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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the transition period from ____ TO ____
Commission file number: 0-16645
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
California 33-0157561
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 South El Camino Real, Suite 1100 94402-1708
------------
San Mateo, California (Zip Code)
---------------------
(Address of principal executive offices)
Partnership's telephone number, including area code (650) 343-9300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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
No market for the Limited Partnership Units exists and therefore a market value
for such Units cannot be determined.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Page 1 of 30
Part I
Item 1. Business
Rancon Income Fund I, a California Limited Partnership, ("the Partnership") was
organized in accordance with the provisions of the California Revised Limited
Partnership Act for the purpose of acquiring, operating and disposing of
existing income producing commercial, industrial and residential real estate
properties. The general partner of the Partnership is Rancon Income Partners I
("General Partner"). The Partnership was organized in 1986, completed its public
offering of partnership units ("Units") in April 1989 and has 14,555 Units
issued and outstanding. The Partnership has no employees.
At December 31, 1997, the Partnership owned three properties, which are more
fully described in Item 2.
Competition Within the Market
Management believes that characteristics influencing the competitiveness of a
real estate project are the geographic location of the property, the
professionalism of the property manager and the maintenance and appearance of
the property, in addition to external factors such as general economic
circumstances, trends, and the existence of new, competing properties in the
vicinity. Additional competitive factors with respect to commercial and
industrial properties are the ease of access to the property, the adequacy of
related facilities, such as parking, and the ability to provide rent concessions
and additional tenant improvements commensurate with local market conditions.
Such competition may lead to rent concessions that could adversely affect the
Partnership's cash flow. Although management believes the Partnership properties
are competitive with comparable properties as to those factors within the
Partnership's control, over-building and other external factors could adversely
affect the ability of the Partnership to attract and retain tenants. The
marketability of the properties may also be affected (either positively or
negatively) by these factors as well as by changes in general or local economic
conditions, including prevailing interest rates. Depending on market and
economic conditions, the Partnership may be required to retain ownership of its
properties for periods longer than anticipated at acquisition, or may need to
sell earlier than anticipated, at a time or under terms and conditions that are
less advantageous than would be the case if unfavorable economic or market
conditions did not exist.
Working Capital
The Partnership's practice is to maintain cash reserves for normal repairs,
replacements, working capital and other contingencies. The Partnership knows of
no statistical information which allows comparison of its cash reserves to those
of its competitors.
Item 2. Properties
The Partnership currently owns the properties listed below:
Encumbrances at
Name Location Type Size December 31, 1997
---- -------- ---- ---- -----------------
Wakefield Industrial Temecula, California Light 44,200 sq. ft. None
Center Industrial
Bristol Medical Center Santa Ana, California Office 52,311 sq. ft. None
Aztec Village
Shopping Center San Diego, California Retail 23,789 sq. ft. None
Page 2 of 30
Wakefield Industrial Center
In April 1987, the Partnership acquired the Wakefield facility, at a cost of
approximately $1,899,000 in addition to acquisition fees of $87,000. Wakefield
consists of two buildings on three adjacent parcels of land comprising an
aggregate of approximately 3.99 acres. The property is located in Temecula,
California, on the west side of Jefferson Avenue, approximately 500 feet west of
the Interstate 15 highway in an area that is zoned for "medium manufacturing".
Both buildings are of concrete tilt-up construction with central heating and air
conditioning systems in the office areas. The first building located on one
parcel, contains approximately 25,000 square feet of leasable space, of which
approximately 5,900 square feet is office space with the balance used for
manufacturing and related purposes. The second building, located on the second
parcel, contains approximately 19,200 square feet of leasable space of which
approximately 4,800 square feet is office space with the balance used for
warehousing and related purposes. Both lots contain uncovered parking for a
total of approximately 54 cars. The third parcel is unimproved except for
partial paving. It is used for car parking and truck access.
According to research conducted by the Partnership's property manager, the
market has approximately 7,120,000 square feet of existing industrial space,
with an overall vacancy rate of 5%. The area offers a wide range of high
quality, attractive industrial projects ranging from multi-tenant incubator
space to large, single-user distribution facilities located in master-planned
business parks. Of the 7,120,000 square feet, approximately 96,000 square feet
of multi-tenant and free standing industrial space compete directly with the
Wakefield Industrial Center. The average annual effective rents for the area
approximate $3.60 per foot NNN (tenant pays all operating expenses, including
taxes, insurance, and capital) depending on age, location and size of the
property. Land prices for finished industrial lots range from $2.00 to $4.00 per
square foot depending on zoning, size, location and amenities.
The occupancy level at December 31, 1997 and 1996 and November 30, 1995, 1994
and 1993, expressed as a percentage of the total net rentable square feet, and
the average annual effective rent per square foot for the last five years were:
Occupancy Level Average Annual Effective
Percentage Rent Per Square Foot
1997 100% $ 4.14
1996 100% $ 4.04
1995 100% $ 3.96
1994 100% $ 5.48
1993 100% $ 4.77
One tenant occupies 100% of the net rentable square footage of the two
buildings. Principal terms of the lease and the nature of the tenant's business
are as follows:
Wakefield Engineering, Inc.
Nature of Business: Manufacturer
Lease Term: 10 years
Expiration Date: November 30, 2004
Square Feet: 44,200
(% of rentable total): 100%
Annual Rent: $183,000
Rent Increase: Annual - CPI
Renewal Options: None
Page 3 of 30
In 1996, due to projected cash flow analyses, management determined that the
carrying value of Wakefield Industrial Center was in excess of the estimated
fair value. As a result, in 1996, the Partnership recorded a provision for
impairment of its investment in Wakefield Industrial Center of $175,000.
In the opinion of management, the property is adequately covered by insurance.
At December 31, 1997, the Wakefield Industrial Center property is unencumbered.
During 1997, the property was assessed property taxes of approximately $23,000
based on a tax rate of 1.27%.
Bristol Medical Center
In October 1987, the Partnership entered into an agreement with Rancon Financial
Corporation ("RFC") to acquire Bristol Medical Center, for a total purchase
price of $5,105,000, plus all costs incurred by RFC in ownership and management
of the property from December 1986. The purchase price was paid in installments
through May 1988, so that the Partnership was entitled to receive a percentage
of the net operating income of the property exclusive of depreciation expense.
The Partnership completed the purchase of the Bristol Medical Center in May 1988
for a total cost of $5,370,000.
Bristol Medical Center consists of two two-story medical office buildings and
related parking on approximately 3.42 acres. The two office buildings together
contain an aggregate of approximately 52,311 net rentable square feet of office
space. Each of the buildings has one elevator and three stairways, and each
suite is served by its own roof-mounted heating and air conditioning unit. The
property contains uncovered parking for approximately 299 cars.
Bristol Medical Center is located in Santa Ana, California, on the west side of
Bristol Street, approximately 1.5 miles from a major east-west freeway and
approximately 2 miles from a major north-south freeway. The John Wayne Orange
County airport is located 2.5 miles northwest of the property.
The medical office market in which the property is located consists of
approximately 189,847 rentable square feet in five projects, all of which are
older Class "B" Buildings. The sub-market, consisting of smaller buildings,
often houses converted to dental/medical offices and retail sites, is being
condemned or purchased by the City of Santa Ana to widen Bristol Street. The
project includes new retail buildings built on the reconfigured lots and a
landscaped median, which should enhance the area considerably.
According to research conducted by the Partnership's property manager, net
absorption in this area has been on a downward trend since 1992 when changes in
the business environment for the medical industry pushed vacancy rates up. Total
vacancy in this market was 15.67% for 1997, an increase of 1.07% from 1996. The
annual rental rates for the area approximates $15.00 per square foot for
modified gross (tenant pays utilities and interior janitorial costs) and $16.80
per square foot for full service gross (tenant pays interior janitorial costs).
The occupancy level at December 31, 1997 and 1996 and November 30, 1995, 1994
and 1993, expressed as a percentage of the total net rentable square feet, and
the average annual effective rent per square foot for the last five years were
as follows:
Page 4 of 30
Occupancy Level Average Annual Effective
Percentage Rent Per Square Foot
1997 83% $ 19.00
1996 85% $ 18.89
1995 91% $ 18.76
1994 93% $ 18.91
1993 98% $ 18.82
The current annual rental rates range from $16.68 to $25.29 per square foot.
The current annual rental rates at Bristol Medical Center are higher than the
market average as the leases in effect are old and were signed at a time when
such rates were market rates. However, the vacancy rate at Bristol Medical
Center remained at approximately 20% during 1997. The main obstacle in leasing
space at Bristol Medical Center is the current state of the medical industry in
Santa Ana, California. It appears that independent physicians not participating
in a managed care group are going bankrupt and, as a result, no new doctors have
leased space in the area in the last three years.
One tenant occupies more than ten percent of the net rentable square footage of
the building. The principal terms of the lease and the nature of the tenant's
business are as follows:
St. Jude
Heritage Health
---------------
Nature of Business: Medical clinic
Lease Term: 1 year
Expiration Date: September 30, 1998
Square Feet: 24,957
(% of rentable total): 48%
Annual Rent: $470,500
Rent Increase: Annual - CPI
Renewal Options: None
St. Jude Heritage Health has a one year contract to manage a neighboring
hospital. Since the renewal of the St. Jude Heritage Health lease upon
expiration is dependent upon their ability to renew their contract with the
hospital, they do not commit to lease renewals with the Partnership in advance.
In September 1997, management successfully executed a one year lease renew with
St. Jude Heritage Health. Management believes, however, that the tenant will
renew for another year in September 1998 as relations with the hospital and St.
Jude Heritage Health appear positive.
In 1996, due to an increase in vacancy, the difficulty in leasing vacant space
and projected cash flow analyses, management determined that the carrying value
of the Bristol Medical Center was in excess of the estimated fair value. As a
result, in 1996, the Partnership recorded a provision for impairment of its
investment in Bristol Medical Center of $1,470,000.
In the opinion of management, the property is adequately covered by insurance.
At December 31, 1997, the Bristol Medical Center property is unencumbered.
During 1997, the property was assessed property taxes of approximately $59,000
based on a tax rate of 1.08%.
Page 5 of 30
Aztec Village Shopping Center
In May 1988, the Partnership entered into an agreement with RFC to acquire the
Aztec Village Shopping Center located in San Diego, California for $3,350,000,
plus all costs incurred by RFC in ownership and management of the property from
May 1988. The purchase price was paid in installments through February 1989, so
that the Partnership was entitled to receive a percentage of the net operating
income of the property exclusive of depreciation expense. The Partnership
completed the purchase of the Aztec Village Shopping Center in February 1989 for
a total cost of $3,357,000. Management does not expect much growth or
appreciation for the shopping center and as such is currently marketing the
property for sale. This rental property is classified as property held for sale
on the Partnership's 1997 and 1996 balance sheets.
Aztec Village Shopping Center contains approximately 23,789 square feet of
leasable space on approximately 1.52 acres. The shopping center is a single
story structure constructed with a wood frame and concrete block walls with
metal stud interior portioning and stucco and wood siding on the exterior. The
shopping center parking lot contains parking for approximately 105 cars.
Aztec Village Shopping Center is located in east San Diego situated
approximately five miles east of downtown, and is situated at the convergence of
Route 8 Inland Freeway and Interstate 15. All freeways are readily accessible
within ten minutes of driving. The property is on the south side of El Cajon
Boulevard, which is a primary business street.
The trade area surrounding the Aztec Village Shopping Center is considered East
San Diego and the western portions of La Mesa. According to research conducted
by the Partnership's property manager, there are approximately 446,000 square
feet of retail space along El Cajon Boulevard from College Avenue to 70th Street
within the neighborhood area, with a combined vacancy rate of 11%, a decrease of
2% over 1996. The commercial sector consists of nine strip retail shopping
centers and two supermarket anchored centers. Annual rental rates range from
$9.00 to $13.20 per square foot NNN (tenant pays all operating expenses,
including taxes, insurance, and capital) for the strip retail centers and $9.00
to $16.80 per square foot NNN for the anchored centers depending upon size,
location, condition, and amenities of the property.
The immediate area surrounding San Diego State University, commencing at College
Avenue and Montezuma, is slated for major redevelopment. The redevelopment will
consist of adding 150,000 square feet of commercial space and over 1,000
residential units. This project will offer considerable competition to the Aztec
Village Shopping Center and, due to its proximity to the campus, will command
higher rents and strong national tenant interest. As of December 31, 1997, the
construction has been delayed.
The occupancy level at December 31, 1997 and 1996 and November 30, 1995, 1994
and 1993, expressed as a percentage of the total net rentable square feet, and
the average annual effective rent per square foot for the last five years were:
Occupancy Level Average Annual Effective
Percentage Rent Per Square Foot
1997 46% $ 10.56
1996 38% $ 10.46
1995 69% $ 10.62
1994 70% $ 7.80
1993 68% $ 13.83
At the end of 1995, two tenants occupying a total of 6,530 square feet vacated
the premises due to their financial instability. Management has continued to
market the space but has been unsuccessful due to the
Page 6 of 30
poor economic area in which the property is located. Management believes
potential business is attracted to the competitors' products which offer either
anchor tenants and/or closer proximity to San Diego State University.
The current annual rental rates range from $9.00 to $15.49 per square foot. In
addition, one tenant rents storage space at an annual rental rate of $3.69 per
square foot.
One tenant occupies more than ten percent of the net rentable square footage of
the building. The principal terms of the lease and the nature of the tenant's
business are as follows:
Music Trader, Inc.
------------------
Nature of Business: Music retailer
Lease Term: 5 years
Expiration Date: May 31, 2001
Square Feet: 2,649
(% of rentable total): 11%
Annual Rent: $23,900
Rent Increase: Annual Fixed
Renewal Options: None
In 1997 due to an increase in vacancy, the difficulty in leasing vacant space
and projected cash flow analyses, management determined that the carrying value
of the Aztec Village Shopping Center was in excess of the estimated fair value.
As a result, in 1997, the Partnership recorded a provision for impairment of its
investment in Aztec Village Shopping Center of $438,000.
In the opinion of management, the property is adequately covered by insurance.
At December 31, 1997, the Aztec Village Shopping Center property is
unencumbered.
During 1997, the property was assessed property taxes of approximately $13,000
based on a tax rate of 0.96%.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Page 7 of 30
Part II
Item 5. Market for Partnership's Common Equity and Related Stockholder Matters
Market Information
- ------------------
There is no established trading market for the Units.
Holders
- -------
As of December 31, 1997, a total of 1,409 persons (Limited Partners) held Units.
Distributions
- -------------
Distributions are paid from either Cash From Operations or Cash From Sales or
Financing.
Cash From Operations is defined in the Partnership Agreement as all cash
receipts from operations in the ordinary course of business (except for the
sale, refinancing, exchange or other disposition of real property in the
ordinary course of business) after deducting payments disbursed for operating
expenses. Distributions of Cash From Operations are generally allocated as
follows: (i) first to the Limited Partners until they receive a noncumulative 6%
return per annum on their unreturned capital contributions and (ii) the
remainder, if any in a given year, shall be divided in the ratio of 90% to the
Limited Partners and 10% to the General Partner.
Distributions equal to the amounts otherwise allocable to the General Partner
but reallocated to the Limited Partners pursuant to (i) above shall be paid to
the General Partner on the next occasion on which Cash From Operations is
available for distributions to Limited Partners in an amount in excess of the
amount required to provide the Limited Partners with a 6% per annum return on
their unreturned capital contributions, in which case the excess shall be paid
to the General Partner in an amount up to the aggregate amount previously
re-allocated pursuant to (i) above and not subsequently repaid in accordance
with the provisions of this paragraph.
Cash From Sales or Financing is defined in the Partnership Agreement as the net
cash realized by the Partnership from the sale, disposition or refinancing of
any property after retirement of applicable mortgage debt and all expenses
related to the transaction, together with interest on any notes taken back by
the Partnership upon the sale of a property. All distributions of Cash From
Sales or Financing are allocated generally as follows (a more explicit statement
of these distribution policies is set forth in the Partnership Agreement):
(i) First, 2% to the General Partner and 98% to the Limited Partners until
the Limited Partners have received an amount equal to their capital
contributions; (ii) Second, 2% to the General Partner and 98% to the
Limited Partners until the Limited Partners have received a 6% return
on their unreturned capital contributions (less prior distributions of
Cash From Operations); (iii) Third, to the General Partner the amount
of subordinated real estate commissions payable per the Partnership
Agreement; (iv) Fourth, 2% to the General Partner and 98% to the
Limited Partners until the Limited Partners have received an
additional 4% return on their unreturned capital contributions (less
prior distributions of Cash From Operations); (v) Fifth, 2% to the
General Partner and 98% to the Limited Partners until the Limited
Partners who purchased their Units prior to June 1, 1988, receive an
additional return (depending on the date on which they purchased the
Units) on their unreturned capital of either 8%, 5% or 2% (calculated
through the first anniversary date of the purchase of the Units); (vi)
Sixth, 98% to the General Partner and
Page 8 of 30
2% to the Limited Partners until the General Partner has received an
amount equal to 15% of all prior distributions made to the Limited
Partners and the General Partner pursuant to subparagraph (iv) and (v)
(less prior distributions to the General Partner under subparagraph
(iv) and (v)); and (vii) Seventh, 85% to the Limited Partners and 15%
to the General Partner.
The following distributions of Cash From Operations were made by the Partnership
during the three most recent fiscal years. There were no distributions of Cash
From Sales or Financing made by the Partnership during the three most recent
fiscal years.
Amount Amount
Date of Amount Distributed Distributed Distributed to
Distribution to Limited Partners Per Unit General Partner
08/29/97 $ 28,000 $ 1.92 --
02/28/97 $ 14,000 $ 0.96 --
11/29/96 $ 14,000 $ 0.96 --
08/30/96 $ 14,000 $ 0.96 --
05/31/96 $ 14,000 $ 0.96 --
03/01/96 $ 60,000 $ 4.12 --
12/31/95 $ 60,000 $ 4.12 --
08/31/95 $ 61,000 $ 4.19 --
06/02/95 $ 61,000 $ 4.19 --
03/02/95 $ 182,000 $ 12.50 --
12/02/94 $ 182,000 $ 12.50 --
Of the total distributions noted above, $2.88, $7.00 and $12.99 per unit
represented a return of capital for the fiscal years ended December 31, 1997 and
1996 and November 30, 1995, respectively.
Estimated distributions for 1998 will remain consistent with the 1997 level but
there can be no assurance that the distribution level will not be adjusted.
Page 9 of 30
Item 6. Selected Financial Data
The following is selected financial data for the five years ended December 31,
1997 and 1996 and November 30, 1995, 1994 and 1993 (in thousands, except per
Unit data).
1997 1996 1995 1994 1993
-------- ------- -------- -------- -------
Rental income $ 1,142 $ 1,125 $ 1,397 $ 1,417 $ 1,304
Provision for
impairment of
investment in
real estate $ 438 $ 1,645 $ -- $ 380 $ --
Net income (loss) $ (165) $ (1,394) $ 300 $ (69) $ 403
Net income (loss)
allocable to limited
partners $ (163) $ (1,380) $ 297 $ (62) $ 399
Net income (loss)
per limited
partnership unit $ (11.20) $ (94.81) $ 20.40 $ (4.26) $ 27.42
Total assets $ 6,323 $ 6,531 $ 8,159 $ 8,483 $ 8,905
Cash distributions
per limited
partnership unit $ 2.88 $ 7.00 $ 33.39 $ 37.50 $ 50.00
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LIQUIDITY AND CAPITAL RESOURCES
As of April 21, 1989, Rancon Income Fund I ("the Partnership") was funded from
the sale of limited partnership units ("Units") in the amount of $14,555,000. As
of December 31, 1997, the Partnership had cash of $749,000. The remainder of the
Partnership's assets consists primarily of its investments in properties, which
totaled approximately $5,478,000 at December 31, 1997.
The Partnership's primary source of funds has consisted of the proceeds of its
public offering of Units. As the Partnership was organized for the purpose of
acquiring income producing properties, the cash generated from such properties,
net of costs incurred in operating the properties, is also a significant source
of funds for the Partnership. Another source of funds is the interest income
earned on cash balances. Such cash flows from operating activities have been
sufficient to provide funds to reinvest in the properties by way of
improvements, as well as to fund quarterly distributions to the limited
partners.
All of the Partnership's assets are located in the Southern California region
and have been directly affected by the economic weakness of the region.
Management continues to evaluate the real estate market in Southern California
in an effort to determine the optimal time to dispose of the assets and realize
their maximum value.
Page 10 of 30
Management believes that the Partnership's available cash together with the cash
generated by the operations of the Partnership's properties will be sufficient
to finance the Partnership's continued operations. Estimated distributions for
1998 will remain consistent with the 1997 level but there can be no assurance
that the distribution level will not be adjusted. The Partnership is currently
soliciting offers for the sale of Aztec Village Shopping Center. This rental
property is classified as property held for sale on the Partnership's 1997 and
1996 balance sheets.
RESULTS OF OPERATIONS
Effective with the year ended December 31, 1995, the Partnership's reporting
year changed from November 30 to December 31. Since the Partnership's operations
are not seasonal, the analysis of operations compares the fiscal years ended
December 31, 1996 and November 30, 1995.
Rental income increased slightly, 2%, for the year ended December 31, 1997
compared to the year ended December 31, 1996. The 19%, or $272,000, decrease for
the year ended December 31, 1996 compared to the year ended November 30, 1995 is
a result of decreased occupancy at Aztec Village Shopping Center and Bristol
Medical Center combined with the decrease in billings for common area
maintenance (CAM) and prior year recoveries due to the higher vacancies. Aztec
Village Shopping Center lost two major tenants at the end of 1995 due to
financial instability and has been unsuccessful in leasing the space. In
addition, there were unexpected vacancies in 1996 at Bristol Medical Center due
to the depressed market.
Interest and other income decreased $107,000, or 88%, in 1997 compared to 1996
and increased $115,000 in 1996 compared to 1995 primarily due to a one-time
legal settlement of $111,000 in 1996 from a former tenant at Bristol Medical
Center. Additionally, interest income has increased in 1997 compared to the same
periods in 1996 and 1995 due to higher average invested cash balances.
Operating expenses decreased $52,000, or 11%, for the year ended December 31,
1997 compared to the same period in 1996 primarily due to $42,000 of legal fees
incurred in 1996 in connection with the settlement of a former tenant at Bristol
Medical Center. The remaining decrease relates to $9,000 of costs incurred in
1996 when the Partnership obtained appraisals of the rental properties. The
$84,000, or 15%, decrease for the year ended December 31, 1996 compared to the
year ended November 30, 1995 was partially due to the vacancies at Aztec Village
Shopping Center and Bristol Medical Center. As a result miscellaneous operating
expenses, electric expense and base management fees decreased $30,000, $20,000
and $8,000, respectively. In addition, there was a decrease in real estate taxes
of $25,000 pertaining to all the Partnership's properties.
The $46,000, or 20%, decrease in depreciation and amortization expense for the
year ended December 31, 1997 compared to the same period in 1996 is a result of
the decrease in depreciation of the Aztec Village Shopping Center as such
property was classified as held for sale at December 31, 1996 and accordingly,
depreciation of the asset ceased. The $68,000, or 23%, decrease for the year
ended December 31, 1996 compared to the year ended November 30, 1995 is
primarily the result of certain lease commissions becoming fully amortized at
Bristol Medical Center and Aztec Village Shopping Center at the end of 1995.
In 1997 and 1996, due to an increase in vacancy, the difficulty in leasing
vacant space and projected cash flow analyses, management determined that the
carrying value of the Partnership's rental properties were in excess of their
estimated fair values. As a result, in 1997, the Partnership recorded a
provision for impairment of its investment in Aztec Village Shopping Center of
$438,000 and, in 1996, provisions for impairment of the investments in Bristol
Medical Center and Wakefield Industrial Center were recorded in the amounts of
$1,470,000 and $175,000, respectively.
Page 11 of 30
General and administrative expenses decreased $14,000, or 5%, for the year ended
December 31, 1997 compared to the year ended December 31, 1996 primarily due to
additional one-time tax preparation fees of $13,000 incurred in 1996 resulting
from the preparation of additional prior and current year tax returns. The
$44,000, or 18%, increase in the year ended December 31, 1996 compared to the
year ended November 30, 1995 is partially due to a the aforementioned tax
preparation fees, $10,000 increase in quarterly overhead expense, a one-time
payment of $5,000 for professional services rendered in connection with the
valuation of the limited partner interests and an increase in data processing
fees of $7,000. In addition, the Partnership incurred legal fees of
approximately $9,000 associated with the management of the Partnership's and
properties day-to-day affairs.
Year 2000 Compliance
The Partnership utilizes a number of computer software programs and operating
systems across its entire organization, including applications used in financial
business systems and various administrative functions. To the extent that the
Partnership's software applications contain a source code that is unable to
appropriately interpret the upcoming calendar year "2000" and beyond, some level
of modification, or replacement of such applications will be necessary. The
Partnership has completed its identification of applications that are not yet
"Year 2000" compliant and has commenced modification or replacement of such
applications, as necessary. Given information known at this time about the
Partnership's systems that are non-compliant, coupled with the Partnership's
ongoing, normal course-of-business efforts to upgrade or replace critical
systems, as necessary, management does not expect "Year 2000" compliance costs
to have any material adverse impact on the Partnership's liquidity or ongoing
results of operations. No assurance can be given, however, that all of the
Partnership's systems will be "Year 2000" compliant or that compliance costs or
the impact of the Partnership's failure to achieve substantial "Year 2000"
compliance will not have a material adverse effect on the Partnership's future
liquidity or results of operations.
Item 8. Financial Statements and Supplementary Data
For information with respect to Item 8, see Financial Statements and Schedules
as listed in Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Page 12 of 30
Part III
Item 10. Directors and Executive Officers of the Partnership
Rancon Income Partners I is the General Partner of the Partnership. Daniel Lee
Stephenson and Rancon Financial Corporation ("RFC") are the General Partners of
Rancon Income Partners I, L.P. The executive officer and director of RFC is:
Daniel L. Stephenson Director, President, Chief Executive Officer and
Chief Financial Officer
There is no fixed term of office for Mr. Stephenson.
Mr. Stephenson, age 54, founded RFC (formerly known as Rancon Corporation) in
1971 for the purpose of establishing itself as a commercial, industrial and
residential property syndication, development and brokerage concern. Mr.
Stephenson has, from inception, held the position of Director. In addition, Mr.
Stephenson was President and Chief Executive Officer of RFC from 1971 to 1986,
from August 1991 to September 1992 and from March 31, 1995 to present. Mr.
Stephenson is Chairman of the Board of PacWest Group, Inc., a real estate firm
which has acquired a portfolio of assets from the Resolution Trust Corporation.
Item 11. Executive Compensation
The Partnership has no executive officers. For information relating to fees,
compensation, reimbursements and distributions paid to related parties,
reference is made to Item 13 below.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
No person is known by the Partnership to be the beneficial owner of more than 5%
of the Units.
Security Ownership of Management
Amount and Nature of
Title of Class Name of Beneficial Owner Beneficial Ownership Percent of Class
- -------------- ------------------------ -------------------- ----------------
Units Daniel L. Stephenson 3 Units (trust) Less than 1 percent
Changes in Control
The Limited Partners have no right, power or authority to act for or bind the
Partnership. However, the Limited Partners have the power to vote upon the
following matters affecting the basic structure of the Partnership, each of
which shall require the approval of Limited Partners holding a majority of the
outstanding Units: (i) amendment of the Partnership's Partnership Agreement;
(ii) termination and dissolution of the Partnership; (iii) sale, exchange or
pledge of all or substantially all of the assets of the Partnership; (iv)
removal of the General Partner or any successor General Partner; (v) election of
a new General Partner; (vi) the approval or disapproval of the terms of purchase
of the General Partner's interest; and (vii) the modification of the terms of
any agreement between the Partnership and the General Partner or an affiliate.
Page 13 of 30
Item 13. Certain Relationships and Related Transactions
For the year ended December 31, 1997, the Partnership did not incur any costs
reimbursable to RFC.
Page 14 of 30
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report
(1) Financial Statements:
Report of Independent Public Accountants
Balance Sheets as of December 31, 1997 and 1996
Statements of Operationsfor the Years Ended December 31,1997 and 1996,
the Month Ended December 31, 1995 and the Year Ended November 30,1995
Statements of Partners'Equity (Deficit)for the Years Ended December31,
1997 and 1996, the Month Ended December 31, 1995 and the Year Ended
November 30, 1995
Statements ofCash Flows for the Years Ended December 31,1997 and 1996,
the Month Ended December 31, 1995 and the Year Ended November 30,
1995
Notes to Financial Statements
(2) Financial Statement Schedule:
Schedule III -- Real Estate and Accumulated Depreciation as of
December 31, 1997 and Note thereto
All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements or
notes thereto.
(3) Exhibits:
(27)Financial Data Schedule
(b) Reports on Form 8-K
None.
Page 15 of 30
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RANCON INCOME FUND I,
a California Limited Partnership
(Partnership)
By: RANCON INCOME PARTNERS I, L.P.
General Partner
Date: March 27, 1998 By: /s/ Daniel L. Stephenson
------------------------
Daniel L. Stephenson,
Director,President,Chief Executive Officer
and Chief Financial Officer of
Rancon Financial Corporation,
General Partner of
Rancon Income Partners I, L.P.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Partnership and in the
capacities and on the dates indicated.
By: RANCON INCOME PARTNERS I, L.P.
General Partner
Date: March 27, 1998 By: /s/ Daniel L. Stephenson
------------------------
Daniel L. Stephenson,
Director,President, Chief Executive Officer
and Chief Financial Officer of
Rancon Financial Corporation,
General Partner of
Rancon Income Partners I, L.P.
Page 16 of 30
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULE
Page
----
Report of Independent Public Accountants 18
Financial Statements:
Balance Sheets as of December 31, 1997 and 1996 19
Statements of Operations for the years ended December 31, 1997 and
1996, the month ended December 31, 1995 and the year ended
November 30, 1995 20
Statements of Partners' Equity (Deficit) for the years ended December
31, 1997 and 1996, the month ended December 31, 1995
and the year ended November 30, 1995 21
Statements of Cash Flows for the years ended December 31, 1997 and
1996, the month ended December 31, 1995 and the year ended
November 30, 1995 22
Notes to Financial Statements 23
Schedule:
III - Real Estate and Accumulated Depreciation
as of December 31, 1997 and Note thereto 29
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Page 17 of 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP:
We have audited the accompanying balance sheets of RANCON INCOME FUND I, A
CALIFORNIA LIMITED PARTNERSHIP, as of December 31, 1997 and 1996, and the
related statements of operations, partners' equity (deficit) and cash flows for
the years ended December 31, 1997 and 1996, the month ended December 31, 1995
and the year ended November 30, 1995. These financial statements and the
schedule referred to below are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 RANCON INCOME FUND I, A
CALIFORNIA LIMITED PARTNERSHIP, as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for the years ended December 31,
1997 and 1996, the month ended December 31, 1995 and the year ended November 30,
1995, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule listed in the
index to financial statements and schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not a
required part of the basic financial statements. This information has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
San Francisco, California /s/ Arthur Andersen LLP
February 11, 1998
Page 18 of 30
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Balance Sheets
December 31, 1997 and 1996
(in thousands, except units outstanding)
1997 1996
------------- ------------
Assets
Real estate investments:
Rental property, net of accumulated depreciation of
$1,463 and $1,423 at December 1997 and 1996,
respectively $ 4,803 $ 4,954
Rental property held for sale, at estimated fair value 675 1,104
------------ ------------
Net real estate investments 5,478 6,058
------------ ------------
Cash and cash equivalents 749 426
Accounts receivable 70 17
Deferred costs, net of accumulated amortization of
$30 and $196 at December 31, 1997 and 1996, respectively 15 19
Other assets 11 11
------------ ------------
Total assets $ 6,323 $ 6,531
============ ============
Liabilities and Partners' Equity (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 24 $ 23
Other liabilities 61 63
------------ ------------
Total liabilities 85 86
------------ ------------
Partners' equity (deficit):
General Partner (180) (178)
Limited Partners (14,555 limited partnership
units outstanding in 1997 and 1996) 6,418 6,623
------------- ------------
Total partners' equity 6,238 6,445
------------ ------------
Total liabilities and partners' equity $ 6,323 $ 6,531
============ ============
The accompanying notes are an integral part of these financial statements.
Page 19 of 30
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Operations
For the years ended December 31, 1997 and 1996, the month ended
December31, 1995 and for the year ended November 30, 1995
(in thousands, except per unit amounts)
For the For the For the For the
year ended year ended month ended year ended
December 31, December 31, December 31, November 30,
1997 1996 1995 1995
Revenue:
Rental income $ 1,142 $ 1,125 $ 57 $ 1,397
Interest and other income 15 122 1 7
------------ ------------ ----------- ----------
Total revenue 1,157 1,247 58 1,404
------------ ------------ ----------- ----------
Expenses:
Operating, including $6 paid to Sponsor
during the year ended November 30, 1995 424 476 47 560
Depreciation and amortization 181 227 19 295
Provision for impairment of investments
in real estate 438 1,645 -- --
General and administrative, including
$7 paid to Sponsor during the year
ended November 30, 1995 279 293 20 249
------------ ------------ ----------- ----------
Total expenses 1,322 2,641 86 1,104
------------ ------------ ----------- ----------
Net income (loss) $ (165) $ (1,394) $ (28) $ 300
============ =========== ========== =========
Net income (loss) per limited partnership unit $ (11.20) $ (94.81) $ (1.92) $ 20.40
============ =========== ========== =========
Distributions per limited partnership unit:
Representing return of capital $ 2.88 $ 7.00 $ 4.12 $ 12.99
From net income -- -- -- 20.40
----------- ----------- ---------- ---------
Total distributions per limited
partnership unit $ 2.88 $ 7.00 $ 4.12 $ 33.39
=========== =========== ========= =========
Weighted average number of limited partnership units outstanding during each
period used to compute net income (loss) and distributions
per limited partnership unit 14,555 14,555 14,555 14,555
=========== =========== ========== =========
The accompanying notes are an integral part of these financial statements.
Page 20 of 30
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Partners' Equity (Deficit) For the years ended
December 31, 1997 and 1996, the month ended
December 31, 1995 and the year ended November 30, 1995
(in thousands)
General Limited
Partner Partners Total
---------- ---------- ----------
Balance at November 30, 1994 $ (167) $ 8,382 $ 8,215
Distributions -- (486) (486)
Net income 3 297 300
---------- --------- -----------
Balance at November 30, 1995 (164) 8,193 8,029
Distributions -- (60) (60)
Net loss -- (28) (28)
--------- -------- ---------
Balance at December 31, 1995 (164) 8,105 7,941
Distributions -- (102) (102)
Net loss (14) (1,380) (1,394)
--------- -------- ---------
Balance at December 31, 1996 (178) 6,623 6,445
Distributions -- (42) (42)
Net loss (2) (163) (165)
---------- ---------- ----------
Balance at December 31, 1997 $ (180) $ 6,418 $ 6,238
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
Page 21 of 30
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Cash Flows
For the years ended December 31, 1997 and 1996, the month ended December
31, 1995 and the year ended November 30, 1995
(in thousands)
For the For the For the For the
year ended year ended month ended year ended
December 31, December 31, December 31, November 30,
1997 1996 1995 1995
----------- ----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ (165) $ (1,394) $ (28) $ 300
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 181 227 19 295
Provision for impairment of investments
in real estate 438 1,645 -- --
Changes in certain assets and liabilities:
Accounts receivable (53) (1) 7 (9)
Deferred costs (3) (1) -- --
Other assets -- -- 35 7
Payable to sponsor -- -- -- (158)
Accounts payable and accrued expenses 1 (52) -- 32
Other liabilities (2) (6) 14 (12)
-------- --------- --------- ---------
Net cash provided by operating activities 397 418 47 455
-------- --------- --------- ---------
Cash flows used for investing activities:
Additions to real estate (32) (164) (1) (53)
-------- --------- ---------- ---------
Cash flows used for financing activities:
Cash distributions to limited partners (42) (102) (60) (486)
-------- --------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents 323 152 (14) (84)
Cash and cash equivalents at beginning
of period 426 274 288 372
-------- --------- ---------- ---------
Cash and cash equivalents at end of period $ 749 $ 426 $ 274 $ 288
======== ========= ========== =========
The accompanying notes are an integral part of these financial statements.
Page 22 of 30
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1997, 1996 and November 30, 1995
Note 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Rancon Income Fund I ("the Partnership") was organized in accordance with the
provisions of the California Revised Limited Partnership Act for the purpose of
acquiring, operating and disposing of existing income producing commercial,
industrial and residential real estate properties. The Partnership reached final
funding in April, 1989. The Partnership was formed with initial capital
contributions from Rancon Income Partners I, L.P. (the General Partner) and
Daniel Lee Stephenson, the initial limited partner, who indirectly owns and
controls the General Partner. The General Partner and its affiliates are
hereinafter referred to as the Sponsor. At December 31, 1997 and 1996, 14,555
units were issued and outstanding.
Effective with the year ended December 31, 1995, the Partnership's reporting
year changed from November 30 to December 31.
Allocation of the profits and losses from operations are made pursuant to the
terms of the Partnership Agreement. Generally, net income from operations is
allocated to the general partner and limited partners in proportion to the
amounts of cash from operations distributed to the partners for each fiscal
year. If there are no distributions of cash from operations during such fiscal
year, net income shall be allocated 90% to the limited partners and 10% to the
general partner. Net losses from operations are allocated 90% to the limited
partners and 10% to the general partner until such time as a partner's account
is reduced to zero. Additional losses will be allocated entirely to those
partners with positive account balances until such balances are reduced to zero.
In no event will the general partner be allocated less than 1% of net income or
net loss for any period. Distributions of cash from operations are generally
allocated as follows: (i) first to the limited partners until they receive a
noncumulative 6% return per annum on their unreturned capital contributions and
(ii) the remainder, if any in a given year, shall be divided in the ratio of 90%
to the limited partners and 10% to the general partner.
All of the Partnership's assets are located in the Southern California region
and have been directly affected by the economic weakness of the region.
Management continues to evaluate the real estate market in Southern California
in an effort to determine the optimal time to dispose of the assets and realize
their maximum value.
Management believes that the Partnership's available cash together with the cash
generated by the operations of the Partnership's properties will be sufficient
to finance the Partnership's continued operations. Estimated distributions for
1998 will remain consistent with the 1997 level but there can be no assurance
that the distribution level will not be adjusted. The Partnership is currently
soliciting offers for the sale of Aztec Village Shopping Center. This rental
property is classified as property held for sale on the Partnership's 1997 and
1996 balance sheets.
Page 23 of 30
General Partner and Management Matters
In December 1994, Rancon Financial Corporation ("RFC") entered into an agreement
with Glenborough Corporation (successor by merger with Glenborough Inland Realty
Corporation) ("Glenborough") whereby RFC sold to Glenborough the contract to
perform the rights and responsibilities under RFC's agreement with the
Partnership and other related Partnerships (collectively, "the Rancon
Partnerships") to perform or contract on the Partnership's behalf financial,
accounting, data processing, marketing, legal, investor relations, asset and
development management and consulting services for the Partnership for a period
of ten years or to the liquidation of the Partnership, whichever comes first.
According to the contract, the Partnership will pay Glenborough for its services
as follows: (i) a specified asset administration fee of $208,000 per year, which
is fixed for five years subject to reduction in the year following the sale of
assets; (ii) sales fees of 2% for improved properties and 4% for land; (iii) a
refinancing fee of 1% and (iv) a management fee of 5% of gross rental receipts.
As part of this agreement, Glenborough will perform certain responsibilities for
the General Partner of the Rancon Partnerships. RFC has agreed to cooperate with
Glenborough, should Glenborough attempt to obtain a majority vote of the limited
partners to substitute itself as the Sponsor for the Rancon Partnerships. This
agreement was effective January 1, 1995. Glenborough is not an affiliate of RFC
or the Partnership.
Significant Accounting Policies
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 is effective for fiscal
years beginning after December 15, 1997. Management has not yet determined the
level of additional disclosure, if any, that may be required by SFAS 131.
Additional disclosures that may be required will be provided beginning with the
financial statements of the Partnership for the year ending December 31, 1998.
Rental Property to be Held and Used - Rental properties are stated at cost, and
include the related land, unless events or circumstances indicate that cost
cannot be recovered in which case carrying value is reduced to estimated fair
value. Estimated fair value: (i) is based upon the Partnership's plans for the
continued operation of each property; (ii) is computed using estimated sales
price, as determined by prevailing market values for comparable properties
and/or the use of capitalization rates multiplied by annualized rental income
based upon the age, construction and use of the building, and (iii) does not
purport, for a specific property, to represent the current sales price that the
Partnership could obtain from third parties for such property. The fulfillment
of the Partnership's plans related to each of its properties is dependent upon,
among other things, the presence of economic conditions which will enable the
Page 24 of 30
Partnership to continue to hold and operate the properties prior to their
eventual sale. Due to uncertainties inherent in the valuation process and in the
economy, it is reasonably possible that the actual results of operating and
disposing of the Partnership's properties could be materially different than
current expectations.
Rental Property Held for Sale - Rental property held for sale is stated at its
estimated fair value. Estimated fair value is computed using estimated sales
price or appraised value of the property less selling costs and does not
purport, for a specific property, to represent the sales price that the
Partnership could obtain from third parties for such property.
Cash and cash equivalents - The Partnership considers all certificates of
deposit and money marketfunds with original maturities of less than ninety
days to be cash
Deferred Costs - Deferred lease commissions are amortized over the initial fixed
term of the related lease agreement on a straight-line basis. Amortization
expense was $7,000 and $24,000 for the years ended December 31, 1997 and 1996,
respectively, and $58,000 for the year ended November 30, 1995.
Rental Income - Rental income is recognized as earned over the life of the
respective leases.
Net Income (Loss) Per Limited Partnership Unit - Net income (loss) per limited
partnership unit is calculated using the weighted average number of limited
partnership units outstanding during the period and the limited partners' share
of the net income (loss).
Income Taxes - No provision for income taxes is included in the accompanying
financial statements as the Partnership's results of operations are passed
through to the partners for inclusion in their respective income tax returns.
Net income (loss) and partners' equity for financial reporting purposes will
differ from the Partnership income tax return because of different accounting
methods used for certain items, principally depreciation expense and the
provision for impairment of investments in real estate.
Note 2. RELATED PARTY TRANSACTIONS
Reimbursable Expenses and Management Fee to Sponsor
In 1994, the Partnership had an agreement with RFC for property management
services. The agreement provided for a management fee equal to 5% of gross
rentals collected in addition to reimbursement of certain administrative
expenses incurred while managing properties. Fees and costs incurred under this
agreement totaled $6,000 for the year ended November 30, 1995.
The Partnership Agreement also provided for the reimbursement of actual costs
incurred by RFC in providing certain administrative, legal and development
services necessary for the prudent operation of the Partnership. Reimbursable
costs incurred by the Partnership and paid to RFC totaled $7,000 for the year
ended November 30, 1995. Effective January 1, 1995, these services are provided
by Glenborough as described in Note 1.
Page 25 of 30
Note 3. RENTAL PROPERTY, NET
Rental property as of December 31, 1997 and 1996 is as follows:
- ---------------------------------------------------------------
1997 1996
---- ----
Land $ 2,072,000 $ 2,072,000
Buildings and improvements 3,788,000 3,851,000
Tenant improvements 406,000 454,000
------------- --------------
6,266,000 6,377,000
Less: accumulated depreciation (1,463,000) (1,423,000)
------------- --------------
Total $ 4,803,000 $ 4,954,000
============= ==============
Rental property held for sale at December 31, 1997 and 1996 is as follows:
- -------------------------------------------------------------------------
1997 1996
---- ----
Land $ 312,000 $ 461,000
Buildings and improvements 632,000 920,000
Tenant improvements 70,000 86,000
-------------- ---------------
1,014,000 1,467,000
Less: accumulated depreciation (339,000) (363,000)
-------------- ---------------
Total $ 675,000 $ 1,104,000
============== ===============
At December 31, 1997 and 1996, the Aztec Village Shopping Center property is
classified as held for sale.
None of the Partnership's properties are encumbered as of December 31, 1997.
In 1997 and 1996, due to an increase in vacancy, the difficulty in leasing
vacant space and projected cash flow analyses, management determined that the
carrying value of the Partnership's rental properties were in excess of their
estimated fair values. As a result, in 1997, the Partnership recorded a
provision for impairment of its investment in Aztec Village Shopping Center of
$438,000 and, in 1996, provisions for impairment of the investments in Bristol
Medical Center and Wakefield Industrial Center were recorded in the amounts of
$1,470,000 and $175,000, respectively.
Note 4. LEASES
The Partnership's rental properties are leased under operating leases that
expire on various dates through November 2004. Minimum future rental income on
non-cancelable operating leases as of December 31, 1997 is as follows:
1998 $ 950,000
1999 546,000
2000 459,000
2001 414,000
2002 401,000
Thereafter 1,913,000
-----------
Total $ 4,683,000
===========
Page 26 of 30
Note 5. TAXABLE INCOME
The Partnership's tax returns, the qualification of the Partnership as a
partnership for federal income tax purposes, and the amount of income or loss
are subject to examination by federal and state taxing authorities. If such
examinations result in changes to the Partnership's taxable income or loss, the
tax liability of the partners could change accordingly.
The Partnership's tax returns are filed on a calendar year basis. As such, the
following is a reconciliation of the net income for financial reporting purposes
to the estimated taxable income, for the years ended December 31, 1997 and 1996
and November 30, 1995, determined in accordance with accounting practices used
in preparation of federal income tax returns (in thousands).
1997 1996 1995
---- ---- ----
Net income (loss) per financial statements $ (165) $ (1,394) $ 300
Provision for impairment of investments in
real estate 438 1,645 --
Financial reporting depreciation in excess
of tax depreciation (19) (4) --
Rental income reported in a different period
for tax than for financial reporting (40) 114 112
Operating revenues and expenses reported in a
different period for tax than for financial
reporting, net 48 (111) (190)
------------ ------------ ------------
Estimated net income for federal
income tax purposes $ 262 $ 250 $ 222
=========== =========== ===========
Page 27 of 30
The following is a reconciliation as of December 31, 1997 and 1996 of partner's
equity for financial reporting purposes to estimated partners' equity for
federal income tax purposes (in thousands).
1997 1996
---- ----
Partners' equity per financial statements $ 6,238 $ 6,445
Cumulative provision for impairment of
investments in real estate 4,563 4,125
Financial reporting depreciation in excess
of tax reporting depreciation (285) (266)
Operating expenses recognized in a different
period for financial reporting than for
tax reporting, net 49 3
Other, net (44) (7)
------------- -------------
Estimated partners' equity for federal
income tax purposes $ 10,521 $ 10,300
============= =============
Page 28 of 30
RANCON INCOME FUND I,
A California Limited Partnership
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(In Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------------------------
Initial Cost to Subsequent to Gross Amount Carried
Partnership Acquisition at December 31, 1997
---------------- ---------------- --------------------
Buildings Building
and Carrying and (1,2)
Description Encumbrances Land Improvements Improvements Cost Land Improvements Total
- ------------------------------------------------------------------------------------------------------------------------------------
Rental Properties:
Wakefield Facility $ -- $ 740 $ 1,159 $ 218 $ -- $ 740 $ 1,377 $ 2,117
Less: Provisions for impairment
in real estate (2) -- (135) (116) (123) -- (135) (239) (374)
Bristol Medical Center -- 1,937 3,327 729 -- 1,937 4,056 5,993
Less: Provision for impairment
in real estate(2) -- (470) (271) (729) -- (470) (1,000) (1,470)
-------- ---------- --------- ---------- ------- ---------- -------- ---------
Subtotal -- 2,072 4,099 95 -- 2,072 4,194 6,266
-------- ---------- --------- ---------- ------- --------- -------- ---------
Rental property held for sale:
Aztec Village Shopping Center -- 1,205 2,152 375 -- 1,205 2,527 3,732
Less: Provision for impairment
in real estate (2) -- (893) (1,617) (208) -- (893) (1,825) (2,718)
-------- ---------- ---------- ---------- ------- --------- -------- ---------
Subtotal -- 312 535 167 -- 312 702 1,014
-------- ---------- ---------- ---------- ------- --------- --------- ---------
Totals $ -- $ 2,384 $ 3,564 $ 262 $ -- $ 2,384 $ 4,896 $ 7,280
========= ========== ========== ========== ======= ========= ========= =========
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I
- ------------------------------------------------------------------------------ -----------------------------------------------------
Date Life
Accumulated Construction Date Depreciated
Description Depreciation Began Acquired Over
- ------------------------------------------------------------------------------------------------------------------------------------
Rental Properties: $ 321 N/A 4/20/87 5 - 40 years
Wakefield Facility --
Less: Provisions for impairment
in real estate (2) 1,142 N/A 5/04/88 5 - 40 years
Bristol Medical Center --
Less: Provision for impairment ---------
in real estate(2)
Subtotal 1,463
---------
Rental property held for sale:
Aztec Village Shopping Center 339 N/A 2/20/89 5- 40 years
Less: Provision for impairment --
in real estate (2) ---------
Subtotal 339
---------
Totals $ 1,802
=========
(1) The aggregate cost for Federal income tax purposes is $11,478
(2) See Note 3 to Financial Statements
Page 29 of 30
NOTE TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
(In Thousands)
Reconciliation of gross amount at which real estate was carried for the years
ended December 31, 1997 and 1996 and the month ended December 31, 1995 and the
year ended November 30, 1995:
Dec. 31, Dec. 31, Dec. 31, Nov. 30,
1997 1996 1995 1995
INVESTMENT IN REAL ESTATE
Balance at beginning of period $ 7,844 $ 9,325 $ 9,324 $ 9,362
Additions during period:
Improvements, etc. 32 164 1 53
Deletions during period:
Disposals(158) (158) -- -- (91)
Provision for impairment of
investments in real estate (438) (1,645) -- --
----------- --------- ---------- -----------
Balance at end of period $ 7,280 $ 7,844 $ 9,325 $ 9,324
========== ========== ========== ===========
ACCUMULATED DEPRECIATION
Balance at beginning of period $ 1,786 $ 1,583 $ 1,566 $ 1,420
Additions charged expenses 174 203 17 237
Disposals (158) -- -- (91)
---------- ----------- ----------- ----------
Balance at end of period $ 1,802 $ 1,786 $ 1,583 $ 1,566
========== ========== ========== ===========
Page 30 of 30