366,966 300,000
Recoveries from former affiliates 1,566,507 53,274
Deposit to restoration escrow accounts (900,282) 0
Payment from affiliated partnerships 96,088 23,679
------------- ------------
Net cash from investing activities 2,203,400 559,612
------------- ------------
CASH FLOW FROM (USED IN) FINANCING ACTIVITIES:
Cash distributions to Limited Partners (2,675,000) (1,680,000)
Cash distributions to current General Partner (6,750) (4,487)
Payments of equipment notes (77,255) (119,715)
------------- ------------
Net cash (used in) financing activities (2,759,005) (1,804,202)
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 231,587 5,788
CASH AND CASH EQUIVALENT AT BEGINNING OF PERIOD 1,005,764 1,349,101
------------- ------------
CASH AND CASH EQUIVALENT AT END OF PERIOD $1,237,351 $1,354,889
============= ===========
SUPPLEMENTAL DISCLOSURE-cash paid for interest $3,551 $22,530
====== =======
</TABLE>
The accompany 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 June 30, 1989, the general partners exercised their option
to extend the offering period to a date no later than February 22, 1990. The
offering closed on February 22, 1990, at which point 46,280.3 interests had been
sold, resulting in total offering proceeds, net of underwriting compensation and
other offering costs, of $39,358,468.
The Partnership is currently engaged in the business of owning and operating its
investment portfolio (the "Properties") of commercial real estate and recovering
the assets misappropriated by the former general partners and their affiliates.
The Properties are leased on a triple net basis to, and operated by, franchisors
or franchisees of national, regional, and local retail chains under long-term
leases. The lessees consist primarily of fast-food, family style, and
casual/theme restaurants, but also include a video rental store and a child care
center. At June 30, 1996, the Partnership owned 37 properties with specialty
leasehold improvements in 18 of these properties.
Deferred organization costs are amortized over a 60-month period. Deferred
costs on proposed acquisitions are capitalized as a cost of the properties upon
acquisition.
Rental revenue from investment properties is recognized on the straight-line
basis over the life of the respective lease. Revenue from direct financing
leases is recognized at level rates of return over the term of the lease.
Depreciation of the properties is provided on a straight-line basis over 31.5
years, which is the estimated useful lives of the buildings and improvements.
Equipment is depreciated on a straight-line basis over the estimated useful
lives of 5 to 7 years.
Real estate taxes on the Partnership's investment properties are the
responsibility of the tenant. However, when a tenant fails to make the required
tax payments or when a property becomes vacant, the Partnership makes the
appropriate payment to avoid possible foreclosure of the property. Taxes are
accrued in the period in which the liability is incurred.
Cash and cash equivalents include cash on deposit with financial institutions
and highly liquid temporary investments with initial maturities of 90 days or
less.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities (and disclosure of
contingent assets and liabilities) at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Partnership will be dissolved on November 30, 2010, or earlier upon the
prior occurrence of any of the following events: (a) the disposition of all
properties of the Partnership; (b) the written determination by the General
Partner that the Partnership's assets may constitute "plan assets" for purposes
of ERISA; (C) the agreement of Limited Partners owning a majority of the
outstanding interests to dissolve the Partnership; or (d) the dissolution,
bankruptcy, death, withdrawal, or incapacity of the last remaining General
Partner, unless an additional General Partner is elected previously by a
majority in interest of the Limited Partners.
6
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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, 1995, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$8,700,000.
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 $13,800,000, of which
approximately $5,573,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at June 30, 1996. The 9%
interest accrued as of June 30, 1996, amounted to approximately $1,663,000 and
is not reflected in the accompanying income statement. As of December 31, 1995,
approximately $6,353,000 was reflected as due from former affiliates based on
estimated overall misappropriation and related costs of $15,700,000. Permanent
Manager Agreement ("PMA") savings, representing cost savings to the Partnerships
as a result of the implementation of the PMA, are not credited against the due
from former affiliates account on the financial statements of the Partnership.
Subsequent to discovery, and in response to the regulatory inquiries, a third-
party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed (effective
February 8, 1993) to assume 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.
The current General Partner is vigorously pursuing recovery of the
misappropriated funds from the various sources and initially estimated an
aggregate recovery of $3 million for the Partnerships, of which approximately
$1.2 million was allocated to the Partnerships. As such, an allowance has been
established against amounts due from former general partner affiliates
reflecting the current General Partner's best estimate of probable 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 recorded by the Partnership was
reduced by approximately $644,000 during the first six months of 1996 as a
result of recoveries received in excess of the original estimate. Pending the
outcome of resolution of all sources of potential recovery, it is not possible
to determine the amount that will ultimately be recovered.
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 June
30, 1996. 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,
7
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but have not been restated due to the impracticality and uncertainty in
attempting to make such restatements. Correspondingly, management has elected to
record currently 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 June 30, 1996, the Partnership owned 34 fully constructed fast-food
restaurants, a tag agency, a video store, and a preschool. The properties are
composed of the following: ten (10) Wendy's restaurants, eight (8) Hardee's
restaurants, seven (7) Denny's restaurants, two (2) Applebee's restaurants, one
(1) Popeye's Famous Fried Chicken restaurant, one (1) Country Kitchen
restaurant, one (1) Hooter's restaurant, one (1) Kentucky Fried Chicken
restaurant, one (1) Hostetler's restaurant, one (1) Miami Subs restaurant, one
(1) Village Inn restaurant, one (1) Hallandale Tag Agency, one (1) Blockbuster
Video store, and one (1) Sunrise Preschool. The 37 properties are located in a
total of fourteen (14) states.
From time to time, the Partnership experiences interruptions in rental receipts
due to tenant delinquencies and vacancies. At June 30, 1996, one of the
Partnership's properties was unoccupied. During 1995, the tenant of the Country
Kitchen restaurant in Cedar Rapids, Iowa, vacated the property and stopped
making rent payments. Management is negotiating a potential sale or lease of
the property, and is pursuing collection of the past due rents.
The total cost of the investment properties and specialty leasehold improvements
includes the original purchase price plus acquisition fees and other capitalized
costs paid to an affiliate of the former general partners.
According to the Partnership Agreement, the former general partners were to
commit 80% of the original offering proceeds to investment in properties. Upon
full investment of the net proceeds of the offering, approximately 75% of the
original proceeds was invested in the Partnership's properties.
The 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 amounting to approximately $8,000 through
February 28, 1993. In addition, the former general partner affiliate was
entitled to receive reimbursements of general and administrative costs, either
direct or indirect, amounting to approximately $49,000 during 1993. As a result
of the Investigation, the Partnership engaged a third party as Interim Manager
in October 1992. The Interim Manager received approximately $53,000 during
1993, for management services. 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. The
minimum management fee and the maximum reimbursement for office rent and
overhead have increased annually by 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 $36,225 to date on the amounts recovered,
which has been offset against the 4% minimum fee.
The Partnership currently maintains rent insurance policies with terms expiring
in 1996 for 10 of the 37 leased properties. Terms of the rent insurance policies
call for the Partnership 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 June 30,
1996 to substantiate whether the uninsured properties had tenants with adequate
net worth at the time the leases were initiated.
8
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The tenant of the Partnership's eight (8) Hardee's restaurants has experienced
sales difficulties over the past two years. Management entered into a one year
lease modification with the tenant for 1996 resulting in a $200,000 decrease in
base rent for the year, and agreed to capitalize delinquent rents totaling
$112,000 into a five year note earning 10% interest.
The Partnership owns four (4) restaurants located on parcels of land where it
has entered into long-term ground leases. Two (2) of these leases are paid by
the tenant and two (2) are paid by the Partnership. The leases paid by the
Partnership are considered operating leases and the lease payments are expensed
in the periods to which they apply. The lease terms require aggregate minimum
annual payments of approximately $124,000 and expire in the years ranging from
1998 to 2003.
The tenant operating a Denny's restaurant on Camelback Road in Phoenix, Arizona,
has not formally exercised its option to extend its lease which expired on
January 30, 1993, but continues to operate the restaurant and pay rent.
Management is currently negotiating a possible new lease or sale of the property
to the tenant.
Several of the Partnership's property leases contained purchase option
provisions with stated purchase prices in excess of the original cost of the
properties. The current General Partner is not aware of any unfavorable
purchase options in relation to original cost. Apple South, Inc. the tenant of
two Applebee's restaurants, notified Management of its intent to exercise an
option in its lease to purchase these two properties. One sale closed in
January 1996, resulting in a gain of $484,000. The other sale is expected to
take place during the Third Quarter of 1996 at an expected gain of approximately
$450,000.
4. PARTNERSHIP AGREEMENT:
----------------------
The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that, for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
general partners. The Partnership Agreement also provided for quarterly cash
distributions from Net Cash Receipts, as defined, within 60 days after the last
day of the first full calendar quarter following the date of release of the
subscription funds from escrow, and each calendar quarter thereafter, in which
such funds were available for distribution with respect to such quarter. Such
distributions were to be made 90% to Limited Partners and 10% to the former
general partners, provided, however, that quarterly distributions were to be
cumulative and were not to be made to the former general partners unless and
until each Limited Partner had received a distribution from Net Cash Receipts in
an amount equal to 10% per annum, cumulative simple return on his or her
Adjusted Original Capital, as defined, from the Return Calculation Date, as
defined.
Net Proceeds, as originally defined, were to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a Liquidation Preference equal to a 13.5% per annum, cumulative
simple return on Adjusted Original Capital from the Return Calculation date
including in the calculation of such return all prior distributions of Net Cash
Receipts and any prior distributions of Net Proceeds under this clause; and (C)
then, to Limited Partners, 90% and to the General Partners, 10%, of the
remaining Net Proceeds available for distribution.
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
9
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made to the current General Partner unless and until each Limited Partner has
received a distribution from Net Cash Receipts in an amount equal to 10% per
annum, cumulative simple return on his or her Adjusted Original Capital, as
defined, from the Return Calculation Date, as defined, except to the extent
needed by the General Partner to pay its federal and state income taxes on the
income allocated to them attributable to such year. Distributions paid to the
General Partner are based on the estimated tax liability resulting from
allocated income. Subsequent to the filing of the General Partner's income tax
returns, a true-up with actual distributions is made.
The provisions regarding distribution of Net Proceeds, as defined, were also
amended to provide that Net Proceeds are to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a Liquidation Preference equal to a 13.5% per annum, cumulative
simple return on Adjusted Original Capital from the Return Calculation Date
including in the calculation of such return on all prior distributions of Net
Cash Receipts and any prior distributions of Net Proceeds under this clause,
except to the extent needed by the General Partner to pay its federal and state
income tax on the income allocated to its attributable to such year; and (C)
then, to Limited Partners, 99%, and to the General Partner, 1%, of remaining Net
Proceeds available for distribution.
Additionally, per the amendment of the Partnership Agreement dated May 26, 1993,
the total compensation paid to all persons for the sale of the investment
properties shall be limited to a competitive real estate commission, not to
exceed 6% of the contract price for the sale of the property. The General
Partner may receive up to one-half of the competitive real estate commission,
not to exceed 3%, provided that the General Partner provides a substantial
amount of services in the sales effort. It is further provided that a portion
of the amount of such fees payable to the General Partner is subordinated to its
success in recovering the funds misappropriated by the former general partners.
(See Note 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 breakpoints.
The lessee is responsible for occupancy costs such as maintenance, insurance,
real estate taxes, and utilities. Accordingly, these amounts are not reflected
in the statements of income except in circumstances where, in management's
opinion, the Partnership will be required to pay such costs to preserve its
assets (i.e., payment of past-due real estate taxes). Management has determined
that the leases are properly classified as operating leases; therefore, rental
income is reported when earned and the cost of the property, excluding the cost
of the land, is depreciated over its estimated useful life.
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending
December 31,
1996 $ 3,048,076
1997 3,221,602
1998 3,123,336
1999 3,156,936
2000 3,153,604
Thereafter 26,571,560
----------
$42,275,114
==========
</TABLE>
Eight (8) of the Partnership's properties are leased to Terratron, Inc., a
franchisee of Hardee's restaurants and ten (10) of the properties are leased to
Wensouth, a franchisee of Wendy's restaurants. Terratron base rents accounted
for 22% of total base rents for 1995, and Wensouth accounted for 25% of base
rents for 1995. Due to sales difficulties experienced by Terratron, a one (1)-
year lease modification was entered into, reducing 1996 base rents by
approximately $200,000. Additionally, delinquent rent totaling $112,000 was
capitalized into a five (5) year note accruing interest at 10% per annum. The
amount of rent capitalized was also written off as uncollectible at December 31,
1995.
10
<PAGE>
6. EQUIPMENT NOTE PAYABLE:
-----------------------
In August 1992, the Partnership executed a note payable in the amount of
$190,000 with Norwest Equipment Finance, Inc., for equipment placed in the
Denny's restaurant located in Twin Falls, Idaho. The note was payable in
monthly installments of $4,018, including interest at 9.8% through September
1997 and was secured by the equipment under a direct financing lease with an
initial cost of $190,000. The note was repaid in full during April 1996.
7. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the six-month periods ended June
30, 1996 and 1995 are as follows.
<TABLE>
<CAPTION>
Incurred as of Incurred as of
Current General Partner June 30, 1996 June 30, 1995
- - ----------------------- -------------- --------------
<S> <C> <C>
Management fees $85,414 $80,985
Disposition fees 20,550 3,000
Restoration fees 24,638 2,131
Overhead allowance 7,118 6,926
Reimbursement for out-of-pocket expenses 11,148 7,906
Cash distribution 6,750 4,487
------- -------
$155,618 $105,435
======== ========
</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 comprised of the following as of June
30, 1996:
<TABLE>
<S> <C>
Minimum lease payments receivable $595,806
Estimated residual values of leased
property (non-recourse) 22,364
Acquisition fees, net 402
Less-Unearned income (102,568)
---------
Net investment in direct
financing leases $516,004
=========
</TABLE>
At June 30, 1996, future minimum lease payments for each of the five succeeding
fiscal years are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1996 $112,893
1997 196,139
1998 177,791
1999 131,347
--------
$618,170
========
</TABLE>
During 1995, it was determined that the residual values of the equipment leases
were overstated. Accordingly, they were written down to their estimated net
realizable values as of December 31, 1995. The total amount of the write-down
was approximately $72,000.
11
<PAGE>
9. GENERAL AND ADMINISTRATIVE EXPENSES:
------------------------------------
For the periods ended June 30, 1996 and 1995, general and administrative
expenses incurred by the Partnership were as follows:
Three Months Ended June 30, 1996 and 1995, general and administrative expenses
incurred by the partnership were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
Communication costs $30,218 $22,693 $42,041 $35,229
Other administration 741 1,103 3,541 3,563
Travel costs 1,144 918 1,924 1,901
Overhead allowance 3,592 3,493 7,118 6,926
Registration/filing fees 3,090 588 7,364 4,942
Income taxes 13,495 0 13,495 11,203
------- ------- ------- -------
$52,280 $28,795 $75,483 $63,764
======= ======= ======= =======
</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 have been paid directly to the restoration account and
then distributed among the three Partnerships. Fifty percent (50%) of the total
amount paid to the recovery was refunded to the current General Partner during
March 1996 after exceeding the recovery level of $4,500,000. The remaining
amount allocated to the Partnership may be owed to the current General Partner
if the $6,000,000 recovery level is met. As of June 30, 1996, the Partnership
may owe the current General Partner $16,296, which is currently reflected as a
recovery, if the $6,000,000 recovery level is achieved.
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 Indemnification Trust ("Trust") serving such purposes has been
established at United Missouri Bank, N.A. The Trust has been fully funded with
Partnership assets as of June 30, 1996. Funds are invested in U.S. Treasury
securities. In addition, $32,302 of earnings have been credited to the Trust as
of June 30, 1996. 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
<PAGE>
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. These amounts
have been fully repaid by DiVall 3 as of June 30, 1996.
Recoveries realized by the Partnerships are being distributed to each respective
partnership on the same basis as the restoration costs are currently being
allocated. Any available recovery funds have been utilized first to satisfy
amounts due other partnerships for amounts advanced under prior allocation
methods. As of June 30, 1996, the Partnerships recovered a total of
approximately $4,578,000 from the former general partners and their affiliates,
accountants and attorneys. Of this amount, the Partnership received its pro-rata
share in the amount of $1,852,000. Additionally, $40,347, representing 25% of
all disposition fees earned by the General Partner have been paid to the
recovery. Of that amount, $16,296 was allocated to the Partnership and is
contingently payable to the General Partner upon achievement of the final
recovery level as described in Note 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 proceeds to each respective
partnership. Management has concluded that a fair and reasonable interim
accounting for recovery proceeds can be accomplished at the partnership level in
a manner similar to restoration costs which are paid directly by the
Partnerships. Management reserves the right to cause the final allocation of
such costs and recoveries to be determined either by a vote of the Limited
Partners or a court of competent jurisdiction. Potential sources of recoveries
include third party litigation, promissory notes, land contracts, and personal
assets of the former general partners and their affiliates.
On March 24, 1994, an affiliated partnership, DiVall 1, filed a complaint in the
United States District Court for the Western District of Missouri against
Boatmen's First National Bank of Kansas City ("Boatmen's) seeking a declaratory
judgment that Boatmen's has no right or interest in a promissory note executed
in the name of DiVall 1 by the former general partners (the "Note") secured by
mortgages on five DiVall 1 properties, and further seeking an injunction against
foreclosure proceedings instituted against a DiVall 1 property located in
Dallas, Texas under a first deed of trust and security agreement given to secure
the Note (the "Foreclosure"). The former general partners borrowed $600,000
during or before 1991 from Metro North State Bank (now Boatmen's). The proceeds
of the Note were not received by DiVall 1. As of June 30, 1996, 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 June 30, 1996, interest in the amount of $200,000 had accrued but was unpaid
on the Note. Interest is accrued at the face rate of the Note. If DiVall 1
loses the case against Boatmen's, additional interest totaling approximately
$218,000, representing the default rate of interest may be due. Boatmen's has
agreed to stay its foreclosure proceedings pending the outcome of the
litigation. Boatmen's answered the complaint and filed a motion for summary
judgment to which DiVall 1 responded. The District Court granted Boatmen's
motion for summary judgement. DiVall 1 appealed and the Eighth Circuit Court of
Appeals reversed the District Court's ruling. The case was sent back to the
District Court for further discovery and trial. Pursuant
13
<PAGE>
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.
13. LITIGATION:
-----------
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure
the repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 1 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
On July 23, 1993, nineteen (19) of the Private Partnerships sought the
protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven
(7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies
were involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest. These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.
The Partnership's experience in those bankruptcy cases that have concluded,
either through the approval of Plans of Reorganization, dismissal of the
bankruptcies, settlements or a combination of the foregoing, is that (I) the
value of the obligations of the Private Partnerships assigned to the Partnership
has been at a significant discount to their face amounts, and (ii) the General
Partner interests in such Private Partnerships often have little economic value.
The Partnership's recoveries in these bankruptcies have, 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 eighteen (18) of the bankruptcies to date have resulted in cash
payments to the Partnerships of a total of $573,000 and notes secured by
subordinated mortgages in the aggregate amount of $625,000. The Partnership is
continuing to vigorously defend its interests in the remaining bankruptcies.
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 August 15, 1996, the Partnership made distributions to the Limited Partners
for the Second Quarter of 1996 of $1,650,000 amounting to approximately $35.65
per limited partnership interest.
14
<PAGE>
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 June
30, 1996, were originally purchased at a price, including acquisition costs, of
approximately $28,500,000.
The tenant of the Country Kitchen restaurant in Cedar Rapids, Iowa vacated the
property during 1995 and ceased paying rent. Management is negotiating a
potential sale or lease of the property.
Apple South, Inc. the tenant of two Applebee's restaurants in Tennessee and
Florida, notified management of their intent to exercise an option in their
lease to purchase those properties. The Tennessee property was sold to Apple
South during January 1996, resulting in a gain of approximately $484,000. The
sale of the Florida property is expected to take place in the Third Quarter of
1996 at an expected gain of approximately $450,000.
Terratron, Inc., the lessee of eight (8) Hardee's restaurants has experienced
sales difficulties over the past two years. Management entered into a one year
lease modification with the tenant which reduces base rents for 1996 by
approximately $200,000. Additionally, delinquent rent totaling $112,000 was
capitalized into a five (5) year note accruing interest at 10% per annum. The
amount of rent capitalized was also written off as uncollectible at December 31,
1995.
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, amounted to $516,000 at June 30, 1996,
compared to $591,000 at December 31, 1995. The decrease of $75,000 was a result
of principal payments received.
OTHER ASSETS
- - ------------
Cash and cash equivalents, including cash restricted for real estate taxes and
cash held in restoration escrow was approximately $2,138,000 at June 30, 1996,
compared to $1,067,000 at December 31, 1995. The Partnership designated cash of
$1,650,000 to fund the Second Quarter 1996 distributions to Limited Partners,
$310,000 for the payment of accounts payable and accrued expenses, and the
remainder represents reserves deemed necessary to allow the Partnership to
operate normally. Cash generated through the operations of the Partnership's
investment properties, sales of investment properties and any recoveries of
misappropriated funds by the former general partners, will provide the sources
for future fund liquidity and Limited Partner distributions.
A restoration escrow account was established during the First Quarter of 1996,
and $890,000, representing the net proceeds to the Partnership from the
settlement of litigation against the former accountants and attorneys, was
deposited to the account. For information regarding the settlement, refer to
PART II, Item 2 of this report. Interest deposited to the account during the
Second Quarter of 1996, totaled $10,000. The total balance of this account is
being distributed to the limited partners as part of the Second Quarter
distribution on August 15, 1996.
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.
15
<PAGE>
DUE FROM AFFILIATED PARTNERSHIPS, DUE FROM FORMER AFFILIATES, ALLOWANCE FOR
- - ---------------------------------------------------------------------------
UNCOLLECTIBLE AMOUNTS DUE FROM FORMER AFFILIATES AND DEFERRED INCOME
- - --------------------------------------------------------------------
Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $1,963,000 at June
30, 1996. The receivable decreased from December 31, 1995 due to $1,567,000 of
recoveries received from the former general partners and their affiliates,
including the settlement received in the litigation against the Partnerships'
former accountants and attorneys.
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 $2,824,000 at December 31, 1995, to
$3,610,000 at June 30, 1996, and includes $1,663,000 of cumulative accrued
interest.
The current General Partner is vigorously pursuing recovery of the
misappropriated funds from the various sources and initially estimated an
aggregate recovery of $3 million for the Partnerships, of which approximately
$1.2 million was allocated to the Partnership. As such, an allowance was
established against amounts due from the former general partners and their
affiliates reflecting the current General Partner's original estimate of
probable loss from misappropriated amounts. This allowance was allocated among
the Partnerships based on each Partnership's pro rata share of the total
misappropriation. The amount of the allowance recorded by the Partnership was
reduced by approximately $644,000 during the first six months of 1996 as a
result of recoveries received in excess of the original estimates.
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. the allocation is adjusted periodically 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 a corresponding reduction reflected in professional expenses
related to the Investigation, former general partner removal expenses, and
interim fund manager fees and expenses. Recoveries allocated to DiVall 3 have
been used to repay amounts owed to the Partnership. At December 31, 1995, the
remaining amount due from DiVall 3 for restoration costs was $74,000. The total
amount due was repaid by DiVall 3 during March 1996 from recoveries received.
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 June 30, 1996.
LIABILITIES
- - -----------
Accounts payable and accrued expenses at June 30, 1996, in the amount of
$63,000, primarily represented the accrual of legal and auditing fees. The
decrease from December 31, 1995, is a result of the payment of out-of-pocket
costs associated with the litigation against the Partnerships' former
accountants and attorneys.
The equipment note payable in the amount of $77,000 at December 31, 1995, was
repaid during the Second Quarter of 1996 from the proceeds of the sale of the
Applebee's property in Memphis, Tennessee.
16
<PAGE>
PARTNERS' CAPITAL
- - -----------------
Net income for the quarter was allocated between the General Partner and the
Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement and the Amendment to the Partnership Agreement, as discussed more
fully in Note 4 of the financial statements. The former general partners'
deficit capital account balance was reallocated to the Limited Partners at
December 31, 1993. Refer to Note 14 to the financial statements for additional
information regarding the reallocation.
Cash distributions paid to the Limited Partners and to the General Partner
during 1996 of $2,675,000 and $6,750, respectively, have also been in accordance
with the amended Partnership Agreement. The Second Quarter 1996 distribution of
$1,650,000 was paid to the Limited Partners on August 15, 1996.
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. However, the settlement of litigation
against the Partnership's former accountants and attorneys should result in
operating results going forward which more closely represent "normal" operations
than what has been experienced during the past three years.
The Partnership reported net income for the quarter ended June 30, 1996, in the
amount of $603,000 compared to net income for the quarter ended June 30, 1995,
of $526,000. For the six months ended June 30, 1996 and 1995, net income
totaled $1,688,000 and $1,193,000, respectively. Results for all 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 and tenant defaults. The costs associated with the
misappropriation increased significantly during the First Quarter of 1996 as the
lawsuit against the former general partner accountants and attorneys got closer
to trial and as a result of contingent fee payments made in connection with the
settlement. These costs decreased during the Second Quarter of 1996 due to the
settlement of the litigation.
REVENUES
- - --------
Total revenues were $861,000 and $976,000, for the quarters ended June 30, 1996
and 1995, respectively, and were $2,853,000 and $2,008,000 for the six months
ended June 30, 1996 and 1995, respectively. 1996 revenue included a recovery
of amounts due from the former general partners which had been previously
written off and a gain on the sale of an Applebee's property.
Total revenues should approximate $3,000,000 annually or $750,000 quarterly
based on leases currently in place. Future revenues may decrease with tenant
defaults and/or sales of Partnership properties. They may also increase with
additional rents due from tenants, if those tenants experience sales levels
which require the payment of additional rent to the Partnership. The decrease
from 1995 to 1996 is a result of property sales as well as the one (1) year
lease modification entered into with Terratron, the tenant of eight (8) Hardee's
restaurants.
EXPENSES
- - --------
For the quarters ended June 30, 1996 and 1995, cash expenses amounted to
approximately 15% and 30%, of total revenues, respectively. For the six months
ended June 30, 1996 and 1995, cash expenses totaled 32% and 25%, respectively.
Total expenses, including non-cash items, amounted to approximately 30% and 46%,
of total
17
<PAGE>
revenues for the quarters ended June 30, 1996 and 1995, respectively, and were
41% for both of the six months ended June 30, 1996 and 1995. Items negatively
impacting expenses include expenses incurred primarily in relation to the
misappropriation of assets by the former general partners and their affiliates.
For the six months ended June 30, 1996 and 1995, expenses incurred in relation
to the misappropriated assets amounted to $502,000 and $139,000, respectively.
Future expenses incurred in relation to the misappropriation should have a
minimal impact on the Partnership.
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.
INFLATION:
- - ----------
Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio of triple net leases. By their nature, such leases actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes. If inflation causes operating margins to deteriorate for lessees
if expenses grow faster than revenues, then, inflation may well negatively
impact the portfolio through tenant defaults.
It would be misleading to associate inflation with asset appreciation for real
estate, in general, and the Partnership's portfolio, specifically. Due to the
"triple net" nature of the property leases, asset values generally move
inversely with interest rates.
PART II - OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure
the repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 1 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
On July 23, 1993, nineteen (19) of the Private Partnerships sought the
protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven
(7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies
were involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest. These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.
The Partnership's experience in those bankruptcy cases that have concluded,
either through the approval of Plans of Reorganization, dismissal of the
bankruptcies, settlements or a combination of the foregoing, is that (i) the
value of the obligations of the Private Partnerships assigned to the
Partnerships have been at a significant discount to their face amounts, and (ii)
the General Partner interests in such Private Partnerships often have little
economic value. The Partnership's recoveries in these bankruptcies have, 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.
18
<PAGE>
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 eighteen (18) of the bankruptcies to date have resulted in cash
payments to the Partnerships of a total of $573,000 and notes secured by
subordinated mortgages in the aggregate amount of $625,000. 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 August 15, 1996,
regarding the Second Quarter 1996 distribution.
(b) Reports on Form 8-K:
The Registrant filed no reports on Form 10-K during the second quarter of
fiscal year 1996.
19
<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: ___________________________
Bruce A. Provo, President
Date: August 14, 1996
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: ___________________________
Bruce A. Provo, President
Date: August 14, 1996
By: ____________________________
Kristin J. Atkinson
Vice President - Finance and Administration
Date: August 14, 1996
20
<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: August 14, 1996
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: August 14, 1996
By: /s/Kristin J. Atkinson
----------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: August 14, 1996
21
<PAGE>
THE PROVO GROUP
[LETTERHEAD OF The Provo Group]
August 15, 1996
RE: SECOND QUARTER 1996 CORRESPONDENCE
DIVALL INSURED INCOME PROPERTIES 2, L.P. (THE "PARTNERSHIP")
Dear Limited Partner:
______________________________
SECOND QUARTER 1996 HIGHLIGHTS
. The Wisconsin ATTORNEY GENERAL'S Office is SEEKING investor INPUT before
sentencing Gary J. DiVall and Paul E. Magnuson. (See enclosed correspondence
from the Office of Crime Victim Services.)
. "NET" settlement PROCEEDS from the Quarles & Brady and Ernst & Young lawsuit
were DISTRIBUTED this quarter. (See "Statements of Income and Cash Flow
Highlights" below.)
. Unauthorized "THIRD-PARTY" solicitations causing investor concern.
(See Questions & Answers below.)
______________________________
SECOND QUARTER 1996 "DISTRIBUTION" HIGHLIGHTS
. 7.8% (approx.) annualized return from operations and other sources and 2.3%
(approx.) non-annualized return of capital from distributed "net" settlement
dollars based on $38,886,000 ("net" remaining initial investment).
. $1,650,000 "total" amount distributed for the SECOND QUARTER 1996 which was
$1,000,000 more than budgeted, primarily due to the disbursement of "net"
settlement dollars.
. $35.65 per unit (approx.) for the SECOND QUARTER 1996 from both cash flow from
----
operations and "net" cash activity from financing and investing activities.
. $690.00 "total" per unit (approx.) distributed SINCE INCEPTION from both cash
----
flow from operations and "net" cash activity from financing and investing
activities. (NOTE: ORIGINAL UNITS WERE PURCHASED FOR $1,000/UNIT.)
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2, L.P
August 15, 1996
Page 2
______________________________
STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS
. 11% increase in TOTAL OPERATING REVENUES from projections.
. 19% decrease in "TOTAL" EXPENSES from projections.
. 31% increase in NET INCOME from projections.
. $890,000 total "NET" SETTLEMENT DOLLARS from the Quarles & Brady and Ernst &
Young lawsuit were distributed for the quarter ended June 30, 1996.
. $106,000 reversal of RESTORATION COSTS WHICH were previously accrued for the
Partnership.
. $53,000 MORE in RENTAL INCOME than budgeted
was recorded during the second quarter due to
percentage rents.
______________________________
PROPERTY HIGHLIGHTS
VACANCIES
---------
. There was one vacancy at June 30, 1996; COUNTRY KITCHEN (Cedar Rapids, IA).
---
Earlier this year, the Partnership had executed a sales contract with a
"prospective" buyer for this property, however, the closing was delayed due to
environmental issues. These environmental issues -- which are soon to be
resolved -- were caused by an adjoining property and management is comfortable
there is no material impact. The Partnership is, however, negotiating "new"
terms to lease (with an option to buy) to the same potential buyer.
OTHER PROPERTY MATTERS
----------------------
. Apple South, Inc., tenant of APPLEBEE'S restaurant (Port St. Lucie, FL), was
delinquent at June 30, 1996, but has since cured this delinquency. As
discussed in our last correspondence, the prior delinquency was a result of a
dispute on the "final" sale price of this property. During the second quarter,
the purchase price of $1,535,000 was mutually agreed upon, and the closing is
scheduled to occur by third quarter.
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2, L.P.
August 15, 1996
Page 3
______________________________
PROPERTY HIGHLIGHTS (CONT'D)
OTHER PROPERTY MATTERS (CONT'D)
-------------------------------
. (cont'd) *NOTE: Apple South, Inc. had exercised their option to purchase
this APPLEBEE'S restaurant at NO LESS THAN 120% of the original
costs.
. Terratron, Inc., tenant of HARDEE'S restaurant (Fond du Lac, WI), remains
current on its monthly rental payments; however, they continue to experience
-------
difficulties with their CATCH-UP rental payments due the Partnership.
______________________________
RESTORATION HIGHLIGHTS
. Recoveries received during the SECOND QUARTER 1996 totalled $14,600 (approx.)
for the Partnership.
. "Total" recoveries received TO DATE for the Partnership amount to
approximately $1,868,000.
. As previously communicated, the Partnership is in the discovery stage prior to
the trial against BOATMEN'S First National Bank of Kansas City. The TRIAL has
been scheduled for MARCH of 1997.
. The Partnership continues to monitor and negotiate the remaining settlements
as they arise with the DiVall "PRIVATE" Partnerships.
______________________________
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 June 30, 1988 through June 30, 1996.
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2, L.P.
August 15, 1996
Page 4
______________________________
RETURN OF CAPITAL (CONT'D)
<TABLE>
<CAPTION>
=============================================================================
DISTRIBUTION CAPITAL
------------ -------
ANALYSIS BALANCE
-------- -------
<S> <C> <C>
Original Capital Balance - $46,280,300
Cash Flow From Operations Since Inception $20,060,743 -
Total Distributions Since Inception (27,455,268) -
------------
(Return) of Capital $(7,394,525) (7,394,525)
============ -----------
"NET" REMAINING INITIAL INVESTMENT
BY ORIGINAL PARTNERS - $38,885,775
===========
=============================================================================
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
______________________________
QUESTIONS & ANSWERS
1. WHAT IS THE "CURRENT" VALUE OF MY INVESTMENT IN THE PARTNERSHIP?
. According to the Partnership Agreement, we are required to provide
valuation information annually which was approximately $650 per unit
at December 31, 1995.
It is important to understand, however, that your investment value
will most likely diminish whenever "original" capital is returned to
--------
you. For example, this quarter's distribution included "net"
settlement proceeds which is considered return of capital. The overall
impact of this $19.23 (approx.) per unit amount (reflective of "net"
settlement dollars) on 1996's valuation will not be determined until
early 1997.
2. HAS THERE BEEN ANY DECISION MADE REGARDING THE PARTNERSHIP'S LIQUIDATION
ALTERNATIVES OR THE POSSIBILITY OF REPOSITIONING ITS ASSETS?
. No decision has been made at this time. The Advisory Board has
requested feedback from the investor community to assist in our
decision-making process. (See enclosed letter from the Advisory
Board.)
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2, L.P.
August 15, 1996
Page 5
______________________________
QUESTIONS & ANSWERS (CONT'D)
3. WHAT ARE MY "IMMEDIATE" LIQUIDATION OPTIONS FOR INTERESTS IN THE PARTNERSHIP?
. The only option for immediate liquidation of interests, at this time, is
through the secondary market. According to current secondary market
trading information provided to management, interests in the Partnership
are selling between $425-$575 per unit.
It is important to note that there has been a recent increase in the
frequency of direct "solicitations" of your interests by third parties.
Since we do not have control or support these solicitation efforts, we
-- ---
strongly urge you to thoroughly review all your options and understand
-------- ---
their motivation -- prior to any liquidation.
We have no affiliation with any "third-party" solicitors of your
--
interests; and, as noted above, we do not support any "unsolicited
written offers" that you may receive. If you are in receipt of such
offers and have questions regarding your investment, we encourage you to
contact us.
As always, if you have any questions or need additional information, please
contact Investor Relations at 1-800-547-7686 or 1-608-829-2992. All written
inquiries may be mailed or faxed to:
THE PROVO GROUP, INC.
Post Office Box 2137
Madison, Wisconsin 53701-2137
(FAX 608-829-2996)
Sincerely,
THE PROVO GROUP, INC.
By: /s/ Brenda Bloesch By: /s/ Kristin Atkinson
------------------------------- ----------------------------
Brenda Bloesch Kristin Atkinson
Director of Investor Relations V.P. - Finance and Administration
Enclosures
<PAGE>
- - --------------------------------------------------------------------------------
DIVALL INSURED INCOME PROPERTIES 2 L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 1996
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROJECTED ACTUAL VARIANCE
-------------------------------------------------------
2ND 2ND
QUARTER QUARTER BETTER
OPERATING REVENUES 6/30/96 6/30/96 (WORSE)
-------------- ---------------- ------------------
<S> <C> <C> <C>
Rental income $743,857 $796,959 $53,102
Direct financing interest 15,478 15,471 (7)
Interest income 16,944 30,726 13,782
Recovery of amounts previously written off 0 14,641 14,641
Other income 0 3,494 3,494
-------------- ---------------- ------------------
TOTAL OPERATING REVENUES $776,279 $861,291 $85,012
-------------- ---------------- ------------------
OPERATING EXPENSES
Insurance $8,009 $8,796 ($787)
Management fees 43,182 43,098 84
Restoration fees 0 585 (585)
Overhead allowance 3,600 3,592 8
Advisory Board 4,600 4,249 351
Administrative 30,433 48,690 (18,257)
Professional services 946 1,687 (741)
Auditing 12,000 13,237 (1,237)
Legal 12,600 27,363 (14,763)
Defaulted tenants 300 2,589 (2,289)
-------------- ---------------- ------------------
TOTAL OPERATING EXPENSES $115,670 $153,886 ($38,216)
-------------- ---------------- ------------------
GROUND RENT $30,945 $30,936 $9
-------------- ---------------- ------------------
INTEREST EXPENSE $0 $1,741 ($1,741)
-------------- ---------------- ------------------
INVESTIGATION AND RESTORATION EXPENSES $47,257 ($58,284) $105,541
-------------- ---------------- ------------------
NON-OPERATING EXPENSES
Depreciation $123,291 $129,488 ($6,197)
Amortization 201 201 0
-------------- ---------------- ------------------
TOTAL NON-OPERATING EXPENSES $123,492 $129,689 ($6,197)
-------------- ---------------- ------------------
TOTAL EXPENSES $317,364 $257,968 $59,396
-------------- ---------------- ------------------
NET INCOME $458,915 $603,323 $144,408
OPERATING CASH RECONCILIATION: VARIANCE
------------------
Depreciation and amortization 123,492 129,689 6,197
Recovery of amounts previously written off 0 (14,641) (14,641)
(Increase) Decrease in current assets (47,661) (57,073) (9,412)
Increase (Decrease) in current liabilities (8,106) (66,531) (58,425)
Decrease in Security Deposits 0 (10,380) (10,380)
(Increase) Decrease in cash reserved for payables 3,000 130,000 127,000
Advance from/(to) future cash flows for current distributions 80,000 60,000 (20,000)
-------------- ---------------- ------------------
Net Cash Provided From Operating Activities $609,640 $774,387 $164,747
-------------- ---------------- ------------------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Payments received from affiliated partnerships 0 0 0
Recoveries from former G.P. affiliates 0 14,641 14,641
Disbursement from Restoration Escrow 0 889,945 889,945
Principal received on equipment leases 39,011 38,412 (599)
Sale of Investment Properties 0 0 0
Principal payments on mortgage notes 0 (67,010) (67,010)
-------------- ---------------- ------------------
Net Cash Provided From Investing And Financing
Activities $39,011 $875,988 $836,977
-------------- ---------------- ------------------
TOTAL CASH FLOW FOR QUARTER $648,651 $1,650,375 $1,001,724
Cash Balance Beginning of Period 3,740,608 2,702,470 (1,038,138)
Less 1st quarter distributions paid 5/96 (3,375,000) (2,025,000) 1,350,000
Change in cash reserved for payables or future distributions (83,000) (190,000) (107,000)
-------------- ---------------- ------------------
Cash Balance End of Period $931,259 $2,137,845 $1,206,586
Cash reserved for 2nd quarter L.P. distributions (650,000) (1,650,000) (1,000,000)
Cash reserved for future distributions 0 (40,000) (40,000)
Cash reserved for payment of payables (122,000) (270,000) (148,000)
-------------- ---------------- ------------------
Unrestricted Cash Balance End of Period $159,259 $177,845 $18,586
============== ================ ==================
- - -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
PROJECTED ACTUAL VARIANCE
------------------------------------------------------
<S> <C> <C> <C>
* Quarterly Distribution $650,000 $1,650,000 $1,000,000
Mailing Date 8/15/96 (enclosed) -
- - -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Refer to distribution letter for detail of quarterly distribution.
<PAGE>
PROJECTIONS FOR
DISCUSSION PURPOSES
DIVALL INSURED INCOME PROPERTIES 2 LP
1996 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
<TABLE>
<CAPTION>
PORTFOLIO (Note 1)
------------------------------------- ---------------------------------------------------
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> <C>
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 94,836 14.67%
COUNTRY KIT. CEDAR RAPIDS, IA 660,156 0 0.00%
DENNY'S N. SYMRNA BCH, FL 1,025,830 133,380 13.00%
DENNY'S DAYTONA, FL 1,029,844 136,800 13.28%
DENNY'S (2)(3) PHOENIX, AZ 295,750 39,000 13.19% 224,376 0 0.00%
DENNY'S (2) PHOENIX, AZ 972,726 84,000 8.64% 183,239 0 0.00%
DENNY'S (2) PHOENIX, AZ 865,900 86,000 9.93% 221,237 0 0.00%
DENNY'S TWIN FALLS, ID 699,032 78,000 11.16% 04/30/99 190,000 37,860 19.93%
DENNY'S (2)(3) PHOENIX, AZ 500,000 37,000 7.40% 14,259 0 0.00%
HARDEE'S (5) S MILWAUKEE, WI 808,032 81,000 10.02%
HARDEE'S (5) DELEVAN, WI 718,250 45,000 6.27% 12/31/99 (4) 221,813 29,420 13.26%
HARDEE'S (5) HARTFORD, WI 686,563 72,000 10.49%
HARDEE'S (5) MILWAUKEE, WI 1,010,045 99,000 9.80% 12/31/99 (4) 260,000 35,593 13.69%
" " 12/31/99 (4) 151,938 24,205 15.93%
HARDEE'S (5) OCONOMOWOC, WI 802,750 72,000 8.97%
HARDEE'S (5) W JORDAN, UT 617,907 72,000 11.65%
HARDEE'S (5) SANDY, UT 355,847 50,472 14.18%
HARDEE'S (5) FOND DU LAC, WI 849,767 103,500 12.18% 12/31/99 (4) 290,469 50,713 17.46%
HARDEE'S (5) MILWAUKEE, WI 0 0 0.00% 780,000 0 0.00%
HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62%
HOSTETTLER'S DES MOINES, IA 845,000 55,584 6.58% 52,813 0 0.00%
KFC SANTA FE, NM 451,230 60,000 13.30%
MIAMI SUBS PALM BEACH, FL 743,625 32,000 4.30%
- - ------------------------------------ ------------------------------------- --------------------------------------------------
<CAPTION>
---------------------------------------------------------
ORIGINAL EQUITY $46,280,300
NET DISTRIBUTION OF
CAPITAL SINCE INCEPTION $7,394,525
----------------
CURRENT EQUITY $38,885,775
-----------------------------------------================
-------------------------------------- ----------------
TOTALS TOTAL % ON
--------------------------------------
38,885,775
ANNUAL EQUITY
- - ------------------------------------
CONCEPT LOCATION COST RECEIPTS RETURN RAISE
- - ------------------------------------ -------------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
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 94,836 14.67%
COUNTRY KIT. CEDAR RAPIDS, IA 660,156 0 0.00%
DENNY'S N. SYMRNA BCH, FL 1,025,830 133,380 13.00%
DENNY'S DAYTONA, FL 1,029,844 136,800 13.28%
DENNY'S (2)(3) PHOENIX, AZ 520,126 39,000 7.50%
DENNY'S (2) PHOENIX, AZ 1,155,965 84,000 7.27%
DENNY'S (2) PHOENIX, AZ 1,087,137 86,000 7.91%
DENNY'S TWIN FALLS, ID 889,032 115,860 13.03%
DENNY'S (2)(3) PHOENIX, AZ 514,259 37,000 7.19%
HARDEE'S (5) S MILWAUKEE, WI 808,032 81,000 10.02%
HARDEE'S (5) DELEVAN, WI 940,063 74,420 7.92%
HARDEE'S (5) HARTFORD, WI 686,563 72,000 10.49%
HARDEE'S (5) MILWAUKEE, WI 1,421,983 158,798 11.17%
" "
HARDEE'S (5) OCONOMOWOC, WI 802,750 72,000 8.97%
HARDEE'S (5) W JORDAN, UT 617,907 72,000 11.65%
HARDEE'S (5) SANDY, UT 355,847 50,472 14.18%
HARDEE'S (5) FOND DU LAC, WI 1,140,236 154,213 13.52%
HARDEE'S (5) MILWAUKEE, WI 780,000 0 0.00%
HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62%
HOSTETTLER'S DES MOINES, IA 897,813 55,584 6.19%
KFC SANTA FE, NM 451,230 60,000 13.30%
MIAMI SUBS PALM BEACH, FL 743,625 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 1996 is
based on 1995 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 effective January 1, 1996, extending the
remaining lease over four years at a rate of 10% per annum.
5: A one-year lease modification was entered into with this tenant
reducing base rent for 1996 by a total of approximately $200,000.
Page 1 of 2
<PAGE>
PROJECTINS FOR
DISCUSSION PURPOSES DIVALL INSURED INCOME PROPERTIES 2 LP
1996 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
<TABLE>
<CAPTION>
PORTFOLIO (Note 1)
-------------------------------------- --------------------------------------------------
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> <C>
POPEYE'S PARK FOREST, IL 580,938 77,280 13.30%
SUNRISE PS PHOENIX, AZ 1,084,503 127,920 11.80% 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%
WENDY'S AIKEN, SC 633,750 90,480 14.28%
WENDY'S CHARLESTION, 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 (37 Properties) 27,803,775 3,004,132 10.80% 2,772,876 215,531 7.77%
- - ------------------------------------ -------------------------------------- ---------------------------------
<CAPTION>
--------------------------------------------------------
ORIGINAL EQUITY $46,280,300
NET DISTRIBUTION OF
CAPITAL SINCE INCEPTION $7,394,525
----------------
CURRENT EQUITY $38,885,775
------------------------------------------================
-------------------------------------- -----------------
TOTALS TOTAL % ON
---------------------------------------
38,885,775
- - ------------------------------------ TOTAL EQUITY
CONCEPT LOCATION COST RECEIPTS RETURN RAISE
- - ------------------------------------ --------------------------------------- -----------------
<S> <C>
POPEYE'S PARK FOREST, IL 580,938 77,280 13.30%
SUNRISE PS PHOENIX, AZ 1,182,735 148,222 12.53%
VILLAGE INN GRAND FORKS, ND 739,375 84,000 11.36%
WENDY'S AIKEN, SC 633,750 90,480 14.28%
WENDY'S CHARLESTION, 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 (37 Properties) 30,576,651 3,219,664 10.53% 8.28%
- - ------------------------------------ --------------------------------------- -----------------
</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.
Page 2 of 2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
June 30, 1996 Form 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 1,237,564 1,237,564
<SECURITIES> 1,182,584 1,182,584
<RECEIVABLES> 7,037,159 7,037,159
<ALLOWANCES> 5,825,860 5,825,860
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,631,447 3,631,447
<PP&E> 27,772,505 27,772,505
<DEPRECIATION> 5,556,146 5,556,146
<TOTAL-ASSETS> 25,847,806 25,847,806
<CURRENT-LIABILITIES> 377,522 377,522
<BONDS> 0 0
<COMMON> 0 0
0 0
0 0
<OTHER-SE> 25,470,284 25,470,284
<TOTAL-LIABILITY-AND-EQUITY> 25,847,806 25,847,806
<SALES> 812,430 1,648,326
<TOTAL-REVENUES> 861,291 2,853,108
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 256,225 1,162,001
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,741 3,551
<INCOME-PRETAX> 603,325 1,687,556
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 603,325 1,687,556
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 603,325 1,687,556
<EPS-PRIMARY> 12.91 36.10
<EPS-DILUTED> 12.91 36.10
</TABLE>
