Del Taco Restaurant Properties Iii (DTRPIII) 10-Q 2008 Q2 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 endedJune 30, 2008. 

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 þ  No o

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” inRule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o

(Do not check if a smaller reporting company)

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

INDEX

DEL TACO RESTAURANT PROPERTIES III

	PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets at June 30, 2008 (Unaudited) and December 31, 2007		3
Condensed Statements of Income for the three and six months ended June 30, 2008 and 2007 (Unaudited)		4
Condensed Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (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
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

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PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

DEL TACO RESTAURANT PROPERTIES III

CONDENSED BALANCE SHEETS

	June 30,			December 31,
	2008			2007
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	319,571		$	321,231
Receivable from Del Taco LLC		89,181			85,642
Deposits		2,121			1,654
Total current assets		410,873			408,527
RESTRICTED CASH		86,017			86,017
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		3,755,036			3,698,416
		5,128,811			5,185,431
	$	5,625,701		$	5,679,975
LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES:
Payable to limited partners	$	63,159		$	64,734
Accounts payable		20,461			13,357
Total current liabilities		83,620			78,091
OBLIGATION TO GENERAL PARTNER		577,510			577,510
PARTNERS’ EQUITY:
Limited partners; 47,261 units outstanding at June 30, 2008 and December 31, 2007		5,010,338			5,069,543
General partner-Del Taco LLC		(45,767	)		(45,169	)
		4,964,571			5,024,374
	$	5,625,701		$	5,679,975

See accompanying notes to condensed financial statements.

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DEL TACO RESTAURANT PROPERTIES III

CONDENSED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
RENTAL REVENUES	$	266,067	$	262,074	$	522,955	$	512,433
EXPENSES:
General and administrative		13,153		13,782		55,907		55,784
Depreciation		28,310		28,310		56,620		56,620
		41,463		42,092		112,527		112,404
Operating income		224,604		219,982		410,428		400,029
OTHER INCOME:
Interest		796		2,126		2,158		4,190
Other		4,400		650		5,070		1,200
Net income	$	229,800	$	222,758	$	417,656	$	405,419
Net income per limited partnership unit (note 3)	$	4.81	$	4.67	$	8.75	$	8.49
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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DEL TACO RESTAURANT PROPERTIES III

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	June 30,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	417,656		$	405,419
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		56,620			56,620
Changes in operating assets and liabilities:
Receivable from Del Taco LLC		(3,539	)		(1,131	)
Deposits		(467	)		217
Payable to limited partners		(1,575	)		(5,445	)
Accounts payable		7,104			(5,906	)
Net cash provided by operating activities		475,799			449,774
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to partners		(477,459	)		(488,519	)
Net decrease in cash		(1,660	)		(38,745	)
Beginning cash balance		321,231			335,050
Ending cash balance	$	319,571		$	296,305

See accompanying notes to condensed financial statements.

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DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008

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, 2007 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 June 30, 2008, the results of operations for the three and six month periods ended June 30, 2008 and 2007 and cash flows for the six month periods ended June 30, 2008 and 2007 have been included. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. Amounts related to disclosure of December 31, 2007 balances within these condensed financial statements were derived from the audited 2007 financial statements.

NOTE 2 — RESTRICTED CASH

At June 30, 2008 and December 31, 2007, 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 1% allocation to the general partner) using the weighted average number of units outstanding during the periods presented which amounted to 47,261 during the three months and six months ended June 30, 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, 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.

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DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS – CONTINUED

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008

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 under any of the leases.

For the three months ended June 30, 2008, the nine restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $2,217,223 and unaudited net losses of $86,557, as compared to $2,183,947 and unaudited net income of $4,434 for the corresponding period in 2007. 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 income from the corresponding period of the prior year primarily relates to food, labor and operating expense increases that exceeded the growth in restaurant revenues.

For the six months ended June 30, 2008, the nine restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $4,357,962 and unaudited net losses of $118,557, as compared to $4,270,277 and unaudited net income of $17,226 for the corresponding period in 2007. 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 income from the corresponding period of the prior year primarily relates to food, labor and operating expense increases that exceeded the growth in restaurant revenues.

NOTE 5 — TRANSACTIONS WITH DEL TACO

The receivable from Del Taco consists primarily of rent accrued for the month of June 2008. The June rent was collected in July 2008.

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 January and April 2008 were $254,714 and $222,745, respectively. On July 23, 2008, a distribution to the limited partners of $249,224, or approximately $5.27 per limited partnership unit, was declared. Such distribution was paid on July 30, 2008. The General Partner also received a distribution of $2,517 with respect to its 1% partnership interest in July 2008.

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DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS – CONTINUED

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008

UNAUDITED

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 nine 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 six months ended June 30, 2008 and 2007. 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 cash balance is in excess of the Federal Depository Insurance Commission’s limits. At June 30, 2008 and December 31, 2007, the Partnership had approximately $423,000 and $427,000, respectively, on deposit at one financial institution.

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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.

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 totaling $86,017 at June 30, 2008. 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 six months ended June 30, 2008 and 2007 (unaudited):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
Rancho California Plaza, Rancho California, CA	$	42,835	$	40,893	$	83,417	$	79,790
East Vista Way, Vista, CA		23,431		21,814		46,321		42,823
Plaza at Puente Hills, Industry, CA		20,486		20,528		39,804		40,061
4th Street, Perris, CA		34,831		36,674		67,543		70,813
Foothill Blvd., Upland, CA		33,163		31,618		65,704		63,167
East Valley Blvd., Walnut, CA		18,887		18,960		37,404		37,005
Lassen Street, Chatsworth, CA		37,559		36,134		73,272		71,021
Hesperia Road, Victorville, CA		36,453		35,929		72,734		69,584
W. Sepulveda Blvd., Los Angeles, CA		18,422		19,524		36,756		38,169
Total	$	266,067	$	262,074	$	522,955	$	512,433

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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 $266,067 during the three month period ended June 30, 2008, which represents an increase of $3,993 from the corresponding period in 2007. The Partnership earned rental revenue of $522,955 during the six month period ended June 30, 2008, which represents an increase of $10,522 from the corresponding period in 2007. The increases in rental revenues are directly attributable to increases 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						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Accounting fees		48.07	%		46.38	%		77.00	%		74.19	%
Distribution of information to limited partners		51.93	%		53.62	%		23.00	%		25.81	%
		100.00	%		100.00	%		100.00	%		100.00	%

General and administrative costs for the three month period ended June 30, 2008 decreased slightly from the corresponding period in the previous year due to a decrease in accounting fees. General and administrative costs for the six month period ended June 30, 2008 were essentially the same as the corresponding period in 2007 as increased audit and tax preparation fees were offset by decreased costs for accounting fees and printing costs.

For the three month period ended June 30, 2008, net income increased by $7,042 from 2007 to 2008 primarily due to the increase in revenues of $3,993, the increase in interest and other income of $2,420 and the decrease in general and administrative expenses of $629. For the six month period ended June 30, 2008, net income increased by $12,237 from 2007 to 2008 primarily due to the increase in revenues of $10,522 and the increase in interest and other income of $1,838, partially offset by the increase in general and administrative expenses of $123.

Recent Accounting Pronouncements

None

Off-Balance Sheet Arrangements

None

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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, 2007 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 Statement of Financial Accounting Standards (SFAS) No. 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.

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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 President and Treasurer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the President 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.

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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	Shirlene Lopez’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

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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: August 14, 2008	/s/ Steven L. Brake
	Steven L. Brake
	Treasurer

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EXHIBIT INDEX

Exhibits	Description
31.1	Shirlene Lopez’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

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