FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-13157
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
California 33-0023868
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)
400 South El Camino Real, Suite 1100
San Mateo, California 94402
(Address of principal executive offices) (Zip Code)
(415) 343-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Total number of units outstanding as of March 31, 1996: 37,489.
Page 1 of 13
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Balance Sheets
(in thousands, except units outstanding)
(Unaudited)
March 31, December 31,
Assets 1996 1995
------ --------- ---------
Property:
Rental property (net of accumulated
depreciation of $570 and $557 at March
31, 1996 and December 31, 1995) $ 1,139 $ 1,152
Land held for development 3,190 3,186
Land held for sale 1,514 1,514
------ ------
Total property 5,843 5,852
Cash and cash equivalents 211 459
Prepaid expenses and other assets (net of
accumulated amortization of $61 and $53
at March 31, 1996 and December 31, 1995 45 51
------ ------
Total assets $ 6,099 $ 6,362
====== ======
Liabilities and Partners' Equity (Deficit)
Accounts payable and other liabilities $ 203 $ 194
Accrued guarantee settlement costs --- 300
Notes payable - secured 560 500
------ ------
Total liabilities 763 994
Partners' equity (deficit):
General Partners (265) (264)
Limited partners - 37,489 limited partnership
units outstanding 5,601 5,632
------ ------
Total partners' equity (deficit) 5,336 5,368
------ ------
Total liabilities and partners' equity $ 6,099 $ 6,362
====== ======
See accompanying notes to financial statements.
Page 2 of 13
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Operations
(in thousands, except per unit amounts)
(Unaudited)
Three Months Ended
March 31,
1996 1995
Revenues: ------ ------
Rental income $ 50 $ 95
Interest and other income 3 4
------ ------
Total revenues 53 99
------ ------
Costs and expenses:
Operating 20 36
Interest expense 16 52
Depreciation and amortization 21 31
Expenses associated with undeveloped
land 35 34
General and administrative 110 103
------ ------
Total operating costs and expenses 202 256
------ ------
Loss before extraordinary item (149) (157)
Extraordinary gain:
Guarantee settlement 117 ---
------ ------
Net loss $ (32) $ (157)
====== ======
Net loss per limited partnership unit $ (0.83) $ (4.11)
====== ======
Distribution per unit $ --- $ ---
====== ======
Weighted average number of limited
partnership units outstanding during
each period used to compute net loss
per limited partnership unit 37,489 37,489
====== ======
See accompanying notes to financial statements.
Page 3 of 13
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Partners' Equity (Deficit) (in thousands)
For the three months ended March 31, 1996 and 1995
(Unaudited)
Total
General Limited Partners'
Partners Partners Equity
-------- ------ ------
Balance at December 31, 1994 $ (112) $ 13,093 $ 12,981
Net loss (3) (154) (157)
------- ------- -------
Balance at March 31, 1995 $ (115) $ 12,939 $ 12,824
======= ======= =======
Balance at December 31, 1995 $ (264) $ 5,632 $ 5,368
Net loss (1) (31) (32)
------- ------- -------
Balance at March 31, 1996 $ (265) $ 5,601 $ 5,336
======= ======= =======
See accompanying notes to financial statements.
Page 4 of 13
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Cash Flows (in thousands)
(Unaudited)
Three Months Ended
March 31,
1996 1995
------ ------
Cash flows provided by operating
activities:
Net loss $ (32) $ (157)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation and amortization 21 31
Extraordinary gain on guarantee
settlement (117) ---
Changes in certain assets and liabilities:
Prepaid expenses and other
assets (1) (6)
Accounts payable and other
liabilities 9 111
------- -------
Net cash used for operating
activities (120) (21)
------- -------
Cash flows from investing activities:
Additions to real estate (5) (9)
------- -------
Net cash used for investing
activities (5) (9)
------- -------
Cash flows from financing activities:
Borrowings on notes
payable - secured 60 ---
Payment of guarantee settlement (183) ---
Net cash used for financing ------- -------
activities (123) ---
------- -------
Net decrease in cash and cash
equivalents (248) (30)
Cash and cash equivalents
at beginning of period 459 66
------- -------
Cash and cash equivalents
at end of period $ 211 $ 36
======= =======
See accompanying notes to financial statements.
Page 5 of 13
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
March 31, 1996
(Unaudited)
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
-------------------------------------------------------
In the opinion of Rancon Financial Corporation and Daniel Lee
Stephenson (the Sponsors) and Glenborough Inland Realty
Corporation, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal accruals)
necessary to present fairly the financial position of Rancon
Realty Fund III, A California Limited Partnership (the
Partnership) as of March 31, 1996 and December 31, 1995, and the
related statements of operations, changes in partners' equity,
and cash flows for the three months ended March 31, 1996 and
1995.
Effective with the year ended December 31, 1996, the
Partnership's year end has been changed from September 30 to
December 31.
Allocation of profits, losses and cash distributions from
operations and cash distributions from sale or refinancing are
made pursuant to the terms of the Partnership Agreement.
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
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 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 $299,000 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.
Reclassification - Certain 1995 balances have been reclassified
to conform with the current period presentation.
Page 6 of 13
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
March 31, 1996
(Unaudited)
Note 2. REFERENCE TO 1995 AUDITED FINANCIAL STATEMENTS
----------------------------------------------
These unaudited financial statements should be read in
conjunction with the Notes to Financial Statements included in
the 1995 audited financial statements.
Note 3. NOTES RECEIVABLE
----------------
During October, 1992, the Partnership began legal proceedings
against Sumarco (the buyer of a restaurant sold by the
Partnership) on a $38,000 note receivable that was in default.
The Partnership and Sumarco successfully negotiated a payment
schedule and the Partnership received monthly payments for a
short-time. Sumarco then defaulted on its payments under the
note and the Partnership obtained a default judgement and
recorded the related abstracts of judgement. Based on the
uncertainty of collection on the defaulted note, management
established a reserve for the remaining balance of $17,000 at
September 30, 1994. Legal council has since then determined the
$17,000 note receivable is uncollectible, therefore, management
applied the receivable to the established reserve on March 31,
1996.
Note 4. DISPOSITION OF PROPERTY
-----------------------
On March 15, 1995 management of Civic Center III was turned over
to a receiver for the lender of the $2,149,000 note payable
secured by such property. As a result of decreased occupancy and
rental rates, the monthly debt service payments exceeded the cash
generated by the rental operations of the property. These
factors, along with the decline in the property s value and the
unsuccessful attempts to renegotiate the terms of the loan,
forced management to discontinue the monthly debt service
payments. In April 1995, the Partnership was required to turn
over to the receiver the net cash flow generated by Civic Center
III from January 1, 1995 through March 15, 1995 of approximately
$26,000 and on May 23, 1995, title to the property passed to the
lender.
Note 5. ACCRUED GUARANTEE SETTLEMENT COSTS
----------------------------------
The Partnership agreed to indemnify the Sponsors for any amounts
paid under an agreement executed by the Sponsors in 1992
guaranteeing the payment and performance of a portion of a
promissory note to Imperial Thrift and Loan (Imperial) which was
assumed by Sumarco when they purchased a restaurant from the
Page 7 of 13
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
March 31, 1996
(Unaudited)
Partnership on April 30, 1992. The guarantee of up to a maximum
of $600,000 in liability, was a condition of such assumption.
Sumarco defaulted under the terms of the note. Imperial filed a
foreclosure action against Sumarco and named the Sponsors as
defendants for purposes of enforcing the guarantee. The
Partnership felt there were strong points in its favor, but in
the interim had recorded an estimated loss on such guarantee of
$300,000 as of September 30, 1993.
In order to avoid the uncertainties and expense of further
litigation, Imperial and the Sponsors entered into a Settlement
Agreement and Release on January 2, 1996. The Agreeing Parties
(Imperial and the Sponsors) acknowledge that the settlement
between them is a compromise resolution of disputed claims.
Accordingly, Imperial filed a Request for Dismissal of Case No.
RCV 07394, and the Sponsors complied with their payment of
$182,500 on January 16, 1996. The Partnership reimbursed the
Sponsor under its indemnity agreement and applied the estimated
loss of $300,000 recorded at September 30, 1993 to the $182,500
payment and $117,500 to extraordinary gain. Sumarco is not party
to this full and final settlement, and is in no way to be
benefited or released by it.
Note 6. NOTES PAYABLE
-------------
On October 4, 1995, the Partnership borrowed $575,000, from an
unaffiliated third party, secured by Civic Center II. $75,000 of
the loan proceeds were held back by the lender to be disbursed
for tenant improvements. During 1996, $60,000 have been
disbursed to the Partnership from the lender holdback. Interest
accrues at the Wells Fargo Bank Prime Rate plus 2.00% (10.25% at
March 31, 1996), payable in monthly interest only installments.
The outstanding principal is due February 20, 1997.
Note 7. SUBSEQUENT EVENT
----------------
Subsequent to the Partnership's quarter end, approximately 33
acres of the 35 acres of unimproved Land Held for Sale in Rancho
Cucamonga went into escrow for a sales price of $2,166,000, for
which the buyer paid a $250,000 non-refundable deposit. The
expected close of escrow is June 3, 1996. The cash proceeds will
be used to payoff the balance of the $575,000 note payable
discussed in Note 6 and the remainder will be used to establish
cash reserves for the Partnership.
Page 8 of 13
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
As of December, 1986, Rancon Realty Fund III (the Partnership)
was fully funded from the sale of all limited partnership units
(Units) in the amount of $37,500,000. As of March 31, 1996, the
Partnership had cash of $211,000. The remainder of the
Partnership's assets consist primarily of its investments in
property, which totaled $5,843,000 as of March 31, 1996.
The Partnership's primary source of funds has consisted of the
proceeds of the sale of its Units. Other sources of funds
include property sales, property operations, property financing
and interest income earned on cash balances. Funds from property
operations consist of cash generated from rental activities
reduced by related rental expenses and costs associated with
acquiring tenants. The net cash generated by property operations
as well as the Partnership's cash reserves and interest income
thereon have been used to pay expenses related to the
Partnership's administrative operations. Cash expected to be
generated by rental activities during 1996 when combined with
cash on hand and the borrowing discussed in Note 7 will not be
adequate to cover the Partnership's projected expenditures for
1996. Management and the general partners are currently
considering the best action to take to satisfy this shortfall.
Options being considered include reducing expenses and selling a
portion of the unimproved land in Rancho Cucamonga, California,
(which, subsequent to March 31, 1996, has gone into escrow for a
sales price of $2,166,000 - see further discussion below) to
generate sufficient cash proceeds to place the Partnership in a
position to cover its projected expenditures. The Partnership
will continue to monitor market conditions in order to sell its
remaining properties for the best obtainable price during fiscal
years 1996 through 1999 as conditions allow.
The Partnership's assets are located within the Inland Empire
submarket of the Southern California region. The Southern
California regional economy in general, and the real estate
industry in particular, are considered to be in a recessionary
cycle. The Partnership may receive both positive and negative
effects from these current market conditions. Potential negative
effects include the delinquency of lease and mortgage payments
owed to the Partnership, a decrease in competitive market lease
rates and land prices and decreased occupancy levels due to
corporate downsizing. The Partnership may benefit from the
current economic and financing conditions due to the general lack
of new competitive product being constructed, potentially causing
greater absorption of existing inventory.
In November 1993, the Partnership and Sumarco (the buyer of a
restaurant sold by the Partnership on April 30, 1992)
successfully negotiated a payment schedule in connection with
delinquent $38,000 note receivable, which provided for a
reduction in the principal balance of approximately $5,000
Page 9 of 13
provided that semi-monthly principal and interest payments of
$1,000 are made by Sumarco until $33,000 in principal has been
paid. To show good faith during the negotiations, the
Partnership received a partial payment in the amount of $5,000
from Sumarco. Such payment was applied to accrued interest
receivable, late charges and the reimbursement of a portion of
the legal costs incurred to date related to the delinquent note.
In addition, upon reaching the final agreement, a one-time
payment of $5,000 was also received. Sumarco defaulted on its
payments under the note which had a balance of $17,000 as of
December 31, 1995, and the Partnership obtained a default
judgement and recorded the related abstracts of judgement. Legal
council determined the $17,000 note receivable was uncollectible,
therefore, management applied the receivable to the established
reserve on March 31, 1996.
In connection with the sale of the restaurant site to Sumarco,
the Sponsors guaranteed a portion of the payment and performance
of the promissory note to Imperial Thrift and Loan (Imperial)
which was assumed by Sumarco and the Partnership agreed to
indemnify the Sponsors for any amounts so paid. The guarantee by
the Sponsors of up to a maximum $600,000 in liability was a
condition of such assumption. Sumarco defaulted under the terms
of the note. Imperial filed a foreclosure action against Sumarco
and named the Sponsors as defendants for purposes of enforcing
the guarantee. The Partnership felt there were strong points in
its favor, but, recorded a liability for the estimated loss on
the guarantee at September 30, 1993 of $300,000. On January 2,
1996, Imperial and the Sponsors negotiated a full and final
settlement of all claims. The agreeing Parties (Imperial and the
Sponsors) acknowledge that the settlement between them is a
compromise resolution of deputed claims. Accordingly, Imperial
filed a Request for Dismissal of Case No. RCV 07394, and the
Sponsors complied with their payment of $182,500 on January 16,
1996. The Partnership reimbursed the Sponsor under its indemnity
agreement and applied the estimated loss of $300,000 recorded at
September 30, 1993 to the $182,500 payment and $117,500 to
extraordinary gain. Sumarco is not party to this full and final
settlement, and is in no way to be benefited or released by it.
On March 15, 1995, management of Civic Center III was turned over
to a receiver for Mitsui Manufacturers Bank, the lender of the
$2,149,000 note payable secured by such property. As a result of
decreased occupancy and rental rates, the monthly debt service
payments exceeded the cash generated by the rental operations of
the property. These components, along with the decline in the
property s value and the unsuccessful attempts to renegotiate the
terms of the loan, forced management to discontinue the monthly
debt service payments. In April 1995, the Partnership was
required to turn over to the receiver the net cash flow generated
by Civic Center III from January 1, 1995 through March 15, 1995
of approximately $26,000 and on May 23, 1995, title to the Civic
Center III property passed to the lender. The deed-in-lieu of
foreclosure reduced total assets by $1,485,000 and long term
obligations by $2,244,000.
Page 10 of 13
The Partnership currently owns the following properties: Civic
Center II (17,750 leasable commercial square feet), parcels
totalling approximately 41 acres of unimproved land in Rancho
Cucamonga, CA and approximately 8.92 acres of unimproved land in
San Bernardino, CA.
The Partnership has received city approval on a tentative parcel
map for 33 acres of the unimproved land owned in Rancho Cucamonga
with the intent to sell and/or "build to suit" the parcels. This
property was listed for sale in 1996 and is currently in escrow
for a sales price of $2,166,000, for which the buyer has paid a
$250,000 non-refundable deposit. The expected close of escrow is
June 3, 1996. The cash proceeds will be used to establish cash
reserves for the Partnership.
The balance of the Partnership's unimproved land in Rancho
Cucamonga (approximately 8 acres), and the 8.92 acres of
unimproved land in San Bernardino will be held by the Partnership
with minimum development activity, in hopes that land prices will
increase in the next few years.
On October 4, 1995, the Partnership borrowed $575,000, from an
unaffiliated third party, secured by Civic Center II. $75,000 of
the loan proceeds were held back by the lender to be disbursed
for tenant improvements. During 1996, $60,000 have been
disbursed to the Partnership from the lender holdback. Interest
accrues at the Wells Fargo Bank Prime Rate plus 2.00% (10.25% at
March 31, 1996), payable in monthly interest only installments.
The outstanding principal is due February 20, 1997. The proceeds
have been used to fund operations and provide working capital for
development and or sale of unimproved parcels of land.
RESULTS OF OPERATIONS
---------------------
As would be expected as a result of the deed-in-lieu of
foreclosure on Civic Center III (discussed above) in 1995, rental
income, operating expenses, interest expense, and depreciation
and amortization decreased during the three months ended March
31, 1996 compared to the same period in 1995.
General and administrative expenses increased 6% during the three
months ended March 31, 1996 when compared to the three months
ended March 31, 1995 primarily as a result of professional
services rendered in connection with a valuation of the
Partnership's assets.
The guarantee settlement amount of $117,000 is the result of
reversing a portion of an estimated accrual set up at September
30, 1993, pertaining to the guarantee of a promissory note to
Imperial Thrift, as previously discussed.
Page 11 of 13
Part 2. OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated by reference to Note 5 of the Notes to
Financial Statements included herein.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
None.
Page 12 of 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: RANCON REALTY FUND III,
a California Limited Partnership
(Registrant)
Date: By: /s/ Daniel L. Stephenson
Daniel L. Stephenson, General Partner
and
Director, President, Chief Executive
Officer and
Chief Financial Officer of
Rancon Financial Corporation,
General Partner of
Rancon Realty Fund III,
a California Limited Partnership
Page 13 of 13
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