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 June 30, 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 June 30, 1996: 37,481.
Page 1 of 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Balance Sheets
(in thousands, except units outstanding)
(Unaudited)
June 30, December 31,
Assets 1996 1995
--------- ---------
Property:
Rental property (net of accumulated
depreciation of $582 and $557 at June
30, 1996 and December 31, 1995) $ 1,128 $ 1,152
Land held for development 3,186 3,186
Land held for sale 151 1,514
------ ------
Total property 4,465 5,852
Cash and cash equivalents 1,250 459
Prepaid expenses and other assets (net of
accumulated amortization of $80 and $53
at June 30, 1996 and December 31, 1995) 46 51
------ ------
Total assets $ 5,761 $ 6,362
====== ======
Liabilities and Partners' Equity (Deficit)
Accounts payable and other liabilities $ 27 $ 194
Accrued guarantee settlement costs --- 300
Note payable - secured --- 500
------ ------
Total liabilities 27 994
------ ------
Partners' equity (deficit):
General partners (257) (264)
Limited partners - 37,481 and 37,489
limited partnership units outstanding 5,991 5,632
at June 30, 1996 and December 31,
1995 ------ ------
Total partners' equity 5,734 5,368
------ ------
Total liabilities and partners' equity $ 5,761 $ 6,362
====== ======
See accompanying notes to financial statements.
Page 2 of 14
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Operations
(in thousands, except per unit amounts)
(Unaudited)
Three months Six months
ended ended
June 30, June 30,
----------- ----------
1996 1995 1996 1995
------ ------ ------ ------
Revenues:
Rental income $ 34 $ 69 $ 84 $ 164
Gain on sale of land 623 1 623 1
Gain on deed-in-lieu --- 760 --- 760
Interest and other income 2 5 5 9
------ ------ ------ ------
Total revenues 659 835 712 934
------ ------ ------ ------
Costs and expenses:
Operating 23 46 43 82
Interest expense 12 37 28 89
Depreciation and amortization 31 39 52 70
Expenses associated with
undeveloped land 88 43 123 77
General and administrative 107 124 217 227
------ ------ ------ ------
Total costs and expenses 261 289 463 545
------ ------ ------ ------
Income before extraordinary item 398 546 249 389
Extraordinary item:
Guarantee settlement --- --- 117 ---
------ ------ ------ ------
Net income $ 398 $ 546 $ 366 $ 389
====== ====== ====== ======
Net income per limited
partnership unit $ 10.41 $ 14.27 $ 9.57 $ 10.17
====== ====== ====== ======
Weighted average number of
limited partnership units
outstanding during each
period used to compute net
income per limited
partnership unit 37,484 37,489 37,486 37,489
====== ====== ====== ======
See accompanying notes to financial statements.
Page 3 of 14
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Partners' Equity (Deficit)
For the six months ended June 30, 1996 and 1995
(in thousands)
(Unaudited)
Total
General Limited Partners'
Partners Partners Equity
-------- -------- --------
Balance at December 31, 1994 $ (112) $ 13,093 $ 12,981
Net income 8 381 389
------- ------- -------
Balance at June 30, 1995 $ (104) $ 13,474 $ 13,370
======= ======= =======
Balance at December 31, 1995 $ (264) $ 5,632 $ 5,368
Net income 7 359 366
------- ------- -------
Balance at June 30, 1996 $ (257) $ 5,991 $ 5,734
======= ======= =======
See accompanying notes to financial statements.
Page 4 of 14
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Cash Flows (in thousands)
(Unaudited)
Six months Ended
Ended
June 30,
1996 1995
------ ------
Cash flows provided by operating
activities:
Net income $ 366 $ 389
Adjustments to reconcile net income
to net cash used for operating
activities:
Depreciation and amortization 52 70
Gain on sale of land (623) (1)
Gain on deed-in-lieu --- (760)
Extraordinary gain:
Guarantee settlement (117) ---
Changes in certain assets and
liabilities:
Prepaid expenses and other
assets (22) 7
Accounts payable and other
liabilities (167) 231
Payment of guarantee settlement (183) ---
------ ------
Net cash used for operating
activities (694) (64)
------ ------
Cash flows from investing activities:
Net proceeds from sale of assets 1,986 25
Additions to real estate (1) (13)
------ ------
Net cash provided by investing
activities 1,985 12
------ ------
Cash flows from financing activities:
Borrowings on notes payable-
secured 60 ---
Note payable principal payments (560) ---
------ ------
Net cash used for financing
activities (500) ---
------- -------
Net increase (decrease) in cash and
cash equivalents 791 (52)
Cash and cash equivalents
at beginning of period 459 66
------- -------
Cash and cash equivalents
at end of period $ 1,250 $ 14
======= =======
See accompanying notes to financial statements.
Page 5 of 14
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
June 30, 1996
(Unaudited)
Note 1. THE PARTNERSHIP AND ITS' 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 June 30, 1996 and December 31, 1995, and the
related statements of operations for the three and six months
ended June 30, 1996 and 1995, and the changes in partners'
equity, and cash flows for the six months ended June 30, 1996 and
1995.
Effective with the year ended December 31, 1995, the
Partnership's year end has been changed from September 30 to
December 31.
During 1996, six limited partnership units were abandoned as a
result of partners desiring to no longer receive Partnership K-
1's and to give them the ability to write-off investments for
income tax purposes. As of June 30, 1996 units issued and
outstanding were 37,481.
Allocations 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
Page 6 of 14
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
June 30, 1996
(Unaudited)
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.
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. LAND HELD FOR DEVELOPMENT
-------------------------
On June 15, 1996, approximately 1 acre of the 6 acres of
unimproved Land Held for Development went into escrow for a sales
price of $265,000, for which the buyer paid a $5,000 deposit. The
expected close of escrow is October 15, 1996 or 30 days after the
Buyer has approved all of the conditions set forth in the
Agreement Of Purchase And Sale And Joint Escrow Instructions. The
cash proceeds will be cash reserves of the Partnership.
Note 4. NOTE 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 5. DISPOSITION OF PROPERTY
-----------------------
On June 3, 1996, the Partnership sold 33 acres of the Rancho
Cucamonga unimproved Land Held for Sale for $2,166,000. The gain
on sale after closing costs of $180,000 was $623,000 and is
included as a gain on sale of land on the Partnership's 1996
statement of operations. The net cash proceeds of $1,986,000 from
Page 7 of 14
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
June 30, 1996
(Unaudited)
the sale were used to pay prior and current property taxes and
the $560,000 note payable discussed in Note 7, the remaining
proceeds were added to cash reserves.
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.
In 1995, the Partnership recognized a $760,000 gain on the deed-
in-lieu of foreclosure primarily as a result of the fiscal year
1994 write-down of $620,000 to reduce the value of the property
to its estimated net realizable value at September 30, 1994. The
gain is included on the Partnership's 1995 statement of
operations.
On May 30, 1995, the Partnership sold a 3,417 square foot
easement of the San Bernardino unimproved land for $26,000. The
gain on sale, after closing costs of $1,000, was $1,000 and is
included as gain on sale of land on the Partnership's 1995
statement of operations.
Note 6. 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
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.
Page 8 of 14
RANCON REALTY FUND III,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
June 30, 1996
(Unaudited)
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 7. NOTE 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 was disbursed to
the Partnership from the lender holdback. On June 10, 1996, the
Partnership, with the net cash proceeds from the 33 acre land
sale, paid-off the $560,000 note payable plus accrued interest of
$1,400.
Page 9 of 14
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 June 30, 1996, the
Partnership had cash of $1,250,000. The remainder of the
Partnership's assets consist primarily of its investments in
property, which totaled $4,465,000 as of June 30, 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 net cash proceeds discussed in Note 5 will
be adequate to cover the Partnership's projected expenditures for
1996, and maintain cash reserves. The Partnership will continue
to monitor market conditions in order to sell its remaining
properties for the best obtainable price during calendar 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 a
delinquent $38,000 note receivable, which provided for a
reduction in the principal balance of approximately $5,000
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.
Page 10 of 14
In addition, upon reaching the final agreement, a one-time
payment of $5,000 was also received. Subsequent to the
negotiations 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.
The 33 acres of Rancho Cucamonga unimproved Land Held for Sale
closed escrow on June 3, 1996, for a sales price of $2,166,000.
The gain on sale after closing costs of $180,000 was $623,000.
The net cash proceeds of $1,986,000 from the sale were used to
pay prior and current property taxes and the $560,000 note
payable discussed in Note 7, the remaining proceeds were added to
cash reserves.
Page 11 of 14
The Partnership currently owns the following properties: Civic
Center II (17,750 leasable commercial square feet), approximately
8 acres of unimproved land in Rancho Cucamonga, California and
approximately 8.92 acres of unimproved land in San Bernardino,
California.
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 was disbursed to
the Partnership from the lender holdback. On June 10, 1996 the
Partnership, with the net cash proceeds from the 33 acre land
sale, paid-off the $560,000 note payable plus accrued interest of
$1,400.
RESULTS OF OPERATIONS
---------------------
As would be expected, as a result of the deed-in-lieu of
foreclosure on Civic Center III in 1995 (discussed above), rental
income, operating expenses, interest expense, and depreciation
and amortization decreased during the six months ended June 30,
1996 compared to the same period in 1995.
Expenses associated with undeveloped land increased during the
six months ended June 30, 1996 when compared to the same period
in 1995, primarily as a result of expenses paid through escrow
upon the sale of the 33 acres of land discussed in Note 5.
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 12 of 14
Part 2. OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated by reference to Note 6 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 13 of 14
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: August 13, 1996 RANCON REALTY FUND III,
a California Limited Partnership
(Registrant)
Date: August 13, 1996 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 14 of 14
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<NAME> RANCON REALTY FUND III
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,250
<SECURITIES> 0
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<DEPRECIATION> (582)
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0
0
<COMMON> 0
<OTHER-SE> 5,734
<TOTAL-LIABILITY-AND-EQUITY> 5,761
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