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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, 1999
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 26
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, 1999, the Partnership owned two 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's
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, 1999
---- -------- ---- ---- -----------------
Wakefield Industrial Temecula, California Light 44,200 sq. ft. None
Center Industrial
Bristol Medical Center Santa Ana, California Office 52,311 sq. ft. None
Page 2 of 26
Wakefield Industrial Center
- - ---------------------------
In April 1987, the Partnership acquired the Wakefield facility, at a cost of
approximately $1,899,000 plus acquisition fees of $87,000. Wakefield consists of
two buildings on approximately 3.99 acres of land. 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 composed of concrete tilt-up construction and have central
heating and air conditioning systems in the office areas. One building 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 other building 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. The Wakefield facility
provides uncovered parking for approximately 54 cars and includes partially
improved land which is used for car parking and truck access.
According to research conducted by the Partnership's property manager, the
market has approximately 7,549,000 square feet of existing industrial space,
with an overall vacancy rate of 8.4%. 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. There is approximately 325,000 square feet of multi-tenant and
free standing industrial space that competes directly with Wakefield Industrial
Center. The asking rent for industrial space in this area ranges between $4.80
industrial gross to $6.00 per foot NNN (tenant pays all operating expenses,
including taxes, insurance, and capital).
The occupancy level at December 31, 1999, 1998, 1997 and 1996 and November 30,
1995, 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:
Occupancy Level Average Annual Effective
Percentage Rent Per Square Foot
--------------- ------------------------
1999 100% $ 4.40
1998 100% $ 4.31
1997 100% $ 4.14
1996 100% $ 4.04
1995 100% $ 3.96
One tenant occupies 100% of the net rentable square footage of the two
buildings. The 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: $194,000
Rent Increase: Annual - CPI
Renewal Options: None
In 1996, management determined that the carrying value of Wakefield Industrial
Center was in excess of the estimated fair value. As a result, the Partnership
recorded a provision for impairment of its
Page 3 of 26
investment in Wakefield IndustrialCenter of $175,000. No such provision was
recorded in 1997, 1998 or 1999.
Bristol Medical Center
- - ----------------------
In October 1987, the Partnership entered into an agreement with Rancon Financial
Corporation ("RFC") to acquire Bristol Medical Center for a 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, for a total cost of $5,370,000. 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.
Bristol Medical Center consists of two 2-story medical office buildings and
related parking spaces on approximately 3.42 acres. The two office buildings
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.
According to research conducted by the Partnership's property manager, the
direct market area consists of five medical buildings totaling approximately
189,847 rentable square feet, all of which are older Class "B" Buildings. The
sub-market, consisting of smaller dental/medical offices and retail sites is
being condemned or purchased by the City of Santa Ana to widen Bristol Street.
The renovation project which is underway by the City of Santa Ana will include
new retail buildings and a landscaped median, which should enhance the area
considerably. Net absorption in this area has been on a downward trend since
1992 when changes in the health care industry began. Currently, total vacancy in
this market is approximately 8.6%. The annual rental rates for the area range
from $16.08 per square foot to $17.40 per square foot modified gross (tenant
pays interior janitorial costs).
The occupancy level at December 31, 1999, 1998 and 1997, 1996 and November 30,
1995, 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:
Occupancy Level Average Annual Effective
Percentage Rent Per Square Foot
--------------- ------------------------
1999 65% $ 18.00
1998 60% $ 18.40
1997 83% $ 19.00
1996 85% $ 18.89
1995 91% $ 18.76
The current annual rental rates for this property range from $10.32 to $27.36
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. The occupancy at Bristol Medical Center increased
from 60% at December 31, 1998 to 65% at December 31, 1999 due to leasing of
2,043 square feet of previously vacant space. Leasing space at Bristol Medical
Center is difficult as changes in the healthcare industry have reduced the
number of independent physicians opening second offices. Additionally,
physicians appear to be leasing space at retail locations, which tend to offer
more exposure than the traditional medical buildings.
Page 4 of 26
There is one tenant that occupies more than ten percent of the net rentable
square footage of the Bristol Medical Center. 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: 5 year
Expiration Date: August 31, 2003
Square Feet: 11,283
(% of rentable total): 22%
Annual Rent: $198,300
Rent Increase: Annual - CPI
Renewal Options: None
In 1998 and 1996, the Partnership recorded provisions for impairment of its
investment in Bristol Medical Center of $451,000 and $1,470,000,
respectively due to an increase in vacancy, the difficulty in leasing vacant
space and projected cash flows. There is no such provision in 1999
Aztec Village Shopping Center
- - -----------------------------
On May 12, 1999, the Partnership sold Aztec Village Shopping Center ("Aztec") to
an unaffiliated entity for $1,000,000. The Partnership had originally acquired
Aztec, located in San Diego, CA in May 1988 for $3,350,000, plus closing costs.
The Partnership realized a $254,000 gain on the sale, which is reflected in the
accompanying statement of operations for the year ended December 31, 1999. The
net proceeds totaled $937,000, of which $742,305 was distributed to the partners
and the remainder was added to the Partnership's cash reserves.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Page 5 of 26
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, 1999, a total of 1,320 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 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; (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: 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
Page 6 of 26
(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. A more explicit statement of the distribution policies is set forth in
the Partnership Agreement.
The following distributions of Cash From Operations were 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
------------ ------------------- -------- ---------------
08/30/99 $ 145,550 $ 10.00 --
05/28/99 $ 727,750 $ 50.00 $ 14,555
02/25/99 $ 27,656 $ 1.90 --
09/03/98 $ 27,656 $ 1.90 --
02/26/98 $ 27,656 $ 1.90 --
08/29/97 $ 28,000 $ 1.92 --
02/28/97 $ 14,000 $ 0.96 --
Of the total distributions noted above, $61.90, $3.80 and $2.88 per unit
represented a return of capital for the fiscal years ended December 31, 1999,
1998 and 1997, respectively. The increase in distributions for the year ended
1999, compared to 1998 and 1997, resulted from the proceeds from the sale of
Aztec Village.
Item 6. Selected Financial Data
-----------------------
The following is selected financial data for the five years ended December 31,
1999, 1998, 1997, 1996 and November 30, 1995 (in thousands, except per Unit
data).
1999 1998 1997 1996 1995
---- ------ -------- -------- ------
Rental income $ 868 $ 1,022 $ 1,142 $ 1,125 $ 1,397
Provision for impairment
of investments in
real estate $ -- $ 451 $ 438 $ 1,645 $ --
Net income (loss) $ 391 $ (279) $ (165) $ (1,394) $ 300
Net income (loss)
allocable to limited
partners $ 387 $ (276) $ (163) $ (1,380) $ 297
Net income (loss)
per limited
partnership unit $ 26.59 $ (18.96) $ (11.20) $ (94.81) $ 20.40
Total assets $ 5,488 $ 6,012 $ 6,323 $ 6,531 $ 8,159
Cash distributions
per limited
partnership unit $ 61.90 $ 3.80 $ 2.88 $ 7.00 $ 33.39
Page 7 of 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The following discussions should be read in conjunction with the financial
statements and notes thereto in Item 14 of Part IV:
On April 21, 1989, Rancon Income Fund I ("the Partnership") was funded from the
sale of 14,559 limited partnership units ("Units") in the amount of $14,559,000.
Four units were retired in 1990 and 14,555 Units remain outstanding at December
31, 1999. As of December 31, 1999, the Partnership had cash of $1,208,000. The
remainder of the Partnership's assets consists primarily of its real estate
investments, which totaled approximately $4,220,000 at December 31, 1999.
Operationally, the Partnership's primary source of funds consists of cash
generated from operating the rental properties. 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 distributions to the limited
partners. Another source of funds has been the interest earned on invested cash
balances.
On May 12, 1999, the Partnership sold Aztec Village Shopping Center ("Aztec"), a
23,879 square foot retail center located in San Diego, California, to an
unaffiliated entity for $1,000,000. The Partnership realized a $254,000 gain on
the sale, which is reflected in the accompanying statement of operations for the
year ended December 31, 1999. The sale proceeds totaling $937,000 were net of
selling costs and expenses incurred, of which $742,305 was distributed to the
partners and the remainder was added to the Partnership's cash reserves.
Management believes that the Partnership's cash balance as of December 31, 1999,
together with the cash from operations, will be sufficient to finance the
Partnership's and the properties continued operations on both a short-term and
long-term basis.
RESULTS OF OPERATIONS
- - ---------------------
1999 versus 1998
- - ----------------
Rental income decreased $154,000, or 15%, for the year ended December 31, 1999
compared to the year ended December 31, 1998. The decrease was primarily due to
the sale of Aztec Village.
The $254,000 gain on sale of real estate resulted from the May 1999 sale of
Aztec Village Shopping Center.
Interest and other income increased $10,000, or 34%, for the year ended December
31, 1999 compared to the year ended December 31, 1998 due to a higher invested
balance resulting from sale of Aztec Village.
Operating expenses decreased $84,000, or 20%, for the year ended December 31,
1999 compared to the year ended December 31, 1998 primarily due to the sale of
the Aztec Village.
Depreciation and amortization expense increased $19,000, or 11%, for the year
ended December 31, 1999 compared to December 31, 1998 due to capital
improvements at rental properties.
Page 8 of 26
General and administrative expenses decreased $44,000, or 16%, during the year
ended December 31, 1999 compared to the year ended December 31, 1998, primarily
due to a decrease in asset management fee resulting from the sale of Aztec
Village. Since July 1999, the annual asset management fee was reduced to
$100,000
1998 versus 1997
- - ----------------
Rental income decreased $120,000, or 11%, for the year ended December 31, 1998
compared to the year ended December 31, 1997. The decrease was primarily due to
one of the tenants, St. Jude Hospital, downsizing leased office space in
September 1998 at Bristol Medical Center.
Interest and other income increased $15,000, or 100%, in 1998 compared to 1997
due to the interest earned on a higher invested cash balance in 1998.
Operating, depreciation and amortization and general and administrative expenses
incurred in 1998 were consistent with the expenses incurred in 1997.
In 1998 and 1997, due to high vacancy levels, difficulty in leasing vacant space
and projected cash flows, management determined that the carrying value of two
of the Partnership's rental properties were in excess of their estimated fair
values. As a result, in 1998, the Partnership recorded a provision for
impairment of its investment in Bristol Medical Center in the amount of
$451,000. In 1997, a provision for impairment of the investment in Aztec Village
Shopping Center was recorded in the amount of $438,000.
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 9 of 26
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 56, founded RFC in 1971 for the purpose of establishing 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 10 of 26
Item 13. Certain Relationships and Related Transactions
For the year ended December 31, 1999, the Partnership did not incur any costs
reimbursable to RFC or any affiliate of the Partnership.
Page 11 of 26
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, 1999 and 1998
Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Statements of Partners' Equity (Deficit) for the Years Ended
December 31, 1999, 1998 and 1997
Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Financial Statements
(2) Financial Statement Schedule:
Schedule III -- Real Estate and Accumulated Depreciation as
of December 31, 1999 and Notes 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 12 of 26
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 30, 2000 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 30, 2000 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 13 of 2
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULE
Page
Report of Independent Public Accountants 15
Financial Statements:
Balance Sheets as of December 31, 1999, 1998 and 1997 16
Statements of Operations for the years ended December 31, 1999,
1998 and 1997 17
Statements of Partners' Equity (Deficit) for the years ended
December 31, 1999, 1998 and 1997 18
Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997 19
Notes to Financial Statements 20
Schedule:
III - Real Estate and Accumulated Depreciation
as of December 31, 1999 and Notes thereto 25
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Page 14 of 26
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, 1999 and 1998, and the
related statements of operations, partners' equity (deficit) and cash flows for
the years ended December 31, 1999, 1998 and 1997. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the
results of its operations and its cash flows for the years ended December 31,
1999, 1998 and 1997 in conformity with accounting principles generally accepted
in the United States.
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
February 4, 2000
Page 15 of 26
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Balance Sheets
December 31, 1999 and 1998
(in thousands, except units outstanding)
1999 1998
------------- ------------
Assets Real estate investments:
Rental property, net of accumulated depreciation of
$1,805 and $1,626 at December 1999 and 1998,
respectively $ 4,220 $ 4,290
Rental property held for sale, net -- 685
------------- ------------
Total real estate investments 4,220 4,975
------------- ------------
Cash and cash equivalents 1,208 872
Deferred costs, net of accumulated amortization of
$40 and $42 at December 31, 1999 and 1998, respectively 45 55
Prepaid expenses and other assets 15 110
------------- ------------
Total assets $ 5,488 $ 6,012
============= ============
Liabilities and Partners' Equity (Deficit)
- - ------------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 48 $ 36
Security deposits 60 72
------------- ------------
Total liabilities 108 108
------------- ------------
Partners' Equity (deficit):
General Partner (193) (183)
Limited Partners (14,555 limited partnership
units outstanding) 5,573 6,087
------------- ------------
Total partners' equity 5,380 5,904
------------- ------------
Total liabilities and partners' equity $ 5,488 $ 6,012
============= ============
The accompanying notes are an integral part of these financial statements.
Page 16 of 26
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Operations
For the years ended December 31, 1999, 1998 and 1997
(in thousands, except per unit and unit amounts)
1999 1998 1997
--------- ----------- ---------
Revenue:
Rental income $ 868 $ 1,022 $ 1,142
Gain on sale of real estate 254 -- --
Interest and other income 40 30 15
--------- ----------- ---------
Total revenue 1,162 1,052 1,157
--------- ----------- ---------
Expenses:
Operating 345 429 424
Depreciation and amortization 194 175 181
Provision for impairment of investments
in real estate -- 451 438
General and administrative 232 276 279
--------- ----------- ---------
Total expenses 771 1,321 1,322
--------- ----------- ---------
Net income (loss) $ 391 $ (279) $ (165)
======== =========== ========
Net income (loss) per limited partnership unit $ 26.59 $ (18.96) $ (11.20)
======= ========== =======
Distributions per limited partnership unit:
From net income $ 26.59 $ -- $ --
Representing return of capital 35.31 3.80 2.88
--------- ---------- --------
Total distributions per limited partnership unit $ 61.90 $ 3.80 $ 2.88
======= ========== ========
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
========= =========== ========
The accompanying notes are an integral part of these financial statements.
Page 17 of 26
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Partners' Equity (Deficit)
For the years ended December 31, 1999, 1998 and 1997
(in thousands)
General Limited
Partner Partners Total
--------- ----------- ----------
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
Distributions -- (55) (55)
Net loss (3) (276) (279)
---------- ---------- ----------
Balance at December 31, 1998 (183) 6,087 5,904
Distributions (14) (901) (915)
Net income 4 387 391
--------- ---------- ----------
Balance at December 31, 1999 $ (193) $5,573 $5,380
========= ========== ==========
The accompanying notes are an integral part of these financial statements.
Page 18 of 26
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997
(in thousands)
1999 1998 1997
------------ ----------- ----------
Cash flows from operating activities:
Net loss $ 391 $ (279) $ (165)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Net gain on sale of real estate (254) -- --
Depreciation and amortization 194 175 181
Provision for impairment of investments
in real estate -- 451 438
Changes in certain assets and liabilities:
Deferred costs 5 (52) (3)
Prepaid expenses and other assets 95 (29) (53)
Accounts payable & other liabilities -- 23 (1)
----------- ----------- -----------
Net cash provided by operating activities 431 289 397
----------- ----------- -----------
Cash flows used for investing activities:
Net proceeds from sale of real estate 937 -- --
Additions to real estate (117) (111) (32)
------------ ----------- -----------
Net cash provided by (used for) 820 (111) (32)
----------- ----------- -----------
investing activities
Cash flows used for financing activities:
Cash distributions to limited partners (915) (55) (42)
------------ ----------- -----------
Net increase in cash and cash equivalents 336 123 323
Cash and cash equivalents at beginning of year 872 749 426
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,208 $ 872 $ 749
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
Page 19 of 26
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1999, 1998 and 1997
Note 1. 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, 1999 and 1998, 14,555
units were issued and outstanding.
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. In no event shall the General Partner be allocated less than one percent
of such income. 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 non-cumulative 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.
The terms of the Partnership agreement call for the general partner to restore
any deficits that may exist in its capital account after allocation of gains and
losses from the sale of the final property owned by the Partnership, but prior
to any liquidating distributions being made to the partners.
Effective January 1, 1995, Glenborough Corporation (successor by merger with
Glenborough Inland Realty Corporation) ("Glenborough") entered into an agreement
with the Partnership and other related Partnerships (collectively, the Rancon
Partnerships) to perform or contract on the Partnership's behalf for 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 until the liquidation of the Partnership, whichever comes first.
Effective January 1, 1998, the agreement was amended to eliminate Glenborough's
responsibilities for providing investor relations services. According to the
contract, the Partnership will pay Glenborough for its services as follows: (i)
a specified annual asset administration fee ($144,000 in 1999, $187,000 in 1998
and $208,000 in 1997); (ii) sales fees of 2% for improved properties and 4% for
land; (iii) a refinancing fee of 1% and (iv) management fees of 5% of gross
rental receipts. As part of this agreement, Glenborough will perform certain
duties for the General Partner of the Rancon Partnerships. RFC 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. Glenborough is not an affiliate of the Partnership or RFC.
Page 20 of 26
Note 2: Significant Accounting Policies
-------------------------------
Basis of Accounting - The accompanying financial statements have been prepared
on the accrual basis of accounting in accordance with generally accepted
accounting principles under the presumption that the Partnership will continue
as a going concern.
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.
Risks and Uncertainties - The Partnership's ability to (i) achieve positive cash
flow from operations, provide distributions from operations (ii) continue as a
going concern, may be impacted by changes in property values, geographic
economic conditions, or the entry of other competitors into the market. The
accompanying financial statements do not provide for adjustments with regard to
these uncertainties.
Rental Property - Rental properties, including the related land, are stated at
cost unless events or circumstances indicate that cost cannot be recovered in
which case the carrying value is reduced to the estimated fair value. Estimated
fair value: (i) is based upon the Partnership's plans for the continued
operation of each property; and (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. 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 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.
Depreciation is provided using the straight-line method over the useful lives of
the respective assets.
Rental Property Held for Sale - Rental property held for sale is stated at the
lower of cost or estimated fair value less costs to sell. Estimated fair value
is based upon 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. The fulfillment of the Partnership's
plans to dispose of property is dependent upon, among other things, the presence
of economic conditions, which will enable the Partnership to hold the property
for eventual sale. The Partnership discontinues depreciating rental property
once it is classified as held for sale.
Cash and cash equivalents - The Partnership considers certificates of deposit
and money market funds with original maturities of less than ninety days to be
cash equivalents.
Page 21 of 26
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107 requires disclosure about fair value for all financial
instruments. Cash and cash equivalents consist of demand deposits, certificates
of deposit and short-term investments with financial institutions. The carrying
amount of cash and cash equivalents approximates fair value.
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 $15,000 $12,000 and $7,000 for the years ended December 31, 1999,
1998 and 1997 respectively.
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'
allocable 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 3. RENTAL PROPERTY, NET
--------------------
Rental property as of December 31, 1999 and 1998 is as follows:
1999 1998
---- ----
Land $ 1,928,000 $ 1,928,000
Buildings and improvements 3,562,000 3,504,000
Tenant improvements 535,000 484,000
------------- --------------
6,025,000 5,916,000
Less: accumulated depreciation (1,805,000) (1,626,000)
-------------- --------------
Total $ 4,220,000 $ 4,290,000
============= ==============
Rental property held for sale at December 31, 1998 is as follows:
1998
----
Land $ 312,000
Buildings and improvements 642,000
Tenant improvements 70,000
---------------
1,024,000
Less: accumulated depreciation (339,000)
----------------
Total $ 685,000
===============
In 1998 and 1997, due to high vacancy levels, difficulty in leasing vacant space
and projected cash flows, management determined that the carrying value of two
of the Partnership's rental properties were in excess of their estimated fair
values. As a result, in 1998 the Partnership recorded a provision for
Page 22 of 26
impairment of its investment in Bristol Medical Center in the amount of $451,000
and, in 1997, a provision for impairment of its investment in Aztec Village
Shopping Center in the amount of $438,000.
At December 31 1998, the Aztec Village Shopping Center property was classified
as held for sale. On May 12, 1999, the Partnership sold Aztec Village Shopping
Center ("Aztec"), a 23,879 square foot retail center located in San Diego,
California, to an unaffiliated entity for $1,000,000. The Partnership realized a
$254,000 gain on the sale, which is reflected in the accompanying statement of
operations for the year ended December 31, 1999. The sale generated net proceeds
of $937,000.
None of the Partnership's properties are encumbered by debt as of December 31,
1999 and 1998.
Note 4. LEASES
------
The Partnership's rental properties are leased under non-cancelable operating
leases that expire on various dates through November 2004. Minimum future rents
under non-cancelable operating leases as of December 31, 1999 are as follows:
2000 $ 770,000
2001 760,000
2002 759,000
2003 619,000
2004 293,000
Thereafter 805,000
-------------
Total $ 4,006,000
============
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, 1999, 1998 and
1997, determined in accordance with accounting practices used in preparation of
federal income tax returns (in thousands).
Page 23 of 26
1999 1998 1997
---- ----- ----
Net income (loss) per financial statements $ 391 $ (279) $ (165)
Provision for impairment of investments in
real estate -- 451 438
Financial reporting depreciation in excess
of tax depreciation 18 (29) (19)
Gain (loss) on property sales in excess of
Financial reporting (2,263) -- --
Rental income reported in a different period
for tax than for financial reporting -- -- (40)
Operating revenues and expenses reported in a
different period for tax than for financial
reporting, net (29) 21 48
--------- --------- ---------
Estimated net income (loss) for federal income tax purposes $ (1,883) $ 164 $ 262
======== ======== ========
The following is a reconciliation as of December 31, 1999 and 1998 of partner's
equity for financial reporting purposes to estimated partners' equity for
federal income tax purposes (in thousands).
1999 1998
---- ----
Partners' equity per financial statements $ 5,380 $ 5,904
Cumulative provision for impairment of
investments in real estate 2,096 5,014
Financial reporting depreciation in excess
of tax reporting depreciation 301 (314)
Operating expenses recognized in a different
period for financial reporting than for
tax reporting, net 56 26
------------ ------------
Estimated partners' equity for federal
income tax purposes $ 7,833 $ 10,630
=========== ============
Page 24 of 26
RANCON INCOME FUND I,
A California Limited Partnership
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(In Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- - -----------------------------------------------------------------------------------------------------------------------------------
Cost Capitalized
Initial Cost to Subsequent to Gross Amount Carried
Partnership Acquisition at December 31, 1999
--------------------- ----------------------- --------------------------------
Buildings Buildings Building
and and Carrying and (1 , 2) Accumulated
Description ncumbrances Land Improvements Improvements Cost Land Improvements Total Depreciation
- - -----------------------------------------------------------------------------------------------------------------------------------
Rental Properties:
Wakefield Facility $ -- $ 666 $ 1,118 $ 133 $ -- $ 666 $ 1,251 $ 1,917 $ 385
Less: Provisions for
impairmenet in real estate -- -- -- (175) -- (61) (114) (175) --
Bristol Medical Center -- 1,937 3,327 939 -- 1,937 4,266 6,203 1,420
Less: Provision for
impairment in real estate -- (614) (271) (1,036) -- (614) (1,307) (1,921) --
------- ---------- ---------- ----------- ------- --------- --------- --------- ------
Total $ -- $ 1,928 $ 4,099 $ (2) $ -- $ 1,928 $ 4,097 $ 6,025 $ 1,805
======= ========== ========== =========== ======= ========= ========= ======== ======
COLUMN A COLUMN G COLUMN H COLUMN I
- - -----------------------------------------------------------------------
Date Life
Construction Date Depreciated
Description Began Acquired Over
- - -----------------------------------------------------------------------
Rental Properties:
Wakefield Facility $ N/A 4/20/87 5 - 40 years
Less: Provisions for
impairmenet in real estate
Bristol Medical Center N/A 5/04/88 5 - 40 years
Less: Provision for
impairment in real estate
Total
(1) The aggregate cost of land and buildings for Federal income tax purposes is
$8,158
Page 25 of 26
NOTE TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
Reconciliation of gross amount at which real estate was carried for the years
ended December 31, 1999, 1998 and 1997 (in thousands):
1999 1998 1997
------------ ------------ ---------
INVESTMENT IN REAL ESTATE
Balance at beginning of year $ 6,940 $ 7,280 $ 7,844
Additions during year:
Improvements, etc. 109 111 32
Deletions during year:
Disposals (1,024) -- (158)
Provision for impairment of
investments in real estate -- (451) (438)
----------- ------------ ----------
Balance at end of year $ 6,025 $ 6,940 $ 7,280
=========== =========== ==========
ACCUMULATED DEPRECIATION
Balance at beginning of year $ 1,965 $ 1,802 $ 1,786
Additions charged to expenses 179 163 174
Disposals (339) -- (158)
----------- ----------- ---------
Balance at end of year $ 1,805 $ 1,965 $ 1,802
=========== =========== =========
Page 26 of 26