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: 0-14207
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 94402-1708
(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: 76,765
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Balance Sheets
(in thousands, except unit amounts)
June 30, December 31,
1999 1998
(Unaudited) (Audited)
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Assets
Investments in real estate:
Rental property, net of accumulated depreciation of
$13,427 and $12,723 at June 30, 1999 and December
31, 1998, respectively $ 33,363 $ 33,781
Land held for development 1,579 1,575
Land held for sale 2,441 2,741
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Total real estate investments 37,383 38,097
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Cash and cash equivalents 4,497 4,297
Restricted cash 369 369
Deferred financing costs and other fees, net of
accumulated amortization of $1,340 and $1,195
at June 30, 1999 and December 31, 1998, respectively 1,389 1,312
Prepaid expenses and other assets 1,192 1,434
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Total assets $ 44,830 $ 45,509
============= =============
Liabilities and Partners' Equity (Deficit)
Liabilities:
Notes payable $ 15,922 $ 16,005
Accounts payable and other liabilities 613 929
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Total liabilities 16,535 16,934
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Commitments and contingent liabilities (see Note 4) -- --
Partners' Equity (Deficit):
General partners (658) (658)
Limited partners, 76,765 and 76,767 limited partnership
units outstanding at June 30, 1999 and December 31,
1998, respectively 28,953 29,233
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Total partners' equity 28,295 28,575
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Total liabilities and partners' equity $ 44,830 $ 45,509
============= =============
</TABLE>
See accompanying notes to financial statements.
Page 2 of 19
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<TABLE>
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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 Six months ended
June 30, June 30,
-------------------------- ---------------------------
1999 1998 1999 1998
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Revenues:
Rental income: $ 1,701 $ 1,784 $ 3,324 $ 3,694
Interest and other income 34 13 110 23
Gain on sale of rental property -- 5,468 -- 5,468
---------- ---------- ----------- ----------
Total revenues 1,735 7,265 3,434 9,185
---------- ---------- ----------- ----------
Expenses:
Operating 632 733 1,284 1,556
Interest expense 385 475 759 983
Depreciation and amortization 406 346 795 693
Loss on sales of real estate -- -- 4 11
Expenses associated with
undeveloped land 94 141 218 280
General and administrative 256 338 499 626
Proposed dissolution costs 109 -- 154 22
---------- ---------- ----------- ----------
Total expenses 1,882 2,033 3,713 4,171
---------- ---------- ----------- ----------
Net income (loss) $ (147) $ 5,232 $ (279) $ 5,014
========== ========== =========== ==========
Net income (loss) per limited
partnership unit $ (1.91) $ 64.55 $ (3.63) $ 61.67
========== ========== =========== ==========
Weighted average number of limited
partnership units outstanding during
each period used to compute net loss
per limited partnership unit 76,765 76,821 76,765 76,881
========== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
Page 3 of 19
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated 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 $ (658) $ 29,233 $ 28,575
Retirement of limited partnership units -- (1) (1)
Net loss -- (279) (279)
-------- ---------- ----------
Balance at June 30, 1999 $ (658) $ 28,953 $ 28,295
======== ========== ==========
See accompanying notes to financial statements.
Page 4 of 19
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six months ended
June 30,
---------------------------
1999 1998
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Cash flows from operating activities:
Net income (loss) $ (279) $ 5,014
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Net (gain) loss on sales of real estate 4 (5,457)
Depreciation and amortization 795 693
Amortization of loan fees, included in
interest expense 55 52
Changes in certain assets and liabilities:
Deferred financing costs and other fees (223) (169)
Prepaid expenses and other assets 242 7
Accounts payable and other liabilities (316) 80
Interest payable -- (2)
---------- ----------
Net cash provided by operating activities 278 218
---------- ----------
Cash flows from investing activities:
Net proceeds from sales of land 296 15,847
Net additions to real estate investments (290) (378)
---------- ----------
Net cash provided by investing activities 6 15,469
---------- ----------
Cash flows from financing activities:
Notes payable principal payments (83) (5,922)
Retirement of limited partnership units (1) (89)
---------- ----------
Net cash used for financing activities (84) (6,011)
---------- ----------
Net increase in cash and cash equivalents 200 9,676
Cash and cash equivalents at beginning of period 4,297 788
---------- ----------
Cash and cash equivalents at end of period $ 4,497 $ 10,464
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 704 $ 933
========== ==========
</TABLE>
See accompanying notes to financial statements.
Page 5 of 19
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated 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" or "General Partner") and Glenborough Corporation, the
Partnership's asset and property manager ("Glenborough"), the accompanying
unaudited consolidated 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, 1999 and December 31, 1998, and the related consolidated statements
of operations and cash flows for the six months ended June 30, 1999 and 1998.
Asset Sale and Dissolution Proposal - The General Partner is currently seeking
the Limited Partners' consent to sell all of the Partnership's real estate
assets ("Asset Sale") and liquidate the Partnership ("Dissolution"). A Consent
Solicitation Statement was sent to the Limited Partners on July 6, 1999,
detailing the Asset Sale and Dissolution Proposal (incorporated by reference to
the Schedule 14A - Preliminary Proxy Statement filed with the United States
Securities and Exchange Commission ("Commission") in the second quarter of
1999). The Partnership's properties consist of ten rental properties and
approximately 23 acres of unimproved land in the Tri-City Corporate Centre in
San Bernardino, California (the "Tri-City Properties") and an aggregate of
approximately 27 acres of unimproved land in Lake Elsinore and Temecula,
California (the "Remaining Properties"). Assuming the Asset Sale and Dissolution
Proposal is approved by the Limited Partners, the General Partner currently
intends to sell all of the Partnership's properties within approximately six
months after consent has been obtained, distribute the proceeds and liquidate
the Partnership after all of the properties are sold and the cash proceeds
thereof received. The General Partner does not expect the Dissolution to occur
until at least early 2000 (and potentially not until 2001) as some of the
properties may be sold with the purchase price payable on an installment basis.
The Partnership has not, as of the date of the filing of this Quarterly Report
on Form 10-Q with the Commission, entered into any agreement for the sale of its
properties, although the Partnership has, in 1997, granted to Glenborough Realty
Trust Incorporated, a Maryland corporation ("GLB"), a right to match offers for
the purchase of the Partnership's properties ("GLB Matching Right"). The GLB
Matching Right applies to the Tri-City Properties and the Remaining Properties.
GLB is not an affiliate of the Partnership.
If the Limited Partners consent to the Asset Sale and Dissolution Proposal, the
General Partner currently intends to offer the Partnership's Tri-City Properties
for sale by soliciting bids from various potential purchasers. The Remaining
Properties will not be sold with the Tri-City Properties, but will be sold
separately in a single or multiple sales. If the Asset Sale and Dissolution
Proposal is not approved by the Limited Partners, the General Partner currently
intends to continue to manage the Partnership and its properties and will
Page 6 of 19
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
continue to entertain and consider indications of interest from third parties to
acquire all or a portion of the properties. The Partnership will continue to
operate the properties and attempt to sell such properties in single or multiple
sales and develop properties it believes are developable and would improve its
return on investment.
Allocation of Net Income and Net Loss - Allocation of net income and net losses
are made pursuant to the terms of the Partnership Agreement. Generally, net
losses from operations are allocated 99% to the limited partners and 1% to the
general partners until such time as a partner's capital account is reduced to
zero. Additional losses will be allocated entirely to those partners with
positive capital account balances until such balances are reduced to zero.
Net income from operations is allocated 90% to the limited partners and 10% to
the general partners. Net income other than net income from operations shall be
allocated as follows: (i) first, to the partners who have a deficit balance in
their capital account, provided that, in no event shall the general partners be
allocated more than 5% 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 limited
partner's original invested capital; (ii) second, to the limited partners in
proportion to and to the extent of the amounts required to increase their
capital accounts to an amount equal to the sum of the adjusted invested capital
of their units plus an additional cumulative non-compounded 6% return per annum
(plus additional amounts depending on the date units were purchased); (iii)
third, to the partners in the minimum amount required to first equalize their
capital accounts in proportion to the number of units owned, and then, to bring
the sum of the balances of the capital accounts of the limited partners and the
general partners into the ratio of 4 to 1; and (iv) the balance, if any, 80% to
the limited partners and 20% to the general partners. In no event shall the
general partners be allocated less than 1% of the net income other than net
income from operations for any period.
Management Agreement - Effective January 1, 1995, Glenborough entered into an
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., a California Corporation unaffiliated with
the Partnership, contracted to assume these services. In August 1998, the
management agreement was further amended to provide Glenborough with a guarantee
of a specified amount of asset management and property management fees through
December 31, 1999, regardless of whether the Partnership sells any or all of its
properties prior to such date. In exchange, Glenborough waived any and all
claims related to liquidated damages under the agreement to which it may have
otherwise been entitled. According to the contract, the Partnership will pay
Glenborough for its services as follows: (i) a specified asset administration
Page 7 of 19
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
fee which is fixed for five years subject to reduction in the year following the
sale of assets ($597,000 in 1999); (ii) sales fees of 2% for improved properties
and 4% for land; (iii) a refinancing fee of 1% ($49,750 in 1999) 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 limited partners to substitute itself
as the Sponsor for the Rancon Partnerships. Glenborough is not an affiliate of
RFC or the Partnership.
Basis of Accounting - The accompanying unaudited consolidated 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.
The consent of the Limited Partners to the proposal to sell all of the
Partnership's properties and liquidate the Partnership will not impact the
accounting treatment applied by the Partnership in its financial statements
prepared in accordance with generally accepted accounting principles as the
liquidation proceeds and the timing thereof are not currently estimable. The
Partnership will classify as "held for use" or "held for development", all of
its operating and undeveloped properties until such time as an acceptable buyer
is identified and an offer which is reasonably assured of consummation is
obtained. At that time, the Partnership will reclassify the appropriate portions
of its assets to "held for sale" and depreciation of those assets will be
discontinued.
When the sale price and timing of the last property disposal is reasonably
determinable, the Partnership will adopt liquidation basis accounting in that
quarter. At that time, all assets and liabilities will be adjusted to their
settlement amounts and an amount to be distributed to the partners upon
liquidation will be estimated.
Consolidation - In April 1996, the Partnership formed Rancon Realty Fund IV
Tri-City Limited Partnership, a Delaware limited partnership ("RRF IV
Tri-City"). As required by the lender (Bear, Stearns Funding, Inc.) of a
$6,400,000 loan obtained by the Partnership in 1996, the Partnership contributed
three of its operating properties to RRF IV Tri-City to provide a bankruptcy
remote borrower for the lender. The loan, secured by the properties in RRF IV
Tri-City, has a principal balance of $6,244,000 at June 30, 1999, and matures on
May 1, 2006 with an 8.744% fixed interest rate and a 25-year amortization of
principal. The limited partner of RRF IV Tri-City is the Partnership and the
general partner is Rancon Realty Fund IV, Inc. ("RRF IV, Inc."), a corporation
wholly owned by the Partnership. Since the Partnership owns 100% of RRF IV, Inc.
and indirectly owns 100% of RRF IV Tri-City, the financial statements of RRF IV,
Inc. and RRF IV Tri-City have been consolidated with those of the Partnership.
All intercompany balances and transactions have been eliminated in the
consolidation.
Reclassifications - Certain prior year balances have been reclassified to
conform with the current year presentation.
Page 8 of 19
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
Note 2. REFERENCE TO 1998 AUDITED FINANCIAL STATEMENTS
These unaudited consolidated financial statements should be read in conjunction
with the Notes to Financial Statements included in the December 31, 1998 audited
consolidated financial statements.
Note 3. SALE OF REAL ESTATE
On January 15, 1999, the Partnership sold approximately 17 acres of land located
in Perris, Riverside County, California to an unaffiliated entity for $334,800.
The Partnership recognized a $4,000 loss on the sale and the net proceeds of
approximately $296,000 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 Sponsors in the aggregate amount of $643,000 at June 30, 1999 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, which is not expected to be achieved as a result of the Asset Sale. As
a result, such subordinated real estate commissions will not be paid to the
General Partner and will be eliminated.
The Partnership is also contingently liable for a subordinated note payable in
connection with the land in Temecula, California, that the Partnership
reacquired in June 1992 through a deed in lieu of foreclosure in satisfaction of
a $2,276,000 note receivable. The subordinated note payable and accrued interest
total $566,000 as of June 30, 1999. This amount is payable upon the sale of the
property only after the Partnership receives the full amount of the prior note
receivable with accrued and unpaid interest, costs of development, costs of
sale, and other amounts paid to obtain good title to the property, subject to
certain release provisions. Since the circumstances under which this liability
would be payable are limited, the note payable and accrued interest have not
been recorded in the accompanying consolidated financial statements; however,
the amount will be recognized prior to recording any gain on the sale of the
related land.
Page 9 of 19
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
Note 5. NOTES PAYABLE
Notes payable as of June 30, 1999 and December 31, 1998 were as follows (in
thousands):
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1999 1998
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Note payable secured by first deed of trust on Service Retail
Center, Promotional Retail Center and Carnegie Business Center I.
The loan, which matures May 1, 2006, is a 10-year, 8.744% fixed
rate loan with a 25-year amortization requiring monthly payments
of principal and interest totaling $53. $ 6,244 $ 6,290
Note payable secured by first deed of trust on the IRC building.
Interest accrues at a fixed rate of 8.75% per annum. Monthly
payments of $21 of principal and interest are due until the loan
matures on April 23, 2001. 2,410 2,429
Note payable secured by first deed of trust on the One Vanderbilt
building. The note bears interest at a fixed rate of 9% per
annum. Monthly installments of $20 of principal and interest are
due until January 1, 2005, at which time the unpaid principal and
interest are payable in full. 2,268 2,286
Note payable secured by first deeds of trust on Circuit City and
TGI Friday's. Interest is payable monthly at one percent (1%) per
annum in excess of the lender's "Prime Rate" until the loan
matures on April 30, 2000 at which time the unpaid principal and
interest are due. 5,000 5,000
-------- --------
Total notes payable $ 15,922 $ 16,005
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</TABLE>
On March 30, 1999, the Partnership extended the maturity date of its note
payable to Wells Fargo Bank one year from April 30, 1999, to April 30, 2000, and
incurred approximately $75,000 in loan fees.
Note 6. PROPOSED DISSOLUTION COSTS
The General Partner is currently seeking the Limited Partners' consent to the
Asset Sale and Dissolution Proposal (see Note 1). Costs totaling $154,000 and
$22,000 related to the proposal have been incurred and are reflected in the
accompanying consolidated statements of operations for the six months ended June
30, 1999 and 1998, respectively.
Page 10 of 19
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Partnership had cash of $4,497,000 (exclusive of $369,000
in restricted cash). The remainder of the Partnership's assets consist primarily
of its net investments in real estate, totaling approximately $37,383,000 at
June 30, 1999, which includes $33,363,000 in rental properties, $1,579,000 of
land held for development and $2,441,000 of land held for sale.
The Partnership's business strategy has been to focus on the eventual
disposition of its assets at the optimal time and sales price. As discussed in
Note 1 of the Notes to Consolidated Financial Statements, the General Partner is
currently seeking the Limited Partners' consent to sell all of the Partnership's
real estate assets ("Asset Sale") and liquidate the Partnership ("Dissolution").
A Consent Solicitation Statement was sent to the Limited Partners on July 6,
1999, detailing the Asset Sale and Dissolution Proposal (incorporated by
reference to the Schedule 14A - Preliminary Proxy Statement filed with the
United States Securities and Exchange Commission ("Commission") in the second
quarter of 1999). The Partnership's properties consist of ten rental properties
and approximately 23 acres of unimproved land in the Tri-City Corporate Centre
in San Bernardino, California (the "Tri-City Properties") and an aggregate of
approximately 27 acres of unimproved land in Lake Elsinore and Temecula,
California (the "Remaining Properties"). Assuming the Asset Sale and Dissolution
Proposal is approved by the Limited Partners, the General Partner currently
intends to sell all of the Partnership's properties within six months after
consent has been obtained, distribute the proceeds and liquidate the Partnership
after all of the properties are sold and the cash proceeds thereof received. The
General Partner does not expect the Dissolution to occur until at least early
2000 (and potentially not until 2001) as some of the properties may be sold with
the purchase price payable on an installment basis.
The Partnership has not, as of the date of the filing of this Quarterly Report
on Form 10-Q with the Commission, entered into any agreement for the sale of its
properties, although the Partnership has, in 1997, granted to Glenborough Realty
Trust Incorporated, a Maryland corporation ("GLB"), a right to match offers for
the purchase of the Partnership's properties ("GLB Matching Right"). The GLB
Matching Right applies to the Tri-City Properties and the Remaining Properties.
GLB is not an affiliate of the Partnership.
If the Limited Partners consent to the Asset Sale and Dissolution Proposal, the
General Partner currently intends to offer the Partnership's Tri-City Properties
for sale by soliciting bids from various potential purchasers. The Remaining
Properties will not be sold with the Tri-City Properties, but will be sold
separately in a single or multiple sales.
If the Asset Sale and Dissolution Proposal is not approved by the Limited
Partners, the General Partner currently intends to continue to manage the
Partnership and its properties and will continue to entertain and consider
indications of interest from third parties to acquire all or a portion of the
properties. The Partnership will continue to operate the properties and attempt
to sell such properties in single or multiple sales and develop properties it
believes are developable and would improve its return on investment.
Assuming consummation of the Asset Sale and Dissolution, prior to completion of
the sale of all of the Partnership's properties and the receipt in cash of the
Page 11 of 19
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proceeds thereof, the General Partner currently intends to, but is not
obligated, to make interim distributions to the Limited Partners, from time to
time, of all or a portion of the net proceeds from sale of the properties. The
General Partner will not receive any of the net proceeds from sale of the
properties or upon dissolution with respect to its general partnership
interests. The General Partner also intends to distribute in 1999 the net
proceeds from the January 1999 sale of the Perris property. See Note 3 of the
Notes to Consolidated Financial Statements above for further details.
The discussion above contains forward-looking statements regarding the
Partnership's plans, goals and expectations, including statements regarding the
Partnership's estimates of sales proceeds and future distributions resulting
from the Asset Sale, estimates of the timing of the sale of the properties, the
dissolution of the Partnership and the distribution of sales proceeds.
Forward-looking statements are necessarily speculative, there being certain
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in the forward-looking statements. All
forward-looking statements included in this document are based on information
available to the Partnership on the date hereof, and reflect the best judgment
of the management of the Partnership. The General Partner's current plans are
subject to change, including in the event of changes in general business and
economic conditions as well as changes in the local real estate markets where
the Partnership's properties are located. There can be no assurance that the
Asset Sale and Dissolution Proposal will be approved by the Limited Partners, or
if and when the properties will be sold, the proceeds distributed, and the
Partnership liquidated. The timing of any sale of the Partnership's properties,
the distribution of proceeds, and the liquidation of the Partnership are subject
to various and significant uncertainties, many of which are beyond the
Partnership's control and which could delay any sale of the Partnership's
properties, liquidation of the Partnership, and distribution of proceeds
significantly beyond the time periods estimated above. Among such uncertainties
are the date when consent of the Limited Partners is obtained (assuming it is
obtained), the demand for the Partnership's properties by potential purchasers,
the availability of capital for potential purchasers, the actual dates when
properties are sold, and the duration of any installment sales of any of the
properties.
Operationally, the Partnership's primary source of funds consists of cash
provided by its rental activities. Other sources of funds may include permanent
financing, property sales, interest income from certificates of deposit, and
other deposits of funds invested temporarily. Cash generated from property sales
are generally added to the Partnership's cash reserves, pending use in the
development of properties, or are distributed to the partners.
The majority of the Partnership's assets are located in the Tri-City Corporate
Centre, in San Bernardino, California. Tri-City is in the heart of the Inland
Empire, a submarket of Southern California and is the most densely populated
area of San Bernardino and Riverside counties. Tri-City's office space market
continues to improve despite recent completion of new buildings within the
neighboring area. Tri-City's retail space market continued to experience strong
leasing activity, benefiting from its excellent location affording good freeway
visibility and access, while the industrial space market appears to be improving
due to the demand for space for both warehouse and distribution facilities.
Management currently believes that the overall real estate market in the Inland
Empire will remain strong through 1999, with conditions beyond such time being
less predictable.
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Tri-City Properties
The Partnership's Tri-City Properties consist of approximately 23 acres of
unimproved land and approximately 451,903 square feet of improved properties.
The Partnership's improved properties in the Tri-City Corporate Centre are as
follows:
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
Office Max Retail building 23,500
Mimi's Cafe Restaurant 6,455
Remaining Properties
The Partnership's Remaining Properties consist of approximately 24.8 acres of
undeveloped, commercially zoned land in Lake Elsinore, Riverside County,
California ("Lake Elsinore Plaza") and approximately 1.8 acres of undeveloped,
commercially zoned land in Temecula, Riverside County, California (referred to
as Rancon Towne Village). The Lake Elsinore Plaza and the Rancon Towne Village
properties are reflected as land held for sale in the accompanying consolidated
balance sheets.
General Matters
The $300,000 or 11% decrease in land held for sale at June 30, 1999 compared to
December 31, 1998 is due primarily to the January 1999 sale of the Perris
property.
The $242,000 or 17% decrease in prepaid expenses and other assets at June 30,
1999 compared to December 31, 1998 is due primarily to the collection of
approximately $289,000 of December 31, 1998 tenant receivables in the first
quarter of 1999. This decrease in prepaid expenses and other assets was slightly
offset by an increase due to the prepayment of the third quarter investor
relations fees in June 1999.
The $77,000 or 6% increase in deferred financing costs and other fees at June
30, 1999 compared to December 31, 1998 is due to the payment of loan fees
relating to the refinancing of the note payable secured by first deeds of trust
in Circuit City and TGI Friday's.
The $316,000 or 34% decrease in accounts payable and other liabilities at June
30, 1999 compared to December 31, 1998 is due to the payment of December 31,
1998 accounts payable related to tenant improvements in the first half of 1999.
The construction of the tenant improvements was completed in May 1999.
Management believes that the Partnership's cash balance at June 30, 1999,
together with the cash from operations, sales and financing, will be sufficient
Page 13 of 19
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to finance the Partnership's and the properties' continued operations and
development plans, on a short-term basis and for the reasonably foreseeable
future. 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.
Aside from the foregoing and the current plan to potentially sell all of the
Partnership's properties and liquidate the Partnership, the Partnership knows of
no demands, commitments, events or uncertainties which might effect its
liquidity or capital resources in any material respect. In addition, the
Partnership is not subject to any covenants pursuant to its secured debt that
would constrain its ability to obtain additional capital.
RESULTS OF OPERATIONS
Revenues
Rental income decreased $370,000 or 10% and $83,000 or 5% during the six and
three months ended June 30, 1999, compared to the six and three months ended
June 30, 1998, respectively, primarily as a result of: (i) the loss of rental
income due to the June 1998 sale of Shadowridge Woodbend Apartments
("Shadowridge"); and (ii) the decrease in occupancy at Service Retail Center.
This decrease in rental revenue was partially offset by the commencement of
operations of Office Max and Mimi's Cafe and the increased occupancy at Two
Vanderbilt and Carnegie Business Center I.
Occupancy rates at the Partnership's Tri-City properties as of June 30, 1999 and
1998 were as follows:
June 30,
--------------------------------
1999 1998
--------------- ------------
One Vanderbilt 95% 97%
Two Vanderbilt 100% 93%
Service Retail Center 84% 95%
Carnegie Business Center I 78% 72%
Promotional Retail Center 100% 100%
Inland Regional Center 100% 100%
TGI Friday's 100% 100%
Circuit City 100% 100%
Office Max (commenced October 1998) 100% N/A
Mimi's Cafe (commenced January 1999) 100% N/A
As of June 30, 1999, tenants at the 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 through in December 2004; (iv) PetsMart with a lease
through January 2009; (v) Inland Regional Center with a lease through July 2009;
(vi) Circuit City with a lease through January 2018; and (vii) Office Max with a
lease through October 2013. These seven tenants, in the aggregate, occupied
approximately 269,000 square feet of the 452,000 total leasable square feet at
Tri-City and accounted for approximately 56% of the total rental income of the
Partnership during the second quarter of 1999.
Page 14 of 19
<PAGE>
The 7% increase in occupancy from June 30, 1998 to June 30, 1999 at Two
Vanderbilt is attributed to the expansion of the leased space of an existing
tenant.
The 11% decrease in occupancy from June 30, 1998 to June 30, 1999 at Service
Retail Center resulted from three tenants, occupying 3,314 square feet of space
in the aggregate, vacating their space upon their respective lease terminations.
Management has executed a lease expansion for 1,103 square feet and has renewed
one tenant occupying 3,001 square feet to a five year lease. Management is
currently negotiating lease terms with a prospective tenant for approximately
1,100 square feet of space and is negotiating lease renewals for three tenants
occupying a total of 2,140 square feet of space.
The 6% increase in occupancy from June 30, 1998 to June 30, 1999 at Carnegie
Business Center I is attributed to the leasing of 4,122 square feet of space to
two new tenants. Management is currently negotiating a lease expansion with an
existing tenant for an additional 3,985 square feet of space.
The construction of Office Max and Mimi's Cafe, 23,500 and 6,455 square feet
build-to-suit retail buildings, was completed during 1998, with lease
commencements in October, 1998 and January, 1999, respectively.
Interest income increased $87,000 or 378% and $21,000 or 162% during the six and
three months ended June 30, 1999, compared to the six and three months ended
June 30, 1998, respectively, as a result of the increase in cash reserves
resulting from the sale of Shadowridge.
The gain on sale of rental property of $5,468,000 for the six and three months
ended June 30, 1998 resulted from the June 1998 sale of Shadowridge.
Expenses
Operating expenses decreased $272,000 or 17% and $101,000 or 14% for the six and
three months ended June 30, 1999, compared to the six and three months ended
June 30, 1998, respectively, due primarily to the June 1998 sale of Shadowridge.
This decrease is partially offset by an increase in property operating expenses
attributable to the commencement of operations of Office Max and Mimi's Cafe.
Interest expense decreased $224,000 or 23% and $90,000 or 19% 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 payoff of the $5,800,000, 7.95% fixed
rate loan secured by Shadowridge.
Depreciation and amortization increased $102,000 or 15% and $60,000 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 primarily to the commencement of
operations of Office Max and Mimi's Cafe.
The loss on sale of real estate of $4,000 for the six months ended June 30, 1999
resulted from the sale of the Perris property. The loss on sale of real estate
of $11,000 for the six months ended June 30, 1998 resulted from the sale of a
Rancon Towne Village parcel.
Expenses associated with undeveloped land decreased $62,000 or 22% and $47,000
or 33% for the six and three months ended June 30, 1999, compared to the six and
Page 15 of 19
<PAGE>
three months ended June 30, 1998, respectively, due to: (i) the receipt of real
estate tax refunds in May 1999; (ii) the reduction of property taxes as a result
of the sale of the Perris property in January 1999; and (iii) the reduction of
expenses upon completion of construction of Office Max and Mimi's Cafe during
the last quarter of 1998.
General and administrative expenses decreased $127,000 or 20% and $82,000 or 24%
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 a decrease in asset
management fees resulting from the 1998 sale of Shadowridge.
The proposed dissolution costs of $154,000 and $22,000 for the six months ended
June 30, 1999 and 1998, respectively, represent charges for work performed and
expenses incurred while exploring the possibilities of having the Partnership
sell all of its properties and liquidate thereafter, and costs relating to the
preparation of preliminary proxy materials in the quarter ended June 30, 1999.
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 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
Page 16 of 19
<PAGE>
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 17 of 19
<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
Incorporated herein by reference to Note 1 of the Notes to
Consolidated Financial Statements.
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):
None.
Page 18 of 19
<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 REALTY FUND IV,
a California limited partnership
By Rancon Financial Corporation
a California corporation,
its General Partner
Date: August 13, 1999 By: /s/ DANIEL L. STEPHENSON
--------------------------
Daniel L. Stephenson, President
Date: August 13, 1999 By: /s/ DANIEL L. STEPHENSON
--------------------------
Daniel L. Stephenson, General Partner
Page 19 of 19
<PAGE>
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<ARTICLE> 5
<CIK> 0000743870
<NAME> Rancon Realty Fund IV
<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> 4,866
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<ALLOWANCES> 0
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<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 28,295
<TOTAL-LIABILITY-AND-EQUITY> 44,830
<SALES> 0
<TOTAL-REVENUES> 3,434
<CGS> 0
<TOTAL-COSTS> 1,506
<OTHER-EXPENSES> 1,448
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (279)
<INCOME-TAX> 0
<INCOME-CONTINUING> (279)
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<EPS-BASIC> (3.63)
<EPS-DILUTED> (3.63)
</TABLE>
