10-Q 1 f77081e10-q.txt FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2001 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 September 30, 2001 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 November 14, 2001: 13,582 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP Balance Sheets (in thousands, except unit amounts) (Unaudited)

The accompanying notes are an integral part of these financial statements. Page 2 of 13 RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP Statements of Operations (in thousands, except per unit amounts and units outstanding) (Unaudited)

The accompanying notes are an integral part of these financial statements. Page 3 of 13 RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP Statement of Partners' Equity (Deficit) For the nine months ended September 30, 2001 (in thousands) (Unaudited)

The accompanying notes are an integral part of these financial statements. Page 4 of 13 RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP Statements of Cash Flows (in thousands) (Unaudited)

The accompanying notes are an integral part of these financial statements. Page 5 of 13 RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP Notes to Financial Statements September 30, 2001 (Unaudited) Note 1. THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING POLICIES Rancon Income Fund I ("the Partnership") was organized in accordance with the provisions of the California Revised Limited Partnership Act for the purpose of acquiring, operating and disposing of existing income-producing commercial, industrial and residential real estate properties. The Partnership reached final funding in April 1989. The Partnership was formed with initial capital contributions from Rancon Income Partners I, L.P. (the General Partner) and Daniel Lee Stephenson, the initial limited partner, who indirectly owns and controls the General Partner. The General Partner and its affiliates are hereinafter referred to as the Sponsor. At September 30, 2001, 13,589 units were issued and outstanding. In the opinion of Rancon Financial Corporation (RFC) and Daniel Lee Stephenson (the Sponsors), Rancon Income Partners I (the "General Partner") and Glenborough Realty Trust Incorporated ("Glenborough"), the Partnership's asset and property manager, 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 September 30, 2001 and December 31, 2000, and the related statements of income for the three and nine months ended September 30, 2001 and 2000, and changes in partners' equity and cash flows for the nine months ended September 30, 2001 and 2000. Allocation of Net Income and Net Loss - Allocations 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. 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 Page 6 of 13 RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP Notes to Financial Statements September 30, 2001 (Unaudited) distributions of cash from operations); (iii) 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 subparagraphs (iv) and (v), reduced by the aggregate of all prior distributions to the general partner under subparagraphs (iv) and (v); and (vii) seventh, the balance, 85% to the limited partners and 15% to the general partner. The terms of the Partnership agreement call for the general partner to restore any deficits that may exist in its capital account after allocation of gains and losses from the sale of the final property owned by the Partnership, but prior to any liquidating distributions being made to the partners. Note 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting - The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported results of operations during the reporting period. Actual results could differ from those estimates. Rental Property - Rental properties, including the related land, are stated at cost unless events or circumstances indicate that cost cannot be recovered, in which case the carrying value is reduced to the estimated fair value. Estimated fair value: (i) is based upon the Partnership's plans for the continued operation of each property; and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized rental income based upon the age, construction and use of the building. The fulfillment of the Partnership's plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Partnership to continue to hold and operate the properties prior to their eventual sale. Due to uncertainties inherent in the valuation process and in the economy, it is reasonably possible that the actual results of operating and disposing of the Partnership's properties could be materially different than current expectations. Depreciation is provided using the straight-line method over five to forty years of useful lives of the respective assets. Cash and Cash Equivalents - The Partnership considers certificates of deposit and money market funds with original maturities of less than ninety days to be cash equivalents. Fair Value of Financial Instruments - Statement of Financial Accounting Standards No. 107 requires disclosure about fair value for all financial instruments. Cash and cash equivalents consist of demand deposits, certificates of deposit and short-term investments with financial institutions. The carrying amount of cash and cash equivalents approximates fair value. Page 7 of 13 RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP Notes to Financial Statements September 30, 2001 (Unaudited) Deferred Costs - Deferred lease commissions are amortized over the initial fixed term of the related lease agreement on a straight-line basis. Rental Income - Rental income is recognized as earned over the life of the respective leases. Net Income (Loss) Per Limited Partnership Unit - Net income (loss) per limited partnership unit is calculated using the weighted average number of limited partnership units outstanding during the period and the limited partners' allocable share of the net income (loss). Income Taxes - No provision for income taxes is included in the accompanying financial statements as the Partnership's results of operations are passed through to the partners for inclusion in their respective income tax returns. Net income (loss) and partners' equity for financial reporting purposes will differ from the Partnership income tax return because of different accounting methods used for certain items, principally depreciation expense and the provision for impairment of investments in real estate. Concentration Risk - Two tenants represented 45 percent of rental income for the nine months ended September 30, 2001. Reference to 2000 audited financial statements - These unaudited financial statements should be read in conjunction with the Notes to Financial Statements included in the December 31, 2000 audited financial statements on Form 10-K. Note 3. RENTAL PROPERTY, NET Rental property as of September 30, 2001 and December 31, 2000 is as follows:

None of the Partnership's properties are encumbered by debt as of September 30, 2001 and December 31, 2000. Note 4. COMMITMENTS AND CONTINGENT LIABILITIES General Uninsured Losses - The Partnership carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of extraordinary losses, which may be either uninsurable, or not economically insurable. Further, certain of the properties are located in areas that are subject to earthquake activity. Should a property sustain damage as a result of an earthquake, the Partnership may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. Should an uninsured loss occur, the Partnership could lose its investment in, and anticipated profits and cash flows from, a property. Other matters - The Partnership is contingently liable for a subordinated real estate commission payable to the General Partner in the amount of $30,000 at September 30, 2001 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 Page 8 of 13 RANCON INCOME FUND I, A CALIFORNIA LIMITED PARTNERSHIP Notes to Financial Statements September 30, 2001 (Unaudited) 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 9 of 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion should be read in conjunction with the Partnership's December 31, 2000 audited financial statements and the notes thereto. LIQUIDITY AND CAPITAL RESOURCES On 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. At September 30, 2001, 13,589 Units remain outstanding. As of September 30, 2001, the Partnership had cash of $725,000. The remainder of the Partnership's assets consists primarily of its real estate investments, which totaled approximately $4,187,000 at September 30, 2001. The Partnership is contingently liable for a subordinated real estate commission payable to the General Partner in the amount of $30,000 at September 30, 2001 for the May 1999 sale of Aztec Village Shopping Center. 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 Partnership's financial statements; however, the amount will be recorded if and when it becomes payable. Operationally, the Partnership's primary source of funds consists of cash generated from operating its 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. Other sources of funds include the interest earned on invested cash balances and proceeds from property sales. Management believes that the Partnership's cash balance at September 30, 2001, 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. OPERATING ACTIVITIES During the nine months ended September 30, 2001, the Partnership's cash provided by operating activities totaled $307,000. The $29,000 increase in deferred costs at September 30, 2001, compared to December 31, 2000, was primarily due to lease commissions paid for new and renewal leases. The $13,000 increase in prepaid expenses and other assets at September 30, 2001, compared to December 31, 2000, was primarily due to an increase in tenant rents receivable and prepayment of fourth quarter investor service fees. The $52,000 increase in accounts payable and other liabilities at September 30, 2001, compared to December 31, 2000, was primarily due to an increase in accruals for property taxes, audit fees and operating expenses. Investing Activities During the nine months ended September 30, 2001, the Partnership's cash used for investing activities totaled $173,000 for improvement of the rental properties. Page 10 of 13 Financing Activities During the nine months ended September 30, 2001, the Partnership's cash used for financing activities totaled $340,000, which consisted of $277,000 of distributions to the limited partners, and $63,000 paid to redeem 244 limited partnership units ("Units"). RESULTS OF OPERATIONS Revenues Rental income increased $35,000, or 17%, and $73,000, or 11%, for the three and nine months ended September 30, 2001, compared to the three and nine months ended September 30, 2000, respectively, primarily due to an increase in occupancy at Bristol Medical Center. Occupancy rates at the Partnership's rental properties as of September 30, 2001 and 2000 were as follows:

The 12% increase in occupancy from September 30, 2000 to September 30, 2001 at Bristol Medical Center was primarily due to an existing tenant expanding 9,000 square feet in the second quarter. This increase was slightly offset by a decrease of 1,500 square feet due to an existing tenant moving out upon their lease expiration. Interest and other income decreased $5,000, or 45%, and $15,000, or 42%, for the three and nine months ended September 30, 2001, compared to the three and nine months ended September 30, 2000, respectively, primarily due to a lower average invested cash balance resulting from the distributions in August 2000 and February 2001, as well as the redemption of 300 units in August 2000, and 244 units in the 3rd quarter of 2001. Expenses Operating expenses increased $30,000, or 34%, and $44,000, or 18%, for the three and nine months ended September 30, 2001, compared to the three and nine months ended September 30, 2000, respectively, primarily due to the increase in occupancy at Bristol Medical Center. Depreciation and amortization varied slightly for the three and nine months ended September 30, 2001, compared to the three and nine months ended September 30, 2000, respectively. General and administrative expenses increased $2,000, or 4%, and $9,000, or 6%, for the three and nine months ended September 30, 2001, compared to the three and nine months ended September 30, 2000, respectively, primarily due to an increase in audit fees and investor service expenses. Page 11 of 13 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: None. (b) Reports on Form 8-K (incorporated herein by reference): None. Page 12 of 13 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: November 14, 2001 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

RANCON INCOME FUND I 10-Q