UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

Commission file no. 0-16190

 

DEL TACO RESTAURANT PROPERTIES II

(A California limited partnership)

(Exact name of registrant as specified in its charter)

 

 

(949) 462-9300

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

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

 

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

 

DOCUMENTS INCORPORATED BY REFERENCE

 

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

 

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

 

(Do not check if a smaller reporting company)

 

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

 

INDEX

DEL TACO RESTAURANT PROPERTIES II

		PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 2009 (Unaudited) and December 31, 2008			3
Condensed Statements of Income for the three and nine months ended September 30, 2009 and 2008 (Unaudited)			4
Condensed Statements of Cash Flows for the nine months ended September 30, 2009 and 2008 (Unaudited)			5
Notes to Condensed Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			9
Item 3. Quantitative and Qualitative Disclosures About Market Risk			11
Item 4T. Controls and Procedures			12
PART II. OTHER INFORMATION
Item 6. Exhibits			13
SIGNATURE			14
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

ITEM I.		FINANCIAL STATEMENTS

DEL TACO RESTAURANT PROPERTIES II

CONDENSED BALANCE SHEETS

		September 30,				December 31,
		2009				2008
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash		$	174,845			$	160,340
Receivable from Del Taco LLC			44,479				43,520
Deposits			1,991				1,727
Total current assets			221,315				205,587
PROPERTY AND EQUIPMENT:
Land and improvements			1,806,006				1,806,006
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			2,077,891				2,051,344
			1,865,944				1,892,491
		$	2,087,259			$	2,098,078
LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES:
Payable to limited partners		$	36,379			$	35,651
Accounts payable			27,094				14,655
Total current liabilities			63,473				50,306
PARTNERS’ EQUITY:
Limited partners; 27,006 units outstanding at September 30, 2009 and December 31, 2008			2,052,600				2,076,346
General partner-Del Taco LLC			(28,814	)			(28,574	)
			2,023,786				2,047,772
		$	2,087,259			$	2,098,078

See accompanying notes to condensed financial statements.

DEL TACO RESTAURANT PROPERTIES II

CONDENSED STATEMENTS OF INCOME

(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
RENTAL REVENUES		$	137,739			$	138,200			$	402,814			$	416,233
EXPENSES:
General and administrative			17,380				9,851				68,174				63,737
Depreciation			8,849				8,849				26,547				26,547
			26,229				18,700				94,721				90,284
Operating income			111,510				119,500				308,093				325,949
OTHER INCOME:
Interest			48				268				150				967
Other			325				600				1,200				4,175
Net income		$	111,883			$	120,368			$	309,443			$	331,091
Net income per limited partnership unit (note 2)		$	4.10			$	4.41			$	11.34			$	12.14
Number of units used in computing per unit amounts			27,006				27,006				27,006				27,006

See accompanying notes to condensed financial statements.

DEL TACO RESTAURANT PROPERTIES II

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

		Nine Months Ended
		September 30,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	309,443			$	331,091
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			26,547				26,547
Changes in operating assets and liabilities:
Receivable from Del Taco LLC			(959	)			2,682
Deposits			(264	)			(291	)
Payable to limited partners			728				351
Accounts payable			12,439				610
Net cash provided by operating activities			347,934				360,990
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to partners			(333,429	)			(363,806	)
Net increase (decrease) in cash			14,505				(2,816	)
Beginning cash balance			160,340				170,340
Ending cash balance		$	174,845			$	167,524

See accompanying notes to condensed financial statements.

DEL TACO RESTAURANT PROPERTIES II

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009

UNAUDITED

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should therefore be read in conjunction with the financial statements and notes thereto contained in the annual report on Form 10-K for the year ended December 31, 2008 for Del Taco Restaurant Properties II (the Partnership or the Company). In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the Partnership’s financial position at September 30, 2009, the results of operations for the three and nine month periods ended September 30, 2009 and 2008 and cash flows for the nine month periods ended September 30, 2009 and 2008 have been included. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. Amounts related to disclosure of December 31, 2008 balances within these condensed financial statements were derived from the audited 2008 financial statements. Management has evaluated subsequent events through November 16, 2009, which is the date the financial statements were issued.

NOTE 2 — 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 in 2009 and 2008.

Pursuant to the partnership agreement, annual partnership income or loss is allocated one percent to Del Taco LLC, formerly known as Del Taco, Inc. (Del Taco or the General Partner) and 99 percent to the limited partners. Partnership gains from any sale or refinancing will be allocated one percent to the General Partner and 99 percent to the limited partners until allocated gains and profits equal losses, distributions and syndication costs previously allocated. Additional gains will be allocated 15 percent to the General Partner and 85 percent to the limited partners.

DEL TACO RESTAURANT PROPERTIES II

NOTES TO CONDENSED FINANCIAL STATEMENTS — CONTINUED

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009

UNAUDITED

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 terminate in the years 2021 to 2022. There is no minimum rental under any of the leases.

For the three months ended September 30, 2009, the five restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $1,147,828 and unaudited net losses of $110,806 as compared to unaudited sales of $1,151,666 and unaudited net losses of $134,685 for the corresponding period in 2008. Net income or loss of each restaurant includes charges for general and administrative expenses incurred in connection with supervision of restaurant operations and interest expense and the decrease in net loss from the corresponding period of the prior year primarily relates to a reduction in operating costs.

For the nine months ended September 30, 2009, the five restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $3,356,787 and unaudited net losses of $367,478 as compared to unaudited sales of $3,468,611 and unaudited net losses of $331,401 for the corresponding period in 2008. Net income or loss of each restaurant includes charges for general and administrative expenses incurred in connection with supervision of restaurant operations and interest expense and the increase in net loss from the corresponding period of the prior year primarily relates to a reduction in restaurant revenues, partially offset by a reduction in operating expenses.

During the third quarter ended September 30, 2009, the Partnership listed the Palmdale Boulevard, Palmdale, CA restaurant property for sale. Based on limited interest to date and the challenging conditions in the macroeconomic environment as well as within the commercial real estate market the sale of this property is not probable, as such this asset has not been classified as an asset held for sale.

NOTE 4 — TRANSACTIONS WITH DEL TACO

The receivable from Del Taco consists primarily of rent accrued for the month of September 2009. The September rent was collected in October 2009.

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

In addition, see Note 5 with respect to certain distributions to the General Partner.

DEL TACO RESTAURANT PROPERTIES II

NOTES TO CONDENSED FINANCIAL STATEMENTS — CONTINUED

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009

UNAUDITED

NOTE 5 — DISTRIBUTIONS

Total cash distributions declared and paid in January, April and July 2009 were $119,689, $108,810 and $104,930, respectively. On October 27, 2009, a distribution to the limited partners of $132,131, or approximately $4.89 per limited partnership unit, was declared. Such distribution was paid on October 30, 2009. The General Partner also received a distribution of $1,335 with respect to its 1% partnership interest in October 2009.

NOTE 6 – PAYABLE TO LIMITED PARTNERS

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

NOTE 7 – 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 during the three and nine months ended September 30, 2009 and 2008. Therefore, the business of the Partnership is entirely dependent on the success of the Del Taco trade name restaurants that lease the properties.

The Partnership maintains substantially all of its cash and cash equivalents at one major commercial bank. The Federal Depository Insurance Commission’s limit was $250,000 at September 30, 2009 and December 31, 2008. At September 30, 2009 and December 31, 2008, the Partnership had approximately $180,000 and $174,000, respectively, on deposit at one financial institution.

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

Liquidity and Capital Resources

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

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 the Del Taco trade name restaurants that lease the properties. The success of the restaurants is dependent on a large variety of factors, including, but not limited to, competition, consumer demand and preference for fast food, in general, and for Mexican-American food in particular.

During the third quarter ended September 30, 2009, the Partnership listed the Palmdale Boulevard, Palmdale, CA restaurant property for sale. Based on limited interest to date and the challenging conditions in the macroeconomic environment as well as within the commercial real estate market, the timing of the completion of this transaction, if at all, is not certain.

Results of Operations

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

The following table sets forth rental revenue earned by restaurant for the three and nine months ended September 30, 2009 and 2008 (unaudited):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Bear Valley Rd., Victorville, CA		$	25,315			$	24,992			$	72,528			$	73,350
West Valley Blvd., Colton, CA			34,706				33,061				100,520				96,899
Palmdale Blvd., Palmdale, CA			16,278				17,230				48,044				50,223
DeAnza Country Shopping Center, Pedley, CA			30,159				29,588				88,448				95,008
Varner Road, Thousand Palms, CA			31,281				33,329				93,274				100,753
Total		$	137,739			$	138,200			$	402,814			$	416,233

The Partnership receives rental revenues equal to 12 percent of gross sales from the restaurants. The Partnership earned rental revenue of $137,739 during the three month period ended September 30, 2009, which represents a decrease of $461 from the corresponding period in 2008. The Partnership earned rental revenue of $402,814 during the nine month period ended September 30, 2009, which represents a decrease of $13,419 from the corresponding period in 2008. The changes in rental revenues between 2009 and 2008 are directly attributable to changes in sales levels at the restaurants under lease due to local competitive and industry factors.

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

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

		Percentage of Total
		General & Administrative Expense
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Accounting fees			32.80	%			61.31	%			65.22	%			74.80	%
Distribution of information to limited partners			67.20	%			38.69	%			34.78	%			25.20	%
			100.00	%			100.00	%			100.00	%			100.00	%

General and administrative costs for the three month period ended September 30, 2009 increased from the corresponding period in 2008 primarily due to increased printing costs, bank charges and an appraisal on one of the restaurants. General and administrative costs for the nine month period ended September 30, 2009 increased from the corresponding period in 2008 primarily due to increased printing costs, bank charges and an appraisal on one of the restaurants, partially offset by reduced accounting and tax preparation costs.

For the three month period ended September 30, 2009, net income decreased by $8,485 from 2008 to 2009 due to the decrease in revenues of $461, the decrease in interest and other income of $495 and the increase in general and administrative expenses of $7,529. For the nine month period ended September 30, 2009, net income decreased by $21,648 from 2008 to 2009 due to the decrease in revenues of $13,419, the decrease in interest and other income of $3,792 and the increase in general and administrative expenses of $4,437.

Significant Recent Accounting Pronouncements

None

Off –Balance Sheet Arrangements

None

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

Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations, as well as disclosures included elsewhere in this report on Form 10-Q are based upon the Partnership’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Partnership believes the critical accounting policies that most impact the financial statements are described below. A summary of the significant accounting policies of the Partnership can be found in Note 1 to the Financial Statements which is included in the Partnership’s December 31, 2008 Form 10-K.

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

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

The Partnership accounts for property and equipment in accordance with authoritative guidance issued by the Financial Accounting Standards Board that requires long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. In evaluating long-lived assets held for use, an impairment loss is recognized if the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the asset. Once a determination has been made that an impairment loss should be recognized for long-lived assets, various assumptions and estimates are used to determine fair value including, among others, estimated costs of construction and development, recent sales of comparable properties and the opinions of fair value prepared by independent real estate appraisers. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.

Item 3.		Quantitative and Qualitative Disclosures About Market Risk.

None.

Item 4T.		Controls and Procedures

(a)

Evaluation of disclosure controls and procedures:

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

(b)

Changes in internal controls:

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

(c)

Asset-backed issuers:

Not applicable

PART II. OTHER INFORMATION

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

Item 6.		Exhibits

(a)

Exhibits

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

SIGNATURE

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

EXHIBIT INDEX

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