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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

 

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

For the quarterly period ended September 30, 2012

OR

 

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

For the transition period from             to            

Commission file no. 0-16191

 

 

DEL TACO RESTAURANT PROPERTIES III

(A California limited partnership)

(Exact name of registrant as specified in its charter)

 

 

 

California   33-0139247

(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)

(949) 462-9300

(Registrant’s telephone number, including area code)

 

 

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

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

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  (Do not check if a smaller reporting company)    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

INDEX

DEL TACO RESTAURANT PROPERTIES III

 

     PAGE NUMBER

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Condensed Balance Sheets at September 30, 2012 (Unaudited) and December 31, 2011

   3

Condensed Statements of Income for the three and nine months ended September  30, 2012 and 2011 (Unaudited)

   4

Condensed Statements of Cash Flows for the nine months ended September  30, 2012 and 2011 (Unaudited)

   5

Notes to Condensed Financial Statements (Unaudited)

   6

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

   8

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   10

Item 4. Controls and Procedures

   10

PART II. OTHER INFORMATION

  

Item 6. Exhibits

   11

SIGNATURE

   12

 

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Table of Contents
PART I. FINANCIAL INFORMATION

 

ITEM I. FINANCIAL STATEMENTS

DEL TACO RESTAURANT PROPERTIES III

CONDENSED BALANCE SHEETS

 

     September 30,
2012
    December 31,
2011
 
     (Unaudited)        
ASSETS     

CURRENT ASSETS:

    

Cash

   $ 311,479      $ 277,636   

Receivable from Del Taco LLC

     82,272        81,786   

Other current assets

     1,899        1,654   
  

 

 

   

 

 

 

Total current assets

     395,650        361,076   
  

 

 

   

 

 

 

RESTRICTED CASH

     86,017        86,017   
  

 

 

   

 

 

 

PROPERTY AND EQUIPMENT:

    

Land

     3,284,629        3,284,629   

Land improvements

     494,254        494,254   

Buildings and improvements

     2,534,393        2,534,393   

Machinery and equipment

     1,306,171        1,306,171   
  

 

 

   

 

 

 
     7,619,447        7,619,447   

Less-accumulated depreciation

     3,589,695        3,535,386   
  

 

 

   

 

 

 
     4,029,752        4,084,061   
  

 

 

   

 

 

 
   $ 4,511,419      $ 4,531,154   
  

 

 

   

 

 

 
LIABILITIES AND PARTNERS’ EQUITY     

CURRENT LIABILITIES:

    

Payable to limited partners

   $ 74,623      $ 69,529   

Accounts payable

     15,403        37,878   
  

 

 

   

 

 

 

Total current liabilities

     90,026        107,407   
  

 

 

   

 

 

 

OBLIGATION TO GENERAL PARTNER

     577,510        577,510   
  

 

 

   

 

 

 

PARTNERS’ EQUITY:

    

Limited partners; 47,261 units outstanding at September 30, 2012 and December 31, 2011

     3,888,541        3,890,871   

General partner-Del Taco LLC

     (44,658     (44,634
  

 

 

   

 

 

 
     3,843,883        3,846,237   
  

 

 

   

 

 

 
   $ 4,511,419      $ 4,531,154   
  

 

 

   

 

 

 

See accompanying notes to condensed financial statements.

 

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Table of Contents

DEL TACO RESTAURANT PROPERTIES III

CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

RENTAL REVENUES

   $ 255,739       $ 254,668       $ 737,660       $ 760,029   
  

 

 

    

 

 

    

 

 

    

 

 

 

EXPENSES:

           

General and administrative

     15,788         52,578         78,965         107,017   

Depreciation

     18,103         18,103         54,309         58,303   
  

 

 

    

 

 

    

 

 

    

 

 

 
     33,891         70,681         133,274         165,320   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     221,848         183,987         604,386         594,709   

OTHER INCOME:

           

Interest

     124         124         362         370   

Other

     815         1,450         2,565         3,225   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 222,787       $ 185,561       $ 607,313       $ 598,304   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per limited partnership unit (Note 3)

   $ 4.67       $ 3.89       $ 12.72       $ 12.53   
  

 

 

    

 

 

    

 

 

    

 

 

 

Number of units used in computing per unit amounts

     47,261         47,261         47,261         47,261   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to condensed financial statements.

 

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Table of Contents

DEL TACO RESTAURANT PROPERTIES III

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 607,313      $ 598,304   

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

    

Depreciation

     54,309        58,303   

Changes in operating assets and liabilities:

    

Receivable from Del Taco LLC

     (486     13,111   

Other current assets

     (245     641   

Payable to limited partners

     5,094        5,773   

Accounts payable

     (22,475     21,129   
  

 

 

   

 

 

 

Net cash provided by operating activities

     643,510        697,261   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Cash distributions to partners

     (609,667     (692,872
  

 

 

   

 

 

 

Net change in cash

     33,843        4,389   

Beginning cash balance

     277,636        309,131   
  

 

 

   

 

 

 

Ending cash balance

   $ 311,479      $ 313,520   
  

 

 

   

 

 

 

Supplemental disclosure of noncash investing activities:

During the nine months ended September 30, 2011, in connection with the total casualty loss of a restaurant, property and equipment of $719,336 and accumulated depreciation of $578,653 were written off and a corresponding insurance receivable of $140,683 was recorded.

See accompanying notes to condensed financial statements.

 

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Table of Contents

DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012

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, 2011 for Del Taco Restaurant Properties III (the Partnership or the Company). In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the Partnership’s financial position at September 30, 2012, the results of operations for the three and nine month periods ended September 30, 2012 and 2011 and cash flows for the nine month periods ended September 30, 2012 and 2011 have been included. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. Amounts related to disclosure of December 31, 2011 balances within these condensed financial statements were derived from the 2011 audited financial statements.

Management has evaluated events subsequent to September 30, 2012 through the date that the accompanying condensed financial statements were filed with the Securities and Exchange Commission for transactions and other events which may require adjustment of and/or disclosure in such financial statements.

NOTE 2 - RESTRICTED CASH

At September 30, 2012 and December 31, 2011, the Partnership had a restricted cash balance of $86,017. The restricted cash results from a death and disability fund that the Company is required to maintain under the terms of the Partnership agreement. Such fund is maintained in an interest bearing account at a major commercial bank. A limited partner has the right, under certain circumstances involving such limited partner’s death or disability, to tender to the Partnership for redemption all of the units owned of record by such limited partner. The redemption price will be equal to the partners capital account balance as of the redemption date. The death and disability fund was established in 1987. The fund was limited to two percent of the gross proceeds from sale of the limited partnership units. Requests for redemption made after the funds in the death and disability fund are depleted will not be accepted.

NOTE 3 - NET INCOME PER LIMITED PARTNERSHIP UNIT

Net income per limited partnership unit is based on net income attributable to the limited partners (after one percent allocation to the general partner) using the weighted average number of units outstanding during the periods presented which amounted to 47,261 in 2012 and 2011.

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

NOTE 4 - LEASING ACTIVITIES

The Partnership leases certain properties for operation of restaurants to Del Taco on a triple net basis. The leases are for terms of 35 years commencing with the completion of the restaurant facility located on each property and require monthly rentals equal to 12 percent of the gross sales of the restaurants. The leases expire in the years 2022 to 2024.

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

 

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Table of Contents

DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012

UNAUDITED

 

NOTE 4 - LEASING ACTIVITIES - continued

 

For the three months ended September 30, 2012, the restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $2,131,161 and unaudited net losses of $7,111 as compared to unaudited sales of $2,034,740 and unaudited net income of $15,197, respectively, for the corresponding period in 2011. 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 increases in operating costs and decreases in revenues.

For the nine months ended September 30, 2012, the restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $6,147,167 and unaudited net losses of $53,054 as compared to $6,189,625 and unaudited net losses of $16,452 for the corresponding period in 2011. 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 increases in operating costs and decreases in revenues.

NOTE 5 - TRANSACTIONS WITH DEL TACO

The receivable from Del Taco consists primarily of rent accrued for the month of September 2012. The September rent receivable was collected in October 2012.

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

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

NOTE 6 - DISTRIBUTIONS

Total cash distributions declared and paid in February, May and August 2012 were $173,685, $212,180 and $223,802, respectively. On October 25, 2012, a distribution to the limited partners of $229,839, or approximately $4.86 per limited partnership unit, was approved. Such distribution was paid on November 5, 2012. The General Partner also received a distribution of $2,322 with respect to its 1% partnership interest in November 2012.

NOTE 7 - PAYABLE TO LIMITED PARTNERS

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

NOTE 8 - CONCENTRATION OF RISK

The 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, 2012 and 2011. 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.

 

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

Liquidity and Capital Resources

Del Taco Restaurant Properties III (the “Partnership” or the “Company”) offered limited partnership units for sale between February 1986 and June 1987. $12 million was raised through the sale of limited partnership units and used to acquire sites and build ten restaurants and also to pay commissions to brokers and to reimburse Del Taco LLC (the General Partner or Del Taco) for offering costs incurred. In February of 1992, approximately $281,000 raised during the offering but not required to acquire sites and build restaurants was distributed to the limited partners. One restaurant was sold in November 1997 and one restaurant was sold in December 2011.

The 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.

As described in Note 2 to the Notes to the Financial Statements, the Partnership has a death and disability redemption fund totaling $86,017 at September 30, 2012. Investors should contact the General Partner with all questions regarding the eligibility of a limited partner or the estate of a deceased limited partner to participate in the redemption fund.

Results of Operations

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

The following table sets forth rental revenue earned by restaurant (unaudited):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

Rancho California Plaza, Rancho California, CA

   $ 45,169       $ 43,751       $ 125,500       $ 127,943   

East Vista Way, Vista, CA

     28,633         27,130         82,558         79,433   

Plaza at Puente Hills, Industry, CA

     —           10,500         —           42,127   

4th Street, Perris, CA

     31,711         28,621         91,187         85,678   

Foothill Blvd., Upland, CA

     32,931         30,016         92,808         89,008   

East Valley Blvd., Walnut, CA

     20,010         19,194         59,428         55,570   

Lassen Street, Chatsworth, CA

     37,293         37,879         108,843         109,246   

Hesperia Road, Victorville, CA

     37,109         35,491         111,026         105,927   

W. Sepulveda Blvd., Los Angeles, CA

     22,883         22,086         66,310         65,097   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 255,739       $ 254,668       $ 737,660       $ 760,029   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Partnership receives rental revenues equal to 12 percent of gross sales from the restaurants. The Partnership earned rental revenue of $255,739 during the three month period ended September 30, 2012, which represents an increase of $1,071 from the corresponding period in 2011. The Partnership earned rental revenue of $737,660 during the nine month period ended September 30, 2012, which represents a decrease of $22,369 from the corresponding period in 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 and the loss of the Plaza at Puente Hills restaurant in the City of Industry. The City of Industry restaurant was destroyed in a fire resulting from an automobile accident during the second quarter of 2011, and the property was subsequently sold in the fourth quarter of 2011.

 

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Table of Contents
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:

 

    

General & Administrative Expense

 
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Accounting fees

     35.68     29.11     57.97     50.21

Distribution of information to limited partners

     64.32     61.38     42.03     45.12

Appraisal cost on Unit 218

     0.00     9.51     0.00     4.67
  

 

 

   

 

 

   

 

 

   

 

 

 
     100.00     100.00     100.00     100.00
  

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative costs for the three month and nine month periods decreased primarily due to the fact that significant costs were incurred in 2011 in connection with the loss of the Plaza at Puente Hills restaurant in the City of Industry.

For the three month period ended September 30, 2012, net income increased by $37,226 from 2011 to 2012 due to the increase in revenues of $1,071 and the decrease in general and administrative expenses of $36,790, partially offset by the decrease in interest and other income of $635. For the nine month period ended September 30, 2012, net income increased $9,009 from 2011 to 2012 due to the decrease in general and administrative expenses of $28,052 and the decrease in depreciation of $3,994, partially offset by the decrease in revenues of $22,369 and decrease in interest and other income of $668.

Significant Recent Accounting Pronouncements

None.

Off-Balance Sheet Arrangements

None

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, 2011 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.

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - continued

 

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

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

None.

 

Item 4. Controls and Procedures

 

  (a) Evaluation of disclosure controls and procedures:

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

 

  (b) Changes in internal controls:

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

 

  (c) Asset-backed issuers:

Not applicable.

 

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Table of Contents

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
  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

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.

 

      DEL TACO RESTAURANT PROPERTIES III
      (a California limited partnership)
      Registrant
      Del Taco LLC
      General Partner
Date: November 14, 2012      

/s/ Steven L. Brake

      Steven L. Brake
     

Chief Financial Officer

(Principal Financial Officer)

 

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