Del Taco Restaurant Properties Iii (DTRPIII) 10-Q 2007 Q1 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 endedMarch 31, 2007. 

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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act (check one):

Large accelerated filer o     Accelerated filer o     Non-accelerated filer þ

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 March 31, 2007 (Unaudited) and December 31, 2006		3
Condensed Statements of Income for the three months ended March 31, 2007 and 2006 (Unaudited)		4
Condensed Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (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 4. 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

	March 31,			December 31,
	2007			2006
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	313,408		$	335,050
Receivable from Del Taco LLC		89,206			86,610
Deposits		2,591			1,871
Total current assets		405,205			423,531
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		3,613,486			3,585,176
		5,270,361			5,298,671
	$	5,761,583		$	5,808,219
LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES:
Payable to limited partners	$	77,380		$	73,346
Accounts payable		40,188			16,478
Total current liabilities		117,568			89,824
OBLIGATION TO GENERAL PARTNER		577,510			577,510
PARTNERS’ EQUITY:
Limited partners; 47,261 units outstanding at March 31, 2007 and December 31, 2006		5,111,253			5,184,889
General partner-Del Taco LLC		(44,748	)		(44,004	)
		5,066,505			5,140,885
	$	5,761,583		$	5,808,219

See accompanying notes to condensed financial statements.

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DEL TACO RESTAURANT PROPERTIES III

CONDENSED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended
	March 31,
	2007		2006
RENTAL REVENUES	$	250,360	$	258,268
EXPENSES:
General and administrative		42,002		43,374
Depreciation		28,310		28,310
		70,312		71,684
Operating income		180,048		186,584
OTHER INCOME:
Interest		2,063		1,743
Other		550		750
Net income	$	182,661	$	189,077
Net income per limited partnership unit (Note 3)	$	3.83	$	3.96
Number of units used in computing per unit amounts		47,261		47,291

See accompanying notes to condensed financial statements.

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DEL TACO RESTAURANT PROPERTIES III

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended
	March 31,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	182,661		$	189,077
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		28,310			28,310
Changes in operating assets and liabilities:
Receivable from Del Taco LLC		(2,596	)		414
Deposits		(720	)		(654	)
Payable to limited partners		4,034			(695	)
Accounts payable		23,710			18,151
Net cash provided by operating activities		235,399			234,603
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash		—			4,568
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of limited partnership units		—			(4,568	)
Cash distributions to partners		(257,041	)		(262,749	)
Net cash used by financing activities		(257,041	)		(267,317	)
Net decrease in cash		(21,642	)		(28,146	)
Beginning cash balance		335,050			345,363
Ending cash balance	$	313,408		$	317,217

See accompanying notes to condensed financial statements.

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DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2007

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, 2006 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 March 31, 2007, the results of operations and cash flows for the three month periods ended March 31, 2007 and 2006 have been included. Operating results for the three months ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

NOTE 2 — RESTRICTED CASH

At March 31, 2007 and 2006, the Partnership had a restricted cash balance of $86,017. The restricted cash is a death and disability redemption fund. 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.

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DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS — CONTINUED

FOR THE THREE MONTHS ENDED MARCH 31, 2007

UNAUDITED

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 and 47,291 in 2007 and 2006, respectively. Effective March 31, 2006, the Partnership repurchased 30 units for $4,568 in connection with the death and disability redemption fund.

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 2021 to 2024. There is no minimum rental payment required under any of the leases.

For the three months ended March 31, 2007, the nine restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $2,086,330 and net income of $12,792, as compared to $2,152,232 and $146,794, respectively, for the corresponding period in 2006. Del Taco 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 additional interest expense from the debt that was issued in connection with the acquisition of Del Taco (see Note 9).

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DEL TACO RESTAURANT PROPERTIES III

NOTES TO FINANCIAL STATEMENTS — CONTINUED

FOR THE THREE MONTHS ENDED MARCH 31, 2007

UNAUDITED

NOTE 5 — TRANSACTIONS WITH DEL TACO

The receivable from Del Taco consists primarily of rent accrued for the month of March 2007. The March rent receivable was collected in April 2007.

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 April 27, 2007, a distribution to the limited partners of $229,163, or approximately $4.85 per limited partnership unit, was approved. Such distribution was paid on May 3, 2007. The General Partner also received a distribution of $2,315 with respect to its 1% partnership interest. Total cash distributions paid in January 2007 were $257,041.

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.

NOTE 8 — CONCENTRATION OF RISK

The 9 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 months ended March 31, 2007 and 2006. Therefore, the business of the Partnership is entirely dependent on the success of the Del Taco trade name restaurants that lease the properties.

NOTE 9— ACQUISITION OF GENERAL PARTNER

On January 30, 2006, the parent company of the General Partner entered into an agreement to sell all of its issued and outstanding common stock to Sagittarius Acquisitions II, Inc. The transaction was consummated on March 29, 2006 and did not have an impact on the financial position, results of operations or cash flows of the Partnership.

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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 (Del Taco or the General Partner) 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 and the 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.

The increase in accounts payable from December 31, 2006 is a seasonal increase due to the timing of payment for certain annual accounting, audit and tax services.

As described in Note 2 to the Notes to the Condensed Financial Statements, the Partnership has a death and disability redemption fund totaling $86,017 at March 31, 2007 and 2006, respectively. 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 (unaudited):

	Three Months Ended
	March 31,
	2007		2006
Rancho California Plaza, Temecula, CA	$	38,898	$	39,910
East Vista Way, Vista, CA		21,009		21,101
Plaza at Puente Hills, Industry, CA		19,533		18,951
4th Street, Perris, CA		34,140		36,665
Foothill Blvd., Upland, CA		31,550		31,531
East Valley Blvd., Walnut, CA		18,045		15,303
Lassen Street, Chatsworth, CA		34,886		34,381
Hesperia Road, Victorville, CA		33,654		40,914
W. Sepulveda Blvd., Los Angeles, CA		18,645		19,512
Total	$	250,360	$	258,268

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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 $250,360 during the three month period ended March 31, 2007, which represents a decrease of $7,908 from 2006. The change in rental revenues between 2006 and 2007 is directly attributable to decreases in sales at the restaurants under lease due to local competitive and industry factors.

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

	Percentage of Total
	General & Administrative Expense
	Three Months Ended
	March 31,
	2007			2006
Accounting fees		77.29	%		71.22	%
Distribution of information to limited partners		22.71			28.78
		100.00	%		100.00	%

General and administrative costs decreased from 2006 to 2007 primarily due to decreased costs for printing costs, which was partially offset by increased costs for accounting fees related to certain statutory filing requirements.

Net income decreased by $6,416 from 2006 to 2007 due to the decreases in rental revenue of $7,908 which was partially offset by the $1,372 decrease in general and administrative expenses and the increase in interest and other income of $120.

Significant 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, 2006 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 (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 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 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 and Reports

(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

(b)	Reports
	None.

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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: May 14, 2007	/s/ Steven L. Brake
	Steven L. Brake
	Treasurer

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EXHIBIT INDEX

Exhibit No.	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