Del Taco Restaurant Properties Iii (DTRPIII) 10-Q 2005 Q3 Quarterly report

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 endedSeptember 30, 2005 .

OR

o 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. 0-16851

DEL TACO RESTAURANT PROPERTIES III

a California limited partnership

(Exact name of registrant as specified in its charter)

California (State or other jurisdiction of incorporation or organization)	33-0139247 (I.R.S. Employer Identification Number)
25521 Commercentre Drive, Lake Forest, California (Address of principal executive offices)	92630 (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 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 x

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

INDEX

DEL TACO RESTAURANT PROPERTIES III

	PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 2005 (Unaudited) and December 31, 2004		3
Condensed Statements of Income for the three and nine months ended September 30, 2005 and 2004 (Unaudited)		4
Condensed Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (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		11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K		12
SIGNATURE		13
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

-2-

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

DEL TACO RESTAURANT PROPERTIES III

CONDENSED BALANCE SHEETS

	September 30,			December 31,
	2005			2004
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	348,362		$	321,471
Receivable from Del Taco, Inc.		91,790			88,075
Deposits		1,221			1,885
Total current assets		441,373			411,431
RESTRICTED CASH		90,585			90,585
PROPERTY AND EQUIPMENT:
Land and improvements		4,405,966			4,405,966
Buildings and improvements		2,954,959			2,954,959
Machinery and equipment		1,522,922			1,522,922
		8,883,847			8,883,847
Less—accumulated depreciation		3,443,626			3,358,696
		5,440,221			5,525,151
	$	5,972,179		$	6,027,167
LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES:
Payable to limited partners	$	71,939		$	65,751
Accounts payable		12,368			17,443
Total current liabilities		84,307			83,194
OBLIGATION TO GENERAL PARTNER		577,510			577,510
PARTNERS’ EQUITY:
Limited partners; 47,291 units outstanding at September 30, 2005 and December 31, 2004		5,352,718			5,408,258
General partner-Del Taco, Inc.		(42,356	)		(41,795	)
		5,310,362			5,366,463
	$	5,972,179		$	6,027,167

See accompanying notes to condensed financial statements.

-3-

DEL TACO RESTAURANT PROPERTIES III

CONDENSED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
RENTAL REVENUES	$	281,839	$	273,836	$	824,501	$	797,427
EXPENSES:
General and administrative		10,491		12,788		64,313		68,038
Depreciation		28,310		28,310		84,930		84,930
		38,801		41,098		149,243		152,968
Operating income		243,038		232,738		675,258		644,459
OTHER INCOME:
Interest		1,352		905		4,232		2,667
Other		425		225		1,675		1,950
Net income	$	244,815	$	233,868	$	681,165	$	649,076
Net income per limited partnership unit (note 3)	$	5.13	$	4.90	$	14.26	$	13.59
Number of units used in computing per unit amounts		47,291		47,291		47,291		47,291

See accompanying notes to condensed financial statements.

-4-

DEL TACO RESTAURANT PROPERTIES III

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	681,165		$	649,076
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		84,930			84,930
Changes in operating assets and liabilities:
(Increase) decrease in receivable from Del Taco, Inc.		(3,715	)		1,859
Decrease (increase) in deposits		664			(1	)
Increase in accounts payable and payable to limited partners		1,113			15,696
Net cash provided by operating activities		764,157			751,560
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to partners		(737,266	)		(715,563	)
Net increase in cash		26,891			35,997
Beginning cash balance		321,471			301,120
Ending cash balance	$	348,362		$	337,117

See accompanying notes to condensed financial statements.

-5-

DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS

SEPTEMBER 30, 2005

(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, 2004 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, 2005, the results of operations for the three and nine month periods ended September 30, 2005 and 2004 and cash flows for the nine month periods ended September 30, 2005 and 2004 have been included. Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

NOTE 2 — RESTRICTED CASH

At September 30, 2005, the Partnership had a restricted cash balance of $90,585. 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 — ALLOCATION OF NET INCOME OR LOSS PER LIMITED PARTNERSHIP UNIT

Net income per limited partnership unit is based on net income attributable to the limited partners (after 1% allocation to the general partner) using the weighted average number of units outstanding during the periods presented which amounted to 47,291 units.

Pursuant to the partnership agreement, annual partnership income or loss is allocated one percent to 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.

-6-

DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS — CONTINUED

SEPTEMBER 30, 2005

(Unaudited)

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 terminate in the years 2021 to 2024. There is no minimum rental payments required under any of the leases.

For the three months ended September 30, 2005, the nine restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $2,348,656 and unaudited net income of $177,873, as compared to $2,281,967 and $194,719, respectively, for the corresponding period in 2004. Net income by restaurant includes corporate charges for general and administrative expenses incurred in connection with supervision of restaurant operations and interest expense.

For the nine months ended September 30, 2005, the nine restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $6,870,845 and unaudited net income of $511,974, as compared to $6,645,226 and $516,574, respectively, for the corresponding period in 2004.

NOTE 5 — TRANSACTIONS WITH DEL TACO

The receivable from Del Taco, Inc. consists primarily of rent accrued for the month of September. The September rent was collected in October 2005.

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

On October 20, 2005, a distribution to the limited partners of $269,061, or approximately $5.69 per limited partnership unit, was approved. Such distribution was paid on October 25, 2005. The General Partner also received a distribution of $2,718 with respect to its 1% partnership interest. Total cash distributions paid in January, April and July 2005 were $251,049, $242,493 and $243,724, respectively.

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 6 months or longer.

-7-

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. 14.7% of the $12 million raised through sale of limited partnership units was used to pay commissions to brokers and to reimburse Del Taco, Inc. (the General Partner or Del Taco) for offering costs incurred. Approximately $9.5 million of the remaining funds were used to acquire sites and build ten restaurants. In February of 1992, approximately $281,000 raised during the offering but not required to acquire sites and build restaurants was distributed to the limited partners. One restaurant was sold in November 1997.

The nine restaurants leased to Del Taco make up all of the income producing assets of the Partnership. Therefore, the business of the Partnership is entirely dependent on the success of the Del Taco trade name 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 with a remaining balance totaling $90,585 at September 30, 2005. 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 nine properties that are under long-term lease to Del Taco for restaurant operations.

The following table sets forth rental revenue earned by restaurant for the three and nine months ended September 30, 2005 and 2004:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Rancho California Plaza, Rancho California, CA	$	44,197	$	44,184	$	129,876	$	127,519
East Vista Way, Vista, CA		23,355		23,873		69,572		69,961
Plaza at Puente Hills, Industry, CA		21,290		17,988		59,099		53,170
4th Street, Perris, CA		40,492		41,385		118,818		120,875
Foothill Blvd., Upland, CA		32,456		31,150		97,467		91,927
East Valley Blvd., Walnut, CA		15,167		16,880		45,798		49,617
Lassen Street, Chatsworth, CA		41,365		37,950		118,095		110,823
Hesperia Road, Victorville, CA		41,765		38,698		120,607		108,863
W. Sepulveda Blvd., Los Angeles, CA		21,752		21,728		65,169		64,672
					��
Total	$	281,839	$	273,836	$	824,501	$	797,427

-8-

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

The Partnership receives rental revenues equal to 12 percent of gross sales from the restaurants. The Partnership earned rental revenue of $281,839 during the three month period ended September 30, 2005, which represents an increase of $8,003 from the corresponding period in 2004. The Partnership earned rental revenue of $824,501 during the nine month period ended September 30, 2005, which represents an increase of $27,074 from the corresponding period in 2004. The increases in rental revenues are directly attributable to changes in sales levels at the restaurants under lease.

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

	Percent of Total
	General & Administrative Expense
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2005			2004			2005			2004
Accounting fees		57.92	%		34.16	%		68.80	%		57.88	%
Distribution of information to Limited Partners		42.08	%		48.54	%		31.20	%		33.03	%
Independent Appraisals		0.00	%		17.30	%		0.00	%		9.09	%
		100.00	%		100.00	%		100.00	%		100.00	%

General and administrative costs for the three month period ended September 30, 2005 decreased from the corresponding period in the previous year due to the cost of an independent appraisal on one of the leased properties in 2004. General and administrative costs for the nine month period ended September 30, 2005 decreased from the corresponding period in the previous year due to the cost of independent appraisals on two of the leased properties in 2004, partially offset by increased auditing and accounting costs.

For the three month period ended September 30, 2005, net income increased by $10,947 from 2004 to 2005 due to the increase in revenues of $8,003, the increase in interest and other income of $647 and the decrease in general and administrative expenses of $2,297. For the nine month period ended September 30, 2005, net income increased by $32,089 from 2004 to 2005 due to an increase in revenues of $27,074, the increase in interest and other income of $1,290 and the decrease in general and administrative expenses of $3,725.

Recent Accounting Pronouncements

None.

Off-Balance Sheet Arrangements

None.

-9-

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, 2004 Form 10-K.

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 Statement of Financial Accounting Standards No. (SFAS) 144, “Accounting for the Impairment or Disposal of Long Lived Assets.” SFAS 144 requires that 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.

-10-

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.

-11-

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

31.1	Kevin K. Moriarty’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Robert J. Terrano’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

(b) Reports

     None.

-12-

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, 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, Inc.

General Partner

Date: November 14, 2005	/s/ Robert J. Terrano
	Robert J. Terrano
	Executive Vice President,
	Chief Financial Officer

-13-

EXHIBIT INDEX

Exhibit	Description
31.1	Kevin K. Moriarty’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Robert J. Terrano’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

-14-