<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, 1998
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: 32 - 33
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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 (collectively,
the "Partnership Agreement"). As of December 31, 1998, the Partnership consisted
of one General Partner and 2,608 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, 1998, the Partnership owned 29
properties with specialty leasehold improvements in 12 of these properties, as
more fully discussed in Item 2. During the Second Quarter of 1998, the General
Partner received the written consent of a majority of the Partners to liquidate
the Partnership's assets and dissolve the Partnership. No buyer has been
identified for the Partnership's assets, and Management will continue normal
operations for the foreseeable future.
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
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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 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.
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
(which was dissolved in December 1998), 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.
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 three 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
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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.
The Advisory Board currently consists of a broker dealer representative, Steven
Carson of First Albany Corporation; and a Limited Partner from each of the two
remaining Partnerships: 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.
The Partnership has no employees.
All of the Partnership's business is conducted in the United States.
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, 1998:
<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 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 660,156
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
</TABLE>
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<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>
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
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
04/20/89 Hostetlers, BBQ Hickory Park, Inc. 897,813(2) 55,584 12-31-2002 (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, Inc.
Phoenix, AZ
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
</TABLE>
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<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>
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
05/02/90 Denny's (4) 514,259(2)
3752 E Ind School
Phoenix, AZ
05/31/90 Applebee's Thomas & King, 10-31-2009 None
2770 Brice Rd Inc. 1,434,434(2) 135,780
Columbus, OH
$23,955,224 $2,267,298
=========== ==========
</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.
In connection with the proposed liquidation of the Partnership during 1998,
Management received appraisals on each of the Properties. Six of the Properties
were written down to their estimated net realizable values, based on the
appraisal amounts received. The write-downs approximated $685,000.
During the Fourth Quarter of 1998, the tenant of the Cash-A-Check store in
Hallandale, Florida, exercised their option to purchase the property for
$325,000.
The two Florida Denny's properties were sold to the tenant, Cypress Restaurants,
Inc., during January 1998 for a total of $2,200,000, resulting in a gain of
$556,000. 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 could be arranged once the environmental issues were addressed. The
note was repaid in full during the Third Quarter of 1998. The Partnership is not
liable for the environmental contamination.
The tenant of the Red Apple Restaurant in Cedar Rapids, Iowa, vacated the
property during 1998 and ceased paying rent. The uncollected rent was written
off, because the tenant could not be located. Management is currently marketing
the property for lease to a new tenant.
The tenant of the Hostetler's Barbeque in Des Moines, Iowa, vacated the property
during 1998 and has leased the property to a sub-tenant. The tenant continues to
make rental payments as required under the lease.
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. However, the amounts due
during 1998 have been collected. DenAmerica re-leased the property to a
sub-tenant during
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the Fourth Quarter of 1998. DenAmerica remains liable to the Partnership for all
amounts due under the lease.
DenAmerica did not renew its lease on the Denny's property in Phoenix, Arizona,
when it expired on May 31, 1998. Management is currently marketing the property
for lease to a new tenant.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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 the Interests, and it is not anticipated that an active
public market for the Interests will develop.
(b) As of December 31, 1998 there were 2,608 record holders of Interests in
the Partnership.
(c) The Partnership does not pay dividends. However, the Partnership
Agreement, 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 Partnership
Agreement. During 1998 and 1997, $4,585,000 and $4,600,000,
respectively, were distributed in the aggregate to the Limited
Partners. The General Partner received aggregate distributions of
$8,838 and $8,736 in 1998 and 1997, respectively.
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Item 6. Selected Financial Data
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
(a Wisconsin limited partnership)
December 31, 1998, 1997, 1996, 1995, and 1994
(not covered by Independent Auditor's Report)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- - ----------------------------- ------------------ ----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Total Revenue $3,622,550 $3,448,300 $5,316,853 $3,932,498 $4,190,932
- - ----------------------------- ------------------ ----------------- ----------------- ---------------- -----------------
Net Income 1,524,131 2,183,977 3,277,512 1,782,105 2,158,283
- - ----------------------------- ------------------ ----------------- ----------------- ---------------- -----------------
Net Income per
Limited Partner
Interest 32.60 46.72 70.11 38.12 46.17
- - ----------------------------- ------------------ ----------------- ----------------- ---------------- -----------------
Total Assets 17,693,852 20,894,198 23,379,356 27,134,604 29,455,349
- - ----------------------------- ------------------ ----------------- ----------------- ---------------- -----------------
Total Partners' Capital 17,409,414 20,479,121 22,903,880 26,464,478 28,117,453
- - ----------------------------- ------------------ ----------------- ----------------- ---------------- -----------------
Cash Distributions per
Limited Partnership
Interest 99.07 99.39 147.47 74.11 68.68
- - ----------------------------- ------------------ ----------------- ----------------- ---------------- -----------------
</TABLE>
The above selected financial data should be read in conjunction with the
financial statements and the related notes appearing elsewhere in this annual
report.
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 Properties, including equipment held by the Partnership at December 31,
1998, were originally purchased at a price, including acquisition costs, of
approximately $23,955,000.
The tenant of the Red Apple Restaurant in Cedar Rapids, Iowa, vacated the
property during 1998 and ceased paying rent. Management is currently marketing
the property for lease to a new tenant.
Cypress Restaurants, Inc., the tenant of the Denny's restaurants in New Smyrna
Beach, Florida and Daytona Beach, Florida, 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 agreed to finance
$550,000 of the $950,000 purchase price for a period of six months, until the
environmental issues were resolved. The sale of the properties took place in
January 1998, and resulted in a gain of $556,000. The note was repaid in full
during the Third Quarter of 1998.
During the Fourth Quarter of 1998, the tenant of the Cash-A-Check store in
Hallandale, Florida, exercised their option to purchase the property for
$325,000.
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DenAmerica, Inc., the tenant of the Denny's restaurant in Twin Falls, Idaho,
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. However, all amounts due
under the lease have been paid to date. DenAmerica sublet the property to Fiesta
Time during 1998, but remains liable to the Partnership for all amounts due
under the lease.
One of the Denny's properties in Phoenix, Arizona is currently vacant. The lease
expired on May 31, 1998, and the tenant did not renew. Management is pursuing
other possible tenants for the property.
The tenant of the Hostetler's Barbeque in Des Moines, Iowa vacated the property
during 1998 and has leased the property to a sub-tenant. The tenant continues to
make rental payments as required under the lease.
Other Assets
Cash and cash equivalents, including cash restricted for real estate taxes held
by the Partnership, was approximately $1,260,000 at December 31, 1998, compared
to $1,450,000 at December 31, 1997. The Partnership designated cash of $825,000
to fund the Fourth Quarter 1998 distributions to Limited Partners paid in
February 1999, $182,000 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 Properties and sales of 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.
Liabilities
Accounts payable and accrued expenses at December 31, 1998, in the amount of
$45,000, primarily represented the year-end accruals of legal and auditing fees.
Due to the Current General Partner amounted to $3,000 at December 31, 1998,
representing the General Partner's portion of the Fourth Quarter distribution.
Real estate taxes payable increased from $58,000 at December 31, 1997 to $73,000
at December 31, 1998, primarily due to the accrual of real estate taxes for
properties which became vacant during the year.
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 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 9 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 1998 of $4,585,000 and $8,838, respectively, have also been in accordance
with the Partnership Agreement. The Fourth Quarter 1998 distribution of $825,000
was paid to the Limited Partners on February 15, 1999.
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Results of Operations:
The Partnership reported net income for the year ended December 31, 1998, in the
amount of $1,524,000 compared to net income for the years ended December 31,
1997 and 1996, of $2,184,000 and $3,278,000, 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,
property write-downs, real estate taxes on vacant properties, and property
valuation costs. Results 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 decreased
significantly during 1997 and 1998 as the recovery efforts have wound down.
Revenues
Total revenues were $3,623,000, $3,448,000, and $5,317,000, for the years ended
December 31, 1998, 1997, and 1996, 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 $930,000 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. During 1998, gains totaling $639,000 were
recorded on the sales of two Denny's restaurants and a Cash-A-Check store.
Recoveries of receivables which had been previously written off totaled $41,000
during 1998.
Total revenues should approximate $2,700,000 annually based on leases currently
in place. Future revenues may decrease with tenant defaults and/or sales of
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, 1998, 1997, and 1996, cash expenses amounted to
approximately 24%, 19%, and 25%, of total revenues, respectively. Total
expenses, including non-cash items, amounted to approximately 58%, 37% and 38%,
of total revenues for the years ended December 31, 1998, 1997, and 1996,
respectively. Items negatively impacting expenses during the last three years
include expenses 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. In addition,
during 1998, the Partnership incurred legal fees, appraisal fees, and fees for
land title surveys and environmental inspections in connection with the proposed
liquidation of the Partnership.
Charge-offs of uncollectible rent, losses on equipment leases, write-downs of
property to their estimated net realizable values, depreciation, and
amortization 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 $123,000,
$67,000, and $0 at December 31, 1998, 1997, and 1996, 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 was uncertain. However, the tenant has
continued to make all required rent payments. The 1998 write-off related to
certain unpaid rent and notes receivable from DenAmerica.
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During 1998, six properties were written down to their appraised value,
resulting in a non-cash charge of $685,000. 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 1997, remaining equipment lease payments of $61,000 on the Twin Falls,
Idaho, lease were written off. The tenant had vacated the property and future
collectibility was uncertain. However, the tenant continued to make the required
payments during 1998, which were recorded as recoveries of amounts previously
written-off. 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.
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. Fees incurred during 1998 were a result
of the sales of two Denny's properties and the Cash-A-Check property to the
tenants.
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 13% of rental
income for 1998. If inflation causes operating margins to deteriorate for
lessees, if expenses grow faster than revenues, then, inflation may well
negatively impact the portfolio through tenant defaults.
It would be misleading to associate inflation with asset appreciation for real
estate, in general, and the Partnership's portfolio, specifically. Due to the
"triple net" nature of the property leases, asset values generally move
inversely with interest rates.
Year 2000:
The Partnership's operations are not dependent on date sensitive software. The
Partnership is not aware of any Year 2000 problems with its current software.
Accounting and Partnership records software are owned and operated by third
parties who provide services to the Partnership under contract and any cots to
make the software Year 2000 compliant will be borne by the third parties. The
Partnership is currently in the process of evaluating Year 2000 issues with
these third party providers. The Partnership believes, however, that even if any
Year 2000 problems are not corrected on schedule, the cost and disruption to
operations of the Partnership are expected to be minimal.
Tenants are responsible for the operation of any equipment located at the
Partnership's properties. While the Partnership is not fully aware of the
compliance attainment efforts of its tenants, tenant preparedness for the Year
2000 should have minimal impact on the Partnership and are not expected to be
material to the Partnership's operations, financial condition or liquidity. The
Partnership does plan to evaluate the efforts of its tenants to prepare for the
Year 2000.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
None.
11
<PAGE>
Item 8. Financial Statements and Supplementary Data
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
(a Wisconsin limited partnership)
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Report of Independent Public Accountants .......................... 13
Balance Sheets, December 31, 1998 and 1997 ........................ 14 - 15
Statements of Income for the Years
Ended December 31, 1998, 1997, and 1996 ........................... 16
Statements of Partners' Capital for the
Years Ended December 31, 1998, 1997, and 1996...................... 17
Statements of Cash Flows for the Years
Ended December 31, 1998, 1997, and 1996 ........................... 18 - 19
Notes to Financial Statements ..................................... 20 - 28
Schedule III--Real Estate and Accumulated
Depreciation ...................................................... 34 - 35
12
<PAGE>
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, 1998 and
1997, and the related statements of income, partners' capital and cash flows for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, 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.
Chicago, Illinois
February 18, 1999
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
INVESTMENT PROPERTIES AND EQUIPMENT:(Note 3)
<S> <C> <C>
Land $ 7,406,721 $ 8,330,982
Buildings 12,736,444 14,930,273
Equipment 707,378 707,378
Accumulated depreciation (5,356,448) (5,472,407)
------------ ------------
Net investment properties and equipment 15,494,095 18,496,226
------------ ------------
OTHER ASSETS:
Cash and cash equivalents 1,256,165 1,438,534
Cash restricted for real estate taxes 4,404 11,251
Cash held in Indemnification Trust (Note 8) 321,207 304,753
Rents and other receivables (Net of allowance of $41,475
in 1998) 369,715 285,163
Deferred rent receivable 134,899 182,770
Prepaid insurance 19,892 19,341
Deferred charges 91,158 86,434
Unsecured notes receivable from lessees (Net of allowance of
$136,863 in 1998 and $136,335 in 1997) 2,317 69,726
------------ ------------
Total other assets 2,199,757 2,397,972
------------ ------------
Total assets $ 17,693,852 $ 20,894,198
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
BALANCE SHEETS
December 31, 1998 and 1997
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
LIABILITIES:
<S> <C> <C>
Accounts payable and accrued expenses $ 45,050 $ 69,837
Due to current General Partner 2,723 2,510
Security deposits 102,017 153,112
Unearned rental income 61,179 131,263
Real estate taxes payable 73,469 58,355
------------ ------------
Total liabilities 284,438 415,077
------------ ------------
CONTINGENT LIABILITIES: (Note 7)
PARTNERS' CAPITAL: (Notes 1, 4 and 9)
Current General Partner -
Cumulative net income 117,145 101,904
Cumulative cash distributions (48,929) (40,091)
------------ ------------
68,216 61,813
------------ ------------
Limited Partners (46,280.3 interests outstanding)
Capital contributions, net of offering costs 39,358,468 39,358,468
Cumulative net income 17,963,227 16,454,337
Cumulative cash distributions (39,140,268) (34,555,268)
Reallocation of former general partners' deficit capital (840,229) (840,229)
------------ ------------
17,341,198 20,417,308
------------ ------------
Total partners' capital 17,409,414 20,479,121
------------ ------------
Total liabilities and partners' capital $ 17,693,852 $ 20,894,198
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
REVENUES:
<S> <C> <C> <C>
Rental income (Note 5) $ 2,764,028 $ 2,951,174 $ 3,262,082
Interest income on direct financing leases 0 10,384 57,028
Other interest income 123,478 73,223 98,393
Net other income 55,142 63,349 105,710
Recovery of amount previously written off (Note 2) 41,015 244,561 863,643
Net gain on disposal of assets 638,887 105,609 929,997
----------- ----------- -----------
3,622,550 3,448,300 5,316,853
----------- ----------- -----------
EXPENSES:
Partnership management fees (Note 6) 180,450 167,350 202,587
Disposition fees (Note 6) 75,750 52,166 66,750
Disposition fees - Restoration (Note 6) 0 0 20,550
Restoration fees (Note 6) 0 9,782 33,408
Appraisal fees 58,575 6,410 2,268
Environmental inspections 48,250 0 0
Land title surveys 66,150 0 0
Insurance 23,319 26,130 36,594
General and administrative 108,569 107,992 125,634
Advisory Board fees and expenses 15,766 14,018 16,703
Interest 0 0 3,551
Real estate taxes 9,323 12,172 (880)
Ground lease payments (Note 3) 126,541 125,209 123,921
Expenses incurred due to default by lessee 3,403 8,398 7,220
Professional services 150,639 99,481 141,073
Professional services related to Investigation 1,279 32,618 526,210
Loss on equipment lease 0 61,404 95,246
Depreciation 412,950 464,596 511,650
Amortization 9,252 9,186 804
Provision for uncollectible rents and other receivables 122,860 67,411 0
Write down of properties to net realizable value (Note 3) 685,343 0 126,052
----------- ----------- -----------
2,098,419 1,264,323 2,039,341
----------- ----------- -----------
NET INCOME $ 1,524,131 $ 2,183,977 $ 3,277,512
=========== =========== ===========
NET INCOME - CURRENT GENERAL PARTNER 15,241 21,840 32,775
NET INCOME - LIMITED PARTNERS 1,508,890 2,162,137 3,244,737
----------- ----------- -----------
$ 1,524,131 $ 2,183,977 $ 3,277,512
----------- =========== ===========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST, based on 46,280.3 Interests outstanding $ 32.60 $ 46.72 $ 70.11
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Current General Partner Limited Partners
---------------------------------- ------------------------------------------------------------------
Capital
Cumulative Cumulative Contributions, Cumulative
Net Cash Net of Cumulative Cash
Income Distributions Total Offering Costs Net Income Distribution Reallocation Total
------ ------------- -------- -------------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 47,289 $(18,245) $ 29,044 $39,358,468 $11,047,463 $(23,130,268) $(840,229) $26,435,434
Cash Distributions
($147.47 per limited
partnership interest) (13,110) (13,110) (6,825,000) (6,825,000)
Net Income 32,775 32,775 3,244,737 3,244,737
-------- -------- -------- ----------- ----------- ------------ --------- -----------
BALANCE AT DECEMBER 31, 1996 $ 80,064 $(31,355) $ 48,709 $39,358,468 $14,292,200 $(29,955,268) $(840,229) $22,855,171
Cash Distributions
($99.39 per limited
partnership interest) (8,736) (8,736) (4,600,000) (4,600,000)
Net Income 21,840 21,840 2,162,137 2,162,137
-------- -------- -------- ----------- ----------- ------------ --------- -----------
BALANCE AT DECEMBER 31, 1997 $101,904 $(40,091) $ 61,813 $39,358,468 $16,454,337 $(34,555,268) $(840,229) $20,417,308
Cash Distributions
($99.07 per limited
partnership interest) (8,838) (8,838) (4,585,000) (4,585,000)
Net Income 15,241 15,241 1,508,890 1,508,890
-------- -------- -------- ----------- ----------- ------------ --------- -----------
BALANCE AT DECEMBER 31, 1998 $117,145 $(48,929) $ 68,216 $39,358,468 $17,963,227 $(39,140,268) $(840,229) $17,341,198
======== ======== ======== =========== =========== ============ ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,524,131 $ 2,183,977 $ 3,277,512
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 422,202 473,782 512,454
Recovery of amount previously written off (41,015) (244,561) (863,643)
Provision for uncollectible rents and other receivables 122,860 67,411 0
Property write downs to net realizable value 685,343 0 126,052
Net (gain) on disposal of assets (638,887) (105,609) (929,997)
Loss on equipment leases 0 61,404 95,246
Interest applied to Indemnification Trust account (16,454) (15,116) (14,406)
(Increase) Decrease in rents and other receivables (207,412) (67,112) 203,837
(Deposits) Withdrawals for payment of real estate taxes 6,847 99,374 (49,408)
(Increase) Decrease in prepaids (551) 2,921 (2,631)
(Increase) Decrease in deferred rent receivable 47,871 9,145 37,156
Increase (Decrease) in due to current General Partner 213 (84,217) 32,611
Increase (Decrease) in accounts payable and other (24,787) 2,248 (199,126)
Increase (Decrease) in security deposits (51,095) 8,822 (38,355)
Increase (Decrease) in real estate taxes payable 15,114 (60,776) 62,113
Increase (Decrease) in unearned rental income (70,084) 73,524 39,674
----------- ----------- -----------
Net cash from operating activities 1,774,296 2,405,217 2,289,089
----------- ----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Principal payments received on direct financing leases 41,015 47,422 229,294
Proceeds from sale of investment properties 2,542,725 1,931,182 2,990,000
Investment in leasing commissions (13,976) (42,000) 0
Recoveries from former G.P. affiliates 0 244,561 1,785,744
Payments from affiliated partnerships 0 0 96,088
Issuance of unsecured notes 0 0 (36,288)
Principal receipts from unsecured notes 67,409 16,562 0
----------- ----------- -----------
Net cash from investing activities 2,637,173 2,197,727 5,064,838
----------- ----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Cash distributions to Limited Partners (4,585,000) (4,600,000) (6,825,000)
Cash distributions to current General Partner (8,838) (8,736) (13,110)
Payments on equipment notes 0 0 (77,255)
----------- ----------- -----------
Net cash (used in) financing activities (4,593,838) (4,608,736) (6,915,365)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (182,369) (5,792) 438,562
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,438,534 1,444,326 1,005,764
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,256,165 $ 1,438,534 $ 1,444,326
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE--cash paid for interest $ 0 $ 0 $ 3,551
=========== =========== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
18
<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.
19
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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 video rental store and a child care
center. At December 31, 1998, the Partnership owned 29 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.
Percentage rents are accrued throughout the year based on the tenant's actual
reported year-to-date sales along with management's estimate of the tenant's
sales for any remaining unreported periods during the year.
The Partnership considers its operations to be in only one segment and therefore
no segment disclosure is made.
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
20
<PAGE>
makes the appropriate payment to avoid possible foreclosure of the property.
Taxes are accrued in the period in which the liability is incurred.
Cash and cash equivalents include cash on deposit with financial institutions
and highly liquid temporary investments with initial maturities of 90 days or
less.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities (and disclosure of
contingent assets and liabilities) at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain reclassifications have been made to the prior year financial statements
to make them consistent with the current year presentation.
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.
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. The General Partner received the consent of
the Limited Partners to liquidate the Partnership's assets and dissolve the
Partnership during the Second Quarter of 1998. However, a buyer was not found
for the Partnership's assets, and no current liquidation or dissolution plans
are in effect. Management plans to continue normal operations for the
Partnership for the foreseeable future.
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, 1998, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$8,400,000.
21
<PAGE>
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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income, per statements of income $1,524,131 $2,183,977 $3,277,512
Book to tax depreciation difference (32,592) (36,811) (35,161)
Book over tax gain from asset disposition (506,943) (227,315) (98,501)
Straight line rent adjustment 47,871 10,866 37,156
Bad debt reserve/expense 41,475 53,666 (488,777)
Real estate tax expense 0 0 (65,881)
Book valuation adjustment of real property 685,342 0 126,052
Book valuation adjustment of equipment leases 0 65,690 0
Other, net (69,826) 73,865 215,779
-------- ------ -----------
Net income for tax reporting
purposes $1,689,458 $2,123,938 $2,968,179
========== ========== ==========
</TABLE>
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.
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, and restoration costs and recoveries have been allocated based
on the same percentage. Through December 31, 1998, $5,766,000 of recoveries have
been received which exceeded the original estimate of $3 million. As a result,
in 1996 and 1997, the Partnership has recognized $1,108,000 as income, which
represents its share of the excess recovery. There were no restoration
activities or recoveries in 1998. The current General
22
<PAGE>
Partner continues to pursue recoveries of the misappropriated funds, however, no
further significant recoveries are anticipated.
3. INVESTMENT PROPERTIES:
As of December 31, 1998, the Partnership owned 27 fully constructed fast-food
restaurants, a video store, and a preschool. The properties are composed of the
following: ten (10) Wendy's restaurants, four (4) Hardee's restaurants, five (5)
Denny's restaurants, one (1) Applebee's restaurant, one (1) Popeye's Famous
Fried Chicken restaurant, one (1) former 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) Blockbuster Video store, and one (1) Sunrise Preschool. The 29 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, 1998, three of the
Partnership's properties were unoccupied.
The tenant of the Hostetler's Barbeque in Des Moines, Iowa vacated the property
during 1998 and has leased the property to a sub-tenant. The tenant continues to
make rental payments as required under the lease.
DenAmerica, the tenant of the Denny's restaurant in Twin Falls, Idaho, vacated
the property during 1997, 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. However, the
amounts due during 1998 have been collected. DenAmerica re-leased the property
to a sub-tenant during the Fourth Quarter of 1998. DenAmerica remains liable to
the Partnership for all amounts due under the lease.
DenAmerica did not renew its lease on the Denny's property in Phoenix, Arizona
when it expired on May 30, 1998. Management is currently marketing the property
for lease to a new tenant.
The tenant of the Red Apple Restaurant in Cedar Rapids, Iowa, vacated the
property during 1998 and ceased paying rent. The uncollected rent was written
off as uncollectible, because the tenant cannot be located. Management is
currently marketing the property for lease to a new tenant.
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.
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.
23
<PAGE>
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, 1998, the minimum management fee and the maximum
reimbursement for office rent and overhead increased by 1.6% 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 Partnership owns three (3) restaurants located on parcels of land where it
has entered into long-term ground leases. One (1) of these leases is 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 $126,000 and expire in the years 2003 and 2008.
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, 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 agreed to finance
$550,000 of the $950,000 purchase price for a period of six months, until the
environmental issues were 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. The note was repaid in full during the Third
Quarter of 1998.
During the Fourth Quarter of 1998, the tenant of the Cash-A-Check store in
Hallandale, Florida exercised their option to purchase the property for
$325,000, resulting in a gain of approximately $83,000.
In connection with the proposed liquidation of the Partnership during 1998,
Management received appraisals on each of the Properties. Six of the Properties
were written down to their estimated net realizable values, based on the
appraisal amounts received. The write-downs approximated $685,000.
4. PARTNERSHIP AGREEMENT:
The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that, for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
general partners. The Partnership Agreement also provided for quarterly cash
distributions from Net Cash Receipts, as defined, within 60 days after the last
day of the first full calendar quarter following the date of release of the
subscription funds from escrow, and each calendar quarter thereafter, in which
such funds were available for distribution with respect to such quarter. Such
distributions were to be made 90% to Limited Partners and 10% to the former
general partners, provided,
24
<PAGE>
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 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 it 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.)
25
<PAGE>
5. LEASES:
Lease terms for the majority of the investment properties are 20 years from
their inception. The leases generally provide for minimum rents and additional
rents based upon percentages of gross sales in excess of specified breakpoints.
The lessee is responsible for occupancy costs such as maintenance, insurance,
real estate taxes, and utilities. Accordingly, these amounts are not reflected
in the statements of income except in circumstances where, in management's
opinion, the Partnership will be required to pay such costs to preserve its
assets (i.e., payment of past-due real estate taxes). Management has determined
that the leases are properly classified as operating leases; therefore, rental
income is reported when earned and the cost of the property, excluding the cost
of the land, is depreciated over its estimated useful life.
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
<TABLE>
<CAPTION>
Year ending
December 31,
<S> <C>
1999 $2,196,032
2000 2,211,950
2001 2,112,947
2002 2,056,080
2003 2,014,549
Thereafter 12,229,389
----------
$22,820,947
</TABLE>
Percentage rentals included in rental income in 1998, 1997, and 1996 were
$586,429, $608,915, and $578,747, 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 35% of total base rents
for 1998.
6. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
Amounts incurred to the current General Partner for the years ended December 31,
1998, 1997, and 1996, 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, 1998 December 31, 1997 December 31, 1996
- - ----------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Management fees $180,450 $167,350 $202,587
Disposition fees 75,750 52,166 66,750
Restoration fees 0 9,782 33,408
Overhead allowance 14,558 14,367 14,301
Leasing Commissions 13,976 6,000 53,620
Reimbursement for out-of-pocket
expenses 28,906 21,605 21,781
Cash distribution 8,838 8,736 13,110
----- ----- -------
$322,478 $280,006 $405,557
======== ======== ========
</TABLE>
26
<PAGE>
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 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 a 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, 1998, the Partnership may
owe the current General Partner $16,296, which has been 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, 1998. Funds are invested in U.S. Treasury
securities. In addition, $71,207 of earnings have been credited to the Trust as
of December 31, 1998. 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. 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.
27
<PAGE>
10. SUBSEQUENT EVENTS:
On February 15, 1999, the Partnership made distributions to the Limited Partners
of $825,000 amounting to $17.83 per Interest.
28
<PAGE>
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
TPG is an Illinois corporation 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. Prior to such date,
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 3. See 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 48 - 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 36 - Vice President - Finance and
Administration. Ms. Atkinson joined TPG 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
29
<PAGE>
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. Arthur and Company
for one year before joining Farm & Home Savings Association.
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 - Self-Employed Investment Advisor. Mr. Carson's primary
client concentration includes labor union, pension, and annuity funds.
Mr. Carson worked for First Albany Corporation 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.
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 - Retired, 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 Partnership Agreement, which is filed 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.
30
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) As of December 31, 1998, 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, 1998, neither the General Partner nor any of their
affiliates owned any 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 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, 1998, the minimum
management fee and the maximum reimbursement for office rent and overhead
increased by 1.6% 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.
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
31
<PAGE>
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 the Trust in an amount, not to exceed $250,000,
solely for the purpose of funding such indemnification obligations. Once a
determination has been made that no such claims can or will be made against TPG,
the balance of the Trust will become unrestricted cash of the Partnership. At
December 31, 1998 the Partnership had fully funded the Trust.
The following fees and reimbursements from the Partnership were incurred to
management in 1998:
<TABLE>
<CAPTION>
The Provo Group, Inc.
<S> <C>
Management Fees $180,450
Disposition Fees 75,750
Leasing Commissions 13,976
Office Overhead Allowance 14,558
Direct Cost Reimbursements 28,906
---------
1998 Total $313,640
=======
</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, 1998 and 1997
Statements of Income for the Years Ended December 31, 1998,
1997, and 1996
Statements of Partners' Capital for the Years Ended December
31, 1998, 1997, and 1996
Statements of Cash Flows for the Years Ended December 31,
1998, 1997, and 1996
Notes to Financial Statements
2. Financial Statement Schedules
32
<PAGE>
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.
99.0 Correspondence to the Limited Partners dated February
15, 1999 regarding the Fourth Quarter 1998
distribution.
(b) Reports on Form 8-K:
The Registrant filed no reports on Form 8-K during the fourth quarter
of fiscal year 1998.
33
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Gross amount at which
Initial cost to Partnership carried at end of year (A)
----------------------------- -----------------------------------------------
Costs
Building capitalized
and subsequent Building and
Property Encumbrances Land Improvements to acquisitions Land Improvements Total
- - ------------------------- ---------------------------- ------------------------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Palm Gardens, Florida (1) $ - $ 495,237 $ 248,388 $ - $ 325,487 $ 163,258 $ 488,745
Phoenix, Arizona - 444,224 421,676 - 444,224 421,676 865,900
Phoenix, Arizona - - 295,750 - - 295,750 295,750
N. Richland Hills, Texas (2) - 762,580 584,139 - 662,580 480,123 1,142,703
South Milwaukee, Wisconsin - 274,749 454,064 79,219 274,749 533,283 808,032
Phoenix, Arizona (2) - 482,383 490,343 - 453,433 428,676 882,109
Cedar Rapids, Iowa - 108,125 552,031 - 108,125 552,031 660,156
Santa Fe, New Mexico - - 451,230 - - 451,230 451,230
Augusta, Georgia - 215,416 434,178 - 215,416 434,178 649,594
Charleston, South Carolina - 273,619 323,162 - 273,619 323,162 596,781
Park Forest, Illinois - 187,900 393,038 - 187,900 393,038 580,938
Aiken, South Carolina - 402,549 373,795 - 402,549 373,795 776,344
Augusta, Georgia - 332,154 396,659 - 332,154 396,659 728,813
Mt. Pleasant, South Carolina - 286,060 294,878 - 286,060 294,878 580,938
Charleston, South Carolina - 273,625 254,500 - 273,625 254,500 528,125
Aiken, South Carolina - 178,521 455,229 - 178,521 455,229 633,750
Des Moines, Iowa (2) - 164,096 448,529 287,991 161,996 551,056 713,052
Hartford, Wisconsin - 201,603 484,960 - 201,603 484,960 686,563
Milwaukee, Wisconsin (2) - 409,143 600,902 - 409,143 573,871 983,014
North Augusta, Georgia - 250,859 409,297 - 250,859 409,297 660,156
Charleston, South Carolina - 286,068 294,870 - 286,068 294,870 580,938
Martinez, Georgia - 266,175 367,575 - 266,175 367,575 633,750
Grand Forks, North Dakota - 172,701 566,674 - 172,701 566,674 739,375
Phoenix, Arizona (2) - - 725,000 - - 327,357 327,357
Phoenix, Arizona - 241,371 843,132 - 241,371 843,132 1,084,503
Ogden, Utah - 194,350 452,075 - 194,350 452,075 646,425
Fond du Lac, Wisconsin - 297,418 552,349 - 297,418 552,349 849,767
Twin Falls, Idaho (2) - 155,269 483,763 60,000 155,269 353,622 508,891
Columbus, Ohio - 351,325 708,141 - 351,326 708,140 1,059,466
---------------------------- ------------------------------------------------------------- ---------------
$ 0 $ 7,707,520 $ 13,360,327 $ 427,210 $ 7,406,721 $ 12,736,444 $ 20,143,165
============================ ============================================================= ===============
</TABLE>
<TABLE>
<CAPTION>
Life on which
depreciation in
in latest statement
of operations
is computed
Accumulated Date of Date (years)
Property depreciation construction acquired
- - ------------------------- ------------------------------------ ---------------
<S> <C> <C> <C> <C>
Palm Gardens, Florida (1) $ 98,189 - 3/11/88 31.5
Phoenix, Arizona 183,365 - 6/15/88 31.5
Phoenix, Arizona 128,606 - 6/15/88 31.5
N. Richland Hills, Texas (2) 222,703 - 7/15/88 31.5
South Milwaukee, Wisconsin 201,120 1986 8/1/88 31.5
Phoenix, Arizona (2) 185,109 - 8/15/88 31.5
Cedar Rapids, Iowa 206,331 - 9/9/88 31.5
Santa Fe, New Mexico 147,745 - 10/10/88 31.5
Augusta, Georgia 155,771 - 12/22/88 31.5
Charleston, South Carolina 115,941 - 12/22/88 31.5
Park Forest, Illinois 141,011 - 12/22/88 31.5
Aiken, South Carolina 132,704 - 2/21/89 31.5
Augusta, Georgia 140,821 - 2/21/89 31.5
Mt. Pleasant, South Carolina 104,687 - 2/21/89 31.5
Charleston, South Carolina 90,352 - 2/21/89 31.5
Aiken, South Carolina 161,614 - 3/14/89 31.5
Des Moines, Iowa (2) 234,052 1989 8/1/89 31.5
Hartford, Wisconsin 166,699 - 4/28/89 31.5
Milwaukee, Wisconsin (2) 206,513 - 8/2/89 31.5
North Augusta, Georgia 128,339 - 12/29/89 31.5
Charleston, South Carolina 92,459 - 12/29/89 31.5
Martinez, Georgia 115,256 - 12/29/89 31.5
Grand Forks, North Dakota 177,686 - 12/28/89 31.5
Phoenix, Arizona (2) 162,357 - 1/1/90 31.5
Phoenix, Arizona 264,372 - 1/1/90 31.5
Ogden, Utah 167,102 - 1/31/90 31.5
Fond du Lac, Wisconsin 173,194 - 1/5/90 31.5
Twin Falls, Idaho (2) 158,894 - 3/21/90 31.5
Columbus, Ohio 208,638 - 6/1/90 31.5
-------------
$ 4,671,630
=============
</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 at
December 31, 1998
(A) Represents aggregate costs for federal income tax purposes.
34
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(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 1998 1997 Accumulated Depreciation 1998 1997
- - ---------------------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of year $23,261,255 $25,629,957 Balance at beginning of year $4,795,109 $4,881,162
Deletions: Additions charged to costs and
expenses 405,430 457,076
Due to disposition (2,432,747) (2,368,702) Deletion due to real estate
disposition (528,909) (543,129)
Due to property write-downs (685,343) 0
----------- ----------- ---------- ----------
Balance at end of year $20,143,165 $23,261,255 Balance at end of year $4,671,630 $4,795,109
=========== =========== ========== ==========
</TABLE>
35
<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 26, 1999
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 26, 1999
By: /s/ Kristin J. Atkinson
-------------------------------------------
Kristin J. Atkinson
Vice President - Finance and Administration
Date: March 26, 1999
36
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the December 31, 1998 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-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,260,569 1,449,785
<SECURITIES> 321,207 304,753
<RECEIVABLES> 796,319 779,769
<ALLOWANCES> 178,338 136,335
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,199,757 2,397,972
<PP&E> 20,850,543 23,968,633
<DEPRECIATION> 5,356,448 5,472,407
<TOTAL-ASSETS> 17,693,852 20,894,198
<CURRENT-LIABILITIES> 284,438 415,077
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 17,409,414 20,479,121
<TOTAL-LIABILITY-AND-EQUITY> 17,693,852 20,894,198
<SALES> 2,764,028 2,961,558
<TOTAL-REVENUES> 3,622,550 3,448,300
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,975,559 1,196,912
<LOSS-PROVISION> 122,860 67,411
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,524,131 2,183,977
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 1,524,131 2,183,977
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,524,131 2,183,977
<EPS-PRIMARY> 32.60 46.72
<EPS-DILUTED> 32.60 46.72
</TABLE>
<PAGE>
DiVall Insured Income Properties 2, L.P.
QUARTERLY NEWS
- - --------------------------------------------------------------------------------
A publication of The Provo Group, Inc. FOURTH QUARTER 1998
To Sell or Not to Sell, That is the Question ...
While the idea of management continuing to operate this Partnership is
attractive to most investors (See Note1), others are asking, "Why not keep it on
the market and see if we get the right offer?"
First, let's review why we marketed the portfolio during 1998. The real estate
market was hot and if the "supply and demand" imbalances could have created
attractive values, then we wanted to seize the opportunity. The aggressive money
faded away after the Russian financial meltdown in August, because of major
disruptions in the securitized mortgage markets. Our window of opportunity
closed for the time being ... but we still have a strong portfolio with stable
earnings.
Second, the continuous marketing of any asset tends to leave a "stale"
impression in the marketplace. We don't have stale assets, so we won't promote a
misperception of desperation or pressure to sell by keeping this portfolio
"available" on the market.
Third, this Partnership has a good opportunity to have its asset values enhanced
in the near term. There are currently four Hardee's restaurants in this
portfolio. These particular restaurants have been experiencing a decline in
sales since 1992. In fact, nationwide the Hardee's restaurants are viewed as a
weak and struggling concept. Good news though, change is on its way. CKE
Restaurants, ("CKE") has been selected as the top restaurant stock for 1999 by
several stock analysts. Why does that affect you? CKE purchased all of the
Hardee's stock and is now the parent company of Hardee's Food Systems (Thus, CKE
now owns all of your Hardee's). CKE now has a viable plan to turn Hardee's
business around via an extensive remodeling plan, menu revisions, and
improvements in national advertising. Many Hardee's restaurants are being dual
branded with the popular Carl's Jr. restaurant chain also owned by CKE. A new
owner with a strong balance sheet could significantly improve Hardee's
operations. In the restaurant industry (like many industries) there are "hot"
concepts and there are those that are known to be struggling. When this
portfolio is put on the market again and if Hardee's is known as a "hot" concept
again, or if there are any Carl's Jr.'s in this portfolio, potential buyers will
certainly take these factors into consideration when valuing your assets. In the
meantime, increased sales would improve percentage rents with the potential to
impact distributions favorably.
In closing, the Partnership distributed $99.07 per unit (approximately) in 1998.
Since the portfolio is stable and generating consistent revenue, we have the
luxury of timing any future portfolio sale to the most attractive value
environment.
- - --------------------------------------------------------------------------------
Note1 Based on the Expression of Interest Forms received by our offices, only 7%
of investors showed any interest in selling their units.
<PAGE>
PAGE 2 DIVALL 2 4 Q 98
-----------------------------------------------------
DISTRIBUTION HIGHLIGHTS
o 6.2% (approx.) annualized return from operations
and 1% (approx.) non- annualized return from
investing and financing activities based on
$32,000,000 ("net" remaining initial investment).
o $825,000 total amount distributed for the Fourth
Quarter 1998 which was $315,000 more than
projected.
The higher than budgeted distributions are primarily
due to the sale of Cash- A-Check in Hallandale, FL.
o $17.83 per unit (approx.) for the Fourth Quarter
1998 from both cash flow from operations and "net"
cash activity from financing and investing
activities.
o $961.00 to $763.00 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.)
-----------------------------------------------------
(NOTE: Original units were purchased for $1,000/unit.)
STATEMENTS OF INCOME AND CASH FLOW HIGHLIGHTS
o 58% increase in "total" operating revenues from projections.
o An increase of $800,000 in "total" expenses from projections.
o A $425,000 decrease in net income from projections.
o Revenues were higher than anticipated due to the non-cash
accrual of 1998 percentage rents which will be billed to
tenants in 1999. In addition, a gain was recorded on the sale
of the Partnership's Hallandale, Florida property during the
quarter.
o Expenses were higher than expected due to the non-cash
write-down of various properties to their appraised value as
well as the non-cash write-off of uncollectible receivables
from defaulted tenants.
<PAGE>
PAGE 3 DIVALL 2 4 Q 98
PROPERTY HIGHLIGHTS
VACANCIES
o Red Apple Restaurant (Cedar Rapids, IA) unexpectedly vacated the
premises on May 30, 1998. Management has written off the outstanding
balance as uncollectable and will continue to pursue other tenants for
this location.
o Denny's (Phoenix, AZ) was vacant at December 31, 1998. The tenant did
not renew their lease which expired on May 31, 1998. Management is
pursuing other possible tenants for this property, including other
Denny's operators.
o Hostetler's BBQ (Des Moines, IA) was vacant at December 31, 1998.
Management has consented to a sublease agreement between this tenant
and Daytona's Inc. Hostetler's will continue to pay rent directly to
the Partnership.
RENTS RECEIVABLE
o Denny's (Phoenix, AZ) was delinquent at December 31, 1998 in an amount
of $51,800.
PROPERTY ISSUES
O Cash-A-Check (Hallandale, FL) exercised their Option to Purchase for
$325,000. The closing occurred in December 1998, and the proceeds are
included in this distribution.
O Denny's (Twin Falls, ID) Management has consented to a sublease
agreement between this tenant and Fiesta Time effective October 1,
1998. Denny's remains liable for all rent charges.
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, 1998.
<TABLE>
<CAPTION>
Distribution Capital
Analysis Balance
<S> <C> <C>
Original Capital Balance -- $ 46,280,300
Cash Flow From Operations Since Inception $ 25,792,529 --
Total Distributions Since Inception (39,965,268) --
------------
(Return) of Capital ($14,172,739) (14,172,739)
============ ------------
"Net" Remaining Initial Investment
by Original Partners -- $ 32,107,561
===========
</TABLE>
(NOTE: For a more individualized discussion of return of capital
contact Investor Relations.)
<PAGE>
PAGE 4 DIVALL 2 4 Q 98
-----------------------------------------------------
QUESTIONS & ANSWERS
1. What is the value of my units?
Management is currently calculating an estimated Net Unit Value for the
Partnership, as of December 31, 1998. We plan to have this information
available February 26, 1999.
2. When will I receive my K-1?
The 1998 K-1 will be mailed on or before February 26, 1999.
3. When can I expect my next distribution mailing?
Your distribution correspondence for the First Quarter of 1999 is
scheduled to be mailed on May 14, 1999.
OTHER NEWS INSIDE
O CASH-A-CHECK OPTION TO PURCHASE...................PROPERTY ISSUES, PG 4
O DISCUSSION OF LIQUIDATION COSTS.................QUESTION & ANSWER, PG 5
<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, 1998
- - ----------------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
--------------------------------------------
4TH 4TH
QUARTER QUARTER BETTER
OPERATING REVENUES 12/31/98 12/31/98 (WORSE)
----------- ----------- -----------
<S> <C> <C> <C>
Rental income $ 639,945 $ 929,891 $ 289,946
Interest income 16,773 15,941 (832)
Gain on sale of assets 0 82,660 82,660
Other income 12,740 26,474 13,734
----------- ----------- -----------
TOTAL OPERATING REVENUES $ 669,458 $ 1,054,966 $ 385,508
----------- ----------- -----------
OPERATING EXPENSES
Insurance $ 6,628 $ 5,939 $ 689
Management fees 45,855 45,231 624
Overhead allowance 3,700 3,648 52
Advisory Board 3,600 3,743 (143)
Administrative 17,967 11,256 6,711
Professional services 5,930 6,235 (305)
Disposition fee 0 9,750 (9,750)
Property writedowns 0 685,343 (685,343)
Auditing 12,000 16,901 (4,901)
Legal 7,500 4,837 2,663
Real estate taxes 7,929 5,573 2,356
Write-off of uncollectible receivables 0 122,861 (122,861)
Defaulted tenants 2,100 2,144 (44)
----------- ----------- -----------
TOTAL OPERATING EXPENSES $ 113,209 $ 923,461 $ (810,252)
----------- ----------- -----------
GROUND RENT $ 31,200 $ 31,372 $ (172)
----------- ----------- -----------
INVESTIGATION AND RESTORATION EXPENSES $ 474 $ 0 $ 474
----------- ----------- -----------
NON-OPERATING EXPENSES
Depreciation $ 102,380 $ 102,384 $ (4)
Amortization 2,313 2,313 0
----------- ----------- -----------
TOTAL NON-OPERATING EXPENSES $ 104,693 $ 104,697 $ (4)
----------- ----------- -----------
TOTAL EXPENSES $ 249,576 $ 1,059,530 $ (809,954)
----------- ----------- -----------
NET INCOME (LOSS) $ 419,882 $ (4,564) $ (424,446)
----------- ----------- -----------
OPERATING CASH RECONCILIATION: VARIANCE
-----------
Depreciation and amortization 104,693 104,697 4
Gain on sale of assets 0 (82,660) (82,660)
Property writedowns 0 685,343 685,343
Write-off of uncollectible receivables 0 122,861 122,861
(Increase) Decrease in current assets (91,572) (393,622) (302,050)
Increase (Decrease) in current liabilities 21,919 (23,389) (45,308)
(Increase) Decrease in cash reserved for payables (9,055) 29,000 38,055
Advance from current cash flows for future distributions 64,300 64,300 0
----------- ----------- -----------
Net Cash Provided From Operating Activities $ 510,167 $ 501,966 $ (8,201)
----------- ----------- -----------
CASH FLOWS FROM (USED IN) INVESTING
AND FINANCING ACTIVITIES
Proceeds from repayment of notes receivable 0 0 0
Proceeds from property sales 0 325,000 325,000
----------- ----------- -----------
Net Cash Provided From Investing And Financing
Activities $ 0 $ 325,000 $ 325,000
----------- ----------- -----------
Total Cash Flow For Quarter $ 510,167 $ 826,966 $ 316,799
Cash Balance Beginning of Period 1,545,677 1,536,904 (8,773)
Less 3rd quarter distributions paid 11/98 (1,060,000) (1,010,000) 50,000
Change in cash reserved for payables or future distributions (55,245) (93,300) (38,055)
----------- ----------- -----------
Cash Balance End of Period $ 940,599 $ 1,260,570 $ 319,971
Cash reserved for 4th quarter L.P. distributions (510,000) (825,000) (315,000)
Cash reserved for payment of payables (149,197) (182,000) (32,803)
----------- ----------- -----------
Unrestricted Cash Balance End of Period $ 281,402 $ 253,570 $ (27,832)
=========== =========== ===========
- - ----------------------------------------------------------------------------------------------------------------
PROJECTED ACTUAL VARIANCE
--------------------------------------------
* Quarterly Distribution $ 510,000 $ 825,000 $ 315,000
Mailing Date 2/15/99 (enclosed) --
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Refer to distribution letter for detail of quarterly distribution.
5
<PAGE>
<TABLE>
<CAPTION>
PROJECTIONS FOR
DISCUSSION PURPOSES DIVALL INSURED INCOME PROPERTIES 2 LP -------------------------------------------
1998 PROPERTY SUMMARY ORIGINAL EQUITY $46,280,300
AND RELATED ESTIMATED RECEIPTS NET DISTRIBUTION OF
CAPITAL SINCE INCEPTION $14,172,739
-------------
CURRENT EQUITY $32,107,561
-------------------------------============
PORTFOLIO (Note 1) ------------------------------ ---------------------------------------------
REAL ESTATE EQUIPMENT
------------------------------ ---------------------------------------------
ANNUAL LEASE ANNUAL
- - ------------------------------- BASE % EXPIRATION LEASE % *
CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN
- - ------------------------------- ------------------------------ ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
APPLEBEE'S 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 0.00%
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>
--------------------------------------------------------- -------------------
TOTALS TOTAL % ON
--------------------------------------------------------- $32,107,561
- - ---------------------------------- ANNUAL EQUITY
CONCEPT LOCATION COST RECEIPTS RETURN RAISE
- - ---------------------------------- --------------------------------------------------------- -------------------
<S> <C> <C> <C> <C> <C>
APPLEBEE'S COLUMBUS, OH 1,143,965 135,780 11.87%
BLOCKBUSTER OGDEN, UT 646,425 100,554 15.56%
RED APPLE REST. CEDAR RAPIDS, IA 600,156 0 0.00%
DENNY'S (2) (3) PHOENIX, AZ 520,126 39,000 7.50%
DENNY'S PHOENIX, AZ 1,155,965 65,000 5.62%
DENNY'S (2) PHOENIX, AZ 1,087,137 86,000 7.91%
DENNY'S TWIN FALLS, ID 889,032 121,060 13.62%
DENNY'S (2) (3) PHOENIX, AZ 514,259 37,000 7.19%
HARDEE'S (5) S. MILWAUKEE, WI 808,032 64,000 7.92%
HARDEE'S (5) HARTFORD, WI 686,563 64,000 9.32%
HARDEE'S (5) MILWAUKEE, WI 1,421,983 76,000 5.34%
" "
HARDEE'S (5) FOND DU LAC, WI 1,140,236 88,000 7.72%
HARDEE'S (5) MILWAUKEE, WI 780,000 0 0.00%
HOOTER'S R. HILLS, TX 1,246,719 95,000 7.62%
HOSTETTLER'S DES MOINES, IA 897,813 66,000 7.35%
KFC SANTA FE, NM 451,230 60,000 13.30%
MIAMI SUBS PALM BEACH, FL 743,625 39,000 5.24%
</TABLE>
Note 1: This property summary includes only current property and equipment held
by the Partnership. Equipment lease receipts shown include a return of
capital.
2: Rent is based on 12.5% of monthly sales. Rent projected for 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. The annual base rent
shown is net of the underlying ground lease rent.
4: The lease was terminated and the equipment sold to Hardee's Food
Systems in conjunction with their assumption of the Terratron leases in
November 1996.
5: These leases were assumed by Hardee's Food Systems at a reduced rental
rate from that stated in the original leases.
Page 1 of 2
<PAGE>
[Logo for TheProvo Group goes here]
<TABLE>
<CAPTION>
<S> <C> <C>
-------------------------------------
ORIGINAL EQUITY $46,280,300
PROJECTIONS FOR NET DISTRIBUTION OF
DISCUSSION PURPOSES CAPITAL SINCE INCEPTION $14,172,739
-----------
CURRENT EQUITY $32,107,561
--------------------------===========
DIVALL INSURED INCOME PROPERTIES 2 LP
1997 PROPERTY SUMMARY
AND RELATED ESTIMATED RECEIPTS
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO (Note 1)
---------------------------------- --------------------------------------------------
REAL ESTATE EQUIPMENT
---------------------------------- --------------------------------------------------
ANNUAL LEASE ANNUAL
BASE % EXPIRATION LEASE %
CONCEPT LOCATION COST RENT YIELD DATE COST RECEIPTS RETURN
- - --------------------------------- ---------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
POPEYE'S PARK FOREST, IL 580,938 77,280 13.30%
SUNRISE PS PHOENIX, AZ 1,084,503 127,920 11.80% 79,219 0 0.00%
19,013 0 0.00%
VILLAGE INN GRAND FORKS, ND 739,375 84,000 11.36%
WENDY'S AIKEN, SC 633,750 90,480 14.28%
WENDY'S CHARLESTON, SC 580,938 76,920 13.24%
WENDY'S N. AUGUSTA, SC 660,156 87,780 13.30%
WENDY'S AUGUSTA, GA 728,813 96,780 13.28%
WENDY'S CHARLESTON, SC 596,781 76,920 12.89%
WENDY'S AIKEN, SC 776,344 96,780 12.47%
WENDY'S AUGUSTA, GA 649,594 86,160 13.26%
WENDY'S CHARLESTON, SC 528,125 70,200 13.29%
WENDY'S MT. PLEASANT, SC 580,938 77,280 13.30%
WENDY'S MARTINEZ, GA 633,750 84,120 13.27%
- - --------------------------------- ---------------------------------- ------------------------------------------------
PORTFOLIO TOTALS (29 Properties) 21,114,440 2,231,154 10.57% 2,551,063 37,860 1.48%
- - --------------------------------- ----------------------------------- ------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------- ---------------
TOTALS TOTAL % ON
-------------------------------------------------- $32,107,561
TOTAL EQUITY
CONCEPT LOCATION COST RECEIPTS RETURN RAISE
- - --------------------------------- -------------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C>
POPEYE'S PARK FOREST, IL 580,938 77,280 13.30%
SUNRISE PS PHOENIX, AZ 1,182,735 127,920 10.82%
VILLAGE INN GRAND FORKS, ND 739,375 84,000 11.36%
WENDY'S AIKEN, SC 633,750 90,480 14.28%
WENDY'S CHARLESTON, SC 580,938 76,920 13.24%
WENDY'S N. AUGUSTA, SC 660,156 87,780 13.30%
WENDY'S AUGUSTA, GA 728,813 96,780 13.28%
WENDY'S CHARLESTON, SC 596,781 76,920 12.89%
WENDY'S AIKEN, SC 776,344 96,780 12.47%
WENDY'S AUGUSTA, GA 649,594 86,160 13.26%
WENDY'S CHARLESTON, SC 528,125 70,200 13.29%
WENDY'S MT. PLEASANT, SC 580,938 77,280 13.30%
WENDY'S MARTINEZ, GA 633,750 84,120 13.27%
- - --------------------------------- --------------------------------------------------
- - --------------------------------- -------------------------------------------------- ---------------
PORTFOLIO TOTALS (29 Properties) 23,665,503 2,269,015 9.59% 7.07%
- - --------------------------------- -------------------------------------------------- ---------------
</TABLE>
