1 =============================================================================== 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, 1997 ----------------------------- 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. 2-92121 DEL TACO RESTAURANT PROPERTIES II a California limited partnership (Exact name of registrant as specified in its charter) California 33-0064245 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 23041 Avenida De La Carlota, Suite 400, Laguna Hills, CA 92653 (Address of principal executive offices) (Zip Code) (714) 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 _ 2 =============================================================================== INDEX DEL TACO RESTAURANT PROPERTIES II PART I. FINANCIAL INFORMATION PAGE NUMBER Item 1. Financial Statements and Supplementary Data Balance Sheets at September 30, 1997 (Unaudited) and December 31, 1996 3 Statements of Income for the three and nine months ended September 30, 1997 and 1996 (Unaudited) 4 Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (Unaudited) 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12 -2- 3 DEL TACO RESTAURANT PROPERTIES II BALANCE SHEETS SEPTEMBER 30 DECEMBER 31 1997 1996 ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash $124,382 $117,357 Receivable from General Partner (Note 4) 36,955 37,271 Deposits 1,000 1,000 ----------- ----------- Total current assets 162,337 155,628 ----------- ----------- PROPERTY AND EQUIPMENT, AT COST Land and improvements 1,806,006 1,806,006 Buildings and improvements 1,238,879 1,238,879 Machinery and equipment 898,950 898,950 ----------- ----------- 3,943,835 3,943,835 Less--accumulated depreciation 1,486,342 1,400,759 ----------- ----------- 2,457,493 2,543,076 ----------- ----------- $2,619,830 $2,698,704 =========== =========== LIABILITIES AND PARTNERS' EQUITY CURRENT LIABILITIES: Payable to Limited Partners $5,455 5,047 Accounts Payable 3,184 3,000 ----------- ----------- Total current liabilities 8,639 8,047 ----------- ----------- PARTNERS' EQUITY Limited Partners 2,634,129 2,712,800 General Partner-Del Taco, Inc. (22,938) (22,143) ----------- ----------- 2,611,191 2,690,657 ----------- ----------- $2,619,830 $2,698,704 =========== =========== The accompanying notes are an integral part of these financial statements -3- 4 DEL TACO RESTAURANT PROPERTIES II STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1997 1996 1997 1996 -------- -------- -------- -------- REVENUES: Rent (Notes 3 and 4) $117,027 $114,583 $333,692 $319,601 Interest 673 569 2,245 1,542 Other 1,900 275 2,150 665 ------- ------- ------- ------- 119,600 115,427 338,087 321,808 ------- ------- ------- ------- EXPENSES: General and administrative 7,393 10,726 38,810 42,734 Depreciation 13,545 36,017 85,583 108,054 ------- ------- ------- ------- 20,938 46,743 124,393 150,788 ------- ------- ------- ------- Net income $ 98,662 $ 68,684 $213,694 $171,020 ======= ======= ======= ======= Net income per Limited Partnership Unit (Note 2) $3.62 $2.52 $7.83 $6.27 ===== ===== ===== ===== The accompanying notes are an integral part of these financial statements. -4- 5 DEL TACO RESTAURANT PROPERTIES II STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 1997 1996 -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $213,694 $171,020 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 85,583 108,054 Increase in payable to Limited Partners 408 2,461 Decrease in receivable from from General Partner 316 618 Increase (decrease) in accounts payable 184 (288) ------- ------- Net cash provided by operating activities 300,185 281,865 CASH FLOWS FROM FINANCING ACTIVITIES: Cash distributions to partners (293,160) (273,662) ------- ------- Net increase in cash 7,025 8,203 Beginning cash balance 117,357 108,954 ------- ------- Ending cash balance $124,382 $117,157 ======= ======= The accompanying notes are an integral part of these financial statements. -5- 6 DEL TACO RESTAURANT PROPERTIES II NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 NOTE 1 - BASIS OF PRESENTATION The accompanying financial statements, some of which are unaudited, have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements and should therefore be read in conjunction with the financial statements and notes thereto contained in the Registrant's annual report on Form 10-K for the year ended December 31, 1996. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the partnership's financial position at September 30, 1997, the results of operations and cash flows for the nine month periods ended September 30, 1997 and 1996 have been included. Operating results for the three and nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. In fiscal 1996, the Registrant adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of." SFAS 121 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. The adoption of SFAS No. 121 did not have a material effect on the Registrant's financial statements. NOTE 2 - NET INCOME PER LIMITED PARTNERSHIP UNIT Net income per Limited Partnership Unit is based upon the weighted average number of Units outstanding during the periods presented which amounted to 27,006 in 1997 and 1996. -6- 7 DEL TACO RESTAURANT PROPERTIES II NOTES TO FINANCIAL STATEMENTS - CONTINUED SEPTEMBER 30, 1997 NOTE 2 - NET INCOME PER LIMITED PARTNERSHIP UNIT - (Continued) Pursuant to the Partnership Agreement, annual partnership income or loss is allocated one percent to 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 previously allocated. Additional gains will be allocated 15 percent to the General Partner and 85 percent to the Limited Partners. NOTE 3 - LEASING ACTIVITIES The Registrant leases (the "Leases") certain properties (the "Properties") for operation of restaurants to Del Taco, Inc. ("General Partner") 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. There is no minimum rental under any of the Leases. The Registrant had a total of five Properties leased as of September 30, 1997 and 1996. For the three months ended September 30, 1997, the five restaurants operated by Del Taco, for which the Registrant is the lessor, had combined, unaudited sales of $975,227 and net income of $56,754 as compared to $954,851 and $54,100 respectively, for the corresponding period in 1996. Net income by 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, 1997, the five restaurants operated by Del Taco, for which the Registrant is the lessor, had combined, unaudited sales of $2,780,771 and net income of $137,227 as compared to $2,663,343 and $104,445 respectively, for the corresponding period in 1996. For the three months and nine months ended September 30, 1997, the Clay Street restaurant in Riverside, California reported net income of $155 and net loss of $1,127 as compared to net income of $313 and net loss of $3,897 respectively, for the corresponding period in 1996. -7- 8 DEL TACO RESTAURANT PROPERTIES II NOTES TO FINANCIAL STATEMENTS - CONTINUED SEPTEMBER 30, 1997 NOTE 4 - TRANSACTIONS WITH DEL TACO The receivable from General Partner consists primarily of rent accrued for the month of September. The September rent was collected on October 11, 1997. Del Taco, Inc. serves in the capacity of general partner in other partnerships which are engaged in the business of operating restaurants and four 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, Inc. for operation under the Del Taco trade name. In addition, see Note 5 with respect to certain distributions to the General Partner. NOTE 5 - DISTRIBUTIONS On October 15, 1997, a distribution to the Limited Partners of $112,788 or approximately $4.18 per Limited Partnership Unit, was approved. Such distribution was paid on October 16, 1997. The General Partner also received a distribution of $1,139 with respect to its 1% partnership interest. -8- 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Registrant commenced offering of Limited Partnership Units on September 11, 1984. By December 31, 1985, the sale of such Units provided a total capitalization for the Registrant of $6,751,500. Fifteen percent of the cash received from the sale of Limited Partnership Units was used to pay commissions to brokers and to reimburse the General Partner for offering costs incurred. The remaining funds were expended for the acquisition of sites and construction of seven restaurants. In June 1986, the first two restaurants opened for business. Four additional restaurants opened in 1987, and the seventh restaurant opened in April of 1988. Approximately $5,600,000 was expended for such purposes. Two restaurants were sold in 1994. Since the restaurants owned by the Registrant commenced operation, cash flow from Lease payments received from Del Taco, the Registrant's General Partner, which leases all five remaining restaurants, has provided adequate liquidity for operation of the Registrant. However, the Registrant's overwhelmingly predominant source of income to meet its expenses and fund distributions to its Limited Partners is payments from Del Taco under the Leases, comprising primarily rent calculated on the basis of the gross sales of the restaurants operated on the Properties, as to which there are no contractually specified minimum or guaranteed amounts. Thus, the adequacy of the Registrant's liquidity and capital resources in the future will depend primarily upon the gross revenues of such restaurants as well as upon Del Taco's financial condition and results of operations generally. -9- 10 Results of Operations The Registrant owned seven Properties that were under long-term lease to Del Taco for restaurant operations. Two restaurants were sold in 1994 and five are currently operating. For the five operating Del Taco restaurants, the Registrant receives rental revenues equal to 12 percent of restaurant sales. Rental revenues for the three months ended September 30, increased from $114,583 in 1996 to $117,027 in 1997. The Registrant had rental revenues of $319,601 for the nine months ended September 30, 1996, and the rental revenue increased to $333,692 in 1997. The increase in revenues is directly attributable to increased sales at the restaurants. The following table sets forth rental revenue earned by restaurant for the quarter and year to date: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1997 1996 1997 1996 ---- ---- ---- ---- Bear Valley Rd., Victorville, CA $ 22,836 $ 23,974 $ 65,684 $ 66,400 West Valley Blvd., Colton, CA 26,604 23,841 70,707 63,177 Palmdale Blvd., Palmdale, CA 21,270 26,901 67,478 74,997 DeAnza Country Shopping Center, 14,315 13,420 40,487 36,905 Pedley, CA Varner Road, Thousand Palms, CA 32,002 26,447 89,336 78,122 ------- ------- ------- ------- Total $117,027 $114,583 $333,692 $319,601 ======= ======= ======= ======= The following table sets forth the percentage relationship to total general and administrative expenses of items included in the Registrant's Statements of Income: Percentage of Total General & Administrative Expense -------------------------------- Nine Months Ended September 30 1997 1996 ------ ------ Accounting fees 36.90% 36.39% Distribution of information to Limited Partners 61.04 60.49 Other 2.06 3.12 ------ ------ 100.00% 100.00% -10- 11 Operating expenses include general and administrative expenses which consist primarily of accounting fees and costs of distribution of information to the Limited Partners. General and administrative expenses decreased for the three months ended September 30 from $10,726 in 1996 to $7,393 in 1997. The quarter ended September 30, 1996 included printing costs for new checks, envelopes and stationary. For the nine months ended September 30, general and administrative expenses decreased from $42,734 in 1996 to $38,810 in 1997. Depreciation expense was $13,545 and $36,017 for the three months ended September 30, 1997 and 1996, respectively. The Registrant incurred depreciation expense in the amount of $85,583 for the nine months ended September 30, 1997 and $108,054 for the nine months ended September 30, 1996. The decrease in depreciation expense is a result of certain equipment becoming fully depreciated. For the three months ended September 30, 1997 revenues increased $4,173 and expenses decreased $25,805, creating an increase in net income from $68,684 in 1996 to $98,662 in 1997. As a result of increased revenues totaling $16,279 for the nine months ended September 30, 1997 and decreased expenses totaling $26,395 for the nine months ended September 30, 1997, the net income of the Registrant increased from $171,020 for the nine months ended September 30, 1996 to $213,694 for the corresponding period in 1997. For the reasons stated under "Liquidity and Capital Resources" above, the Registrant's results of operations in the future will depend primarily upon the gross revenues of the restaurants located on the Properties leased to Del Taco as well as upon Del Taco's financial condition and results of operations generally. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (b) No reports on Form 8-K were filed during the nine months ended September 30, 1997. 27 Financial Data Schedule. -11- 12 SIGNATURES 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 II (a California limited partnership) Registrant Del Taco, Inc. General Partner Date: October 30, 1997 /s/ Robert J. Terrano --------------------------- Robert J. Terrano Executive Vice President, Chief Financial Officer Date: October 30, 1997 /s/ C. Douglas Mitchell ----------------------- C. Douglas Mitchell Vice President and Corporate Controller -12-