<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
--------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _____________________
Commission file number 0-17686
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Wisconsin 39-1606834
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 W. 11th Street, Suite 1110, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 421-7444
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Interests
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1997 and December 31, 1996
----------------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
INVESTMENT PROPERTIES AND EQUIPMENT:(Note 3)
<S> <C> <C>
Land $ 8,330,982 $ 9,141,303
Buildings 14,930,272 16,488,654
Equipment 707,378 707,378
Accumulated depreciation (5,359,783) (5,550,940)
----------- -----------
Net investment properties and equipment 18,608,849 20,786,395
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES: (Note 7) 63,752 108,826
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 1,556,835 1,444,326
Cash restricted for real estate taxes 11,115 110,625
Cash held in Indemnification Trust (Note 9) 301,622 289,637
Rents and other receivables (net of allowance of
$735 in 1997 and $0 in 1996) 224,678 218,051
Deferred rent receivable 253,254 259,326
Prepaid insurance 2,137 22,262
Deferred charges 51,597 53,620
Unsecured notes receivable from lessees 73,944 86,288
----------- -----------
Total other assets 2,475,182 2,484,135
----------- -----------
DUE FROM FORMER AFFILIATES: (Notes 2 and 10)
Due from former general partner affiliates 1,741,240 1,743,461
Allowance for uncollectible amounts
due from former affiliates (1,741,240) (1,743,461)
Restoration cost receivable 4,322,110 3,897,981
Allowance for uncollectible
restoration receivable (4,322,110) (3,897,981)
----------- -----------
Due from former affiliates, net 0 0
----------- -----------
Total assets $21,147,783 $23,379,356
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 1997 and December 31, 1996
----------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 49,461 $ 67,589
Due to current General Partner 2,112 86,727
Security deposits 131,815 144,290
Unearned rental income 19,261 57,739
Real estate taxes payable 38,105 119,131
------------ ------------
Total liabilities 240,754 475,476
------------ ------------
CONTINGENT LIABILITIES: (Note 8)
PARTNERS' CAPITAL: (Notes 1, 4 and 12)
Current General Partner -
Cumulative net income 95,407 80,064
Cumulative cash distributions (37,492) (31,355)
------------ ------------
57,915 48,709
------------ ------------
Limited Partners (46,280.3 interests outstanding)
Capital contributions, net of offering costs 39,358,468 39,358,468
Cumulative net income 15,811,143 14,292,200
Cumulative cash distributions (33,480,268) (29,955,268)
Reallocation of former general partners' deficit capital (840,229) (840,229)
------------ ------------
20,849,114 22,855,171
------------ ------------
Total partners' capital 20,907,029 22,903,880
------------ ------------
Total liabilities and partners' capital $ 21,147,783 $ 23,379,356
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1997 1996 1997 1996
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income (Note 5) $726,956 $ 857,490 $2,192,632 $2,472,172
Interest income on direct financing 2,245 14,426 8,348 48,070
leases
Other interest income 18,211 20,272 55,413 70,669
Recovery of amount previously written 0 12,925 2,221 657,331
off
Other income 44,288 35,859 79,485 61,613
Gain on disposal of assets 3,772 445,772 76,028 929,997
-------- ---------- ---------- ----------
795,472 1,386,744 2,414,127 4,239,852
-------- ---------- ---------- ----------
EXPENSES:
Partnership management fees 44,520 43,098 132,612 128,512
Disposition fees 15,000 46,000 52,166 66,550
Disposition fees - Restoration 0 0 0 20,550
Restoration fees 0 517 89 25,155
Appraisal fees 0 0 4,597 2,268
Insurance 6,410 7,371 20,126 29,812
General and administrative 16,924 26,748 89,089 102,231
Advisory Board fees and expenses 3,628 4,446 10,316 13,059
Interest 0 0 0 3,551
Real estate taxes 0 0 0 (1,709)
Ground lease payments (Note 3) 31,249 31,124 94,117 92,996
Expenses incurred due to default by 4,811 2,269 8,689 4,737
lessee
Professional services 25,901 29,157 76,668 107,224
Professional services related to 4,283 8,901 31,377 510,869
investigation
Depreciation 113,471 129,489 351,972 388,465
Amortization 1,163 201 8,023 603
-------- ---------- ---------- ----------
267,360 329,321 879,841 1,494,873
-------- ---------- ---------- ----------
NET INCOME $528,112 $1,057,423 $1,534,286 $2,744,979
======== ========== ========== ==========
NET INCOME - CURRENT GENERAL PARTNER $ 5,281 $ 10,574 $ 15,343 $ 27,450
NET INCOME - LIMITED PARTNERS 522,831 1,046,849 1,518,943 2,717,529
-------- ---------- ---------- ----------
$528,112 $1,057,423 $1,534,286 $2,744,979
======== ========== ========== ==========
NET INCOME (LOSS) PER LIMITED PARTNERSHIP $11.30 $22.62 $32.82 $58.72
INTEREST, based on 46,280.3 Interests outstanding ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,534,286 $ 2,744,979
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 359,995 389,068
Recovery of amounts previously written off (2,221) (657,331)
Net (gain) on disposal of assets (76,028) (929,997)
Interest applied to Indemnification Trust account (11,985) (11,255)
(Increase)/Decrease in rents and other receivables (6,627) 248,630
Withdrawals for payment of real estate taxes 99,510 61,033
Decrease in prepaids 20,125 16,207
Decrease in deferred rent receivable 6,072 37,158
Increase (Decrease) in due to current General Partner (84,615) 3,734
(Decrease) in accounts payable and other (18,128) (142,788)
(Decrease) in security deposits (12,475) (38,354)
(Decrease) in real estate taxes payable (81,026) (19,187)
Increase (Decrease) in unearned rental income (38,478) 30,296
----------- -----------
Net cash from operating activities 1,688,405 1,732,193
----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Principal payments received on direct financing leases 45,075 115,030
Principal payments received on notes receivable 12,344 0
Proceeds from sale of investment properties 1,901,601 2,901,576
Recoveries from former affiliates 2,221 1,579,432
Increase in unsecured notes from lessees 0 (39,948)
Increase in deferred lease commissions (6,000) 0
Payments from affiliated partnerships 0 96,088
----------- -----------
Net cash from investing activities 1,955,241 4,652,178
----------- -----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Cash distributions to Limited Partners (3,525,000) (4,325,000)
Cash distributions to current General Partner (6,137) (10,980)
Payments of equipment notes 0 (77,255)
----------- -----------
Net cash (used in) financing activities (3,531,137) (4,413,235)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 112,509 1,971,136
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,444,326 1,005,764
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,556,835 $ 2,976,900
=========== ===========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 0 $ 3,551
=========== ===========
</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 former general partners exercised their
option to extend the offering period to a date no later than February 22, 1990.
The offering closed on February 22, 1990, at which point 46,280.3 interests had
been sold, resulting in total offering proceeds, net of underwriting
compensation and other offering costs, of $39,358,468.
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 September 30, 1997, the Partnership owned 32 properties with
specialty leasehold improvements in 15 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.
Deferred charges consist of leasing commissions paid when properties are leased
to tenants other than the original tenant. Leasing commissions are capitalized
and amortized over the life of the lease.
Real estate taxes on the Partnership's investment properties are the
responsibility of the tenant. However, when a tenant fails to make the required
tax payments or when a property becomes vacant, the Partnership makes the
appropriate payment to avoid possible foreclosure of the property. Taxes are
accrued in the period in which the liability is incurred.
Cash and cash equivalents include cash on deposit with financial institutions
and highly liquid temporary investments with initial maturities of 90 days or
less.
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.
6
<PAGE>
The Partnership will be dissolved on November 30, 2010, or earlier upon the
prior occurrence of any of the following events: (a) the disposition of all
properties of the Partnership; (b) the written determination by the General
Partner that the Partnership's assets may constitute "plan assets" for purposes
of ERISA; (c) the agreement of Limited Partners owning a majority of the
outstanding interests to dissolve the Partnership; or (d) the dissolution,
bankruptcy, death, withdrawal, or incapacity of the last remaining General
Partner, unless an additional General Partner is elected previously by a
majority in interest of the Limited Partners.
No provision for Federal income taxes has been made, as any liability for such
taxes would be that of the individual partners rather than the Partnership. At
December 31, 1996, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$8,300,000.
2. REGULATORY INVESTIGATION:
-------------------------
A preliminary investigation during 1992 by the Office of Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation") revealed that during at least the four years ended
December 31, 1992, the former general partners of the Partnership, Gary J.
DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred substantial
cash assets of the Partnership and two affiliated publicly registered
partnerships, DiVall Insured Income Fund Limited Partnership ("DiVall 1") and
DiVall Income Properties 3 Limited Partnership ("DiVall 3") (collectively the
"Partnerships") to various other entities previously sponsored by or otherwise
affiliated with DiVall and Magnuson. The unauthorized transfers were in
violation of the respective Partnership Agreements and resulted, in part, from
material weaknesses in the internal control system of the Partnerships. The
aggregate amount of the misappropriations, related costs, and 9% interest
accrued since January 1, 1993, is in excess of $15,000,000, of which
approximately $6,063,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at September 30, 1997. The
9% interest accrued as of September 30, 1997, amounted to approximately
$2,312,000 and is not reflected in the accompanying income statement. As of
December 31, 1996, approximately $5,641,000 was reflected as due from former
affiliates based on estimated overall misappropriation and related costs of
$14,000,000.
Subsequent to discovery, and in response to the regulatory inquiries, a third-
party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed (effective
February 8, 1993) to assume responsibility for daily operations and assets of
the Partnerships as well as to develop and execute a plan of restoration for the
Partnerships. Effective May 26, 1993, the Limited Partners, by written consent
of a majority of interests, elected the Permanent Manager, TPG, as General
Partner. TPG terminated the former general partners by accepting their tendered
resignations.
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established
against amounts due from former general partners and their affiliates reflecting
the estimated $3 million receivable. This net receivable was allocated among
the Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through September 30, 1997, $5,166,000 of recoveries have
been received which exceeded the original estimate of $3 million. As a result,
the Partnership has recognized $866,000 as income, which represents its share of
the excess recovery. The current General Partner continues to pursue recoveries
of the misappropriated funds, however, no further significant recoveries are
anticipated.
3. INVESTMENT PROPERTIES:
----------------------
As of September 30, 1997, the Partnership owned 29 fully constructed fast-food
restaurants, one (1) tag agency, one (1) video store, and one (1) preschool.
The restaurant properties are comprised of the following: ten (10) Wendy's
restaurants, four (4) Hardee's restaurants, seven (7) Denny's restaurants, one
(1) Applebee's restaurant, one (1) Popeye's Famous Fried Chicken restaurant, one
(1) former Country Kitchen restaurant, one (1) Hooter's restaurant, one (1)
Kentucky Fried Chicken restaurant, one (1) Hostettler's restaurant, one (1)
Miami Subs restaurant, and one (1) Village Inn restaurant. The 32 properties
are located in a total of thirteen (13) states.
From time to time, the Partnership experiences interruptions in rental receipts
due to tenant delinquencies and vacancies. At September 30, 1997, three of the
Partnership's properties were unoccupied. During 1995, the tenant of the
Country Kitchen restaurant in Cedar Rapids, Iowa, vacated the property and
stopped making rent payments.
7
<PAGE>
Management is currently marketing the property for lease. During the First
Quarter of 1997, DenAmerica, the tenant of the Partnership's Denny's
restaurants, notified the Partnership that it has vacated the property in Twin
Falls, Idaho and ceased paying rent. Management is currently working with
DenAmerica to resolve the issue, and the tenant has begun making rental payments
again, as required by their lease. During the First Quarter of 1997, the tenant
of the Denny's in Daytona Beach vacated the property. The tenant is continuing
to pay rent, and Management is negotiating a potential sale of the property to
the tenant.
The total cost of the investment properties and specialty leasehold improvements
includes the original purchase price plus acquisition fees and other capitalized
costs paid to an affiliate of the former general partners.
According to the Partnership Agreement, the former general partners were to
commit 80% of the original offering proceeds to investment in properties. Upon
full investment of the net proceeds of the offering, approximately 75% of the
original proceeds was invested in the Partnership's properties.
The current General Partner receives a fee for managing the Partnership equal to
4% of 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"). Effective March 1, 1997, the
minimum management fee and the maximum reimbursement for office rent and
overhead increased by 3.3% representing the allowable annual Consumer Price
Index adjustment per the PMA. For purposes of computing the 4% overall fee,
gross receipts include 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 $45,084 to date on the amounts recovered,
which has been offset against the 4% minimum fee.
The Partnership owns three (3) restaurants located on parcels of land where it
has entered into long-term ground leases. One (1) of these leases 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 1998, 2003 and
2018.
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.
The tenant of the Parnership's Hardee's restaurants exercised their negotiated
options to purchase three of their properties during the First Quarter of 1997.
These sales resulted in gross proceeds to the Partnership of $1,394,000 with a
net gain of $72,000. Additionally, a fourth Hardee's restaurant was sold to the
tenant during the Third Quarter of 1997, resulting in a gain of $3,000.
4. PARTNERSHIP AGREEMENT:
----------------------
The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that, for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
general partners. The Partnership Agreement also provided for quarterly cash
distributions from Net Cash Receipts, as defined, within 60 days after the last
day of the first full calendar quarter following the date of release of the
subscription funds from escrow, and each calendar quarter thereafter, in which
such funds were available for distribution with respect to such quarter. Such
distributions were to be made 90% to Limited Partners and 10% to the former
general partners, provided, however, that quarterly distributions were to be
cumulative and were not to be made to the former general partners unless and
until each Limited Partner had received a distribution from Net Cash Receipts in
an amount equal to 10% per annum, cumulative simple return on his or her
Adjusted Original Capital, as defined, from the Return Calculation Date, as
defined.
8
<PAGE>
Net Proceeds, as originally defined, were to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a Liquidation Preference equal to a 13.5% per annum, cumulative
simple return on Adjusted Original Capital from the Return Calculation date
including in the calculation of such return all prior distributions of Net Cash
Receipts and any prior distributions of Net Proceeds under this clause; and (c)
then, to Limited Partners, 90% and to the General Partners, 10%, of the
remaining Net Proceeds available for distribution.
On May 26, 1993, pursuant to the results of a solicitation of written consents
from the Limited Partners, the Partnership Agreement was amended to replace the
former general partners and amend various sections of the agreement. The former
general partners were replaced as General Partner by The Provo Group, Inc., an
Illinois corporation. Under the terms of the amendment, net profits or losses
from operations are allocated 99% to the Limited Partners and 1% to the current
General Partner. The amendment also provided for distributions from Net Cash
Receipts to be made 99% to Limited Partners and 1% to the current General
Partner provided, that quarterly distributions will be cumulative and will not
be made to the current General Partner unless and until each Limited Partner has
received a distribution from Net Cash Receipts in an amount equal to 10% per
annum, cumulative simple return on his or her Adjusted Original Capital, as
defined, from the Return Calculation Date, as defined, except to the extent
needed by the General Partner to pay its federal and state income taxes on the
income allocated to 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 8.)
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.
9
<PAGE>
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
<TABLE>
Year ending
December 31,
<S> <C>
1997 $ 2,908,582
1998 2,810,316
1999 2,804,916
2000 2,801,584
2001 2,692,654
Thereafter 20,617,293
-----------
$34,635,345
===========
</TABLE>
Four (4) of the Partnership's properties are leased to Hardee's Food Systems,
Inc. The corporate owner of Hardee's restaurants and ten (10) of the properties
are leased to Wensouth Orlando, Ltd., a franchisee of Wendy's restaurants.
Hardee's base rent accounts for 12% of total base rents and Wensouth accounts
for 26% of base rents.
6. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the nine-month periods ended
September 30, 1997 and 1996 are as follows.
<TABLE>
<CAPTION>
Incurred as of Incurred as of
Current General Partner September 30, 1997 September 30, 1996
- - ----------------------- ------------------ ------------------
<S> <C> <C>
Management fees $132,612 $128,512
Disposition fees 52,166 66,550
Restoration fees 89 25,155
Overhead allowance 10,775 10,710
Reimbursement for out-of-pocket expenses 13,988 15,322
Cash distribution 6,137 10,980
-------- --------
$215,767 $257,229
======== ========
</TABLE>
7. 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
September 30, 1997:
<TABLE>
<S> <C>
Minimum lease payments receivable $61,697
Estimated residual values of leased
property (non-recourse) 11,400
Less-Unearned income (9,345)
-------
Net investment in direct
financing leases $63,752
=======
</TABLE>
10
<PAGE>
At September 30, 1997, future minimum lease payments for each of the succeeding
fiscal years are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1997 $ 7,537
1998 37,860
1999 27,700
-------
$73,097
=======
</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.
8. 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 September 30, 1997, the
Partnership may owe the current General Partner $16,296, which is currently
reflected as a recovery, if the $6,000,000 recovery level is achieved.
9. 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 September 30, 1997. Funds are invested in U.S.
Treasury securities. In addition, $51,622 of earnings have been credited to the
Trust as of September 30, 1997. The rights of the Permanent Manager to the
Trust shall be terminated upon the earliest to occur of the following events:
(i) the written release by the Permanent Manager of any and all interest in the
Trust; (ii) the expiration of the longest statute of limitations relating to a
potential claim which might be brought against the Permanent Manager and which
is subject to indemnification; or (iii) a determination by a court of competent
jurisdiction that the Permanent Manager shall have no liability to any person
with respect to a claim which is subject to indemnification under the PMA. At
such time as the indemnity provisions expire or the full indemnity is paid, any
funds remaining in the Trust will revert back to the general funds of the
Partnership.
11
<PAGE>
10. RESTORATION TRUST ACCOUNT AND EXPENSE ALLOCATIONS;
--------------------------------------------------
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.
Recoveries realized by the Partnerships are being distributed to each respective
partnership on the same basis as the restoration costs are currently being
allocated. As of September 30, 1997, the Partnerships recovered a total of
approximately $5,126,000 from the former general partners and their affiliates.
Of this amount, the Partnership received its pro-rata share in the amount of
$2,073,000. Additionally, $40,347, representing 50% of all previously escrowed
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 8.
The PMA contemplated that the Permanent Manager could establish a separate and
distinct Restoration Trust Fund which would hold all recoveries until a final
independent adjudication by a court of competent jurisdiction or vote of the
Limited Partners ratified the allocation of proceeds to each respective
partnership. Management has concluded that a fair and reasonable interim
accounting for recovery proceeds can be accomplished at the partnership level in
a manner similar to restoration costs which are paid directly by the
Partnerships. Management reserves the right to cause the final allocation of
such costs and recoveries to be determined either by a vote of the Limited
Partners or a court of competent jurisdiction. Potential sources of recoveries
include third party litigation, promissory notes, land contracts, and personal
assets of the former general partners and their affiliates.
On March 24, 1994, an affiliated partnership, DiVall 1, filed a complaint in the
United States District Court for the Western District of Missouri against
Boatmen's First National Bank of Kansas City ("Boatmen's") seeking a declaratory
judgment that Boatmen's has no right or interest in a promissory note executed
in the name of DiVall 1 by the former general partners (the "Note") secured by
mortgages on five DiVall 1 properties, and further seeking an injunction against
foreclosure proceedings instituted against a DiVall 1 property located in
Dallas, Texas under a first deed of trust and security agreement given to secure
the Note (the "Foreclosure"). The former general partners borrowed $600,000
during or before 1991 from Metro North State Bank (now Boatmen's). The proceeds
of the Note were not received by DiVall 1. As of September 30, 1997, DiVall 1
had not paid debt service on the Note. DiVall 1 received a notice of default on
the Note in October 1993, and the Foreclosure Action was filed in February 1994.
As of September 30, 1997, interest in the amount of $265,000 had accrued but was
unpaid on the Note. Boatmen's 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. Trial of
the case took place on June 23, 1997. The judge ruled in favor of DiVall 1 on
August 21, 1997, that the note was unenforceable. However, Boatmen's appealed
the ruling, so no recovery was recorded during the quarter. However, the
appeal was dropped during the fourth quarter of 1997, so a recovery will be
recorded during the fourth quarter. Pursuant to the Restoration Trust Account
procedures described above, all of the Partnerships are sharing the expenses of
this litigation and the recovery resulting from
12
<PAGE>
the 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.
11. LITIGATION:
-----------
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure
the repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 1 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
On July 23, 1993, nineteen (19) of the Private Partnerships sought the
protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven
(7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies
were involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest. These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.
The Partnership's experience in those bankruptcy cases that have concluded,
either through the approval of Plans of Reorganization, dismissal of the
bankruptcies, settlements or a combination of the foregoing, is that (i) the
value of the obligations of the Private Partnerships assigned to the Partnership
has been at a significant discount to their face amounts, and (ii) the General
Partner interests in such Private Partnerships often have little economic value.
The Partnership's recoveries in these bankruptcies have been on a steeply
discounted basis.
Plans of reorganization have been filed in the bankruptcies, and settlement
agreements in all of the Private Partnerships have been reached. Settlements in
the bankruptcies have resulted in cash payments to the Partnerships of a total
of $720,000 and notes secured by subordinated mortgages in the aggregate amount
of $625,000. The Partnerships subsequently sold the secured notes for a total
of $175,000.
12. 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.
13. SUBSEQUENT EVENTS:
------------------
On November 15, 1997, the Partnership made distributions to the Limited Partners
for the Third Quarter of 1997 of $1,075,000 amounting to approximately $23.23
per limited partnership interest.
13
<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
September 30, 1997, were originally purchased at a price, including acquisition
costs, of approximately $24,305,000.
The tenant of the Country Kitchen restaurant in Cedar Rapids, Iowa vacated the
property during 1995 and ceased paying rent. Management is currently marketing
the property for lease. During the First Quarter of 1997, DenAmerica, the
tenant of the Partnership's Denny's restaurants, notified the Partnership that
is has vacated the property in Twin Falls, Idaho, and ceased paying rent.
Management is currently working with DenAmerica to resolve the issue, and the
tenant has begun making rental payments again, as required by their lease.
During the First Quarter of 1997, the tenant of the Denny's in Daytona Beach
vacated the property. The tenant continues to pay rent, and Management is
negotiating a potential sale of the property to the tenant.
Due to the damaging floods and record snowfalls in Grand Forks, North Dakota,
the tenant of the Village Inn has experienced financial difficulties.
Management worked with the tenant by abating rent on the property for two and
one half months until the business was back in operation.
The tenant of the Partnership's Hardee's restaurants exercised their negotiated
option to purchase three (3) of their properties during the First Quarter of
1997, resulting in a net gain of approximately $72,000. Additionally, a fourth
property was purchased during the Third Quarter of 1997 at a gain of $3,000.
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, amounted to $63,752 at September 30,
1997, compared to $109,000 at December 31, 1996. The decrease of $45,248 was a
result of principal and residual payments received.
Other Assets
- - ------------
Cash and cash equivalents, including cash restricted for real estate taxes was
approximately $1,568,000 at September 30, 1997, compared to $1,555,000 at
December 31, 1996. The Partnership designated cash of $1,075,000 to fund the
Third Quarter 1997 distributions to Limited Partners, $224,000 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.
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 9 to the financial statements.
14
<PAGE>
Due From Former Affiliates and Allowance for Uncollectible Amounts Due From
- - ---------------------------------------------------------------------------
Former Affiliates
- - -----------------
Due from former affiliates represented misappropriated assets due from the
former general partners and their affiliates in the amount of $1,741,000 at
September 30, 1997. The receivable decreased from December 31, 1996 due to
$2,000 of recoveries received from the former general partners and their
affiliates.
The Partnership maintains a record of costs incurred in identifying or
recovering the misappropriated assets. These amounts are expensed when incurred,
and then, recorded on the balance sheet as a restoration cost receivable with a
corresponding allowance for such receivable deemed uncollectible. These costs
are considered due from the former general partners and their affiliates.
Interest has been accrued on the misappropriated funds since January 1, 1993, at
a rate of 9% per annum and has been included in the restoration cost receivable.
The receivable increased from approximately $3,898,000 at December 31, 1996, to
$4,322,000 at September 30, 1997, and includes $2,312,000 of cumulative accrued
interest.
In 1993, the current General Partner estimated an aggregate recovery of $3
million for the Partnerships. At that time, an allowance was established
against amounts due from former general partners and their affiliates reflecting
the estimated $3 million receivable. This net receivable was allocated among
the Partnerships based on each Partnership's pro rata share of the total
misappropriation. Through September 30, 1997, $5,166,000 of recoveries have
been received which exceeded the original estimate of $3 million. As a result,
the Partnership has recognized $866,000 as income, which represents its share of
the excess recovery. The current General Partner continues to pursue recoveries
of the misappropriated funds, however no further significant recoveries are
anticipated.
The restoration costs are allocated among the Partnerships based on each
Partnership's respective share of the misappropriation as discussed in Note 10
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.
Liabilities
- - -----------
Accounts payable and accrued expenses at September 30, 1997, in the amount of
$49,000, primarily represented the accrual of legal and auditing fees.
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 12 to the financial statements for additional
information regarding the reallocation.
Cash distributions paid to the Limited Partners and to the General Partner
during 1997 of $3,525,000 and $6,137, respectively, have also been in accordance
with the amended Partnership Agreement. The Third Quarter 1997 distribution of
$1,075,000 was paid to the Limited Partners on November 15, 1997.
Results of Operations:
- - ----------------------
The Partnership reported net income for the quarter ended September 30, 1997, in
the amount of $528,000 compared to net income for the quarter ended September
30, 1996, of $1,057,000. For the nine months ended September 30, 1997 and 1996,
net income totaled $1,534,000 and $2,745,000, respectively. The
15
<PAGE>
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 of the litigation. During 1997, these costs had a minimal
impact on operations. Additionally, 1996 revenue included a recovery of
amounts previously written off from the Partnership's former accountants and
attorneys and a large gain on the sale of properties.
Revenues
- - --------
Total revenues were $795,000 and $1,387,000, for the quarters ended September
30, 1997 and 1996, respectively, and were $2,414,000 and $4,240,000 for the nine
months ended September 30, 1997 and 1996, respectively. The 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 two Applebee's properties.
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 1996 to 1997 is a result of property sales as well as the reduction in
rents on the remaining Hardee's restaurants.
Expenses
- - --------
For the quarters ended September 30, 1997 and 1996, cash expenses amounted to
approximately 19% and 14%, of total revenues, respectively. For the nine months
ended September 30, 1997 and 1996, cash expenses totaled 22% and 26%,
respectively. Total expenses, including non-cash items, amounted to
approximately 34% and 24%, of total revenues for the quarters ended September
30, 1997 and 1996, respectively and totaled 36% and 35% for the nine months
ended September 30, 1997 and 1996, respectively. Items negatively impacting
expenses during 1996, include expenses incurred primarily in relation to the
misappropriation of assets by the former general partners and their affiliates.
The 1997 percentages are increased as a result of disposition fees paid upon the
sale of properties, while gains on those sales were lower than those experienced
during 1996.
For the nine months ended September 30, 1997 and 1996, expenses incurred in
relation to the misappropriated assets amounted to $31,000 and $511,000,
respectively. Future expenses incurred in relation to the misappropriation
should have a minimal impact on the Partnership.
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.
16
<PAGE>
PART II - OTHER INFORMATION
Item 2. Legal Proceedings
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure
the repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 1 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
On July 23, 1993, nineteen (19) of the Private Partnerships sought the
protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven
(7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies
were involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest. These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.
The Partnership's experience in those bankruptcy cases that have concluded,
either through the approval of Plans of Reorganization, dismissal of the
bankruptcies, settlements or a combination of the foregoing, is that (i) the
value of the obligations of the Private Partnerships assigned to the
Partnerships have been at a significant discount to their face amounts, and (ii)
the General Partner interests in such Private Partnerships often have little
economic value. The Partnership's recoveries in these bankruptcies have been on
a steeply discounted basis.
Plans of reorganization have been filed in the bankruptcies, and settlement
agreements in all the Private Partnerships have been reached. Settlements in
the bankruptcies have resulted in cash payments to the Partnerships of a total
of $720,000 and notes secured by subordinated mortgages in the aggregate amount
of $625,000. The Partnerships subsequently sold the secured notes for a total
of $175,000.
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.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
99.0 Correspondence to the Limited Partners dated November 15, 1997,
regarding the Third Quarter 1997 distribution.
(b) Reports on Form 8-K:
The Registrant filed no reports on Form 10-K during the third quarter of
fiscal year 1997.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
By: The Provo Group, Inc., General Partner
By: /s/Bruce A. Provo
--------------------------------------------
Bruce A. Provo, President
Date: November 14, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: The Provo Group, Inc., General Partner
By: /s/Bruce A. Provo
--------------------------------------------
Bruce A. Provo, President
Date: November 14, 1997
By: /s/Kristin J. Atkinson
-------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: November 14, 1997
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
September 30, 1997 Form 10-Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 1,567,950 1,567,950
<SECURITIES> 301,622 301,622
<RECEIVABLES> 6,733,447 6,733,447
<ALLOWANCES> 6,064,085 6,064,085
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,538,934 2,538,934
<PP&E> 23,968,632 23,968,632
<DEPRECIATION> 5,359,783 5,359,783
<TOTAL-ASSETS> 21,147,783 21,147,783
<CURRENT-LIABILITIES> 240,754 240,754
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 20,907,029 20,907,029
<TOTAL-LIABILITY-AND-EQUITY> 21,147,783 21,147,783
<SALES> 729,201 2,200,980
<TOTAL-REVENUES> 795,472 2,414,127
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 267,360 879,841
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 528,112 1,534,286
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 528,112 1,534,286
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 528,112 1,534,286
<EPS-PRIMARY> 11.30 32.82
<EPS-DILUTED> 11.30 32.82
</TABLE>
<PAGE>
EXHIBIT 99
DiVall Insured Income Properties 2, L.P.
QUARTERLY NEWS
================================================================================
A publication of The Provo Group, Inc. THIRD QUARTER 1997
THIRD-PARTY SOLICITORS...Are They Really "Long-Term" Investors or Merely "Quick"
Profiteers on Your Interests?
Madison, Wisconsin
Over the last year or so, a third-party solicitor may have either telephoned you
or mailed you a "teaser" piece inquiring about the purchase of your interests in
DiVall Insured Income Properties 2 Limited Partnership (the "Partnership").
At the time, you may have either ignored the inquiry or you may have agreed to
sell your interests to this third-party solicitor -- most likely without first
discussing alternatives with a secondary market broker.
So, you ask...third-party solicitors??...secondary market brokers?? What's the
difference? Both parties want my interests for a discounted rate - what does it
matter to whom I choose to sell?
Quite simply, it is your choice, however, you may be interested in knowing that
the third-party solicitations you may receive are not regulated by the
Securities Exchange Commission (S.E.C.).
The secondary market is "highly" regulated by the S.E.C. - offering liquidation
opportunities to investors for years at competitive pricing.
Perhaps, even more interesting is that many third-party solicitors who indicate
that they are interested in your units for their own "investment purposes" (and
may offer to relieve you of the "headache" of filing Schedule K-1's or provide
you with a one time "opportunity for liquidation") are not necessarily serious
long-term investors.
It appears that many of these solicitors are merely "quick profiteers" on your
heretofore patiently held interests...selling those very same interests they
purchased from you on the secondary market within months.
How much is a third-party solicitor making on your interests? Here's an
"example" based on a single unit which was initially purchased by you for
$1,000:
<TABLE>
<S> <C>
Unit (Purchased) by Solicitor: $(331.00)
Distributions Paid to Solicitor: 34.00
Unit Sold by Solicitor (after 7 mos.): 406.00
--------
Profit Made by Solicitor: $ 109.00
========
</TABLE>
Could you have received a higher selling rate in the secondary
market?...Perhaps. (The above example shows an annualized return of over 55%!)
Will a secondary market broker earn a commission or make a profit?...Most
likely.
Again you ask...what's the difference?
The difference is that you always have a choice and you always have a right to
ask for more information.
As your General Partner, we can not act as your financial advisor nor can we be
the "gatekeepers" of your interests. We simply try to keep you informed.
=====================================
OTHER NEWS INSIDE...
<TABLE>
<S> <C> <C>
. Boatmen's Ruling Appealed ............... Restoration Highlights, pg 4
. Cypress Restaurants to Buy its Dennys ...... Property Highlights, pg 4
. DenAmerica's Leases Terminating? .......... Property Highlights, pg 3
. Village Inn Says Sales Are Up .............. Property Highlights, pg 4
</TABLE>
<PAGE>
Page 2 DiVall 2 3 Q
=======================
Distribution Highlights
. 6.6% (approx.) annualized return . $23.23 per unit (approx.) for the
from operations and 1.4% (approx.) Third Quarter 1997 from both cash
non-annualized return of capital flow from operations and investing
from a special distribution related activities.
to a property sale and principal
received from equipment leases based . $844.00 to $646.00 range of
on $34,900,000 ("net" remaining distributions per unit from the
initial investment). first unit sold to the last unit
sold before the offering closed
. $1,075,000 total amount distributed (February 1990), respectively.
for the Third Quarter 1997 which was
$500,000 more than budgeted. Distributions are from both cash
flow from operations and "net"
The "higher" than budgeted distribution cash activity from financing and
is primarily due to the sale of the investing activities.
Hardee's restaurant (West Jordan, UT).
(NOTE: Original units were
purchased for $1,000/unit.)
======================
Statements of Income and Cash Flow Highlights
. 5% increase in . 2% increase in total . 7% increase in "net"
operating revenues expenses from income from
from projections. projections. projections.
. Net proceeds in . $15,000 was paid in . Equipment residuals
the amount of disposition fees (previously written
$470,000 were during the quarter off) in the amount
received by the as a result of a of $17,000 (approx.)
Partnership as a property sale. were collected during
result of a the quarter.
property sale.
<PAGE>
Page 3 DiVall 2 3 Q
===========================
Property Highlights
Vacancies
---------
. Country Kitchen restaurant (Cedar Rapids, IA) was vacant at September 30,
1997. [NOTE: Management recently received a "letter of intent" to re-lease
this restaurant. It is anticipated that rent will commence January 1998.]
. Denny's restaurant (Twin Falls, ID) . Denny's restaurant (Daytona Beach,
was vacant at September 30, 1997. FL) was vacant at September 30, 1997.
The tenant of this property, The tenant of this property, Cypress
DenAmerica, Corporation, vacated the Restaurants, Inc., vacated the
property at the end of December property at the end of March 1997 and
1996. It should be noted, however, intends to remodel to a different
this tenant continues to meet its concept. It should be noted,
rental obligations. (NOTE: Refer to however, this tenant continues to
"Other Property Matters" below for meet its rental obligations. (NOTE:
further discussion.) Refer to "Other Property Matters"
below for further discussion.)
Rents Receivable
----------------
. P&T Holdings, tenant of Miami Subs . DenAmerica Corporation, tenant of
(Palm Beach, FL), was $2,900 Denny's (Twin Falls, ID), was $1,600
delinquent in percentage rent at delinquent in scheduled rent at
September 30, 1997. September 30, 1997.
Sale of Property
----------------
. On July 31, 1997, Hardee's (West Jordan, UT) was sold for $537,200.
----
Other Property Matters
----------------------
. As noted above, DenAmerica Corporation vacated and closed their Twin Falls,
Idaho restaurant. Subsequently, this tenant was defaulted and management is
considering DenAmerica's proposal to terminate the Twin Falls, Idaho lease.
The other consideration to modify their remaining leases that currently pay
straight percentage rent versus fixed rent has been deferred until the
termination agreement is finalized.
<PAGE>
Page 4 DiVall 2 3 Q
========================
Property Highlights (contd.)
Other Property Matters (contd.)
-------------------------------
The status of these requests are as follows:
Denny's - Twin Falls, ID - Lease termination agreement out for
execution. Termination includes a payment
of all charges through 12/31/97; equipment
lease buy-out; plus, payment of 1997 real
estate taxes.
Denny's (3) - Phoenix, AZ - Lease modification negotiations have ceased
until the lease termination agreements and
fees have been fully executed and paid.
(NOTE: These negotiations are for three (3)
DenAmerica restaurants located on N. 7th
Street; W. Camelback Road; and Indian
School Road in Phoenix, Arizona.)
* * *
. Cypress Restaurants, Inc., tenant . FMI, tenant of the Partnership's
of Denny's (Daytona Beach, FL and Village Inn (Grand Forks, ND),
New Smyrna, FL), proposed offers to notified management that another
purchase both of these properties Village Inn that was "operated" by
last quarter. The Partnership has this same tenant, but not "owned"
agreed to the purchase offers and by the Partnership, closed its
anticipates that the closings will doors. This closing has contributed
occur by year-end. to a sales increase for the Village
Inn owned by the Partnership.
======================
Restoration Highlights
. There were no recoveries received . The Partnership received a
during the Third Quarter 1997. "favorable" ruling for its case
against Boatmen's First National
Bank of Kansas City which went to
. "Total" recoveries received to date trial on June 23, 1997. Boatmen's has
for the Partnership are appealed this ruling.
approximately $2,089,000.
(NOTE: The Partnership is awaiting
the outcome of this appeal before any
recovery is recorded.)
<PAGE>
Page 5 DiVall 2 3 Q
=========================
Return of Capital
The following table has been updated to present the breakdown of distributions
since the Partnership's first quarterly distribution, for the period ended June
30, 1988 through September 30, 1997.
<TABLE>
<CAPTION>
================================================================================
Distribution Capital
------------ -------
Analysis Balance
-------- -------
<S> <C> <C>
Original Capital Balance - $ 46,280,300
Cash Flow From Operations Since Inception $ 23,237,202 -
Total Distributions Since Inception (34,638,868) -
------------
(Return) of Capital $(11,401,666) (11,401,666)
============ ------------
"Net" Remaining Initial Investment
by Original Partners - $ 34,878,634
============
================================================================================
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
=========================
Advisory Board
The seventeenth Advisory Board meeting was held November 4 and 5, 1997. The
following new Board members were given a comprehensive orientation of the
Partnerships' affairs.
. Mr. Robert White was nominated by the Limited Partners and selected to
represent DiVall Insured Income Fund, L.P. and will serve a two (2)
year term.
. Mr. Albert Gerritz was nominated by the Limited Partners and selected
to represent DiVall Income Properties 3, L.P. and will serve a two (2)
year term.
<PAGE>
Page 6 DiVall 2 3 Q
========================
Advisory Board (contd.)
. Mr. Steven Carson was nominated and selected by the selling broker
firms of DiVall Insured Income Fund, L.P.; DiVall Insured Income
Properties 2, L.P.; and DiVall Income Properties 3, L.P. to represent
the brokerage community and will serve a two (2) year term.
These new members replaced Mr. Gerhard Zoller (DiVall 1); Dr. Albert Eschen
(DiVall 3); and Mr. Todd Witthoeft (Broker Dealer) whose terms expired September
30, 1997.
The member carrying over from the prior Board is Mr. Richard Otte, representing
DiVall Insured Income Properties 2, L.P. Mr. Otte will serve the remaining year
of his two (2) year term.
For further information regarding the new Advisory Board members, please refer
to the enclosed biographical summaries.
========================
Questions & Answers
<TABLE>
<S> <C>
1. When can I expect to receive my 2. When will 1997 per unit values be
Schedule K-1 for 1997? available for my investment in the
Partnership?
Our current schedule for mailing all
1997 Schedule K-1's for your The Partnership's 1997 "year-end"
Partnership and its affiliated valuation information is tentatively
partnerships is no later than March scheduled to be available by the
13, 1998. First Quarter 1998. We will include
this information in our 1997 Annual
Report which we plan to mail by
early April 1998.
</TABLE>
<PAGE>
Page 7 DiVall 2 3 Q
=======================
Questions & Answers (contd.)
<TABLE>
<S> <C>
3. Why do I receive solicitations to 4. When can I expect my next
buy my interests? distribution mailing?
As discussed earlier in this Your next distribution correspondence
correspondence, any solicitations for the Fourth Quarter of 1997 is
that you may receive to buy your scheduled to be mailed on February
interests are a result of a 13, 1998.
third-party (not affiliated with
TPG, Inc.) who is interested in
acquiring units at a discounted
rate. As General Partner, we
encourage you to review all of your
options.
</TABLE>
* * *
================================================================================
For questions or additional information, please contact Investor Relations at:
1-800-547-7686 or 1-608-244-7661
All written inquiries may be mailed or faxed to:
The Provo Group, Inc.
Post Office Box 8673 1410 Northport Drive
Madison, Wisconsin 53708-8673 Madison, Wisconsin 53704
(FAX 608-244-7663)
================================================================================
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PROJECTED ACTUAL VARIANCE
3RD 3RD
QUARTER QUARTER BETTER
OPERATING REVENUES 9/30/97 9/30/97 (WORSE)
---------- ---------- ---------
<S> <C> <C> <C>
Rental income $725,818 $726,956 $1,138
Direct financing interest 2,245 2,245 0
Interest income 16,550 18,211 1,661
Other income 11,532 48,060 36,528
--------- ---------- ---------
TOTAL OPERATING REVENUES $756,145 $795,472 $39,327
--------- ---------- ---------
OPERATING EXPENSES
Insurance $7,113 $6,409 $704
Management fees 44,391 44,520 (129)
Overhead allowance 3,700 3,591 109
Advisory Board 4,400 3,628 772
Administrative 19,823 15,054 4,769
Professional services 4,992 8,418 (3,426)
Disposition Fees 0 15,000 (15,000)
Auditing 12,000 12,000 0
Legal 7,500 5,483 2,017
Defaulted tenants 1,920 3,090 (1,170)
--------- --------- ---------
TOTAL OPERATING EXPENSES $105,839 $117,193 ($11,354)
--------- --------- ---------
GROUND RENT $30,927 $31,250 ($323)
--------- --------- ---------
INVESTIGATION AND RESTORATION EXPENSES $1,215 $4,282 ($3,067)
--------- --------- ---------
NON-OPERATING EXPENSES
Depreciation $123,186 $113,472 $9,714
Amortization 0 1,163 (1,163)
--------- --------- ---------
TOTAL NON-OPERATING EXPENSES $123,186 $114,635 $8,551
--------- --------- ---------
TOTAL EXPENSES $261,167 $267,360 ($6,193)
--------- --------- ---------
NET INCOME $494,978 $528,112 $33,134
OPERATING CASH RECONCILIATION: VARIANCE
---------
Depreciation and amortization 123,186 114,635 (8,551)
(Increase) Decrease in current assets 7,093 27,125 20,032
Increase (Decrease) in current liabilities (44,187) (240,799) (196,612)
(Increase) Decrease in cash reserved for payables (6,000) 160,000 166,000
Advance from prior cash flows for current distributions (16,000) (16,000) 0
--------- -------- ---------
Net Cash Provided From Operating Activities $559,070 $573,073 $14,003
--------- -------- ---------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Recoveries from former G.P. affiliates 0 0 0
Principal received on equipment leases 13,430 31,445 18,015
Proceeds from property sales 0 470,247 470,247
--------- -------- ---------
Net Cash Provided From Investing And Financing
Activities $13,430 $501,692 $488,262
--------- -------- ---------
Total Cash Flow For Quarter $572,500 $1,074,765 $502,265
Cash Balance Beginning of Period 920,995 1,162,185 241,190
Less 2nd quarter distributions paid 8/97 (575,000) (525,000) 50,000
Change in cash reserved for payables or future disbutions 22,000 (144,000) (166,000)
--------- --------- ---------
Cash Balance End of Period $940,495 $1,567,950 $627,455
Cash reserved for 3rd quarter L.P. distributions (575,000) (1,075,000) (500,000)
Cash reserved for payment of payables (200,000) (224,000) (24,000)
--------- --------- ---------
Unrestricted Cash Balance End of Period $165,495 $268,950 $103,455
========= ========= =========
PROJECTED ACTUAL VARIANCE
* Quarterly Distribution $575,000 $1,075,000 $500,000
Mailing Date 11/15/97 (enclosed) -
</TABLE>
* Refer to distribution letter for detail of quarterly distribution.
<PAGE>
PROJECTIONS FOR DISCUSSION PURPOSES
DIVALL INSURED INCOME PROPERTIES 2 LP
1997 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
ORIGINAL EQUITY $46,280,300
NET DISTRIBUTION OF
CAPITAL SINCE INCEPTION $11,401,666
-----------
CURRENT EQUITY $34,878,634
PORTFOLIO (Note 1)
<TABLE>
<CAPTION>
REAL ESTATE EQUIPMENT
------------------------------ -------------------------------------------
ANNUAL LEASE ANNUAL
BASE % EXPIRATION LEASE % *
CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN
- - ------------------------------------- ------------------------------ -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
APPLEBEE'S COLUMBUS, OH 1,059,465 135,780 12.82% 84,500 0 0.00%
BLOCKBUSTER OGDEN, UT 646,425 100,554 15.56%
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 83,200 11.90% 04/30/99 190,000 37,860 19.93%
DENNY'S (2)(3) PHOENIX, AZ 500,000 37,000 7.40% 14,259 0 0.00%
HARDEE'S (5) S MILWAUKEE, WI 808,032 64,000 7.92%
HARDEE'S (5) HARTFORD, WI 686,563 64,000 9.32%
HARDEE'S (5) MILWAUKEE, WI 1,010,045 76,000 7.52% (4) 260,000 0 0.00%
" " 151,938 0 0.00%
HARDEE'S (5) FOND DU LAC, WI 849,767 88,000 10.36% (4) 290,469 0 0.00%
HARDEE'S (5) MILWAUKEE, WI 0 0 0.00% 780,000 0 0.00%
HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62%
HOSTETTLER'S DES MOINES, IA 845,000 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 39,000 5.24%
<CAPTION>
TOTALS TOTAL % ON
------------------------------- $34,878,634
ANNUAL EQUITY
CONCEPT LOCATION COST RECEIPTS RETURN RAISE
- - ------------------------------------- -------------------------------- -----------
<S> <C> <C> <C> <C>
APPLEBEE'S COLUMBUS, OH 1,143,965 135,780 11.87%
BLOCKBUSTER OGDEN, UT 646,425 100,554 15.56%
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 889,032 121,060 13.62%
DENNY'S (2)(3) PHOENIX, AZ 514,259 37,000 7.19%
HARDEE'S (5) S MILWAUKEE, WI 808,032 64,000 7.92%
HARDEE'S (5) HARTFORD, WI 686,563 64,000 9.32%
HARDEE'S (5) MILWAUKEE, WI 1,421,983 76,000 5.34%
" "
HARDEE'S (5) FOND DU LAC, WI 1,140,236 88,000 7.72%
HARDEE'S (5) MILWAUKEE, WI 780,000 0 0.00%
HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62%
HOSTETTLER'S DES MOINES, IA 897,813 55,584 6.19%
KFC SANTA FE, NM 451,230 60,000 13.30%
MIAMI SUBS PALM BEACH, FL 743,625 39,000 5.24%
</TABLE>
Note 1: This property summary includes only current property and equipment
held by the Partnership.
Equipment lease receipts shown include a return of capital.
2: Rent is based on 12.5% of monthly sales. Rent projected for 1997 is
based on 1996 sales levels.
3: The Partnership entered into a long-term ground lease in which the
Partnership is responsible for payment of rent.
The annual base rent shown is net of the underlying ground lease rent.
4: The lease was terminated and the equipment sold to Hardee's Food
Systems in conjunction with their assumption of the Terratron leases in
November 1996.
5: These leases were assumed by Hardee's Food Systems at a reduced rental
rate from that stated in the original leases.
Page 1 of 2
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------
PROJECTIONS FOR ORIGINAL EQUITY $46,280,300
DISCUSSION PURPOSES DIVALL INSURED INCOME PROPERTIES 2 LP NET DISTRIBUTION OF
1997 PROPERTY SUMMARY CAPITAL SINCE INCEPTION $11,401,666
AND RELATED ESTIMATED RECEIPTS -----------
CURRENT EQUITY $34,878,634
---------------------------------------
PORTFOLIO (Note 1)
--------------------------- ------------------------------------ --------------------------- -----------
REAL ESTATE EQUIPMENT TOTALS TOTAL %
--------------------------- ------------------------------------ --------------------------- ON
ANNUAL LEASE ANNUAL $34,878,634
- - --------------------------- BASE % EXPIRATION LEASE % TOTAL EQUITY
CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN COST RECEIPTS RETURN RAISE
- - --------------------------- --------------------------- ------------------------------------ --------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
POPEYE'S PARK FOREST, IL 580,938 77,280 13.30% 580,938 77,280 13.30%
SUNRISE PS PHOENIX, AZ 1,084,503 127,920 11.80% 79,219 0 0.00% 1,182,735 127,920 10.82%
19,013 0 0.00%
VILLAGE INN GRAND FORKS, ND 739,375 84,000 11.36% 739,375 84,000 11.36%
WENDY'S AIKEN, SC 633,750 90,480 14.28% 633,750 90,480 14.28%
WENDY'S CHARLESTON, SC 580,938 76,920 13.24% 580,938 76,920 13.24%
WENDY'S N. AUGUSTA, SC 660,156 87,780 13.30% 660,156 87,780 13.30%
WENDY'S AUGUSTA, GA 728,813 96,780 13.28% 728,813 96,780 13.28%
WENDY'S CHARLESTON, SC 596,781 76,920 12.89% 596,781 76,920 12.89%
WENDY'S AIKEN, SC 776,344 96,780 12.47% 776,344 96,780 12.47%
WENDY'S AUGUSTA, GA 649,594 86,160 13.26% 649,594 86,160 13.26%
WENDY'S CHARLESTON, SC 528,125 70,200 13.29% 528,125 70,200 13.29%
WENDY'S MT. PLEASANT,
SC 580,938 77,280 13.30% 580,938 77,280 13.30%
WENDY'S MARTINEZ, GA 633,750 84,120 13.27% 633,750 84,120 13.27%
HALLANDALE
TAG HALLANDALE, FL 792,188 30,000 3.79% 792,188 30,000 3.79%
- - --------------------------- -------------------------- ------------------------------------ --------------------------- ------------
- - --------------------------- -------------------------- ------------------------- --------------------------- ------------
PORTFOLIO TOTALS
(32 Properties) 23,962,302 2,539,918 10.60% 2,551,063 37,860 1.48% 26,513,365 2,577,779 9.72% 7.39%
- - --------------------------- -------------------------- ------------------------- --------------------------- ------------
</TABLE>
Note 1: This property summary includes only current property and equipment
held by the Partnership. Equipment lease receipts shown include a
return of capital.
Page 2 of 2
