FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-14207
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
California 33-0016355
(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
(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 March 31, 1998: 76,842
Page 1 of 14
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Balance Sheets
(in thousands, except units outstanding)
(Unaudited)
March 31, December 31,
1998 1997
--------- ---------
Assets
Investments in real estate:
Rental property, net of accumulated depreciation
of $11,776 and $11,474 at March 31, 1998
and December 31, 1997, respectively $ 32,524 $ 32,659
Land held for development, net 2,735 4,666
Rental property held for sale, net 10,181 10,179
Land held for sale, net 3,994 2,310
-------- --------
Total real estate investments 49,434 49,814
Cash and cash equivalents 957 788
Restricted cash 369 369
Accounts and interest receivable 361 286
Deferred financing costs and other fees, net of
accumulated amortization of $1,112 and $1,039 at
March 31, 1998 and December 31, 1997,
respectively 1,371 1,373
Prepaid expenses and other assets 822 771
-------- --------
Total assets $ 53,314 $ 53,401
======== ========
- continued -
Page 2 of 14
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Balance Sheets - continued
(in thousands, except units outstanding)
(Unaudited)
March 31, December 31,
1998 1997
--------- ---------
Liabilities and Partners' Equity (Deficit)
Liabilities:
Notes payable $ 21,941 $ 22,004
Accounts payable and accrued expenses 828 565
Interest payable 83 66
-------- --------
Total liabilities 22,852 22,635
-------- --------
Commitments and contingent liabilities (see Note 4)
Partners' equity (deficit):
General partners (891) (891)
Limited partners, 76,842 and 77,054 limited
partnership units outstanding at
March 31, 1998 and December 31, 1997, respectively 31,353 31,657
-------- --------
Total partners' equity 30,462 30,766
-------- --------
Total liabilities and partners' equity $ 53,314 $ 53,401
======== ========
See accompanying notes to financial statements.
Page 3 of 14
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Operations
(in thousands, except per unit amounts and units outstanding)
(Unaudited)
Three months ended
March 31,
1998 1997
-------- -------
Revenues:
Rental income $ 1,910 $ 1,539
Interest and other income 10 8
-------- -------
Total revenues 1,920 1,547
-------- -------
Expenses:
Operating 823 712
Interest expense 508 393
Depreciation and amortization 347 391
Loss on sale of land 11 --
Expenses associated with land held for development 139 177
General and administrative expenses 310 316
-------- -------
Total expenses 2,138 1,989
-------- -------
Net loss $ (218) $ (442)
======== =======
Net loss per limited partnership unit $ (2.83) $ (5.54)
======== =======
Weighted average number of limited
partnership units outstanding during
each period used to compute net loss
per limited partnership unit 76,940 79,846
======= =======
See accompanying notes to financial statements.
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Partners' Equity (Deficit)
For the three months ended March 31, 1998 and 1997
(in thousands)
(Unaudited)
General Limited
Partners Partners Total
-------- -------- --------
Balance at December 31, 1997 $ (891) $ 31,657 $ 30,766
Retirement of limited partnership units -- (86) (86)
Net loss -- (218) (218)
-------- -------- --------
Balance at March 31, 1998 $ (891) $ 31,353 $ 30,462
======== ======== ========
Balance at December 31, 1996 $ (891) $ 35,550 $ 34,659
Net loss --- (442) (442)
-------- -------- --------
Balance at March 31, 1997 $ (891) $ 35,108 $ 34,217
======== ======== ========
See accompanying notes to financial statements.
Page 5 of 14
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows (in thousands)
(Unaudited)
Three months ended
March 31,
1998 1997
--------- ---------
Cash flows from operating activities:
Net loss $ (218) $ (442)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 347 391
Amortization of loan fees, included in interest expense 28 14
Loss on sale of land 11 --
Changes in certain assets and liabilities:
Accounts and interest receivable (75) 164
Deferred financing costs and other fees (71) (150)
Prepaid expenses and other assets (51) 55
Accounts payable and accrued expenses 263 149
Interest payable 17 29
------- -------
Net cash provided by operating activities 251 210
------- -------
Cash flows from investing activities:
Net proceeds from sale of land 241 --
Net additions to real estate and property development costs (174) (1,481)
------- -------
Net cash provided by (used for) investing activities 67 (1,481)
------- -------
Cash flows from financing activities:
Net loan proceeds -- 2,200
Notes payable principal payments (63) (58)
Purchase and retirement of limited partnership units (86) --
Net cash provided by (used for) financing activities (149) 2,142
------- -------
Net increase in cash and cash equivalents 169 871
Cash and cash equivalents at beginning of period 788 97
------- -------
Cash and cash equivalents at end of period $ 957 $ 968
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest $ 463 $ 350
======= =======
See accompanying notes to financial statements.
Page 6 of 14
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
March 31, 1998
(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 (successor by merger with
Glenborough Inland Realty Corporation)("Glenborough"), the accompanying
unaudited financial statements contain all adjustments (consisting of only
normal accruals) necessary to present fairly the financial position of Rancon
Realty Fund IV, A California Limited Partnership (the "Partnership") as of March
31, 1998 and December 31, 1997, and the related statements of operations,
changes in partners' equity and cash flows for the three months ended March 31,
1998 and 1997.
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 asset administration
fee which is fixed for five years subject to reduction in the year following the
sale of assets ($806,000 in 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 tasks for the General Partner of the Rancon Partnerships and RFC agreed
to cooperate with Glenborough, should Glenborough attempt to obtain a majority
vote of the limited partners to substitute itself as the General Partner for the
Rancon Partnerships. Glenborough is not an affiliate of RFC or the Partnership.
Consolidation - In order to satisfy certain lender requirements for the
Partnership's 1996 loan secured by Service Retail Center, Promotional Retail
Center, and Carnegie Business Center I, Rancon Realty Fund IV Tri-City Limited
Partnership, a Delaware limited partnership ("RRF IV Tri-City") was formed in
April, 1996. The three properties securing the loan were contributed to RRF IV
Tri-City by the Partnership. The limited partner of RRF IV Tri-City is the
Partnership and the general partner is Rancon Realty Fund IV, Inc., a
corporation wholly owned by the Partnership. Since the Partnership indirectly
owns 100% of RRF IV Tri-City, the financial statements of RRF IV Tri-City have
been consolidated with those of the Partnership. All intercompany balances and
transactions have been eliminated in consolidation.
Page 7 of 14
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
March 31, 1998
(Unaudited)
Note 2. REFERENCE TO 1997 AUDITED FINANCIAL STATEMENTS
These unaudited financial statements should be read in conjunction with the
Notes to Financial Statements included in the December 31, 1997 audited
financial statements.
Note 3. SALE OF REAL ESTATE
On January 27, 1998, the Partnership sold one of the three remaining Rancon
Towne Village lots in Temecula, California to an unaffiliated entity for
$270,000. The Partnership recognized an $11,000 loss on the sale and the net
proceeds of $241,000 were added to the Partnership's operating cash reserves.
Note 4. COMMITMENTS AND CONTINGENT LIABILITIES
The Partnership is contingently liable for subordinated real estate commissions
payable to the Sponsor in the amount of $643,000 at March 31, 1998 for sales
that transpired in previous years. The subordinated real estate commissions are
payable only after the Limited Partners have received distributions equal to
their original invested capital plus a cumulative non-compounded return of six
percent per annum on their adjusted invested capital.
Note 5. NOTES PAYABLE
Included in notes payable at March 31, 1998 is a $5,820,000 note (the "Note")
secured by the Shadowridge Woodbend Apartment complex, which matured on April
15, 1998. On March 28, 1998, the Partnership entered into a Forbearance
Agreement with the lender. The Forbearance Agreement provides that the lender
will forebear exercising remedies from March 28, 1998 through July 15, 1998
provided that certain terms and conditions are met. The monthly payments of
principal and interest as well as the interest rate will remain the same during
the forbearance period and the entire remaining loan balance must be paid in
full by July 15, 1998. The Partnership expects to sell the Shadowridge Woodbend
Apartment complex prior to July 15, 1998 and pay-off this Note with the sale
proceeds.
Note 6. SUBSEQUENT EVENT
On May 5, 1998, a potential third-party buyer entered into a contract with the
Partnership for the purchase of the Shadowridge Woodbend Apartments for
$16,075,000 with a close of escrow by June 11, 1998. The net book value of the
property is $10,181,000 at March 31, 1998, therefore no provision for impairment
in investment in real estate is required.
Page 8 of 14
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Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Partnership had cash of $957,000 (exclusive of restricted
cash). The remainder of the Partnership's assets consist primarily of its
investments in real estate, totaling approximately $49,434,000 which includes
$32,524,000 in rental properties, $4,671,000 of land held for development,
$10,181,000 of rental property held for sale and $2,058,000 of land held for
sale.
Operationally, the Partnership's primary source of funds consists of cash
provided by its rental activities. Other sources of funds may include permanent
financing, construction financing, property sales, interest income on
certificates of deposit and other deposits of funds invested temporarily,
pending their use in the development of properties.
A majority of the Partnership's assets are located within the Inland Empire, a
submarket of Southern California, and have been directly affected by the
economic weakness of the region. Management believes, however, that the market
has flattened and is no longer falling in terms of sales prices. While prices
have not increased significantly, the Southern California real estate market
appears to be improving. Management continues to evaluate the real estate
markets in which the Partnership's assets are located in an effort to determine
the optimal time to dispose of them and realize their maximum value. Cash
generated from property sales may be utilized in the development of other
properties or distributed to the partners.
Tri-City
The Partnership currently owns the following properties in the Tri-City
Corporate Center area within the Inland Empire submarket of the Southern
California region:
Property Type Square Feet
---------------------------- ---------------------------------- -----------
One Vanderbilt Four story office building 73,730
Two Vanderbilt Four story office building 69,046
Carnegie Business Center I Two R&D buildings 62,539
Service Retail Center Two retail buildings 20,780
Promotional Retail Center Four strip center retail buildings 66,265
Inland Regional Center Two story office building 81,079
TGI Friday's Restaurant 9,386
Circuit City Retail building 39,123
The Partnership also owns approximately 26 acres of unimproved land in the
Tri-City area.
Management is currently in the process of evaluating the potential sale of the
Tri-City assets. Management has ordered an appraisal from CB Commercial, an
econometric forecast of future
Page 9 of 14
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value from CB Commercial and an analysis by Arlen Capital of the Real Estate
Investment Trust ("REIT") market to determine if it is better to offer the
Tri-City assets for sale in 1998 or 1999.
Shadowridge Woodbend Apartments
The Shadowridge Woodbend Apartment complex, a 240-unit complex in Vista,
California is currently under contract to be sold for $16,075,000 with an
estimated closing date of June 11, 1998. Since December 31, 1997, the
Partnership has classified this property as real estate held for sale and ceased
depreciation on the property effective January 1, 1998. Since the net book value
of the property is $10,181,000 at March 31, 1998, no provision for impairment in
investment in real estate is required.
Lake Elsinore
Lake Elsinore is 24.8 acres of undeveloped land, commercially zoned in Lake
Elsinore, Riverside County, California. During the first quarter of 1998, the
Partnership began marketing this land for sale. On April 24, 1998 the
Partnership entered into a contract with a third party buyer for the sale of the
land for $4,500,000. The sale is expected to close in the fourth quarter of
1998. Accordingly, the Partnership has classified this property as land held for
sale on the accompanying consolidated balance sheet as of March 31, 1998. Since
the net book value of the property is $1,936,000 at March 31, 1998, no provision
for impairment in investment in real estate is required.
Perris
Perris is 17.14 acres of unimproved land near Perris Lake in Perris, Riverside
County, California. There has been no development of the Perris property to
date. The property is being marketed for sale to retail users and interested
developers.
Temecula
Final map approval was received January 2, 1996 to divide the 12.4 acres of
undeveloped commercial property in Temecula, California into twelve parcels to
accommodate retail and commercial development. Through January 1998, the
Partnership sold ten parcels in six transactions, totaling approximately 10.2
acres for an aggregate sales price of $2,529,000.
General
The $75,000 or 20% increase in accounts and interest receivable at March 31,
1998 compared to December 31, 1997 is a result of tenant improvement
reimbursements due from a tenant at March 31, 1998. The Partnership received the
reimbursement in April 1998.
The $263,000 or 47% increase in accounts payable and accrued expenses at March
31, 1998 from December 31, 1997 is primarily due to the accrual of property tax
expenses which are payable in April 1998.
Page 10 of 14
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Management believes that the Partnership's cash balance as of March 31, 1998
together with the cash from operations, sales and financing, will be sufficient
to finance the Partnership's and properties' continued operations and
development plans. However, 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.
RESULTS OF OPERATIONS
Revenues
Rental income for the three months ended March 31, 1998 increased $371,000 or
24% over the three months ended March 31, 1997, primarily as a result of: (i)
the commencement of the Circuit City operating lease in May 1997, (ii) the
acquisition of the TGI Friday's property in February 1997 and (iii) the
significant increase in occupancy at Two Vanderbilt. These sources of increased
revenue were slightly offset with a decrease in rental income associated with
the loss of two tenants at Carnegie Business Center I over the past year.
Management is currently marketing these spaces for lease.
Occupancy rates at the Partnership's Tri-City properties as of March 31, 1998
and 1997 were as follows:
March 31,
1998 1997
--------- ---------
One Vanderbilt 85% 88%
Two Vanderbilt 93% 63%
Service Retail Center 100% 100%
Carnegie Business Center I 69% 90%
Promotional Retail Center-Phase I 100% 97%
Inland Regional Center 100% 100%
TGI Friday's 100% 100%
Circuit City 100% N/A
As of March 31, 1998, tenants at Tri-City occupying substantial portions of
leased rental space included: (i) Inland Empire Health Plan with a lease through
March 2002; (ii) CompUSA with a lease through August 2003; (iii) ITT Educational
Services with a lease which expires in December 2004; (iv) PetsMart with a lease
through January 2009; (v) Inland Regional Center with a lease through July 2009;
and Circuit City with a lease through January 2018. These six tenants, in the
aggregate, occupied approximately 238,000 square feet of the 422,000 total
leasable square feet at Tri-City and account for approximately 56% of the rental
income generated at Tri-City and 41% of the total rental income for the
Partnership during the first quarter of 1998.
Page 11 of 14
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Expenses:
Operating expenses increased $111,000 or 16% during the three months ended March
31, 1998 compared to the three months ended March 31, 1997 due to: (i) the
addition of TGI Friday's as an operating property in February 1997; (ii) the
addition of Circuit City as an operating property in May 1997; and (iii) the
receipt of prior year tax refunds during the first quarter of 1997.
Interest expense increased $115,000 or 29% during the three months ended March
31, 1998 compared to the three months ended March 31, 1997 due to the
Partnership's increased permanent debt to finance selected properties over the
past year.
Depreciation and amortization decreased $45,000 or 12% during the three months
ended March 31, 1998 compared to the three months ended March 31, 1997 primarily
due to ceasing depreciation on the Shadowridge Woodbend Apartments upon
classification of the property as rental property held for sale (non-depreciable
property) effective December 31, 1997.
During the three months ended March 31, 1998, the Partnership recognized $11,000
in loss on the January 1998 sale of one lot in Rancon Towne Village.
Expenses associated with undeveloped land decreased $37,000 or 21% during the
three months ended March 31, 1998 compared to the three months ended March 31,
1997 primarily due to a reduction in property tax expense as a result of the ten
lots of Rancon Towne Village sold since July 1997.
Year 2000 Compliance
The Partnership utilizes a number of computer software programs and operating
systems across its entire organization, including applications used in financial
business systems and various administrative functions. To the extent that the
Partnership's 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 such applications will be necessary. The
Partnership has completed its identification of applications that are not yet
"Year 2000" compliant and has commenced modification or replacement of such
applications, as necessary. Given the information known at this time about the
Partnership's systems that are non-compliant, coupled with the Partnership's
ongoing, normal course-of-business efforts to upgrade or replace critical
systems, as necessary, management does not expect "Year 2000" compliance costs
to have any material adverse impact on the Partnership's liquidity or ongoing
results of operations. No assurance can be given, however, that all of the
Partnership's systems will be "Year 2000" compliant or that compliance costs or
the impact of the Partnership's failure to achieve substantial "Year 2000"
compliance will not have a material adverse effect on the Partnership's future
liquidity or results of operations.
Page 12 of 14
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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 13 of 14
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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 REALTY FUND IV,
a California Limited Partnership
(Registrant)
Date: May 14, 1998 By: /s/ Daniel L. Stephenson
------------------------
Daniel L. Stephenson
Chief Executive Officer and
Chief Financial Officer of
Rancon Financial Corporation,
General Partner of
Rancon Realty Fund IV,
a California Limited Partnership
Page 14 of 14
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<NAME> RANCON REALTY FUND IV
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,326
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0
0
<COMMON> 0
<OTHER-SE> 30,462
<TOTAL-LIABILITY-AND-EQUITY> 53,314
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