UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ______________
Commission File Number: 0-16645
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
--------------------------------
(Exact name of registrant as specified in its charter)
California 33-0157561
---------- ----------
(State or other jurisdiction 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 executive offices) (Zip Code)
(650) 343-9300
---------------
(Registrant's telephone number)
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, 1999: 14,555
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Balance Sheets
(in thousands, except units outstanding)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
Assets
- ------
Assets Real estate investments:
Rental property, net of accumulated
depreciation of $1,671 and $1,626
at March 31, 1999 and December 31,
1998, respectively $ 4,259 $ 4,290
Rental property held for sale, net 685 685
-------------- --------------
Total real estate investments 4,944 4,975
Cash and cash equivalents 992 872
Deferred costs, net of accumulated amortization
of $46 and $42 at March 31, 1999 and
December 31, 1998, respectively 56 55
Prepaid expenses and other assets 48 110
-------------- --------------
Total assets $ 6,040 $ 6,012
============== ==============
Liabilities and Partners' Equity (Deficit)
- ------------------------------------------
Liabilities:
Accounts payable and other liabilities $ 117 $ 108
-------------- --------------
Partners' equity (deficit):
General Partner (183) (183)
Limited Partners (14,555 limited partnership
units outstanding) 6,107 6,087
-------------- --------------
Total partners' equity 5,923 5,904
-------------- --------------
Total liabilities and partners' equity $ 6,040 $ 6,012
============== ==============
</TABLE>
See accompanying notes to financial statements.
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RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Income
(in thousands, except units outstanding and per unit amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenue:
Rental income $ 252 $ 277
Interest and other income 5 6
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Total revenue 257 283
------------- -------------
Expenses:
Operating 93 121
Depreciation and amortization 49 44
General and administrative 68 64
------------- -------------
Total expenses 210 229
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Net income $ 47 $ 54
============= =============
Net income per limited partnership unit $ 3.23 $ 3.64
============= =============
Distributions per limited partnership unit:
From net income $ 1.92 $ 1.92
Representing return of capital -- --
------------- -------------
Total distributions per limited partnership unit $ 1.92 $ 1.92
============= =============
Weighted average number of limited partnership
units outstanding during the period used to
compute net income and distributions per
limited partnership unit 14,555 14,555
============ =============
</TABLE>
See accompanying notes to financial statements.
Page 3 of 12
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RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statement of Partners' Equity (Deficit)
For the three months ended March 31, 1999
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------------- ------------ -------------
<S> <C> <C> <C>
Balance at December 31, 1998 $ (183) $ 6,087 $ 5,904
Net income -- 47 47
Distributions -- (28) (28)
------------- ------------- --------------
Balance at March 31, 1999 $ (183) $ 6,107 $ 5,923
============= ============ =============
</TABLE>
See accompanying notes to financial statements.
Page 4 of 12
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RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------
1999 1998
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 47 $ 54
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 49 44
Changes in certain assets and liabilities:
Prepaid expenses and other assets 62 16
Deferred costs (5) (1)
Accounts payable and other liabilities 9 17
------------ -----------
Net cash provided by operating activities 162 130
------------ -----------
Cash flows from investing activities:
Additions to real estate (14) (2)
------------- -----------
Net cash used for investing activities (14) (2)
------------- -----------
Cash flows from financing activities:
Distributions to limited partners (28) (28)
------------- -----------
Net cash used for financing activities (28) (28)
------------- -----------
Net increase in cash and cash equivalents 120 100
Cash and cash equivalents at beginning of period 872 749
------------ -----------
Cash and cash equivalents at end of period $ 992 $ 849
============ ===========
</TABLE>
See accompanying notes to financial statements.
Page 5 of 12
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RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
March 31, 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) and Glenborough Corporation ("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 March
31, 1999 and December 31, 1998, and the related statements of income, changes in
partners' equity (deficit) and cash flows for the three months ended March 31,
1999 and 1998.
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 one percent
of such income. If there are no distributions of cash from operations during
such fiscal year, net income shall be allocated 90% to the limited partners and
10% to the general partner. Net losses from operations are allocated 90% to the
limited partners and 10% to the general partner until such time as a partner's
account is reduced to zero. Additional losses will be allocated entirely to
those partners with positive account balances until such balances are reduced to
zero. In no event will the general partner be allocated less than 1% of net
income or net loss for any period. Distributions of cash from operations are
generally allocated as follows: (i) first to the limited partners until they
receive a non-cumulative 6% return per annum on their unreturned capital
contributions and (ii) the remainder, if any in a given year, shall be divided
in the ratio of 90% to the limited partners and 10% to the general partner.
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. Effective January 1, 1998 the
agreement was amended to eliminate Glenborough's responsibility for providing
investor relations services. According to the contract, the Partnership will pay
Glenborough for its services as follows: (i) a specified annual asset
administration fee ($187,000 in 1999 and 1998); (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 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
Page 6 of 12
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RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Financial Statements
March 31, 1999
(Unaudited)
limited partners to substitute itself as the Sponsor for the Notes to
Financial Statements Rancon Partnerships. Glenborough is not an affiliate of the
Partnership or RFC
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. SUBSEQUENT EVENTS
-----------------
On May 12, 1999, the Partnership sold one of its real estate assets, Aztec
Village Shopping Center, to an unaffiliated third party for $1,000,000. After
paying closing costs, including commissions and fees, the Partnership added the
net proceeds of approximately $943,000 to its cash reserves.
Page 7 of 12
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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
March 31, 1999 and its results of operations for the three months ended March
31, 1999 and 1998. This information should be read in conjunction with the
Partnership's audited December 31, 1998 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 March 31, 1999. As of March 31, 1999, the Partnership had cash of $992,000.
The remainder of the Partnership's assets consists primarily of its real estate
investments, which totaled approximately $4,944,000 at March 31, 1999.
The Partnership owns three properties: Wakefield Industrial Center (a 44,200
square foot light industrial building in Temecula, California), Bristol Medical
Center (a 52,311 square foot office building in Santa Ana, California) and Aztec
Village Shopping Center (a 23,789 square foot retail center in San Diego,
California).
Operationally, the Partnership's primary source of funds consists of cash
generated from operating the three rental properties. Cash flows from operating
activities have been sufficient to provide funds to reinvest in the properties
by way of improvements, as well as to fund distributions to the limited
partners. Another source of funds has been the interest earned on invested cash
balances.
In February 1999, the Partnership entered into an agreement to sell Aztec
Village Shopping Center to an unaffiliated entity for $1,000,000. The sale is
expected to close during the second quarter of 1999. However, the sale is
subject to a number of contingencies including customary closing conditions and,
as such, there can be no assurance that this sale will be completed. This rental
property is classified as property held for sale on the Partnership's March 31,
1999 and December 31, 1998 balance sheets.
Management believes that the Partnership's available cash together with the cash
generated from the operations will be sufficient to finance the Partnership's
and the properties continued operations on both a short-term and long-term
basis.
The decrease in prepaid expenses and other assets from December 31, 1998 to
March 31, 1999 was primarily due to the collection of tenant rent receivables.
The increase in accounts payable and other liabilities from December 31, 1998 to
March 31, 1999 is due to the accrual of property taxes which are payable in
April and December of each year.
Page 8 of 12
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RESULTS OF OPERATIONS
- ---------------------
Rental income decreased $25,000, or 9%, for the three months ended March 31,
1999 compared to the same quarter in 1998. The decrease was primarily due to one
of the tenants at Bristol Medical Center downsizing leased office space in
September 1998. Partially offsetting the decrease in revenue at Bristol Medical
Center was an increase in revenue at Aztec Village Shopping Center resulting
from a higher occupancy. Occupancy rates as of March 31, 1999 were 62%, 73%,
100% at the Bristol Medical Center, Aztec Village Shopping Center and Wakefield
Building, respectively, compared to 79%, 46% and 100%, respectively, as of March
31, 1998.
Operating expenses decreased $28,000, or 23%, for the three months ended March
31, 1999 compared to the same quarter in 1998. In the first quarter of 1998, a
provision for bad debt totaling $18,000 was recorded, resulting in a portion of
the decrease in expenses. The remaining decrease is primarily due to a reduction
in expenses at Bristol Medical Center resulting from a lower occupancy.
Depreciation and amortization expense increased $5,000, or 11%, for the three
months ended March 31, 1999 compared to the same quarter in 1998. The increase
is due to the amortization of lease commissions and tenant improvements that
have been incurred since March 31, 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
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
Page 9 of 12
<PAGE>
level of inquiry andinvestigation, 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 10 of 12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
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:
#27 - Financial Data Schedule.
(b) Reports on Form 8-K:
None.
Page 11 of 12
<PAGE>
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.
RANCON INCOME FUND I,
A CALIFORNIA LIMITED PARTNERSHIP
By: RANCON INCOME PARTNERS I, L.P.
General Partner
Date: May 14, 1999 By: /s/ Daniel L. Stephenson
------------------------
Daniel L. Stephenson
Director, President, Chief
Executive Officer and
Chief Financial Officer of
Rancon Financial Corporation,
Page 12 of 12
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000791996
<NAME> Rancon Income Fund I
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 992
<SECURITIES> 0
<RECEIVABLES> 21
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,019
<PP&E> 6,615
<DEPRECIATION> 1,671
<TOTAL-ASSETS> 6,040
<CURRENT-LIABILITIES> 117
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 5,923
<TOTAL-LIABILITY-AND-EQUITY> 6,040
<SALES> 0
<TOTAL-REVENUES> 257
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 210
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 47
<INCOME-TAX> 0
<INCOME-CONTINUING> 47
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
