Del Taco Restaurant Properties Iii (DTRPIII) 10-Q 2007 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, 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	3
Condensed Balance Sheets at September 30, 2007 (Unaudited) and December 31, 2006	3
Condensed Statements of Income for the three and nine months ended September 30, 2007 and 2006 (Unaudited)	4
Condensed Statements of Cash Flows for the nine months ended September 30, 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	12
Item 4. Controls and Procedures	12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports	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

	September 30,			December 31,
	2007			2006
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	333,242		$	335,050
Receivable from Del Taco LLC		86,529			86,610
Deposits		1,654			1,871
Total current assets		421,425			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		3,670,106			3,585,176
		5,213,741			5,298,671
	$	5,721,183		$	5,808,219
LIABILITIES AND PARTNERS’ EQUITY
CURRENT LIABILITIES:
Payable to limited partners	$	61,850		$	73,346
Accounts payable		16,397			16,478
Total current liabilities		78,247			89,824
OBLIGATION TO GENERAL PARTNER		577,510			577,510
PARTNERS’ EQUITY:
Limited partners; 47,261 units outstanding at September 30, 2007 and December 31, 2006		5,110,185			5,184,889
General partner-Del Taco LLC		(44,759	)		(44,004	)
		5,065,426			5,140,885
	$	5,721,183		$	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				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
RENTAL REVENUES	$	269,627	$	266,032	$	782,060	$	792,134
EXPENSES:
General and administrative		12,473		12,586		68,258		68,390
Depreciation		28,310		28,310		84,930		84,930
		40,783		40,896		153,188		153,320
Operating income		228,844		225,136		628,872		638,814
OTHER INCOME:
Interest		2,094		2,383		6,285		6,024
Other		400		1,050		1,600		2,225
Net income	$	231,338	$	228,569	$	636,757	$	647,063
Net income per limited partnership unit (note 3)	$	4.85	$	4.79	$	13.34	$	13.55
Number of units used in computing per unit amounts		47,261		47,261		47,261		47,271

See accompanying notes to condensed financial statements.

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DEL TACO RESTAURANT PROPERTIES III

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	636,757		$	647,063
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		84,930			84,930
Changes in operating assets and liabilities:
Receivable from Del Taco LLC		81			5,605
Deposits		217			(1,088	)
Payable to limited partners		(11,496	)		(7,952	)
Accounts payable		(81	)		(140	)
Net cash provided by operating activities		710,408			728,418
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		(712,216	)		(741,911	)
Net cash used by financing activities		(712,216	)		(746,479	)
Net decrease in cash		(1,808	)		(13,493	)
Beginning cash balance		335,050			345,363
Ending cash balance	$	333,242		$	331,870

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 NINE MONTHS ENDED SEPTEMBER 30, 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). Amounts related to disclosure of December 31, 2006 balances within these interim financial statements were derived from the audited 2006 financial statements and notes thereto included in the 2006 Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the Partnership’s financial position at September 30, 2007, the results of operations for the three and nine month periods ended September 30, 2007 and 2006 and cash flows for the nine month periods ended September 30, 2007 and 2006 have been included. Operating results for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

NOTE 2 — RESTRICTED CASH

At September 30, 2007 and December 31, 2006, the Partnership had restricted cash balances 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 ended September 30, 2007 and 2006 and the nine months ended September 30, 2007 and 47,271 during the nine months ended September 30, 2006.

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 NINE MONTHS ENDED SEPTEMBER 30, 2007

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, 2007, the nine restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $2,246,891 and unaudited net income of $11,918, as compared to $2,216,929 and $50,018, respectively, for the corresponding period in 2006. 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.

For the nine months ended September 30, 2007, the nine restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $6,517,169 and unaudited net income of $29,144, as compared to $6,601,119 and $284,512, respectively, for the corresponding period in 2006. Net income or loss or 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).

NOTE 5 — TRANSACTIONS WITH DEL TACO

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

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DEL TACO RESTAURANT PROPERTIES III

NOTES TO CONDENSED FINANCIAL STATEMENTS — CONTINUED

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007

UNAUDITED

NOTE 6 — DISTRIBUTIONS

Total cash distributions declared and paid in January, April and July 2007 were $257,041, $231,478 and $223,697, respectively. On October 29, 2007, a distribution to the limited partners of $264,074, or approximately $5.59 per limited partnership unit, was declared. Such distribution was paid on October 31, 2007. The General Partner also received a distribution of $2,667 with respect to its 1% partnership interest.

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. The reduction in payable to limited partners from December 31, 2006 to September 30, 2007 is primarily due to reissuing outstanding distribution checks to limited partners who were located in connection with the Partnership’s review of unclaimed property.

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 nine months ended September 30, 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 (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 with a remaining balance totaling $86,017 at September 30, 2007. 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.

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

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, 2007 and 2006:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Rancho California Plaza, Rancho California, CA	$	43,265	$	43,276	$	123,055	$	125,163
East Vista Way, Vista, CA		23,545		22,803		66,368		66,064
Plaza at Puente Hills, Industry, CA		21,174		19,615		61,235		58,597
4th Street, Perris, CA		35,713		37,019		106,526		111,807
Foothill Blvd., Upland, CA		33,357		33,251		96,524		97,123
East Valley Blvd., Walnut, CA		19,796		16,917		56,801		48,397
Lassen Street, Chatsworth, CA		38,300		36,437		109,321		107,354
Hesperia Road, Victorville, CA		34,876		35,932		104,460		117,552
W. Sepulveda Blvd., Los Angeles, CA		19,601		20,782		57,770		60,077
Total	$	269,627	$	266,032	$	782,060	$	792,134

The Partnership receives rental revenues equal to 12 percent of gross sales from the restaurants. The Partnership earned rental revenue of $269,627 during the three month period ended September 30, 2007, which represents an increase of $3,595 from the corresponding period in 2006. The Partnership earned rental revenue of $782,060 during the nine month period ended September 30, 2007, which represents a decrease of $10,074 from the corresponding period in 2006. The changes in rental revenues are directly attributable to changes in sales levels at the restaurants under lease due to local competitive and industry factors.

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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:

	Percent of Total
	General & Administrative Expense
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Accounting fees		48.94	%		44.85	%		69.58	%		65.80	%
Distribution of information to limited partners		51.06	%		35.29	%		30.42	%		30.54	%
Independent Appraisals		0.00	%		19.86	%		0.00	%		3.66	%
		100.00	%		100.00	%		100.00	%		100.00	%

General and administrative costs for the three month and nine month periods ended September 30, 2007 decreased from the corresponding period in the previous year due to the cost of an independent appraisal in the previous year not occurring in the current year, partially offset by increases in accounting fees and printing costs.

For the three month period ended September 30, 2007, net income increased by $2,769 from 2006 to 2007 due to the increase in revenues of $3,595 and the decrease in general and administrative expenses of $113, partially offset by the decrease in interest and other income of $939. For the nine month period ended September 30, 2007, net income decreased by $10,306 from 2006 to 2007 due to a decrease in revenues of $10,074 and the decrease in interest and other income of $364, partially offset by the decrease in general and administrative expenses of $132.

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, 2006 Form 10-K.

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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 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.

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, 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, 2007	/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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