10-K405 1 0001.txt FORM 10-K 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, 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___ --- 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: 28-29 ------- 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, 2000, the Partnership consisted of one General Partner and 2,447 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 a video rental store and a child care center. At December 31, 2000, the Partnership owned 27 properties with specialty leasehold improvements in 11 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 the loss of expected lease income for the Partnership. Management will use its best efforts to vigorously 2 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 four person Advisory Board is empowered to, among other functions, review operational policies and practices, review extraordinary transactions, and advise and serve as an audit committee to the Partnership and the General Partner. The Advisory Board does not have the authority to direct management decisions or policies of the Partnership or remove the General Partner. The powers of the Advisory Board are advisory only. The Advisory Board has full and free access to the Partnership's books and records, and individual Advisory Board members have the right to communicate directly with the 3 Limited Partners concerning Partnership business. Members of the Advisory Board are compensated $1,500 annually and $500 for each quarterly meeting attended. The Advisory Board currently consists of a broker dealer representative, William Arnold; and Limited Partners from each of the two remaining Partnerships: Richard Otte and Jesse Small from the Partnership, and Albert Kramer 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, 2000:
Lease Acquisi- Property Name Purchase Rental Per Expiration Renewal tion Date & Address Lessee Price (1) Annum Date Options --------- --------- ------ --------- ----- ---- ------- 03/11/88 Miami Subs QSR, Inc. $743,625 $54,000 03-30-2016 None US-1 Near PGA Blvd Palm Beach, FL 06/15/88 Denny's DenAmerica, Inc. 1,087,137(2) 90,000 08-31-2009 (3) 8801 N 7th St Phoenix, AZ 07/15/88 Hooter's TWI X, Inc. 1,346,719 95,000 07-15-2008 None 7669 Grapevine Hwy N Richland Hills, TX 08/01/88 Hardee's Hardee's Food 1,091,190(2) 58,667 11-30-2001 (3) 106 N Chicago Ave Systems, Inc. S Milwaukee, WI 08/15/88 Denny's First Foods, Inc. 1,155,965(2) 65,000 12-31-2008 None 2360 W Northern Ave Phoenix, AZ 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 Orlando, 596,781 76,920 11-6-2016 None 1721 Sam Rittenburg Blvd Ltd. Charleston, SC 12/22/88 Wendy's WenSouth Orlando, 649,594 86,160 11-6-2016 None 3013 Peach Orchard Rd 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
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Lease Acquisi- Property Name Purchase Rental Per Expiration Renewal tion Date & Address Lessee Price (1) Annum Date Options --------- --------- ------ --------- ----- ---- ------- 02/21/89 Wendy's WenSouth Orlando, 776,344 96,780 11-6-2016 None 1901 Whiskey Rd Ltd. Aiken, SC 02/21/89 Wendy's WenSouth Orlando, 728,813 96,780 11-6-2016 None 1730 Walton Way Ltd. Augusta, GA 02/21/89 Wendy's WenSouth Orlando, 528,125 70,200 11-6-2016 None 347 Folly Rd Ltd. Charleston, SC 02/21/89 Wendy's WenSouth Orlando, 580,938 77,280 11-6-2016 None 361 Hwy 17 Bypass Ltd. Mount Pleasant, SC 03/14/89 Wendy's WenSouth Orlando, 633,750 90,480 11-6-2016 None 1004 Richland Ave Ltd. Aiken, SC 04/20/89 Hostetlers, BBQ Hickory Park, Inc. 897,813(2) 60,000 7-15-2008 (3) 4875 Merle Hay Des Moines, IA 04/28/89 Hardee's Hardee's Food 686,563 64,000 04-30-2009 (3) 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 (3) 4000 S 27th St Systems, Inc. Milwaukee, WI 12/28/89 Village Inn Columbia VI, 845,000(2) 60,000 11-30-2009 (3) 2451 Columbia Rd L.L.C. Grand Forks, ND 12/29/89 Wendy's WenSouth Orlando, 660,156 87,780 11-6-2016 None 1717 Martintown Rd Ltd. N Augusta, SC 12/29/89 Wendy's WenSouth Orlando, 580,938 77,280 11-6-2016 None 1515 Savannah Hwy Ltd. Charleston, SC 12/29/89 Wendy's WenSouth Orlando, 633,750 84,120 11-6-2016 None 3869 Washington Rd Ltd. Martinez, GA 01/01/90 Sunrise Preschool Sunrise 1,182,735(2) 134,136 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 (3) 20 N Pioneer Rd Systems, Inc. Fond du lac, WI 01/31/90 Blockbuster Video Blockbuster 646,425 9,920 01-31-2001 (6) 336 E 12th St Videos, Inc. Ogden, UT 03/21/90 Fiesta Time DenAmerica, Inc. 1,179,501(2) 85,800 04-30-2012 (3) 688 N Blue Lakes Blvd Twin Falls, ID
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Lease Acquisi- Property Name Purchase Rental Per Expiration Renewal tion Date & Address Lessee Price (1) Annum Date Options --------- --------- ------ --------- ----- ---- ------- 05/02/90 Mulberry Street Grill (4) Mr. Munchies, Inc. 514,259(2) 61,200 05-30-2008 None 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 $22,774,942 $2,118,563 =========== ==========
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. (6) Lease renewal negotiations have been finalized with Blockbuster, however, the lease amendment has not been formally executed. The lease will be extended to January 31, 2006 with two(2) five year options. 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. 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. During the Fourth Quarter of 1999, the property was sold for $450,000 at a gain of approximately $26,000. DenAmerica did not formally extend its lease on the Denny's property on Camelback Road in Phoenix, Arizona, when it expired on January 30, 1998, but continued to operate the restaurant and pay rent through December 31, 1999. During January 2000, DenAmerica notified Management that it had vacated the premises and ceased paying rent. Management entered into a termination agreement with the ground lessor for this property during 2000, which resulted in a one-time 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 $153,000 loss. During the Fourth Quarter of 2000, Management negotiated the extension of the leases on the ten (10) Wendy's restaurants from original expirations ranging from 2008 to 2009, to new expiration dates of November 2016. In connection with these extensions, a commission of $190,000 was paid to an affiliate of the General Partner. Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders None. 6 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, 2000 there were 2,447 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 2000 and 1999, $2,635,000 and $2,575,000, respectively, were distributed in the aggregate to the Limited Partners. The General Partner received aggregate distributions of $6,887 and $8,190 in 2000 and 1999, respectively. Item 6. Selected Financial Data DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP (a Wisconsin limited partnership)
December 31, 2000, 1999, 1998, 1997, and 1996 (not covered by Independent Auditor's Report) ------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------- Total Revenue $2,853,286 $3,024,407 $3,622,550 $3,448,300 $5,316,853 ------------------------------------------------------------------------------------------------------------------- Net Income 1,721,791 2,047,520 1,524,131 2,183,977 3,277,512 ------------------------------------------------------------------------------------------------------------------- Net Income per Limited Partner Interest 36.83 43.80 32.60 46.72 70.11 ------------------------------------------------------------------------------------------------------------------- Total Assets 16,199,631 17,125,388 17,693,852 20,894,198 23,379,356 ------------------------------------------------------------------------------------------------------------------- Total Partners' Capital 15,953,648 16,873,744 17,409,414 20,479,121 22,903,880 ------------------------------------------------------------------------------------------------------------------- Cash Distributions per Limited Partnership Interest 56.94 55.64 99.07 99.39 147.47 -------------------------------------------------------------------------------------------------------------------
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 7 Liquidity and Capital Resources: ------------------------------- Investment Properties and Net Investment in Direct Financing Leases ------------------------------------------------------------------- The Properties, including equipment held by the Partnership at December 31, 2000, were originally purchased at a price, including acquisition costs, of approximately $22,775,000. The tenant of the Red Apple Restaurant in Cedar Rapids, Iowa, vacated the property during 1998 and ceased paying rent. Management sold the property during the Fourth Quarter of 1999 for $450,000 at a gain of approximately $26,000. DenAmerica did not formally extend its lease on the Denny's property on Camelback Road in Phoenix, Arizona, when it expired on January 30, 1998, but continued to operate the restaurant and pay rent through December 31, 1999. During January 2000, DenAmerica notified Management that it had vacated the premises and ceased paying rent. Management entered into a termination agreement with the ground lessor of the property during 2000, which resulted in a one-time 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 $153,000 loss. During the Fourth Quarter of 2000, Management negotiated the extension of the leases on the ten (10) Wendy's restaurants from original expirations ranging from 2008 to 2009, to new expiration dates of November 2016. Other Assets ------------ Cash and cash equivalents, held by the Partnership, totaled approximately $752,000 at December 31, 2000, compared to $1,387,000 at December 31, 1999. The Partnership designated cash of $575,000 to fund the Fourth Quarter 2000 distributions to Limited Partners paid in February 2001, $128,000 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. Deferred charges totaled approximately $263,000 and $85,000, net of amortization, at December 31, 2000 and 1999, respectively. Deferred charges represent leasing commissions paid when properties are leased or upon the negotiated extension of a lease. Leasing commissions are capitalized and amortized over the life of the lease. During 2000, a commission of $190,000 was paid to an affiliate of the General Partner upon the negotiated extension of the leases on the ten(10) Wendy's restaurants. Liabilities ----------- Accounts payable and accrued expenses at December 31, 2000, in the amount of $40,000, primarily represented the year-end accruals of legal and auditing fees. 8 Due to the Current General Partner amounted to $3,000 at December 31, 2000, representing the General Partner's portion of the Fourth Quarter distribution. 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 2000 of $2,635,000 and $6,887, respectively, have also been in accordance with the Partnership Agreement. The Fourth Quarter 2000 distribution of $575,000 was paid to the Limited Partners on February 15, 2001. Results of Operations: --------------------- The Partnership reported net income for the year ended December 31, 2000, in the amount of $1,722,000 compared to net income for the years ended December 31, 1999 and 1998, of $2,048,000 and $1,524,000, respectively. Results for all three years were different than would be expected from "normal" operations, primarily because of 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 or losses on the disposition of properties and the reversal of a portion of the former general partner receivable write-off. Revenues -------- Total revenues were $2,853,000, $3,024,000, and $3,623,000, for the years ended December 31, 2000, 1999, and 1998, respectively. A decrease in fixed rents resulted from tenant turnover, property sales, and modified leases. 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. During 1999, a gain of $26,000 was recorded on the sale of the Red Apple Restaurant property, and recoveries totaled $85,000. Recoveries received during 2000 totaled $4,000. 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, 2000, 1999, and 1998, cash expenses amounted to approximately 21%, 18%, and 24%, of total revenues, respectively. Total expenses, including non-cash items, amounted to approximately 40%, 32% and 58%, of total revenues for the years ended December 31, 2000, 1999, and 1998, respectively. Items negatively impacting expenses during the last three years include expenses incurred primarily in relation to non-cash write-offs, property write-downs and real estate taxes. 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. Also during 2000, the Partnership paid a one-time $90,000 fee to terminate a ground lease. In connection with the termination, the property was returned to the ground lessor, resulting in a $153,000 loss. Charge-offs of uncollectible rent, 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. 9 Write-offs for uncollectible rents and receivables amounted to $6,800, $3,400, and $123,000 at December 31, 2000, 1999, and 1998, respectively. The write-offs are the result of defaults as well as modifications to several property leases since inception of the Partnership. The 1998 write-off related to certain unpaid rent and notes receivable from DenAmerica, Inc. a tenant of two of the Partnership's Denny's properties. During 1998, six properties were written down to their appraised value, resulting in a non-cash charge of $685,000. Disposition fees incurred during 1998 were a result of the sales of two Denny's properties and the Cash-A-Check property to the tenants. The 1999 selling commission was a result of the sale of the Red Apple Restaurant property. Selected Quarterly Financial Information (unaudited) ---------------------------------------------------- Quarter Ended March 31, June 30, September 30, December 31, 2000 2000 2000 2000 ---- ---- ---- ---- Revenues $583,668 $613,248 $775,092 $881,278 Net Income $353,265 $355,572 $346,275 $ 66,679 Net Income Per Unit $ 7.56 $ 7.61 $ 7.41 $ 14.25 Quarter Ended March 31, June 30, September 30, December 31, 1999 1999 1999 1999 ---- ---- ---- ---- Revenues $722,032 $795,374 $693,925 $813,076 Net Income $493,858 $577,056 $461,666 $514,940 Net Income Per Unit $ 10.56 $ 12.34 $ 9.88 $ 11.02 Percentage rent revenues were recognized evenly throughout the year during 1999. However, during 2000, recognition of percentage rents did not occur until the tenant actually reached their breakpoint specified in their lease as required by SAB 101. 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 19% of rental income for 2000. 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 7A. Quantitative and Qualitative Disclosure About Market Risk None. 10 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 . . . . . . . . . . . . . . . . . 12 Balance Sheets, December 31, 2000 and 1999 . . . . . . . . . . . . . . . . . 13 - 14 Statements of Income for the Years Ended December 31, 2000, 1999, and 1998 . . . . . . . . . . . . . . . . . 15 Statements of Partners' Capital for the Years Ended December 31, 2000, 1999, and 1998 . . . . . . . . . . . . . . . . . 16 Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998 . . . . . . . . . . . . . . . . . 17 Notes to Financial Statements . . . . . . . . . . . . . . . . . 18 - 25 Schedule III--Real Estate and Accumulated Depreciation . . . . . . . . . . . . . . . . . 31 - 32
11 [LOGO ARTHUR ANDERSEN] 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, 2000 and 1999, and the related statements of income, partners' capital and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Chicago, Illinois January 12, 2001 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS December 31, 2000 and 1999 --------------------------
ASSETS December 31, December 31, 2000 1999 ------------ ------------ 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 (5,694,980) (5,487,177) ----------- ----------- Net investment properties and equipment 14,175,857 14,679,410 ----------- ----------- OTHER ASSETS: Cash and cash equivalents 752,060 1,387,306 Cash held in Indemnification Trust (Note 8) 356,153 335,845 Rents and other receivables (Net of allowance of $44,802 in 1999) 530,379 489,412 Deferred rent receivable 105,684 134,063 Prepaid insurance 16,091 14,392 Deferred charges 263,407 84,960 Unsecured notes receivable from lessees (Net of allowance of $50,000 in 2000 and 1999) 0 0 ----------- ----------- Total other assets 2,023,774 2,445,978 ----------- ----------- Total assets $16,199,631 $17,125,388 =========== ===========
The accompanying notes are an integral part of these statements. 13 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP BALANCE SHEETS December 31, 2000 and 1999 -------------------------- LIABILITIES AND PARTNERS' CAPITAL
December 31, December 31, 2000 1999 ------------- ------------ LIABILITIES: Accounts payable and accrued expenses $ 40,059 $ 50,286 Due to current General Partner 2,667 1,968 Security deposits 117,850 117,850 Unearned rental income 85,407 81,540 ------------ ----------- Total liabilities 245,983 251,644 ------------ ----------- CONTINGENT LIABILITIES: (Note 7) PARTNERS' CAPITAL: (Notes 1, 4 and 9) Current General Partner - Cumulative net income 154,838 137,620 Cumulative cash distributions (64,006) (57,119) ------------ ----------- 90,832 80,501 ------------ ----------- Limited Partners (46,280.3 interests outstanding) Capital contributions, net of offering costs 39,358,468 39,358,468 Cumulative net income 21,694,845 19,990,272 Cumulative cash distributions (44,350,268) (41,715,268) Reallocation of former general partners' deficit capital (840,229) (840,229) ------------ ----------- 15,862,816 16,793,243 ------------ ----------- Total partners' capital 15,953,648 16,873,744 ------------ ----------- Total liabilities and partners' capital $ 16,199,631 $ 17,125,388 ============ ============
The accompanying notes are an integral part of these statements. 14 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF INCOME For the Years Ended December 31, 2000, 1999, and 1998 -----------------------------------------------------
2000 1999 1998 ----- ----- ---- REVENUES: Rental income (Note 5) $2,786,584 $2,768,242 $2,764,028 Interest income 61,221 56,938 123,478 Net other income 1,773 88,139 55,142 Recovery of amounts previously written off (Note 2) 3,708 85,380 41,015 Net gain on disposal of assets 0 25,708 638,887 ---------- ---------- ---------- 2,853,286 3,024,407 3,622,550 ---------- ---------- ---------- EXPENSES: Partnership management fees (Note 6) 187,038 183,074 180,450 Disposition fees (Note 6) 0 0 75,750 Restoration fees (Note 6) 148 260 0 Appraisal fees 0 0 58,575 Environmental inspections 0 0 48,250 Land title surveys 0 0 66,150 Insurance 17,864 22,770 23,319 General and administrative 81,814 71,574 108,569 Advisory Board fees and expenses 12,360 11,425 15,766 Selling Commissions - Non-affiliate 0 15,750 0 Loss on Disposal of property (Note 3) 153,159 12,699 0 Real estate taxes 0 10,032 9,323 Ground lease payments (Note 3) 92,182 125,840 126,541 Expenses incurred due to default by lessee 2,520 8,995 3,403 Professional services 125,497 101,440 150,639 Professional services related to Investigation 0 0 1,279 Ground lease termination fee (Note 3) 90,000 0 0 Depreciation 350,394 369,989 412,950 Amortization 11,709 39,639 9,252 Provision for uncollectible rents and other receivables 6,810 3,400 122,860 Write down of properties to net realizable value (Note 3) 0 0 685,343 ---------- ---------- ---------- 1,131,495 976,887 2,098,419 --------- ---------- ---------- NET INCOME $1,721,791 $2,047,520 $1,524,131 ========== ========== ========== NET INCOME - CURRENT GENERAL PARTNER $ 17,218 $ 20,475 $ 15,241 NET INCOME - LIMITED PARTNERS 1,704,573 2,027,045 1,508,890 ---------- ---------- ---------- $1,721,791 $2,047,520 $1,524,131 ========== ========== ========== NET INCOME PER LIMITED PARTNERSHIP INTEREST, based on 46,280.3 Interests outstanding $ 36.83 $ 43.80 $ 32.60 ========== ========== ==========
The accompanying notes are an integral part of these statements. 15 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF PARTNERS' CAPITAL For the years ended December 31, 2000, 1999 and 1998 ----------------------------------------------------
Current General Partner ----------------------------------- Cumulative Cumulative Net Cash Income Distributions Total ------- ------------- ----- BALANCE AT DECEMBER 31, 1997 $101,904 $(40,091) $61,813 Cash Distributions ($99.07 per limited partnership interest) (8,838) (8,838) Net Income 15,241 15,241 -------- -------- ------- BALANCE AT DECEMBER 31, 1998 $117,145 $(48,929) $68,216 Cash Distributions ($55.64 per limited partnership interest) (8,190) (8,190) Net Income 20,475 20,475 -------- -------- ------- BALANCE AT DECEMBER 31, 1999 $137,620 $(57,119) $80,501 ======== ======== ======= Cash Distributions ($56.94 per limited partnership interest) (6,887) (6,887) Net Income 17,218 17,218 -------- -------- ------- BALANCE AT DECEMBER 31, 2000 $154,838 $(64,006) $90,832 ======== ======== ======= Limited Partners ---------------------------------------------------------------------- Capital Contributions, Cumulative Net of Cumulative Cash Offering Costs Net Income Distribution Reallocation Total -------------- ---------- ------------ ------------ ----- BALANCE AT DECEMBER 31, 1997 $39,358,468 $16,454,337 $(34,555,268) $(840,229) $20,417,308 Cash Distributions ($99.07 per limited partnership interest) (4,585,000) (4,585,000) Net Income 1,508,890 1,508,890 ----------- ----------- ------------ --------- ----------- BALANCE AT DECEMBER 31, 1998 $39,358,468 $17,963,227 $(39,140,268) $(840,229) $17,341,198 Cash Distributions ($55.64 per limited partnership interest) (2,575,000) (2,575,000) Net Income 2,027,045 2,027,045 ----------- ----------- ------------ --------- ----------- BALANCE AT DECEMBER 31, 1999 $39,358,468 $19,990,272 $(41,715,268) $(840,229) $16,793,243 =========== =========== ============ ========= =========== Cash Distributions ($56.94 per limited partnership interest) (2,635,000) (2,635,000) Net Income 1,704,573 1,704,573 ----------- ----------- ------------ --------- ----------- BALANCE AT DECEMBER 31, 2000 $39,358,468 $21,694,845 $(44,350,268) $(840,229) $15,862,816 =========== =========== ============ ========= ===========
The accompanying notes are an integral part of these statements. 16 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2000, 1999, and 1998 -----------------------------------------------------
2000 1999 1998 ---- ---- ---- CASH FLOWS FROM (USED) IN OPERATING ACTIVITIES: Net income (loss) $ 1,721,791 $ 2,047,520 $ 1,524,131 Adjustments to reconcile net income loss to net cash from (used in) operating activities - Depreciation and amortization 362,103 409,628 422,202 Recovery of amount previously written off (3,708) (22,790) (41,015) Provision for uncollectible rents and other receivables 6,810 3,400 122,860 Property write downs to net realizable value 0 0 685,343 Net (gain) loss on disposal of assets 153,159 (13,009) (638,887) Interest applied to Indemnification Trust account (20,308) (14,638) (16,454) (Increase) in rents and other receivables (47,777) (123,097) (207,412) Withdrawals for payment of real estate taxes 0 4,404 6,847 (Increase) Decrease in prepaids (1,699) 5,500 (551) Decrease in deferred rent receivable 28,379 836 47,871 Increase (Decrease) in due to current General Partner 699 (755) 213 Increase (Decrease) in accounts payable and other (10,227) 5,236 (24,787) Increase (Decrease) in security deposits 0 15,833 (51,095) Increase (Decrease) in real estate taxes payable 0 (73,469) 15,114 Increase (Decrease) in unearned rental income 3,867 20,361 (70,084) ----------- ----------- ----------- Net cash from (used in) operating activities 2,193,089 2,264,960 1,774,296 ----------- ----------- ----------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Principal payments received on direct financing leases 0 16,301 41,015 Proceeds from sale of investment properties 0 471,505 2,542,725 Investment in investment properties 0 (13,800) 0 Payment of leasing commissions (190,156) (33,441) (13,976) Recoveries from former G.P. affiliates 3,708 6,489 0 Principal receipts from unsecured notes 0 2,317 67,409 ----------- ----------- ----------- Net cash from (used in) investing activities (186,448) 449,371 2,637,173 ----------- ----------- ----------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Cash distributions to Limited Partners (2,635,000) (2,575,000) (4,585,000) Cash distributions to current General Partner (6,887) (8,190) (8,838) ----------- ----------- ----------- Net cash from (used in) financing activities (2,641,887) (2,583,190) (4,593,838) ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (635,246) 131,141 (182,369) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,387,306 1,256,165 1,438,534 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 752,060 $ 1,387,306 $ 1,256,165 =========== =========== ===========
The accompanying notes are an integral part of these statements. 17 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 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, 2000, the Partnership owned 27 properties with specialty leasehold improvements in 11 of these properties. Rental revenue from investment properties is recognized on the straight-line basis over the life of the respective lease. Percentage rents have historically been 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, during 2000, the Partnership adopted SAB101, which requires the recording of percentage rents only when the tenant has reached the breakpoint stipulated in the 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 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 18 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. 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 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 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, 2000, the tax basis of the Partnership's assets exceeded the amounts reported in the accompanying financial statements by approximately $8,317,680. 19 The following represents a reconciliation of net income as stated on the Partnership statements of income to net income for tax reporting purposes:
2000 1999 1998 ---- ---- ---- Net income, per statements of income $1,721,791 $2,047,520 $1,524,131 Book to tax depreciation difference (43,538) (65,606) (32,592) Book over tax gain from asset disposition (30,231) (148,113) (506,943) Straight line rent adjustment 28,379 836 47,871 Bad debt reserve/expense (44,535) 3,060 41,475 Book valuation adjustment of real property 0 0 685,342 Book valuation adjustment of equipment leases 0 0 0 Other, net 3,879 20,584 (69,826) ----- ------ -------- Net income for tax reporting purposes $1,635,745 $1,858,281 $1,689,458 ========== ========== ==========
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, 2000, $5,788,000 of recoveries have been received which exceeded the original estimate of $3 million. As a result, in 1996, 1997, 1999 and 2000, the Partnership has recognized $1,117,000 as income, which represents its share of the excess recovery. There were no restoration activities or recoveries in 1998. The current General Partner continues to pursue recoveries of the misappropriated funds, however, no further significant recoveries are anticipated. 20 3. INVESTMENT PROPERTIES: --------------------- As of December 31, 2000, the Partnership owned 25 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, 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) Hostetler'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 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 could not be located. Management sold the property during the Fourth Quarter of 1999 for $450,000 at a gain of approximately $26,000. The tenant operating a Denny's restaurant on Camelback Road in Phoenix, Arizona, did not formally exercise its option to extend its lease which expired 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. Management entered into a termination agreement with the ground lessor of the property during 2000, which resulted in a one-time 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 $153,000 loss. The total cost of the investment properties and specialty leasehold improvements includes the original purchase price plus acquisition fees and other capitalized costs paid to an affiliate of the former general partners. According to the Partnership Agreement, the former general partners were to commit 80% of the original offering proceeds to investment in properties. Upon the close of the offering, approximately 75% of the original proceeds was invested in the Partnership's properties. The current General Partner receives a fee for managing the Partnership equal to 4% of the gross receipts, with a maximum reimbursement for office rent and related office overhead of $25,000 between the three original affiliated Partnerships. 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 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 $55,185 to date on the amounts recovered, which has been offset against the 4% minimum fee. The Partnership owns two (2) restaurants, Kentucky Fried Chicken and Mulberry Street Grill restaurant, which are located on parcels of land where it has entered into long-term ground leases. One (1) of these leases is paid by the tenant, Kentucky Fried Chicken, 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. 21 During the Fourth Quarter of 2000, Management negotiated the extension of the leases on the ten(10) Wendy's restaurants from original expirations ranging from 2008 to 2009, to new expiration dates of November 2016. 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. 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, 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 22 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.) Effective June 1, 1993, the Partnership Agreement was amended to (i) change the definition of "Distribution Quarter" to be consistent with calendar quarters, and (ii) change the distribution provisions to subordinate the General Partner's share of distributions from Net Cash Receipts and Net Proceeds, except to the extent necessary for the General Partner to pay its federal and state income taxes on Partnership income allocated to the General Partner. Because these amendments do not adversely affect the rights of the Limited Partners, pursuant to section 10.2 of the Partnership Agreement, the amendments were made by the General Partner without a vote of the Limited Partners. 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: 23 Year ending December 31, 2001 $ 2,118,563 2002 2,098,296 2003 2,050,756 2004 2,074,663 2005 2,085,617 Thereafter 15,627,591 ----------- $26,055,486 =========== Percentage rentals included in rental income in 2000, 1999, and 1998 were $548,180, $552,924, and $586,429, 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 37% of total base rents for 2000. 6. TRANSACTIONS WITH CURRENT GENERAL PARTNER: ------------------------------------------ Amounts incurred to the current General Partner for the years ended December 31, 2000, 1999, and 1998, are as follows:
Incurred Incurred Incurred for the year ended for the year ended for the year ended Current General Partner December 31, 2000 December 31, 1999 December 31, 1998 ----------------------- ------------------ ------------------ ------------------ Management fees $187,038 $183,074 $180,450 Disposition fees 0 0 75,750 Restoration fees 148 260 0 Overhead allowance 15,102 14,791 14,558 Leasing Commissions 190,156 6,319 13,976 Reimbursement for out-of-pocket expenses 9,983 8,119 28,906 Cash distribution 6,887 8,190 8,838 -------- -------- -------- $409,314 $220,753 $322,478 ======== ======== ========
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 original Partnerships. Fifty percent (50%) of the total amount paid to the 24 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, 2000, 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, 2000. Funds are invested in U.S. Treasury securities. In addition, $106,153 of earnings have been credited to the Trust as of December 31, 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 February 15, 2001, the Partnership made distributions to the Limited Partners of $575,000 amounting to $12.42 per Interest. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None 25 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 50 - 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. 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: William Arnold - Investment Broker. Mr. Arnold works as a financial planner and investment advisor at his company, Arnold & Company. Mr. Arnold graduated with a Master's Degree from the University of Wisconsin and is a Certified Financial Planner. 26 Jesse Small - Self Employed. Mr. Small is the President of a small Accounting Firm. In addition to being a CPA, he has a Master's Degree in Economics. Mr. Small is a Limited Partner representing DiVall 2. Richard W. Otte - Editorial Writer. Mr. Otte is in his seventh 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 Kramer - Retired. Mr. Kramer is now retired, but previously worked as Tax Litigation Manager for Phillips Petroleum Company. His education includes undergraduate and MBA degrees from Harvard and a J.D. Degree from South Texas College of Law. Mr. Kramer 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. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) As of December 31, 2000, 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, 2000, 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 27 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, 2000, the minimum management fee and the maximum reimbursement for office rent and overhead increased by 2.2% 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 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, 2000 the Partnership had fully funded the Trust. The Partnership paid the following fees and reimbursements to management in 2000: The Provo Group, Inc. --------------------- Management Fees $187,038 Restoration Fees 148 Leasing Commissions 190,156 Office Overhead Allowance 15,102 Direct Cost Reimbursements 9,983 -------- 2000 Total $402,427 ======== 28 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, 2000 and 1999 Statements of Income for the Years Ended December 31, 2000, 1999, and 1998 Statements of Partners' Capital for the Years Ended December 31, 2000, 1999, and 1998 Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998 Notes to Financial Statements 2. Financial Statement Schedules Schedule III - Real Estate and Accumulated Depreciation All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and, therefore, have been omitted. 3. Listing of Exhibits 3.1 Agreement of Limited Partnership dated as of November 18, 1987, amended as of November 25, 1987, and February 20, 1988, filed as Exhibit 3A to Amendment No. 1 to the Partnership's Registration Statement on Form S-11 as filed on February 22, 1988, and incorporated herein by reference. 3.2 Amendments to Amended Agreement of Limited Partnership dated as of June 21, 1988, included as part of Supplement dated August 15, 1988, filed under Rule 424(b)(3), incorporated herein by reference. 29 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, 2001 regarding the Fourth Quarter 2000 distribution. (b) Reports on Form 8-K: The Registrant filed no reports on Form 8-K during the fourth quarter of fiscal year 2000. 30 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2000
Gross amount at which Initial cost to Partnership carried at end of year (A) ----------------------------- ---------------------------------------- Costs capitalized Building subsequent and to Building and Property Encumbrances Land Improvements acquisitions Land Improvements Total ----------------------------------------------------------------------------------------------------------------------------------- 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 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 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 13,800 - 341,157 341,157 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 $ 7,599,395 $12,512,546 $ 441,010 $ 7,298,596 $11,902,463 $ 19,201,059 ==================================================================================================== Life on which depreciation in in latest statement of operations Accumulated Date of Date is computed depreciation construction acquired (years) ------------------------------------------------------------------------------------------------------------ Palm Gardens, Florida (1) $ 104,487 - 3/11/88 31.5 Phoenix, Arizona 206,152 - 6/15/88 31.5 N. Richland Hills, Texas (2) 247,219 - 7/15/88 31.5 South Milwaukee, Wisconsin 232,574 1986 8/1/88 31.5 Phoenix, Arizona (2) 208,909 - 8/15/88 31.5 Santa Fe, New Mexico 176,197 - 10/10/88 31.5 Augusta, Georgia 181,669 - 12/22/88 31.5 Charleston, South Carolina 135,218 - 12/22/88 31.5 Park Forest, Illinois 164,445 - 12/22/88 31.5 Aiken, South Carolina 155,044 - 2/21/89 31.5 Augusta, Georgia 164,528 - 2/21/89 31.5 Mt. Pleasant, South Carolina 122,311 - 2/21/89 31.5 Charleston, South Carolina 105,562 - 2/21/89 31.5 Aiken, South Carolina 188,822 - 3/14/89 31.5 Des Moines, Iowa (2) 263,092 1989 8/1/89 31.5 Hartford, Wisconsin 195,853 - 4/28/89 31.5 Milwaukee, Wisconsin (2) 238,547 - 8/2/89 31.5 North Augusta, Georgia 153,313 - 12/29/89 31.5 Charleston, South Carolina 110,451 - 12/29/89 31.5 Martinez, Georgia 137,685 - 12/29/89 31.5 Grand Forks, North Dakota 212,263 - 12/28/89 31.5 Phoenix, Arizona (2) 176,297 - 1/1/90 31.5 Phoenix, Arizona 315,817 - 1/1/90 31.5 Ogden, Utah 192,339 - 1/31/90 31.5 Fond du Lac, Wisconsin 208,515 - 1/5/90 31.5 Twin Falls, Idaho (2) 175,664 - 3/21/90 31.5 Columbus, Ohio 252,229 - 6/1/90 31.5 ----------- $ 5,025,202 ===========
(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) Approximates aggregate costs for federal income tax purposes. 31 DIVALL INSURED INCOME PROPERTIES 2 LIMITED PARTNERSHIP SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2000 (B) Reconciliation of "Real Estate and Accumulated Depreciation":
Year Ended Year Ended Year Ended Year Ended December 31, December 31, December 31, December 31, Investment in Real Estate 2000 1999 Accumulated Depreciation 2000 1999 ------------------------- ---- ---- ------------------------ ----- ---------- Balance at beginning of year $19,496,809 $20,143,165 Balance at beginning of year $4,817,399 $4,671,630 Additions charged to costs and Additions 0 13,800 expenses 350,394 364,349 Deletions: Due to disposition (295,750) (660,156) Deletion due to real estate disposition (142,591) (218,580) Due to property write-downs 0 0 ----------- ----------- ---------- ---------- Balance at end of year $19,201,059 $19,496,809 Balance at end of year $5,025,202 $4,817,399 =========== =========== ========== ==========
32 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: March 26, 2001 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: March 26, 2001 By: _________________________________________________ Diane Conley Controller Date: March 26, 2001 33 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, 2001 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, 2001 By: /s/ Diane Conley ------------------------------------------------ Diane Conley Controller Date: March 26, 2001 34