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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark one)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003 .

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                to                                .

Commission file no. 0-16851

DEL TACO RESTAURANT PROPERTIES III

a California limited partnership
(Exact name of registrant as specified in its charter)
     
California
(State or other jurisdiction of
incorporation or organization)
  33-0139247
(I.R.S. Employer
Identification Number)
 
25521 Commercentre Drive, Lake Forest, California
(Address of principal executive offices)
  92630
(Zip Code)

(949) 462-9300

(Registrant’s telephone number, including area code)

     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 for 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 o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)  Yes o  No x




TABLE OF CONTENTS

CONDENSED BALANCE SHEETS
CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF CASH FLOWS
NOTES TO CONDENSED FINANCIAL STATEMENTS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
Exhibit Index
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1


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INDEX

DEL TACO RESTAURANT PROPERTIES III

           
PART I. FINANCIAL INFORMATION   PAGE NUMBER

 
Item 1. Financial Statements
       
  Condensed Balance Sheets at September 30, 2003 and December 31, 2002 (Unaudited)     3  
  Condensed Statements of Income for the three and nine months ended September 30, 2003 and 2002 (Unaudited)     4  
  Condensed Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 (Unaudited)     5  
Notes to Condensed Financial Statements
    6  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    8  
Item 3. Quantitative and Qualitative Disclosures About Market Risk
    11  
Item 4. Controls and Procedures
    12  
PART II. OTHER INFORMATION
       
Item 6. Exhibits and Reports on Form 8-K
    13  
SIGNATURE
    14  

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DEL TACO RESTAURANT PROPERTIES III

CONDENSED BALANCE SHEETS

(Unaudited)

                     
        September 30,   December 31,
        2003   2002
       
 
ASSETS
CURRENT ASSETS:
               
 
Cash
  $ 299,690     $ 262,652  
 
Receivable from Del Taco, Inc.
    82,113       75,394  
 
Deposits
    1,466       1,312  
 
   
     
 
   
Total current assets
    383,269       339,358  
 
   
     
 
RESTRICTED CASH
    90,585       97,291  
 
   
     
 
PROPERTY AND EQUIPMENT:
               
 
Land and improvements
    4,405,966       4,405,966  
 
Buildings and improvements
    2,954,959       2,954,959  
 
Machinery and equipment
    1,522,922       1,522,922  
 
   
     
 
 
    8,883,847       8,883,847  
 
Less—accumulated depreciation
    3,217,146       3,132,216  
 
   
     
 
 
    5,666,701       5,751,631  
 
   
     
 
 
  $ 6,140,555     $ 6,188,280  
 
   
     
 
LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES:
               
 
Payable to limited partners
  $ 53,301     $ 46,094  
 
Accounts payable
    7,257       7,257  
 
   
     
 
   
Total current liabilities
    60,558       53,351  
 
   
     
 
OBLIGATION TO GENERAL PARTNER
    577,510       577,510  
 
   
     
 
PARTNERS’ EQUITY:
               
 
Limited partners
    5,542,922       5,597,372  
 
General partner-Del Taco, Inc.
    (40,435 )     (39,953 )
 
   
     
 
 
    5,502,487       5,557,419  
 
   
     
 
 
  $ 6,140,555     $ 6,188,280  
 
   
     
 

See accompanying notes to condensed financial statements.

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DEL TACO RESTAURANT PROPERTIES III

CONDENSED STATEMENTS OF INCOME

(Unaudited)

                                     
        Three Months Ended   Nine Months Ended
        September 30,   September 30,
       
 
        2003   2002   2003   2002
       
 
 
 
RENTAL REVENUES
  $ 249,643     $ 225,608     $ 702,602     $ 657,691  
 
   
     
     
     
 
EXPENSES:
                               
 
General and administrative
    10,744       8,852       62,914       51,318  
 
Depreciation
    28,310       28,310       84,931       84,931  
 
   
     
     
     
 
   
Operating income
    210,589       188,446       554,757       521,442  
OTHER INCOME:
                               
 
Interest
    776       1,226       2,657       3,488  
 
Other
    425       900       1,851       1,975  
 
   
     
     
     
 
   
Net income
  $ 211,790     $ 190,572     $ 559,265     $ 526,905  
 
   
     
     
     
 
 
Net income per limited partnership unit
  $ 4.43     $ 3.99     $ 11.70     $ 11.02  
 
   
     
     
     
 
 
Number of units used in computing per unit amounts
    47,291       47,331       47,304       47,331  
 
   
     
     
     
 

See accompanying notes to condensed financial statements.

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DEL TACO RESTAURANT PROPERTIES III

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

                     
        Nine Months Ended
        September 30,
       
        2003   2002
       
 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
  $ 559,265     $ 526,905  
Adjustments to reconcile net income to net cash provided by operating activities:
               
 
Depreciation
    84,931       84,931  
 
Increase in receivable from Del Taco, Inc.
    (6,719 )     (807 )
 
Increase in deposits
    (154 )     (467 )
 
(Increase) decrease in accounts payable and payable to limited partners
    7,206       (1,495 )
 
   
     
 
   
Net cash provided by operating activities
    644,529       609,067  
CASH FLOWS FROM INVESTING ACTIVITIES:
               
 
Decrease in restricted cash
    6,706        
 
   
     
 
   
Net cash provided by investing activities
    6,706        
 
   
     
 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Cash distributions to partners
    (607,491 )     (586,100 )
Redemption of limited partnership units
    (6,706 )      
 
   
     
 
   
Net cash used by financing activities
    (614,197 )     (586,100 )
 
   
     
 
Net increase in cash
    37,038       22,967  
Beginning cash balance
    262,652       248,445  
 
   
     
 
Ending cash balance
  $ 299,690     $ 271,412  
 
   
     
 

See accompanying notes to condensed financial statements.

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DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2003

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should therefore be read in conjunction with the financial statements and notes thereto contained in the annual report on Form 10-K for the year ended December 31, 2002 for Del Taco Restaurant Properties III (the Partnership or the Company). In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the Partnership’s financial position at September 30, 2003 and December 31, 2002, the results of operations for the three and nine month periods ended September 30, 2003 and 2002 and cash flows for the nine month periods ended September 30, 2003 and 2002 have been included. Operating results for the three and nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

NOTE 2 — RESTRICTED CASH

At September 30, 2003 the partnership had a restricted cash balance of $90,585. The restricted cash is a death and disability redemption fund. Such fund is maintained in an interest bearing account at a major commercial bank. A limited partner has the right, under certain circumstances involving such limited partner’s death or disability, to tender to the partnership for redemption all of the units owned of record by such limited partner. The redemption price will be equal to the partners capital account balance as of the redemption date. The death and disability fund was established in 1987. The fund was limited to two percent of the gross proceeds from sale of the limited partnership units. Requests for redemption made after the funds in the death and disability fund are depleted will not be accepted. On April 1, 2003, the Partnership redeemed 40 limited partnership units for $6,706.

NOTE 3 — NET INCOME PER LIMITED PARTNERSHIP UNIT

Net income per limited partnership unit is based upon the weighted average number of units outstanding during the periods presented which amounted to 47,331 in 2002, 47,291 for the three months ended September 30, 2003 and 47,304 for the nine months ended September 30, 2003.

Pursuant to the partnership agreement, annual partnership income or loss is allocated one percent to Del Taco, Inc. (Del Taco or the General Partner) and 99 percent to the limited partners. Partnership gains from any sale or refinancing will be allocated one percent to the General Partner and 99 percent to the limited partners until allocated gains and profits equal losses, distributions and syndication costs, and until each class of limited partners receive their priority return as defined in the partnership agreement. Additional gains will be allocated 15 percent to the General Partner and 85 percent to the limited partners.

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DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS — CONTINUED

SEPTEMBER 30, 2003

NOTE 4 — LEASING ACTIVITIES

The Partnership leases certain properties for operation of restaurants to Del Taco on a triple net basis. The leases are for terms of 35 years commencing with the completion of the restaurant facility located on each property and require monthly rentals equal to 12 percent of the gross sales of the restaurants. The leases terminate in the years 2021 to 2024. There is no minimum rental under any of the leases.

For the three months ended September 30, 2003, the nine restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $2,080,353 and unaudited net income of $144,823, as compared to $1,880,067 and $124,836, respectively, for the corresponding period in 2002. Net income by restaurant includes charges for general and administrative expenses incurred in connection with supervision of restaurant operations and interest expense.

For the nine months ended September 30, 2003, the nine restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $5,855,015 and unaudited net income of $409,760, as compared to $5,480,760 and $345,850, respectively, for the corresponding period in 2002.

NOTE 5 — TRANSACTIONS WITH DEL TACO

The receivable from Del Taco, Inc. consists primarily of rent accrued for the month of September. The September rent was collected in October 2003.

Del Taco serves in the capacity of general partner in other partnerships which are engaged in the business of operating restaurants, and three other partnerships which were formed for the purpose of acquiring real property in California for construction of Mexican-American restaurants for lease under long-term agreements to Del Taco, Inc. for operation under the Del Taco trade name.

In addition, see Note 6 with respect to certain distributions to the General Partner.

NOTE 6 — DISTRIBUTIONS

On October 15, 2003, a distribution to the limited partners of $239,289, or approximately $5.06 per limited partnership unit, was approved. Such distribution was paid on October 31, 2003. The General Partner also received a distribution of $2,417 with respect to its 1% partnership interest. Total cash distributions paid in January, April and July 2003 were $211,834, $186,378 and $209,279, respectively.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources

Del Taco Restaurant Properties III (the Partnership or the Company) offered limited partnership units for sale between February 1986 and June 1987. 14.7% of the $12 million raised through sale of limited partnership units was used to pay commissions to brokers and to reimburse Del Taco, Inc. (the General Partner or Del Taco) for offering costs incurred. Approximately $9.5 million of the remaining funds were used to acquire sites and build ten restaurants. In February of 1992, approximately $281,000 raised during the offering but not required to acquire sites and build restaurants was distributed to the limited partners. One restaurant was sold in November 1997.

The nine restaurants leased to Del Taco make up almost all of the income producing assets of the Partnership. Therefore, the business of the Partnership is almost entirely dependent on the success of the Del Taco trade name restaurants that lease the properties. The success of the restaurants is dependent on a large variety of factors, including, but not limited to, consumer demand and preference for fast food, in general, and for Mexican-American food in particular.

As described in Note 2 to the Notes to the Financial Statements, the Partnership has a death and disability redemption fund totaling $90,585 at September 30, 2003. Investors should contact the General Partner with all questions regarding the eligibility of a limited partner or the estate of a deceased limited partner to participate in the redemption fund. On April 1, 2003, the Partnership redeemed 40 limited partnership units for $6,706.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — continued

Results of Operations

The Partnership owns nine properties that are under long-term lease to Del Taco for restaurant operations.

The following table sets forth rental revenue earned by restaurant for the three and nine months ended September 30, 2003 and 2002:

                                   
      September 30,   September 30,
     
 
      2003   2002   2003   2002
     
 
 
 
Rancho California Plaza, Temecula, CA
  $ 39,333     $ 35,514     $ 110,153     $ 99,677  
East Vista Way, Vista, CA
    22,697       20,723       64,323       62,396  
Plaza at Puente Hills, Industry, CA
    17,871       16,041       50,096       45,575  
4th Street, Perris, CA
    35,572       31,957       100,646       93,609  
Foothill Blvd., Upland, CA
    28,562       26,189       81,086       76,069  
East Valley Blvd., Walnut, CA
    15,695       14,012       44,972       43,092  
Lassen Street, Chatsworth, CA
    36,294       34,248       102,959       99,293  
Hesperia Road, Victorville, CA
    33,213       28,543       92,299       85,490  
W. Sepulveda Blvd., Los Angeles, CA
    20,406       18,381       56,068       52,490  
 
   
     
     
     
 
 
Total
  $ 249,643     $ 225,608     $ 702,602     $ 657,691  
 
   
     
     
     
 

The Partnership receives rental revenues equal to 12 percent of gross sales from the restaurants. The Partnership earned rental revenue of $249,643 during the three month period ended September 30, 2003, which represents an increase of $24,035 from 2002. The Partnership earned rental revenue of 702,602 during the nine month period ended September 30, 2003, which represents an increase of $44,911 from 2002. The changes in rental revenue between 2003 and 2002 are directly attributable to increases in sales levels at the restaurants under lease.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – continued

The following table breaks down general and administrative expenses by type of expense:

                                 
    Percentage of Total
    General & Administrative Expense
   
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
   
 
    2003   2002   2003   2002
   
 
 
 
Accounting fees
    38.57 %     54.35 %     63.62 %     57.75 %
Distribution of information to Limited Partners
    61.43 %     45.65 %     36.38 %     42.25 %
 
   
     
     
     
 
 
    100.00 %     100.00 %     100.00 %     100.00 %
 
   
     
     
     
 

General and administrative costs for the three and nine month periods ended September 30, increased from 2002 to 2003 due to costs incurred in changing auditors and increased costs for printing and mailing, and audit and tax preparation fees.

For the three month period ended September 30, 2003 net income increased by $21,218 from 2002 to 2003 due to the $24,035 increase in revenues, which was partially offset by the $1,892 increase in general and administrative expenses and the $924 decrease in interest and other income. For the nine month period ended September 30, 2003 net income increased by $32,360 from 2002 to 2003 due to the $44,911 increase in revenues, which was partially offset by the $11,596 increase in general and administrative expenses and the $955 decrease in interest and other income.

Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“Interpretation 45”), an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34. Interpretation 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Interpretation 45’s initial recognition and initial measurement provisions are effective on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted the disclosure requirements of Interpretation 45 effective December 31, 2002 and has not entered into any guarantees since December 31, 2002.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — continued

Recent Accounting Pronouncements – (Continued)

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“Interpretation 46”), an interpretation of Accounting Research Bulletin ARB No. 51. Interpretation 46 addresses consolidation by business enterprises of variable interest entities. Interpretation 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first year or interim period beginning after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company believes it has no variable interest entities to which Interpretation 46 would apply.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations, as well as disclosures included elsewhere in this report on Form 10-Q are based upon the Partnerships financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Partnership believes the critical accounting policies that most impact the financial statements are described below. A summary of the significant accounting policies of the Partnership can be found in Note 1 to the Financial Statements which is included in the Partnership’s December 31, 2002 Form 10-K.

Property and Equipment: Property and equipment is stated at cost. Depreciation is computed using the straight-line method over estimated useful lives which are 20 years for land improvements, 35 years for buildings and improvements, and 10 years for machinery and equipment.

The Partnership accounts for property and equipment in accordance with Statement of Financial Accounting Standards No. (SFAS) 144, “Accounting for the Impairment or Disposal of Long Lived Assets.” SFAS 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In evaluating long-lived assets held for use, an impairment loss is recognized if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the asset. Once a determination has been made that an impairment loss should be recognized for long-lived assets, various assumptions and estimates are used to determine fair value including, among others, estimated costs of construction and development, recent sales of comparable properties and the opinions of fair value prepared by independent real estate appraisers. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

None.

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Item 4. Controls and Procedures

  (a)   Evaluation of disclosure controls and procedures:

    As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its subsidiaries) required to be included in our periodic Securities and Exchange Commission filings.

  (b)   Changes in internal controls:

    There were no significant changes in the Company’s internal controls over financial reporting that occurred during our most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

  (c)   Asset-Backed issuers:

    Not applicable.

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PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

  (a)   Exhibits

    31.1 Kevin K. Moriarty’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

    31.2 Robert J. Terrano’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

    32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

  (b)   Reports

    None

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SIGNATURE

Pursuant to the requirements 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.

         
        DEL TACO RESTAURANT PROPERTIES III
        (a California limited partnership)
        Registrant
         
        Del Taco, Inc.
        General Partner
         
Date:   November 14, 2003   /s/ Robert J. Terrano
   
 
        Robert J. Terrano
        Executive Vice President,
Chief Financial Officer

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EXHIBIT INDEX

    31.1 Kevin K. Moriarty’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

    31.2 Robert J. Terrano’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

    32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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