<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, 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
March 31, 1997 and December 31, 1996
------------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1997 1996
----------- ------------
INVESTMENT PROPERTIES AND EQUIPMENT: (Note 3)
<S> <C> <C>
Land $ 8,605,185 $ 9,141,303
Buildings 15,273,975 16,488,654
Equipment 707,378 707,378
Accumulated depreciation (5,245,204) (5,550,940)
----------- -----------
Net investment properties and equipment 19,341,334 20,786,395
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES: (Note 7) 101,200 108,826
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 2,523,401 1,444,326
Cash restricted for real estate taxes 16,808 110,625
Cash held in Indemnification Trust (Note 9) 293,766 289,637
Rents and other receivables (net of allowance of
$2,975 in 1997 and $0 in 1996) 152,694 218,051
Deferred rent receivable 259,339 259,326
Prepaid insurance 15,138 22,262
Deferred charges 47,923 53,620
Unsecured notes receivable from lessees 82,224 86,288
----------- -----------
Total other assets 3,391,293 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 4,040,675 3,897,981
Allowance for uncollectible
restoration receivable (4,040,675) (3,897,981)
----------- -----------
Due from former affiliates, net 0 0
----------- -----------
Total assets $22,833,827 $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
March 31, 1997 and December 31, 1996
------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 49,328 $ 67,589
Due to current General Partner 30,301 86,727
Security deposits 139,670 144,290
Unearned rental income 132,182 57,739
Real estate taxes payable 46,908 119,131
------------ ------------
Total liabilities 398,389 475,476
------------ ------------
CONTINGENT LIABILITIES: (Note 8)
PARTNERS' CAPITAL: (Notes 1, 4 and 12)
Current General Partner -
Cumulative net income 85,401 80,064
Cumulative cash distributions (33,490) (31,355)
------------ ------------
51,911 48,709
------------ ------------
Limited Partners (46,280.3 interests outstanding)
Capital contributions, net of offering costs 39,358,468 39,358,468
Cumulative net income 14,820,556 14,292,200
Cumulative cash distributions (30,955,268) (29,955,268)
Reallocation of former general partners' deficit capital (840,229) (840,229)
------------ ------------
22,383,527 22,855,171
------------ ------------
Total partners' capital 22,435,438 22,903,880
------------ ------------
Total liabilities and partners' capital $ 22,833,827 $ 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
March 31,
----------------------
1997 1996
-------- ----------
<S> <C> <C>
REVENUES:
Rental income (Note 5) $761,332 $ 817,723
Interest income on direct financing leases 3,226 18,173
Other interest income 18,014 19,671
Recovery of amount previously written off 2,221 629,765
Other income 12,015 22,260
Gain on disposal of assets 72,256 484,225
-------- ----------
869,064 1,991,817
-------- ----------
EXPENSES:
Partnership management fees 43,572 42,316
Disposition fees 37,166 20,550
Disposition fees - Restoration 0 20,550
Restoration fees 89 24,053
Appraisal fees 4,597 2,268
Insurance 7,124 13,645
General and administrative 30,744 23,203
Advisory Board fees and expenses 4,088 4,364
Interest 0 1,810
Real estate taxes 0 (1,709)
Ground lease payments (Note 3) 31,785 30,936
Expenses incurred due to default by lessee 2,156 (121)
Professional services 27,799 35,780
Professional services related to investigation 17,219 560,252
Depreciation 123,335 129,488
Amortization 5,697 201
-------- ----------
335,371 907,586
-------- ----------
NET INCOME $533,693 $1,084,231
======== ==========
NET INCOME - CURRENT GENERAL PARTNER $ 5,337 $ 10,842
NET INCOME - LIMITED PARTNERS 528,356 1,073,389
-------- ----------
$533,693 $1,084,231
======== ==========
NET INCOME (LOSS) PER LIMITED PARTNERSHIP INTEREST,
based on 46,280.3 Interests outstanding $ 11.42 $ 23.19
======== ==========
</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>
Three Months Ended
March 31,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 533,693 $1,084,231
Adjustments to reconcile net income to net cash provided by
operating activities -
Depreciation and amortization 129,032 129,689
Recovery of amounts previously written off (2,221) (629,765)
Net (gain) on disposal of assets (72,256) (484,225)
Interest applied to Indemnification Trust account (4,129) (3,518)
Decrease in rents and other receivables 65,357 165,917
(Deposits) Withdrawals for payment of real estate taxes 93,817 (448)
Decrease in prepaids 7,124 3,852
(Increase) Decrease in deferred rent receivable (13) 17,051
Increase (Decrease) in due to current General Partner (56,426) 3,841
(Decrease) in accounts payable and other (18,261) (110,724)
(Decrease) in security deposits (4,620) (15,000)
(Decrease) in real estate taxes payable (72,223) (21,962)
Increase (Decrease) in unearned rental income 74,443 0
----------- ----------
Net cash from operating activities 673,317 138,939
----------- ----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Principal payments received on direct financing leases 7,626 35,709
Principal payments received on notes receivable 4,064 0
Proceeds from sale of investment properties 1,393,982 1,366,966
Recoveries from former affiliates 2,221 1,551,866
Deposit to restoration escrow 0 (889,945)
Payments from affiliated partnerships 0 96,088
----------- ----------
Net cash from investing activities 1,407,893 2,160,684
----------- ----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Cash distributions to Limited Partners (1,000,000) (650,000)
Cash distributions to current General Partner (2,135) (4,337)
Payments of equipment notes 0 (10,245)
----------- ----------
Net cash (used in) financing activities (1,002,135) (664,582)
----------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,079,075 1,635,041
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,444,326 1,005,764
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,523,401 $2,640,805
=========== ==========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 0 $ 1,810
=========== ==========
</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, 1997, the Partnership owned 33 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 finanacial 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 $14,300,000, of which
approximately $5,782,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at March 31, 1997. The 9%
interest accrued as of March 31, 1997, amounted to approximately $2,044,000 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 March 31, 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 March 31, 1997, the Partnership owned 30 fully constructed fast-food
restaurants, a tag agency, a video store, and a preschool. The properties are
comprised of the following: ten (10) Wendy's restaurants, five (5) Hardee's
restaurants, seven (7) Denny's restaurants, one (1) Applebee's restaurant, 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) Hostettler'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 33 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 March 31, 1997, two 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 is has vacated the property in Twin
Falls, North Dakota and ceased paying rent. Management is currently working
with DenAmerica to resolve the issue.
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 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 $45,084 to date on the
amounts recovered, which has been offset against the 4% minimum fee.
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.
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.
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
8
<PAGE>
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>
Five (5) 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, 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 three-month periods ended
March 31, 1997 and 1996 are as follows.
<TABLE>
<CAPTION>
Incurred as of Incurred as of
Current General Partner March 31, 1997 March 31, 1996
- - ----------------------- -------------- --------------
<S> <C> <C>
Management fees $43,572 $42,316
Disposition fees 37,166 20,550
Restoration fees 89 24,053
Overhead allowance 3,592 3,526
Reimbursement for out-of-pocket expenses 5,885 4,872
Cash distribution 2,135 4,337
------- -------
$92,439 $99,654
======= =======
</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
March 31, 1997:
<TABLE>
<S> <C>
Minimum lease payments receivable $ 93,304
Estimated residual values of leased
property (non-recourse) 22,364
Less-Unearned income (14,468)
--------
Net investment in direct
financing leases $101,200
========
</TABLE>
At March 31, 1997, future minimum lease payments for each of the succeeding
fiscal years are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1997 $ 50,108
1998 37,860
1999 27,700
--------
$115,668
========
</TABLE>
10
<PAGE>
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 March 31, 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 March 31, 1997. Funds are invested in U.S. Treasury
securities. In addition, $43,766 of earnings have been credited to the Trust as
of March 31, 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.
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.
11
<PAGE>
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 March 31, 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 March 31, 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 March 31, 1997, interest in the amount of $239,000 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
$260,000, 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. Trial of the case is scheduled
to begin on June 23, 1997. 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.
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.
12
<PAGE>
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 May 15, 1997, the Partnership made distributions to the Limited Partners for
the First Quarter of 1997 of $2,000,000 amounting to approximately $43.21 per
limited partnership interest.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources:
- - --------------------------------
Investment Properties and Net Investment in Direct Financing Leases
- - -------------------------------------------------------------------
The investment properties, including equipment held by the Partnership at March
31, 1997, were originally purchased at a price, including acquisition costs, of
approximately $27,629,000.
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, North Dakota, and ceased paying rent.
Management is currently working with DenAmerica to resolve the issue.
Due to the damaging floods and record snowfalls in Grand Forks, North Dakota,
the tenant of the Village Inn has experienced financial difficulties.
Management intends to work with the tenant by abating rent on the property until
the business is back in operation.
13
<PAGE>
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.
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, amounted to $101,000 at March 31, 1997,
compared to $109,000 at December 31, 1996. The decrease of $8,000 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 $2,540,000 at March 31, 1997, compared to $1,555,000 at December
31, 1996. The Partnership designated cash of $2,000,000 to fund the First
Quarter 1997 distributions to Limited Partners, $270,000 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.
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 $1,741,000 at
March 31, 1997. The receivable decreased from December 31, 1996 due to $2,000
of recoveries received during the quarter 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
$4,041,000 at March 31, 1997, and includes $2,044,000 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 March 31, 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.
14
<PAGE>
Liabilities
- - -----------
Accounts payable and accrued expenses at March 31, 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 $1,000,000 and $2,135, respectively, have also been in accordance
with the amended Partnership Agreement. The First Quarter 1997 distribution of
$2,000,000 was paid to the Limited Partners on May 15, 1997.
Results of Operations:
- - ----------------------
The Partnership reported net income for the quarter ended March 31, 1997, in the
amount of $534,000 compared to net income for the quarter ended March 31, 1996,
of $1,084,000. 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. 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.
Revenues
- - --------
Total revenues were $869,000 and $1,992,000, for the quarters ended March 31,
1997 and 1996, 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 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 March 31, 1997 and 1996, cash expenses amounted to
approximately 24% and 39%, of total revenues, respectively. Total expenses,
including non-cash items, amounted to approximately 39% and 46%, of total
revenues for the quarters ended March 31, 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.
For the quarters ended March 31, 1997 and 1996, expenses incurred in relation to
the misappropriated assets amounted to $17,000 and $560,000, respectively.
Future expenses incurred in relation to the misappropriation should have a
minimal impact on the Partnership.
15
<PAGE>
Inflation:
- - ----------
Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio of triple net leases. By their nature, such leases actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes. If inflation causes operating margins to deteriorate for lessees
if expenses grow faster than revenues, then, inflation may well negatively
impact the portfolio through tenant defaults.
It would be misleading to associate inflation with asset appreciation for real
estate, in general, and the Partnership's portfolio, specifically. Due to the
"triple net" nature of the property leases, asset values generally move
inversely with interest rates.
PART II - OTHER INFORMATION
Item 2. Legal Proceedings
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure the
repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 1 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
On July 23, 1993, nineteen (19) of the Private Partnerships sought the
protection of the Bankruptcy Court in the Eastern District of Wisconsin. Seven
(7) of these bankruptcies were voluntary and twelve (12) of these bankruptcies
were involuntary. Several of the Private Partnerships seeking bankruptcy owe
promissory notes to DiVall, Magnuson, or entities owned by them, in which the
Partnership has a security interest. These cases were subsequently transferred
to the Western District Bankruptcy Court located in Madison, Wisconsin.
The Partnership's experience in those bankruptcy cases that have concluded,
either through the approval of Plans of Reorganization, dismissal of the
bankruptcies, settlements or a combination of the foregoing, is that (i) the
value of the obligations of the Private Partnerships assigned to the
Partnerships have been at a significant discount to their face amounts, and (ii)
the General Partner interests in such Private Partnerships often have little
economic value. The Partnership's recoveries in these bankruptcies have 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.
16
<PAGE>
The Partnership is also pursuing collection actions against former tenants of
the Partnership and/or guarantors of former tenants of the Partnership arising
from defaults on their leases. Although the Partnership believes its claims are
valid, it is currently unknown whether the Partnerships will receive favorable
verdicts or whether any such verdicts will ultimately prove collectible.
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
99.0 Correspondence to the Limited Partners dated May 15, 1997, regarding
the First Quarter 1997 distribution.
(b) Reports on Form 8-K:
The Registrant filed no reports on Form 10-K during the first quarter of
fiscal year 1997.
17
<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, 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: May 14, 1997
By: /s/ Kristin J. Atkinson
-------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: March 14, 1997
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
March 31, 1997 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-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,540,209
<SECURITIES> 293,766
<RECEIVABLES> 6,443,408
<ALLOWANCES> 5,784,890
<INVENTORY> 0
<CURRENT-ASSETS> 3,492,493
<PP&E> 24,586,538
<DEPRECIATION> 5,245,204
<TOTAL-ASSETS> 22,833,827
<CURRENT-LIABILITIES> 398,389
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 22,435,438
<TOTAL-LIABILITY-AND-EQUITY> 22,833,827
<SALES> 764,558
<TOTAL-REVENUES> 869,064
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 335,371
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 533,693
<INCOME-TAX> 0
<INCOME-CONTINUING> 533,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 533,693
<EPS-PRIMARY> 11.42
<EPS-DILUTED> 11.42
</TABLE>
<PAGE>
The ProvoGroup
DiVall Insured Income Properties 2, L.P.
QUARTERLY NEWS
- - --------------------------------------------------------------------------------
A publication of The Provo Group, Inc. FIRST QUARTER 1997
NORTH DAKOTA FLOOD SPARES VILLAGE INN
Grand Forks, North Dakota
The Partnership's Village Inn (Grand Forks, ND) fortunately sustained minimal
flood damage in April, but the winter was still a disaster after being hit with
a record snowfall of 120 inches which paralyzed the economy for months.
Bruce Provo met with our Village Inn tenant on April 29th...one day after they
were finally allowed by the National Guard to inspect their property. The
Partnership granted the tenant 2 1/2 months of rent abatement because of their
inability to operate through the dual weather disasters...snow and floods.
We do expect to apply to FEMA (Federal Emergency Management Agency) to recover
our imputation of lost rents via abatement. We also expect a reduction of the
property's 1997 real estate taxes.
The ability to re-open this restaurant may give the tenant a competitive market
advantage in the Grand Forks area as many other restaurants will not open for
months...if ever, including another Village Inn (not in this portfolio) that
apparently was ruined beyond repair.
--------------------------
OTHER NEWS INSIDE...
. Hardee's Corporate Sells to CKE!.............. Property Highlights, pg 4
. New Leases for DenAmerica?.................... Property Highlights, pg 4
. Three More Hardee's Sold...................... Property Highlights, pg 4
. Cypress Closes Its Denny's................... Property Highlights, pg 4
. Third-Party Solicitations................... Questions and answers, pg 6
. What's My Investment Worth?................. Questions and answers, pg 6
. Are the Former GPs in Jail?................. Questions and answers, pg 6
<PAGE>
The ProvoGroup
Page 2 DiVall 2 1 Q 97
-----------------------
DISTRIBUTION HIGHLIGHTS
. 6.7% (approx.) annualized return from operations and 4.0% (approx.) non-
annualized return of capital from a special distribution related to
property sales, equipment leases and recoveries based on $35,500,000 ("net"
remaining initial investment).
. $2,000,000 total amount distributed for the First Quarter 1997 which was
$1,425,000 more than budgeted.
The higher than budgeted distributions are primarily due to the sale of
three (3) Hardee's restaurants.
. $43.21 per unit (approx.) for the First Quarter 1997 from both cash flow
from operations and investing activities.
. $809.00 to $611.00 range of distributions per unit from the first unit sold
to the last unit sold before the offering closed (February 1990),
respectively.
Distributions are from both cash flow from operations and "net" cash
activity from financing and investing activities. (NOTE: Original units
were purchased for $1,000/unit.)
--------------
STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS
. 14% increase in operating revenues from projections.
. 7% increase in total expenses from projections.
. 19% increase in "net" income from projections.
. The Partnership experienced a $73,000 "net" gain on three (3) Hardee's
property sales during the quarter. (Refer to "Sale of Properties" below for
further discussion.)
. Rental income was $35,000 higher than projected due to the accrual of
higher than budgeted percentage rents. There were also budgeted vacancies
which did not occur.
<PAGE>
The ProvoGroup
Page 3 DiVall 2 1 Q 97
-------------------------
Statements of Income and Cash Flow Highlights
(cont'd)
. Investigation and restoration expenses were $15,000 lower than projected
for the quarter ended March 31, 1997, due to the delay of the Boatmen's
trial.
. Professional and auditing expenses were in "total" $12,000 lower than
budgeted for the quarter ended March 31, 1997.
-------------------------
Property Highlights
Vacancies
---------
. Country Kitchen restaurant (Cedar Rapids, IA) remains vacant at March 31,
1997. The Partnership continues to work with prospective tenants for either
the re-lease or sale of this property.
. Hardee's restaurant (West Jordan, UT) was vacant at March 31, 1997. The
tenant, Terratron, Inc., remains responsible for this lease while pursuing
its sales opportunities.
. Denny's restaurant (Twin Falls, ID) was vacant at March 31, 1997.
The tenant of this property, DenAmerica, Corp., vacated the property at the
end of the December 1996 and notified management that they were ceasing all
rental payments.
(NOTE: Refer to "Other Property Matters" below for further discussion.)
Rents Receivable
----------------
The following restaurants were delinquent at March 31, 1997.
. Denny's restaurant (Twin Falls, ID) - DenAmerica, Corp. - $19,900 for
scheduled rent, equipment rent, sales tax, and late charges.
Hardee's restaurant (West Jordan, UT) - Terratron, Inc. - $24,000 for
scheduled rent and property tax escrow payments.
<PAGE>
The ProvoGroup
Page 4 DiVall 2 1 Q 97
-------------------------
Property Highlights (cont'd)
Rents Receivable (cont'd)
-------------------------
. Miami Subs restaurant (Palm Beach, FL) - P & T Holdings - $2,200 for
scheduled rent, percentage rent, sales tax, and late fees.
Sale of Properties
------------------
. On March 28, 1997, Hardee's (Delavan, WI) was sold for $520,000.
. On March 28, 1997, Hardee's (Oconomowoc, WI) was sold for $570,000.
. On January 28, 1997, Hardee's (South Milwaukee, WI) was sold for $300,000.
NOTE: All three (3) of these Hardee's restaurant sales were a result
of prior lease negotiations the Partnership made with the former
tenant, Terratron, Inc. and the new tenant, Hardee's Food Systems,
Inc. As previously mentioned, the Partnership experienced a net gain
of $73,000 in total from these property sales. The Hardee's restaurant
(West Jordan, UT) sale is currently pending.
Other Property Matters
----------------------
. As noted above, DenAmerica Corporation notified management during the
quarter that they were ceasing rental payments on their Twin Falls, Idaho
restaurant in the Partnership.
This tenant was defaulted and has since requested that management consider
their proposal for terminating the Twin Falls, Idaho lease and consider
modifying their remaining leases that currently pay straight percentage
rent versus fixed rent.
The Partnership has countered these proposals and is currently awaiting a
response from the tenant.
. Cypress Restaurant, Inc., tenant of Denny's (Daytona Beach, FL) notified
the Partnership at the end of April 1997 that it closed this restaurant on
March 31, 1997. The Partnership is pursuing its legal options with respect
to this lease.
. Hardee's Food Systems, Inc. was recently acquired by CKE Restaurants, owner
of Carl's Jr. restaurants. Closing is expected to occur July 1997. The
Partnership anticipates the buy out and the marriage of Hardee's breakfast
menu and Carl's Jr.'s lunch/dinner menus may "boost" sales nationwide.
Hardee's Food Systems, Inc. is the new tenant for most of the Partnership's
Hardee's restaurants.
<PAGE>
Page 5 DiVall 2 1 Q 97
------------------------------
Restoration Highlights
. Recoveries received during the First Quarter 1997 were slightly over $2,000
for the Partnership.
. "Total" recoveries received to date for the Partnership are approximately
$2,089,000.
. The trial against Boatmen's First National Bank of Kansas City has been re-
scheduled for June 23, 1997.
------------------------------
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 March 31, 1997.
<TABLE>
<CAPTION>
Distribution Capital
Analysis Balance
------------- -------------
<S> <C> <C>
Original Capital Balance - $ 46,280,300
Cash Flow From Operations Since Inception $ 22,128,498 -
Total Distributions Since Inception (32,955,268) -
------------
(Return) of Capital $(10,826,770) (10,826,770)
============ ------------
"Net" Remaining Initial Investment
by Original Partners - $ 35,453,530
============
</TABLE>
(NOTE: For a more individualized discussion of return of capital contact
Investor Relations.)
<PAGE>
The Provo Group
Page 6 DiVall 2 1 Q 97
-------------------------
Questions & Answers
1. Why am I receiving solicitations to buy my units?
Any solicitations that you receive to buy your units are a result of a
third-party (not affiliated with TPG, Inc.) who is interested in acquiring
units at a discounted rate. As General Partner, we encourage you to
thoroughly review all your options.
2. What is the 1996 per unit value for my investment in the Partnership?
As we reported in your 1996 Annual Report, the estimated value of your
investment in the Partnership at December 31, 1996 was $470 per unit.
3. Are the former general partners in jail?
Former general partner, Gary J. DiVall, was sentenced last year to eight
(8) years in prison with seven (7) years of subsequent probation. Former
general partner, Paul E. Magnuson received the same sentence on March 3,
1997.
4. When can I expect my next distribution mailing?
Your next scheduled distribution correspondence for the Second Quarter of
1997 will be mailed on August 15, 1997.
* * *
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>
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
TheProvoGroup DIVALL INSURED INCOME PROPERTIES 2 L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1997
- - --------------------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
-----------------------------------------------
1ST 1ST
QUARTER QUARTER BETTER
3/31/97 3/31/97 (WORSE)
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUES
Rental income $ 726,059 $ 761,332 $ 35,273
Direct financing interest 3,226 3,226 0
Interest income 19,703 18,013 (1,690)
Recovery of amounts previously written off 0 2,221 2,221
Gain on sale of assets 0 72,894 72,894
Other income 11,081 12,016 935
----------- ----------- -----------
TOTAL OPERATING REVENUES $ 760,069 $ 869,702 $ 109,633
----------- ----------- -----------
OPERATING EXPENSES
Insurance $ 7,097 $ 7,124 $ (27)
Management fees 43,530 43,572 (42)
Restoration fees 0 89 (89)
Overhead allowance 3,627 3,592 35
Advisory Board 7,300 4,088 3,212
Administrative 25,997 26,532 (535)
Professional services 7,476 657 6,819
Auditing 21,000 16,171 4,829
Legal 7,500 10,508 (3,008)
Disposition fees 0 37,166 (37,166)
Appraisals 0 4,597 (4,597)
Write-off of uncollectible rent 0 1,721 (1,721)
Defaulted tenants 2,670 2,156 514
----------- ----------- -----------
TOTAL OPERATING EXPENSES $ 126,197 $ 157,973 $ (31,776)
----------- ----------- -----------
GROUND RENT $ 30,927 $ 31,785 $ (858)
----------- ----------- -----------
INVESTIGATION AND RESTORATION EXPENSES $ 32,635 $ 17,219 $ 15,416
----------- ----------- -----------
NON-OPERATING EXPENSES
Depreciation $ 123,186 $ 123,335 $ (149)
Amortization 0 5,697 (5,697)
----------- ----------- -----------
TOTAL NON-OPERATING EXPENSES $ 123,186 $ 129,032 $ (5,846)
----------- ----------- -----------
TOTAL EXPENSES $ 312,945 $ 336,009 $ (23,064)
----------- ----------- -----------
NET INCOME $ 447,124 $ 533,693 $ 86,569
OPERATING CASH RECONCILIATION: VARIANCE
----------
Depreciation and amortization 123,186 129,032 5,846
Recovery of amounts previously written off 0 (2,221) (2,221)
Gain on sale of assets 0 (72,894) (72,894)
Write-off of uncollectible rent 0 1,721 1,721
(Increase) Decrease in current assets 42,247 68,876 26,629
Increase (Decrease) in current liabilities (84,230) (72,798) 11,432
Decrease in Security Deposits 0 (4,620) (4,620)
(Increase) Decrease in cash reserved for payables 30,000 30,000 0
Advance from prior cash flows for current distributions (2,000) 0 2,000
----------- ----------- -----------
Net Cash Provided From Operating Activities $ 556,327 $ 610,789 $ 54,462
----------- ----------- -----------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Recoveries from former G.P. affiliates 0 2,221 2,221
Principal received on equipment leases 16,334 7,626 (8,708)
Proceeds from property sales 0 1,394,620 1,394,620
Investment in equipment 0 0 0
----------- ----------- -----------
Net Cash Provided From Investing And Financing
Activities $ 16,334 $ 1,404,467 $ 1,388,133
----------- ----------- -----------
Total Cash Flow For Quarter $ 572,661 $ 2,015,256 $ 1,442,595
Cash Balance Beginning of Period 1,264,693 1,554,953 290,260
Less 4th quarter distributions paid 2/97 (925,000) (1,000,000) (75,000)
Change in cash reserved for payables or future distributions (28,000) (30,000) (2,000)
----------- ----------- -----------
Cash Balance End of Period $ 884,354 $ 2,540,209 $ 1,655,855
Cash reserved for 1st quarter L.P. distributions (575,000) (2,000,000) (1,425,000)
Cash reserved for payment of payables (140,000) (270,000) (130,000)
----------- ----------- -----------
Unrestricted Cash Balance End of Period $ 169,354 $ 270,209 $ 100,855
=========== =========== ===========
- - --------------------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
-----------------------------------------------
* Quarterly Distribution $ 575,000 $ 2,000,000 $ 1,425,000
Mailing Date 5/15/97 (enclosed) -
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Refer to distribution letter for detail of quarterly distribution.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
[The Provo Group Logo]
-------------------------------------------
PROJECTIONS FOR DIVALL INSURED INCOME PROPERTIES 2 LP ORIGINAL EQUITY $46,280,300
DISCUSSION PURPOSES 1997 PROPERTY SUMMARY NET DISTRIBUTION OF
AND RELATED ESTIMATED RECEIPTS CAPITAL SINCE INCEPTION $10,826,770
-----------
CURRENT EQUITY $35,453,530
-------------------------------===========
</TABLE>
PORTFOLIO (Note 1)
<TABLE>
<CAPTION>
--------------------------------- ---------------------------------------------
REAL ESTATE EQUIPMENT
--------------------------------- ---------------------------------------------
ANNUAL LEASE ANNUAL
- - ------------------------------------------ BASE % EXPIRATION LEASE
CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS
- - ------------------------------------------ -------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
APPLEBEE'S COLUMBUS, OH 1,059,465 135,780 12.82% 06/30/97 84,500 17,438
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% 0
DENNY'S DAYTONA, FL 1,029,844 136,800 13.28% 0
DENNY'S (2) (3) PHOENIX, AZ 295,750 39,000 13.19% 224,376 0
DENNY'S (2) PHOENIX, AZ 972,726 84,000 8.64% 183,239 0
DENNY'S (2) PHOENIX, AZ 865,900 86,000 9.93% 221,237 0
DENNY'S TWIN FALLS, ID 699,032 83,200 11.90% 04/30/99 190,000 37,860
DENNY'S (2) (3) PHOENIX, AZ 500,000 37,000 7.40% 14,259 0
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
" " 151,938 0
HARDEE'S W. JORDAN, UT 617,907 77,880 12.60%
HARDEE'S (5) FOND DU LAC, WI 849,767 88,000 10.36% (4) 290,469 0
HARDEE'S (5) MILWAUKEE, WI 0 0 0.00% 780,000 0
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
KFC SANTA FE, NM 451,230 60,000 13.30%
MIAMI SUBS PALM BEACH, FL 743,625 39,000 5.24%
- - --------------------------------------- --------------------------------- --------- -------------------------
</TABLE>
<TABLE>
<CAPTION>
-----------
TOTAL % ON
$35,453,530
--------- ------------------------------------ EQUITY
EQUIPMENT TOTALS RAISE
--------- ------------------------------------ -----------
- - --------------------------------------- % * ANNUAL
CONCEPT LOCATION RETURN COST RECEIPTS RETURN
- - --------------------------------------- --------- ------------------------------------
<S> <C> <C> <C> <C> <C>
APPLEBEE'S COLUMBUS, OH 20.64% 1,143,965 153,218 13.39%
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 0.00% 520,126 39,000 7.50%
DENNY'S (2) PHOENIX, AZ 0.00% 1,155,965 84,000 7.27%
DENNY'S (2) PHOENIX, AZ 0.00% 1,087,137 86,000 7.91%
DENNY'S TWIN FALLS, ID 19.93% 889,032 121,060 13.62%
DENNY'S (2) (3) PHOENIX, AZ 0.00% 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 0.00% 1,421,983 76,000 5.34%
" " 0.00%
HARDEE'S W. JORDAN, UT 617,907 77,880 12.60%
HARDEE'S (5) FOND DU LAC, WI 0.00% 1,140,236 88,000 7.72%
HARDEE'S (5) MILWAUKEE, WI 0.00% 780,000 0 0.00%
HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62%
HOSTETTLER'S DES MOINES, IA 0.00% 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>
[LOGO OF THE PROVO GROUP]
PROJECTIONS FOR
DISCUSSION PURPOSES
DIVALL INSURED INCOME PROPERTIES 2 LP
1997 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
<TABLE>
<CAPTION>
-------------------------------------------
ORIGINAL EQUITY $46,280,300
NET DISTRIBUTION OF
CAPITAL SINCE INCEPTION $10,826,770
-----------
CURRENT EQUITY $35,453,530
===========
-------------------------------------------
PORTFOLIO (Note 1)
REAL ESTATE EQUIPMENT TOTALS
---------------------------- --------------------------------------- ----------------------------- TOTAL % ON
ANNUAL LEASE ANNUAL $35,453,530
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>
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% 1,182,735 131,850 11.15%
06/30/97 19,013 3,930 20.67%
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
(33 Properties) 24,580,209 2,617,798 10.65% 2,551,063 59,228 2.32% 27,131,272 2,677,027 9.87% 7.55%
- - ----------------- ========== ========= ===== ========= ====== ==== ========== ========= ===== ====
</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.
