Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

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, 2015

¨	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. 0-16190

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

incorporation or organization)

(I.R.S. Employer

Identification Number)

25521 Commercentre Drive

Lake Forest, California

92630

(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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

INDEX

DEL TACO RESTAURANT PROPERTIES II


	PAGE NUMBER
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Balance Sheets at September 30, 2015 (Unaudited) and December 31, 2014		3

Condensed Statements of Income for the three and nine months ended September 30, 2015 and 2014 (Unaudited)		4

Condensed Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (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		11

PART II. OTHER INFORMATION

Item 6. Exhibits		12

SIGNATURE		13

-2-

PART I.

FINANCIAL INFORMATION

ITEM I.

FINANCIAL STATEMENTS

DEL TACO RESTAURANT PROPERTIES II

CONDENSED BALANCE SHEETS


	September 30,			December 31,
	2015			2014
	(Unaudited)
ASSETS

CURRENT ASSETS:
Cash	$	188,483		$	173,242
Receivable from Del Taco LLC		48,759			49,915
Other current assets		1,697			1,940

Total current assets		238,939			225,097

PROPERTY AND EQUIPMENT:
Land		1,430,345			1,430,345
Land improvements		375,661			375,661
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		2,290,267			2,263,720

		1,653,568			1,680,115

	$	1,892,507		$	1,905,212

LIABILITIES AND PARTNERS’ EQUITY

CURRENT LIABILITIES:
Payable to limited partners	$	41,556		$	54,773
Accounts payable		53,389			23,373

Total current liabilities		94,945			78,146

PARTNERS’ EQUITY:
Limited partners; 27,006 units outstanding at September 30, 2015 and December 31, 2014		1,828,637			1,857,846
General partner-Del Taco LLC		(31,075	)		(30,780	)

		1,797,562			1,827,066

	$	1,892,507		$	1,905,212

See accompanying notes to condensed financial statements.

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DEL TACO RESTAURANT PROPERTIES II

CONDENSED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
RENTAL REVENUES	$	149,528	$	143,586	$	447,923	$	427,143

EXPENSES:
General and administrative		39,288		24,676		145,792		83,916
Depreciation		8,849		8,849		26,547		26,547

		48,137		33,525		172,339		110,463

Operating income		101,391		110,061		275,584		316,680

OTHER INCOME:
Interest		57		61		159		174
Other		1,250		2,225		4,150		5,675

Net income	$	102,698	$	112,347	$	279,893	$	322,529

Net income per limited partnership unit (Note 2)	$	3.76	$	4.12	$	10.26	$	11.82

Number of units used in computing per unit amounts		27,006		27,006		27,006		27,006

See accompanying notes to condensed financial statements.

-4-

DEL TACO RESTAURANT PROPERTIES II

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	September 30,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income	$	279,893		$	322,529
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		26,547			26,547
Changes in operating assets and liabilities:
Receivable from Del Taco LLC		1,156			2,882
Other current assets		243			175
Payable to limited partners		(13,217	)		3,517
Accounts payable		30,016			13,444

Net cash provided by operating activities		324,638			369,094

CASH FLOWS FROM FINANCING ACTIVITIES:

Cash distributions to partners		(309,397	)		(367,952	)

Net cash used in financing activities		(309,397	)		(367,952	)

Net change in cash		15,241			1,142

Beginning cash balance		173,242			177,072

Ending cash balance	$	188,483		$	178,214

See accompanying notes to condensed financial statements.

-5-

DEL TACO RESTAURANT PROPERTIES II

NOTES TO CONDENSED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015

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, 2014 for Del Taco Restaurant Properties II (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 September 30, 2015, the results of operations for the three and nine month periods ended September 30, 2015 and 2014 and cash flows for the nine month periods ended September 30, 2015 and 2014 have been included. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. Amounts related to disclosure of December 31, 2014 balances within these condensed financial statements were derived from the 2014 audited financial statements.

Management has evaluated events subsequent to September 30, 2015 through the date that the accompanying condensed financial statements were filed with the Securities and Exchange Commission (“SEC”) for transactions and other events which may require adjustment of and/or disclosure in such financial statements.

NOTE 2 - NET INCOME PER LIMITED PARTNERSHIP UNIT

Net income per limited partnership unit is based on net income attributable to the limited partners (after one percent allocation to the general partner) using the weighted average number of units outstanding during the periods presented which amounted to 27,006 in 2015 and 2014.

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 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 Partnership leases five 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 2023. Pursuant to the lease agreements, minimum rentals of $3,500 per month are due to the Partnership during the first six months of any non-operating period caused by an insured casualty loss.

For the three months ended September 30, 2015, the five restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $1,246,067 and unaudited net income of $15,215 as compared to unaudited sales of $1,196,553 and unaudited net losses of $33,604, respectively, for the corresponding period in 2014. 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 loss from the corresponding period of the prior year primarily relates to increases in sales and reduced interest expense.

-6-

DEL TACO RESTAURANT PROPERTIES II

NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015

UNAUDITED

NOTE 3 - LEASING ACTIVITIES - continued

For the nine months ended September 30, 2015, the five restaurants operated by Del Taco, for which the Partnership is the lessor, had combined, unaudited sales of $3,732,695 and unaudited net income of $4,520 as compared to unaudited sales of $3,559,523 and unaudited net losses of $77,015 for the corresponding period in 2014. 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 loss from the corresponding period of the prior year primarily relates to increases in sales and reduced interest expense.

NOTE 4 - TRANSACTIONS WITH DEL TACO

The receivable from Del Taco consists primarily of rent accrued for the month of September 2015. The September rent receivable was collected in October 2015.

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 5 with respect to certain distributions to the General Partner.

NOTE 5 - DISTRIBUTIONS

Total cash distributions declared and paid in February, June and August 2015 were $103,469, $64,626 and $141,302, respectively. On October 26, 2015, a distribution to the limited partners of $100,908, or approximately $3.74 per limited partnership unit, was approved. Such distribution was paid on November 5, 2015. The General Partner also received a distribution of $1,019 with respect to its one percent partnership interest in November 2015.

NOTE 6 – 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.

NOTE 7 – CONCENTRATION OF RISK

The five 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, 2015 and 2014. Therefore, the business of the Partnership is entirely dependent on the success of the Del Taco trade name restaurants that lease the properties.

The Partnership maintains substantially all of its cash and cash equivalents at one major commercial bank. Although the Partnership at times maintains balances that exceed the federally insured limit, it has not experienced any losses related to these balances and management believes the credit risk to be minimal.

-7-

DEL TACO RESTAURANT PROPERTIES II

NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015

UNAUDITED

NOTE 8 – PURCHASE AND SALE AGREEMENT

On July 24, 2015, the Partnership entered into a purchase and sale agreement (the “Agreement”) with Orion Buying Corp. (“Orion”), an unrelated party, which is subject to approval as described below. Pursuant to the Agreement, and upon the terms and subject to the conditions described therein, Orion agreed to purchase all five properties owned by the Partnership (the “Properties”) on an “as is, where is” basis for a total purchase price of $8,075,000 in cash. Pursuant to the terms of the Agreement, Orion is obligated to deposit funds in escrow in an aggregate amount of $187,500.

If the Partnership is in default, and Orion is not in default, in the performance of any of its representations, warranties or covenants under the Agreement, and Orion has satisfied all of its obligations, then Orion may either (i) terminate the Agreement and receive a refund of its deposits and also recover from the Partnership its reasonable out-of-pocket costs in connection with the Agreement (but not to exceed $50,000) as liquidated damages, or (ii) bring a suit for specific performance.

If a contingency to the Partnership closing set forth in the Agreement is not satisfied by December 17, 2015, then the Partnership may terminate the Agreement and Orion will be refunded its deposits. However, if Orion is in default, and the Partnership is not in default, in the performance of any of its representations, warranties or covenants under the Agreement, and the Partnership has satisfied all of its obligations, then the Partnership may terminate the Agreement and receive Orion’s deposits as liquidated damages.

Following completion of the transaction, the current leases on the Properties will be terminated and the General Partner will lease the Properties from Orion. The sale of the Properties pursuant to the terms and conditions of the Agreement is subject to approval of a majority interest of the limited partners of the Partnership and other customary closing conditions related to the sale of real property. A Special Meeting of the limited partners is scheduled for November 23, 2015 for the purpose of considering a proposal to sell all of the properties owned by the partnership. If the transaction is consummated, CBRE, Inc., the real estate broker for the sale of the properties by the Partnership, will receive a commission of 1.5% of the purchase price. If the sale is approved by the majority interest of limited partners of the Partnership, the sale is expected to close during the fourth quarter of 2015.

On September 18, 2015, MacKenzie Realty Capital, Inc. (“MacKenzie”), a limited partner, filed a Schedule TO initiating a tender offer to purchase all units of the Partnership. This MacKenzie tender offer is unrelated to purchase and sale agreement with Orion. On September 25, 2015, the Partnership filed a Schedule 14D-9 solicitation/recommendation statements in response to the Schedule TO. On November 5, 2015, MacKenzie filed an amendment to its Schedule TO reporting that 435 units have been tendered and following purchase of all the tendered units, the purchasers will own an aggregate of approximately 2,283 units, or approximately 8.5% of the total outstanding units.

-8-

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources

Del Taco Restaurant Properties II (the “Partnership” or the “Company”) offered limited partnership units for sale between September 1984 and December 1985. $6,751,000 was raised through the sale of limited partnership units and used to acquire sites and build seven restaurants and also to pay commissions to brokers and to reimburse Del Taco LLC (the General Partner or Del Taco) for offering costs incurred. Two restaurants were sold in 1994.

The five 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.

Results of Operations

The Partnership owns five 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				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Bear Valley Rd., Victorville, CA	$	21,008	$	19,349	$	61,342	$	56,551
West Valley Blvd., Colton, CA		42,446		41,672		125,965		117,586
Palmdale Blvd., Palmdale, CA		19,749		19,194		59,893		56,027
Clay St., Riverside, CA		33,900		33,081		99,008		101,695
Varner Road, Thousand Palms, CA		32,425		30,290		101,715		95,284

Total	$	149,528	$	143,586	$	447,923	$	427,143

The Partnership receives rental revenues equal to 12 percent of gross sales from the restaurants. The Partnership earned rental revenue of $149,528 during the three month period ended September 30, 2015, which represents an increase of $5,942 from the corresponding period in 2014. The Partnership earned rental revenue of $447,923 during the nine month period ended September 30, 2015, which represents an increase of $20,780 from the corresponding period in 2014. The changes in rental revenues between 2014 and 2015 are directly attributable to changes in sales levels at the restaurants under lease due to local competitive and industry factors.

-9-

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,
	2015			2014			2015			2014
Accounting fees		14.96	%		23.46	%		32.26	%		54.52	%
Distribution of information to limited partners		20.18	%		31.73	%		19.39	%		32.30	%
Potential sale-related expenses		64.86	%		44.81	%		48.35	%		13.18	%

		100.00	%		100.00	%		100.00	%		100.00	%

Prior year percentages above have been reclassified to conform to the current year presentation. General and administrative expenses increased due to increased legal and printing costs in connection with the matters described in Note 8.

For the three month period ended September 30, 2015, net income decreased by $9,649 from 2014 to 2015 due to the increase in general and administrative expenses of $14,612 and the decrease in interest and other income of $979, partially offset by the increase in revenues of $5,942. For the nine month period ended September 30, 2015, net income decreased by $42,636 from 2014 to 2015 due to the increase in general and administrative expenses of $61,876 and the decrease in interest and other income of $1,540, partially offset by the increase in revenues of $20,780.

Significant Recent Accounting Pronouncements

None.

Off-Balance Sheet Arrangements

None

Critical Accounting Policies and Estimates

The Partnership’s consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and the Partnership’s disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in the financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of the Partnership’s results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical which involve significant management judgments, assumptions and estimates is included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2014. There have been no significant changes to the Partnership’s policies during 2015.

-10-

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 Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer 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.

-11-

PART II. OTHER INFORMATION

There is no information required to be reported for any items under Part II, except as follows:

Item 6.

Exhibits

(a)

Exhibits



31.1		Paul J. B. Murphy, III’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

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

-12-

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 II
						(a California limited partnership)
						Registrant

						Del Taco LLC
						General Partner

Date: November 12, 2015						/s/ Steven L. Brake
						Steven L. Brake
						Chief Financial Officer
						(Principal Financial Officer)

-13-

Large accelerated filer

Accelerated filer

Non-accelerated filer

x (Do not check if a smaller reporting company)

Smaller reporting company

DEL TACO RESTAURANT PROPERTIES II 10-Q