ITEM 1 - BUSINESS
General
The Registrant engages in one line of business, the development, manufacture, sale and service of microwave-based instrumentation for testing, analysis and process control in analytical laboratory and industrial markets. These sample preparation products provide advantages of speed and simplicity compared to traditional methods of testing and analysis. The Registrant's products are used in the general analytical laboratory market and in many manufacturing and processing industries, including chemical and food processing. A significant amount of the Registrant's sales consists of consumable supplies, parts and service for its instrumentation. The Registrant was organized as a North Carolina corporation in 1971.
Products
Microwave Digestion System. The Microwave Digestion System and related accessories accounted for approximately 37%, 35%, and 35% of the Registrant's consolidated sales in 1996, 1995, and 1994, respectively. This product is a microwave heating system designed especially for use in the digestion of samples for laboratory analysis. It performs a rapid dissolution of samples in acid in a closed vessel system and is sold to the analytical laboratory market.
Moisture/Solids Analyzer. The Moisture/Solids Analyzer and related accessories accounted for approximately 19%, 22%, and 23% of the Registrant's consolidated sales in 1996, 1995, and 1994, respectively. This product performs percent moisture or percent solids measurement in process control monitoring, quality control and product development in a variety of industries, including chemical processing, pharmaceuticals, food and dairy products, tobacco, textiles, paint and coatings, pulp and paper, water and wastewater treatment.
Fat Analyzer System. The Registrant manufactures an automatic extraction unit which is used in conjunction with the Moisture/Solids Analyzer to form the Fat Analyzer System. This product measures the fat content of a variety of samples and is sold primarily to meat processing and other food industries.
Microwave Extraction System. The Microwave Extraction System uses microwave energy to rapidly heat solvents to high temperatures. These elevated temperatures reduce the time necessary to extract organic compounds from solid matrices. This product uses a unique temperature control system and multiple safety devices to insure both rapid and safe sample preparation. This product is a cost effective alternative to traditional solvent extraction due to its high recoveries and significantly reduced solvent usage. The Microwave Extraction System is marketed under the trade name, MES 1000. Sales of the MES 1000 will be limited in the United States until the U.S. Environmental Protection Agency approves the use of microwave-based instruments as an alternative method for extraction.
Microwave Ashing System. The Microwave Ashing System uses microwave energy to rapidly oxidize a sample to determine the ash (metal oxide) content. This product is primarily sold to the analytical laboratory market and petrochemical industry.
SpectroPrep System. The SpectroPrep System is a fully automated microwave heating system using a continuous flow-through process to digest samples for laboratory analysis. Initial uses of the system include environmental, chemical and agricultural applications.
STAR System. The STAR system, which incorporates temperature control and reagent (acid) addition, is an open cavity microwave heating system designed initially for use in the digestion of samples for laboratory analysis. It performs a rapid dissolution of samples
and is sold to the food, polymer, petroleum and chemical industries. The STAR system was introduced in March 1996.
Marketing and Sales
The Registrant's marketing and sales strategy is based on identifying applications for its products and providing its customers with prompt and effective technical and applications support.
The Registrant's marketing strategy utilizes telemarketing, direct mail, trade show demonstrations, articles, studies and trade journal advertising, product releases, seminars and extensive use of the Registrant's applications laboratory to develop specific testing applications for potential and existing customers.
Sales in the U.S. are generated by full-time sales personnel through sales and service locations throughout the country. Sales are conducted through direct selling efforts including on-site demonstrations. Sales and service representatives provide installation and training of production and laboratory personnel. Sales representatives are paid a base salary, commissions and/or other incentive compensation.
The Registrant's applications laboratory provides technical assistance to customers and potential customers in developing new and improved applications and related procedures. The applications laboratory performs tests in its facility in North Carolina and provides the results to customers.
The Registrant's foreign sales are conducted through independent dealers throughout the world and the Registrant's subsidiaries in England, Germany and Italy. Foreign sales are primarily to customers in Europe, Asia and Latin America. Foreign sales accounted for 46%, 42%, and 38% of net sales in fiscal 1996, 1995 and 1994, respectively.
Research and Development
The Registrant invests heavily in the research and development of potential new products, product improvements and enhancements, and applications research for existing products. For fiscal 1996, 1995, and 1994, research and development expense was $2,891,000, $2,605,000, and $2,641,000, respectively.
Product Protection
The Registrant relies upon its proprietary technology, continuing research and development and customer service support to maintain and enhance its competitive position. Important features of certain of the Registrant's products are protected by issued patents or pending patent applications. In March and July, the Company entered into licensing agreements for certain proprietary technology relating to the development of instruments to be used in testing for bacteria in raw milk and sterilization of dental, medical and laboratory equipment.
Manufacturing
The Registrant's manufacturing operations are carried out at its headquarters in Matthews, North Carolina and consist mostly of the assembly and testing of mechanical and electronic components purchased from others.
Certain components are currently purchased from single source suppliers. An interruption of one of these sources could result in delays in the Registrant's production while the Registrant developed an alternative supplier and could result in a loss of sales and income. There are other single source components for which the Registrant has determined that other sources are readily available.
The Registrant has experienced no significant production delays because of a supplier's inability to ship an acceptable component. The Registrant stocks what it believes is an adequate supply of all components and materials based upon delivery lead times and orders currently in hand.
Environmental Regulations
Compliance with federal, state and local provisions relating to protection of the environment has not had, and is not expected to have, any material adverse effects upon the production, capital expenditures, earnings or competitive position of the Registrant and its subsidiaries.
Employees
At June 30, 1996, the Registrant employed 186 persons. None of the Registrant's employees are covered by a collective bargaining agreement.
Backlog
The Registrant does not have a significant backlog of orders, as it normally ships its products within a short time after it receives orders.
Competition
The Registrant experiences direct competition in both foreign and U.S. markets from companies using microwave technology, traditional methods of heating and drying and other technologies.
There are a number of methods for performing acid digestions, the most common of which is the traditional "open vessel on a hot plate" method. There are three other primary manufacturers of closed vessel microwave digestion systems similar in nature to the Registrant's product. Also competing with the Microwave Digestion System are other advanced methods utilizing higher pressure and temperature including steel jacketed digestion vessels for use in conventional ovens and high pressure wet ashers.
There are a number of other methods for testing the moisture or solids content of various liquids and solids. In most instances, the equipment and instruments, which consist typically of simple heating and drying units and measurement techniques, are less expensive than the Moisture/Solids Analyzer produced by the Registrant. In addition, infrared moisture analyzers, radio frequency energy absorption techniques and the Karl Fischer titration method, a wet chemical procedure, have been developed. These systems compete directly with the Registrant's instrumentation in certain markets. Although there is one manufacturer of a microwave moisture system similar in nature to the Registrant's Moisture/Solids Analyzer, the Registrant does not believe there have been significant sales of this competitive product to date.
There are a number of methods for performing extractions, the most common of which are the traditional Soxhlet and sonication methods. Also competing with the Registrant's Microwave Extraction System are other advanced methods such as Supercritical Fluid Extraction and Accelerated Solvent Extraction.
The traditional method of ashing is with a resistance heat furnace. There are a number of manufacturers of laboratory furnaces used for ashing. Although these products are typically less expensive than the Microwave Ashing System sold by the Registrant, the Registrant's product offers advantages in both speed and process control.
Typically the Registrant's selling prices are higher than those of most of its competitors. The Registrant competes primarily upon the speed, ease of use, applications support and long-term cost savings to the users.
International Operations and Sales
Information about the Registrant's international operations and sales is incorporated by reference to footnotes 1 and 7 of the financial statements contained in the Registrant's 1996 Annual Report to Shareholders.
ITEM 2

ITEM 2 - PROPERTIES
The Registrant's headquarters, research and manufacturing operations are located in an 82,000 square foot building on an eight and three-fourths acre tract of land owned by the Registrant near Charlotte, North Carolina. The Registrant also owns a 5,000 square foot office and warehouse facility in England, owns a 5,200 square foot office and warehouse in Germany and leases a 4,000 square foot office in Italy. The facility in Germany is subject to a mortgage which had a balance of $116,000 at June 30, 1996. Management believes these facilities are adequate to serve existing markets for the next several years.
ITEM 3

ITEM 3 - LEGAL PROCEEDINGS
The Registrant is not a party to any material legal proceedings other than routine litigation incidental to the business of the Registrant.
ITEM 4

ITEM 4 is inapplicable and has been omitted.
PART II
ITEMS 5-7 are incorporated herein by reference to the inside front cover, pages 6-8, page 18 and items captioned "1996 Financial Highlights," "Management's Discussion and Analysis" and Footnote 10 "Quarterly Information (Unaudited)" of the Registrant's 1996 Annual Report to Shareholders.
ITEM 8

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, notes to the financial statements and quarterly supplemental financial data of the Registrant appearing on pages 9-18 of the Registrant's 1996 Annual Report to Shareholders are hereby incorporated by reference.
ITEM 9

ITEM 9 is inapplicable and has been omitted.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of CEM Corporation:
We have audited the consolidated financial statements of CEM Corporation and Subsidiaries as of June 30, 1996 and 1995, and for each of the three years in the period ended June 30, 1996, which financial statements are included on pages 9 through 18 of the 1996 Annual Report to Shareholders of CEM Corporation and incorporated by reference herein. We have also audited the financial statement schedule listed in the index on page 9 of this Form 10-K. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits.
We have conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CEM Corporation and Subsidiaries as of June 30, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
Charlotte, North Carolina July 26, 1996
PART III
Separate Item - Executive Officers of the Registrant
Information as to the chief executive officer of the Registrant is incorporated herein by reference to the section captioned "Election of Directors" of the Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held November 7, 1996. The following information is provided as to the executive officers of the Registrant who are not directors:
All of the Registrant's executive officers were appointed to their current positions at the Annual Meeting of the Board of Directors held on November 8, 1995. All of the Registrant's executive officers' terms of office extend until the next Annual Meeting of the Board of Directors and until their successors are elected and qualified.
ITEMS 10 through 12 are incorporated herein by reference to the sections captioned "Principal Shareholders and Holdings of Management," "Election of Directors," "Executive Compensation," "Director Compensation" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for Annual Meeting of Shareholders to be held November 7, 1996.
ITEM 13

ITEM 13 is inapplicable and has been omitted.
PART IV
ITEM 14

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. See accompanying Index to Financial Statements. (2) Financial Statement Schedules. See accompanying Index to Financial Statements. (3) Exhibits. 3.1 Restated Charter of the Registrant, as amended.(1) 3.2 Bylaws of the Registrant.(1) 10.1 * CEM Corporation 1986 Nonqualified Stock Option Plan, as amended, incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-53694). 10.2 * CEM Corporation Employee Stock Purchase Plan, as amended, incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-80136). 10.3 * CEM Corporation 1987 Stock Option Plan, as amended.(1) 10.4 * CEM Corporation 1993 Management Equity Plan, incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-75368). 10.5 * CEM Corporation Management Incentive Compensation Plan. 10.6 * CEM Corporation 1993 Nonqualified Stock Option Plan for Non-Employee Directors, incorporated herein by reference to the Registrant's Registration Statement on Form S-8 (File No. 33-75366). 11. Computation of Earnings per Share. 13. The Registrant's 1996 Annual Report to Shareholders. This Annual Report to shareholders is furnished for the information of the Commission only and, except for the parts thereof incorporated in this report, is not deemed to be "filed" as part of this filing. 21. List of the Registrant's Subsidiaries.(1) 23. Consent of Independent Accountants. 27. Financial Data Schedule (filed in electronic format only). This schedule shall not be deemed "filed" for purposes of Section 11 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 or otherwise be subject to the liabilities of such sections, nor shall it be deemed a part of any registration statement to which it relates. 99. Revised Item 21 of Part II to the Registrant's registration statements on Form S-8 (Registration Numbers 33-11952 and 33-25739).(1)
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* This exhibit is one of the Registrant's management contracts and compensatory plans and arrangements.
(1)Incorporated herein by reference to the Registrant's Form 10-K for the year ended June 30, 1994.
(b) Reports on Form 8-K. No reports on Form 8-K have been filed during the last quarter of the period covered by this report.
PART IV (CONTINUED)
With the exception of the consolidated financial statements listed in the above index, the information referred to in Items 5, 6, 7 and the supplementary quarterly information referred to in Item 8, all of which is included in the 1996 Annual Report to Shareholders of CEM Corporation and incorporated by reference into this Form 10-K Annual Report, the 1996 Annual Report to Shareholders is not to be deemed "filed" as part of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned thereunto duly authorized.
CEM CORPORATION
By: /s/ Michael J. Collins ---------------------- Michael J. Collins Dated: September 23, 1996 President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
CEM CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
EXHIBITS ITEM 14(a)(3) ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended Commission File Number - ------------------------- ---------------------- June 30, 1996 0-15383
CEM CORPORATION EXHIBIT INDEX
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(1)Incorporated herein by reference to the Registrant's Form 10-K for the year ended June 30, 1994.
CEM CORPORATION EXHIBIT INDEX (continued)
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(1)Incorporated herein by reference to the Registrant's Form 10-K for the year ended June 30, 1994.


ITEM 1. BUSINESS
The Registrant is a publicly-held Limited Partnership organized under the California Uniform Limited Partnership Act. In accordance with the Partnership Agreement, the Registrant's General Partner is Del Taco, Inc., a California corporation ("General Partner"). The Registrant sold 48,000 Units aggregating $12,000,000 through an offering of Limited Partnership Units from February 26, 1986 through June 1, 1987. The term of the Partnership Agreement is until December 31, 2025 unless terminated earlier by means provided therein.
The Registrant has engaged in the business of acquiring sites in California for the construction of ten Mexican-American restaurants for long-term lease to Del Taco, Inc. for operation under the Del Taco trade name. Ten properties are leased for 35 years on a triple-net basis for a rent equal to twelve percent of gross sales of each restaurant constructed thereon. 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 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. 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 was 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 net realizable value. Accordingly, the carrying value of the Twentynine Palms property was adjusted down to $274,500 generating a write down of $102,369 in the third quarter of 1996. The Registrant had a total of ten Properties leased to Del Taco as of December 31, 1996 (Del Taco, in turn has subleased two of the restaurants).
Because the ten Properties owned by the Registrant constitute virtually all of the Registrant's income producing assets, the business of the Registrant is almost entirely dependent on the success of the Del Taco trade name restaurants which lease those Properties. In turn, the success of those restaurants, which are not operated by the Registrant, is dependent on a large variety of factors, including, but not limited to, consumer demand and preference for fast food, in general, and for Mexican-American food in particular.
The Registrant has no full time employees. The General Partner is vested with full authority as to the general management and supervision of the business and affairs of the Registrant, and has a one percent interest in the profits or losses and distributions of the Registrant. Limited Partners have no right to participate in the management or conduct of such business and affairs.
ITEM 2.

ITEM 2. PROPERTIES
The Registrant has acquired ten Properties with proceeds obtained from the sale of Limited Partnership Units:
(1) Commencement of operation is the first date Del Taco, Inc., as lessee, operated the facility on the site as a Del Taco restaurant.
(2) The restaurant ceased operations as a Del Taco restaurant on February 1, 1994 and reopened on February 3, 1994 under the trade name of Bobby Lyle's Incredible Edibles. The sublease ceased operation on July 22, 1996.
(3) The restaurant is subleased to a franchisee of Del Taco, Inc. and the restaurant operates as a Del Taco restaurant.
PART II
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Registrant is not a party to any material pending legal proceedings.
ITEM 4.

ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 14, 1994, the General Partner held a special meeting of limited partners of the Partnership at the Doubletree Hotel, 100 The City Drive, Orange, California, for the purpose of voting on whether Del Taco should continue to serve as the General Partner of the Partnership.
A proposal to remove Del Taco as General Partner failed to obtain the necessary majority vote, receiving only 6.20 percent of eligible votes, and was defeated. Thus, Del Taco will continue to serve as sole General Partner of the Partnership, subject to all of the rights and responsibilities set forth in the Partnership's Restated Certificate and Agreement of Limited Partnership.
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS
The Registrant, a publicly-held Limited Partnership, sold 48,000 ($12,000,000) Limited Partnership Units during the offering period ended June 1, 1987 and currently has 1,792 Limited Partners of record. There is no public market for the trading of the Units. Distributions made by the Registrant to the Limited Partners during the past three fiscal years are described in Note 8 to the Notes to the Financial Statements contained under Item 8.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
(1) The net income per Limited Partnership Unit was calculated based upon 47,461, 47,513 and 47,573 weighted average Units outstanding for years 1996, 1995 and 1994, respectively.
(2) Cash distributions for the quarter ended December 31, 1992 amounted to $3.39 per Limited Partnership Unit and were paid December 31, 1992. Five quarterly distributions were disbursed during the year ended December 31, 1992.
(3) Two quarterly distributions were disbursed during the year ended December 31, 1993. Cash distributions for the quarters ended September 30, 1993 and December 31, 1993 amounted to $7.70 and were paid January 31, 1994 and February 2, 1994 respectively.
(4) Cash distributions for the quarter ended December 31, 1994 amounted to $3.56 per Limited Partnership Unit and were paid January 17, 1995. Five distributions were disbursed during the year ended December 31, 1994.
ITEM 6. SELECTED FINANCIAL DATA - CONTINUED
(5) Cash distributions for the quarter ended December 31, 1995 amounted to $3.86 per Limited Partnership Unit and were paid January 17, 1996. Four distributions were disbursed during the year ended December 31, 1995.
(6) Cash distributions for the quarter ended December 31, 1996 amounted to $3.64 per Limited Partnership Unit and were paid January 31, 1997. Four distributions were disbursed during the year ended December 31, 1996.
ITEM 7.

ITEM 7. 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 December 31, 1996 restricted cash balance is a death and disability redemption fund totaling $110,617. 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.
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 February 1, 1994 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 was 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 generating a write down of $102,369 in the third quarter of 1996.
The Registrant receives rental revenues equal to 12 percent of restaurant sales. The Registrant had rental revenue of $722,856 for the year ended December 31, 1996, representing a decrease from the rental revenues of $724,382 in 1995. Such decrease is directly attributable to decreased sales at the restaurants.
The following table sets forth, for the periods indicated, the percentage relationship to total general and administrative expenses of items included in the Registrant's Statements of Income:
Percentage of Total General & Admin. Expense
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 years ended December 31, general and administrative expenses increased from $52,211 in 1995 to $56,248 in 1996 reflecting higher costs for accounting and reporting to the Limited Partner's. The Registrant incurred depreciation expense in the amount of $281,447, $286,756, and $286,756 for the years ended December 31, 1996, 1995 and 1994, respectively. Depreciation expense decreased in 1996 due to the writedown in connection with the Twentynine Palms property.
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.
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." The adoption of SFAS No. 121 did not have a material impact on the Registrant's financial statements.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS
PART I. INFORMATION
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------
To the Partners of Del Taco Restaurant Properties III:
We have audited the accompanying balance sheets of DEL TACO RESTAURANT PROPERTIES III (a California limited partnership) as of December 31, 1996 and 1995, and the related statements of income, changes in partners' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Del Taco Restaurant Properties III as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP -------------------------------- ARTHUR ANDERSEN LLP
Orange County, California February 14, 1997
DEL TACO RESTAURANT PROPERTIES III
BALANCE SHEETS
The accompanying notes are an integral part of these financial statements.
DEL TACO RESTAURANT PROPERTIES III
STATEMENTS OF INCOME
The accompanying notes are an integral part of these financial statements.
DEL TACO RESTAURANT PROPERTIES III
STATEMENT OF CHANGES IN PARTNERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1996
The accompanying notes are an integral part of these financial statements.
DEL TACO RESTAURANT PROPERTIES III
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
DEL TACO RESTAURANT PROPERTIES III
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE PARTNERSHIP: Del Taco Restaurant Properties III (a California limited partnership) was formed on December 19, 1985, for the purpose of acquiring real property in California for construction of ten Mexican-American restaurants to be leased under long-term agreements to Del Taco, Inc. (General Partner for operation under the Del Taco trade name). As of July 5, 1990, all ten restaurants had commenced operation on acquired properties.
BASIS OF ACCOUNTING: The Partnership utilizes the accrual method of accounting for transactions relating to the business of the Partnership. Distributions are made to the General and Limited Partners in accordance with the provisions of the Partnership Agreement (see Note 2).
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.
INCOME TAXES: No provision has been made for federal or state income taxes on Partnership net income, since the Partnership is not subject to income tax. Partnership income is includable in the taxable income of the individual partners as required under applicable income tax laws. Certain items, primarily related to depreciation methods, are accounted for differently for income tax reporting purposes (see Note 7).
NET INCOME PER LIMITED PARTNERSHIP UNIT: The net income per Limited Partnership Unit was calculated based upon 47,461, 47,513, and 47,573 weighted average Units outstanding in 1996, 1995, and 1994, respectively.
USE OF ESTIMATES: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
DEL TACO RESTAURANT PROPERTIES III NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1996
NOTE 2 - PARTNERS' EQUITY
Pursuant to the Partnership Agreement, annual partnership net 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 3 - SITE ACQUISITION AND DEVELOPMENT FEE
Under terms of the Partnership Agreement, the General Partner is entitled to receive a fee in an amount equal to five percent of aggregate capital contributions. The fee shall be for services rendered in connection with site selection and the design and supervision of construction of improvements to acquired properties. This fee shall be earned at the time the services are rendered, but shall not be paid and shall be subordinated to the Limited Partners' interests until all restaurants have opened and the Limited Partners have received certain minimum returns on their investment, as required by the Partnership Agreement. It is the policy of the Partnership to accrue the site acquisition and development fee as an obligation to the General Partner. No fees were earned for such services during 1996, 1995 and 1994.
NOTE 4 - LEASING ACTIVITIES
The Registrant leases certain 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, 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 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 property (see note 9).
DEL TACO RESTAURANT PROPERTIES III NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1996
The Registrant had a total of ten Properties leased to Del Taco as of December 31, 1996 (Del Taco, in turn has subleased two of the restaurants).
NOTE 5 - RELATED PARTIES
The receivable from Del Taco consists of rent accrued for the month of December 1996. The rent receivable was collected on January 17, 1997.
The General Partner received $6,756 in distributions relating to its one percent interest in the Registrant for the year ended December 31, 1996.
Del Taco, Inc. 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, Inc. for operation under the Del Taco trade name.
Partners Network Corp., a California corporation ("PNC"), which is wholly-owned by the same principals who own the Dealer Manager, who was primarily responsible for selling Limited Partnership Units, is the Special Limited Partner of the Partnership, as defined in the Partnership Agreement. PNC will monitor the Partnership investments and perform services in connection with the disposition of properties in the future. In return for such services, PNC will be entitled to receive certain subordinated distributions and payments.
DEL TACO RESTAURANT PROPERTIES III NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1996
NOTE 6 - RESTRICTED CASH
At December 31, 1996 and 1995 the partnership had restricted cash balances of $110,617 and $126,277, respectively. 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 7 - INCOME TAXES
A reconciliation of financial statement net income to taxable income for each of the periods is as follows:
A reconciliation of partnership equity per the financial statements to net worth for tax purposes as of December 31, 1996, is as follows:
NOTE 8 - CASH DISTRIBUTIONS TO LIMITED PARTNERS
Cash distributions paid to Limited Partners for the three years ended December 31, 1996 were as follows:
DEL TACO RESTAURANT PROPERTIES III NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 1996
Cash distributions per Limited Partnership Unit were calculated based upon the weighted average number of units outstanding for each quarter and were paid from operations. Cash distributions for the quarter ended December 31, 1996 amounted to $3.64 per Limited Partnership Unit and were paid January 31, 1997.
NOTE 9 - 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 generating a writedown of $102,369 in the third quarter of 1996.
PART III
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT'S GENERAL PARTNER
(a) & (b) The executive officers and directors of the General Partner and their ages are set forth below:
The above referenced executive officers and directors of the General Partner will hold office until the annual meeting of its shareholders and directors, which is scheduled for the later part of 1997.
(c) None
(d) No family relationship exists between any such director or executive officer of the General Partner.
(e) The following is an account of the business experience during the past five years of each such director and executive officer:
Kevin K. Moriarty, Director, Chairman and Chief Executive Officer of Del Taco, Inc. Mr. Moriarty began his career with Burger King Corporation in 1974 in Operations Unit Management. In 1983, he was promoted to Area Manager in New York, and was subsequently promoted to the Regional Vice President, Chicago Region in 1985. In 1988, he became Executive Vice President and General Manager of the North Central Division. Mr. Moriarty served in that position until 1990 when he joined Del Taco, Inc. as President and Chief Executive Officer on July 31, 1990. Mr. Moriarty has served as a Director of the General Partner since 1990.
Paul W. Hitzelberger, Executive Vice President, Brand Strategy and Franchise Relations/Development of Del Taco, Inc. He was appointed to his current position in December 1995. Mr. Hitzelberger has responsibility for franchise development, relations and training and will oversee public relations and training for the corporation. From 1991 to 1995, Mr. Hitzelberger was Executive Vice President, Marketing of Del Taco, Inc. From September 1988 through September 1989, Mr. Hitzelberger was Chief Executive Officer of Environmental Marketing Group. Prior to that, Mr. Hitzelberger was a Vice President of Del Taco, Inc. Prior to joining Del Taco, Inc., he served as Vice President - Marketing at the department store division of Lucky Stores, Inc., a major supermarket retailer. Prior to his position with Lucky, Mr. Hitzelberger held various positions in marketing and retailing at Wallpapers to Go, Inc., a division of General Mills, Inc., and Coast to Coast Stores, Inc. a subsidiary of Household Merchandising, Inc. Mr. Hitzelberger received a Master of Business Administration degree from Loyola University in Chicago, Illinois.
Robert J. Terrano, Executive Vice President and Chief Financial Officer of Del Taco, Inc. From May 1994 to April 1995, Mr. Terrano served as Chief Financial Officer for Denny's, Inc. in Spartanburg, S.C. From August 1983 to May 1994, he served with Burger King Corporation, Miami Florida, in a variety of positions, most recently as Division Controller. Mr. Terrano joined Del Taco, Inc. in April 1995.
James D. Stoops, Executive Vice President, Operations of Del Taco, Inc. From 1968 to 1991, Mr. Stoops served in a wide variety of Operations positions with Burger King Corporation with increasing levels of responsibility. In 1985, Mr. Stoops was appointed Region Vice President/General Manager for the New York region and served in that position until October of 1990. In January of 1991, he joined Del Taco, Inc. in his current post.
Janet D. Simmons, Senior Vice President, Purchasing of Del Taco, Inc. From 1979 to 1986, Ms. Simmons was with Denny's Incorporated. She served in the Research and Development department in a variety of positions until 1982 when she was promoted to the position of Purchasing Agent. Ms. Simmons was hired in 1986 as Manager of Contract Purchasing with Carl Karcher Enterprises, a post she held until March 1990 when she became Vice President, Purchasing for Del Taco, Inc. Ms. Simmons has a Bachelor of Science degree in Foods and Nutrition from Cal State Polytechnic University in Pomona, California.
Michael L. Annis, Vice President, Secretary and General Counsel of Del Taco, Inc. From 1981 to 1986 Mr. Annis served as Regional Real Estate Manager and Director of Real Estate Services with Taco Bell, Inc. In 1986 he served as Regional General Manager with Quaker State Minit Lube. In January of 1987 Mr. Annis joined Red Robin International, Inc. as General Counsel and was subsequently promoted to Vice President/Secretary and later Vice President Real Estate Development/Secretary and General Counsel, the position he held until joining Del Taco, Inc. in December of 1993. Mr. Annis received his J.D. Degree from Whittier College.
C. Douglas Mitchell, Vice President and Corporate Controller. Mr. Mitchell joined Del Taco, Inc. in August of 1994 as Controller and was promoted to his current position in January 1996. From 1990 to 1994, Mr. Mitchell was a Senior Audit Manager with Coopers & Lybrand. Prior to 1990, Mr. Mitchell held various positions in finance and accounting with the Geneva Companies (a subsidiary of Chemical Bank), Zaremba Corporation (a real estate developer) and The Dexter Corporation (an international manufacturer of specialty materials). Mr. Mitchell has a Bachelor of Science degree with a major in accounting from the University of Southern California.
ITEM 11.

ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
The Registrant has no executive officers or directors and pays no direct remuneration to any executive officer or director of its General Partner. The Registrant has not issued any options or stock appreciation rights to any executive officer or director of its General Partner, nor does the Registrant propose to pay any annuity, pension or retirement benefits to any executive officer or director of its General Partner. The Registrant has no plan, nor does the Registrant presently propose a plan, which will result in any remuneration being paid to any executive officer or director of the General Partner upon termination of employment.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) No person of record currently owns more than five percent of Limited Partnership Units of the Registrant, nor was any person known of by the Registrant to own of record and beneficially, or beneficially only, more than five percent of such securities.
(b) Neither Del Taco, Inc., nor any executive officer or director of Del Taco, Inc. owns any Limited Partnership Units of the Registrant.
(c) The Registrant knows of no contractual arrangements, the operation or the terms of which may at a subsequent date result in a change in control of the Registrant, except for provisions in the Partnership Agreement providing for removal of the General Partner by holders of a majority of the Limited Partnership Units and if a material event of default occurs under the financing agreements of the General Partner.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) No transactions have occurred between the Registrant and any executive officer or director of its General Partner.
During 1996, the following transactions occurred between the Registrant and the General Partner pursuant to the terms of the Partnership Agreement.
(1) The General Partner earned $2,922 as its one percent share of the net income of the Registrant.
(2) The General Partner received $6,756 in distributions relating to its one percent interest in the Registrant.
(b) During 1996, the Registrant had no business relationships with any entity of a type required to be reported under this item.
(c) Neither the General Partner, any director or officer of the General Partner or any associate of any such person, was indebted to the Registrant at any time during 1996 for any amount in excess of $60,000.
(d) Not applicable.
PART IV
ITEM 14(a)(1) AND (2). EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
All schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(b) No reports on Form 8-K were filed during the last quarter of 1996.
(c) Exhibits required by Item 601 of Regulation S-K:
1. Incorporated herein by reference, Restated Agreement of Limited Partnership of Del Taco Restaurant Properties III filed as Exhibit 3.01 to Registrant's Registration Statement on Form S-11 as filed with the Securities and Exchange Commission on December 30, 1985.
2. Incorporated herein by reference, Amendment to Restated Agreement of Limited Partnership of Del Taco Restaurant Properties III.
3. Incorporated herein by reference, Form of Standard Lease to be entered into by Registrant and Del Taco, Inc., as lessee, filed as Exhibit 10.02 to Registrant's Registration Statement on Form S-11 as filed with the Securities and Exchange Commission on December 30, 1985.
27. Financial Data Schedule.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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