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 June 30, 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 33-0061355
(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 June 30, 1998: 76,788
Page 1 of 15
<PAGE>
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)
June 30, December 31,
1998 1997
Assets
Investments in real estate:
Rental property, net of accumulated depreciation
of $12,081 and $11,474 at June 30, 1998
and December 31, 1997, respectively $ 32,275 $ 32,659
Land held for development, net 2,877 4,666
Rental property held for sale, net -- 10,179
Land held for sale, net 3,994 2,310
--------- ---------
Total real estate investments 39,146 49,814
Cash and cash equivalents 10,464 788
Restricted cash 369 369
Accounts and interest receivable 169 286
Deferred financing costs and other fees, net of
accumulated amortization of $1,066 and $1,039
at June 30, 1998 and December 31, 1997,
respectively 1,404 1,373
Prepaid expenses and other assets 881 771
--------- ---------
Total assets $ 52,433 $ 53,401
========= =========
- continued -
Page 2 of 15
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Balance Sheets - continued
(in thousands, except units outstanding)
(Unaudited)
June 30, December 31,
1998 1997
Liabilities and Partners' Equity (Deficit)
Liabilities:
Notes payable $ 16,082 $ 22,004
Accounts payable and accrued expenses 596 565
Interest payable 64 66
--------- ---------
Total liabilities 16,742 22,635
--------- ---------
Commitments and contingent liabilities (see Note 4)
Partners' equity (deficit):
General partners (618) (891)
Limited partners, 76,788 and 77,054 limited
partnership units outstanding at June 30, 1998
and December 31, 1997, respectively 36,309 31,657
--------- ---------
Total partners' equity 35,691 30,766
--------- ---------
Total liabilities and partners' equity $ 52,433 $ 53,401
========= =========
See accompanying notes to financial statements.
Page 3 of 15
<PAGE>
<TABLE>
<CAPTION>
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 Six months ended
June 30, June 30,
--------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 1,784 $ 1,748 $ 3,694 $ 3,287
Interest and other income 13 3 23 11
Gain on sale of rental property 5,468 -- 5,468 --
--------- --------- --------- ---------
Total revenues 7,265 1,751 9,185 3,298
--------- --------- --------- ---------
Expenses:
Operating 733 758 1,556 1,470
Interest expense 475 468 983 861
Depreciation and amortization 346 429 693 820
Provision for impairment of land
held for sale -- 378 -- 378
Loss on sale of land -- -- 11 --
Expenses associated with
land held for development 141 148 280 325
General and administrative 338 325 648 641
--------- --------- --------- ---------
Total expenses 2,033 2,506 4,171 4,495
--------- --------- --------- ---------
Net income (loss) $ 5,232 $ (755) $ 5,014 $ (1,197)
========= ========= ========= =========
Net income (loss) per limited
partnership unit $ 64.55 $ (9.45) $ 61.67 $ (14.99)
========= ========= ========= =========
Weighted average number of limited
partnership units outstanding during
each period used to compute net income
(loss) per limited partnership unit 76,821 79,846 76,881 79,846
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
Page 4 of 15
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Partners' Equity (Deficit)
For the six months ended June 30, 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 -- (89) (89)
Net income 273 4,741 5,014
------- -------- ---------
Balance at June 30, 1998 $ (618) $ 36,309 $ 35,691
======= ======== =========
Balance at December 31, 1996 $ (891) $ 35,550 $ 34,659
Net loss -- (1,197) (1,197)
------- -------- ---------
Balance at June 30, 1997 $ (891) $ 34,353 $ 33,462
======= ======== =========
See accompanying notes to financial statements.
Page 5 of 15
<PAGE>
<TABLE>
<CAPTION>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six months ended
June 30,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,014 $ (1,197)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Net gain on sale of real estate (5,457) --
Depreciation and amortization 693 820
Amortization of loan fees, included in interest expense 52 48
Provision for impairment of land held for sale -- 378
Changes in certain assets and liabilities:
Accounts and interest receivable 117 151
Deferred financing costs and other fees (169) (272)
Prepaid expenses and other assets (110) 78
Accounts payable and accrued expenses 80 (109)
Interest payable (2) 18
--------- ---------
Net cash provided by (used for) operating activities 218 (85)
--------- ---------
Cash flows from investing activities:
Net proceeds from sale of real estate 15,847 --
Net additions to real estate and property development costs (378) (3,837)
--------- ---------
Net cash provided by (used for) investing activities 15,469 (3,837)
--------- ---------
Cash flows from financing activities:
Net loan proceeds -- 6,500
Increase in restricted cash, net -- (269)
Payment of loan fees -- (122)
Notes payable principal payments (5,922) (1,621)
Purchase and retirement of limited partnership units (89) --
--------- ---------
Net cash provided by (used for) financing activities (6,011) 4,488
--------- ---------
Net increase in cash and cash equivalents 9,676 566
Cash and cash equivalents at beginning of period 788 97
--------- ---------
Cash and cash equivalents at end of period $ 10,464 $ 663
========= =========
</TABLE>
- continued -
Page 6 of 15
<PAGE>
<TABLE>
<CAPTION>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows - continued
(in thousands)
(Unaudited)
Six months ended
June 30,
1998 1997
-------- --------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 933 $ 795
======== =========
Supplemental disclosure of additions to real estate
and property development costs:
Purchase price of real estate $ -- $ (1,750)
Reduction of note receivable -- 405
Additions to real estate and property development costs (378) (2,492)
-------- ---------
Net additions to real estate and property development costs $ (378) $ (3,837)
======== =========
Supplemental disclosure of non-cash refinancing activity:
New financing $ -- $ 7,700
Original financing paid off in escrow -- (1,200)
-------- ---------
Net loan proceeds $ -- $ 6,500
======== =========
</TABLE>
See accompanying notes to financial statements.
Page 7 of 15
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 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 June
30, 1998 and December 31, 1997, and the related statements of operations for the
three and six months ended June 30, 1998 and 1997, and the changes in partners'
equity (deficit) and cash flows for the six months ended June 30, 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 and Preferred Partnership Services, Inc. ("PPS"), a
California Corporation unaffiliated with the Partnership, contracted to assume
these services. According to the Glenborough 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 of the Rancon Partnerships. Glenborough is not an affiliate of RFC or
the Partnership.
During the first half of 1998, a total of 266 limited partnership units were
repurchased and retired as a result of the Partnership's offer to redeem limited
partnership units. As of June 30, 1998, there were 76,788 limited partnership
units outstanding.
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 RRF IV, Inc., a corporation wholly owned
by the Partnership. Since the
Page 8 of 15
<PAGE>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
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.
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. INVESTMENTS IN 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.
On June 4, 1998, the Partnership sold the Shadowridge Woodbend Apartments, a
240-unit complex in Vista, California, to an unaffiliated entity for
$16,075,000. The Partnership recognized a gain on the sale of the rental
property of $5,468,000 and realized net proceeds of $9,806,000.
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 June 30, 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.
Page 9 of 15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Partnership had cash of $10,464,000 (exclusive of
restricted cash) which includes $9,806,000 of net cash proceeds from the
Shadowridge Woodbend Apartment sale. Management is currently analyzing the
Partnership's cash flow requirements and its ability to make a distribution from
the sale proceeds. The remainder of the Partnership's assets consist primarily
of its investments in real estate, totaling approximately $39,146,000 which
includes $32,275,000 of rental properties, $2,877,000 of land held for
development and $3,994,000 of land held for sale.
Operationally, the Partnership's primary source of funds consists of cash
provided by rental activities. Other sources of funds may include permanent
financing, construction financing, property sales and interest income on
certificates of deposit and other deposits of funds invested temporarily,
pending their use in the development of properties. Cash generated from property
sales may be utilized in the development of other properties or distributed to
the partners.
A majority of the Partnership's assets are located within the Inland Empire, a
submarket of Southern California, which, despite recent economic growth has been
affected by recent business mergers. Management believes that while the
commercial real estate market continues to improve in the Inland Empire, new
construction may soon begin to constrain rent and price increases.
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.
The Partnership's general partner is currently in the process of evaluating the
fair market value of the Tri-City assets. The general partner and management are
evaluating appraisals prepared by CB Commercial and other market information in
an effort to determine the optimal time to dispose of its assets and realize
their maximum value.
Page 10 of 15
<PAGE>
Lake Elsinore
The Partnership owns 24.8 acres of undeveloped land (referred to as Lake
Elsinore) 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.
Perris
The Partnership owns 17.14 acres of unimproved land near Perris Lake in Perris,
Riverside County, California (referred to as Perris). There has been no
development of the Perris property to date. The property is being marketed for
sale to retail users and interested developers. Accordingly, this property is
classified as land held for sale on the accompanying consolidated balance
sheets.
Temecula
The Partnership owns two parcels of unimproved land in Temecula, California
which are being marketed for sale. Accordingly, this property is classified as
land held for sale on the accompanying consolidated balance sheet.
General Matters
The $10,179,000 decrease in rental property held for sale and the $9,676,000
increase in cash at June 30, 1998 from December 31, 1997 is primarily due to the
June 4, 1998 sale of the Shadowridge Woodbend Apartments ("Shadowridge"). In
addition, the $5,922,000 decrease in notes payable is largely due to the payoff
of the note secured by Shadowridge.
The $117,000 or 41% decrease in accounts and interest receivable at June 30,
1998 compared to December 31, 1997 is due to the collection of December 31, 1997
tenant receivables and the reimbursement from a tenant for tenant improvements
during the first quarter of 1998.
The $110,000 or 14% increase in prepaid expenses and other assets at June 30,
1998 compared to December 31, 1997 is primarily due to the prepayment of
premiums for annual pollution liability insurance coverage.
Other than the aforementioned, the Partnership knows of no demands, commitments,
events or uncertainties that might effect its liquidity or capital resources in
any material respect. The effect of inflation on the Partnership's business
should be no greater than its effect on the economy as a whole.
Page 11 of 15
<PAGE>
RESULTS OF OPERATIONS
Revenues
Rental income for the six and three months ended June 30, 1998 increased
$407,000 or 12% and $36,000 or 2% over the six and three months ended June 30,
1997, respectively, primarily as a result of the increased occupancy at One
Vanderbilt, Two Vanderbilt and Promotional Retail Center. The overall increase
in revenue was offset with a decrease in rental income resulting from the June
1998 sale of Shadowridge and the loss of an 18,000 square foot tenant at
Carnegie Business Center I following a business merger.
Occupancy rates at the Partnership's Tri-City properties as of June 30, 1998 and
1997 were as follows:
June 30,
1998 1997
-------- -------
One Vanderbilt 97% 90%
Two Vanderbilt 93% 90%
Service Retail Center 95% 100%
Carnegie Business Center I 72% 81%
Promotional Retail Center-Phase I 100% 97%
Inland Regional Center 100% 100%
TGI Friday's 100% 100%
Circuit City 100% 100%
As of June 30, 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 (vi) Circuit City with a lease through January 2018. These six tenants, in
the aggregate, occupy approximately 238,000 square feet of the 422,000 total
leasable square feet at Tri-City and account for approximately 55% of the rental
income generated at Tri-City and 43% of the total rental income of the
Partnership during the first half of 1998.
Interest income increased $12,000 or 109% and $10,000 or 333% during the six and
three months ended June 30, 1998 compared to the six and three months ended June
30, 1997, respectively, due to interest earned on an $80,000 note received as
part of a settlement agreement with a former tenant. The note bears interest at
10% per annum commencing January 1, 1998.
Expenses
Operating expenses increased $86,000 or 6% during the six months ended June 30,
1998 over the six months ended June 30, 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.
Page 12 of 15
<PAGE>
Interest expense increased $122,000 or 14% during the six months ended June 30,
1998 compared to the same period in 1997, due to the increased permanent debt to
finance certain properties over the past year.
Depreciation and amortization decreased $127,000 or 15% and $83,000 or 19%
during the six and three months ended June 30, 1998 compared to the six and
three months ended June 30, 1997, respectively, 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.
Provision for impairment of land held for sale was recorded in the first quarter
of 1997 in the amount of $378,000 due to management's conclusion that the
carrying value of the Partnership's investment in land held for sale in
Temecula, California was in excess of its fair value.
Expenses associated with land held for development decreased $45,000 or 14% and
$7,000 or 5% for the six and three months ended June 30, 1998 compared to the
six and three months ended June 30, 1997, respectively, due in large part to the
reduction in property tax expense as a result of the sale of ten parcels in
Rancon Towne Village since July 1997.
General and administrative expenses remained stable during the six and three
months ended June 30, 1998 compared to the six and three months ended June 30,
1997. This was due to a reduction in asset administration fees resulting from
land sales in 1997 which was offset by increases in professional fees due to the
special appraisals, analyses and forecasts ordered by management to assist in
determining the optimal time to market the properties for sale.
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 13 of 15
<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:
Registrant filed a Current Report on Form 8-K, dated July 6, 1998
reporting the sale of the Shadowridge Woodbend Apartments, a 240 unit
apartment complex in Vista, California. Also included were the
pro-forma financial statements.
Page 14 of 15
<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 REALTY FUND IV,
a California Limited Partnership
(Registrant)
Date: August 12, 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 15 of 15
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000743870
<NAME> Rancon Realty Fund IV
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 10,833
<SECURITIES> 0
<RECEIVABLES> 169
<ALLOWANCES> 0
<INVENTORY> 3,994
<CURRENT-ASSETS> 11,002
<PP&E> 35,152
<DEPRECIATION> 12,081
<TOTAL-ASSETS> 52,433
<CURRENT-LIABILITIES> 660
<BONDS> 16,082
0
0
<COMMON> 0
<OTHER-SE> 35,691
<TOTAL-LIABILITY-AND-EQUITY> 52,433
<SALES> 5,468
<TOTAL-REVENUES> 9,185
<CGS> 0
<TOTAL-COSTS> 1,847
<OTHER-EXPENSES> 1,341
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 983
<INCOME-PRETAX> 5,014
<INCOME-TAX> 0
<INCOME-CONTINUING> (443)
<DISCONTINUED> 5,457
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,014
<EPS-PRIMARY> 61.67
<EPS-DILUTED> 61.67
</TABLE>
