<PAGE>
FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting securities held by nonaffiliates
of the Registrant: The aggregate market value of limited partnership interests
held by nonaffiliates is not determinable since there is no public trading
market for the limited partnership interests.
Index to Exhibits located on page: 35 - 36
--------------
<PAGE>
PART I
Item 1. Business
Background
- - ----------
The Registrant, DiVall Insured Income Properties 2 Limited Partnership (the
"Partnership"), is a limited partnership organized under the Wisconsin Uniform
Limited Partnership Act pursuant to an Agreement of Limited Partnership dated as
of November 18, 1987, and amended as of November 25, 1987, February 20, 1988,
June 21, 1988, February 8, 1993, May 26, 1993 and June 30, 1994. As of December
31, 1997, the Partnership consisted of one General Partner and 2,671 Limited
Partners owning an aggregate of 46,280.3 Limited Partnership Interests (the
"Interests") acquired at a public offering price of $1,000 per Interest before
volume discounts. The Interests were sold commencing February 23, 1988, pursuant
to a Registration Statement on Form S-11 filed under the Securities Act of 1933
(Registration 33-18794) as amended. 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. On February 22, 1990, the Partnership closed the
offering at 46,280.3 Interests ($46,280,300), providing net proceeds to the
Partnership after volume discounts and 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. 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 of primarily fast-food, family style, and
casual/theme restaurants, but also include an auto tag agency, a video rental
store and a child care center. At December 31, 1997, the Partnership owned 32
properties with specialty leasehold improvements in 12 of these properties, as
more fully discussed in Item 2.
Prior to the disposal of the Properties, the Partnership's return on its
investment will be derived principally from rental payments received from its
lessees. Therefore, the Partnership's return on its investment is largely
dependent, among other factors, upon the business success of its lessees. The
business success of the Partnership's individual lessees can be adversely
affected on three general levels. First, the tenants rely heavily on the
management contributions of a few key entrepreneurial owners. The business
operations of such entrepreneurial tenants can be adversely affected by death,
disability or divorce of a key owner, or by such owner's poor business decisions
such as an undercapitalized business expansion. Second, changes in a local
market area can adversely affect a lessee's business operation. A local economy
can suffer a downturn with high unemployment. Socioeconomic neighborhood changes
can affect retail demand at specific sites and traffic patterns may change, or
stronger competitors may enter a market. These and other local market factors
can potentially adversely affect the lessees of Partnership properties. Finally,
despite an individual lessee's solid business plans in a strong local market,
the chain concept itself can suffer reversals or changes in management policy
which in turn can affect the profitability of operations for Partnership
properties. Therefore, there can be no assurance that any specific lessee will
have the ability to pay its rent over the entire term of its lease with the
Partnership.
Since over 90% of the Partnership's investment in properties and equipment
involves restaurant tenants, the restaurant market is the major market segment
with a material impact on Partnership operations. It would appear that the
management skill and potential operating efficiencies realized by Partnership
lessees will be a major ingredient for their future operating success in a very
competitive restaurant and food service marketplace.
There is no way to determine, with any certainty, which, if any, tenants will
succeed or fail in their business operations over the term of their respective
leases with the Partnership. It can be reasonably anticipated that some lessees
will default on future lease payments to the Partnership which will result in
the loss of expected lease income for the Partnership. Management will use its
best efforts to vigorously pursue collection of any defaulted amounts and to
protect the Partnership's assets and future rental income potential by trying to
re-lease any properties with rental defaults. External events which could
impact the Partnership's liquidity are the entrance of other competitors into
the market areas of our tenants; liquidity
2
<PAGE>
and working capital needs of the leaseholders; and failure or withdrawal of any
of the national franchises held by the Partnership's tenant. Each of these
events, alone or in combination, would affect the liquidity level of
leaseholders resulting in possible default by the tenant. Since the information
regarding plans for future liquidity and expansion of closely held
organizations, which are tenants of the Partnership, tend to be of a private and
proprietary nature, anticipation of individual liquidity problems is difficult,
and prediction of future events is nearly impossible.
A preliminary investigation during 1992 by the Office of the 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, two of 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. The aggregate amount
of the misappropriation, related costs and 9% interest accrued since January 1,
1993, is approximately $14,800,000, net of recoveries, of which $5,969,000 has
been allocated to the Partnership.
Subsequent to discovery, and in response to the regulatory inquiries, a third-
party Permanent Manager, The Provo Group, Inc. ("TPG"), was appointed (effective
February 8, 1993) to assume the responsibility for daily operations and assets
of the Partnerships as well as to develop and execute a plan of restoration to
the Partnerships. As reported in the Partnership's report on Form 8-K dated May
26, 1993, effective as of that date, the Limited Partners, by written consent of
a majority of interests, elected the Permanent Manager, TPG, as General Partner.
Additional results of the solicitation included the approval of the Permanent
Manager Agreement ("PMA"), the acceptance of the resignations of the former
general partners, amendments to certain provisions of the Partnership Agreement
pertaining to general partner interests and compensation, and an amendment of
the Partnership Agreement providing for an Advisory Board (the "Board").
The Permanent Manager Agreement
- - -------------------------------
The PMA was entered into on February 8, 1993, between the Partnership, DiVall 1,
DiVall 3, the now former general partners DiVall and Magnuson, their controlled
affiliates, and TPG, naming TPG as the Permanent Manager. The PMA contains
provisions allowing the Permanent Manager to submit the PMA, the issue of
electing the Permanent Manager as General Partner, and the issue of acceptance
of the resignations of the former general partners to a vote of the Limited
Partners through a solicitation of written consents.
TPG, as the new General Partner, has been operating and managing the affairs of
the Partnership in accordance with the provisions of the PMA and the Partnership
Agreement, as amended.
Advisory Board
- - --------------
The concept of the Advisory Board was first introduced by TPG during the
solicitation of written consents for the Partnerships and is the only type of
oversight body known to exist for similar partnerships at this time. The first
Advisory Board was appointed in October 1993, and held its first meeting in
November 1993. The four person Advisory Board is empowered to, among other
functions, review operational policies and practices, review extraordinary
transactions, and advise and serve as an audit committee to the Partnership and
the General Partner. The Advisory Board does not have the authority to direct
management decisions or policies of the Partnership or remove the General
Partner. The powers of the Advisory Board are advisory only. The Advisory
Board has full and free access to the Partnership's books and records, and
individual Advisory Board members have the right to communicate directly with
the Limited Partners concerning Partnership business. Members of the Advisory
Board are compensated $3,000 annually and $1,200 for each quarterly meeting
attended.
3
<PAGE>
The Advisory Board currently consists of a broker dealer representative, Steven
Carson of First Albany Corporation; and a Limited Partner from each of the three
Partnerships: Robert White from DiVall 1, Richard Otte from the Partnership, and
Albert Gerritz from DiVall 3. For a brief description of each Advisory Board
member, refer to Item 10, Directors and Executive Officers of the Registrant.
Restoration Plan
- - ----------------
TPG, upon commencement of its management of the Partnerships, developed a
strategy (the "Restoration Plan" or "Plan") for recovering as much of the
amounts misappropriated by the former general partners and their affiliates as
possible. The Plan focused on recovery from the following sources: (a)
personal property, (b) promissory notes, (c) land contracts, (d) litigation, and
(e) PMA savings.
A. Personal Property. DiVall and Magnuson appear to have very few
unencumbered personal assets which would materially benefit the
Partnerships. The Partnerships have obtained security interests in
substantially all of DiVall and Magnuson's assets which have been
identified. The security interests included a mortgage on DiVall's
residence and surrounding farm land which was subsequently sold to a
third party.
B. Promissory Notes. Pursuant to the PMA, DiVall, Magnuson, and entities
owned by them, granted the Partnerships a security interest in certain
promissory notes and mortgages due from other DiVall related entities
(the "Private Partnerships"). Recovery of amounts due under these
notes is substantially complete, but the amount of such recoveries has
been significantly discounted because many of the Private Partnerships
are involved in bankruptcy proceedings. See Item 3, Legal Proceedings,
for additional information regarding the bankruptcy proceedings of the
Private Partnerships.
C. Land Contracts. The Partnerships were assigned two land contracts from
the Partnership's former general partners. These contracts were not
originally identified nor assigned in connection with the PMA, and
settlements have been received on these contracts.
D. Litigation. The Partnerships initiated lawsuits against the
Partnership's former auditors, former securities counsel, former
general partners and a former affiliate. Settlements were received in
these lawsuits during 1996. Refer to Item 3, Legal Proceedings, and
Note 10 to the financial statements included in Item 8 below for
additional information concerning the settlement of these lawsuits.
E. PMA Savings. Pursuant to the terms of the PMA, The Provo Group, Inc.
is to account to the former general partners for all of the following
which are avoided or reduced by implementation of the PMA: (i) Fees
payable to the general partner or entities controlled by the general
partner, (ii) brokerage commissions, and (iii) residuals. Under the
PMA, all such savings shall be credited against the amount owed the
Partnership by the former general partners.
Total amounts recovered at December 31, 1997, amounted to $5,766,000, of which
approximately $2,332,000 was allocated to the Partnership. Currently, there are
few potential sources of recovery remaining.
The total amount due the Partnerships from the former general partners and their
affiliates as of December 31, 1997, as a result of the misappropriation of
assets, approximates $14,800,000, net of recoveries, which includes the amount
of the misappropriation discovered to date, related costs, and 9% interest
accrued since January 1, 1993.
The Partnership has no employees.
All of the Partnership's business is conducted in the United States.
4
<PAGE>
Item 2. Properties
The Partnership's properties are leased under long-term leases, generally with
terms of approximately 20 years. All leases are triple net which require the
tenant to pay all property operating costs including maintenance, repairs,
utilities, property taxes, and insurance. A majority of the leases contain
percentage rent provisions which require the tenant to pay a specified
percentage (3% to 8%) of gross sales above a threshold amount.
The Partnership owned the following properties (including specialty leasehold
improvements for use in some of these properties) as of December 31, 1997:
<TABLE>
<CAPTION>
Lease
Acquisi- Property Name Purchase Rental Per Expiration Renewal
tion Date & Address Lessee Price (1) Annum Date Options
- - --------- --------- ------ --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
03/11/88 Cash-A-Check MBA, Inc. $ 792,188 $ 30,000 5/31/00 (3)
601 W Hallandale Beach Blvd
Hallandale, FL
03/11/88 Miami Subs QSR, Inc. 743,625 39,000 03-31-2016 None
US-1 Near PGA Blvd
Palm Beach, FL
06/15/88 Denny's DenAmerica, Inc. 1,087,137(2) 115,200 08-20-2009 (3)
8801 N 7th St
Phoenix, AZ
06/15/88 Denny's (4) DenAmerica, Inc. 520,126(2) 93,000 01-30-1993 (3)
2201 W Camelback
Phoenix, AZ
07/15/88 Hooter's TWI X, Inc. 1,346,719 95,000 07-14-2008 None
7669 Grapevine Hwy
N Richland Hills, TX
08/01/88 Hardee's Hardee's Food 1,091,190(2) 64,000 10-31-2001 (3)
106 N Chicago Ave Systems, Inc.
S Milwaukee, WI
08/15/88 Denny's First Foods, Inc. 1,155,965(2) 65,000 10-31-2007 (3)
2360 W Northern Ave
Phoenix, AZ
09/09/88 Red Apple Restaurant Selman Alieu 660,156 60,000 12-31-2007 (3)
555 33rd Ave
Cedar Rapids, IA
10/10/88 Kentucky Fried Chicken (5) KFC National 451,230 60,000 06-30-2018 None
1014 S St Francis Dr Management Co.
Santa Fe, NM
12/22/88 Wendy's WenSouth 596,781 76,920 12-31-2008 None
1721 Sam Rittenburg Blvd Orlando, Ltd.
Charleston, SC
12/22/88 Wendy's WenSouth 649,594 86,160 12-31-2008 None
3013 Peach Orchard Rd Orlando, Ltd.
Augusta, GA
12/29/88 Popeye's Stillman Mgmt. 580,938 77,280 12-31-2009 None
2562 Western Ave Co., Inc.
Park Forest, IL
02/21/89 Wendy's WenSouth 776,344 96,780 01-31-2009 None
1901 Whiskey Rd Orlando, Ltd.
Aiken, SC
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Lease
Acquisi- Property Name Purchase Rental Per Expiration Renewal
tion Date & Address Lessee Price (1) Annum Date Options
- - --------- ------------------------------ ------------------- ------------- ---------- ----------- --------
<C> <S> <C> <C> <C> <C> <C>
02/21/89 Wendy's WenSouth 728,813 96,780 01-31-2009 None
1730 Walton Way Orlando, Ltd.
Augusta, GA
02/21/89 Wendy's WenSouth 528,125 70,200 01-31-2009 None
347 Folly Rd Orlando, Ltd.
Charleston, SC
02/21/89 Wendy's WenSouth 580,938 77,280 01-31-2009 None
361 Hwy 17 Bypass Orlando, Ltd.
Mount Pleasant, SC
03/14/89 Wendy's WenSouth 633,750 90,480 01-31-2009 None
1004 Richland Ave Orlando, Ltd.
Aiken, SC
04/04/89 Denny's Cypress 1,029,844 136,800 11-30-2008 None
607 Internatl Speedway Restaurants, Inc.
Daytona Beach, FL
04/20/89 Hostetlers, BBQ Hickory Park, Inc. 897,813(2) 55,584 12-31-1997 (3)
4875 Merle Hay
Des Moines, IA
04/28/89 Hardee's Hardee's Food 686,563 64,000 04-30-2009 None
1570 E Sumner St Systems, Inc.
Hartford, WI
10/18/89 Hardee's Hardee's Food 1,421,983(2) 76,000 04-30-2009 None
4000 S 27th St Systems, Inc.
Milwaukee, WI
12/28/89 Village Inn Columbia VI, 845,000(2) 84,000 11-30-2009 None
2451 Columbia Rd L.L.C.
Grand Forks, ND
12/29/89 Wendy's WenSouth 660,156 87,780 12-31-2009 None
1717 Martintown Rd Orlando, Ltd.
N Augusta, SC
12/29/89 Wendy's WenSouth 580,938 77,280 12-31-2009 None
1515 Savannah Hwy Orlando, Ltd.
Charleston, SC
12/29/89 Wendy's WenSouth 633,750 84,120 12-31-2009 None
3869 Washington Rd Orlando, Ltd.
Martinez, GA
01/01/90 Sunrise Preschool Sunrise 1,182,735(2) 127,920 05-31-2009 None
4111 E Ray Rd Preschools,
Phoenix, AZ Inc.
01/05/90 Denny's Cypress 1,025,830 133,380 09-30-2009 None
1820 State Road 44 Restaurants, Inc.
New Smyrna Beach, FL
01/05/90 Hardee's Hardee's Food 1,140,236(2) 88,000 11-30-2009 None
20 N Pioneer Rd Systems, Inc.
Fond du lac, WI
01/31/90 Blockbuster Video Blockbuster 646,425 100,554 01-31-2001 (3)
336 E 12th St Videos, Inc.
Ogden, UT
03/21/90 Denny's DenAmerica, Inc. 1,179,501(2) 83,200 04-30-2012 (3)
688 N Blue Lakes Blvd
Twin Falls, ID
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Lease
Acquisi- Property Name Purchase Rental Per Expiration Renewal
tion Date & Address Lessee Price (1) Annum Date Options
- - --------- ----------------- ---------------- ------------- ---------- ----------- --------
<C> <S> <C> <C> <C> <C> <C>
05/02/90 Denny's (4) DenAmerica, Inc. 514,259(2) 90,000 05-30-1998 (3)
3752 E Ind School
Phoenix, AZ
05/31/90 Applebee's Thomas & King, 1,434,434(2) 135,780 10-31-2009 None
2770 Brice Rd Inc. ----------- ----------
Columbus, OH
$26,803,086 $2,657,478
=========== ==========
</TABLE>
Footnotes:
(1) Purchase price includes all costs incurred to acquire the property.
(2) Purchase price includes cost of specialty leasehold improvements.
(3) Renewal option available.
(4) Ownership of lessee's interest under a ground lease. The Partnership is
responsible for payment of all rent obligations under the ground lease.
(5) Ownership of lessee's interest under a ground lease. The tenant is
responsible for payment of all rent obligations under the ground lease.
Terratron, Inc., the lessee of eight (8) Hardee's restaurants has experienced
sales difficulties over the past three years. Effective December 31, 1995,
management entered into a one-year lease modification with the tenant which
reduced base rents for 1996 by approximately $200,000. Additionally, delinquent
rent totaling $112,000 was capitalized into a five (5)-year note accruing
interest at 10% per annum. The amount of rent capitalized was also written off
as uncollectible.
During the Fourth Quarter of 1996, management terminated the leases in six (6)
of the properties with Terratron and entered into new leases on five (5) of the
properties with Hardee's Food Systems, Inc. In connection with this
transaction, the capitalized rent was received. The new leases resulted in
annual rents which were $255,000 lower than Terratron's contract rent and
$106,000 lower than 1996 adjusted rents. In connection with the transaction,
Terratron terminated their equipment leases in three of the properties and the
equipment was sold to the new tenant for $80,000, resulting in a loss to the
Partnership of $95,000. Additionally, purchase options were granted on three of
the properties. Those properties were written down to the option price at
December 31, 1996. Four (4) of the properties were sold (three of which were in
accordance with the option agreements) during 1997.
The two Florida Denny's properties were sold to the tenant, Cypress Restaurants,
Inc., during January 1998 for a total of $2,200,000. Environmental
contamination from an adjacent property was detected on the Daytona Beach
property. Therefore, the Partnership accepted a note for $550,000 of the sale
price to be paid in full in six months, when permanent financing can be arranged
once the environmental issues have been addressed. The $400,000 down payment is
non-refundable. The Partnership is not liable for the environmental
contamination.
The tenant of the Country Kitchen restaurant in Cedar Rapids, Iowa, vacated the
property during 1995 and ceased paying rent. Management entered into a lease
agreement for the property beginning on January 1, 1998.
DenAmerica, Inc., the tenant of the Denny's restaurant in Twin Falls, Idaho, has
vacated the property, but is continuing to make rental payments. During 1997,
the deferred rental income and remaining equipment lease balances were written
off, due to uncertainty regarding their collectibility.
7
<PAGE>
Item 3. Legal Proceedings
In 1993, the Partnership, along with DiVall 1 and DiVall 3, initiated a lawsuit
against Ernst & Young LLP ("E&Y"), a certified public accounting firm, in
connection with the audits of the Partnerships performed by E &Y for the years
1989, 1990 and 1991. The Partnerships also filed claims against Magnuson,
DiVall, DiVall Real Estate Investment Corporation, David Shea, and the
Partnerships' former securities law firm, Quarles & Brady.
These matters were settled in 1996, yielding net proceeds to the Partnership,
after the payment of contingent legal fees and related expenses, of
approximately $900,000.
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure
the repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 1 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
In 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 of the Private Partnerships have been reached. Settlements in
the bankruptcies resulted in cash payments to the Partnerships in the amount 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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
8
<PAGE>
PART II
Item 5. Market Price and Dividends on the Registrant's Common Equity and
Related Stockholder Matters
(a) Although some interests have been traded, there is no active public market
for limited partnership interests, and it is not anticipated that an active
public market for limited partnership interests will develop.
(b) As of December 31, 1997 there were 2,671 record holders of limited
partnership interests in the Partnership.
(c) The Partnership does not pay dividends. However, the Partnership
Agreement, as amended, provides for distributable net cash receipts of the
Partnership to be distributed on a quarterly basis, 99% to the Limited
Partners and 1% to the General Partner, subject to the limitations on
distributions to the General Partner described in the amended Partnership
Agreement. During 1997 and 1996, $4,600,000 and $6,825,000, respectively,
were distributed in the aggregate to the Limited Partners. The General
Partner received aggregate distributions of $8,736 and $13,110 in 1997 and
1996, respectively.
Item 6. Selected Financial Data
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
(a Wisconsin limited partnership)
December 31, 1997, 1996, 1995, 1994, and 1993
(not covered by Independent Auditor's Report)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenue $ 3,448,300 $ 5,316,853 $ 3,932,498 $ 4,190,932 $ 4,133,668
- - ------------------------------------------------------------------------------------------
Net Income 2,183,977 3,277,512 1,782,105 2,158,283 804,920
- - ------------------------------------------------------------------------------------------
Net Income per
Limited Partner
Interest 46.72 70.11 38.12 46.17 17.19
- - ------------------------------------------------------------------------------------------
Total Assets 20,894,198 23,379,356 27,134,604 29,455,349 31,288,856
- - ------------------------------------------------------------------------------------------
Total Partners' Capital 20,479,121 22,903,880 26,464,478 28,117,453 29,146,593
- - ------------------------------------------------------------------------------------------
Cash Distributions per
Limited Partnership
Interest 99.39 147.47 74.11 68.68 50.76
- - ------------------------------------------------------------------------------------------
</TABLE>
(a) The above selected financial data should be read in conjunction with the
financial statements and the related notes appearing elsewhere in this
annual report.
9
<PAGE>
Item 7. 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
December 31, 1997, were originally purchased at a price, including acquisition
costs, of approximately $26,803,000.
The tenant of the Country Kitchen restaurant in Cedar Rapids, Iowa, vacated the
property during 1995 and ceased paying rent. Management entered into a lease
agreement for the property beginning on January 1, 1998.
Apple South, Inc., the tenant of two Applebee's restaurants in Tennessee and
Florida, notified management of their intent to exercise an option in their
lease to purchase those properties. The Tennessee property was sold to Apple
South during January 1996. The sale of the Florida property took place during
September 1996.
Cypress Restaurants, Inc., the tenant of the Denny's restaurants in New Smyrna
Beach, Florida and Daytona Beach, Florida, have negotiated a purchase contract
for their properties in the amount of $1,250,000 and $950,000, respectively,
from the Partnership. The Daytona Beach property, however, was found to have
environmental contamination from an adjoining property, which impacted their
ability to obtain financing. Therefore, the Partnership has agreed to finance
$550,000 of the $950,000 purchase price for a period of six months, until the
environmental issues can be resolved. The sale of the properties took place in
January 1998, and resulted in a gain of $556,000.
Terratron, Inc., the lessee of eight (8) Hardee's restaurants has experienced
sales difficulties over the past three years. Effective December 31, 1995,
management entered into a one-year lease modification with the tenant which
reduced base rents for 1996 by approximately $200,000. Additionally, delinquent
rent totaling $112,000 was capitalized into a five (5)-year note accruing
interest at 10% per annum. The amount of rent capitalized was also written off
as uncollectible. During the Fourth Quarter of 1996, management terminated the
leases in six (6) of the properties with Terratron and entered into new leases
on five (5) of the properties with Hardee's Food Systems, Inc. In connection
with this transaction, the capitalized rent was received. The new leases
resulted in annual rents which are $255,000 lower than Terratron's contract
rents and $106,000 lower than 1996 adjusted rents. In exchange for lower fixed
rent on the properties, percentage rent of 8% is allowed on sales breakpoints
which were lower than the original leases called for. In connection with the
transaction, Terratron terminated their equipment leases in three of the
properties and the equipment was sold to the new tenant for $80,000, resulting
in a loss to the Partnership of $95,000. Additionally, purchase options were
granted on three of the properties. Those properties were written down to the
option price at December 31, 1996. The three option properties and a fourth
Hardee's property were sold to the former tenant during 1997, resulting in a net
gain, before disposition fees, of $106,000.
DenAmerica, Inc., the tenant of the Denny's restaurant in Twin Falls, Idaho, has
vacated the property, but is continuing to make rental payments. During 1997,
the deferred rental income and remaining equipment lease balances were written
off, due to uncertainty regarding their collectibility.
The net investment in direct financing leases, which includes the Partnership's
specialty leasehold improvement leases, were fully extinguished or reserved at
December 31, 1997, compared to $109,000 outstanding at December 31, 1996. The
decrease was a result of principal and residual payments received during the
year as well as an allowance recorded for remaining equipment lease payments on
the Twin Falls, Idaho property. The tenant has vacated the property and future
collectablility is uncertain.
10
<PAGE>
Other Assets
Cash and cash equivalents, including cash restricted for real estate taxes held
by the Partnership, was approximately $1,450,000 at December 31, 1997, compared
to $1,555,000 at December 31, 1996. The Partnership designated cash of $875,000
to fund the Fourth Quarter 1997 distributions to Limited Partners paid in
February 1998, $300,000 for the payment of year-end 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 and sales of investment properties 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 8 to the financial statements included in Item 8 of this
report.
Due From Affiliated Partnerships, Due From Former Affiliates, 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 $1,499,000 at
December 31, 1997. The receivable decreased from the prior year due to $245,000
of recoveries received during the year from the former general partners and
their affiliates including a settlement received from DiVall 1 resulting from
the favorable outcome of a disputed note with Boatmen's First National Bank of
Kansas City.
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 $4,470,000 at December 31, 1997, and
includes $2,447,000 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 December 31, 1997, $5,766,000 of recoveries have been
received which exceeded the original estimate of $3 million. As a result, the
Partnership has recognized $1,108,000 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 9 of
the financial statements included in Item 8 of this report. 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 December 31, 1997, in the amount of
$70,000, primarily represented the year-end accruals of legal and auditing fees.
Due to the Current General Partner amounted to $87,000 at December 31, 1996,
representing a true-up of the general partner's management fee, leasing
commissions for the lease of the Hardee's restaurants,
11
<PAGE>
and the Fourth Quarter distribution, all of which were paid in 1997. The
December 31, 1997 amount of $2,510 represents the General Partner's portion of
the Fourth Quarter distribution.
Real estate taxes payable decreased from $119,000 at December 31, 1996, to
$58,000 at December 31, 1997, primarily due to the collection of all 1996 real
estate taxes due in 1997 from Terratron, the former tenant of the Partnership's
Hardee's restaurants which were paid during 1997.
Partners' Capital
Net income for the year 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 included in Item 8 of this report.
The former general partners' deficit capital account balance was reallocated to
the Limited Partners at December 31, 1993. Refer to Note 11 to the financial
statements included in Item 8 of this report for additional information
regarding the reallocation.
Cash distributions paid to the Limited Partners and to the General Partner
during 1997 of $4,600,000 and $8,736, respectively, have also been in accordance
with the amended Partnership Agreement. The Fourth Quarter 1997 distribution of
$875,000 was paid to the Limited Partners on February 15, 1998.
Results of Operations:
The Partnership reported net income for the year ended December 31, 1997, in the
amount of $2,184,000 compared to net income for the years ended December 31,
1996 and 1995, of $3,278,000 and $1,782,000, respectively. Results for all
three years were different than would be expected from "normal" operations,
primarily because of costs associated with the misappropriation of assets by the
former general partners and their affiliates, tenant defaults, non-cash write-
offs, and real estate taxes on vacant properties. Results for 1997 and 1996
were also impacted by gains on the sales of properties and the reversal of a
portion of the former general partner receivable write-off. The costs
associated with the misappropriation increased significantly during 1995 and
1996 as the lawsuit against the former general partners' 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 only a minimal
impact on operations.
Revenues
Total revenues were $3,448,000, $5,317,000, and $3,932,000, for the years ended
December 31, 1997, 1996, and 1995, respectively. A decrease in fixed rents
resulted from tenant turnover, property sales, and modified leases. The
unusually high revenues in 1996 were primarily a result of a $930,00 gain on the
sale of two Applebee's restaurants, and an $864,000 recovery for a portion of
the former general partner receivable which had previously been written-off due
to recoveries received in excess of original estimates. During 1997, a $106,000
gain was recognized on the sales of four Hardee's restaurants and a $245,000
recovery was recorded.
Total revenues should approximate $3,000,000 annually based on leases currently
in place. Future revenues may decrease with tenant defaults and/or sales of
Partnership properties. They may also increase with additional rents due from
tenants, if those tenants experience sales levels which require the payment of
additional rent to the Partnership.
Expenses
For the years ended December 31, 1997, 1996, and 1995, cash expenses amounted to
approximately 19%, 25%, and 29%, of total revenues, respectively. Total
expenses, including non-cash items, amounted to approximately 37%, 38%, and 55%,
of total revenues for the years ended December 31, 1997, 1996, and 1995,
respectively. Items negatively impacting expenses during the last three years
include expenses
12
<PAGE>
incurred primarily in relation to the misappropriation of assets by the former
general partners and their affiliates, non-cash write-offs, property write-
downs, real estate taxes, and equipment losses.
For the years ended December 31, 1997, 1996, and 1995, expenses incurred in
relation to the misappropriated assets amounted to $33,000, $526,000, and
$417,000, respectively. Future expenses incurred in relation to the
misappropriation should have a minimal impact on the Partnership.
Additional expenses impacting operating results are provisions for uncollectible
rent, losses on equipment leases, and write-downs of property to their estimated
net realizable values. All of these items, including depreciation, are non-cash
items and do not affect current operating cash flow of the Partnership or
distributions to the Limited Partners.
Write-offs for uncollectible rents and receivables amounted to $67,000, $0, and
$112,000 at December 31, 1997, 1996, and 1995, respectively. The write-offs are
the result of defaults as well as modifications to several property leases since
inception of the Partnership. The 1997 write-off is primarily a result of an
allowance recorded for deferred rent on the Denny's in Twin Falls, Idaho. The
tenant of the property, DenAmerica, Inc., has vacated the property and future
collectibility is uncertain.
During 1996, two Hardee's properties were written down to their estimated net
realizable values based on purchase option prices granted to the tenant of the
properties.
During 1995, the Miami Subs restaurant in Palm Beach, Florida, was written down
$255,000 to its estimated net realizable value of $400,000. The poor location
of this property has required lease modifications for the tenant.
During 1997, remaining equipment lease payments of $61,000 on the Twin Falls,
Idaho, lease were written off. The tenant has vacated the property and future
collectibility is uncertain. Equipment lease terminations created losses during
1996, in the amount of $95,000. The equipment leases were terminated by the
tenant of eight (8) Hardee's restaurants which had been experiencing sales
difficulties. During 1995, write-downs were taken on the residual values of all
equipment leases to more closely reflect their estimated fair market value.
Partnership management fees increased during 1996 primarily due to the
prepayment of rent in connection with the lease terminations on the Hardee's
properties.
Disposition fees were incurred during 1996 as a result of the sale of two of the
Partnership's Applebee's properties. Fees incurred during 1997 were a result of
the sales of four Hardee's properties.
Real estate tax expenses for 1995 were inordinately high as former management
allowed these taxes to become delinquent for several years while interest and
penalties accumulated along with new liabilities incurred on vacant properties
and defaulted tenants. During 1997, real estate tax expense was recorded on the
vacant former Country Kitchen property. The Partnership incurred real estate
taxes on behalf of tenants in the amounts of $12,000, and $30,000, for the years
ended December 31, 1997, and 1995, respectively.
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. Although the majority of the Partnership's leases have percentage
rent clauses, revenues from percentage rents represented only 9% of rental
income for 1997. 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.
13
<PAGE>
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.
Year 2000
- - ---------
Since the Partnership's accounting and investor relations software are not owned
by the Partnership and tenants are responsible for the operation of any
equipment located at the Partnership's properties, issues regarding preparedness
for the year 2000 should have a minimal impact on the Partnership.
Item 8. Financial Statements and Supplementary Data
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
------------------------------------------------------
(a Wisconsin limited partnership)
---------------------------------
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
-------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants ........... 15
Balance Sheets, December 31, 1997 and 1996 ........... 16 - 17
Statements of Income for the Years
Ended December 31, 1997, 1996, and 1995 ........... 18
Statements of Partners' Capital for the
Years Ended December 31, 1997, 1996, and 1995 ........... 19
Statements of Cash Flows for the Years
Ended December 31, 1997, 1996, and 1995 ........... 20 - 21
Notes to Financial Statements ........... 22 - 31
Schedule III--Real Estate and Accumulated
Depreciation ........... 37 - 38
</TABLE>
14
<PAGE>
[LETTERHEAD OF ARTHUR ANDERSEN LLP]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Divall Insured Income Properties 2 Limited Partnership:
We have audited the accompanying balance sheets of Divall Insured Income
Properties 2 Limited Partnership (the Partnership) as of December 31, 1997 and
1996, and the related statements of income, partners' capital and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Divall Insured Income
Properties 2 Limited Partnership as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Chicago, Illinois
February 26, 1998
15
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1997 and 1996
--------------------------
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
INVESTMENT PROPERTIES AND EQUIPMENT:(Note 3)
<S> <C> <C>
Land $ 8,330,982 $ 9,141,303
Buildings 14,930,273 16,488,654
Equipment 707,378 707,378
Accumulated depreciation (5,472,407) (5,550,940)
----------- -----------
Net investment properties and equipment 18,496,226 20,786,395
----------- -----------
NET INVESTMENT IN DIRECT FINANCING LEASES: 0 108,826
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 1,438,534 1,444,326
Cash restricted for real estate taxes 11,251 110,625
Cash held in Indemnification Trust (Note 8) 304,753 289,637
Rents and other receivables 285,163 218,051
Deferred rent receivable 182,770 259,326
Prepaid insurance 19,341 22,262
Deferred charges 86,434 53,620
Unsecured notes receivable from lessees 69,726 86,288
----------- -----------
Total other assets 2,397,972 2,484,135
----------- -----------
DUE FROM FORMER AFFILIATES: (Notes 2 and 9)
Due from former general partner affiliates 1,498,900 1,743,461
Allowance for uncollectible amounts
due from former affiliates (1,498,900) (1,743,461)
Restoration cost receivable 4,469,873 3,897,981
Allowance for uncollectible
restoration receivable (4,469,873) (3,897,981)
----------- -----------
Due from former affiliates, net 0 0
----------- -----------
Total assets $20,894,198 $23,379,356
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1997 and 1996
--------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 69,837 $ 67,589
Due to current General Partner 2,510 86,727
Security deposits 153,112 144,290
Unearned rental income 131,263 57,739
Real estate taxes payable 58,355 119,131
------------ ------------
Total liabilities 415,077 475,476
------------ ------------
CONTINGENT LIABILITIES: (Note 7)
PARTNERS' CAPITAL: (Notes 1, 4 and 11)
Current General Partner -
Cumulative net income 101,904 80,064
Cumulative cash distributions (40,091) (31,355)
------------ ------------
61,813 48,709
------------ ------------
Limited Partners (46,280.3 interests outstanding)
Capital contributions, net of offering costs 39,358,468 39,358,468
Cumulative net income 16,454,337 14,292,200
Cumulative cash distributions (34,555,268) (29,955,268)
Reallocation of former general partners' deficit capital (840,229) (840,229)
------------ ------------
20,417,308 22,855,171
------------ ------------
Total partners' capital 20,479,121 22,903,880
------------ ------------
Total liabilities and partners' capital $ 20,894,198 $ 23,379,356
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the Years Ended December 31, 1997, 1996, and 1995
-----------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Rental income (Note 5) $2,951,174 $3,262,082 $3,770,280
Interest income on direct financing leases 10,384 57,028 102,101
Other interest income 73,223 98,393 69,287
Net other income (Note 3) 63,349 105,710 (10,899)
Recovery of amount previously written off (Notes 9 & 10) 244,561 863,643 0
Net gain on disposal of assets 105,609 929,997 1,729
---------- ---------- ----------
3,448,300 5,316,853 3,932,498
---------- ---------- ----------
EXPENSES:
Partnership management fees (Note 6) 167,350 202,587 164,350
Disposition fees (Note 6) 52,166 66,750 3,000
Disposition fees - Restoration 0 20,550 3,000
Restoration fees (Note 6) 9,782 33,408 2,616
Selling commissions - Nonaffiliate 0 0 9,900
Appraisal fees 6,410 2,268 2,500
Insurance 26,130 36,594 48,180
General and administrative 107,992 125,634 103,142
Advisory Board fees and expenses 14,018 16,703 17,351
Interest 0 3,551 42,893
Real estate taxes 12,172 (880) 30,203
Ground lease payments (Note 3) 125,209 123,921 123,825
Expenses incurred due to default by lessee 8,398 7,220 24,748
Professional services 99,481 141,073 133,189
Professional services related to Investigation (Note 9) 32,618 526,210 417,433
Loss on equipment lease 61,404 95,246 72,264
Depreciation 464,596 511,650 584,352
Amortization 9,186 804 804
Provision for uncollectible rents and other receivables 67,411 0 111,762
Write down of properties to net realizable value 0 126,052 254,881
---------- ---------- ----------
1,264,323 2,039,341 2,150,393
---------- ---------- ----------
NET INCOME $2,183,977 $3,277,512 $1,782,105
========== ========== ==========
NET INCOME - CURRENT GENERAL PARTNER 21,840 32,775 17,821
NET INCOME - LIMITED PARTNERS 2,162,137 3,244,737 1,764,284
---------- ---------- ----------
$2,183,977 $3,277,512 $1,782,105
========== ========== ==========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST, based on 46,280.3 Interests outstanding $46.72 $70.11 $38.12
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
For the years ended December 31, 1997, 1996 and 1995
----------------------------------------------------
<TABLE>
<CAPTION>
Current General Partner
------------------------------------------
Cumulative Cumulative
Net Cash
Income Distributions Total
---------- -------------- -----
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ 29,468 $(13,165) $ 16,303
Cash Distributions
($74.11 per limited partnership interest) (5,080) (5,080)
Net Income 17,821 17,821
-------- -------- --------
BALANCE AT DECEMBER 31, 1995 $ 47,289 $(18,245) $ 29,044
Cash Distributions
($147.47 per limited partnership interest) (13,110) (13,110)
Net Income 32,775 32,775
-------- -------- --------
BALANCE AT DECEMBER 31, 1996 $ 80,064 $(31,355) $ 48,709
Cash Distributions
($99.39 per limited partnership interest) (8,736) (8,736)
Net Income 21,840 21,840
-------- -------- --------
BALANCE AT DECEMBER 31, 1997 $101,904 $(40,091) $ 61,813
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Limited Partners
--------------------------------------------------------------------------
Capital
Contributions, Cumulative
Net of Cumulative Cash
Offering Costs Net Income Distribution Reallocation Total
-------------- ----------- ------------ ------------ ----
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $39,358,468 $ 9,283,179 $(19,700,268) $(840,229) $28,101,150
Cash Distributions
($74.11 per limited partnership interest) (3,430,000) (3,430,000)
Net Income 1,764,284 1,764,284
----------- ----------- ------------ --------- -----------
BALANCE AT DECEMBER 31, 1995 $39,358,468 $11,047,463 $(23,130,268) $(840,229) $26,435,434
Cash Distributions
($147.47 per limited partnership interest) (6,825,000) (6,825,000)
Net Income 3,244,737 3,244,737
----------- ----------- ------------ --------- -----------
BALANCE AT DECEMBER 31, 1996 $39,358,468 $14,292,200 $(29,955,268) $(840,229) $22,855,171
Cash Distributions
($99.39 per limited partnership interest) (4,600,000) (4,600,000)
Net Income 2,162,137 2,162,137
----------- ----------- ------------ --------- -----------
BALANCE AT DECEMBER 31, 1997 $39,358,468 $16,454,337 $(34,555,268) $(840,229) $20,417,308
=========== =========== ============ ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,183,977 $ 3,277,512 $ 1,782,105
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 473,782 512,454 585,156
Recovery of amount previously written off (244,561) (863,643) 0
Provision for uncollectible rents and other receivables 67,411 0 111,762
Property write downs to net realizable value 0 126,052 254,881
Net (gain) on disposal of assets (105,609) (929,997) (1,729)
Loss on equipment leases 61,404 95,246 72,264
Interest applied to Indemnification Trust account (15,116) (14,406) (21,673)
(Increase) Decrease in rents and other receivables (67,112) 203,837 (296,921)
(Deposits) Withdrawals for payment of real estate taxes and CD 99,374 (49,408) 240,477
(Increase) Decrease in prepaids 2,921 (2,631) 21,020
(Increase) Decrease in deferred rent receivable 9,145 37,156 13,747
Increase (Decrease) in due to current General Partner (84,217) 32,611 (814)
Increase (Decrease) in accounts payable and other 2,248 (199,126) 82,558
Increase (Decrease) in security deposits 8,822 (38,355) (254,136)
Increase (Decrease) in real estate taxes payable (60,776) 62,113 (54,558)
Increase (Decrease) in unearned rental income 73,524 39,674 (7,056)
----------- ----------- -----------
Net cash from operating activities 2,405,217 2,289,089 2,527,083
----------- ----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Principal payments received on direct financing leases 47,422 229,294 603,956
Proceeds from sale of investment properties 1,931,182 2,990,000 300,000
Investment in leasing commissions (42,000) 0 0
Recoveries from former G.P. affiliates 244,561 1,785,744 65,400
Payments from affiliated partnerships 0 96,088 29,068
Issuance of unsecured notes 0 (36,288) 0
Principal receipts from unsecured notes 16,562 0 0
----------- ----------- -----------
Net cash from investing activities 2,197,727 5,064,838 998,424
----------- ----------- -----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Cash distributions to Limited Partners (4,600,000) (6,825,000) (3,430,000)
Cash distributions to current General Partner (8,736) (13,110) (5,080)
Payments on equipment notes 0 (77,255) (433,764)
----------- ----------- -----------
Net cash (used in) financing activities (4,608,736) (6,915,365) (3,868,844)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,792) 438,562 (343,337)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 1,444,326 1,005,764 1,349,101
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,438,534 $ 1,444,326 $ 1,005,764
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 0 $ 3,551 $ 30,203
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
Supplemental Information to the Statements of Cash Flows
--------------------------------------------------------
The following significant noncash transactions occurred during the three years
affecting the Partnership's financial statements:
1. During 1996, the Partnership was deeded land with a value of $88,424
in exchange for a note receivable from a tenant.
2. During 1996, equipment was transferred to the Partnership with an
estimated value of $37,600 in exchange for delinquent rent from a
tenant.
3. During 1996, security deposits totaling $67,932 were applied as
equipment lease payments for a tenant.
4. During 1996, the Partnership incurred leasing commissions totaling
$53,520 which were unpaid at year-end. The amount was paid in full
during 1997.
The accompanying notes are an integral part of these statements.
21
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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. 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 cash-a-check store, a video rental
store and a child care center. At December 31, 1997, the Partnership owned 32
properties with specialty leasehold improvements in 12 of these properties.
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 represent 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.
22
<PAGE>
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.
During 1996, the Partnership adopted Statement of Financial Accounting Standards
No.121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of, which requires that all long-lived assets
be reviewed for impairment in value whenever changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The adoption of
SFAS 121 had no impact on the Partnership's financial statements in 1996 or
1997.
The Partnership will be dissolved on November 30, 2010, or earlier upon the
prior occurrence of any of the following events: (a) the disposition of all
properties of the Partnership; (b) the written determination by the General
Partner that the Partnership's assets may constitute "plan assets" for purposes
of ERISA; (c) the agreement of Limited Partners owning a majority of the
outstanding interests to dissolve the Partnership; or (d) the dissolution,
bankruptcy, death, withdrawal, or incapacity of the last remaining General
Partner, unless an additional General Partner is elected previously by a
majority of the Limited Partners.
No provision for Federal income taxes has been made, as any liability for such
taxes would be that of the individual partners rather than the Partnership. At
December 31, 1997, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$8,200,000.
The following represents a reconciliation of net income as stated on the
Partnership statements of income to net income for tax reporting purposes:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income, per statements of income $2,183,977 $3,277,512 $1,782,105
Book to tax depreciation difference (36,811) (35,161) (6,450)
Book over tax gain from asset disposition (227,315) (98,501) (82,904)
Straight line rent adjustment 10,866 37,156 13,747
Affiliate receivable basis adjustment 0 0
Bad debt reserve/expense 53,666 (488,777) 111,762
Real estate tax expense 0 (65,881) 16,804
Book valuation adjustment of real property 0 126,052 254,881
Book valuation adjustment of equipment leases 65,690 0 50,820
Other, net 73,865 215,779 (6,437)
---------- ---------- ----------
Net income for tax reporting
purposes $2,123,938 $2,968,179 $2,134,328
========== ========== ==========
</TABLE>
23
<PAGE>
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 approximately $14,800,000, of which
approximately $5,969,000 has been attributed to the Partnership and is reflected
as due from former affiliates on the balance sheet at December 31, 1997. The 9%
interest accrued as of December 31, 1997, amounted to approximately $2,447,000
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 December 31, 1997, $5,766,000 of recoveries have been
received which exceeded the original estimate of $3 million. As a result, the
Partnership has recognized $1,108,000 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 December 31, 1997, the Partnership owned 29 fully constructed fast-food
restaurants, an auto tag agency, a video store, and a preschool. The properties
are composed 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) Red Apple Restaurant, one
(1) Hooter's restaurant, one (1) Kentucky Fried Chicken restaurant, one (1)
Hostetler's restaurant, one (1) Miami Subs restaurant, one (1) Village Inn
restaurant, one (1) Cash-A-Check operation, one (1) Blockbuster Video store, and
one (1) Sunrise Preschool. 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 December 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
ceased
24
<PAGE>
making rent payments. Management entered into a lease on the property
which became effective January 1, 1998. The tenant of the Denny's restaurant in
Twin Falls, Idaho, has vacated the property, but is continuing to make rental
payments. During 1997, the deferred rental income and remaining equipment lease
balances were written off due to uncertainty regarding their collectibility.
The total cost of the investment properties and specialty leasehold improvements
includes the original purchase price plus acquisition fees and other capitalized
costs paid to an affiliate of the former general partners.
According to the Partnership Agreement, the former general partners were to
commit 80% of the original offering proceeds to investment in properties. Upon
the close of the offering, approximately 75% of the original proceeds was
invested in the Partnership's properties.
The current General Partner receives a fee for managing the Partnership equal to
4% of the gross receipts, with a maximum reimbursement for office rent and
related office overhead of $25,000 between the three affiiliated Partnerships.
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 Permanent Manager
Agreement ("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 $54,777 to date on the amounts recovered, which has
been offset against the 4% minimum fee.
The tenant of the Partnership's Hardee's restaurants has experienced sales
difficulties over the past three years. Effective December 31, 1995, management
entered into a one-year lease modification with the tenant for 1996 resulting in
a $200,000 decrease in base rent for the year and agreed to capitalize
delinquent rents totaling $112,000 into a five-year note earning 10% interest.
During the Fourth Quarter of 1996, management terminated six (6) of the leases
and entered into new leases on five (5) of the properties with Hardee's Food
Systems, Inc. In connection with the transaction, the capitalized rent was
received. The new leases resulted in annual rents which are $255,000 lower than
the former tenant's contract rent and $106,000 lower than the 1996 adjusted
rents. In connection with the transaction, the original tenant terminated their
equipment leases in three of the properties and the equipment was sold to the
new tenant for $80,000, resulting in a loss to the Partnership of $95,000.
Additionally, purchase options were granted on three of the properties. Those
properties were written down to the option price at December 31, 1996. Four of
the properties (three of which were subject to option agreements) were sold to
the former tenant during 1997, resulting in a net gain of $106,000.
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 ranging from
2003 to 2008.
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.
25
<PAGE>
Several of the Partnership's property leases contained purchase option
provisions with stated purchase prices in excess of the original cost of the
properties. The current General Partner is not aware of any unfavorable
purchase options in relation to original cost. Apple South, Inc. the tenant of
two Applebee's restaurants, notified Management of its intent to exercise an
option in its lease to purchase those properties. One sale closed in January
1996, resulting in an approximate gain of $484,000. The other sale took place
during September 1996 and resulted in an approximate gain of $446,000.
Cypress Restaurants, Inc., the tenant of the Denny's restaurants in New Smyrna
Beach, Florida and Daytona Beach, Florida, have negotiated a purchase contract
for their properties in the amount of $1,250,000 and $950,000 respectively, from
the Partnership. The Daytona Beach property, however, was found to have
environmental contamination from an adjoining property, which impacted their
ability to obtain financing. Therefore, the Partnership has agreed to finance
$550,000 of the $950,000 purchase price for a period of six months, until the
environmental issues can be addressed. The sale of the properties took place in
January 1998, resulting in a gain of $556,000. The Partnership is not liable
for the environmental contamination.
4. PARTNERSHIP AGREEMENT:
The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that, for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
general partners. The Partnership Agreement also provided for quarterly cash
distributions from Net Cash Receipts, as defined, within 60 days after the last
day of the first full calendar quarter following the date of release of the
subscription funds from escrow, and each calendar quarter thereafter, in which
such funds were available for distribution with respect to such quarter. Such
distributions were to be made 90% to Limited Partners and 10% to the former
general partners, provided, however, that quarterly distributions were to be
cumulative and were not to be made to the former general partners unless and
until each Limited Partner had received a distribution from Net Cash Receipts in
an amount equal to 10% per annum, cumulative simple return on his or her
Adjusted Original Capital, as defined, from the Return Calculation Date, as
defined.
Net Proceeds, as originally defined, were to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a Liquidation Preference equal to a 13.5% per annum, cumulative
simple return on Adjusted Original Capital from the Return Calculation date
including in the calculation of such return all prior distributions of Net Cash
Receipts and any prior distributions of Net Proceeds under this clause; and (c)
then, to Limited Partners, 90% and to the General Partners, 10%, of the
remaining Net Proceeds available for distribution.
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
26
<PAGE>
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 7.)
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.
27
<PAGE>
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
<TABLE>
<S> <C>
Year ending
December 31,
1998 $ 2,310,028
1999 2,304,628
2000 2,301,296
2001 2,197,033
2002 2,134,166
Thereafter 14,778,980
-----------
$26,026,131
===========
</TABLE>
Percentage rentals included in rental income in 1997, 1996, and 1995 were
$608,915, $578,747, and $719,407, respectively. The decrease in percentage
rental income is a result of the sale of various properties subject to
percentage rent.
Ten (10) of the properties are leased to Wensouth Orlando, a franchisee of
Wendy's restaurants. Wensouth base rents accounted for 31% of total base rents
for 1997.
6. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts incurred to the current General Partner for the years ended December 31,
1997, 1996, and 1995, are as follows:
<TABLE>
<CAPTION>
Incurred Incurred Incurred
for the year ended for the year ended for the year ended
Current General Partner December 31, 1997 December 31, 1996 December 31, 1995
- - ----------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Management fees $167,350 $202,587 $164,350
Disposition fees 52,166 66,750 3,000
Restoration fees 9,782 33,408 2,616
Overhead allowance 14,367 14,301 13,914
Leasing Commissions 6,000 53,620 0
Reimbursement for out-of-pocket 21,605 21,781 19,148
expenses
Cash distribution 8,736 13,110 5,080
-------- -------- --------
$280,006 $405,557 $208,108
======== ======== ========
</TABLE>
7. 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
28
<PAGE>
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 1996 after exceeding
the recovery level of $4,500,000. The remaining amount allocated to the
Partnership may be owed to the current General Partner if the $6,000,000
recovery level is met. As of December 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. Management believes it is unlikely
that such a recovery level will be achieved.
8. 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 December 31, 1997. Funds are invested in U.S. Treasury
securities. In addition, $54,753 of earnings have been credited to the Trust as
of December 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.
9. RESTORATION TRUST ACCOUNT; EXPENSE ALLOCATIONS;
AND RELATED INTER-PARTNERSHIP RECEIVABLES:
------------------------------------------
Restoration costs represent expenses incurred by the Partnership associated with
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 may 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.
When recoveries are realized by the Partnerships, the amounts received are
distributed to each respective partnership on the same basis as the restoration
costs are currently being allocated. As of December 31, 1997, the Partnerships
recovered a total of $5,726,000 from the former general partners and their
affiliates, accountants and attorneys. Of this amount, the Partnership received
its pro-rata share in the amount of $2,315,485. Additionally, $40,347,
representing 50% of all previously escrowed disposition fees earned
29
<PAGE>
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 certain recovery levels as described in Note 7.
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 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.
In 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"). 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 not
enforceable. An appeal by Boatmen's was subsequently dropped, so the full
$600,000 recovery has been recorded. 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 the full cancellation of the
alleged indebtedness was allocated among the three Partnerships on the same
basis as the restoration costs are being allocated. The Partnership's portion of
the recovery was $242,340.
10. LITIGATION:
-----------
In 1993, the Partnership, along with DiVall 1 and DiVall 3, initiated a lawsuit
against Ernst & Young LLP ("E & Y"), a certified public accounting firm, in
connection with the audits of the Partnerships performed by E & Y for the years
1989, 1990, and 1991. The Partnerships also filed claims against Magnuson,
DiVall, DiVall Real Estate Investment Corporation, David Shea, and the
Partnerships' former securities law firm, Quarles & Brady.
These matters were settled in 1996, yielding net proceeds to the Partnership,
after the payment of contingent legal fees and related costs, of approximately
$900,000.
As part of the Permanent Manager Agreement, DiVall, Magnuson, and entities owned
by them, granted the Partnership a security interest in certain promissory notes
and mortgages from other DiVall related entities (the "Private Partnerships").
In the aggregate, the face amount of these notes were equal to a minimum of
$8,264,932. In addition, DiVall, Magnuson, and related entities owned by them,
granted the Partnership a security interest in their general partner interests
in the Private Partnerships. The foregoing security interests were to secure the
repayment of the funds which were diverted by DiVall and Magnuson from the
Partnership. The Partnership shares such security interests with DiVall 1 and
DiVall 3. These promissory notes and mortgages are not recorded on the balance
sheets of the Partnerships, but are recorded as recoveries on a cash basis upon
settlement.
30
<PAGE>
In 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.
11. 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.
12. SUBSEQUENT EVENTS:
------------------
On February 15, 1998, the Partnership made distributions to the Limited Partners
of $875,000 amounting to $18.91 per limited partnership interest.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The General Partner of the Partnership is The Provo Group, Inc., an Illinois
corporation ("TPG") with its principal office at 101 West 11th Street, Suite
1110, Kansas City, Missouri 64105. TPG was elected General Partner by vote of
the Limited Partners effective on May 26, 1993. TPG had been managing the
Partnership since February 8, 1993, under the terms of the Permanent Manager
Agreement ("PMA"), which remains in effect. TPG also serves as the corporate
general partner for DiVall 1 and DiVall 3. See
31
<PAGE>
Items 1 and 13 hereof for additional information about the PMA and the election
of TPG as General Partner.
The executive officers and director of the General Partner who control the
affairs of the Partnership are as follows:
Bruce A. Provo, Age 47 - President, Founder and Director.
Mr. Provo has been involved in the management of real estate and other
asset portfolios since 1979. Since he founded the company in 1985, Mr.
Provo has been President of TPG. From 1982 to 1986, Mr. Provo served as
President and Chief Operating Officer of the North Kansas City Development
Company ("NKCDC"), North Kansas City, Missouri. NKCDC was founded in 1903
and the assets of the company were sold in December, 1985 for $102,500,000.
NKCDC owned commercial and industrial properties, including an office park
and a retail district, as well as apartment complexes, motels, recreational
facilities, fast food restaurants, and other properties. NKCDC's holdings
consisted of over 100 separate properties and constituted approximately 20%
of the privately held real property in North Kansas City, Missouri (a four
square mile municipality). Following the sale of the company's real
estate, Mr. Provo served as the President, Chief Executive Officer and
Liquidating Trustee of NKCDC from 1986 to 1991.
Mr. Provo graduated from Miami University, Oxford, Ohio in 1972 with a B.S.
in Accounting. He became a Certified Public Accountant in 1974 and was a
manager in the banking and financial services division of Arthur Andersen
LLP prior to joining Rubloff Development Corporation in 1979. From 1979
through 1985, Mr. Provo served as Vice President - Finance and then as
President of Rubloff Development Corporation. Mr. Provo has previously
served on the Board of Directors of the National Realty committee, a
legislative "watchdog" organization for the commercial real estate industry
headquartered in Washington, DC.
Kristin J. Atkinson, Age 35 - Vice President - Finance and Administration.
Ms. Atkinson joined The Provo Group, Inc. in September 1994 to provide
management expertise in the areas of financial controls and management
accounting services for four limited partnerships managed by TPG. Prior to
joining TPG, Ms. Atkinson was Manager of Financial Reporting for Farm &
Home Savings Association (a $4 billion savings and loan association) for
nine years where she was responsible for supervision of the preparation of
internal and external financial documentation, including regulatory filings
for the savings association and its parent company. Ms. Atkinson graduated
Magna Cum Laude with a B.S. in Accounting from Missouri Southern State
College in Joplin, Missouri and worked as an accountant for James P. Arthus
and Company for one year before joining Farm & Home Savings Association.
Brenda Bloesch, Age 36 - Director of Investor Relations. Ms. Bloesch
joined The Provo Group, Inc. in March 1993, to oversee and provide various
levels of client support for more than 8,000 broker dealers, registered
representatives, custodians and investors. Primarily responsible for all
communications regarding four limited partnerships managed by TPG, Ms.
Bloesch is also involved with database management and partnership
compliance issues. Prior to joining TPG, Ms. Bloesch was Manager of
Investment Services at DiVall Real Estate Investment Corporation ("DREIC")
for four years and Publisher Services Manager at NewsNet, Inc. for five
years. Her role at DREIC allowed Ms. Bloesch to obtain extensive knowledge
of limited partnerships and gain familiarity
32
<PAGE>
with the broker and investor communities. Ms. Bloesch is a graduate of Lock
Haven University in Lock Haven, Pennsylvania, where she received her B.A.
in Journalism and Media Studies.
The Advisory Board, although its members are not "Directors" or "Executive
Officers" of the Partnership, provides advisory oversight to management of the
Partnership and consists of:
Steven Carson - Vice President/Investments at First Albany Corporation.
Mr. Carson's primary client concentration includes labor union, pension,
and annuity funds. Mr. Carson has worked for First Albany for 11 years.
He began his career as a retail broker at E.F Hutton & Company and served
as Vice President, Shearson American Express from 1980-1986. Mr. Carson
attended Northrup University in Los Angeles, California. He has served as
Board Member and President on various Civic Boards in Syracuse, New York.
Mr. Carson represents the broker-dealer community.
Robert White - President of Chevron, TCI. Mr. White has worked for Chevron
in various positions over the past 38 years. This company specializes in
acquiring real estate that has been allocated as either Low-Income Housing
or Historic Rehabilitation tax credits. Most of the acquisitions are made
using limited partnership structures -- with TCI as the limited partner.
Mr. White started his career as a research chemist with Chevron Research
Company in 1959, after receiving a B.S Degree in Chemistry from the
University of California at Berkeley. In 1977, Mr. White received a M.B.A
Degree in Financial Analysis and subsequently transferred to Chevron
Corporation's Planning and Analysis Department in San Francisco. In 1991,
Mr. White became Vice-President of Chevron Land. After this company was
sold in 1995, he assumed the position as President of the new Chevron
subsidiary, Chevron TCI, Inc. Mr. White is a Limited Partner representing
DiVall 1.
Richard W. Otte - Editorial Writer. Mr. Otte is in his sixth year as an
Editorial Board Member and editorial writer for The Volusion, a DeLand,
Florida, subsidiary of the News-Journal Corporation in Daytona Beach,
Florida. Mr. Otte retired in 1988 after 34 years with the Dispatch
Printing Co., serving his last eight years as Managing Editor of the
Columbus Dispatch and as a member of its Operating Committee. He
previously was the executive sports editor of the newspaper in Ohio's
capital city. Mr. Otte's 49 years in professional journalism also include
news reporting, editing and sports assignments with the Daytona Journal
Herald and Springfield News-Sun. Mr. Otte is a Limited Partner
representing DiVall 2.
Albert Gerritz - Perinton Volunteer Ambulance Corps. Mr. Gerritz has
held various offices in Finance and Administration, including President.
Mr. Gerritz retired in 1986 after 36 years with Eastman Kodak Co. where he
was Supervisor of Engineering Services, Research Labs. Mr. Gerritz was
instrumental in identifying the need and pursuing the development of a
unique research complex for Kodak, which became the case study for his
consulting activities on research facilities nationwide. Mr. Gerritz also
worked for forty years in the Bushnell's Basin Fire Department and served
five years as Chief. Mr. Gerritz has a life membership in National Society
of Professional Engineers. Mr. Gerritz is a Limited Partner representing
DiVall 3.
Item 11. Executive Compensation
The Partnership has not paid any "executive compensation" to the corporate
General Partner or to the directors and officers of the General Partner. The
General Partner's participation in the income of the Partnership is set forth in
the Agreement of Limited Partnership and amendments thereto, which are filed
33
<PAGE>
as Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 hereto. The current General Partner
received management fees and expense reimbursements during the year.
See Item 13, below, and Note 6 to the financial statements in Item 8 hereof for
further discussion of payments by the Partnership to the General Partner and the
former general partners.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) As of December 31, 1997, no one person or group is known by the Partnership
to own beneficially more than 5% of the outstanding interests of the
Partnership.
(b) As of December 31, 1997, neither the General Partner nor any of their
affiliates owned any Limited Partner Interests in the Partnership.
Item 13. Certain Relationships and Related Transactions
The compensation to be paid to TPG is governed by the Partnership Agreement, as
amended by vote of the Limited Partners to reflect the terms of the PMA. TPG's
compensation includes a base fee equal to 4% of the Partnership's gross
collected receipts, subject to a minimum of $159,000 per year. For this
purpose, "gross collected receipts" means all cash revenues arising from
operations and reserves of the Partnerships, including any proceeds recovered
with respect to the obligations of the former general partners. The portion of
such fee resulting from recoveries from former general partners is designated as
restoration fees. TPG is also entitled to reimbursement for office rent and
utilities not to exceed $13,250 per year. TPG is entitled to reimbursement of
reasonable direct costs and expenses, such as travel, lodging, overnight
delivery and postage, but has no right to be reimbursed for administrative
expenses such as payroll, payroll taxes, insurance, retirement and other
benefits, base phone and fax charges, office furniture and equipment, copier
rent, and the like. Between the three Partnerships, TPG is entitled to an
aggregate minimum base management fee of $300,000 per year and reimbursement for
office rent in the maximum amount of $25,000 per year. The Partnership shall
only be responsible for its allocable share of such minimum and maximum amounts
as indicated above ($159,000 minimum base fee and $13,250 maximum rent
reimbursement). TPG is entitled to an annual increase in the minimum base
management fee and maximum office overhead reimbursement in an amount not to
exceed the percentage increase in the Consumer Price Index ("CPI") for the
immediately preceding calendar year. 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 CPI adjustments.
Additionally, TPG is allowed up to one-half of the Competitive Real Estate
Commission, not to exceed 3% upon the disposition of assets. The payment of a
portion of such fees is subordinated to TPG's success at recovering the funds
misappropriated by the former general partners.
The PMA has an expiration date of December 31, 2002, but may be terminated
earlier (a) by a vote at any time by a majority in interest of the Limited
Partners, (b) upon the dissolution and winding up of the Partnership, (c) upon
the entry of an order of a court finding that the Permanent Manager has engaged
in fraud or other like misconduct or has shown itself to be incompetent in
carrying out its duties under the Partnership Agreement, or (d) upon sixty (60)
days written notice from the Permanent Manager to the Limited Partners of the
Partnership. Upon termination of the PMA, other than by the voluntary action of
TPG, TPG shall be paid a termination fee of one month's Base Fee allocable to
the Partnership, subject to a minimum of $13,250. In the event that TPG is
terminated by action of a substitute general partner, TPG shall also receive, as
part of this termination fee, 4% of any proceeds recovered with respect to the
obligations of the former general partners, whenever such proceeds are
collected.
34
<PAGE>
Under the PMA, TPG shall be indemnified by the Partnership, DiVall and Magnuson,
and their controlled affiliates, and shall be held harmless from all claims of
any party to the Partnership Agreement and from any third party including,
without limitation, the Limited Partners of the Partnership, for any and all
liabilities, damages, costs and expenses, including reasonable attorneys' fees,
arising from or related to claims relating to or arising from the PMA or its
status as Permanent Manager. The indemnification does not extend to claims
arising from fraud or criminal misconduct of TPG as established by court
findings. To the extent possible, the Partnership is to provide TPG with
appropriate errors and omissions, officers liability or similar insurance
coverage, at no cost to TPG. In addition, TPG is granted the right to establish
and segregate Partnership assets in an amount, not to exceed $250,000, solely
for the purpose of funding such indemnification obligations (the
"Indemnification Trust"). Once a determination has been made that no such
claims can or will be made against TPG, the balance of the Indemnification Trust
will become unrestricted cash of the Partnership. At December 31, 1997 the
Partnership had fully funded the Indemnification Trust.
The following fees and reimbursements from the Partnership were incurred to
management in 1997:
<TABLE>
<CAPTION>
The Provo Group, Inc.
---------------------
<S> <C>
Management Fees $167,350
Disposition Fees 52,166
Restoration Fees 9,782
Leasing Commissions 6,000
Office Overhead Allowance 14,367
Direct Cost Reimbursements 21,605
--------
1997 Total $271,270
========
</TABLE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The following financial statements of DiVall Insured Income Properties
2 Limited Partnership are included in Part II, Item 8:
Report of Independent Public Accountants
Balance Sheets, December 31, 1997 and 1996
Statements of Income for the Years Ended December 31, 1997, 1996, and
1995
Statements of Partners' Capital for the Years Ended December 31, 1997,
1996, and 1995
Statements of Cash Flows for the Years Ended December 31, 1997, 1996,
and 1995
35
<PAGE>
Notes to Financial Statements
2. Financial Statement Schedules
Schedule III - Real Estate and Accumulated Depreciation
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instruction or are inapplicable and, therefore,
have been omitted.
3. Listing of Exhibits
3.1 Agreement of Limited Partnership dated as of November 18, 1987,
amended as of November 25, 1987, and February 20, 1988, filed as
Exhibit 3A to Amendment No. 1 to the Partnership's Registration
Statement on Form S-11 as filed on February 22, 1988, and
incorporated herein by reference.
3.2 Amendments to Amended Agreement of Limited Partnership dated as
of June 21, 1988, included as part of Supplement dated August 15,
1988, filed under Rule 424(b)(3), incorporated herein by
reference.
3.3 Amendment to Amended Agreement of Limited Partnership dated as of
February 8, 1993, filed as Exhibit 3.3 to the Partnership's 10-K
for the year ended December 31, 1992, and incorporated herein by
reference.
3.4 Amendment to Amended Agreement of Limited Partnership dated as of
May 26, 1993, filed as Exhibit 3.4 to the Partnership's 10-K for
the year ended December 31, 1993, and incorporated herein by
reference.
3.5 Amendment to Amended Agreement of Limited Partnership dated as of
June 30, 1994, filed as Exhibit 3.5 to the Partnership's 10-K for
the year ended December 31, 1994 and incorporated herein by
reference.
10.0 Permanent Manager Agreement filed as an exhibit to the Current
Report on Form 8-K dated January 22, 1993, incorporated herein by
reference.
28.0 Correspondence to the Limited Partners dated February 15, 1998
regarding the Fourth Quarter 1997 distribution.
(b) Reports on Form 8-K:
The Registrant filed no reports on Form 8-K during the fourth quarter of
fiscal year 1997.
36
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Initial cost to Partnership
----------------------------
Costs
Building capitalized
and Subsequent
Property Encumbrances Land Improvements to acquisitions Land
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Palm Gardens, Florida (1) $ - $ 495,237 $ 248,388 $ - $ 325,487
Hallandale, Florida (2) - 502,578 289,610 - 198,084
Phoenix, Arizona - 444,224 421,676 - 444,224
Phoenix, Arizona - - 295,750 - -
N. Richland Hills, Texas - 762,580 584,139 - 662,580
South Milwaukee, Wisconsin - 274,749 454,064 79,219 274,749
Phoenix, Arizona - 482,383 490,343 - 482,383
Cedar Rapids, Iowa - 108,125 552,031 - 108,125
Santa Fe, New Mexico - - 451,230 - -
Augusta, Georgia - 215,416 434,178 - 215,416
Charleston, South Carolina - 273,619 323,162 - 273,619
Park Forest, Illinois - 187,900 393,038 - 187,900
Aiken, South Carolina - 402,549 373,795 - 402,549
Augusta, Georgia - 332,154 396,659 - 332,154
Mt. Pleasant, South Carolina - 286,060 294,878 - 286,060
Charleston, South Carolina - 273,625 254,500 - 273,625
Aiken, South Carolina - 178,521 455,229 - 178,521
Des Moines, Iowa - 164,096 448,529 287,991 164,096
Daytona Beach, Florida - 291,356 738,488 - 291,356
Hartford, Wisconsin - 201,603 484,960 - 201,603
Milwaukee, Wisconsin - 409,143 600,902 - 409,143
North Augusta, Georgia - 250,859 409,297 - 250,859
Charleston, South Carolina - 286,068 294,870 - 286,068
Martinez, Georgia - 266,175 367,575 - 266,175
Grand Forks, North Dakota - 172,701 566,674 - 172,701
Phoenix, Arizona - - 725,000 - -
Phoenix, Arizona - 241,371 843,132 - 241,371
New Smyrna Beach, Florida - 403,771 622,059 - 403,771
Ogden, Utah - 194,350 452,075 - 194,350
Fond du Lac, Wisconsin - 297,418 552,349 - 297,418
Twin Falls, Idaho - 155,269 483,763 60,000 155,269
Columbus, Ohio - 351,325 708,141 - 351,326
---------------------------------------------------------------------
$0 $8,905,225 $15,010,484 $427,210 $8,330,982
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross amount at which Life on which
carried at end of year (A) depreciation in
------------------------------ in latest statement
of operations
Building and Accumulated Date of Date is computed
Improvements Total depreciation construction acquired (years)
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Palm Gardens, Florida (1) $ 163,258 $ 488,745 $ 95,040 - 3/11/88 31.5
Hallandale, Florida (2) 147,937 346,021 101,541 - 3/11/88 31.5
Phoenix, Arizona 421,676 865,900 171,972 - 6/15/88 31.5
Phoenix, Arizona 295,750 295,750 120,616 - 6/15/88 31.5
N. Richland Hills, Texas 584,139 1,246,719 205,492 - 7/15/88 31.5
South Milwaukee, Wisconsin 533,283 808,032 185,393 1986 8/1/88 31.5
Phoenix, Arizona 490,343 972,726 170,632 - 8/15/88 31.5
Cedar Rapids, Iowa 552,031 660,156 189,999 - 9/9/88 31.5
Santa Fe, New Mexico 451,230 451,230 133,520 - 10/10/88 31.5
Augusta, Georgia 434,178 649,594 142,822 - 12/22/88 31.5
Charleston, South Carolina 323,162 596,781 106,303 - 12/22/88 31.5
Park Forest, Illinois 393,038 580,938 129,289 - 12/22/88 31.5
Aiken, South Carolina 373,795 776,344 121,533 - 2/21/89 31.5
Augusta, Georgia 396,659 728,813 128,967 - 2/21/89 31.5
Mt. Pleasant, South Carolina 294,878 580,938 95,875 - 2/21/89 31.5
Charleston, South Carolina 254,500 528,125 82,747 - 2/21/89 31.5
Aiken, South Carolina 455,229 633,750 148,010 - 3/14/89 31.5
Des Moines, Iowa 680,902 844,998 213,586 1989 8/1/89 31.5
Daytona Beach, Florida 738,488 1,029,844 245,739 - 4/4/89 31.5
Hartford, Wisconsin 484,960 686,563 152,122 - 4/28/89 31.5
Milwaukee, Wisconsin 600,902 1,010,045 188,465 - 8/2/89 31.5
North Augusta, Georgia 409,297 660,156 115,852 - 12/29/89 31.5
Charleston, South Carolina 294,870 580,938 83,463 - 12/29/89 31.5
Martinez, Georgia 367,575 633,750 104,042 - 12/29/89 31.5
Grand Forks, North Dakota 566,674 739,375 160,398 - 12/28/89 31.5
Phoenix, Arizona 500,000 500,000 147,152 - 1/1/90 31.5
Phoenix, Arizona 843,132 1,084,503 238,649 - 1/1/90 31.5
New Smyrna Beach, Florida 622,059 1,025,830 176,074 - 1/5/90 31.5
Ogden, Utah 452,075 646,425 154,483 - 1/31/90 31.5
Fond du Lac, Wisconsin 552,349 849,767 156,343 - 1/5/90 31.5
Twin Falls, Idaho 543,763 699,032 142,150 - 3/21/90 31.5
Columbus, Ohio 708,140 1,059,466 186,840 - 6/1/90 31.5
----------------------------------------
$14,930,273 $23,261,255 $4,795,109
========================================
</TABLE>
(1) This property was written down to its estimated net realizable value of
$400,000 at December 31, 1995.
(2) This property was written down to its estimated net realizable value of
$250,000 at December 31, 1994.
(A) Represents aggregate costs for federal income tax purposes.
37
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(B) Reconciliation of "Real Estate and Accumulated Depreciation":
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
Investment in Real Estate 1997 1996 Accumulated Depreciation 1997 1996
- - ------------------------- ------------- ------------- ------------------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $25,629,957 $28,180,103 Balance at beginning of year $4,881,162 $4,822,028
Deletions: Additions charged to costs
and 457,076 511,650
expenses
Due to disposition (2,368,702) (2,424,094) Deletion due to real estate
disposition (543,129) (452,516)
Due to property write-downs 0 (126,052)
----------- ----------- ---------- ----------
Balance at end of year $23,261,255 $25,629,957 Balance at end of year $4,795,109 $4,881,162
=========== =========== ========== ==========
</TABLE>
38
<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: March 27, 1998
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: March 27, 1998
By: /s/Kristin J. Atkinson
--------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: March 27, 1998
39
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1997 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 1,449,785 1,554,951
<SECURITIES> 304,753 289,637
<RECEIVABLES> 6,612,207 6,389,815
<ALLOWANCES> 5,968,773 5,641,442
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,397,972 2,592,961
<PP&E> 23,968,633 26,337,335
<DEPRECIATION> 5,472,407 5,550,940
<TOTAL-ASSETS> 20,894,198 23,379,356
<CURRENT-LIABILITIES> 415,077 475,476
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 20,479,121 22,903,880
<TOTAL-LIABILITY-AND-EQUITY> 20,894,198 23,379,356
<SALES> 0 0
<TOTAL-REVENUES> 3,448,300 5,316,853
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,196,912 2,039,341
<LOSS-PROVISION> 67,411 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 2,183,977 3,277,512
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 2,183,977 3,277,512
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,183,977 3,277,512
<EPS-PRIMARY> 46.72 70.11
<EPS-DILUTED> 46.72 70.11
</TABLE>
<PAGE>
DiVall Insured Income Properties 2, L.P.
QUARTERLY NEWS
================================================================================
A publication of The Provo Group, Inc. FOURTH QUARTER 1997
DISSOLUTION...IS IT A DISILLUSION?
Madison, Wisconsin
You may recall that management communicated to you over a year ago about the
feedback that we had received from our survey to limited partners which
indicated a strong interest in the dissolution of the Partnership over the next
3-5 years.
Since that time, management has been working aggressively to maximize the value
of the Partnership's asset portfolio and satisfy all potential recovery efforts
of the misappropriated funds by the former general partners and their
affiliates. In addition, management has investigated the specifics surrounding a
partnership dissolution with an emphasis on understanding all continuing
liability and tax issues.
As we understand it today, once we are successful in finding the appropriate
buyer(s) for the properties in the Partnership's portfolio, we are faced with
complying with the terms of the sales lease agreement(s); resolving or reserving
for any pending or potential liability issues with the Partnership or the
General Partner; soliciting and receiving limited partners' approval on the
liquidation proposal; and administratively managing the limited partners'
accounts until such time as a final distribution can be made; and the statute of
limitations runs out on liabilities or tax matters, including the
preparation/mailing of annual Schedule K-1s.
At this time, it appears that the 3-5 year plan is still feasible, pending no
litigation issues, if we begin our marketing efforts within the next 2 years and
allow at least a year or so for the final wind-down of the Partnership,
including the final distribution and K-1 preparations.
Management fully appreciates the investment period that the Partnership's
original limited partners have endured over the years and will be working to
make the dissolution process as efficient as possible.
Interestingly, the comparative rates of return available in the market (ie: bank
rates and bond yields) are becoming less competitive with the "stabilized"
returns available from your partnership.
--------------------------
OTHER NEWS INSIDE...
. Country Kitchen Released..........................Property Highlights, pg 3
. First Quarter 1998 Property Sales.................Property Highlights, pg 3
. Restoration Efforts Concluded..................Restoration Highlights, pg 4
. Schedule K-1s/Year-End Values................Questions and Answers, pgs 5/6
<PAGE>
Page 2 DiVall 2 4 Q 97
--------------------------
Distribution Highlights
. 7.3% (approx.) annualized return from operations and 0.7% (approx.) non-
annualized return of capital from a special distribution related to
recoveries from the former general partners and their affiliates as well as
principal received from equipment leases based on $34,600,000 ("net"
remaining initial investment).
. $18.91 per unit (approx.) for the Fourth Quarter 1997 from both cash flow
from operations and investing activities.
(NOTE: Original units were purchased for $1,000/unit.)
. $875,000 total amount distributed for the Fourth Quarter 1997 which was
$300,000 more than projected.
The "higher" than budgeted distribution is primarily due to the recoveries
received from the Boatmen's lawsuit.
. $863.00 to $665.00 range of distributions per unit from the first unit sold
to the last unit sold before the offering closed (February 1990),
respectively. (NOTE: Distributions are from both cash flow from operations
and "net" cash activity from financing and investing activities.)
--------------------------
Statements of Income and Cash Flow Highlights
. 39% increase in operating revenues from projections.
. Total "annual" sales for Applebee's and Wendy's restaurants were higher
than expected, and accordingly, $43,000 of additional rental income
(percentage rent accruals only) was recognized for the quarter ended
December 31, 1997.
. 9% decrease in total expenses from projections.
. $13,000 in real estate taxes that were previously budgeted to occur during
the Fourth Quarter 1997 were no longer necessary since the property
responsible for the taxes was sold early last year.
<PAGE>
Page 3 DiVall 2 4 Q 97
-----------------------
Property Highlights
Vacancies
---------
. Country Kitchen restaurant (Cedar Rapids, IA) was vacant at December 31,
1997. However, the Partnership has since executed a new lease with Red
Apple Kitchen for this property. Rental payments began January 1, 1998. The
new tenant is also expected to invest $100,000 in tenant and building
improvements.
. Denny's restaurant (Twin Falls, ID) was vacant at December 31, 1997. The
tenant of this property, DenAmerica Corporation, vacated the property at
the end of December 1996. It should be noted, however, this tenant
continues to meet its rental obligations.
(NOTE: Refer to "Other Property Matters" below for further discussion.)
Rents Receivable
----------------
. There were no rental delinquencies at December 31, 1997.
Sale of Property
----------------
. Denny's restaurants located in Daytona Beach and New Smyrna, Florida,
were both sold during the First Quarter 1998.
Other Property Matters
----------------------
. The Partnership has ceased any further lease termination or modification
negotiations with DenAmerica Corporation at this time for the multiple
Denny's restaurants in Arizona and Idaho. The tenant is current on all
rental payments, including the Twin Falls vacancy, and must remain in
compliance with the existing lease terms.
. The tenant of another Denny's restaurant (Phoenix, AZ), First Foods, has
signed a new lease with the Partnership to include value-oriented emphasis
on fixed rent versus percentage rent.
(NOTE: This property was previously percentage rent only.)
<PAGE>
Page 4 DiVall 2 4 Q 97
--------------------------
Property Highlights (contd.)
Other Property Matters (contd.)
-------------------------------
. Applebee's restaurant (Columbus, OH) received over $280,000
more in store sales from 1996 to 1997. The impact of this
sales increase for the Partnership resulted in $16,000 more in
percentage rents for the 1997 year.
--------------------------
Restoration Highlights
. The Partnership received $242,000 in recoveries during the Fourth Quarter
1997.
. "Total" recoveries received to date for the Partnership are approximately
$2,332,000.
. As communicated last quarter, an affiliated partnership received a
"favorable" ruling in the case against Boatmen's First National Bank of
Kansas City which went to trial on June 23, 1997. Following the judge's
ruling, Boatmen's appealed, but subsequently dropped their appeal.
. This disputed Boatmen's liability has always been included as part of the
"total" misappropriation of funds by the former general partners and their
affiliates -- for all three (3) partnerships, DiVall Insured Income Fund,
L.P., DiVall Insured Income Properties 2, L.P., and DiVall Income
Properties 3, L.P. Consequently, all expenses, potential default interest,
and recoveries have been shared by each of these partnerships.
. With the resolution of the disputed Boatmen's liability, the Partnership's
restoration activities are substantially complete. Accordingly, we do not
expect any further recoveries or related restoration costs of any
significance that would be associated with the funds misappropriated by the
former general partners and their affiliates.
<PAGE>
Page 5 DiVall 2 4 Q 97
--------------------------
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 December 31, 1997.
<TABLE>
<CAPTION>
================================================================================
Distribution Capital
Analysis Balance
------------ ------------
<S> <C> <C>
Original Capital Balance - $ 46,280,300
Cash Flow From Operations Since Inception $ 23,867,515 -
Total Distributions Since Inception (35,513,868) -
------------
(Return) of Capital $(11,646,353) (11,646,353)
============ ------------
"Net" Remaining Initial Investment
by Original Partners - $ 34,633,947
============
</TABLE>
================================================================================
(NOTE: For a more individualized discussion of return of
capital contact Investor Relations.)
--------------------------
Questions & Answers
1. When will 1997 per unit values be available for my investment in the
Partnership?
The Partnership's 1997 "year-end" valuation information is scheduled to be
available by the end of February by contacting Investor Relations. A
mailing to all qualified plan holders is scheduled to occur at that time as
well.
We will also include this information in our 1997 Annual Report which we
plan to mail by early April 1998.
<PAGE>
Page 6 DiVall 2 4 Q 97
--------------------------
Questions & Answers (contd.)
2. When can I expect to receive my Schedule K-1 for 1997?
Our current schedule for mailing all 1997 Schedule K-1's for your
Partnership and its affiliated partnerships is by the end of February 1998.
3. When can I expect my next distribution mailing?
Your distribution correspondence for the First Quarter of 1998 is scheduled
to be mailed on May 15, 1998.
* * *
================================================================================
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>
- - --------------------------------------------------------------------------------------------------------------
DIVALL INSURED INCOME PROPERTIES 2 L.P.
STATEMENTS OF INCOME AND CASH FLOW CHANGES
FOR THE THREE MONTH PERIOD ENDED DECEMBER 31, 1997
- - --------------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
----------- ----------- -----------
4TH 4TH
QUARTER QUARTER BETTER
OPERATING REVENUES 12/31/97 12/31/97 (WORSE)
----------- ----------- -----------
<S> <C> <C> <C>
Rental income $715,123 $758,542 $43,419
Direct financing interest 2,036 2,036 0
Interest income 16,266 17,810 1,544
Recovery of amounts previously written off 0 242,340 242,340
Other income 11,764 13,445 1,681
----------- ----------- -----------
TOTAL OPERATING REVENUES $745,189 $1,034,173 $288,984
----------- ----------- -----------
OPERATING EXPENSES
Insurance $7,114 $6,005 $1,109
Management fees 44,391 34,738 9,653
Restoration fees 0 9,694 (9,694)
Overhead allowance 3,700 3,592 108
Advisory Board 4,400 2,702 1,698
Administrative 17,348 15,482 1,866
Professional services 4,442 7,286 (2,844)
Disposition fees 0 0 0
Auditing 12,000 12,000 0
Legal 7,500 5,336 2,164
Real estate taxes 25,589 12,172 13,417
Defaulted tenants 1,920 2,259 (339)
----------- ----------- -----------
TOTAL OPERATING EXPENSES $128,404 $111,266 $17,138
----------- ----------- -----------
GROUND RENT $30,927 $31,093 $166
----------- ----------- -----------
INVESTIGATION AND RESTORATION EXPENSES $1,215 $1,241 ($26)
----------- ----------- -----------
NON-OPERATING EXPENSES
Depreciation $123,186 $112,625 $10,561
Amortization 0 1,163 (1,163)
----------- ----------- -----------
TOTAL NON-OPERATING EXPENSES $123,186 $113,788 $9,398
----------- ----------- -----------
TOTAL EXPENSES $283,732 $257,388 $26,344
----------- ----------- -----------
NET INCOME $461,457 $776,785 $315,328
OPERATING CASH RECONCILIATION: VARIANCE
-----------
Depreciation and amortization $123,186 $113,788 (9,398)
Recovery of amounts previously written off 0 (242,340) (242,340)
(Increase) Decrease in current assets (80,771) (113,845) (33,074)
Increase (Decrease) in current liabilities 36,920 177,762 140,842
(Increase) Decrease in cash reserved for payables (36,000) (135,000) (99,000)
Advance from prior cash flows for current distributions 61,000 59,000 (2,000)
----------- ----------- -----------
Net Cash Provided From Operating Activities $565,792 $636,150 $70,358
----------- ----------- -----------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Recoveries from G.P. affiliates 0 242,340 242,340
Principal received on equipment leases 7,429 2,347 (5,082)
Proceeds from property sales 0 0 0
----------- ----------- -----------
Net Cash Provided From Investing And Financing
Activities $7,429 $244,687 $237,258
----------- ----------- -----------
Total Cash Flow For Quarter $573,221 $880,837 $307,616
Cash Balance Beginning of Period 940,496 1,567,950 627,454
Less 3rd quarter distributions paid 11/97 (575,000) (1,075,000) (500,000)
Change in cash reserved for payables or future distributions (25,000) 76,000 101,000
----------- ----------- -----------
Cash Balance End of Period $913,717 $1,449,787 $536,070
Cash reserved for 4th quarter L.P. distributions (575,000) (875,000) (300,000)
Cash reserved for payment of payables (175,000) (300,000) (125,000)
----------- ----------- -----------
Unrestricted Cash Balance End of Period $163,717 $274,787 $111,070
=========== =========== ===========
- - --------------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
----------------------------------------
* Quarterly Distribution $575,000 $875,000 $300,000
Mailing Date 2/15/98 (enclosed) --
- - --------------------------------------------------------------------------------------------------------------
</TABLE>
*Refer to distribution letter for detail of quarterly distribution.
<PAGE>
The ProvoGroup
DIVALL INSURED INCOME PROPERTIES 2 LP
1997 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
PROJECTIONS FOR
DISCUSSION PURPOSES
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> <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%
RED APPLE REST. CEDAR RAPIDS, IA 660,156 54,000 8.18%
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 PHOENIX, AZ 972,726 65,000 6.68% 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 66,000 7.81% 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%
</TABLE>
<TABLE>
<CAPTION>
- - ----------------------------------------------------------
<S> <C>
ORIGINAL EQUITY $46,280,300
NET DISTRIBUTION OF
CAPITAL SINCE INCEPTION $11,646,353
-----------
CURRENT EQUITY $34,633,947
===========
- - ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- - --------------------------------------- -----------
TOTALS
- - --------------------------------------- TOTAL % ON
$34,633,947
ANNUAL % * EQUITY
COST RECEIPTS RETURN RAISE
- - ------------------------------------------ -----------
<S> <C> <C> <C>
1,143,965 135,780 11.87%
646,425 100,554 15.56%
660,156 54,000 8.18%
1,025,830 133,380 13.00%
1,029,844 136,800 13.28%
520,126 39,000 7.50%
1,155,965 65,000 5.62%
1,087,137 86,000 7.91%
889,032 121,060 13.62%
514,259 37,000 7.19%
808,032 64,000 7.92%
686,563 64,000 9.32%
1,421,983 76,000 5.34%
1,140,236 88,000 7.72%
780,000 0 0.00%
1,246,719 95,000 7.62%
897,813 66,000 7.35%
451,230 60,000 13.30%
743,625 39,000 5.24%
- - ------------------------------------------
</TABLE>
Note 1: This property summary includes only current property and equipment held
by the Partnership.
2: Rent is based on 12.5% of monthly sales. Rent projected for 1998 is
based on 1997 sales levels.
3: The Partnership entered into a long-term ground lease in which the
Partnership is responsible for payment of 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>
The Provo Group
DIVALL INSURED INCOME PROPERTIES 2 LP
1997 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
-----------------------------------------
PROJECTIONS FOR ORIGINAL EQUITY $46,280,300
DISCUSSION PURPOSES NET DISTRIBUTION OF CAPITAL
SINCE INCEPTION $11,646,353
-----------
CURRENT EQUITY $34,633,947
===========
-----------------------------------------
PORTFOLIO (Note 1)
<TABLE>
<CAPTION>
--------------------------- --------------------------------- --------------------------- ---------
REAL ESTATE EQUIPMENT TOTALS
--------------------------- --------------------------------- --------------------------- TOTAL %
LEASE ON
ANNUAL EXPIRA- ANNUAL $34,633,947
- - ----------- --------------- BASE % TION 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>
POPEYES 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 649,954 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 2,585,334 10.79% 2,551,063 37,860 1.48% 26,513,365 2,623,195 9.89% 7.57%
- - --------------------------- ----------- --------- ----- ------- --------- -------- ------ ---------- -------- ------ ---------
</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
<PAGE>
TheProvoGroup
DIVALL INSURED INCOME PROPERTIES 2, L.P.
<TABLE>
<CAPTION>
Acquisition Original Current Tenant Sold
Date Property Building Size Trade Name Date
----------- -------- ------------- -------------- ----
<S> <C> <C> <C> <C> <C>
1. 03/11/88 Wendy's 2,117 MBA, Inc.
601 W. Hallandale Beach Blvd. Cash-A-Check
Hallandale, Florida
2. 03/11/88 Wendy's P & T Holdings
US-1 Near PGA Boulevard Miami Subs
Palm Beach Country, Florida
3. 05/09/88 Hardee's 3,640 SOLD 03/28/97
662 East Wisconsin Avenue
Oconomowoc, Wisconsin
4. 06/15/88 Denny's 5,415 DenAmerica Corp.
8801 7th Street Denny's
Phoenix, Arizona
5. 06/15/88 Denny's 5,848 DenAmerica Corp.
2201 West Camelback Road Denny's
Phoenix, Arizona
6. 07/15/88 Two Peso's TWIX, Inc.
7769 Grapevine Highway Hooter's
North Richland Hills, Texas
7. 07/22/88 Hardee's 3,731 SOLD 01/28/97
9400 South 2000 East
Sandy, Utah
8. 08/01/88 Hardee's 3,828 Hardee's Food Systems, Inc.
106 North Chicago Avenue Hardee's
South Milwaukee, Wisconsin
9. 08/15/88 Denny's 6,500 First Foods, Inc.
2360 West Northern Avenue Denny's
Phoenix, Arizona
10. 08/22/88 Hardee's 3,870 SOLD 07/31/97
9039 South Redwood
West Jordan, Utah
11. 09/09/88 Country Kitchen 4,433 Red Apple Kitchen
555 33rd Avenue
Cedar Rapids, Iowa
12. 09/19/88 Applebee's 4,632 SOLD 09/30/96
U.S. Highway 1 & Port St. Lucie
Port St. Lucie, Florida
13. 10/10/88 Kentucky Fried Chicken 2,771 KFC Nat'l Mgt. Co.
1014 South St. Francis Drive KFC
Santa Fe, New Mexico
</TABLE>
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2, L.P.
<TABLE>
<CAPTION>
Acquisition Original Current Tenant Sold
Date Property Building Size Trade Name Date
----------- -------- ------------- -------------- ----
<S> <C> <C> <C> <C> <C>
14. 10/14/88 Applebee's 3,875 SOLD 01/31/96
2114 Union Street
Memphis, Tennessee
15. 12/22/88 Wendy's 2,808 WenSouth Orlando, Ltd.
1721 Sam Rittenberg Boulevard Wendy's
Charleston, South Carolina
16. 12/22/88 Wendy's 2,117 WenSouth Orlando, Ltd.
3013 Peach Orchard Road Wendy's
Augusta, Georgia
17. 12/29/88 Popeye's 2,574 WenSouth Orlando, Ltd.
2562 Western Avenue Wendy's
Park Forest, Illinois
18. 02/21/89 Wendy's 2,137 WenSouth Orlando, Ltd.
1901 Whiskey Road Wendy's
Aiken, South Carolina
19. 02/21/89 Wendy's 2,117 WenSouth Orlando, Ltd.
1730 Walton Way Wendy's
Augusta, Georgia
20. 02/21/89 Wendy's 2,280 WenSouth Orlando, Ltd.
347 Folly Road Wendy's
Charleston, South Carolina
21. 02/21/89 Arby's SOLD 04/01/95
1502 North Prospect Road
Champaign, Illinois
22. 02/21/89 Imperial Express SOLD 08/04/93
1102 West University
Urbana, Illinois
23. 02/21/89 Wendy's 2,712 WenSouth Orlando, Ltd.
361 Highway 17 Bypass Wendy's
Mount Pleasant, South Carolina
24. 03/14/89 Wendy's 2,137 WenSouth Orlando, Ltd.
1004 Richland Avenue Wendy's
Aiken, South Carolina
25. 04/04/89 Denny's 7,550 SOLD
607 Broadway Avenue
Daytona Beach, Florida
26. 04/20/89 Country Kitchen 3,052 Hickory Park, Inc.
4875 Merle Hay Road Hosteller's
Des Moines, Iowa
</TABLE>
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2, L.P.
<TABLE>
<CAPTION>
Acquisition Original Current Tenant Sold
Date Property Building Size Trade Name Date
----------- -------- ------------- -------------- ----
<S> <C> <C> <C> <C> <C>
27. 04/28/89 Hardee's 3,592 Hardee's Food Systems, Inc.
1570 East Sumner Street Hardee's
Hartford, Wisconsin
28. 05/05/89 Hardee's 3,638 SOLD 03/28/97
1265 East Geneva Street
Delavan, Wisconsin
29. 10/18/89 Hardee's 5,040 Hardee's Food Systems, Inc.
4000 South 27th Street Hardee's
Milwaukee, Wisconsin
30. 12/28/89 Village Inn 7,600 FMI, Inc.
2451 Columbia Road Village Inn
Grand Forks, North Dakota
31. 12/29/89 Wendy's 2,116 WenSouth Orlando, Ltd.
7171 Martintown Road Wendy's
North Augusta, South Carolina
32. 12/29/89 Wendy's 2,808 WenSouth Orlando, Ltd.
1515 Savannah Highway Wendy's
Charleston, South Carolina
33. 12/29/89 Wendy's 2,135 WenSouth Orlando, Ltd.
3869 Washington Road Wendy's
Martinez, Georgia
34. 01/01/90 Sunrise Preschool 9,746 Sunrise Preschools, Inc.
4111 East Ray Road Sunrise Preschool
Phoenix, Arizona
35. 01/05/90 Hardee's SOLD 08/12/94
85 Gateway Boulevard
Rock Springs, Wyoming
36. 01/05/90 Denny's 4,329 SOLD 01/23/98
Route 44 West
New Smyrna Beach, Florida
37. 01/01/90 Hardee's 5,374 Hardee's Food Systems, Inc.
South Main & Pioneer Road Hardee's
Fond du Lac, Wisconsin
38. 01/31/90 Blockbuster Video 6,000 Blockbuster, Inc.
366 East 12th Street Blockbuster Video
Ogden, Utah
39. 03/21/90 Denny's 3,840 DenAmerica Corp.
688 North Blue Lakes Blvd Denny's
Twin Falls, Idaho
</TABLE>
<PAGE>
TheProvoGroup
DIVALL INSURED INCOME PROPERTIES 2, L.P.
<TABLE>
<CAPTION>
Acquisition Original Current Tenant Sold
Date Property Building Size Trade Name Date
----------- -------- ------------- -------------- ----
<S> <C> <C> <C> <C> <C>
40. 05/02/90 Denny's 3,410 DenAmerica Corp.
3752 E. Indian School Road Denny's
Phoenix, Arizona
41. 05/30/90 Applebee's 4,340 Thomas & King, Inc.
2770 Brice Road Applebee's
Columbus, Ohio
</TABLE>
