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, JUNE 30, 1998 ------------------------------------------------ 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 INCOME 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 NO.) 23041 AVENIDA DE LA CARLOTA, LAGUNA HILLS, CALIFORNIA 92653 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (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 [X] NO [ ] ================================================================================ 2 INDEX DEL TACO RESTAURANT PROPERTIES III ---------------------------------- PART I. FINANCIAL INFORMATION PAGE NUMBER - ------------------------------ ----------- Item 1. Financial Statements and Supplementary Data Balance Sheets at June 30, 1998 (Unaudited) and December 31, 1997 3 Statements of Income for the three and six months ended June 30, 1998 and 1997 (Unaudited) 4 Statements of Cash Flows for the six months ended June 30, 1998 and 1997 (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 12 SIGNATURES 13 - ---------- -2- 3 DEL TACO RESTAURANT PROPERTIES III ---------------------------------- BALANCE SHEETS -------------- June 30 December 31, 1998 1997 ---------- ---------- (UNAUDITED) ASSETS ------ CURRENT ASSETS: Cash $ 175,258 $ 189,315 Receivable from General Partner (Note 5) 62,124 59,368 Deposits 2,516 1,000 ---------- ---------- Total current assets 239,898 249,683 ---------- ---------- RESTRICTED CASH (NOTE 2) 107,809 107,809 PROPERTY AND EQUIPMENT, AT COST: 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 2,570,323 2,437,557 ---------- ---------- 6,313,524 6,446,290 ---------- ---------- $6,661,231 $6,803,782 ========== ========== LIABILITIES AND PARTNERS' EQUITY CURRENT LIABILITIES: Payable to Limited Partners $ 3,895 $ 4,006 Accounts Payable 2,258 9,938 ---------- ---------- Total current liabilities 6,153 13,944 ---------- ---------- OBLIGATION TO GENERAL PARTNER 577,510 577,510 ---------- ---------- PARTNERS' EQUITY: Limited Partners 6,112,468 6,245,880 General Partner-Del Taco, Inc. (34,900) (33,552) ---------- ---------- 6,077,568 6,212,328 ---------- ---------- $6,661,231 $6,803,782 ========== ========== The accompanying notes are an integral part of these financial statements -3- 4 DEL TACO RESTAURANT PROPERTIES III ---------------------------------- STATEMENTS OF INCOME -------------------- (UNAUDITED) ----------- THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------ ---------------------- 1998 1997 1998 1997 -------- -------- -------- ------- REVENUES: Rent (Notes 4 and 5) $181,264 $185,614 $347,788 $356,207 Interest 2,045 2,502 4,153 5,377 Other 525 425 1,678 675 -------- -------- -------- ------- 183,834 188,541 353,619 362,259 -------- -------- -------- ------- EXPENSES: General and administrative 13,233 9,304 35,746 31,884 Depreciation 66,383 66,383 132,766 132,766 -------- -------- -------- ------- 79,616 75,687 168,512 164,650 -------- -------- -------- ------- Net income $104,218 $112,854 $185,107 $197,609 ======== ======== ======== ======== Net income per Limited Partnership Unit (Note 3) $2.18 $2.36 $3.87 $4.13 ===== ===== ===== ===== The accompanying notes are an integral part of these financial statements. -4- 5 DEL TACO RESTAURANT PROPERTIES III ---------------------------------- STATEMENTS OF CASH FLOWS ------------------------ (UNAUDITED) ----------- SIX MONTHS ENDED JUNE 30 -------------------------- 1998 1997 -------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $185,107 $197,609 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 132,766 132,766 Increase in deposits (1,516) - Decrease in payable to Limited Partners (111) (256) Increase in receivable from General Partner (2,756) (4,618) Decrease in accounts payable (7,680) (1,276) -------- ---------- Net cash provided by operating activities 305,810 324,225 CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in restricted cash - 2,808 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemption of Limited Partnership Units - (2,808) Cash distribution to partners (319,867) (336,618) -------- -------- Net cash used by financing activities (319,867) (339,426) -------- -------- Net decrease in cash (14,057) (12,393) Beginning cash balance 189,315 190,185 -------- -------- Ending cash balance $175,258 $177,792 ======== ======== The accompanying notes are an integral part of these financial statements. -5- 6 DEL TACO RESTAURANT PROPERTIES III ---------------------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- JUNE 30, 1998 ------------- 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, 1997. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary to present fairly the partnership's financial position at June 30, 1998, the results of operations and cash flows for the six month periods ended June 30, 1998 and 1997 have been included. Operating results for the three and six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. NOTE 2 - RESTRICTED CASH At June 30, 1998 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. -6- 7 DEL TACO RESTAURANT PROPERTIES III ---------------------------------- NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- JUNE 30, 1998 ------------- 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 47,394 in 1998 and 47,410 in 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 nine Properties leased to Del Taco as of June 30, 1998 (Del Taco, in turn, has subleased one 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. For the three months ended June 30, 1998, the eight restaurants operated by Del Taco, for which the Registrant is the lessor, had combined, unaudited sales of $1,400,577 and net income of $59,534 as compared to $1,361,911 and $41,624 respectively, for the corresponding period in 1997. 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 June 30, 1998, the one restaurant operated by a Del Taco franchisee, for which the Registrant is the lessor, had unaudited sales of $109,951 as compared with $101,539 during the same period in 1997. For the six months ended June 30, 1998, the eight restaurants operated by Del Taco, for which the Registrant is the lessor, had combined, unaudited sales of $2,689,125 and net income of $107,350 as compared to $2,609,029 and $76,982 respectively, for the corresponding period in 1997. For the six months ended June 30, 1998, the one restaurant -7- 8 DEL TACO RESTAURANT PROPERTIES III ---------------------------------- NOTES TO FINANCIAL STATEMENTS - CONTINUED ----------------------------------------- JUNE 30, 1998 ------------- NOTE 4 - LEASING ACTIVITIES (CONTINUED) operated by a Del Taco franchisee, for which the Registrant is the lessor, had unaudited sales of $209,103 as compared with $192,696 during the same period in 1997. For the three months and six months ended June 30, 1998, the East Valley Blvd. Restaurant in Walnut, California reported net losses of $1,755 and $4,357 as compared to net losses of $5,686 and $12,087 respectively, for the corresponding period in 1997. For the three months and six months ended June 30, 1998, the Puente Hills Plaza restaurant in Industry, California reported net income of $943 and $506 as compared to net losses of $12 and $1,345 respectively, for the corresponding period in 1997. For the three months and six months ended June 30, 1998, the Vista Way restaurant in Vista, California reported net losses of $2,865 and $8,650 as compared to a net loss of $1,026 and net income of $1,037 respectively, for the corresponding period in 1997. NOTE 5 - TRANSACTIONS WITH DEL TACO The receivable from General Partner consists primarily of rent accrued for the month of June. The June rent was collected on July 10, 1998. 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 July 15, 1998, a distribution to the Limited Partners of $164,201, or approximately $3.46 per Limited Partnership Unit, was approved. Such distribution was paid on August 5, 1998. The General Partner also received a distribution of $1,659 with respect to its 1% partnership interest. -8- 9 NOTE 7 - SALE OF PROPERTY In November 1997, the Twentynine Palms property was sold yielding net proceeds of $278,612, resulting in a gain of $4,112. -9- 10 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. One restaurant was sold in November 1997. Since the nine restaurants owned by the Registrant opened, cash flow from Lease payments received from Del Taco, the Registrant's General Partner, which leases all nine remaining restaurants (one of which has 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 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 June 30, 1998 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 General Partner. -10- 11 Results of Operations - --------------------- The Registrant owns nine properties that are under long-term lease to Del Taco for restaurant operations (Del Taco, in turn, has subleased one of the restaurants). The Registrant receives rental revenues equal to 12 percent of restaurant sales. The Registrant had rental revenue of $181,264 for the three months ended June 30, 1998, representing a decrease from the rental revenues of $185,614 during the same period in 1997. The Registrant had rental revenues of $347,788 for the six months ended June 30, 1998, representing a decrease from the rental revenues of $356,207 during the same period in 1997. Such decreases are attributable to the sale of the Twentynine Palms property in November 1997. The following table sets forth rental revenue earned by restaurant for the quarter and year to date: THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 --------------------- ---------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Rancho California Plaza, Rancho California, CA $ 27,799 $ 29,183 $ 54,125 $ 56,231 East Vista Way, Vista, CA 15,209 14,883 29,118 28,731 4th Street, Perris, CA 29,311 26,637 55,375 51,295 Foothill Blvd., Upland, CA 20,758 19,134 40,013 37,181 Plaza at Puente Hills, Industry, CA 13,844 14,493 26,137 27,181 Twentynine Palms Hwy., Twentynine Palms, CA - 10,000 - 20,000 East Valley Blvd., Walnut, CA 11,239 10,823 21,532 20,645 W. Sepulveda Blvd., Los Angeles, CA 13,194 12,185 25,092 23,124 Lassen Street, Chatsworth, CA 28,803 27,521 55,482 51,953 Hesperia Road, Victorville, CA 21,107 20,755 40,914 39,866 -------- -------- -------- -------- Total $181,264 $185,614 $347,788 $356,207 ======== ======== ======== ======== -11- 12 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 -------------------------------- Six Months Ended June 30 ----------------------- 1998 1997 ------ ------ Accounting fees 61.96% 70.63% Distribution of information to Limited Partners 38.04 29.37 ------ ------ 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 June 30, general and administrative expenses increased from $9,304 in 1997 to $13,233 in 1998. For the six months ended June 30, general and administrative expenses increased from $31,884 in 1997 to $35,746 in 1998. General and administrative costs increased due to increased costs of printing and distribution. The Registrant incurred depreciation expense in the amount of $66,383 for the three months ended June 30, 1998 and 1997. The Registrant incurred depreciation expense in the amount of $132,766 for the six months ended June 30, 1998 and 1997. As a result of the decrease in revenues totaling $4,707 for the three months ended June 30, 1998 as compared to the corresponding period in 1997, and the increases in general and administrative expenses of $3,929, the Registrant's net income decreased from $112,854 for the three months ended June 30, 1997 to $104,218 for the corresponding period in 1998. As a result of the decrease in revenues totaling $8,640 for the six months ended June 30, 1998 as compared to the corresponding period in 1997, and the increase in general and administrative expenses of $3,862, the Registrant's net income decreased from $197,609 for the six months ended June 30, 1997 to $185,107 for the corresponding period in 1998. 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. On May 19, 1998, the Special Limited Partner resigned. Consistent with the Partnership Agreement, the General Partner assumed the duties and responsibilities of the Special Limited Partner. -12- 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 - Financial Data Schedule. (b) No reports on Form 8-K were filed during the six months ended June 30, 1998. -13- 14 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: July 31, 1998 /s/ Robert J. Terrano --------------------- Robert J. Terrano Executive Vice President, Chief Financial Officer Date: July 31, 1998 /s/ C. Douglas Mitchell ------------------------------- C. Douglas Mitchell Vice President and Corporate Controller -14- 15 EXHIBIT INDEX Exhibit Number Description - ------ ----------- 27 Financial Data Schedule