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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, 2014

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. 33-13437

 

 

DEL TACO INCOME PROPERTIES IV

(A California limited partnership)

(Exact name of registrant as specified in its charter)

 

 

 

California		33-0241855
(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.

 

 

 

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DEL TACO INCOME PROPERTIES IV

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

TABLE OF CONTENTS

 

		PART I		PAGE NUMBER
Item 1.		Business			3
Item 1A.		Risk Factors			3
Item 2.		Properties			3
Item 3.		Legal Proceedings			3
Item 4.		Mine Safety Disclosures			3
		PART II
Item 5.		Market for Partnership’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities			4
Item 6.		Selected Financial Data			4
Item 7.		Management Discussion and Analysis of Financial Condition and Results of Operations			4
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			6
Item 8.		Financial Statements and Supplementary Data			7
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosures			18
Item 9A.		Controls and Procedures			18
Item 9B.		Other Information			18
		PART III
Item 10.		Directors, Executive Officers, and Corporate Governance			19
Item 11.		Executive Compensation			20
Item 12.		Security Ownership of Certain Beneficial Owners and Management			20
Item 13.		Certain Relationships, Related Transactions, and Director Independence			20
Item 14.		Principal Accountant Fees and Services			20
		PART IV
Item 15.		Exhibits and Financial Statement Schedules			21
		Signatures			23

 

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PART I

 

Item 1.

Business

Del Taco Income Properties IV (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 165,415 units totaling $4,135,375 through an offering of limited partnership units from June 1987 through June 1988. The term of the partnership agreement is until December 31, 2027, 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 three Mexican-American restaurants for long-term lease to Del Taco. Each property is leased for 32 years on a triple net basis. Rent is equal to twelve percent of gross sales of the restaurants plus supplemental rent as required by the partnership agreement. As of December 31, 2014, the Partnership had a total of three properties leased to Del Taco (Del Taco, in turn, has sub-leased one of the restaurants to a Del Taco franchisee).

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 three properties with proceeds obtained from the sale of limited partnership units:

 

Address		City, State		Date of Acquisition		Restaurant Constructed		Date of Commencement of Operation (1)
Orangethorpe Avenue		Placentia, CA		August 5, 1988		60 seat with drive through service window		March 27, 1989
Lakeshore Drive		Lake Elsinore, CA		February 1, 1989		60 seat with drive through service window		April 18, 1990 (2)
Highland Avenue		San Bernardino, CA		December 8, 1989		60 seat with drive through service window		July 13, 1990

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)	The restaurant is subleased to a franchisee of Del Taco and the restaurant operates as a Del Taco restaurant.

 

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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PART II

 

Item 5.

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

The Partnership sold 165,415 ($4,135,375) limited partnership units during the public offering period ended June 3, 1988 and currently has 252 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 7 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, 2014, 2013, 2012, 2011, and 2010, 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,
		2014				2013				2012				2011				2010
Rental revenues		$	463,395			$	439,860			$	424,716			$	415,270			$	410,415
General and administrative expense			93,378				71,826				68,363				78,055				60,422
Depreciation expense			36,852				36,852				36,852				36,852				37,465
Interest and other income			1,277				592				1,046				717				681
Net income			334,442				331,774				320,547				301,080				313,209
Net income per limited partnership unit			2.00				1.99				1.92				1.80				1.87
Cash distributions per limited partnership unit			2.29				2.19				2.06				2.04				2.11
Total assets			1,404,260				1,447,856				1,482,572				1,509,951				1,539,029
Long-term obligations			137,953				137,953				137,953				137,953				137,953

 

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 three 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 June 1987 and June 1988. In total, $4,135,375 was raised through the sale of limited partnership units and used to acquire sites, build three restaurants, 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 $442,000 raised during the offering but not required to acquire sites and build restaurants was distributed to the limited partners.

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.

 

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

 

Results of Operations

The Partnership owns three properties that are under long-term lease to Del Taco for restaurant operations (Del Taco, in turn, has sub-leased one of the restaurants to a Del Taco franchisee).

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

 

		Years Ended December 31,
		2014				2013				2012
Orangethorpe Ave., Placentia, CA		$	198,282			$	190,965			$	184,300
Lakeshore Drive, Lake Elsinore, CA			172,185				160,716				156,074
Highland Ave., San Bernardino, CA			92,928				88,179				84,342
Total		$	463,395			$	439,860			$	424,716

The Partnership earns rental revenues equal to 12 percent of gross sales from the restaurants plus supplemental rent as required by the partnership agreement. The Partnership earned rental revenues of $463,395 during the year ended December 31, 2014, which represents an increase of $23,535 from 2013. The changes in rental revenues between 2013 and 2014 are directly attributable to increases in sales levels at the restaurants under lease due to local competitive and industry factors.

The Partnership earned rental revenues of $439,860 during the year ended December 31, 2013, which represents an increase of $15,144 from 2012. The changes in rental revenues between 2012 and 2013 are directly attributable to increases in sales levels at the restaurants under lease due to local competitive and industry factors.

There was no supplemental rent for the years ended December 31, 2014, 2013 and 2012. Supplemental rent is calculated on an annual basis and recorded in the fourth quarter since the amount of supplemental rent, if any, is contingent upon the amount of annual gross sales and pretax profits of the restaurants which are not known until the end of the year. The amount of supplemental rent, if any, is the lesser of (a) the supplemental rental rate of 14.6 percent times the aggregate property costs of $3,011,349, less 12 percent of gross sales of the restaurants, or (b) 50 percent of the aggregate pretax profit, less general and administrative expenses (as defined) and 50 percent of the franchise royalties paid (as defined). To the extent 12 percent of gross sales of the restaurants exceeds the supplemental rent rate, the supplemental rent would be zero.

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

 

		Percentage of Total General and Administrative Expense
		Years Ended December 31,
		2014				2013				2012
Accounting fees			50.31	%			62.37	%			63.22	%
Distribution of information to limited partners			26.80				33.13				31.75
Potential sale-related expenses			19.48				—				—
Other			3.41				4.50				5.03
			100.00	%			100.00	%			100.00	%

General and administrative costs increased by $21,552 from 2013 to 2014. The increase was caused primarily by costs related to the “straw poll” and Form 8-K filings discussed in Notes 10 and 11.

General and administrative costs increased by $3,463 from 2012 to 2013. The increase was caused primarily by an increase in costs related to the mandatory filing process known as XBRL.

Net income increased by $2,668 from 2013 to 2014 due to the increase in revenues of $23,535 and the increase in interest and other income of $685, partially offset by the and the increase in general and administrative expenses of $21,552.

 

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

 

Results of Operations (Continued)

 

Net income increased by $11,227 from 2012 to 2013 due to the increase in revenues of $15,144, partially offset by the decrease in interest and other income of $454 and the increase in general and administrative expenses of $3,463.

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.

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. Supplemental rent is calculated on an annual basis and recorded in the fourth quarter since the amount of supplemental rent, if any, is contingent upon the amount of annual gross sales and pretax profits of the restaurants which are not known until the end of the year. The amount of supplemental rent, if any, is the lesser of (a) the supplemental rental rate of 14.6 percent times the aggregate property costs of $3,011,349, less 12 percent of gross sales of the restaurants, or (b) 50 percent of the aggregate pretax profit, less general and administrative expenses (as defined) and 50 percent of the franchise royalties paid (as defined). To the extent 12 percent of gross sales of the restaurants exceeds the supplemental rent rate the supplemental rent would be zero.

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.

 

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Item 8.

Financial Statements and Supplementary Data

 

INDEX		PAGE NUMBER
Report of Independent Registered Public Accounting Firm - Squar, Milner, Peterson, Miranda  & Williamson, LLP		8
Balance Sheets at December 31, 2014 and 2013		9
Statements of Income for the years ended December 31, 2014, 2013 and 2012		10
Statements of Partners’ Equity for the years ended December 31, 2014, 2013 and 2012		11
Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012		12
Notes to Financial Statements		13-17
Schedule III - Real Estate and Accumulated Depreciation		22

 

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Report of Independent Registered Public Accounting Firm

To the Partners

Del Taco Income Properties IV:

We have audited the accompanying balance sheets of Del Taco Income Properties IV (a California Limited Partnership) as of December 31, 2014 and 2013 and the related statements of income, partners’ equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule of the Partnership in Item 15 (a) Schedule III – Real Estate and Accumulated Depreciation. 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 Partnership 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 Partnership’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 Income Properties IV as of December 31, 2014 and 2013 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, 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 2, 2015

 

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DEL TACO INCOME PROPERTIES IV

BALANCE SHEETS

 

		December 31,
		2014				2013
ASSETS
CURRENT ASSETS
Cash		$	118,794			$	126,862
Receivable from Del Taco LLC			39,830				38,611
Deposits			732				627
Total current assets			159,356				166,100
PROPERTY AND EQUIPMENT
Land			868,344				868,344
Land improvements			368,356				368,356
Buildings and improvements			1,289,860				1,289,860
Machinery and equipment			484,789				484,789
			3,011,349				3,011,349
Less: accumulated depreciation			1,766,445				1,729,593
			1,244,904				1,281,756
		$	1,404,260			$	1,447,856
LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES
Payable to limited partners		$	20,152			$	20,133
Accounts payable			17,074				12,530
Total current liabilities			37,226				32,663
OBLIGATION TO GENERAL PARTNER			137,953				137,953
PARTNERS’ EQUITY
Limited partners; 165,375 units outstanding at December 31, 2014 and 2013			1,247,924				1,295,601
General partner-Del Taco LLC			(18,843	)			(18,361	)
			1,229,081				1,277,240
		$	1,404,260			$	1,447,856

See accompanying notes to financial statements.

 

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DEL TACO INCOME PROPERTIES IV

STATEMENTS OF INCOME

 

		Years Ended December 31,
		2014				2013				2012
RENTAL REVENUES		$	463,395			$	439,860			$	424,716
EXPENSES
General and administrative			93,378				71,826				68,363
Depreciation			36,852				36,852				36,852
			130,230				108,678				105,215
Operating income			333,165				331,182				319,501
OTHER INCOME
Interest			132				117				106
Other			1,145				475				940
Net income		$	334,442			$	331,774			$	320,547
Net income per limited partnership unit (Note 2)		$	2.00			$	1.99			$	1.92
Number of limited partnership units used in computing per unit amounts			165,375				165,375				165,375

See accompanying notes to financial statements.

 

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DEL TACO INCOME PROPERTIES IV

STATEMENTS OF PARTNERS’ EQUITY

Years Ended December 31, 2014, 2013, and 2012

 

		Limited Partners								General
		Units				Amount				Partner				Total
Balance, December 31, 2011			165,375			$	1,351,349			$	(17,798	)		$	1,333,551
Net Income			—				317,342				3,205				320,547
Cash Distributions			—				(340,214	)			(3,436	)			(343,650	)
Balance, December 31, 2012			165,375				1,328,477				(18,029	)			1,310,448
Net Income			—				328,456				3,318				331,774
Cash Distributions			—				(361,332	)			(3,650	)			(364,982	)
Balance, December 31, 2013			165,375				1,295,601				(18,361	)			1,277,240
Net Income			—				331,098				3,344				334,442
Cash Distributions			—				(378,775	)			(3,826	)			(382,601	)
Balance, December 31, 2014			165,375			$	1,247,924			$	(18,843	)		$	1,229,081

See accompanying notes to financial statements.

 

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DEL TACO INCOME PROPERTIES IV

STATEMENTS OF CASH FLOWS

 

		Years Ended December 31,
		2014				2013				2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	334,442			$	331,774			$	320,547
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			36,852				36,852				36,852
Changes in operating assets and liabilities:
Receivable from Del Taco LLC			(1,219	)			(2,850	)			(67	)
Deposits			(105	)			(75	)			—
Payable to limited partners			19				1,968				797
Accounts payable			4,544				(3,476	)			(5,073	)
Net cash provided by operating activities			374,533				364,193				353,056
CASH FLOWS FROM FINANCING ACTIVITIES
Cash distributions to partners			(382,601	)			(364,982	)			(343,650	)
Net cash used in financing activities			(382,601	)			(364,982	)			(343,650	)
Net change in cash			(8,068	)			(789	)			9,406
Beginning cash balance			126,862				127,651				118,245
Ending cash balance		$	118,794			$	126,862			$	127,651

See accompanying notes to financial statements.

 

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DEL TACO INCOME PROPERTIES IV

NOTES TO FINANCIAL STATEMENTS

December 31, 2014

NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Partnership: Del Taco Income Properties IV, a California limited partnership, (the Partnership) was formed on March 23, 1987, for the purpose of acquiring real property in California for construction of three 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 term of the partnership agreement is until December 31, 2027 unless terminated earlier by means provided in the partnership agreement.

The Partnership has no full-time employees (see Note 5). 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 6).

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 165,375 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. Supplemental rent is calculated on an annual basis and recorded in the fourth quarter since the amount of supplemental rent, if any, is contingent upon the amount of annual gross sales and pretax profits of the restaurants which are not known until the end of the year. The amount of supplemental rent, if any, is the lesser of (a) the supplemental rental rate of 14.6 percent times the aggregate property costs of $3,011,349, less 12 percent of gross sales of the restaurants, or (b) 50 percent of the aggregate pretax profit, less general and administrative expenses (as defined) and 50 percent of the franchise royalties paid (as defined). To the extent 12 percent of gross sales of the restaurants exceeds the supplemental rent rate the supplemental rent would be zero. There was no supplemental rent in 2014.

 

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DEL TACO INCOME PROPERTIES IV

NOTES TO FINANCIAL STATEMENTS – CONTINUED

 

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

 

Concentration of Risk: The three 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, 2014. 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. 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, 2014 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 (see Note 11).

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, and until each class of limited partners receive their priority return as defined in the partnership agreement. Additional gains will be allocated 12 percent to the General Partner and 88 percent to the limited partners.

NOTE 3 — OBLIGATION TO GENERAL PARTNER

Under terms of the partnership agreement, the General Partner is entitled to receive a fee in an amount equal to five percent of the gross proceeds of the offering. The fee shall be for services rendered in connection with site selection and the design and supervision of construction of improvements to acquired properties. One percent of the gross proceeds of the offering has been paid to the General Partner. The remaining four percent of this fee shall be earned at the time the services are rendered, but shall not be paid and shall be subordinated to the limited partners’ interests until all restaurants have opened and the limited partners have received certain minimum returns on their investment, as required by the partnership agreement. It is the policy of the Partnership to accrue the site selection and development fee as an obligation to the General Partner. No fees were earned for such services during 2014, 2013, and 2012.

NOTE 4 — LEASING ACTIVITIES

The Partnership leases its properties for operation of restaurants to Del Taco on a triple net basis. The leases are for terms of 32 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. Supplemental rent (as defined in the partnership agreement) may be earned if certain criteria are met. No supplemental rent was earned for the years ended December 31, 2014, 2013, and 2012, respectively. The leases terminate in the years 2021 to 2022. 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 three properties leased to Del Taco as of December 31, 2014, 2013, and 2012 (Del Taco, in turn, has subleased one of the restaurants to a Del Taco franchisee for each of the three years ended December 31, 2014).

The two restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $2,426,746, $2,326,201, and $2,238,685 and unaudited net income of $23,370 and unaudited net losses of $7,609 and $1,834 for the years ended December 31, 2014, 2013, and 2012, 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 decrease in net loss from the corresponding period of the prior year primarily relates to increased sales. The one restaurant operated by a Del Taco franchisee, for which the Partnership is the lessor, had unaudited sales of $1,434,879, $1,339,301, and $1,300,615 for the years ended December 31, 2014, 2013, and 2012, respectively.

 

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DEL TACO INCOME PROPERTIES IV

NOTES TO FINANCIAL STATEMENTS – CONTINUED

 

NOTE 5 — RELATED PARTIES

The receivable from Del Taco consists of rent accrued for the months of December 2014 and 2013. This amount was collected in January 2015 and 2014, respectively.

The General Partner received $3,826, $3,650 and $3,436 in distributions relating to its one percent interest in the Partnership for the years ended December 31, 2014, 2013 and 2012, 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.

NOTE 6 — 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:

 

		2014				2013				2012
Net income per financial statements		$	334,442			$	331,774			$	320,547
Excess tax depreciation			(3,501	)			(3,501	)			(3,501	)
Taxable income		$	330,941			$	328,273			$	317,046

A reconciliation of partnership equity per the financial statements to partners’ equity for tax purposes as of December 31, 2014, is as follows (unaudited):

 

Partners’ equity per financial statements		$	1,229,081
Issue costs of limited partnership units capitalized for tax purposes			579,259
Difference in book vs. tax depreciation			272,609
Partners’ equity for tax purposes		$	2,080,949

 

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DEL TACO INCOME PROPERTIES IV

NOTES TO FINANCIAL STATEMENTS – CONTINUED

 

NOTE 7 — CASH DISTRIBUTIONS TO LIMITED PARTNERS

Cash distributions paid to limited partners for the three years ended December 31, 2014 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, 2011		$	0.48				165,375				165,375
March 31, 2012			0.48				165,375				165,375
June 30, 2012			0.56				165,375				165,375
September 30, 2012			0.54				165,375				165,375
Total paid in 2012		$	2.06
December 31, 2012		$	0.60				165,375				165,375
March 31, 2013			0.47				165,375				165,375
June 30, 2013			0.54				165,375				165,375
September 30, 2013			0.58				165,375				165,375
Total paid in 2013		$	2.19
December 31, 2013		$	0.58				165,375				165,375
March 31, 2014			0.55				165,375				165,375
June 30, 2014			0.59				165,375				165,375
September 30, 2014			0.57				165,375				165,375
Total paid in 2014		$	2.29

Cash distributions per limited partnership unit were calculated based upon the weighted average number of units outstanding for each quarter and were paid from operations. Distributions declared in January 2015 amounted to $0.52 per limited partnership unit and were paid in February 2015.

NOTE 8 — RESULTS BY QUARTER (UNAUDITED)

 

		First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Year ended December 31, 2014
Rental revenues		$	109,722			$	115,639			$	118,504			$	119,530
Net income			63,651				93,639				87,919				89,233
Net income per limited partnership unit			0.38				0.56				0.53				0.53
Year ended December 31, 2013
Rental revenues		$	104,389			$	109,976			$	110,873			$	114,622
Net income			58,951				87,793				91,793				93,237
Net income per limited partnership unit			0.35				0.53				0.55				0.56

NOTE 9 — 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.

 

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DEL TACO INCOME PROPERTIES IV

NOTES TO FINANCIAL STATEMENTS – CONTINUED

 

Note 10 - COMMUNICATION FROM CERTAIN LIMITED PARTNERS AND STRAW POLL RESULTS

During the third quarter of 2014, several limited partners communicated to the General Partner their desire to potentially sell all of the properties and then dissolve the Partnership. Pursuant to the Partnership agreement, any decision to sell all of the properties and to dissolve the Partnership would require approval from a majority in interest of limited partners. On October 1, 2014 the General Partner initiated a “straw poll” of all limited partners to determine if there is sufficient interest to support a potential sale of the properties and dissolution of the Partnership, as disclosed in Form 8-K filed on October 1, 2014. Limited partner responses to the straw poll were received during the fourth quarter of 2014 and on December 17, 2014, Del Taco filed a Form 8-K to disclose the results of the poll. The poll was intended to gauge interest level only and the results indicate a strong majority of the units responded either “open to” or “strongly in favor of” Del Taco testing the market and presenting a sale proposal to the limited partners for a vote. Accordingly, Del Taco filed a Form 8-K on January 12, 2015 indicating its intention to initiate a sale process to market the properties owned by the Partnership that may result in the presentation of a sale transaction to the limited partners for approval (see Note 11).

Note 11 - SUBSEQUENT EVENTS

The Partnership filed a Form 8-K on January 12, 2015 indicating its intention to initiate a sale process to market the properties owned by the Partnership that may result in the presentation of a sale transaction to the limited partners for approval. Del Taco intended to appoint a special committee comprised of a small group of qualified limited partners to facilitate the sale process and to manage any potential conflicts of interest with respect to Del Taco that may arise during the sale process, however, zero timely applications were received. Therefore, the sale process has commenced without a special committee and Del Taco will resolve any potential conflicts of interest pursuant to the Partnership’s partnership agreement and applicable law. The sale process may result in the presentation of a sale transaction to the limited partners for approval; however, there are no assurances that Del Taco will receive any offers or will be successful in entering into a binding agreement to sell the properties. On February 17, 2015, affiliates of MacKenzie Realty Capital, Inc. (“MacKenzie”), a limited partner, filed a Schedule TO initiating a tender offer to purchase all units of the Partnership. The MacKenzie tender offer is unrelated to the sale process that Del Taco has initiated. On February 27, 2015, the Partnership filed a Schedule 14D-9 solicitation/recommendation statement in response to the Schedule TO.

 

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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, 2014. 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, 2014, our internal control over financial reporting was effective based on these criteria.

 

(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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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		60
Steven L. Brake		Chief Financial Officer		42
John Cappasola		Chief Brand Officer		41
David Pear		Senior Vice President, Operations		51

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 2013. From January 2009 to January 2013 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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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 2014, the following transactions occurred between the Partnership and the General Partner pursuant to the terms of the partnership agreement.

 

(1)

The General Partner earned $3,344 as its one percent share of the net income of the Partnership.

 

(2)

The General Partner received $3,826 in distributions relating to its one percent interest in the Partnership.

 

(b)	During 2014, 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 2014 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).

 

		2014				2013
Audit Fees		$	16,953			$	17,010
Audit-Related Fees			—				—
Tax Fees			—				—
All Other Fees			—				—
Total		$	16,953			$	17,010

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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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, Restated Agreement of Limited Partnership of Del Taco Income Properties IV filed as Exhibit 3.01 to Partnership’s Registration Statement on Form S-11 as filed with the Securities and Exchange Commission on June 5, 1987.
		2.		Incorporated herein by reference, Amendment to Restated Agreement of Limited Partnership of Del Taco Income Properties IV.
		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 June 5, 1987.
		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

 

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DEL TACO INCOME PROPERTIES IV

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2014

 

						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
Placentia, CA		$	—			$	465,933			$	485,961			$	—			$	951,894			$	482,865			1988		1988		20 (LI), 35 (BI)
Lake Elsinore, CA			—				449,058				468,361				—				917,419				465,378			1989		1989		20 (LI), 35 (BI)
San Bernardino, CA			—				321,709				335,538				—				657,247				333,383			1989		1989		20 (LI), 35 (BI)
		$	—			$	1,236,700			$	1,289,860			$	—			$	2,526,560			$	1,281,626

 

		Restaurants				Accumulated Depreciation
Balances at December 31, 2011		$	2,526,560			$	1,171,070
Additions			—				36,852
Retirements			—				—
Balances at December 31, 2012			2,526,560				1,207,922
Additions			—				36,852
Retirements			—				—
Balances at December 31, 2013			2,526,560				1,244,774
Additions			—				36,852
Retirements			—				—
Balances at December 31, 2014		$	2,526,560			$	1,281,626

The aggregate cost basis of Del Taco Income Properties IV real estate assets for Federal income tax purposes was $2,526,560 (unaudited) at December 31, 2014.

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 INCOME PROPERTIES IV
				a California limited partnership
				Del Taco LLC
				General Partner
Date March 2, 2015				/s/ Paul J. B. Murphy, III
				Paul J. B. Murphy, III
				Chief Executive Officer
Date March 2, 2015				/s/ Steven L. Brake
				Steven L. Brake
				Chief Financial Officer
Date March 2, 2015				/s/ John Cappasola
				John Cappasola
				Chief Brand Officer

 

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