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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from                      to                     

Commission file no. 0-16190

 

 

DEL TACO RESTAURANT PROPERTIES II

(A California limited partnership)

(Exact name of registrant as specified in its charter)

 

 

 

California   33-0064245

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

25521 Commercentre Drive

Lake Forest, California

  92630
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (949) 462-9300

Securities registered pursuant to section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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.    ¨

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.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    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  ¨    No  x

 

 

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.

 

 

 


Table of Contents

PART I

 

Item 1. Business

Del Taco Restaurant Properties II (the Partnership, us, we or our) is a publicly-held limited partnership organized under the California Uniform Limited Partnership Act. The Partnership’s General Partner is Del Taco LLC, a California limited liability company (Del Taco or the General Partner). The Partnership sold 27,006 units totaling $6.751 million through an offering of limited partnership units from September 1984 through December 1985. The term of the partnership agreement is until April 30, 2025, unless terminated earlier by means provided in the partnership agreement.

The business of the Partnership is ownership and leasing of restaurants in California to Del Taco. The Partnership acquired land and constructed seven Mexican-American restaurants for long-term lease to Del Taco. Two properties were sold in 1994. Each property is leased for 35 years on a triple net basis. Rent is equal to twelve percent of gross sales of the restaurants. As of December 31, 2013, the Partnership had a total of five properties leased to Del Taco.

The Partnership has no full-time employees. The Partnership agreement assigns full authority for general management and supervision of the business affairs of the Partnership to the General Partner. The General Partner has a one percent interest in the profits or losses and distributions of the Partnership. Limited partners have no right to participate in the day to day management or conduct of the Partnership’s business affairs.

 

Item 1A. Risk Factors

None.

 

Item 2. Properties

The Partnership acquired seven properties with proceeds obtained from the sale of partnership units:

 

Address

  

City, State

   Date of Acquisition    Restaurant Constructed    Date of Commencement
of Operation (1)
Bear Valley Road    Victorville, CA    February 4, 1986    60 seat with drive
through service window
   June 13, 1986
West Valley Boulevard    Colton, CA    March 11, 1986    60 seat with drive
through service window
   June 24, 1986
Palmdale Boulevard    Palmdale, CA    December 12, 1986    60 seat with drive
through service window
   May 7, 1987
South Gate Town Center    South Gate, CA    January 28, 1987    60 seat with drive
through service window
   May 28, 1987 (2)
Main Avenue    Fallbrook, CA    March 10, 1987    60 seat with drive
through service window
   August 19, 1987 (3)
De Anza Country Shopping Center    Pedley, CA    April 13, 1987    60 seat with drive
through service window
   October 28, 1987
Varner Road    Thousand Palms, CA    October 14, 1987    60 seat with drive
through service window
   April 28, 1988

See also Schedule III – Real Estate and Accumulated Depreciation included in Item 8.

 

(1) Commencement of operation is the first date Del Taco, as lessee, operated the facility on the site as a Del Taco restaurant.
(2) In May 1994, the South Gate property was sold yielding net proceeds to the Partnership of $497,202.
(3) In November 1994, the Fallbrook property was sold yielding net proceeds to the Partnership of $357,531.

 

Item 3. Legal Proceedings

The Partnership is not a party to any material pending legal proceedings.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

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Table of Contents

PART II

 

Item 5. Market for the Partnership’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities

The Partnership sold 27,006 ($6,751,500) limited partnership units during the public offering period ended December 31, 1985 and currently has 832 limited partners of record. There is no public market for the trading of the units. Distributions made by the Partnership to the limited partners during the past three fiscal years are described in Note 6 to the Notes to the Financial Statements contained under Item 8.

 

Item 6. Selected Financial Data

The selected financial data presented as of and for the years ended December 31, 2013, 2012, 2011, 2010, and 2009, has been derived from the audited financial statements and should be read in conjunction with the financial statements and related notes and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

     Years ended December 31,  
     2013      2012      2011      2010      2009  

Rental revenues

   $ 546,998       $ 530,622       $ 534,812       $ 546,584       $ 539,513   

General and administrative expense

     85,455         82,406         92,656         72,011         79,023   

Depreciation expense

     35,396         35,396         35,396         35,396         35,396   

Interest and other income

     2,360         2,405         2,636         2,727         2,468   

Net income

     428,507         415,225         409,396         441,904         427,562   

Net income per limited partnership unit

     15.71         15.22         15.01         16.20         15.67   

Cash distributions per limited partnership unit

     16.68         16.07         16.82         17.28         17.12   

Total assets

     1,942,486         1,975,289         2,001,990         2,033,122         2,060,970   

Long-term obligations

     —           —           —           —           —     

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of financial condition, results of operations, liquidity and capital resources, and off balance sheet arrangements and contractual obligations contained within this report on Form 10-K is more clearly understood when read in conjunction with the notes to the financial statements. The notes to the financial statements elaborate on certain terms that are used throughout this discussion and provide information about the Partnership and the basis of presentation used in this report on Form 10-K.

The five 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 Del Taco as the operator of the restaurants located at our 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.

Liquidity and Capital Resources

The Partnership offered limited partnership units for sale between September 1984 and December 1985. In total, $6.751 million was raised through the sale of limited partnership units and used to acquire sites, build seven restaurants, pay commissions to brokers and to reimburse Del Taco LLC (the General Partner or Del Taco) for offering costs incurred. Two properties were sold in 1994.

The Partnership’s only source of cash flow is rental income from the properties from the triple net leases. Such operating income has historically been and is expected to continue to be sufficient to fund the Partnership’s operating expenses. Net cash provided by operating activities in excess of the Partnership’s ongoing needs is distributed to the partners.

Off Balance Sheet Arrangements and Contractual Obligations

None.

Results of Operations

The Partnership owned seven properties that were under long-term lease to Del Taco for restaurant operations. Two properties were sold in 1994 and five are currently operating.

 

3


Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

The following table sets forth rental revenues earned by restaurant by year:

 

     Years Ended December 31,  
     2013      2012      2011  

Bear Valley Rd., Victorville, CA

   $ 73,007       $ 83,353       $ 93,802   

West Valley Blvd., Colton, CA

     147,478         136,780         132,171   

Palmdale Blvd., Palmdale, CA

     69,249         67,994         68,862   

DeAnza Country Shopping Center, Pedley, CA

     137,669         130,342         120,418   

Varner Road, Thousand Palms, CA

     119,595         112,153         119,559   
  

 

 

    

 

 

    

 

 

 

Total

   $ 546,998       $ 530,622       $ 534,812   
  

 

 

    

 

 

    

 

 

 

The Partnership earns rental revenues equal to 12 percent of gross sales from the restaurants. The Partnership earned rental revenues of $546,998 during the year ended December 31, 2013, which represents an increase of $16,376 from 2012. The changes in rental revenues between 2012 and 2013 are directly attributable to changes in sales levels at the restaurants under lease due to local competitive and industry factors.

The Partnership earned rental revenues of $530,622 during the year ended December 31, 2012, which represents a decrease of $4,190 from 2011. The changes in rental revenues between 2011 and 2012 are directly attributable to changes in sales levels at the restaurants under lease due to local competitive and industry factors.

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

 

     Percentage of Total General and Administrative Expense  
     Years Ended December 31,  
     2013     2012     2011  

Accounting fees

     53.57     53.72     49.32

Distribution of information to limited partners

     42.49        42.08        35.76   

Other

     3.94        4.20        14.92   
  

 

 

   

 

 

   

 

 

 
     100.00     100.00     100.00
  

 

 

   

 

 

   

 

 

 

General and administrative costs increased by $3,049 from 2012 to 2013. The increase was caused primarily by increased costs related to the mandatory filing process known as XBRL.

General and administrative costs decreased by $10,250 from 2011 to 2012. The decrease was caused primarily by decreased legal fees, which was partially offset by an increase in costs related to the mandatory filing process known as XBRL.

Net income increased by $13,282 from 2012 to 2013 due to the increase in revenues of $16,376, partially offset by the increase in general and administrative expenses of $3,049 and the decrease in other income of $45.

Net income increased by $5,829 from 2011 to 2012 due to the decrease in general and administrative expenses of $10,250, partially offset by the decrease in revenues of $4,190 and the decrease in other income of $231.

Recent Accounting Pronouncements

None that applies to the Partnership.

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-K 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 Item 8 of this Form 10-K.

 

4


Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Critical Accounting Policies and Estimates (Continued)

 

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 7A. Quantitative and Qualitative Disclosures About Market Risk

None.

 

5


Table of Contents
Item 8. Financial Statements and Supplementary Data

PART I. INFORMATION

 

INDEX

  

PAGE NUMBER

 

Report of Independent Registered Public Accounting Firm – Squar, Milner, Peterson, Miranda & Williamson, LLP

     7   

Balance Sheets at December 31, 2013 and 2012

     8   

Statements of Income for the years ended December 31, 2013, 2012 and 2011

     9   

Statements of Partners’ Equity for the years ended December 31, 2013, 2012 and 2011

     10   

Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011

     11   

Notes to Financial Statements

     12-15   

Schedule III – Real Estate and Accumulated Depreciation

     20   

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

To the Partners

Del Taco Restaurant Properties II:

We have audited the accompanying balance sheets of Del Taco Restaurant Properties II (a California Limited Partnership) as of December 31, 2013 and 2012 and the related statements of income, partners’ equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule of the Partnership listed in Item 15. These financial statements and financial statement schedule are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Del Taco Restaurant Properties II as of December 31, 2013 and 2012 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Squar, Milner, Peterson, Miranda & Williamson, LLP

Newport Beach, California

March 21, 2014

 

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DEL TACO RESTAURANT PROPERTIES II

BALANCE SHEETS

 

     December 31,  
     2013     2012  
ASSETS     

CURRENT ASSETS:

    

Cash

   $ 177,072      $ 179,489   

Receivable from Del Taco LLC

     48,194        43,359   

Deposits

     1,709        1,534   
  

 

 

   

 

 

 

Total current assets

     226,975        224,382   
  

 

 

   

 

 

 

PROPERTY AND EQUIPMENT:

    

Land

     1,430,345        1,430,345   

Land improvements

     375,661        375,661   

Buildings and improvements

     1,238,879        1,238,879   

Machinery and equipment

     898,950        898,950   
  

 

 

   

 

 

 
     3,943,835        3,943,835   

Less—accumulated depreciation

     2,228,324        2,192,928   
  

 

 

   

 

 

 
     1,715,511        1,750,907   
  

 

 

   

 

 

 
   $ 1,942,486      $ 1,975,289   
  

 

 

   

 

 

 
LIABILITIES AND PARTNERS’ EQUITY     

CURRENT LIABILITIES:

    

Payable to limited partners

   $ 51,253      $ 48,353   

Accounts payable

     10,955        20,183   
  

 

 

   

 

 

 

Total current liabilities

     62,208        68,536   
  

 

 

   

 

 

 

PARTNERS’ EQUITY:

    

Limited partners; 27,006 units outstanding at December 31, 2013 and 2012

     1,910,526        1,936,737   

General partner-Del Taco LLC

     (30,248     (29,984
  

 

 

   

 

 

 
     1,880,278        1,906,753   
  

 

 

   

 

 

 
   $ 1,942,486      $ 1,975,289   
  

 

 

   

 

 

 

See accompanying notes to financial statements.

 

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Table of Contents

DEL TACO RESTAURANT PROPERTIES II

STATEMENTS OF INCOME

 

     Years Ended December 31,  
     2013      2012      2011  

RENTAL REVENUES

   $ 546,998       $ 530,622       $ 534,812   
  

 

 

    

 

 

    

 

 

 

EXPENSES:

        

General and administrative

     85,455         82,406         92,656   

Depreciation

     35,396         35,396         35,396   
  

 

 

    

 

 

    

 

 

 
     120,851         117,802         128,052   
  

 

 

    

 

 

    

 

 

 

Operating income

     426,147         412,820         406,760   

OTHER INCOME:

        

Interest

     210         190         186   

Other

     2,150         2,215         2,450   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 428,507       $ 415,225       $ 409,396   
  

 

 

    

 

 

    

 

 

 

Net income per limited partnership unit (Note 2)

   $ 15.71       $ 15.22       $ 15.01   
  

 

 

    

 

 

    

 

 

 

Number of limited partnership units used in computing per unit amounts

     27,006         27,006         27,006   
  

 

 

    

 

 

    

 

 

 

See accompanying notes to financial statements.

 

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Table of Contents

DEL TACO RESTAURANT PROPERTIES II

STATEMENTS OF PARTNERS’ EQUITY

Years Ended December 31, 2013, 2012, and 2011

 

     Limited Partners     General        
     Units      Amount     Partner     Total  

Balance, December 31, 2010

     27,006       $ 2,008,573      $ (29,259   $ 1,979,314   

Net Income

     —           405,302        4,094        409,396   

Cash Distributions

     —           (454,193     (4,587     (458,780
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

     27,006         1,959,682        (29,752     1,929,930   

Net Income

     —           411,073        4,152        415,225   

Cash Distributions

     —           (434,018     (4,384     (438,402
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

     27,006         1,936,737        (29,984     1,906,753   

Net Income

     —           424,222        4,285        428,507   

Cash Distributions

     —           (450,433     (4,549     (454,982
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

     27,006       $ 1,910,526      $ (30,248   $ 1,880,278   
  

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to financial statements.

 

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DEL TACO RESTAURANT PROPERTIES II

STATEMENTS OF CASH FLOWS

 

     Years Ended December 31,  
     2013     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

   $ 428,507      $ 415,225      $ 409,396   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation

     35,396        35,396        35,396   

Changes in operating assets and liabilities:

      

Receivable from Del Taco LLC

     (4,835     922        2,669   

Deposits

     (175     —          457   

Payable to limited partners

     2,900        3,990        5,528   

Accounts payable

     (9,228     (7,514     12,724   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     452,565        448,019        466,170   

CASH FLOWS FROM FINANCING ACTIVITIES -

      

Cash distributions to partners

     (454,982     (438,402     (458,780
  

 

 

   

 

 

   

 

 

 

Net change in cash

     (2,417     9,617        7,390   

Beginning cash balance

     179,489        169,872        162,482   
  

 

 

   

 

 

   

 

 

 

Ending cash balance

   $ 177,072      $ 179,489      $ 169,872   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to financial statements.

 

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DEL TACO RESTAURANT PROPERTIES II

NOTES TO FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Partnership: Del Taco Restaurant Properties II, a California limited partnership, (the Partnership) was formed on June 20, 1984, for the purpose of acquiring real property in California for construction of seven Mexican-American restaurants to be leased under long-term agreements to Del Taco LLC (General Partner or Del Taco), for operation under the Del Taco trade name. The South Gate and Fallbrook properties were sold on May 18, 1994 and November 30, 1994, respectively. The term of the partnership agreement is until April 30, 2025 unless terminated earlier by means provided in the partnership agreement.

The Partnership has no full-time employees (see Note 4). The Partnership agreement assigns full authority for general management and supervision of the business affairs of the Partnership to the General Partner. The General Partner has a one percent interest in the profits or losses and distributions of the Partnership. Limited partners have no right to participate in the day to day management or conduct of the Partnership’s business affairs.

Distributions are made to the general and limited partners in accordance with the provisions of the Partnership agreement (see Note 2).

Basis of Accounting: The Partnership utilizes the accrual method of accounting for transactions relating to the business of the Partnership. The summary of significant accounting policies presented below is designed to assist in understanding the Partnership’s financial statements. Such financial statements and accompanying notes are the representations of the Partnership’s management, who is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) in all material respects, and have been consistently applied in preparing the accompanying financial statements.

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.

Income Taxes: No provision has been made for federal or state income taxes on partnership net income, since the Partnership is not subject to income tax. Partnership income is includable in the taxable income of the individual partners as required under applicable income tax laws. Certain items, primarily related to depreciation methods, are accounted for differently for income tax reporting purposes (see Note 5).

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 27,006 units for all years presented.

Use of Estimates: The preparation of the financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

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.

Concentration of Risk: The five 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 for the three years ended December 31, 2013. Therefore, the business of the Partnership is entirely dependent on the success of the Del Taco trade name restaurants that lease the properties.

 

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DEL TACO RESTAURANT PROPERTIES II

NOTES TO FINANCIAL STATEMENTS – CONTINUED

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The Partnership maintains substantially all of its cash and cash equivalents at one major commercial bank. Although the Partnership at times maintains balances that exceed the federally insured limit, it has not experienced any losses related to these balances and management believes the credit risk to be minimal.

Fair Value of Financial Instruments: The fair values of cash, accounts receivables, deposits, accounts payable and payables to limited partners approximate the carrying amounts due to their short maturities.

Subsequent Events: Management has evaluated events subsequent to December 31, 2013 through the date the accompanying financial statements were filed with the Securities and Exchange Commission for transactions and other events that may require adjustment of and/or disclosure in such financial statements.

NOTE 2 – PARTNERS’ EQUITY

Pursuant to the partnership agreement, annual partnership income or loss is allocated one percent to Del Taco 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 previously allocated. Additional gains will be allocated 15 percent to the General Partner and 85 percent to the limited partners.

NOTE 3 – 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 2021 to 2023. 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. The Partnership had a total of five properties leased as of December 31, 2013, 2012, and 2011.

The five restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $4,558,320, $4,421,845, and $4,456,766 and unaudited net losses of $178,500, $170,321 and $156,064 for the years ended December 31, 2013, 2012 and 2011, respectively. Del Taco net income by restaurant includes charges for general and administrative expenses incurred in connection with supervision of restaurant operations and interest expense and the increase in net loss from the corresponding period of the prior years primarily relates to increased operating expenses.

NOTE 4 – RELATED PARTIES

The receivable from Del Taco consists of rent accrued for the month of December 2013 and 2012. The rent receivable was collected in January 2014 and 2013, respectively.

The General Partner received $4,549, $4,384 and $4,587 in distributions relating to its one percent interest in the Partnership for the years ended December 31, 2013, 2012 and 2011, respectively.

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.

The General Partner provides certain minimal managerial and accounting services to the Partnership at no cost.

 

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DEL TACO RESTAURANT PROPERTIES II

NOTES TO FINANCIAL STATEMENTS – CONTINUED

 

NOTE 5 – INCOME TAXES (UNAUDITED)

The Partnership is not subject to income taxes because its income is taxed directly to the General Partner and limited partners. The reconciling items presented in the table below are the only items that create a difference between the tax basis and reported amounts of the Partnership’s assets and liabilities.

A reconciliation of financial statement net income to taxable income for each of the periods is as follows:

 

     2013      2012      2011  

Net income per financial statements

   $ 428,507       $ 415,225       $ 409,396   

Excess book depreciation

     3,777         3,777         3,777   
  

 

 

    

 

 

    

 

 

 

Taxable income

   $ 432,284       $ 419,002       $ 413,173   
  

 

 

    

 

 

    

 

 

 

A reconciliation of partnership equity per the financial statements to partners’ equity for tax purposes as of December 31, 2013, is as follows (unaudited):

 

Partners’ equity per financial statements

   $ 1,880,278   

Issue costs of limited partnership units capitalized for tax purposes

     986,745   

Difference in book vs. tax depreciation

     138,418   

Writedown of real estate previously held for sale

     161,963   

Other

     5,465   
  

 

 

 

Partners’ equity for tax purposes

   $ 3,172,869   
  

 

 

 

NOTE 6 – CASH DISTRIBUTIONS TO LIMITED PARTNERS

Cash distributions to limited partners for the three years ended December 31, 2013 were as follows:

 

Quarter Ended

   Cash
Distribution per
Limited Partnership
Unit
     Weighted
Average Number
of Units
Outstanding
   Number of Units
Outstanding at
the End of
Quarter

December 31, 2010

   $ 4.35       27,006    27,006

March 31, 2011

     3.85       27,006    27,006

June 30, 2011

     4.04       27,006    27,006

September 30, 2011

     4.58       27,006    27,006
  

 

 

       

Total paid in 2011

   $ 16.82         
  

 

 

       

December 31, 2011

   $ 3.76       27,006    27,006

March 31, 2012

     3.82       27,006    27,006

June 30, 2012

     4.35       27,006    27,006

September 30, 2012

     4.14       27,006    27,006
  

 

 

       

Total paid in 2012

   $ 16.07         
  

 

 

       

December 31, 2012

   $ 4.37       27,006    27,006

March 31, 2013

     3.59       27,006    27,006

June 30, 2013

     4.24       27,006    27,006

September 30, 2013

     4.48       27,006    27,006
  

 

 

       

Total paid in 2013

   $ 16.68         
  

 

 

       

Cash distributions per limited partnership unit were calculated based upon the weighted average units outstanding for each quarter and were paid from operations. Distributions declared in January 2014, for the quarter ended December 31, 2013, amounted to $4.17 per limited partnership unit and were paid in February 2014.

 

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DEL TACO RESTAURANT PROPERTIES II

NOTES TO FINANCIAL STATEMENTS – CONTINUED

 

NOTE 7 – RESULTS BY QUARTER (UNAUDITED)

 

     First
Quarter
     Second
Quarter
     Third
Quarter
     Fourth
Quarter
 

Year ended December 31, 2013

           

Rental revenues

   $ 128,580       $ 139,284       $ 137,523       $ 141,611   

Net income

     79,029         114,746         116,149         118,583   

Net income per limited partnership unit

     2.90         4.21         4.26         4.34   

Year ended December 31, 2012

           

Rental revenues

   $ 130,058       $ 134,791       $ 135,209       $ 130,564   

Net income

     82,686         108,870         115,124         108,545   

Net income per limited partnership unit

     3.03         3.99         4.22         3.98   

NOTE 8 – 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. The increase in payable to limited partners from December 31, 2012 to December 31, 2013 is primarily due to the increase in distribution checks that were not deposited by limited partners.

 

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Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None

 

Item 9A. Controls and Procedures

Disclosure controls and procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any system of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost–benefit relationship of possible controls and procedures.

In connection with the preparation of this Annual Report on Form 10-K, an evaluation was performed 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 (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Internal control over financial reporting

 

  (a) Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control system is designed to provide reasonable assurance to our management regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making its assessment of internal control over financial reporting, management used the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Management has concluded that, as of December 31, 2013, our internal control over financial reporting was effective based on these criteria.

This annual report does not include an attestation report of the Partnership’s registered public accounting firm regarding the effectiveness of internal control over financial reporting. Pursuant to temporary rules of the Securities and Exchange Commission, such attestation report is not required to be included in this filing; the Partnership is only required to provide management’s report in this annual report.

 

  (b) Changes in internal controls:

There were no significant changes in the Partnership’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.

 

Item 9B. Other Information

None.

 

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Table of Contents

PART III

 

Item 10. Directors, Executive Officers, and Corporate Governance

(a) & (b) Del Taco serves as the Partnership’s sole General Partner. Individuals who perform the functions of directors and officers of the Partnership consist of the following officers of Del Taco:

 

Name

  

Title

  

Age

Paul J.B. Murphy, III    Chief Executive Officer    59
Steven L. Brake    Chief Financial Officer    41
John Cappasola    Chief Brand Officer    40
David Pear    Senior Vice President, Operations    50

Del Taco’s term as General Partner will continue indefinitely, subject to the right of a majority in interest of the limited partners to remove and replace it. The above referenced officers of the General Partner will hold office until their resignation or the election or appointment of their successor.

 

(c) None

 

(d) No family relationship exists between any such officer of the General Partner.

 

(e) The following is an account of the business experience during the past five years of each such officer:

Paul J.B. Murphy, III, Chief Executive Officer of Del Taco LLC. Mr. Murphy has served as Chief Executive Officer since February 2009. He previously served as President and Chief Executive Officer of Einstein Noah Restaurant Group, Inc. (formerly, New World Restaurant Group, Inc.) from October 2003 to December 2008.

Steven L. Brake, Executive Vice President, Chief Financial Officer of Del Taco LLC. Mr. Brake has served as Chief Financial Officer since April 2010 and previously served as Treasurer from March 2006 to April 2010 and as the Corporate Controller of Del Taco LLC from September 2003 to March of 2006. From December 1995 until September 2003 Mr. Brake spent seven years with Arthur Andersen and one year with KPMG LLP in their respective audit departments. Mr. Brake is a licensed certified public accountant and holds a Bachelor of Arts degree in Economics from the University of California, Irvine and an MBA from the Paul Merage School of Business at the University of California, Irvine.

John Cappasola, Executive Vice President, Chief Brand Officer of Del Taco LLC. Mr. Cappasola has served as our Chief Brand Officer since February 2011. He previously served as our Vice President of Marketing from March 2009 to February 2011. From September 2008 to March 2009, he served as our Vice President of Marketing Development. From August 2002 to September 2008, he held various positions in marketing, strategic development and operations at Blockbuster, Inc. of Dallas, Texas.

David Pear, Senior Vice President, Operations of Del Taco LLC. Mr. Pear has served as Senior Vice President of Operations since January 2012. From January 2009 to January 2012 Mr. Pear served as a Director of DMA Operations for Taco Bell (Yum Brands). From 1985 to January 2009, Mr. Pear served in a wide variety of operation positions with increasing level of responsibility for Domino’s Pizza, Inc.

Code of Ethics

The Partnership has no executive officers or any full-time employees and, accordingly, has not adopted a code of ethics.

 

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Table of Contents
Item 11. Executive Compensation

The Partnership has no executive officers or directors and pays no direct remuneration to any executive officer or director of its General Partner. The Partnership has not issued any options or stock appreciation rights to any executive officer or director of its General Partner, nor does the Partnership propose to pay any annuity, pension or retirement benefits to any executive officer or director of its General Partner. The Partnership has no plan, nor does the Partnership presently propose a plan, which will result in any remuneration being paid to any executive officer or director of the General Partner upon termination of employment.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management

 

(a) No person of record currently owns more than five percent of limited partnership units of the Partnership, nor was any person known of by the Partnership to own of record and beneficially, or beneficially only, more than five percent of such securities.

 

(b) Neither Del Taco LLC, nor any executive officer or director of Del Taco LLC, owns any limited partnership units of the Partnership.

 

(c) The Partnership knows of no contractual arrangements, the operation or the terms of which may at a subsequent date result in a change in control of the Partnership, except for provisions in the Partnership agreement providing for removal of the General Partner by holders of a majority of the limited partnership units and if a material event of default occurs under the financing agreements of the General Partner.

 

Item 13. Certain Relationships, Related Transactions, and Director Independence

 

(a) Other than listed below, no transactions have occurred between the Partnership and any executive officer or director of its General Partner.

During 2013, the following transactions occurred between the Partnership and the General Partner pursuant to the terms of the partnership agreement.

 

  (1) The General Partner earned $4,285 as its one percent share of the net income of the Partnership.

 

  (2) The General Partner received $4,549 in distributions relating to its one percent interest in the Partnership.

 

(b) During 2013, the Partnership had no business relationships with any entity of a type required to be reported under this item.

 

(c) Neither the General Partner, any director or officer of the General Partner, or any associate of any such person, was indebted to the Partnership at any time during 2013 for any amount.

 

(d) Not applicable.

 

Item 14. Principal Accountant Fees and Services

The following table presents fees for professional services rendered by Squar, Milner, Peterson, Miranda & Williamson, LLP (Squar Milner).

 

     2013      2012  

Audit Fees

   $ 17,010       $ 17,065   

Audit-Related Fees

     —          —    

Tax Fees

     —          —    

All Other Fees

     —          —    
  

 

 

    

 

 

 

Total

   $ 17,010       $ 17,065   
  

 

 

    

 

 

 

The General Partner approves all the audit and non-audit services and related fees provided to the Partnership by the independent auditors prior to the services being rendered.

 

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Table of Contents

PART IV

 

Item 15. Exhibits and Financial Statement Schedules

 

(a)(1) 

   Financial Statements
   Included in Part II of this report:
  

Report of Independent Registered Public Accounting Firm – Squar, Milner, Peterson, Miranda & Williamson, LLP

Balance Sheets

Statements of Income

Statements of Partners’ Equity

Statements of Cash Flows

Notes to Financial Statements

(a)(2) 

   Financial Statement Schedule
   Schedule III – Real Estate and Accumulated Depreciation
   Financial statement schedules other than those referred to above have been omitted because they are not applicable or not required.

(b)      

   Reports on Form 8-K
   None

(c)       

   Exhibits required by Item 601 of Regulation S-K:

 

    1.   Incorporated herein by reference, Agreement of Limited Partnership of Del Taco Restaurant Properties II filed as Exhibit 3.01 to Partnership’s Registration Statement on Form S-11 as filed with the Securities and Exchange Commission on July 10, 1984.
    2.   Incorporated herein by reference, Amendment to Agreement of Limited Partnership of Del Taco Restaurant Properties II.
    3.   Incorporated herein by reference, Form of Standard Lease to be entered into by partnership and Del Taco, Inc., as lessee, filed as Exhibit 10.02 to Partnership’s Registration Statement on Form S-11 as filed with the Securities and Exchange Commission on July 10, 1984.
  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 Section 906 of the Sarbanes-Oxley Act of 2002
101. INS   XBRL Instance Document*
101. SCH   XBRL Taxonomy Extension Schema Document*
101. CAL   XBRL Taxonomy Extension Calculation Linkbase Document*
101. DEF   XBRL Taxonomy Extension Definition Linkbase Document*
101. LAB   XBRL Taxonomy Extension Label Linkbase Document*
101. PRE   XBRL Taxonomy Extension Presentation Linkbase Document*

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

 

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Table of Contents

DEL TACO RESTAURANT PROPERTIES II

SCHEDULE III – REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2013

 

          Initial cost to company     Cost
capitalized
subsequent to
acquisition
    Gross amount
at which carried
at close of
period
                  Life on which
depreciation in
latest income
statement is
computed

Description

(All Restaurants)

  Encumbrances     Land & land
improvements
    Building &
Improvements
    Carrying costs     Land,
buildings &
improvements
Total
    Accumulated
depreciation
    Date of
construction
  Date
acquired
 

Victorville, CA

  $ —        $ 327,770      $ 224,843      $ —        $ 552,613      $ 241,266      1986   1986   20 (LI), 35 (BI)

Colton, CA

    —          262,661        180,179        —          442,840        193,343      1986   1986   20 (LI), 35 (BI)

Palmdale, CA

    —          404,791        277,677        —          682,468        297,966      1986   1986   20 (LI), 35 (BI)

Pedley, CA

    —          364,334        249,925        —          614,259        268,184      1987   1987   20 (LI), 35 (BI)

Thousand Palms, CA

    —          446,450        306,255        —          752,705        328,614      1987   1987   20 (LI), 35 (BI)
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       
  $ —        $ 1,806,006      $ 1,238,879      $ —        $ 3,044,885      $ 1,329,373         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

    Restaurants     Accumulated
Depreciation
 

Balances at December 31, 2010

  $ 3,044,885      $ 1,223,185   

Additions

    —          35,396   

Retirements

    —          —     
 

 

 

   

 

 

 

Balances at December 31, 2011

    3,044,885        1,258,581   

Additions

    —          35,396   

Retirements

    —          —     
 

 

 

   

 

 

 

Balances at December 31, 2012

    3,044,885        1,293,977   

Additions

    —          35,396   

Retirements

    —          —     
 

 

 

   

 

 

 

Balances at December 31, 2013

  $ 3,044,885      $ 1,329,373   
 

 

 

   

 

 

 

The aggregate cost basis of Del Taco Restaurant Properties II real estate assets for Federal income tax purposes was $2,910,462 at December 31, 2013.

See accompanying report of independent registered public accounting firm.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

      DEL TACO RESTAURANT PROPERTIES II
     

a California limited partnership

     

Del Taco LLC

     

General Partner

Date March 21, 2014       /s/ Paul J.B. Murphy, III
      Paul J.B. Murphy, III
      Chief Executive Officer
Date March 21, 2014       /s/ Steven L. Brake
      Steven L. Brake
      Chief Financial Officer
Date March 21, 2014       /s/ John Cappasola
      John Cappasola
      Chief Brand Officer

 

21