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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
400 South El Camino Real, Suite 1100
San Mateo, California 94402-1708
(Address of principal (Zip Code)
executive offices)
(650) 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, 1999: 14,555
Page 1 of 13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Balance Sheets
(in thousands, except unit amounts)
June 30, December 31,
1999 1998
(Unaudited) (Audited)
------------- ------------
<S> <C> <C>
Assets Real estate investments:
Rental property, net of accumulated depreciation
of $1,716 and $1,626 at June 30, 1999 and
December 31, 1998, respectively $ 4,212 $ 4,290
Rental property held for sale, net -- 685
------------- ------------
Total real estate investments 4,212 4,975
------------- ------------
Cash and cash equivalents 1,279 872
Deferred costs, net of accumulated amortization
of $34 and $42 at June 30, 1999 and December
31, 1998, respectively 46 55
Prepaid expenses and other assets 23 110
------------- ------------
Total assets $ 5,560 $ 6,012
============= ============
Liabilities and Partners' Equity (Deficit)
Liabilities:
Accounts payable and other liabilities $ 105 $ 108
------------- ------------
Commitments and contingent liabilities (see Note 5) -- --
Partners' Equity (Deficit):
General partner (154) (183)
Limited partners, 14,555 limited partnership
units outstanding 5,609 6,087
------------- -------------
Total partners' equity 5,455 5,904
------------- -------------
Total liabilities and partners' equity $ 5,560 $ 6,012
============= ============
</TABLE>
See accompanying notes to financial statements.
Page 2 of 13
<PAGE>
<TABLE>
<CAPTION>
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Operations
(in thousands, except per unit amounts and units outstanding)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------ -------------------------
1999 1998 1999 1998
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 223 $ 267 $ 475 $ 544
Gain on sale of real estate 252 -- 252 --
Interest and other income 9 8 14 14
---------- ---------- ----------- ----------
Total revenues 484 275 741 558
---------- ---------- ----------- ----------
Expenses:
Operating 90 104 183 225
Depreciation and amortization 48 41 97 85
General and administrative 72 79 140 143
---------- ---------- ----------- ----------
Total expenses 210 224 420 453
---------- ---------- ----------- ----------
Net income $ 274 $ 51 $ 321 $ 105
========== ========== =========== ==========
Net income per limited partnership unit $ 15.87 $ 3.51 $ 19.10 $ 7.15
========== ========== =========== ==========
Distributions per limited partnership unit:
From net income $ -- $ 1.92 $ 1.92 $ 1.92
Representing return of capital 50.00 -- 50.00 --
---------- ---------- ----------- ----------
Total distributions per limited
partnership unit $ 50.00 $ 1.92 $ 51.93 $ 1.92
========== ========== =========== ==========
Weighted average number of limited
partnership units outstanding during each
period used to compute net income per
limited partnership unit 14,555 14,555 14,555 14,555
========== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
Page 3 of 13
<PAGE>
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statement of Partners' Equity (Deficit)
For the six months ended June 30, 1999
(in thousands)
(Unaudited)
General Limited
Partners Partners Total
------------ ------------ -----------
Balance at December 31, 1998 $ (183) $ 6,087 $ 5,904
Net income 44 277 321
Distributions (15) (755) (770)
------------ ----------- -----------
Balance at June 30, 1999 $ (154) $ 5,609 $ 5,455
============ =========== ===========
See accompanying notes to financial statements.
Page 4 of 13
<PAGE>
<TABLE>
<CAPTION>
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Cash Flows
(in thousands)
(Unaudited)
Six months ended
June 30,
----------------------------
1999 1998
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 321 $ 105
Adjustments to reconcile net income
to net cash provided by operating activities:
Net gain on sale of real estate (252) --
Depreciation and amortization 97 85
Changes in certain assets and liabilities:
Prepaid expenses and other assets 87 46
Deferred costs 1 --
Accounts payable and other liabilities (3) 25
----------- ----------
Net cash provided by operating activities 251 261
----------- ----------
Cash flows from investing activities:
Net proceeds from sales of real estate 937 --
Additions to real estate (11) (6)
----------- ----------
Net cash provided by (used for) investing activities 926 (6)
----------- ----------
Cash flows from financing activities:
Distributions to limited partners (770) (28)
----------- ----------
Net increase in cash and cash equivalents 407 227
Cash and cash equivalents at beginning of period 872 749
----------- ----------
Cash and cash equivalents at end of period $ 1,279 $ 976
=========== ==========
</TABLE>
See accompanying notes to financial statements.
Page 5 of 13
<PAGE>
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
June 30, 1999
(Unaudited)
Note 1. THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING POLICIES
In the opinion of Rancon Financial Corporation ("RFC") and Daniel Lee Stephenson
(the "Sponsors"), Rancon Income Partners I (the "General Partner") and
Glenborough Corporation, the Partnership's asset and property manager
("Glenborough"), the accompanying unaudited financial statements contain all
adjustments (consisting of only normal accruals) necessary to present fairly the
financial position of Rancon Income Fund I, a California Limited Partnership,
(the "Partnership") as of June 30, 1999 and December 31, 1998, and the related
statements of income, changes in partners' equity (deficit) and cash flows for
the six months ended June 30, 1999 and 1998.
Allocation of Net Income and Net Loss - Allocation of the profits and losses
from operations are made pursuant to the terms of the Partnership Agreement.
Generally, net income from operations is allocated to the general partner and
the limited partners in proportion to the amounts of cash from operations
distributed to the partners for each fiscal year. In no event shall the general
partner be allocated less than 1% of the net income from any period. If there
are no distributions of cash from operations during such fiscal year, net income
shall be allocated 90% to the limited partners and 10% to the general partner.
Net losses from operations are allocated 90% to the limited partners and 10% to
the general partner until such time as a partner's account is reduced to zero.
Additional losses will be allocated entirely to those partners with positive
account balances until such balances are reduced to zero. In no event will the
general partner be allocated less than 1% of net loss for any period.
Net income other than net income from operations shall be allocated as follows:
(i) first, 1% to the general partner; (ii) second, to the partners who have a
deficit balance in their capital account in proportion to and to the extent of
such deficit balances, provided, that in no event shall the general partner be
allocated more than 10% of the net income other than net income from operations
until the earlier of sale or disposition of substantially all of the assets or
the distribution of cash (other than cash from operations) equal to the original
invested capital of the general partner and the limited partner; (iii) the
balance, if any, shall be allocated (a) first, to the general partner in an
amount equal to the lesser of (1) the amount of cash from sale or financing
anticipated to be distributed to the general partner or (2) an amount sufficient
to increase the general partner's account balance to an amount equal to such
distribution from sale or financing; (b) the balance, to the limited partners.
In no event shall the general partner be allocated less than 1% of the net
income other than net income from operations for any period.
Distributions - Distributions of cash from operations are generally allocated as
follows: (i) first, to the limited partners until they receive a non-cumulative
6% return per annum on their unreturned capital contributions and (ii) the
remainder, if any in a given year, shall be divided in the ratio of 90% to the
limited partners and 10% to the general partner.
Page 6 of 13
<PAGE>
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
June 30, 1999
(Unaudited)
Distributions of cash from sales or financing are generally allocated as
follows: (i) first, 2% to the general partner and 98% to the limited partners
until the limited partners have received an amount equal to their capital
contributions; (ii) second, 2% to the general partner and 98% to the limited
partners until the limited partners have received a cumulative non-compounded
return of 6% per annum on their unreturned capital contributions (less prior
distributions of cash from operations); (ii) third, to the general partner for
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 partnership units
("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 partners
pursuant to subparagraph (iv) and (v), reduced by the aggregate of all prior
distributions to the general partner under subparagraph (iv) and (v); and (vii)
seventh, the balance, 85% to the limited partners and 15% to the general
partner.
Management Agreement - Effective January 1, 1995, RFC entered into an agreement
with 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 until the
liquidation of the Partnership, whichever comes first. On January 1, 1998, the
agreement was amended to eliminate Glenborough's responsibility for providing
investor relations services, resulting in a reduction in asset administration
fee from $208,000, or $52,000 per quarter (as originally set forth in the
agreement), to $187,000, or $46,800 per quarter, in 1998. Effective July 1,
1999, the agreement was further amended to: (i) reduce the asset administration
fee to $100,000, or $25,000 per quarter, for the remaining half of the year
(totaling $144,000 in 1999); (ii) increase the sales fee for improved properties
from 2% to 3% and (ii) reduce the management fee applicable to Wakefield
Industrial Center from 5% to 3% of the gross rental receipts. The Partnership
will also pay Glenborough: (i) sales fees of 4% for land; (ii) a refinancing fee
of 1% and (iii) a management fee of 5% of gross rental receipts from Bristol
Medical Center. As part of this agreement, Glenborough will perform certain
duties for the General Partner of the Rancon Partnerships. RFC agreed to
cooperate with Glenborough, should Glenborough attempt to obtain a majority vote
of the limited partners to substitute itself as the Sponsor for the Rancon
Partnerships. Glenborough is not an affiliate of the Partnership or RFC.
Page 7 of 13
<PAGE>
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
June 30, 1999
(Unaudited)
Basis of Accounting - The accompanying unaudited 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.
Note 2. REFERENCE TO 1998 AUDITED FINANCIAL STATEMENTS
These unaudited financial statements should be read in conjunction with the
Notes to Financial Statements included in the December 31, 1998 audited
financial statements.
Note 3. SALES OF REAL ESTATE
On May 12, 1999, the Partnership sold Aztec Village Shopping Center ("Aztec"), a
23,879 square foot retail center located in San Diego, California, to an
unaffiliated entity for $1,000,000. The Partnership realized a $252,000 gain on
the sale which is reflected in the accompanying statement of operations for the
six months ended June 30, 1999. The sale proceeds totaling $937,000 were net of
selling costs and expenses incurred through June 30, 1999, of which $742,305
were distributed to the partners and the remainder was added to the
Partnership's cash reserves.
Note 4. DISTRIBUTIONS
On May 31, 1999, the Partnership distributed $14,555 and $727,750 to the general
partner and limited partners, respectively, from proceeds from the sale of
Aztec. This distribution of cash from sales represents a return of capital.
During the first half of 1999, the Partnership distributed $27,600 of cash from
operations to the limited partners.
Note 5. COMMITMENTS AND CONTINGENT LIABILITIES
The Partnership is contingently liable for a subordinated real estate commission
payable to the General Partner in the amount of $30,000 at June 30, 1999 for the
May 1999 sale of Aztec. Per the Partnership Agreement, upon the sale of a
Partnership property, the General Partner shall be entitled to a subordinated
real estate commission, provided that, in no event shall the subordinated real
estate commission payable to the General Partner exceed 3% of the gross sales
price of the property which is sold. The subordinated real estate commission is
payable only after the limited partners have received distributions equal to
their original invested capital plus a cumulative non-compounded return of 6%
per annum on their adjusted invested capital. Since the circumstances under
which this commission would be payable are limited, the liability has not been
recognized in the accompanying unaudited financial statements; however, the
amount will be recorded if and when it becomes payable.
Page 8 of 13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
The following discussion addresses the Partnership's financial condition at June
30, 1999 and its results of operations for the six months ended June 30, 1999
and 1998. This information should be read in conjunction with the Partnership's
December 31, 1998 audited financial statements, notes thereto and other
information contained elsewhere in this report.
LIQUIDITY AND CAPITAL RESOURCES
As of April 21, 1989, Rancon Income Fund I ("the Partnership") was funded from
the sale of 14,559 limited partnership units ("Units") in the amount of
$14,559,000. Four Units were retired in 1990 and 14,555 Units remain outstanding
at June 30, 1999. As of June 30, 1999, the Partnership had cash of $1,279,000.
The remainder of the Partnership's assets consists primarily of its real estate
investments, totaling approximately $4,212,000 at June 30, 1999.
Operationally, the Partnership's primary source of funds consists of cash
provided by its rental activities. Cash flows from operating activities have
been sufficient to provide funds to reinvest in the properties by way of
improvements, as well as to fund distributions to the limited partners. Other
sources of funds include interest earned on invested cash balances and proceeds
from property sales.
The Partnership currently owns two properties:
<TABLE>
<CAPTION>
Property Type Square Feet
<S> <C> <C>
Wakefield Industrial Center Industrial building (in Temecula, California) 44,200
Bristol Medical Center Office building (in Santa Ana, California) 52,311
</TABLE>
On May 12, 1999, the Partnership sold Aztec Village Shopping Center ("Aztec"), a
23,879 square foot retail center located in San Diego, California, to an
unaffiliated entity for $1,000,000. The Partnership realized a $252,000 gain on
the sale which is reflected in the accompanying statement of operations for the
six months ended June 30, 1999. The sale proceeds totaling $937,000 were net of
selling costs and expenses incurred through June 30, 1999, of which $742,305
were distributed to the partners and the remainder was added to the
Partnership's cash reserves.
Management believes that the Partnership's cash balance at June 30, 1999,
together with the cash from operations and sales, will be sufficient to finance
the Partnership's and the properties' continued operations on both a short-term
and long-term basis. There can be no assurance that the Partnership's results of
operations will not fluctuate in the future and at times affect its ability to
meet its operating requirements.
General Matters
The $685,000 or 100% decrease in rental property held for sale at June 30, 1999
compared to December 31, 1998 is due to the May 1999 sale of Aztec.
Page 9 of 13
<PAGE>
The $87,000 or 79% decrease in prepaid expenses and other assets at June 30,
1999 compared to December 31, 1998 is primarily due to the collection of
December 31, 1998 tenant receivables in the first quarter of 1999.
RESULTS OF OPERATIONS
Revenues
Rental income decreased $69,000 or 13% and $44,000 or 16% for the six and three
months ended June 30, 1999, compared to the six and three months ended June 30,
1998, respectively, primarily due to the loss of rental income from the May 1999
sale of Aztec.
Occupancy rates at the Partnership's rental properties as of June 30, 1999 and
1998 were as follows:
June 30,
-----------------------------
1999 1998
--------- -------
Bristol Medical Center 62% 75%
Wakefield Building 100% 100%
The 13% decrease in occupancy from June 30, 1998 to June 30, 1999 at Bristol
Medical Center is a result of a 3,000 square foot tenant downsizing to a 2,000
square foot office space in September 1998. Management is currently in
negotiations with a prospective tenant to lease a 1,600 square foot suite and is
marketing the other vacant space to potential tenants.
The $252,000 gain on sale of real estate at June 30, 1999 resulted from the May
1999 sale of Aztec.
Interest and other income remained stable during the six and three months ended
June 30, 1999, compared to the six and three months ended June 30, 1998.
Expenses
Operating expenses decreased $42,000 or 19% and $14,000 or 13% for the six and
three months ended June 30, 1999, compared to the six and three months ended
June 30, 1998, respectively, primarily due to the sale of Aztec. Also
contributing to the decrease is the recognition of $18,000 of bad debt in the
first quarter of 1998 and a reduction in 1999 expenses at Bristol Medical Center
due to lower occupancy.
Depreciation and amortization expense increased $12,000 or 14% and $7,000 or 17%
for the six and three months ended June 30, 1999 compared to the six and three
months ended June 30, 1998, respectively, due to the depreciation of additions
to rental properties and the amortization of lease commissions.
General and administrative expenses remained stable during the six and three
months ended June 30, 1999, compared to the six and three months ended June 30,
1998.
Year 2000 Compliance
State of Readiness. Glenborough Corporation ("Glenborough"), the Partnership's
asset and property manager, utilizes a number of computer software programs and
Page 10 of 13
<PAGE>
operating systems. These programs and systems primarily comprise information
technology systems ("IT Systems") (i.e., software programs and computer
operating systems) that serve the management operations. Although the
Partnership does not utilize any significant IT Systems of its own, it does
utilize embedded systems such as devices used to control, monitor or assist the
operation of equipment and machinery systems (e.g., HVAC, fire safety and
security) at its properties ("Property Systems"). To the extent that software
applications contain a source code that is unable to appropriately interpret the
upcoming calendar year "2000" and beyond, some level of modification or
replacement of these IT Systems and Property Systems will be necessary.
IT Systems. Employing a team made up of internal personnel and third-party
consultants, Glenborough has completed an identification of IT Systems,
including hardware components that are not yet Year 2000 compliant. To the best
of Glenborough's knowledge based on available information and a reasonable level
of inquiry and investigation, such upgrading as appears to be called for under
the circumstances has been completed in accordance with prevailing industry
practice. Glenborough has commenced a testing program which will be completed
during 1999. In addition, the Partnership is currently communicating with third
parties with whom it does significant business, such as financial institutions,
tenants and vendors, to determine their readiness for Year 2000 compliance.
Property Systems. An identification of Property Systems, including hardware
components, that are not yet Year 2000 compliant, has also been completed.
Upgrading of such systems as appears to be called for under the circumstances
based on available information and a reasonable level of inquiry and
investigation, and in accordance with prevailing industry practice has
commenced. Upon completion of such upgrading, a testing program will be
initiated and completed during 1999. To the best of Glenborough's knowledge, the
Partnership has no Property Systems, the failure of which would have a material
effect on its operations.
Costs of Addressing Year 2000 issues. Given the information known at this time
about systems that are non-compliant, coupled with ongoing, normal course-of
business efforts to upgrade or replace critical systems, as necessary, the
Partnership does not expect Year 2000 compliance costs to have a material
adverse impact on its liquidity or ongoing results of operations. The costs of
assessment and remediation of the Property Systems will be paid by the
Partnership as an operating expense.
Risks of Year 2000 issues. In light of the assessment and upgrading efforts to
date, and assuming completion of the planned, normal course-of-business upgrades
and subsequent testing, the Partnership believes that any residual Year 2000
risk will be limited to non-critical business applications and support hardware,
and to short-term interruptions affecting Property Systems which, if they occur
at all, will not be material to overall operations. Glenborough and the
Partnership believe that all IT Systems and Property Systems will be Year 2000
compliant and that compliance will not materially adversely affect its future
liquidity or results of operations or its ability to service debt. However,
absolute assurance that this is the case cannot be given.
Contingency Plans. The Partnership is currently developing a contingency plan
for all operations which will address the most reasonably likely worst case
scenario regarding Year 2000 compliance. Such a plan, however, will recognize
material limitations on the ability to respond to major regional or industrial
failures such as power outages or communications breakdowns. Management expects
such a contingency plan to be completed during 1999.
Page 11 of 13
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
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:
(27) Financial Data Schedule
(b) Reports on Form 8-K (incorporated herein by reference):
On May 26, 1999, the Partnership filed a report on Form 8-K
with respect to the sale of the Aztec Village Shopping Center.
Page 12 of 13
<PAGE>
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
By Rancon Income Partners I, L.P.
its General Partner
Date: August 13, 1999 By: /s/ DANIEL L. STEPHENSON
--------------------------
Daniel L. Stephenson
Director, President, Chief Executive
Officer and Chief Financial Officer of
Rancon Financial Corporation, General
Partner of Rancon Income Partners I, L.P.
Page 13 of 13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000791996
<NAME> RANCON INCOME FUND I
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,279
<SECURITIES> 0
<RECEIVABLES> 5
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,284
<PP&E> 4,212
<DEPRECIATION> 1,716
<TOTAL-ASSETS> 5,560
<CURRENT-LIABILITIES> 105
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 5,455
<TOTAL-LIABILITY-AND-EQUITY> 5,560
<SALES> 252
<TOTAL-REVENUES> 489
<CGS> 0
<TOTAL-COSTS> 183
<OTHER-EXPENSES> 237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 321
<INCOME-TAX> 0
<INCOME-CONTINUING> 321
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 321
<EPS-BASIC> 19.10
<EPS-DILUTED> 19.10
</TABLE>
