<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 March 31, 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
March 31, 1996 and December 31, 1995
------------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, 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 (5,426,659) (5,491,806)
----------- -----------
Net investment properties and equipment 22,345,846 23,358,075
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES: (NOTE 8) 554,617 590,527
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 2,640,805 1,005,764
Cash restricted for real estate taxes 61,665 61,217
Restoration escrow account 889,945 0
Cash held in Indemnification Trust (NOTE 11) 278,749 275,231
Rents and other receivables (net of allowance of
$141,529 in 1996 and $254,543 in 1995) 293,570 459,213
Due from current General Partner 0 275
Deferred rent receivable 279,431 296,482
Due from affiliated partnerships (NOTE 12) 0 96,088
Prepaid insurance 15,779 19,631
Unsecured notes receivable from lessees (net of allowance of
$111,762 in 1996) 50,000 50,000
----------- -----------
Total other assets 4,509,944 2,263,901
----------- -----------
DUE FROM FORMER AFFILIATES: (NOTES 2 AND 12)
Due from former general partner affiliates 1,977,339 3,529,205
Allowance for uncollectible amounts
due from former affiliates (1,977,339) (2,607,104)
Restoration cost receivable 3,544,610 2,823,862
Allowance for uncollectible
restoration receivable (3,544,610) (2,823,862)
----------- -----------
Due from former affiliates, net 0 922,101
----------- -----------
Total assets $27,410,407 $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
MARCH 31, 1996 AND DECEMBER 31, 1995
------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1996 1995
------------- -------------
<S> <C> <C>
LIABILITIES:
Equipment notes payable (NOTE 6) $ 67,010 $ 77,255
Accounts payable and accrued expenses 155,991 266,715
Due to current General Partner 4,337 496
Security deposits 235,577 250,577
Unearned rental income 18,065 18,065
Real estate taxes payable 35,056 57,018
------------ ------------
Total liabilities 516,036 670,126
------------ ------------
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 58,131 47,289
Cumulative cash distributions (22,582) (18,245)
------------ ------------
35,549 29,044
------------ ------------
Limited Partners (46,280.3 interests outstanding)
Capital contributions, net of offering costs 39,358,468 39,358,468
Cumulative net income 12,120,851 11,047,463
Cumulative cash distributions (23,780,268) (23,130,268)
Reallocation of former general partners' deficit capital (840,229) (840,229)
------------ ------------
26,858,822 26,435,434
------------ ------------
Total partners' capital 26,894,371 26,464,478
------------ ------------
Total liabilities and partners' capital $ 27,410,407 $ 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 March 31,
-----------------------------
1996 1995
---------- ----------
<S> <C> <C>
REVENUES:
Rental income (NOTE 5) $ 817,723 $ 981,794
Interest income on direct financing leases 18,173 18,731
Other interest income 19,671 29,057
Recovery of amount previously written off 629,765 0
Other income 22,260 2,517
Gain on disposal of assets 484,225 0
---------- ----------
1,991,817 1,032,099
---------- ----------
EXPENSES:
Partnership management fees 42,316 40,766
Disposition fees 20,550 0
Disposition fees - Restoration 20,550 0
Restoration fees 24,053 425
Appraisal fees 2,268 0
Insurance 13,645 11,323
General and administrative (NOTE 9) 23,203 34,969
Advisory Board fees and expenses 4,364 4,143
Interest 1,810 11,992
Real estate taxes (1,709) 0
Ground lease payments (NOTE 3) 30,936 30,896
Expenses incurred due to default by lessee (121) 1,736
Professional services 35,780 32,135
Professional services related to investigation 560,252 36,458
Depreciation 129,488 159,870
Amortization 201 201
---------- ----------
907,586 364,914
---------- ----------
NET INCOME $1,084,231 $ 667,185
========== ==========
NET INCOME - CURRENT GENERAL PARTNER $ 10,842 $ 6,672
NET INCOME - LIMITED PARTNERS 1,073,389 660,513
---------- ----------
$1,084,231 $ 667,185
========== ==========
NET INCOME (LOSS) PER LIMITED PARTNERSHIP
INTEREST, based on 46,280.3 Interests outstanding $23.19 $14.27
====== ======
</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>
Three Months Ended March 31,
-----------------------------------------
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,084,231 $ 667,185
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 129,689 160,070
Recovery of amounts previously written off (629,765) 0
Net (gain) on disposal of assets (484,225) 0
Interest applied to Indemnification Trust account (3,518) (6,250)
(Increase) Decrease in rents and other receivables 165,917 (104,334)
(Deposits) for payment of real estate taxes (448) (4,764)
(Increase) Decrease in prepaids 3,852 (1,502)
Decrease in deferred rent receivable 17,051 667
Increase in due to current General Partner 3,841 1,359
(Decrease) in accounts payable and other (110,724) (132,594)
(Decrease) in security deposits (15,000) 0
(Decrease) in real estate taxes payable (21,962) (65,121)
(Decrease) in unearned rental income 0 (7,056)
---------- ----------
Net cash from operating activities 138,939 507,660
---------- ----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Principal payments received on
direct financing leases 35,709 76,542
Proceeds from sale of investment properties 1,366,966 0
Recoveries from former affiliates 1,551,866 10,623
Deposit to restoration escrow (889,945) 0
Payments from affiliated partnerships 96,088 4,722
---------- ----------
Net cash from investing activities 2,160,684 91,887
---------- ----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Cash distributions to Limited Partners (650,000) (930,000)
Cash distributions to current General Partner (4,337) (2,669)
Payments of equipment notes (10,245) (59,130)
---------- ----------
Net cash (used in) financing activities (664,582) (991,799)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,635,041 (392,252)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,005,764 1,349,101
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,640,805 $ 956,849
========== ==========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 1,810 $ 11,992
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
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 March 31, 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 $13,700,000, of which
approximately $5,522,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at March 31, 1996. The 9%
interest accrued as of March 31, 1996, amounted to approximately $1,540,000 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 $630,000 at March 31, 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
March 31, 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
<PAGE>
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 March 31, 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 March 31, 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 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. Effective March 1, 1996,
the minimum management fee and the maximum reimbursement for office rent and
overhead increased by 2.8% 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 $35,640 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 39 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 March 31, 1996 to
substantiate whether the uninsured properties had tenants with adequate net
worth at the time the leases were initiated.
8
<PAGE>
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 those properties. One sale closed in January 1996,
resulting in a gain of $484,000. The other sale is pending due to a dispute over
the option price.
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
9
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Net Cash Receipts to be made 99% to Limited Partners and 1% to the current
General Partner provided, that quarterly distributions will be cumulative and
will not be made to the current General Partner unless and until each Limited
Partner has received a distribution from Net Cash Receipts in an amount equal to
10% per annum, cumulative simple return on his or her Adjusted Original Capital,
as defined, from the Return Calculation Date, as defined, except to the extent
needed by the General Partner to pay its federal and state income taxes on the
income allocated to them attributable to such year. Distributions paid to the
General Partner are based on the estimated tax liability resulting from
allocated income. Subsequent to the filing of the General Partner's income tax
returns, a true-up with actual distributions is made.
The provisions regarding distribution of Net Proceeds, as defined, were also
amended to provide that Net Proceeds are to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a Liquidation Preference equal to a 13.5% per annum, cumulative
simple return on Adjusted Original Capital from the Return Calculation Date
including in the calculation of such return on all prior distributions of Net
Cash Receipts and any prior distributions of Net Proceeds under this clause,
except to the extent needed by the General Partner to pay its federal and state
income tax on the income allocated to its attributable to such year; and (c)
then, to Limited Partners, 99%, and to the General Partner, 1%, of remaining Net
Proceeds available for distribution.
Additionally, per the amendment of the Partnership Agreement dated May 26, 1993,
the total compensation paid to all persons for the sale of the investment
properties shall be limited to a competitive real estate commission, not to
exceed 6% of the contract price for the sale of the property. The General
Partner may receive up to one-half of the competitive real estate commission,
not to exceed 3%, provided that the General Partner provides a substantial
amount of services in the sales effort. It is further provided that a portion of
the amount of such fees payable to the General Partner is subordinated to its
success in recovering the funds misappropriated by the former general partners.
(See Note 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>
<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
10
<PAGE>
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.
6. EQUIPMENT NOTE PAYABLE:
-----------------------
At March 31, 1996, equipment notes payable consist of the following:
Outstanding
Principal
Balance Interest Rate Maturity Date
----------- ------------- -------------
$67,010 9.80% September 1997
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. The note was repaid in full during April 1996.
7. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the three-month periods ended
March 31, 1996 and 1995 are as follows.
<TABLE>
<CAPTION>
Incurred as of Incurred as of
Current General Partner March 31, 1996 March 31, 1995
- - ----------------------- -------------- --------------
<S> <C> <C>
Management fees $42,316 $40,766
Disposition fees 20,550 0
Restoration fees 24,053 425
Overhead allowance 3,526 3,433
Reimbursement for out-of-pocket expenses 4,872 3,517
Cash distribution 4,337 2,669
------- -------
$99,654 $50,810
======= =======
</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
March 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Minimum lease payments receivable $ 649,688
Estimated residual values of leased
property (non-recourse) 22,364
Acquisition fees, net 603
Less-Unearned income (118,038)
---------
Net investment in direct
financing leases $ 554,617
=========
</TABLE>
11
<PAGE>
At March 31, 1996, future minimum lease payments for each of the five succeeding
fiscal years are as follows:
<TABLE>
<CAPTION>
<S> <C>
Year ending
December 31,
1996 $166,775
1997 196,139
1998 177,791
1999 131,347
--------
$672,052
========
</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.
9. GENERAL AND ADMINISTRATIVE EXPENSES:
------------------------------------
For the periods ended March 31, 1996 and 1995, general and administrative
expenses incurred by the Partnership were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
------- -------
<S> <C> <C>
Communication costs $11,823 $12,536
Other administration 2,800 2,460
Travel costs 780 983
Overhead allowance 3,526 3,433
Registration/filing fees 4,274 4,354
Income taxes 0 11,203
------- -------
$23,203 $34,969
======= =======
</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 surpassing the recovery level of $4,500,000. The remaining
amount allocated to the Partnership may be owed to the current General Partner
if the $6,000,000 recovery level is met. As of March 31, 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.
12
<PAGE>
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 March 31, 1996. Funds are invested in U.S. Treasury
securities. In addition, $28,749 of earnings have been credited to the Trust as
of March 31, 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. 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 March 31, 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 March 31, 1996, the Partnerships recovered a total of
approximately $4,541,000 from the former general partners and their affiliates.
Of this amount, the Partnership received its pro-rata share in the amount of
$1,837,000. 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
13
<PAGE>
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 March 31, 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 March 31, 1996, interest in the amount of $187,000 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 $204,000,
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 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:
-----------
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 alleged, 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 requested the payment of damages
in the amount of $9,000,000, plus interest, attorneys fees and costs, and
whatever additional relief the court deemed just and proper. The Partnerships
hired legal counsel under a contingent fee arrangement to prosecute all of the
Partnerships' claims. E & Y filed an Answer denying that it was negligent.
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 filed third party claims against KPMG Peat Marwick, the
Partnerships' accountants preceding E & Y. The Partnerships also filed claims
against Magnuson, DiVall, DREIC, Shea, and Quarles & Brady. E & Y's claims
against Ms. Shatrawka and its fraud claims against Quarles & Brady were
voluntarily dismissed.
14
<PAGE>
The trial of the case was scheduled to take place in Iowa County, Wisconsin,
beginning March 20, 1996. Shortly before trial The Partnerships reached a
resolution of their claims against Quarles & Brady. A resolution of the claims
against Ernst & Young was reached after opening statements. As a result of these
settlements, net proceeds deposited in the partnership's restoration escrow
account totaled approximately $890,000.
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure the
repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 1 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
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 sixteen (16) of the bankruptcies to date have resulted in cash
payments to the Partnerships of a total of $537,000 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 May 15, 1996, the Partnership made distributions to the Limited Partners for
the First Quarter of 1996 of $2,025,000 amounting to approximately $43.76 per
limited partnership interest.
15
<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 March
31, 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 has negotiated a sale of
the property which closed on May 1, 1996.
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
Applesouth during January 1996, resulting in a gain of approximately $484,000.
Due to a dispute over the sale price for the Florida property, that potential
sale is still pending.
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 $555,000 at March 31, 1996,
compared to $591,000 at December 31, 1995. The decrease of $36,000 was a result
of principal payments received during the quarter.
OTHER ASSETS
- - ------------
Cash and cash equivalents, including cash restricted for real estate taxes was
approximately $2,702,000 at March 31, 1996, compared to $1,067,000 at December
31, 1995. The Partnership designated cash of $2,025,000 to fund the First
Quarter 1996 distributions to Limited Partners, $380,000 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.
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.
16
<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 $1,977,000 at
March 31, 1996. The receivable decreased from December 31, 1995 due to
$1,552,000 of recoveries received during the quarter 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
$3,545,000 at March 31, 1996, and includes $1,540,000 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 has been
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 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 $630,000 at March 31, 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 March 31, 1996.
LIABILITIES
- - -----------
Accounts payable and accrued expenses at March 31, 1996, in the amount of
$156,000, 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.
17
<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 $650,000 and $5,080, respectively, have also been in accordance
with the amended Partnership Agreement. The First Quarter 1996 distribution of
$2,025,000 was paid to the Limited Partners on May 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 March 31, 1996, in the
amount of $1,084,000 compared to net income for the quarter ended March 31,
1995, of $667,000. Results for both 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 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.
REVENUES
- - --------
Total revenues were $1,992,000 and $1,032,000, for the quarters ended March 31,
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 March 31, 1996 and 1995, cash expenses amounted to
approximately 39% and 20%, of total revenues, respectively. Total expenses,
including non-cash items, amounted to approximately 46% and 35%, of total
revenues for the quarters ended March 31, 1996 and 1995, respectively. Items
negatively impacting expenses include expenses incurred primarily in relation to
the misappropriation of assets by the former general partners and their
affiliates.
18
<PAGE>
For the quarters ended March 31, 1996 and 1995, expenses incurred in relation to
the misappropriated assets amounted to $560,000 and $36,000, 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
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 alleged, 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 requested the payment of damages
in the amount of $9,000,000, plus interest, attorneys fees and costs, and
whatever additional relief the court deemed just and proper. The Partnerships
have hired legal counsel under a contingent fee arrangement to prosecute all of
the Partnerships' claims. E & Y filed an Answer denying that it was negligent.
E & Y also filed third-party claims alleging fraud and negligence on the part of
the Partnerships' former securities 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 filed third party claims against KPMG Peat Marwick, the
Partnerships' accountants preceding E & Y. The Partnerships also filed claims
against Magnuson, DiVall, DREIC, Shea, and Quarles & Brady. E & Y's claims
against Ms. Shatrawka and its fraud claims against Quarles & Brady were
voluntarily dismissed.
19
<PAGE>
The trial of the case was scheduled to take place in Iowa County, Wisconsin,
beginning on March 20, 1996. Shortly before trial, the Partnerships reached a
resolution of their claims against Quarles & Brady. A resolution of the claims
against Ernst & Young was reached after opening statements. As a result of these
settlements, net proceeds deposited in the partnership's restoration escrow
account totaled approximately $890,000.
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure the
repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 1 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
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.
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 sixteen (16) of the bankruptcies to date have resulted in cash
payments to the Partnerships of a total of $537,000 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.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits:
28.0 Correspondence to the Limited Partners dated May 15, 1996,
regarding the First Quarter 1996 distribution.
(b) Reports on Form 8-K:
The Registrant filed no reports on Form 10-K during the first quarter
of fiscal year 1996.
21
<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: May 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: May 14, 1996
By: ______________________________________
Kristin J. Atkinson
Vice President - Finance and Administration
Date: May 14, 1996
22
<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: May 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: May 14, 1996
By: /s/Kristin J. Atkinson
--------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: March 29, 1996
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the March 31, 1996 Form 10-Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,592,415
<SECURITIES> 278,749
<RECEIVABLES> 6,968,637
<ALLOWANCES> 5,775,240
<INVENTORY> 0
<CURRENT-ASSETS> 5,064,561
<PP&E> 27,772,505
<DEPRECIATION> 5,426,659
<TOTAL-ASSETS> 27,410,407
<CURRENT-LIABILITIES> 449,026
<BONDS> 67,010
<COMMON> 0
0
0
<OTHER-SE> 26,894,371
<TOTAL-LIABILITY-AND-EQUITY> 27,410,407
<SALES> 835,896
<TOTAL-REVENUES> 1,991,817
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 905,776
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,810
<INCOME-PRETAX> 1,084,231
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,084,231
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,084,231
<EPS-PRIMARY> 23.19
<EPS-DILUTED> 23.19
</TABLE>
<PAGE>
May 15, 1996
RE: FIRST QUARTER 1996 CORRESPONDENCE
DIVALL INSURED INCOME PROPERTIES 2, L.P. (THE "PARTNERSHIP")
Dear Limited Partner:
_____________________________
FIRST QUARTER 1996 HIGHLIGHTS
. During the First Quarter of 1996, we SETTLED our lawsuit
with QUARLES & BRADY and ERNST & YOUNG, the
Partnership's former attorneys and accountants.
(Refer to "Restoration Highlights" for more details.)
_____________________________
FIRST QUARTER 1996 "DISTRIBUTION" HIGHLIGHTS
. 6.6% (approx.) annualized return . $2,025,000 "total" amount
from operations and other sources distributed for the FIRST QUARTER
and 3.4% (approx.) non-annualized 1996 represented 35% from operations
return of capital from the sale of and 65% from the sale of an
Applebee's based on $39,762,000 Applebee's restaurant.
("net" remaining initial investment).
. $655.00 "total" per unit (approx.)
. $43.76 per unit (approx.) for the distributed SINCE INCEPTION from both
FIRST QUARTER 1996 from both cash cash flow from operations and "net"
flow from operations and "net" cash cash activity from financing and
activity from financing and investing activities.
investing activities.
(NOTE: Original units were purchased for $1,000/unit.)
<PAGE>
DiVall Insured Income Properties 2, L.P.
May 15, 1996
Page 2
_______________________________
STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS
. 25% increase in . 41% increase in . 12% decrease in
OPERATING REVENUES OPERATING EXPENSES NET INCOME from
from projections. from projections. projections.
. Investigation and Restoration . RENTAL INCOME of $818,000 was
costs in the amount of $560,000 $71,000 HIGHER than projected due to
(related to the trial and the "non-budgeted" receipt of rental
settlement with QUARLES & BRADY income from Applebee's restaurant
and ERNST & YOUNG) were recorded (Memphis, TN) and additional
in March. A portion of these percentage rent from various stores.
costs had been budgeted to occur
in April due to initial . A SETTLEMENT was reached between the
projections of the anticipated Partnership and E&A Falcone, a former
length of the March 1996 trial. tenant of the Hallandale and Palm
(See "Restoration Highlights" for Beach properties. The Partnership
additional information.) received $25,000.
. The Partnership received $74,000 . The Partnership experienced a
from an affiliated partnership $484,000 "NET" GAIN on the Applebee's
for previously advanced restaurant sale.
restoration costs.
_______________________________
PROPERTY HIGHLIGHTS
VACANCIES
---------
. There was one vacancy at March 31, 1996; COUNTRY KITCHEN (Cedar Rapids, IA).
The Partnership executed a sales contract for this property last quarter and
is expecting a "tentative" close date during May 1996. The closing continues
to be delayed due to environmental issues.
<PAGE>
DiVall Insured Income Properties 2, L.P.
May 15, 1996
Page 3
_______________________________
PROPERTY HIGHLIGHTS (CONT'D)
RENTS RECEIVABLE
----------------
. Apple South, Inc., tenant of . (cont'd) [*NOTE: This tenant had
APPLEBEE'S restaurants (Port St. exercised their option to
Lucie, FL) continues to be purchase this property (along
delinquent in its rental payments with their Memphis, TN
due to an ongoing DISPUTE regarding property - see below) at NO
the "final" sale price of this LESS THAN 120% of the original
property. We anticipate this costs.]
delinquency will be cured once a
purchase price has been agreed The rent receivable DUE at
upon.* March 31, 1996 was $59,600
for Apple South, Inc.
. DenAmerica, tenant of four (4) DENNY'S restaurants (Arizona and Idaho)
was one (1) month or $24,000 delinquent in scheduled rental payments at
March 31, 1996. This tenant is experiencing slight cash flow problems
associated with a recent merger*. The Partnership is currently working
with the tenant to cure this total delinquency for its restaurants.
(*NOTE: DenAmerica finalized their merger during the First Quarter of
1996. Currently these four (4) leases provide for straight percentage
rents which reduces the value of the property in the market due to greater
perceived risk. The recent MERGER allows the Partnership to secure "fixed"
rents plus percentage rents for each of the properties. Additionally,
$75,000 (principal/interest) is expected to be collected from an
outstanding promissory note with this tenant. Leases are anticipated to be
renegotiated by year-end.)
SALE OF PROPERTIES
------------------
. On January 31, 1996, the Partnership sold the APPLEBEE'S restaurant (MEMPHIS,
TENNESSEE) for $1,370,000 which resulted in a net gain of $484,000. (NOTE: A
portion of these sales proceeds were reserved at March 31, 1996 to pay
outstanding debt in the Partnership. Payment of outstanding debt occurred in
April 1996.)
As mentioned above, this tenant exercised their option to purchase this
property at NO LESS THAN 120% of the original costs.
<PAGE>
DiVall Insured Income Properties 2, L.P.
May 15, 1996
Page 4
_______________________________
RESTORATION HIGHLIGHTS
. Recoveries received during the FIRST . "Total" recoveries received TO
QUARTER 1996 totalled $1,552,000 DATE for the Partnership amount to
(approx.) for the Partnership. approximately $1,853,000.
. As previously communicated, the . With respect to the DiVall "PRIVATE"
Partnership and its affiliated Partnerships, we would like to
partnerships settled with QUARLES & finalize all remaining settlements
BRADY (Q&B) and ERNST & YOUNG (E&Y) with the bankruptcy courts as quickly
during the First Quarter of 1996. as possible.
The "NET" recoveries (less fees Although we have no control of the
and expenses paid upon timetable for these proceedings, we
settlement) from this lawsuit continue to monitor closely and
are currently in a separate negotiate settlements as they arise.
bank account.
We currently have only a few
We are pleased with the results remaining settlements pending.
of the settlement because it
allowed us to recapture not
only the cost of the litigation
but also all expenses
associated with the
investigation and former
general partner removal.
. Earlier this year, DiVall Insured Income Fund, L.P. (DiVall 1) WON its
appeal in the Eighth Circuit Federal Court of Appeals in St. Louis,
Missouri against Boatmen's First National Bank of Kansas City
("BOATMEN'S"). The FDIC and Boatmen's did not pursue their option to
obtain a ruling by the U.S. Supreme Court - which means the case will now
go back to the lower courts for trial.
For purposes of summarizing background information regarding this lawsuit,
please note the following:
<PAGE>
DiVall Insured Income Properties 2, L.P.
May 15, 1996
Page 5
___________________________________
RESTORATION HIGHLIGHTS (CONT'D)
. During 1993, it was discovered that the former general partners borrowed
$600,000 IN DIVALL 1'S NAME during or before 1991 from Metro North State Bank
(now "BOATMEN'S"). Not only were the proceeds never received by DiVall 1 --
but, this loan was secured by mortgages on FIVE (5) of DiVall 1's properties.
. At the time of discovery, . On March 24, 1994, DiVall 1 formally
all three partnerships disputed the loan by filing a
included the diversion of complaint against BOATMEN'S. Since
the BOATMEN'S loan proceeds that time, various summary judgments
as part of the "total" and appeals have occurred resulting
misappropriation -- in the final stage of discovery and
meaning all expenses and TRIAL -- which is expected to begin
recoveries of this this FALL.
litigation are shared by
the Partnership and its
affiliated partnerships.
. Former general partner, Gary . Former general partner, Paul E.
J. DiVall pleaded "NO- Magnuson has NOT formally responded
CONTEST" to criminal charges to criminal charges brought against
brought against him by the him by the Wisconsin Attorney
Wisconsin Attorney General's General's Office.
Office.
. At this time we are unaware of any "criminal" charges made by the
Wisconsin Attorney General's Office against any other agent of the
former general partners.
___________________________________
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 March 31, 1996.
<PAGE>
DiVall Insured Income Properties 2, L.P.
May 15, 1996
Page 6
___________________________________
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 $ 19,286,731 -
Total Distributions Since Inception (25,805,268) -
------------
(Return) of Capital $ (6,518,537) (6,518,537)
============ -----------
"NET" REMAINING INITIAL INVESTMENT
BY ORIGINAL PARTNERS - $39,761,763
===========
==========================================================================
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
___________________________________
QUESTIONS & ANSWERS
1. WHEN WILL THE "NET" PROCEEDS FROM THE Q&B AND E&Y SETTLEMENT BE DISTRIBUTED
TO LIMITED PARTNERS?
. We anticipate releasing the "net" settlement proceeds in accordance with our
historical allocation percentages and including the payout with the
Partnership's Second Quarter Distribution scheduled to be mailed on August
15, 1996.
2. HAS THERE BEEN ANY DECISION MADE REGARDING THE PARTNERSHIP'S LIQUIDATION
ALTERNATIVES OR THE POSSIBILITY OF REPOSITIONING ITS ASSETS?
. We recently met with the Advisory Board to continue our discussions
regarding future alternatives for the Partnership - no decisions have been
made at this time.
There are various operating issues management would like resolve for the
Partnership prior to any plans for dissolution or repositioning assets.
<PAGE>
DiVall Insured Income Properties 2, L.P.
May 15, 1996
Page 7
___________________________________
QUESTIONS & ANSWERS
3. WHAT IS TPG'S POLICY FOR RECEIVING NOTIFICATION OF ADDRESS CHANGES FROM
LIMITED PARTNERS?
. It is our policy that all Limited Partner address changes* be submitted in
writing to our Investor Relations Department.
(*NOTE: Any change in a Limited Partner's distribution or correspondence
address should be sent to Investor Relations NO LATER THAN THREE (3) WEEKS
before each scheduled distribution mailing date to insure that the change will
be processed prior to check printing and label processing.)
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>
<TABLE>
<CAPTION>
DIVALL INSURED INCOME PROPERTIES 2 L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996
------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
------------ ------------ -----------
1ST 1ST
QUARTER QUARTER BETTER
3/31/96 3/31/96 (WORSE)
OPERATING REVENUES ----------- ----------- ------------
<S> <C> <C> <C>
Rental income $ 746,707 $ 817,723 $ 71,016
Direct financing interest 16,486 18,173 1,687
Interest income 16,832 19,671 2,839
Gain on sale of investment properties 808,911 484,225 (324,686)
Recovery of amounts previously written off 0 629,765 629,765
Other income 0 22,260 22,260
----------- ----------- -----------
TOTAL OPERATING REVENUES $ 1,588,936 $ 1,991,817 $ 402,881
----------- ---------- -----------
OPERATING EXPENSES
Insurance $ 8,657 $ 13,645 $ (4,988)
Management fees 42,344 42,316 28
Restoration fees 0 24,053 (24,053)
Disposition fee - TPG 0 20,550 (20,550)
Disposition fee - Restoration 0 20,550 (20,550)
Overhead allowance 3,530 3,526 4
Advisory Board 4,601 4,364 237
Administrative 38,856 19,675 19,181
Professional services 473 602 (129)
Auditing 20,000 21,211 (1,211)
Legal 12,600 13,967 (1,367)
Real Estate Taxes 0 (1,709) 1,709
Appraisal Fees 0 2,268 (2,268)
Defaulted tenants 300 (121) 421
----------- ----------- -----------
TOTAL OPERATING EXPENSES $ 131,361 $ 184,897 $ (53,536)
----------- ----------- -----------
GROUND RENT $ 30,945 $ 30,936 $ 9
----------- ----------- -----------
INTEREST EXPENSE $ 1,234 $ 1,810 $ (576)
----------- ----------- -----------
INVESTIGATION AND RESTORATION EXPENSES $ 62,807 $ 560,252 $ (497,445)
----------- ----------- -----------
NON-OPERATING EXPENSES
Depreciation $ 130,883 $ 129,488 $ 1,395
Amortization 201 201 0
----------- ----------- -----------
TOTAL NON-OPERATING EXPENSES $ 131,084 $ 129,689 $ 1,395
----------- ----------- -----------
TOTAL EXPENSES $ 357,431 $ 907,584 $ (550,153)
------------ ----------- -----------
NET INCOME $ 1,231,505 $ 1,084,233 $ (147,272)
OPERATING CASH RECONCILIATION: VARIANCE
-----------
Depreciation and amortization 131,084 129,689 (1,395)
Gain on Sale of Investment Properties (808,911) (484,225) 324,686
Recovery of amounts previously written off 0 (629,765) (629,765)
(Increase) Decrease in current assets 243,268 207,930 (35,338)
Increase (Decrease) in current liabilities (146,777) (135,312) 11,465
Decrease in Security Deposits 0 (15,000) (15,000)
(Increase) Decrease in cash reserved for payables 95,000 (140,000) (235,000)
Advance from/(to) future cash flows for current distributions (120,000) (120,000) 0
----------- ----------- -----------
Net Cash Provided From Operating Activities $ 625,169 $ (102,450) $ (727,619)
----------- ----------- -----------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Payments received from affiliated partnerships 0 73,588 73,588
Recoveries from former G.P. affiliates 0 1,551,866 1,551,866
Deposits to Restoration Escrow 0 (889,945) (889,945)
Principal received on equipment leases 37,595 35,709 (1,886)
Sale of Investment Properties 2,791,800 1,366,966 (1,424,834)
Principal payments on mortgage notes (77,255) (10,245) 67,010
----------- ----------- -----------
Net Cash Provided From Investing And Financing
Activities $ 2,752,140 $ 2,127,939 $ (624,201)
----------- ----------- -----------
Total Cash Flow For Quarter $ 3,377,309 $ 2,025,489 $(1,351,820)
Cash Balance Beginning of Period 988,299 1,066,981 78,682
Less 4th quarter distributions paid 2/96 (650,000) (650,000) 0
Change in cash reserved for payables or future distributions 25,000 260,000 235,000
----------- ----------- -----------
Cash Balance End of Period $ 3,740,608 $ 2,702,470 $(1,038,138)
Cash reserved for 1st quarter L.P. distributions (3,375,000) (2,025,000) 1,350,000
Cash reserved for future distributions 0 (120,000) (120,000)
Cash reserved for payment of payables (205,000) (380,000) (175,000)
----------- ----------- -----------
Unrestricted Cash Balance End of Period $ 160,608 $ 177,470 $ 16,862
=========== =========== ===========
------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
----------- ----------- -----------
* Quarterly Distribution $ 3,375,000 $ 2,025,000 $(1,350,000)
Mailing Date 5/15/96 (enclosed) -
------------------------------------------------------------------------------------------------------
</TABLE>
* Refer to distribution letter for detail of quarterly distribution.
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------
PROJECTIONS FOR ORIGINAL EQUITY $46,280,300
DISCUSSION PURPOSES DIVALL INSURED INCOME PROPERTIES 2 LP NET DISTRIBUTION OF
1996 PROPERTY SUMMARY CAPITAL SINCE INCEPTION $ 6,518,537
AND RELATED ESTIMATED RECEIPTS -----------
CURRENT EQUITY $39,761,763
-----------------------------===========
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%
- - --------------------------------------------------------------------------------------------------------------------------------
--------------------------- ----------------
TOTALS
--------------------------- TOTAL % ON
$39,761,763
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%
- - ----------------------------------------------------------------------- ----------------
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------
<S> <C>
PROJECTIONS FOR ORIGINAL EQUITY $46,280,300
DISCUSSION PURPOSES DIVALL INSURED INCOME PROPERTIES 2 LP NET DISTRIBUTION OF
1996 PROPERTY SUMMARY CAPITAL SINCE INCEPTION $6,518,537
AND RELATED ESTIMATED RECEIPTS -----------
CURRENT EQUITY $39,761,763
===========
----------------------------------------
</TABLE>
<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 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 (37 Properties) 27,803,775 3,004,132 10.80% 2,772,876 215,531 7.77%
- - ----------------------------------- -------------------------------- ------------------------------
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING DEBT
<S> <C> <C> <C> <C>
--------------------------------
- - ----------------------------------- AMOUNT ANNUAL CURRENT
MORTGAGED PROPERTIES OWED DEBT INTEREST
- - ----------------------------------- 3/31/96 SERVICE RATE
- - ----------------------------------- --------------------------------
DENNY'S TWIN FALLS, ID
HARDEE'S MILWAUKEE, WI
- - ----------------------------------- --------------------------------
- - ----------------------------------- --------------------------------
TOTAL OUTSTANDING DEBT - - -
- - ----------------------------------- --------------------------------
- - ----------------------------------- --------------------------------
NET AFTER DEBT 27,803,775 3,004,132 10.80%
- - ----------------------------------- -------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------
TOTALS TOTAL % ON
------------------------------- $39,761,763
TOTAL EQUITY
CONCEPT LOCATION COST RECEIPTS RETURN RAISE
- - ----------------------------------- ------------------------------- -------------
<S> <C> <C> <C> <C> <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 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 (37 Properties) 30,576,651 3,219,664 10.53% 8.10%
- - ----------------------------------- ------------------------------- -------------
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING DEBT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- - -----------------------------------
MORTGAGED PROPERTIES AMOUNT ANNUAL CURRENT AMOUNT ANNUAL
- - ----------------------------------- OWED DEBT INTEREST OWED DEBT
3/31/96 SERVICE RATE 3/31/96 SERVICE
- - ----------------------------------- ------------------------------ --------------------
DENNY'S TWIN FALLS, ID 67,010 48,219 9.80% 67,010 48,219
HARDEE'S MILWAUKEE, WI 0 0 9.75% 0 0
- - ----------------------------------- ------------------------------ --------------------
TOTAL OUTSTANDING DEBT 67,010 48,219 - 67,010 48,219
- - ----------------------------------- ------------------------------ --------------------
- - ----------------------------------- ------------------------------ ------------------------------- -------------
NET AFTER DEBT 2,705,866 167,312 6.18% 30,509,641 3,171,445 10.39% 7.98%
- - ----------------------------------- ------------------------------ ------------------------------- -------------
</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.
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