UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-Q

 

 

Commission file no. 0-16851

 

DEL TACO RESTAURANT PROPERTIES III

(A California limited partnership)

(Exact name of registrant as specified in its charter)

 

 

(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 þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Form S-11 Registration Statement filed December 17, 1982 are incorporated by reference into Part IV of this report.

 

INDEX

DEL TACO RESTAURANT PROPERTIES III

		PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Balance Sheets at March 31, 2011 (Unaudited) and December 31, 2010			3
Condensed Statements of Income for the three months ended March 31, 2011 and 2010 (Unaudited)			4
Condensed Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (Unaudited)			5
Notes to Condensed Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			9
Item 3. Quantitative and Qualitative Disclosures About Market Risk			12
Item 4. Controls and Procedures			13
PART II. OTHER INFORMATION
Item 6. Exhibits			14
SIGNATURE			15
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

DEL TACO RESTAURANT PROPERTIES III

CONDENSED BALANCE SHEETS

		March 31,				December 31,
		2011				2010
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash		$	294,096			$	309,131
Receivable from Del Taco LLC			90,669				88,135
Deposits			2,228				2,440
Total current assets			386,993				399,706
RESTRICTED CASH			86,017				86,017
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			4,058,740				4,037,633
			4,825,107				4,846,214
		$	5,298,117			$	5,331,937
LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES:
Payable to limited partners		$	66,421			$	62,605
Accounts payable			28,050				14,543
Total current liabilities			94,471				77,148
OBLIGATION TO GENERAL PARTNER			577,510				577,510
PARTNERS’ EQUITY:
Limited partners; 47,261 units outstanding at March 31, 2011 and December 31, 2010			4,675,287				4,725,919
General partner-Del Taco LLC			(49,151	)			(48,640	)
			4,626,136				4,677,279
		$	5,298,117			$	5,331,937

See accompanying notes to condensed financial statements.

DEL TACO RESTAURANT PROPERTIES III

CONDENSED STATEMENTS OF INCOME

(Unaudited)

		Three Months Ended
		March 31,
		2011				2010
RENTAL REVENUES		$	250,437			$	249,723
EXPENSES:
General and administrative			39,428				38,007
Depreciation			21,107				28,310
			60,535				66,317
Operating income			189,902				183,406
OTHER INCOME:
Interest			122				130
Other			675				225
Net income		$	190,699			$	183,761
Net income per limited partnership unit (Note 3)		$	3.99			$	3.85
Number of units used in computing per unit amounts			47,261				47,261

See accompanying notes to condensed financial statements.

DEL TACO RESTAURANT PROPERTIES III

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

		Three Months Ended
		March 31,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	190,699			$	183,761
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			21,107				28,310
Changes in operating assets and liabilities:
Receivable from Del Taco LLC			(2,534	)			(3,006	)
Deposits			212				93
Payable to limited partners			3,816				(23	)
Accounts payable			13,507				3,866
Net cash provided by operating activities			226,807				213,001
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to partners			(241,842	)			(246,925	)
Net change in cash			(15,035	)			(33,924	)
Beginning cash balance			309,131				321,805
Ending cash balance		$	294,096			$	287,881

See accompanying notes to condensed financial statements.

DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2011

UNAUDITED

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, 2010 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 March 31, 2011, the results of operations and cash flows for the three month periods ended March 31, 2011 and 2010 have been included. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. Amounts related to the disclosure of December 31, 2010 balances within these condensed financial statements were derived from the audited 2010 financial statements.

NOTE 2 — RESTRICTED CASH

At March 31, 2011 and December 31, 2010, the Partnership had a restricted cash balance of $86,017. The restricted cash results from a death and disability fund that the Company is required to maintain under the terms of the Partnership agreement. 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.

DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS — CONTINUED

FOR THE THREE MONTHS ENDED MARCH 31, 2011

UNAUDITED

NOTE 3 — NET INCOME PER LIMITED PARTNERSHIP UNIT

Net income per limited partnership unit is based on net income attributable to the limited partners (after 1% allocation to the general partner) using the weighted average number of units outstanding during the periods presented which amounted to 47,261 in 2011 and 2010.

Pursuant to the partnership agreement, annual partnership income or loss is allocated one percent to Del Taco LLC, formerly known as 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.

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 expire in the years 2022 to 2024. Pursuant to the lease agreements, minimum rentals of $3,500 per month are due to the Partnership during the first six months of any non-operating period caused by an insured casualty loss.

For the three months ended March 31, 2011, the nine restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $2,086,979 and unaudited net losses of $25,010, as compared to unaudited sales of $2,081,025 and unaudited net losses of $56,903, respectively, for the corresponding period in 2010. Net income or loss of each restaurant includes charges for general and administrative expenses incurred in connection with supervision of restaurant operations and interest expense and the decrease in net loss from the corresponding period of the prior year primarily relates to reduced interest charges due to a decrease in debt and related interest rate.

DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS — CONTINUED

FOR THE THREE MONTHS ENDED MARCH 31, 2011

UNAUDITED

NOTE 5 — TRANSACTIONS WITH DEL TACO

The receivable from Del Taco consists primarily of rent accrued for the month of March 2011. The March rent receivable was collected in April 2011.

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 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

Total cash distributions declared and paid in January 2011 were $241,842. On April 29, 2011, a distribution to the limited partners of $220,739, or approximately $4.67 per limited partnership unit, was declared. Such distribution was paid on May 6, 2011. The General Partner also received a distribution of $2,230 with respect to its 1% partnership interest in May 2011.

NOTE 7 — PAYABLE TO LIMITED PARTNERS

Payable to limited partners represents a reclassification from cash for distribution checks made to limited partners that have remained outstanding for six months or longer.

NOTE 8 — CONCENTRATION OF RISK

The nine restaurants leased to Del Taco make up all of the income producing assets of the Partnership and contributed all of the Partnership’s rental revenues during the three months ended March 31, 2011 and 2010. Therefore, the business of the Partnership is entirely dependent on the success of the Del Taco trade name restaurants that lease the properties.

The Partnership maintains substantially all of its cash and cash equivalents at one major commercial bank. The cash balance is in excess of the Federal Depository Insurance Commission’s limits. The Federal Depository Insurance Commission’s limits were $250,000 at March 31, 2011 and 2010. At March 31, 2011 and December 31, 2010, the Partnership had approximately $398,000 and $411,000, respectively, on deposit at one financial institution.

DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS — CONTINUED

FOR THE THREE MONTHS ENDED MARCH 31, 2011

UNAUDITED

NOTE 9 — SUBSEQUENT EVENTS

On May 3, 2011, an automobile accident resulted in a total casualty loss of the Plaza at Puente Hills restaurant in Industry, California. The location is covered by insurance and the General Partner is currently evaluating the expected insurance recovery as well as future plans for this location pursuant to the lease and partnership agreements. The restaurant is currently closed until such determination has been made. Pursuant to the lease agreement, minimum rentals of $3,500 per month are due to the Partnership during the first six months of any non-operating period caused by an insured casualty loss. No additional revenues are expected to be generated from this location in the near term.

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. $12 million was raised through the sale of limited partnership units and used to acquire sites and build ten restaurants and also to pay commissions to brokers and to reimburse Del Taco LLC (Del Taco or the General Partner) for offering costs incurred. 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 all of the income producing assets of the Partnership. Therefore, the business of the Partnership is entirely dependent on the success of the Del Taco trade name and the restaurants that lease the Properties. The success of the restaurants is dependent on a large variety of factors, including, but not limited to, competition, 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 Condensed Financial Statements, the Partnership has a death and disability redemption fund totaling $86,017 at March 31, 2011 and December 31, 2010, respectively. 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.

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 months ended March 31, 2011 (unaudited):

		Three Months Ended
		March 31,
		2011				2010
Rancho California Plaza, Temecula, CA		$	40,756			$	41,522
East Vista Way, Vista, CA			25,226				24,139
Plaza at Puente Hills, Industry, CA			17,936				18,345
4th Street, Perris, CA			27,930				28,990
Foothill Blvd., Upland, CA			29,144				29,541
East Valley Blvd., Walnut, CA			17,717				18,470
Lassen Street, Chatsworth, CA			35,031				35,302
Hesperia Road, Victorville, CA			35,333				33,304
W. Sepulveda Blvd., Los Angeles, CA			21,364				20,110
Total		$	250,437			$	249,723

Item 2.

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

The Partnership receives rental revenues equal to 12 percent of gross sales from the restaurants. The Partnership earned rental revenue of $250,437 during the three month period ended March 31, 2011, which represents an increase of $714 from 2010. The changes in rental revenues between 2010 and 2011 are directly attributable to changes in sales levels at the restaurants under lease due to local competitive and industry factors.

The increase in accounts payable from December 31, 2010 is a seasonal increase due to the timing of payment for certain annual accounting, audit and tax services.

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

		Percent of Total
		General & Administrative Expense
		Three Months Ended
		March 31,
		2011				2010
Accounting fees			76.86	%			76.50	%
Distribution of information to limited partners			23.14	%			23.50	%
			100.00	%			100.00	%

General and administrative costs increased from 2010 to 2011 primarily due to increased accounting fees and costs for printing and the distribution of information to limited partners. Depreciation expense decreased as land improvements became fully depreciated in the fourth quarter of 2010.

Net income increased by $6,938 from 2010 to 2011 due to the increases in revenues of $714, the increase interest and other income of $442 and the decrease in depreciation expense of $7,203, partially offset by the increase in general and administrative expenses of $1,421.

Significant Recent Accounting Pronouncements

None

Off-Balance Sheet Arrangements

None

Item 2.

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

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 Partnership’s 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, 2010 Form 10-K.

Revenue Recognition: Rental revenue is recognized based on 12 percent of gross sales of the restaurants for the corresponding period, and is earned at the point of sale.

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 authoritative guidance issued by the Financial Accounting Standards Board that requires 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.

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 the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s 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.

PART II.       OTHER INFORMATION

There is no information required to be reported for any items under Part II, except as follows:

Item 6. Exhibits

	31.1			Paul J. B. Murphy, III’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2			Steven L. Brake’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1			Certification pursuant to Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX

Exhibit No.				Description
	31.1			Paul J. B. Murphy, III’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2			Steven L. Brake’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1			Certification pursuant to Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002