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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, 1996
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 (415) 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:
Annual report on Form 10-K for the fiscal year ended November 30, 1991, is
incorporated by reference in Part IV hereof.
Page 1 of 33
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, 1996, 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'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.
Page 2 of 33
Item 2. Properties
The Partnership currently owns the properties listed below:
Encumbrances at
Name Location Type Size December 31, 1996
---- -------- ---- ---- -----------------
Wakefield Industrial Temecula, California Light 44,200 sq. ft. None
Center (formerly Aham Tor) 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
Wakefield Industrial Center (formerly Aham Tor)
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 7,043,550 square feet of existing industrial space,
with an overall vacancy rate of 6.4%. 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. The average annual effective rents for the area approximate
$3.48 per foot NNN (tenant pays all operating expenses, including taxes,
insurance, and non-structural capital improvements) depending on age, location
and size of the property. Land prices for finished industrial lots range from
$2.00 to $3.75 per square foot depending on zoning, size, location and
amenities.
The occupancy level at December 31, 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 four years were:
Occupancy Level Average Annual Effective
Percentage Rent Per Square Foot
1996 100% $ 4.04
1995 100% $ 3.96
1994 100% $ 5.48
1993 100% $ 4.77
Page 3 of 33
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: $178,500
Rent Increase: Annual - CPI
Renewal Options: None
In the opinion of management, the property is adequately covered by insurance.
At December 31, 1996, the Wakefield Industrial Center property is unencumbered.
During 1996, the property was assessed property taxes of approximately $24,000
based on a tax rate of 1.36%.
Bristol Medical Center
The Partnership purchased Bristol Medical Center from Rancon Financial
Corporation ("RFC") 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.
According to research conducted by the Partnership's property manager, net
absorption in this area has been on a downward trend since 1992 as changes in
the business environment for the medical industry continue to push vacancy rates
up. No new medical buildings are under construction for the area. 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 total vacancy in this market was 14.6% for 1996, an increase of
7.53% from 1995. The sub-market consists of smaller buildings, which often are
houses converted to dental/medical offices and retail sites.
The annual rental rates for the area approximate $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).
However, as management is not aware of any new doctors having leased space in
the area in the last two years, the rates for competing buildings have not been
tested.
Page 4 of 33
The occupancy level at December 31, 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 four years were:
Occupancy Level Average Annual Effective
Percentage Rent Per Square Foot
1996 85% $ 18.89
1995 91% $ 18.76
1994 93% $ 18.91
1993 98% $ 18.82
The current annual rental rates range from $8.10 to $25.29 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:
St. Jude
Heritage Health
Nature of Business: Medical clinic
Lease Term: 1 year
Expiration Date: September 30, 1997
Square Feet: 24,957
(% of rentable total): 48%
Annual Rent: $470,500
Rent Increase: Annual - CPI
Renewal Options: None
The tenant is uncertain at this time whether or not they will renew in September
1997 due to changes occurring at the neighboring hospital of which they are
affiliated.
In the opinion of management, the property is adequately covered by insurance.
At December 31, 1996, the Bristol Medical Center property is unencumbered.
During 1996, the property was assessed property taxes of approximately $65,000
based on a tax rate of 1.07%.
Aztec Village Shopping Center
The Partnership purchased Aztec Village Shopping Center from RFC in February,
1989 for a total cost of $3,357,000. Management does not expect significant
growth or appreciation for the shopping center and as such is currently
marketing the property for sale. This rental property is classified as rental
property held for sale on the Partnership's 1996 balance sheet.
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
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
Page 5 of 33
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 Aztec Village is considered east San Diego and the
western portions of La Mesa. According to research conducted by the
Partnership's property manager, this area is comprised of over 186,000 residents
within a three mile radius of Aztec Village as well as approximately 29,000
students enrolled at San Diego State University. There are approximately 400,000
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 13%, an
increase of 2.3% over 1995. Annual rental rates range from $6.00 to $16.80 per
square foot NNN (tenant pays all operating expenses, including taxes, insurance,
and non-structural capital improvements) depending upon size, location,
condition, and amenities of the property. There are nine strip retail shopping
centers competing with Aztec Village for tenants and two supermarket anchored
centers.
The immediate area surrounding San Diego State University, commencing at College
Avenue and Montezuma, is slated for major redevelopment in late 1997. This
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 Aztec Village and due to its proximity to the campus, will command higher
rents and strong national tenant interest.
The occupancy level at December 31, 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 four years were:
Occupancy Level Average Annual Effective
Percentage Rent Per Square Foot
1996 38% $ 10.46
1995 69% $ 10.62
1994 70% $ 7.80
1993 68% $ 13.83
In December 1995, the property lost two tenants occupying a total of 6,530
square feet due to financial instability. Management continues to market but has
been unsuccessful in leasing the space. Subsequent to the Partnership's year
end, the occupancy increased to 42%.
The current annual rental rates range from $9.00 to $15.04 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 the opinion of management, the property is adequately covered by insurance.
Page 6 of 33
At December 31, 1996, the Aztec Village Shopping Center property is
unencumbered.
During 1996, the property was assessed property taxes of approximately $20,000
based on a tax rate of 1.12%.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Page 7 of 33
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, 1996, a total of 1,478 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 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.
Page 8 of 33
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
11/29/96 $ 14,000 $ 0.96 --
8/30/96 $ 14,000 $ 0.96 --
5/31/96 $ 14,000 $ 0.96 --
3/1/96 $ 60,000 $ 4.12 --
12/31/95 $ 60,000 $ 4.12 --
8/31/95 $ 61,000 $ 4.19 --
6/2/95 $ 61,000 $ 4.19 --
3/2/95 $ 182,000 $ 12.50 --
12/2/94 $ 182,000 $ 12.50 --
9/2/94 $ 182,000 $ 12.50 --
6/3/94 $ 182,000 $ 12.50 --
12/3/93 $ 182,000 $ 12.50 --
In order to rebuild cash reserves, management decided to forego a distribution
from 1994's first quarter earnings, therefore no distribution was made in March,
1994.
Due to the uncertainty of the St. Jude Heritage Health lease renewal in 1997,
representing 48% of the space at Bristol Medical Center, estimated distributions
for 1997 will remain consistent with the 1996 level.
Of the total distributions paid, $7.00, $12.99 and $37.50 per unit represented a
return of capital for the fiscal year ends 1996, 1995, and 1994 respectively.
Page 9 of 33
Item 6. Selected Financial Data
The following is selected financial data for the year ended December 31, 1996
and the years ended November 30, 1995, 1994, 1993 and 1992 (in thousands, except
per Unit data).
1996 1995 1994 1993 1992
-------- -------- -------- ------- ------
Rental income $ 1,125 $ 1,397 $ 1,417 $ 1,304 $ 1,427
Provision for
impairment of
investment in
real estate $ 1,645 $ -- $ 380 $ -- $ 2,100
Net income (loss) $ (1,394) $ 300 $ (69) $ 403 $ (1,655)
Net income (loss)
allocable to limited
partners $ (1,380) $ 297 $ (62) $ 399 $ (1,314)
Net income (loss)
per limited
partnership unit $ (94.81) $ 20.40 $ (4.26) $ 27.42 $ (90.28)
Total assets $ 6,531 $ 8,159 $ 8,483 $ 8,905 $ 9,232
Cash distributions
per limited
partnership unit $ 7.00 $ 33.39 $ 37.50 $ 50.00 $ 50.00
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Partnership had cash of $426,000. The remainder of
the Partnership's assets consist primarily of its investments in properties,
which totaled approximately $6,058,000 at December 31, 1996.
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 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 Southern California and have been
directly affected by the economic weakness of the region. Management believes,
however, that the market has flattened and is no longer falling in terms of
sales prices. While prices have not increased significantly, the Southern
California real estate market appears to be improving. 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 33
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. Due to the uncertainty of the
St. Jude Heritage Health lease renewal in 1997, representing 48% of the space at
Bristol Medical Center, estimated distributions for 1997 will remain consistent
with the 1996 level but there can be no assurance that the distribution level
will not be adjusted. As the Partnership's properties are owned free of mortgage
indebtedness, the long term operations of the properties and the Partnership are
expected to be comparable to the current operations. The Partnership is
currently soliciting offers for the sale of Aztec Village Shopping Center. This
rental property is classified as rental property held for sale on the
Partnership's 1996 balance sheet.
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 decreased 19% for the year ended December 31, 1996 compared to the
year ended November 30, 1995 as 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 during the year at
Bristol Medical Center due to the depressed market.
The increase in interest and other income in 1996 compared to 1995 of $115,000
is primarily due to a one-time legal settlement of $111,000 from a former tenant
at Bristol Medical Center. The decrease in 1995 compared to the same period in
1994 is due to lower prevailing interest rates and average invested cash
balances during 1995.
Operating expenses decreased 15% for the year ended December 31, 1996 compared
to the year ended November 30, 1995. Due to the vacancies at Aztec Village
Shopping Center and Bristol Medical Center, utilities expense and base
management fees decreased $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 decrease of 11% in 1995 compared to 1994 is due to
one-time repairs and maintenance made to Bristol Medical Center in 1994.
Depreciation and amortization expense decreased 23% for the year ended December
31, 1996 compared to the year ended November 30, 1995 primarily as a result of
certain lease commissions becoming fully amortized at Bristol Medical Center and
Aztec Village Shopping Center at the end of 1995. The increase of 7% for the
year ended November 30, 1995 as compared to the same period in 1994 is a result
of additional tenant improvements.
In 1996, due to a higher vacancy rate and current cash flow analyses, management
concluded that the carrying value of two of the Partnership's investments were
in excess of their estimated fair value. As a result, the Partnership recorded
$1,470,000 and $175,000 provisions for impairment of it's investments in Bristol
Medical Center and Wakefield Industrial Center, respectively. In 1994,
management concluded that the carrying value of the Partnership's investment in
Aztec Village was in excess of its net realizable value and a $380,000 provision
for impairment of the investment was recorded to reduce the carrying value to
the estimated fair value.
General and administrative expenses for the year ended December 31, 1996
compared to the year ended November 30, 1995 increased 18%. The increase is
partially due to a $10,000 increase in quarterly overhead expense, a one-time
payment of $5,000 for professional services rendered in connection with the
Page 11 of 33
valuation of the limited partner interests and an increase in data processing
fees of $7,000. In addition, the Partnership incurred professional fees of
approximately $13,000, resulting from the preparation of additional prior and
current year tax returns in states where returns had not previously been filed,
and an increase of $9,000 in general legal fees associated with the management
of the Partnership's and properties day-to-day affairs. The increase of 15% in
1995 as compared to the same period in 1994 is a result of the payment and
expense of 1994 audit and tax return fees in 1995. Since January 1, 1995, audit
and tax fees have been accrued in the year to which they relate.
In December, 1994, RFC entered into an agreement with Glenborough Inland Realty
Corporation ("Glenborough") whereby RFC sold to Glenborough, for approximately
$4,466,000 and the assumption of $1,715,000 of RFC's debt, the contract to
perform the rights and responsibilities under RFC's agreement with the
Partnership, eight other related partnerships and third parties (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. As part of this agreement, Glenborough will perform certain
responsibilities for the General Partner of the Rancon Partnerships and 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 RFC. This agreement
was effective January 1, 1995.
RFC entered into the transaction with Glenborough described above, when it
determined to sell that portion of its business relating to investor services,
property management services and asset management services, and those services
are now rendered to the Rancon Partnerships by Glenborough. The Partnership
required those services to be rendered to it until such time as all of its
properties were sold, whether performed by the General Partner or Glenborough.
RFC, as General Partner of the General Partner for the Partnership, has the
responsibility and obligation to manage the Partnership business, including the
sale of its properties, notwithstanding that certain property management and
other administrative activities regarding the Partnership are now performed by
Glenborough.
As a result of the agreement between RFC and Glenborough, RFC terminated certain
employees who were previously responsible for performing the administrative,
legal and development services to the Partnership. Upon termination, certain
employee costs including severance benefits were allocated to the various Rancon
Partnerships. Such costs allocated to the Partnership aggregated $48,000 and
were included in administrative expenses for the year ended November 30, 1994.
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
On June 6, 1995, Price Waterhouse LLP was dismissed as the principal independent
accountant for the Partnership. The decision to dismiss Price Waterhouse LLP was
made by the Partnership's General Partner.
The reports of Price Waterhouse LLP on the Partnership's financial statements
for the period ending November 30, 1994, do not contain an adverse opinion or a
disclaimer of an opinion, nor were such opinions modified as to uncertainty,
audit scope, or accounting principles.
During the fiscal year ended November 30, 1994 and the subsequent interim period
from December 1, 1994 to June 6, 1995, there were no disagreements between the
Partnership and Price Waterhouse LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
Page 12 of 33
which, if not resolved to the satisfaction of Price Waterhouse LLP, would have
caused it to make a reference to the subject matter of the disagreement in
connection with its reports. For this purpose the term disagreement does not
include initial differences of opinion based on incomplete facts or preliminary
information that were later resolved to the satisfaction of Price Waterhouse LLP
by obtaining additional relevant facts or information.
During the fiscal year ended November 30, 1994 and the subsequent interim period
from December 1, 1994 to June 6, 1995, there were no "reportable events" of the
type described in Rule 304(a)(1)(v)(A) through (D) of Regulation S-K.
On June 6, 1995, the Partnership engaged Arthur Andersen LLP as its new
principal independent accountant. During the fiscal year ended November 30, 1994
and the subsequent interim period from December 1, 1994 through June 6, 1995,
the Partnership did not consult with Arthur Andersen LLP as to the application
of accounting principles to a specified transaction or the type of audit opinion
that might be rendered on the Partnership's financial statements.
Page 13 of 33
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 RFC are the General Partners of Rancon Income Partners I, L.P.
The executive officer and director of Rancon 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 53, 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.
Effective January 1, 1994 RFC acquired all the outstanding shares of Partnership
Asset Management Company, a California corporation, which previously performed
or contracted on the Partnership's behalf for financial, accounting, data
processing, marketing, legal, investor relations, asset and development
management and consulting services for the Partnership. These services were
provided to the Partnership by RFC subject to the provisions of the Partnership
Agreement during calendar 1994.
Rancon Development Fund VII ("RDFVII"), a partnership sponsored by the General
Partners, filed for protection under Chapter 11 of Federal Bankruptcy Law on May
6, 1994 in order to put an automatic stay on RDFVII's property and to forestall
the pending foreclosure. In March, 1994, the General partners were approached by
a non-affiliated party interested in acquiring the interests of RDFVII's general
partners and attempting to restructure the partnership and its secured debt.
Although the necessary majority-in-interest of RDFVII's limited partners was
received, an agreement regarding the terms of the transfer and the plan of
reorganization could not be reached. The holder of the note secured by RDFVII's
property filed for and was granted a relief from the stay thereby allowing the
foreclosure sale to proceed. Such sale took place on September 15, 1994 and the
bankruptcy was subsequently dismissed, as the property was RDFVII's only asset.
Six Stoneridge L.P. ("SSRLP"), a partnership formed by Rancon Development Fund
VI ("RDFVI"), a partnership sponsored by the General Partners filed for
protection under Chapter 11 of Federal Bankruptcy Law in December, 1992. Efforts
to negotiate a modification of the purchase agreement of StoneRidge I, to obtain
loans, joint venture partners or other vehicles to meet or modify the cash
payment requirements were unsuccessful. In February, 1993, an adversary
complaint was filed against SSRLP in the bankruptcy court to determine the
nature and extent of SSRLP's interest in StoneRidge I and the debt associated
with the property. A tentative agreement has been reached and the bankruptcy was
dismissed effective November 8, 1995. As of December 31, 1996, SSRLP and RDFVI
have been dissolved.
Page 14 of 33
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 Beneficial Percent
of Class Name of Beneficial Owner Ownershipof 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.
Item 13. Certain Relationships and Related Transactions
The Partnership did not incur any costs reimbursable to RFC during the year
ended December 31, 1996, or the one month ended December 31, 1995.
Page 15 of 33
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:
Reports of Independent Public Accountants
Balance Sheets as of December 31, 1996 and 1995 and November
30, 1995
Statements of Operations for the Year Ended December 31,
1996, the Month Ended December 31, 1995 and the Years Ended
November 30, 1995 and 1994
Statements of Partners' Equity (Deficit) for the Year Ended
December 31, 1996, the Month Ended December 31, 1995 and the
Years Ended November 30, 1995 and 1994
Statements of Cash Flows for the Year Ended December 31,
1996, the Month Ended December 31, 1995 and the Years Ended
November 30, 1995 and 1994
Notes to Financial Statements
(2) Financial Statement Schedule:
Schedule III -- Real Estate and Accumulated Depreciation as
of December 31, 1996 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 16 of 33
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 28, 1997 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 28, 1997 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 17 of 33
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULE
Page
Reports of Independent Public Accountants 19 & 20
Financial Statements:
Balance Sheets as of December 31, 1996 and 1995 and
November 30, 1995 21
Statements of Operations for the year ended December
31, 1996, the month ended December 31, 1995 and the
years ended November 30, 1995 and 1994 22
Statements of Partners' Equity (Deficit) for the year
ended December 31, 1996, the month ended December
31, 1995 and the years ended November 30, 1995 and
1994 23
Statements of Cash Flows for the year ended December
31, 1996, the month ended December 31, 1995 and the
years ended November 30, 1995 and 1994 24
Notes to Financial Statements 25
Schedule:
III - Real Estate and Accumulated Depreciation
as of December 31, 1996 and Note thereto 31
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Page 18 of 33
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, 1996 and 1995 and November 30,
1995, and the related statements of operations, partners' equity (deficit) and
cash flows for the year ended December 31, 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, 1996 and 1995 and November
30, 1995, and the results of its operations and its cash flows for the year
ended December 31, 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.
ARTHUR ANDERSEN
San Francisco, California
February 12, 1997
Page 19 of 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the General and Limited Partners of
Rancon Income Fund I
In our opinion, the accompanying statements of operations, of partners' equity
and of cash flows present fairly, in all material respects, the results of
operations and cash flows of Rancon Income Fund I for the year ended November
30, 1994, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the financial statements of Rancon Income Fund I for
any period subsequent to November 30, 1994.
Our audit for the year ended November 30, 1994 was made for the purpose for
forming an opinion on the basic financial statements taken as a whole. Our audit
also included an audit of the Financial Statement Schedule listed in Item 14 (a)
of this Form 10-K. In our opinion, the Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements.
PRICE WATERHOUSE LLP
San Diego, California
January 20, 1995
Page 20 of 33
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Balance Sheets
December 31, 1996, 1995 and November 30, 1995
(in thousands, except units outstanding)
December 31, December 31, November 30,
1996 1995 1995
Assets
Investments in real estate:
Rental property, net of accumulated
depreciation of $1,423, $1,583 and $1,566
at December 31, 1996, 1995, and
November 30, 1995, respectively $ 4,954 $ 7,742 $ 7,758
Rental property held for sale 1,104 -- --
----------- ---------- ----------
Net real estate investments 6,058 7,742 7,758
----------- ---------- ----------
Cash and cash equivalents 426 274 288
Accounts receivable 17 16 23
Deferred costs, net of accumulated
amortization of $196, $172 and $170 at
December 31, 1996, 1995 and November
30, 1995, respectively 19 42 44
Other assets 11 11 46
---------- --------- ---------
Total assets $ 6,531 $ 8,085 $ 8,159
========== ========= =========
Liabilities and Partners' Equity (Deficit)
Liabilities:
Accounts payable and accrued expenses $ 23 $ 75 $ 75
Other liabilities 63 69 55
---------- --------- ---------
Total liabilities 86 144 130
---------- --------- ---------
Partners' equity (deficit):
General Partner (178) (164) (164)
Limited Partners (14,555 limited partnership
units outstanding in 1996 and 1995) 6,623 8,105 8,193
---------- --------- ---------
Total partners' equity 6,445 7,941 8,029
---------- --------- ---------
Total liabilities and partners' equity $ 6,531 $ 8,085 $ 8,159
========== ========= =========
The accompanying notes are an integral part of these financial statements.
Page 21 of 33
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Operations
For the year ended December 31, 1996, the month ended
December 31, 1995 and the years ended November 30, 1995 and 1994
(in thousands, except per unit amounts)
For the For the For the For the
year ended month ended year ended year ended
December 31, December 31, November 30, November 30,
1996 1995 1995 1994
Revenue:
Rental income $ 1,125 $ 57 $ 1,397 $ 1,417
Interest and other income 122 1 7 11
------------ ------------ ----------- ----------
Total revenue 1,247 58 1,404 1,428
------------ ------------ ----------- ----------
Expenses:
Operating, including $6 and $156 paid to
Sponsor for the years ended November 30,
1995 and 1994, respectively 476 47 560 626
Depreciation and amortization 227 19 295 275
Provision for impairment of investment
in real estate 1,645 -- -- 380
General and administrative, including
$7 and $179 paid to Sponsor for the years
ended November 30, 1995 and 1994,
respectively 293 20 249 216
------------ ------------ ----------- ----------
Total expenses 2,641 86 1,104 1,497
------------ ------------ ----------- ----------
Net income (loss) $ (1,394) $ (28) $ 300 $ (69)
=========== =========== ========== =========
Net income (loss) per limited partnership unit $ (94.81) $ (1.92) $ 20.40 $ (4.26)
=========== =========== ========= =========
Distributions per limited partnership unit:
Representing return of capital $ 7.00 $ 4.12 $ 12.99 $ 37.50
From net income -- -- 20.40 --
----------- ----------- --------- ---------
Total distributions per limited
partnership unit $ 7.00 $ 4.12 $ 33.39 $ 37.50
=========== =========== ========= =========
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 22 of 33
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Partners' Equity (Deficit)
For the year ended December 31, 1996, the month ended
December 31, 1995 and the years ended November 30, 1995 and 1994
(in thousands)
General Limited
Partner Partners Total
Balance at November 30, 1993 $ (160) $ 8,990 $ 8,830
Distributions -- (546) (546)
Net loss (7) (62) (69)
--------- -------- ---------
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
======== ======== ========
The accompanying notes are an integral part of these financial statements.
Page 23 of 33
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Cash Flows
For the year ended December 31, 1996, the month ended
December 31, 1995 and the years ended November 30, 1995 and 1994
(in thousands)
For the For the For the For the
year ended month ended year ended year ended
December 31, December 31, November 30, November 30,
1996 1995 1995 1994
Cash flows from operating activities:
Net income (loss) $ (1,394) $ (28) $ 300 $ (69)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 227 19 295 275
Provision for impairment of investment
in real estate 1,645 -- -- 380
Changes in certain assets and liabilities:
Accounts receivable (1) 7 (9) 37
Deferred costs (1) -- -- --
Other assets -- 35 7 8
Payable to sponsor -- -- (158) 155
Accounts payable and accrued expenses (52) -- 32 33
Other liabilities (6) 14 (12) 5
-------- --------- --------- ---------
Net cash provided by operating activities 418 47 455 824
-------- --------- --------- ---------
Cash flows used for investing activities:
Additions to investments in real estate (164) (1) (53) (62)
--------- ---------- ----------- ----------
Cash flows used for financing activities:
Cash distributions to limited partners (102) (60) (486) (546)
-------- --------- ---------- ---------
Net increase (decrease) in cash and cash equivalents 152 (14) (84) 216
Cash and cash equivalents at beginning of period 274 288 372 156
-------- --------- ---------- ---------
Cash and cash equivalents at end of period $ 426 $ 274 $ 288 $ 372
======== ========= ========== =========
The accompanying notes are an integral part of these financial statements.
Page 24 of 33
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1996, November 30, 1995 and 1994
Note 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
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 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, 1996 and 1995 and November 30, 1995, 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 profits, losses and cash distributions from operations and from
sale or financing of any Partnership property are made pursuant to the terms of
the Partnership Agreement. Generally, net income and distributions from
operations are 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 losses for any period.
All of the Partnership's assets are located in Southern California and have been
directly affected by the economic weakness of the region. Management believes,
however, that the market has flattened and is no longer falling in terms of
sales prices. While prices have not increased significantly, the Southern
California real estate market appears to be improving. 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. The Partnership is currently
soliciting offers for the sale of Aztec Village Shopping Center. This rental
property is classified as rental property held for sale on the Partnership's
1996 balance sheet.
General Partner and Management Matters
Effective January 1, 1994, Rancon Financial Corporation ("RFC"), wholly owned by
Daniel Lee Stephenson, performed or contracted on the Partnership's behalf for
financial, accounting, data processing, marketing, legal, investor relations,
asset and development management and consulting services. These services were
provided by RFC subject to the provisions of the Partnership Agreement. Prior to
January 1, 1994, the Partnership had contracted with Partnership Asset
Management Company (PAMCO), a California corporation, to perform the same
services. Effective January 1, 1994, RFC entered into an agreement with the
Page 25 of 33
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1996, November 30, 1995 and 1994
owner of PAMCO to purchase all of its outstanding shares of stock. PAMCO was not
an affiliate of the Partnership or RFC at the time of purchase.
In December, 1994, RFC entered into an agreement 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.
As a result of this agreement, RFC terminated several of its employees between
December 31, 1994 and February 28, 1995. Also as a result of this agreement,
certain of the officers of RFC resigned from their positions effective February
28, 1995, March 31, 1995 and July 1, 1995.
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, (ii) meet its debt obligations, (iii) provide
distributions either from operations or the ultimate disposition of the
Partnership's properties or (iv) continue as a going concern, may be impacted by
changes in interest rates, 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.
Investments in Real Estate - In March, 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121 (SFAS 121),
"Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of." The Partnership adopted SFAS 121 in the fourth quarter of fiscal
1995. SFAS 121 requires that long-lived assets be carried at the lower of
Page 26 of 33
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1996, November 30, 1995 and 1994
carrying amount or fair value and that an evaluation of an individual property
for possible impairment must be performed whenever events or changes in
circumstances indicate that an impairment may have occurred. The specific
accounting policy for assets to be held and used is described in more detail
below.
Rental Property - 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 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 the
lower of cost or 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. Once the property
is classified as held for sale, the Partnership will cease depreciation of the
asset.
Cash and cash equivalents - The Partnership considers all certificates of
deposit and money market funds with original maturities of less than ninety days
to be cash equivalents.
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 $24,000 for the year ended December 31, 1996 and $58,000 and $45,000
for the years ended November 30, 1995 and 1994, 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' 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 (deficit) 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.
Reclassifications - Certain 1995 and 1994 balances have been reclassified to
conform with the current year presentation.
Page 27 of 33
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1996, November 30, 1995 and 1994
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 and $156,000 for the years ended November 30, 1995 and
1994, respectively.
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 totaled $7,000 and $179,000 for the years
ended November 30, 1995 and 1994, respectively. Effective January 1, 1995, these
services are provided by Glenborough as described in Note 1.
Note 3. INVESTMENTS IN REAL ESTATE
Rental property as of December 31, 1996 and 1995 and November 30, 1995 is as
follows:
December 31, December 31, November 30,
1996 1995 1995
Land $ 2,072,000 $ 3,065,000 $ 3,065,000
Buildings and improvements 3,851,000 5,743,000 5,742,000
Tenant improvements 454,000 517,000 517,000
--------------- ------------- --------------
6,377,000 9,325,000 9,324,000
Less: accumulated depreciation (1,423,000) (1,583,000) (1,566,000)
--------------- ------------- --------------
Total $ 4,954,000 $ 7,742,000 $ 7,758,000
=============== ============= ==============
Rental property held for sale at December 31, 1996 is as follows:
Land $ 461,000
Buildings and improvements 920,000
Tenant improvements 86,000
--------------
1,467,000
Less: accumulated depreciation (363,000)
--------------
Total $ 1,104,000
==============
At December 31, 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, 1996.
In 1996, due to a higher vacancy rate and current cash flow analyses, management
concluded that the carrying value of two of the Partnership's investments were
in excess of their estimated fair value. As a
Page 28 of 33
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1996, November 30, 1995 and 1994
result, the Partnership recorded $1,470,000 and $175,000 provisions for
impairment of it's investments in Bristol Medical Center and Wakefield
Industrial Center, 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, 1996 is as follows:
1997 $ 956,000
1998 503,000
1999 451,000
2000 367,000
2001 332,000
Thereafter 1,281,000
---------
Total $ 3,890,000
============
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, 1996 and
November 30, 1995 and 1994, determined in accordance with accounting practices
used in preparation of federal income tax returns (in thousands).
1996 1995 1994
----- ---- ----
Net income (loss) per financial statements $ (1,394) $ 300 $ (69)
Provision for impairment of investments in
real estate 1,645 -- 380
Financial reporting depreciation in excess
of tax reporting depreciation (4) -- --
Rental income reported in a different period
for tax than for financial reporting 114 112 --
Operating expenses recognized in a different
period for financial reporting than
for tax reporting (111) (190) 173
------------- ------------ ------------
Estimated net income for federal
income tax purposes $ 250 $ 222 $ 484
=========== =========== ===========
Page 29 of 33
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 1996, November 30, 1995 and 1994
The following is a reconciliation as of December 31, 1996 and November 30, 1995
of partner's equity for financial reporting purposes to estimated partners'
equity for Federal income tax purposes (in thousands).
1996 1995
---- ----
Partners' equity per financial statements $ 6,445 $ 8,029
Cumulative provision for impairment of
investments in real estate 4,125 2,480
Financial reporting depreciation in excess
of tax reporting depreciation (266) --
Operating expenses recognized in a different
period for financial reporting than for
tax reporting, net 3 --
Other, net (7) (212)
----------- ------------
Estimated partners' equity for federal
income tax purposes $ 10,300 $ 10,297
=========== ============
Page 30 of 33
RANCON INCOME FUND I,
A California Limited Partnership
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(In Thousands)
COLUMN A COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
- ----------------------------------------------------------------------------------------------------------------------
Gross Amount Carried
at December 31, 1996
Building Date Life
and (1 , 2) Accumulated Construction Date Depreciated
Description Land Improvements Total Depreciation Began Acquired Over
- ----------------------------------------------------------------------------------------------------------------------
Rental Properties:
Wakefield Industrial Center $ 741 $ 1,384 $ 2,125 $ 296 N/A 4/20/87 40yrs
Less: write-down to
estimated fair value (2) (135) (240) (375) --
Bristol Medical Center 1,937 4,160 6,097 1,127 N/A 5/04/88 40yrs
Less: write-down to
estimated fair value(2) (470) (1,000) (1,470) --
--------- --------- --------- -----
Subtotal 2,073 4,304 6,377 1,423
-------- -------- -------- ------
Rental property held for sale:
Aztec Village Shopping Center 1,205 2,542 3,747 363 N/A 2/20/89 40yrs
Less: write-down to
estimated fair value (2) (744) (1,536) (2,280) --
-------- -------- -------- -------
Subtotal 461 1,006 1,467 363
-------- -------- -------- -------
Totals $ 2,534 $ 5,310 $ 7,844 $ 1,786
======== ======== ======== =======
(1) The aggregate cost for Federal income tax purposes is $11,425
(2) See Note 3 to Financial Statements
Page 31 of 33
RANCON INCOME FUND I,
A California Limited Partnership
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
(In Thousands)
COLUMN A COLUMN B COLUMN C
- -------------------------------------------------------------------------------------------------
Cost Capitalized
Initial Cost to Subsequent to
Partnership Acquisition
Buildings
and Carrying
Description Encumbrances Land Improvements Improvements Cost
- -------------------------------------------------------------------------------------------------
Rental Properties:
Wakefield Industrial Center $ -- $ 741 $ 1,158 $ 226 $ --
Less: write-down to
estimated fair value (2) -- (135) (34) (206) --
Bristol Medical Center -- 1,937 3,433 727 --
Less: write-down to
estimated fair value(2) -- (470) (273) (727) --
------- ------- -------- -------- ---------
Subtotal -- 2,073 4,284 20 --
------- ------- -------- --------- -------
Rental property held for sale:
Aztec Village Shopping Center -- 1,205 2,152 390 --
Less: write-down to
estimated fair value (2) -- (744) (1,154) (382) --
------- -------- -------- ------- ---------
Subtotal -- 461 998 8 --
------- -------- -------- ------- -------
Totals $ -- $ 2,534$ 5,282 $ 28 $ --
======== ======== ======== ======= =========
(1) The aggregate cost for Federal income tax purposes is $11,425
(2) See Note 3 to Financial Statements
Page 31 of 33
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
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, 1996 and 1995 and November 30, 1995 and 1994:
Dec. 31, Dec. 31, Nov. 30, Nov. 30,
1996 1995 1995 1994
INVESTMENT IN REAL ESTATE
Balance at beginning of period $ 9,325 $ 9,324 $ 9,362 $ 9,680
Additions during period:
Improvements, etc. 164 1 53 62
Deletions during period:
Disposals-- -- -- (91) --
Provision for impairment of
investment in real estate (1,645) -- -- (380)
----------- --------- ---------- ----------
Balance at end of period $ 7,844 $ 9,325 $ 9,324 $ 9,362
========== ========== ========== ==========
ACCUMULATED DEPRECIATION
Balance at beginning of period $ 1,583 $ 1,566 $ 1,420 $ 1,190
Additions charged expenses 203 17 237 230
Disposals -- -- (91) --
---------- ------- --------- -------
Balance at end of period $ 1,786 $ 1,583 $ 1,566 $ 1,420
========== ======== ========= ========
Page 32 of 33
INDEX TO EXHIBITS
Exhibit Number Exhibit
27 Financial Data Schedule
Page 33 of 33