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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. 33-2462
DEL TACO RESTAURANT PROPERTIES III
a California limited partnership
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0139247
(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
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INDEX
DEL TACO RESTAURANT PROPERTIES III
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 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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DEL TACO RESTAURANT PROPERTIES III
BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
1997 1996
--------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 197,932 $ 190,185
Receivable from General Partner (Note 5) 60,596 57,288
Deposits 1,000 1,000
--------- ---------
Total current assets 259,528 248,473
--------- ---------
RESTRICTED CASH (NOTE 2) 107,809 110,617
REAL ESTATE HELD FOR SALE (NOTE 7) 274,500 274,500
PROPERTY AND EQUIPMENT, AT COST
Land and improvements 4,505,966 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 2,371,174 2,172,025
--------- ---------
6,512,673 6,711,822
--------- ---------
$7,154,510 $7,345,412
========= =========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Payable to Limited Partners $ 3,925 $ 4,181
Accounts Payable 2,512 3,000
--------- ---------
Total current liabilities 6,437 7,181
--------- ---------
OBLIGATION TO GENERAL PARTNER 577,510 577,510
--------- ---------
PARTNERS' EQUITY
Limited Partners 6,603,321 6,791,606
General Partner-Del Taco, Inc. (32,758) (30,885)
--------- ---------
6,570,563 6,760,721
--------- ---------
$7,154,510 $7,345,412
========= =========
The accompanying notes are an
integral part of these financial statements
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DEL TACO RESTAURANT PROPERTIES III
STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------ -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
REVENUES:
Rent (Notes 4 and 5) $187,675 $190,182 $543,882 $541,377
Interest 2,497 2,279 7,874 6,556
Other 1,325 250 2,000 575
------- ------- ------- -------
191,497 192,711 553,756 548,508
------- ------- ------- -------
EXPENSES:
General and administrative 7,396 14,461 39,280 48,505
Depreciation 66,383 71,687 199,149 215,063
Writedown of real estate
held for resale (Note 7) - 102,369 - 102,369
------- ------- ------- -------
73,779 188,517 238,429 365,937
------- ------- ------- -------
Net income $117,718 $ 4,194 $315,327 $182,571
======= ======= ======= =======
Net income per Limited
Partnership Unit (Note 3) $2.46 $0.08 $6.59 $3.80
===== ===== ===== =====
The accompanying notes are an
integral part of these financial statements.
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DEL TACO RESTAURANT PROPERTIES III
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $315,327 $182,571
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 199,149 215,063
Writedown of real estate held for sale - 102,369
Increase (decrease)in payable to
Limited Partners (256) 2,029
(Increase) decrease in receivable from
General Partner (3,308) 5,851
Decrease in accounts payable (488) (691)
------ -------
Net cash provided by operating
activities 510,424 507,192
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash 2,808 15,659
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of Limited Partnership Units (2,808) (15,659)
Cash distribution to partners (502,677) (497,203)
------- -------
Increase in cash 7,747 9,989
Beginning cash balance 190,185 184,497
------- -------
Ending cash balance $197,932 $194,486
======= =======
The accompanying notes are an
integral part of these financial statements.
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DEL TACO RESTAURANT PROPERTIES III
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.
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DEL TACO RESTAURANT PROPERTIES III
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997
NOTE 2 - RESTRICTED CASH
At September 30, 1997 the partnership had a restricted cash balance of $107,809.
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 Registrant 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 upon the weighted average
number of Units outstanding during the periods presented which amounted to
47,399 in 1997 and 47,472 in 1996. The decrease is due to redemptions during the
period ended June 30, 1997.
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,
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 Registrant leases (the "Leases") certain properties (the "Properties") for
operation of restaurants to Del Taco, Inc. ("General Partner") on a triple net
basis. The Registrant had a total of ten Properties leased to Del Taco as of
September 30, 1997 (Del Taco, in turn, has subleased two of the restaurants).
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, except for the restaurant location in Twentynine Palms,
California. In accordance with an agreement entered into November 30, 1993,
effective February 1, 1994, the Del Taco restaurant in Twentynine Palms,
California ceased operation as a Del Taco and reopened on February 3, 1994 under
the trade name of Bobby Lyle's Incredible Edibles. In connection with the
agreement, the lease
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DEL TACO RESTAURANT PROPERTIES III
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997
NOTE 4 - LEASING ACTIVITIES - (Continued)
agreement has been amended to reflect a base rent of $3,333.33 per month and
overage rent of 12% of sales for annual sales greater than $333,333. On July 22,
1996, the subleasee ceased operation at the Twentynine Palms location. (see note
7)
For the three months ended September 30, 1997, the eight restaurants operated by
Del Taco, for which the Registrant is the lessor, had combined, unaudited sales
of $1,371,159 and net income of $49,770 as compared to $1,396,050 and $41,038
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 three
months ended September 30, 1997, the one restaurant operated by a Del Taco
franchisee, for which the Registrant is the lessor, had unaudited sales of
$109,463 as compared with $105,472 during the same period in 1996.
For the nine months ended September 30, 1997, the eight restaurants operated by
Del Taco, for which the Registrant is the lessor, had combined, unaudited sales
of $3,980,197 and net income of $126,752 as compared to $3,973,166 and $102,500
respectively, for the corresponding period in 1996. For the nine months ended
September 30, 1997, the one restaurant operated by a Del Taco franchisee, for
which the Registrant is the lessor, had unaudited sales of $302,159 as compared
with $288,311 during the same period in 1996.
For the three months and nine months ended September 30, 1997, the East Valley
Blvd. Restaurant in Walnut, California reported net losses of $4,512 and $16,599
as compared to net losses of $5,883 and $14,436 respectively, for the
corresponding period in 1996.
For the three months and nine months ended September 30, 1997, the Puente Hills
Plaza restaurant in Industry, California reported net income of $2,860 and
$1,515 as compared to net losses of $3,237 and $8,848 respectively, for the
corresponding period in 1996.
For the three months and nine months ended September 30, 1997, the Hesperia Road
restaurant in Victorville, California reported net income of $2,276 and $4,884
as compared to net losses of $102 and $3,595 respectively, for the corresponding
period in 1996.
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DEL TACO RESTAURANT PROPERTIES III
NOTES TO FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 1997
NOTE 5 - 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 6 with respect to certain distributions to the General
Partner.
NOTE 6 - DISTRIBUTIONS
On October 15, 1997, a distribution to the Limited Partners of $184,337 or
approximately $3.89 per Limited Partnership Unit, was approved. Such
distribution was paid on October 16, 1997. The General Partner also received a
distribution of $1,862 with respect to its 1% partnership interest.
NOTE 7 - REAL ESTATE HELD FOR SALE
In the third quarter of 1996, the Twentynine Palms location was reviewed for
suitability as a continuing partnership property and it was concluded that the
site is no longer suitable for operation of a Del Taco restaurant or as a
partnership investment under a sublease arrangement. After the review of the
site suitability, an estimate of current market value was prepared by an
independent real estate appraiser. As a result of the review, the Twentynine
Palms location was listed for sale with a broker and the property was written
down to its estimated fair value. Accordingly, the carrying value of the
Twentynine Palms property was adjusted down to $274,500.
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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 February 21,
1986. By June 1, 1987, the sale of such Units provided a total capitalization
for the Registrant of $12,001,000 including $1,000 attributable to the Original
Limited Partner. 14.7 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. Approximately $9,500,000 of the
remaining funds were expended for the acquisition of sites and construction of
ten restaurants. During 1987, the first three restaurants opened for business.
Four additional restaurants opened in 1988, two additional restaurants opened in
1989, and the tenth restaurant opened in 1990. In February 1992, the Registrant
distributed to Limited Partners of record on December 31, 1991 $280,553 of net
proceeds not utilized as reserves and not invested in Properties.
Since the ten restaurants owned by the Registrant opened, cash flow from Lease
payments received from Del Taco, the Registrant's General Partner, which leases
all ten restaurants (two of which have been subleased), have 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, except for the
restaurant located in Twentynine Palms, 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.
The September 30, 1997 restricted cash balance is a death and disability
redemption fund totaling $107,809. 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 Registrant 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. All questions regarding the eligibility of a Limited
Partner or the estate of a deceased Limited Partner to participate in the
redemption fund are determined by the Special Limited Partner.
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Results of Operations
The Registrant owns ten Properties that are under long-term lease to Del Taco
for restaurant operations (Del Taco, in turn, has subleased two of the
restaurants, one of which ceased operation as a Del Taco franchise and reopened
February 3, 1994 under the trade name of Bobby Lyle's Incredible Edibles). On
July 22, 1996, the subleasee ceased operation at the Twentynine Palms location.
In the third quarter of 1996, the Twentynine Palms location was reviewed for
suitability as a continuing partnership property and it was concluded that the
site is no longer suitable for operation of a Del Taco restaurant or as a
partnership investment under a sublease arrangement. After the review of the
site suitability, an estimate of current market value was prepared by an
independent real estate appraiser. As a result of the review, the Twentynine
Palms location was listed for sale with a broker and the property was written
down to its estimated fair value. Accordingly, the carrying value of the
Twentynine Palms property was adjusted down to $274,500.
The Registrant receives rental revenues equal to 12 percent of restaurant sales.
The Registrant had rental revenue of $187,675 for the three months ended
September 30, 1997, representing a decrease from the rental revenues of $190,182
during the same period in 1996. Such decrease is directly attributable to
decreased sales at the restaurants during the three month period. The Registrant
had rental revenues of $543,882 for the nine months ended September 30, 1997,
representing a increase from the rental revenues of $541,377 during the same
period in 1996. Such increase is directly attributable to increased sales at the
restaurants during the nine month periods.
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
---- ---- ---- ----
Rancho California Plaza,
Rancho California, CA $ 27,864 $ 33,546 $ 84,095 $ 95,708
East Vista Way, Vista, CA 15,193 15,165 43,924 45,065
4th Street, Perris, CA 26,757 26,223 78,052 76,615
Foothill Blvd., Upland, CA 20,070 19,331 57,251 53,616
Plaza at Puente Hills, Industry, CA 14,712 14,678 41,893 40,298
Twentynine Palms Hwy., Twentynine Palms, CA 10,000 10,000 30,000 30,000
East Valley Blvd., Walnut, CA 10,997 10,699 31,642 29,987
W. Sepulveda Blvd., Los Angeles, CA 13,136 12,656 36,259 34,597
Lassen Street, Chatsworth, CA 28,813 27,018 80,766 75,569
Hesperia Road, Victorville, CA 20,133 20,866 60,000 59,922
------- ------- ------- -------
Total $187,675 $190,182 $543,882 $541,377
======= ======= ======= =======
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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 38.70% 32.06%
Distribution of
information to
Limited Partners 59.26 64.75
Other 2.04 3.19
------ ------
100.00% 100.00%
====== ======
Operating expenses include general and administrative expenses which consist
primarily of accounting fees and costs of distribution of information to the
Limited Partners. For the three months ended September 30, general and
administrative expenses decreased from $14,461 in 1996 to $7,396 in 1997. The
quarter ended September 30, 1996, included printing costs for new checks,
envelopes, stationary and an appraisal fee for the Twentynine Palms restaurant.
The aforementioned costs did not recur in the quarter ended September 30, 1997.
For the nine months ended September 30, general and administrative expenses
decreased from $48,505 in 1996 to $39,280 in 1997. The Registrant incurred
depreciation expense in the amount of $66,383 and $71,687 for the three months
ended September 30, 1997 and 1996 respectively. The Registrant incurred
depreciation expense in the amount of $199,149 and $215,063 for the nine months
ended September 30, 1997 and 1996 respectively. The decrease in depreciation
expense is a result of certain equipment becoming fully depreciated in 1997.
As a result of the decrease in revenues totaling $1,214 for the three months
ended September 30, 1997 as compared to the corresponding period in 1996, and
the decrease in expenses totaling $114,738, primarily due to the writedown of
real estate held for sale, the Registrant's net income increased from $4,194 for
the three months ended September 30, 1996 to $117,718 for the corresponding
period in 1997. As a result of the increase in revenues totaling $5,248 for the
nine months ended September 30, 1997 as compared to the corresponding period in
1996, and the decrease in expenses totaling $127,508, the Registrant's net
income increased from $182,571 for the nine months ended September 30, 1996 to
$315,327 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.
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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.
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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 III
(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
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