<PAGE>
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-17686
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Wisconsin 39-1606834
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 W. 11th Street, Suite 1110, Kansas City, Missouri 64105
(Address of principal executive offices, including zip code)
(816) 421-7444
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Interests
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 2000 and December 31, 1999
----------------------------------------
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
INVESTMENT PROPERTIES AND EQUIPMENT: (Note 3)
Land $ 7,298,596 $ 7,298,596
Buildings 11,902,463 12,198,213
Equipment 669,778 669,778
Accumulated depreciation (5,598,311) (5,487,177)
----------- -----------
Net investment properties and equipment 14,272,526 14,679,410
----------- -----------
OTHER ASSETS:
Cash and cash equivalents 1,009,781 1,387,306
Cash held in Indemnification Trust (Note 8) 350,484 335,845
Rents and other receivables 216,414 489,412
Deferred rent receivable 114,104 134,063
Prepaid insurance 1,462 14,392
Deferred charges 76,117 84,960
----------- -----------
Total other assets 1,768,362 2,445,978
----------- -----------
Total assets $16,040,888 $17,125,388
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
BALANCE SHEETS
September 30, 2000 and December 31, 1999
----------------------------------------
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ 45,217 $ 50,286
Due to current General Partner 1,385 1,968
Security deposits 117,850 117,850
Unearned rental income 86,800 81,540
------------ ------------
Total liabilities 251,252 251,644
------------ ------------
CONTINGENT LIABILITIES: (Note 7)
PARTNERS' CAPITAL: (Notes 1, 4 and 9)
Current General Partner -
Cumulative net income 148,171 137,620
Cumulative cash distributions (61,339) (57,119)
------------ ------------
86,832 80,501
------------ ------------
Limited Partners (46,280.3 interests outstanding)
Capital contributions, net of offering costs 39,358,468 39,358,468
Cumulative net income 21,034,833 19,990,272
Cumulative cash distributions (43,850,268) (41,715,268)
Reallocation of former general partners' deficit capital (840,229) (840,229)
------------ ------------
15,702,804 16,793,243
------------ ------------
Total partners' capital 15,789,636 16,873,744
------------ ------------
Total liabilities and partners' capital $ 16,040,888 $ 17,125,388
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ ------------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income (Note 5) $758,089 $697,497 $1,920,832 $2,061,152
Interest income 15,558 12,308 45,967 41,569
Recovery of amount previously written off 1,390 (17,146) 3,708 20,472
Other income 55 1,266 1,501 88,138
-------- -------- ---------- ----------
775,092 693,925 1,972,008 2,211,331
-------- -------- ---------- ----------
EXPENSES:
Partnership management fees 46,910 45,880 140,073 137,306
Insurance 4,404 5,968 13,183 17,903
General and administrative 14,141 21,848 76,287 59,926
Advisory Board fees and expenses 2,187 2,600 10,172 8,825
Ground lease payments (Note 3) 16,511 31,372 74,272 94,468
Expenses incurred due to default by lessee 740 1,994 2,130 5,885
Real estate taxes 0 829 0 (44,381)
Professional services 20,422 25,565 88,093 79,487
Professional services related to restoration 55 167 148 167
Ground lease termination fee (Note 3) 90,000 0 90,000 0
Loss on disposal of assets (Note 3) 142,591 0 142,591 0
Write-off of uncollectible receivables 0 0 6,810 0
Depreciation 88,098 93,988 264,294 281,891
Amortization 2,758 2,048 8,843 37,274
-------- -------- ---------- ----------
428,817 232,259 916,896 678,751
-------- -------- ---------- ----------
NET INCOME $346,275 $461,666 $1,055,112 $1,532,580
======== ======== ========== ==========
NET INCOME - CURRENT GENERAL PARTNER $ 3,463 $ 4,617 $ 10,551 $ 15,326
NET INCOME - LIMITED PARTNERS 342,812 457,049 1,044,561 1,517,254
-------- -------- ---------- ----------
$346,275 $461,666 $1,055,112 $1,532,580
======== ======== ========== ==========
NET INCOME PER LIMITED PARTNERSHIP
INTEREST, based on 46,280.3 Interests outstanding $7.41 $9.88 $22.57 $32.78
===== ===== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,055,112 $ 1,532,580
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization 273,137 319,165
Recovery of amounts previously written off (3,708) (20,472)
Net (loss) on disposal of assets 142,591 0
Interest applied to Indemnification Trust account (14,639) (10,579)
Decrease in rents and other receivables 272,998 9,695
Withdrawals/(Deposits) for payment of real estate taxes 0 4,404
Decrease in prepaids 12,930 17,903
Decrease in deferred rent receivable 19,958 711
(Decrease) in due to current General Partner (583) (876)
Increase/(Decrease) in accounts payable and other (5,069) 2,994
Increase/(Decrease) in security deposits 0 15,833
Increase/(Decrease) in real estate taxes payable 0 (56,918)
Increase in unearned rental income 5,260 24,801
----------- -----------
Net cash from operating activities 1,757,987 1,839,241
----------- -----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Principal payments received on direct financing leases 0 16,300
Principal payments received on notes receivable 0 2,317
Investment in leasing commissions 0 (33,441)
Proceeds from sale of investment properties 0 18,300
Investment in building improvements 0 (13,800)
Recoveries from former affiliates 3,708 4,172
----------- -----------
Net cash from investing activities 3,708 (6,152)
----------- -----------
CASH FLOWS (USED IN) FINANCING ACTIVITIES:
Cash distributions to Limited Partners (2,135,000) (2,075,000)
Cash distributions to current General Partner (4,220) (6,130)
----------- -----------
Net cash (used in) financing activities (2,139,220) (2,081,130)
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (377,525) (248,041)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,387,306 1,256,165
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,009,781 $ 1,008,124
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
These unaudited interim financial statements should be read in conjunction with
DiVall Insured Income Properties 2 Limited Partnership's (the "Partnership")
1999 annual audited financial statements within Form 10-K.
These unaudited financial statements include all adjustments which are, in the
opinion of management, necessary to present a fair statement of the
Partnership's financial position as of September 30, 2000, and the results of
operations for the three and nine-month periods ended September 30, 2000, and
1999, and cash flows for the nine-month periods ended September 30, 2000 and
1999. Results of operations for the periods are not necessarily indicative of
the results to be expected for the full year.
1. ORGANIZATION AND BASIS OF ACCOUNTING:
-------------------------------------
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 September 30, 2000, the Partnership owned 27 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. Percentage rents were previously
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. However, effective January 1, 2000, the
Partnership adopted Staff Accounting Bulletin 101, which requires the recording
of percentage rents only when the tenant has reached the breakpoint stipulated
in its lease.
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 consist of leasing commissions paid when properties are leased
to tenants other than the original tenant. Leasing commissions are capitalized
and amortized over the life of the lease.
Real estate taxes on the Partnership's investment properties are the
responsibility of the tenant. However, when a tenant fails to make the required
tax payments or when a property becomes vacant, the Partnership makes the
appropriate payment to avoid possible foreclosure of the property. Taxes are
accrued in the period in which the
6
<PAGE>
liability is incurred.
Cash and cash equivalents include cash on deposit with financial institutions
and highly liquid temporary investments with initial maturities of 90 days or
less.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities (and disclosure of
contingent assets and liabilities) at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Partnership follows 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 Partnership will be dissolved on November 30, 2010, or earlier upon the
prior occurrence of any of the following events: (a) the disposition of all
properties of the Partnership; (b) the written determination by the General
Partner that the Partnership's assets may constitute "plan assets" for purposes
of ERISA; (c) the agreement of Limited Partners owning a majority of the
outstanding interests to dissolve the Partnership; or (d) the dissolution,
bankruptcy, death, withdrawal, or incapacity of the last remaining General
Partner, unless an additional General Partner is elected previously by a
majority in interest of the Limited Partners. During the Second Quarter of
1998, the General Partner received the consent of the Limited Partners to
liquidate the Partnership's assets and dissolve the Partnership. 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 forseeable 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, 1999, the tax basis of the Partnership's assets exceeded the
amounts reported in the accompanying financial statements by approximately
$8,400,000.
2. REGULATORY INVESTIGATION:
-------------------------
A preliminary investigation during 1992 by the Office of Commissioner of
Securities for the State of Wisconsin and the Securities and Exchange Commission
(the "Investigation") revealed that during at least the four years ended
December 31, 1992, the former general partners of the Partnership, Gary J.
DiVall ("DiVall") and Paul E. Magnuson ("Magnuson") had transferred substantial
cash assets of the Partnership and two affiliated publicly registered
partnerships, DiVall Insured Income Fund Limited Partnership ("DiVall 1")
(dissolved effective December 31, 1998) 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. Through September 30, 2000, $5,788,000 of recoveries have
been received which exceeded the original estimate of $3 million. As a result,
the Partnership has recognized
7
<PAGE>
$1,117,000 as income over the past four years, which represents its share of the
excess recovery. No further significant recoveries are anticipated.
3. INVESTMENT PROPERTIES:
----------------------
As of September 30, 2000, the Partnership owned 25 fully constructed fast-food
restaurants, a video store, and a preschool. The properties are comprised of
the following: ten (10) Wendy's restaurants, four (4) Hardee's restaurants, two
(2) Denny's restaurants, one (1) Fiesta Time restaurant, one (1) Mulberry Street
Grill restaurant, one (1) Applebee's restaurant, one (1) Popeye's Famous Fried
Chicken restaurant, one (1) Hooter's restaurant, one (1) Kentucky Fried Chicken
restaurant, one (1) Hostettler's restaurant, one (1) Miami Subs restaurant, one
(1) Village Inn restaurant, one (1) Blockbuster Video store, and one (1) Sunrise
Preschool. The 27 properties are located in a total of thirteen (13) states.
The total cost of the investment properties and specialty leasehold improvements
includes the original purchase price plus acquisition fees and other capitalized
costs paid to an affiliate of the former general partners.
According to the Partnership Agreement, the former general partners were to
commit 80% of the original offering proceeds to investment in properties. Upon
full investment of the net proceeds of the offering, approximately 75% of the
original proceeds was invested in the Partnership's properties.
The current General Partner receives a fee for managing the Partnership equal to
4% of gross receipts, with a maximum reimbursement for office rent and related
office overhead of $25,000 between the three original affiliated Partnerships as
provided in the Permanent Manager Agreement ("PMA"), which amount has been
reduced due to the 1998 sale of DiVall 1. Effective March 1, 2000, the minimum
management fee and the maximum reimbursement for office rent and overhead
increased by 2.2% representing the allowable annual Consumer Price Index
adjustment per the PMA. For purposes of computing the 4% overall fee, gross
receipts includes amounts recovered in connection with the misappropriation of
assets by the former general partners and their affiliates. TPG has received
fees from the Partnership totaling $55,185 to date on the amounts recovered,
which has been offset against the 4% minimum fee.
The Partnership owns two (2) 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 one (1) is paid by the Partnership. The lease paid by the
Partnership is considered an operating lease and the lease payments are expensed
in the periods to which they apply. The lease terms require aggregate minimum
annual payments of approximately $66,000 and expires in the year 2008. An
additional ground lease expiring in 2003 was terminated during the Third Quarter
of 2000, in exchange for a payment of $90,000 and the return of the property to
the lessor, resulting in a $142,000 loss.
Several of the Partnership's property leases contain 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.
4. PARTNERSHIP AGREEMENT:
----------------------
The Partnership Agreement, prior to an amendment effective May 26, 1993,
provided that, for financial reporting and income tax purposes, net profits or
losses from operations were allocated 90% to the Limited Partners and 10% to the
general partners. The Partnership Agreement also provided for quarterly cash
distributions from Net Cash Receipts, as defined, within 60 days after the last
day of the first full calendar quarter following the date of release of the
subscription funds from escrow, and each calendar quarter thereafter, in which
such funds were available for distribution with respect to such quarter. Such
distributions were to be made 90% to Limited Partners and 10% to the former
general partners, provided, however, that quarterly distributions were to be
cumulative and were not to be made to the former general partners unless and
until each Limited Partner had received a distribution from Net Cash Receipts in
an amount equal to 10% per annum, cumulative simple return on his or her
Adjusted Original Capital, as defined, from the Return Calculation Date, as
defined.
8
<PAGE>
Net Proceeds, as originally defined, were to be distributed as follows: (a) to
the Limited Partners, an amount equal to 100% of their Adjusted Original
Capital; (b) then, to the Limited Partners, an amount necessary to provide each
Limited Partner a Liquidation Preference equal to a 13.5% per annum, cumulative
simple return on Adjusted Original Capital from the Return Calculation date
including in the calculation of such return all prior distributions of Net Cash
Receipts and any prior distributions of Net Proceeds under this clause; and (c)
then, to Limited Partners, 90% and to the General Partners, 10%, of the
remaining Net Proceeds available for distribution.
On May 26, 1993, pursuant to the results of a solicitation of written consents
from the Limited Partners, the Partnership Agreement was amended to replace the
former general partners and amend various sections of the agreement. The former
general partners were replaced as General Partner by The Provo Group, Inc., an
Illinois corporation. Under the terms of the amendment, net profits or losses
from operations are allocated 99% to the Limited Partners and 1% to the current
General Partner. The amendment also provided for distributions from Net Cash
Receipts to be made 99% to Limited Partners and 1% to the current General
Partner provided, that quarterly distributions will be cumulative and will not
be made to the current General Partner unless and until each Limited Partner has
received a distribution from Net Cash Receipts in an amount equal to 10% per
annum, cumulative simple return on his or her Adjusted Original Capital, as
defined, from the Return Calculation Date, as defined, except to the extent
needed by the General Partner to pay its federal and state income taxes on the
income allocated to 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 it attributable to such year; and (c)
then, to Limited Partners, 99%, and to the General Partner, 1%, of remaining Net
Proceeds available for distribution.
Additionally, per the amendment of the Partnership Agreement dated May 26, 1993,
the total compensation paid to all persons for the sale of the investment
properties shall be limited to a competitive real estate commission, not to
exceed 6% of the contract price for the sale of the property. The General
Partner may receive up to one-half of the competitive real estate commission,
not to exceed 3%, provided that the General Partner provides a substantial
amount of services in the sales effort. It is further provided that a portion of
the amount of such fees payable to the General Partner is subordinated to its
success in recovering the funds misappropriated by the former general partners.
(See Note 7.)
5. LEASES:
-------
Lease terms for the majority of the investment properties are 20 years from
their inception. The leases generally provide for minimum rents and additional
rents based upon percentages of gross sales in excess of specified breakpoints.
The lessee is responsible for occupancy costs such as maintenance, insurance,
real estate taxes, and utilities. Accordingly, these amounts are not reflected
in the statements of income except in circumstances where, in management's
opinion, the Partnership will be required to pay such costs to preserve its
assets (i.e., payment of past-due real estate taxes). Management has determined
that the leases are properly classified as operating leases; therefore, rental
income is reported when earned and the cost of the property, excluding the cost
of the land, is depreciated over its estimated useful life.
9
<PAGE>
Aggregate minimum lease payments to be received under the leases for the
Partnership's properties are as follows:
<TABLE>
<S> <C>
Year ending
December 31,
2000 $ 2,259,600
2001 2,161,547
2002 2,104,680
2003 2,063,149
2004 2,064,619
Thereafter 10,340,927
-----------
$20,994,522
===========
</TABLE>
Ten (10) of the properties are leased to Wensouth Orlando, a franchisee of
Wendy's restaurants. Wensouth base rents accounted for 37% of total base rents
for 1999.
6. TRANSACTIONS WITH CURRENT GENERAL PARTNER:
------------------------------------------
Amounts paid to the current General Partner for the nine-month periods ended
September 30, 2000 and 1999 are as follows.
<TABLE>
<CAPTION>
Incurred as of Incurred as of
Current General Partner September 30, 2000 September 30, 1999
---------------------------------------- ------------------ ------------------
<S> <C> <C>
Management fees $140,073 $137,306
Overhead allowance 11,313 11,084
Reimbursement for out-of-pocket expenses 7,992 7,008
Cash distribution 4,220 6,130
-------- --------
$163,598 $161,528
======== ========
</TABLE>
7. CONTINGENT LIABILITIES:
-----------------------
According to the Partnership Agreement, as amended, the current General Partner
may receive a disposition fee not to exceed 3% of the contract price of the sale
of investment properties. Fifty percent (50%) of all such disposition fees
earned by the current General Partner is to be escrowed until the aggregate
amount of recovery of the funds misappropriated from the Partnerships by the
former general partners is greater than $4,500,000. Upon reaching such recovery
level, full disposition fees will thereafter be payable and fifty percent (50%)
of the previously escrowed amounts will be paid to the current General Partner.
At such time as the recovery exceeds $6,000,000 in the aggregate, the remaining
escrowed disposition fees shall be paid to the current General Partner. If such
levels of recovery are not achieved, the current General Partner will contribute
the amounts escrowed towards the recovery. In lieu of an escrow, 50% of all such
disposition fees have been paid directly to the restoration account and then
distributed among the three Partnerships. Fifty percent (50%) of the total
amount paid to the recovery was refunded to the current General Partner during
March 1996 after surpassing the recovery level of $4,500,000. The remaining
amount allocated to the Partnership may be owed to the current General Partner
if the $6,000,000 recovery level is met. As of September 30, 2000, the
Partnership may owe the current General Partner $16,296, which is currently
reflected as a recovery, if the $6,000,000 recovery level is achieved, which is
considered unlikely.
10
<PAGE>
8. PMA INDEMNIFICATION TRUST:
--------------------------
The PMA provides that the Permanent Manager will be indemnified from any claims
or expenses arising out of or relating to the Permanent Manager serving in such
capacity or as substitute general partner, so long as such claims do not arise
from fraudulent or criminal misconduct by the Permanent Manager. The PMA
provides that the Partnership fund this indemnification obligation by
establishing a reserve of up to $250,000 of Partnership assets which would not
be subject to the claims of the Partnership's creditors. An Indemnification
Trust ("Trust") serving such purposes has been established at United Missouri
Bank, N.A. The Trust has been fully funded with Partnership assets as of
September 30, 2000. Funds are invested in U.S. Treasury securities. In addition,
$100,484 of earnings have been credited to the Trust as of September 30, 2000.
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.
10. SUBSEQUENT EVENTS:
------------------
On November 15, 2000, the Partnership will make distributions to the Limited
Partners for the Third Quarter of 2000 of $500,000 amounting to approximately
$10.80 per limited partnership interest.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources:
--------------------------------
Investment Properties and Net Investment in Direct Financing Leases
-------------------------------------------------------------------
The investment properties, including equipment held by the Partnership at
September 30, 2000, were originally purchased at a price, including acquisition
costs, of approximately $23,435,000.
DenAmerica, Inc. did not renew the lease on its Denny's store on Camelback Road
in Phoenix, Arizona upon the original lease's expiration on January 30, 1998,
but continued to operate the restaurant and pay rent through December 31, 1999.
During January 2000, the tenant notified Management that it had vacated the
premises and ceased paying rent. The property was subject to a ground lease
which the Partnership terminated during the Third Quarter of 2000 for a payment
of $90,000 in exchange for a release of all future obligations. Possession of
the property was returned to the ground lessor, resulting in a $142,000 loss.
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Other Assets
------------
Cash and cash equivalents, were approximately $1,010,000 at September 30, 2000,
compared to $1,387,000 at December 31, 1999. The Partnership designated cash of
$500,000 to fund the Third Quarter 2000 distributions to Limited Partners,
$134,000 for the payment of accounts payable and accrued expenses, and the
remainder represents reserves deemed necessary to allow the Partnership to
operate normally. Cash generated through the operations of the Partnership's
investment properties and sales of investment properties will provide the
sources for future fund liquidity and Limited Partner distributions.
The Partnership established 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 PMA 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.
Liabilities
-----------
Accounts payable and accrued expenses at September 30, 2000, in the amount of
$45,000, primarily represented the accrual of legal and auditing fees.
Partners' Capital
-----------------
Net income for the quarter was allocated between the General Partner and the
Limited Partners, 1% and 99%, respectively, as provided in the Partnership
Agreement and the Amendment to the Partnership Agreement, as discussed more
fully in Note 4 of the financial statements. The former general partners'
deficit capital account balance was reallocated to the Limited Partners at
December 31, 1993. Refer to Note 9 to the financial statements for additional
information regarding the reallocation.
Cash distributions paid to the Limited Partners and to the General Partner
during 2000 of $2,135,000 and $4,220, respectively, have also been in accordance
with the amended Partnership Agreement. The Third Quarter 2000 distribution of
$500,000 was paid to the Limited Partners on November 15, 2000.
Results of Operations:
----------------------
The Partnership reported net income for the quarter ended September 30, 2000, in
the amount of $346,000 compared to net income for the quarter ended September
30, 1999, of $462,000. For the nine months ended September 30, 2000 and 1999,
net income totaled $1,055,000 and $1,533,000, respectively.
Revenues
--------
Total revenues were $775,000 and $694,000, for the quarters ended September 30,
2000 and 1999, respectively, and were $1,972,000 and $2,211,000 for the nine
months ended September 30, 2000 and 1999, respectively. Percentage rent income
has varied from 1999 to 2000 due to an accounting standards change which
precludes the recognition of percentage rents until the tenants have reached
their specified breakpoints. In the past, percentage rents were accrued
throughout the year in which they were earned.
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
Partnership properties. They may also increase with additional rents due from
tenants, if those tenants experience sales levels which require the payment of
additional rent to the Partnership.
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Expenses
--------
For the quarters ended September 30, 2000 and 1999, cash expenses amounted to
approximately 25% and 20%, of total revenues, respectively. For the nine months
ended September 30, 2000 and 1999, cash expenses totaled 25% and 16%,
respectively. Total expenses, including non-cash items, amounted to
approximately 55% and 33%, of total revenues for the quarters ended September
30, 2000 and 1999, respectively, and totaled 46% and 31% for the nine months
ended September 30, 2000 and 1999, respectively.
A reversal of a property tax accrual was recorded during 1999 due to the
assumption of liability for these taxes by a tenant who assumed the lease. The
percentages are also affected by the timing of revenue recorded in 2000 as a
result of the aforementioned accounting change and by the termination of the
ground lease on the Denny's property in Phoenix, Arizona.
Inflation:
----------
Inflation has a minimal effect on operating earnings and related cash flows from
a portfolio of triple net leases. By their nature, such leases actually fix
revenues and are not impacted by rising costs of maintenance, insurance, or real
estate taxes. If inflation causes operating margins to deteriorate for lessees
if expenses grow faster than revenues, then, inflation may well negatively
impact the portfolio through tenant defaults.
It would be misleading to associate inflation with asset appreciation for real
estate, in general, and the Partnership's portfolio, specifically. Due to the
"triple net" nature of the property leases, asset values generally move
inversely with interest rates.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
None.
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PART II - OTHER INFORMATION
Items 1 - 5.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Listing of Exhibits:
99.0 Correspondence to the Limited Partners dated November 15, 2000,
regarding the Third Quarter 2000 distribution.
(b) Reports on Form 8-K:
The Registrant filed no reports on Form 8-K during the third quarter of
fiscal year 2000.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP
By: The Provo Group, Inc., General Partner
By: _______________________________________________
Bruce A. Provo, President
Date: November 12, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: The Provo Group, Inc., General Partner
By: _________________________________________________
Bruce A. Provo, President
Date: November 12, 2000
By: __________________________________________________
Kristin J. Atkinson
Vice President - Finance and Administration
Date: November 12, 2000
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