FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 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)
September 30, December 31,
1999 1998
(Unaudited) (Audited)
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<S> <C> <C>
Assets
Investments in real estate:
Rental property, net of accumulated depreciation of
$13,786 and $12,723 at September 30, 1999 and
December 31, 1998, respectively $ 33,055 $ 33,781
Land held for development 1,587 1,575
Land held for sale 2,481 2,741
------------- --------------
Total real estate investments 37,123 38,097
------------- --------------
Cash and cash equivalents 4,646 4,297
Restricted cash 369 369
Deferred financing costs and other fees, net of
accumulated amortization of $1,413 and $1,195
at September 30, 1999 and December 31, 1998,
respectively 1,325 1,312
Prepaid expenses and other assets 1,224 1,434
------------- --------------
Total assets $ 44,687 $ 45,509
============= ==============
Liabilities and Partners' Equity (Deficit)
Liabilities:
Notes payable $ 15,880 $ 16,005
Accounts payable and other liabilities 850 929
------------- --------------
Total liabilities 16,730 16,934
------------- --------------
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 September 30, 1999 and December
31, 1998, respectively 28,615 29,233
-------------- --------------
Total partners' equity 27,957 28,575
------------- --------------
Total liabilities and partners' equity $ 44,687 $ 45,509
============= ==============
See accompanying notes to financial statements.
</TABLE>
Page 2 of 21
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<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 Nine months ended
September 30, September 30,
-------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 1,619 $ 1,490 $ 4,943 $ 5,184
Interest and other income 40 129 150 152
Gain on sale of rental property -- -- -- 5,468
---------- ---------- ----------- ----------
Total revenues 1,659 1,619 5,093 10,804
---------- ---------- ----------- ----------
Expenses:
Operating 702 605 1,986 2,161
Interest expense 383 389 1,142 1,372
Depreciation and amortization 403 350 1,198 1,043
Loss on sales of real estate -- -- 4 11
Expenses associated with
undeveloped land 121 115 339 395
General and administrative 250 313 749 939
Proposed dissolution costs 138 26 292 48
---------- ---------- ----------- ----------
Total expenses 1,997 1,798 5,710 5,969
---------- ---------- ----------- ----------
Net income (loss) $ (338) $ (179) $ (617) $ 4,835
========== ========== =========== ==========
Net income (loss) per limited
partnership unit $ (4.40) $ (2.33) $ (8.03) $ 59.36
========== ========== =========== ==========
Weighted average number of limited
partnership units outstanding
during each period used to compute
net income (loss) per limited
partnership unit
76,765 76,784 76,765 76,849
========== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
Page 3 of 21
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statement of Partners' Equity (Deficit)
For the nine months ended September 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 -- (617) (617)
-------- ---------- -----------
Balance at September 30, 1999 $ (658) $ 28,615 $ 27,957
======== ========== ===========
See accompanying notes to financial statements.
Page 4 of 21
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<CAPTION>
RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine months ended
September 30,
----------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (617) $ 4,835
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 1,198 1,043
Amortization of loan fees, included in
interest expense 82 76
Changes in certain assets and liabilities:
Deferred financing costs and other fees (230) (173)
Prepaid expenses and other assets 210 (95)
Accounts payable and other liabilities (79) 290
Interest payable -- (2)
------------- ------------
Net cash provided by operating activities 568 517
------------- ------------
Cash flows from investing activities:
Net proceeds from sales of land 296 15,847
Net additions to real estate investments (389) (1,128)
------------- ------------
Net cash provided by (used for) investing activities (93) 14,719
------------- ------------
Cash flows from financing activities:
Notes payable principal payments (125) (5,960)
Retirement of limited partnership units (1) (95)
------------- ------------
Net cash used for financing activities (126) (6,055)
------------- ------------
Net increase in cash and cash equivalents 349 9,181
Cash and cash equivalents at beginning of period 4,297 788
------------- ------------
Cash and cash equivalents at end of period $ 4,646 $ 9,969
============= ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,060 $ 1,298
============= ============
</TABLE>
See accompanying notes to financial statements.
Page 5 of 21
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
September 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 September 30, 1999 and December 31, 1998, and the related unaudited
consolidated statements of operations and cash flows for the nine months ended
September 30, 1999 and 1998.
Asset Sale and Dissolution Proposal - A Consent Solicitation Statement (the
"Solicitation") was sent to the holders of limited partnership units
("Unitholders" or "Limited Partners") on July 6, 1999. The Solicitation
(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), discussed the General Partner's proposal to sell
all of the Partnership's assets ("Asset Sale") and liquidate the Partnership
thereafter ("Dissolution Proposal"). 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"). 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.
As of August 25, 1999, the expiration of the voting period, 76,765 limited
partnership units ("Units") were outstanding. Of the total Units outstanding,
61,429 Unitholders, or 80%, have voted ("Units Voted") and no response was
received from the remaining 20%. A final tabulation of the results of the
Solicitation was made on August 25, 1999, with 54,010 Unitholders, or 88%, of
the Units Voted in favor, 5,783 Unitholders, or 9%, against and 1,636
Unitholders, or 3%, abstaining.
Subsequent to obtaining the consent of the majority of the Unitholders, the
General Partner grouped the Tri-City Properties into two or more packages of
properties (such as separate packages of retail properties, office properties
and unimproved land) and included properties in the Tri-City Corporate Centre
which are owned by Rancon Realty Fund V ("Fund V"), a partnership also sponsored
by the General Partner. Bidders for any package of properties containing
Tri-City Properties and Fund V properties will be required to specify how their
overall bid is allocated among the individual properties in the package, and the
proceeds and expenses from the sales of any such package will be apportioned
between the Partnership and Fund V based upon such allocation. The General
Partner hired an independent real estate firm to market the properties and to
Page 6 of 21
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
prepare marketing materials and informational brochures. The informational
brochures were presented to a number of prospective buyers and as of the end of
September 1999, the General Partner had received 39 signed confidentiality
agreements requesting offering memorandums. The General Partner is currently
assessing all offers on the properties in an effort to achieve the highest
possible sales price and return value for the properties. The General Partner
currently intends to close the bidding process by the end of November 1999. The
Remaining Properties will not be sold with the Tri-City Properties, but will be
sold separately in a single or multiple sales.
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
Tri-City 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"). GLB is not an affiliate of the Partnership.
Pursuant to the GLB Matching Right and the right of first refusal, the General
Partner is required to give prompt written notice to GLB of the price and other
terms and conditions of any offer, received from an unaffiliated third party,
the General Partner is willing to accept to sell all or a portion of the
Partnership's properties. GLB has ten days after receipt of the Partnership's
written notice to accept or reject the purchase price and other terms and
conditions of the sale. If GLB exercises its matching right and agrees to
purchase all or a portion of the Partnership's properties at the specified price
and on the other terms and conditions, the Partnership and GLB must promptly
execute a purchase agreement, which is to contain a reasonable feasibility study
period for GLB. If, on the other hand, GLB notifies the Partnership that it does
not intend to exercise its matching right or fails to respond within the ten-day
period, then the Partnership has the right to sell all or a portion of the
Partnership's properties to the unaffiliated third party buyer as set forth in
the Partnership's notice to GLB. The GLB Matching Right applies to the Tri-City
Properties and the Remaining Properties.
Prior to the completion of the sale of all of the Partnership's properties and
the receipt in cash of the proceeds thereof, the General Partner currently
intends, 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 the
sale of the properties. The General Partner will not receive any of the net
proceeds from the sale of the properties or upon dissolution of the Partnership
with respect to its general partnership interests. The General Partner also
intends to distribute in November 1999 the net proceeds from the January 1999
sale of the Perris land. See Note 3 below for further details.
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.
Page 7 of 21
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
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
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.
Page 8 of 21
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
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 $6,220,000 at September 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 to the current year presentation.
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.
Page 9 of 21
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
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,
pending distribution to the Limited Partners in November 1999.
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 September 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 September 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 unaudited consolidated financial statements;
however, the amount will be recognized prior to recording any gain on the sale
of the related land.
Note 5. NOTES PAYABLE
Notes payable as of September 30, 1999 and December 31, 1998 were as follows (in
thousands):
1999 1998
------- -------
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. $ 6,220 $ 6,290
Page 10 of 21
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
1999 1998
------- -------
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. 2,402 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 payments of $20 of principal
and interest are due until January 1, 2005, at which time
the unpaid principal and interest are payable in full. 2,258 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 $15,880 $16,005
======= =======
Note 6. PROPOSED DISSOLUTION COSTS
Costs totaling $292,000 and $48,000, related to the Solicitation and the Asset
Sale and Dissolution Proposal (as defined in Note 1), have been incurred and are
reflected in the accompanying unaudited consolidated statements of operations
for the nine months ended September 30, 1999 and 1998, respectively. These costs
include expenses incurred for the preparation of the preliminary proxy materials
and charges for work performed by independent appraisers and other consultants.
Note 7. SUBSEQUENT EVENTS
On October 6, 1999, the Partnership entered into a contract with an unaffiliated
third party buyer for the sale of one of the two parcels of unimproved land in
Temecula, California (referred to as Rancon Towne Village) for $348,589. The
sale is expected to close in December 1999. The sale of a Rancon Towne Village
parcel is subject to the completion of due diligence, property inspections and
other contingencies. Thus, there is no assurance that the sale will be
completed.
On October 13, 1999, the Partnership executed a letter of intent with an
unaffiliated third party buyer for the sale of the 24.8 acres of unimproved land
in Lake Elsinore, California (referred to as Lake Elsinore Plaza) for
$2,450,000. The sale is expected to close in December 1999. The sale of the Lake
Elsinore Plaza is subject to the completion of due diligence, property
inspections and other contingencies. Thus, there is no assurance that the sale
will be completed.
Page 11 of 21
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion addresses the Partnership's financial condition at
September 30, 1999 and its result of operations for the nine months ended
September 30, 1999 and 1998. This information should be read in conjunction with
the Partnership's December 31, 1998 audited consolidated financial statements,
notes thereto and other information contained elsewhere in this report.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Partnership had cash of $4,646,000 (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
$37,123,000 at September 30, 1999, which includes $33,055,000 in rental
properties, $1,587,000 of land held for development and $2,481,000 of land held
for sale. The Partnership's primary liabilities include notes payable, totaling
approximately $15,880,000 at September 30, 1999, which consist of four secured
loans encumbering properties with an aggregate net book value of approximately
$26,027,000 and maturity dates of April 30, 2000 and May 1, 2006. Three of the
Partnership's notes payable require monthly principal and interest payments, and
bear interest rates of 8.744% and 9%, while one note payable requires monthly
interest-only payments and bears interest at 1% over the lender's Prime Rate.
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 and interest income from invested cash balances. Cash
generated from property sales is generally added to the Partnership's cash
reserves, pending use in the development of properties or distribution to the
partners.
Management believes that the Partnership's cash balance at September 30, 1999,
together with the cash from operations, sales and financing, will be sufficient
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 current plan to potentially sell all of the Partnership's
properties and liquidate the Partnership (as discussed below), 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.
Operating Activities
During the nine months ended September 30, 1999, the Partnership's cash provided
by operating activities totaled $568,000.
The $210,000, or 15%, decrease in prepaid expenses and other assets at September
30, 1999, compared to December 31, 1998, is due primarily to the collection of
Page 12 of 21
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approximately $289,000 of December 31, 1998 tenant receivables in the first
quarter of 1999. This decrease was slightly offset by an increase due to the
prepayment of the fourth quarter investor relation fees and the annual
earthquake insurance premiums in September 1999.
The $79,000, or 9%, decrease in accounts payable and other liabilities at
September 30, 1999, compared to December 31, 1998, is due primarily to the
payment of December 31, 1998 accounts payable related to tenant improvements
during the first half of 1999. The construction of the tenant improvements was
completed in May 1999. This decrease in accounts payable was partially offset by
an increase due to property tax accruals for the current year. Property taxes
are paid in April and December of each year.
Investing Activities
During the nine months ended September 30, 1999, the Partnership's cash used for
investing activities totaled $93,000, which includes $296,000 of net cash
proceeds from sale of land and $389,000 cash used for additions to real estate.
The Partnership received net cash proceeds of $296,000 from the January 1999
sale of approximately 17 acres of land, referred to as Perris land, for
$334,800. The Partnership added the sale proceeds to its operating cash
reserves, pending distribution to the Limited Partners in November 1999. The
$260,000, or 9%, decrease in land held for sale at September 30, 1999, compared
to December 31, 1998, is due primarily to this sale.
The Partnership invested, by way of improvements, approximately $337,000 in
rental properties, $12,000 in land held for development and $40,000 in land held
for sale.
Financing Activities
During the nine months ended September 30, 1999, the Partnership made a total of
$125,000 in principal payments on its four notes payable.
During the nine months ended September 30, 1999, a total of 2 limited
partnership units ("Units") were redeemed for approximately $1,000.
Asset Sale and Dissolution Proposal
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, a Consent Solicitation
Statement (the "Solicitation") was sent to the holders of limited partnership
units ("Unitholders") on July 6, 1999 . The Solicitation (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), discussed the General Partner's proposal to sell all of the
Partnership's real estate assets ("Asset Sale") and liquidate the Partnership
thereafter ("Dissolution Proposal"). 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"). 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
Page 13 of 21
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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.
As of August 25, 1999, the expiration of the voting period, 76,765 Units were
outstanding. Of the total Units outstanding, 61,429 Unitholders, or 80%, have
voted ("Units Voted") and no response was received from the remaining 20%. A
final tabulation of the results of the Solicitation was made on August 25, 1999,
with 54,010 Unitholders, or 88%, of the Units Voted in favor, 5,783 Unitholders,
or 9%, against and 1,636 Unitholders, or 3%, abstaining.
Subsequent to obtaining the consent of the majority of the Unitholders, the
General Partner grouped the Tri-City Properties into two or more packages of
properties (such as separate packages of retail properties, office properties
and unimproved land) and included properties in the Tri-City Corporate Centre
which are owned by Rancon Realty Fund V ("Fund V"), a partnership also sponsored
by the General Partner. Bidders for any package of properties containing
Tri-City Properties and Fund V properties will be required to specify how their
overall bid is allocated among the individual properties in the package, and the
proceeds and expenses from the sales of any such package will be apportioned
between the Partnership and Fund V based upon such allocation. The General
Partner hired an independent real estate firm to market the properties and to
prepare marketing materials and informational brochures. The informational
brochures were presented to a number of prospective buyers and as of the end of
September 1999, the General Partner had received 39 signed confidentiality
agreements requesting offering memorandums. The General Partner is currently
assessing all offers on the properties in an effort to achieve the highest
possible sales price and return value for the properties. The General Partner
currently intends to close the bidding process by the end of November 1999. The
Remaining Properties will not be sold with the Tri-City Properties, but will be
sold in a single or multiple sales.
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
Tri-City 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"). GLB is not an affiliate of the Partnership.
Pursuant to the GLB Matching Right and the right of first refusal, the General
Partner is required to give prompt written notice to GLB of the price and other
terms and conditions of any offer, received from an unaffiliated third party,
the General Partner is willing to accept to sell all or a portion of the
Partnership's properties. GLB has ten days after receipt of the Partnership's
written notice to accept or reject the purchase price and other terms and
conditions of the sale. If GLB exercises its matching right and agrees to
purchase all or a portion of the Partnership's properties at the specified price
and on the other terms and conditions, the Partnership and GLB must promptly
execute a purchase agreement, which is to contain a reasonable feasibility study
period for GLB. If, on the other hand, GLB notifies the Partnership that it does
not intend to exercise its matching right or fails to respond within the ten-day
period, then the Partnership has the right to sell all or a portion of the
Partnership's properties to the unaffiliated third party buyer as set forth in
the Partnership's notice to GLB. The GLB Matching Right applies to the Tri-City
Properties and the Remaining Properties.
Prior to the completion of the sale of all of the Partnership's properties and
the receipt in cash of the proceeds thereof, the General Partner currently
Page 14 of 21
<PAGE>
intends, 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 the
sale of the properties. The General Partner will not receive any of the net
proceeds from the sale of the properties or upon dissolution of the Partnership
with respect to its general partnership interests. The General Partner also
intends to distribute in November 1999 the net proceeds from the January 1999
sale of the Perris land.
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 consummated, 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 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.
Tri-City Properties
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. As a result of Inland Empire's
increasing population and job growth, Tri-City's office space and retail space
market continues to improve and attract new tenants. Management believes that
Tri-City's industrial space market should improve due to the demand for space
for both warehouse and distribution facilities. Management also believes that
the overall real estate market in the Inland Empire will remain strong through
1999, with conditions beyond such time being less predictable.
Page 15 of 21
<PAGE>
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 the remaining two parcels (approximately
1.8 acres) of undeveloped, commercially zoned land in Temecula, Riverside
County, California ("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.
On October 6, 1999, the Partnership entered into a contract with an unaffiliated
third party buyer for the sale of one of the two Rancon Towne Village parcels
for $348,589. The sale is expected to close in December 1999. Additionally, on
October 13, 1999, the Partnership executed a letter of intent with an
unaffiliated third party buyer for the sale of Lake Elsinore Plaza for
$2,600,000. The sale is expected to close in February 2000. The sale of a Rancon
Towne Village parcel and the Lake Elsinore Plaza is subject to the completion of
due diligence, property inspections and other contingencies. Thus, there is no
assurance that the sales will be completed.
RESULTS OF OPERATIONS
Revenues
Rental income decreased $241,000, or 5%, during the nine months ended September
30, 1999, compared to the nine months ended September 30, 1998, primarily as a
result of the loss of rental income due to the June 1998 sale of Shadowridge
Woodbend Apartments ("Shadowridge"). This decrease in rental revenue was
partially offset by an increase due to the commencement of operations of Office
Max and Mimi's Cafe in October 1998 and January 1999, respectively, and the
overall increase in occupancy at the Tri-City Properties. Rental income
increased $129,000, or 9%, during the three months ended September 30, 1999,
compared to the three months ended September 30, 1998, primarily due to the
commencement of operations at Office Max and Mimi's Cafe and the overall
increase in occupancy at the Tri-City Properties.
Page 16 of 21
<PAGE>
Occupancy rates at the Partnership's Tri-City Properties as of September 30,
1999 and 1998 were as follows:
September 30,
-----------------
1999 1998
------- -------
One Vanderbilt 88% 91%
Two Vanderbilt 100% 93%
Service Retail Center 100% 95%
Carnegie Business Center I 77% 72%
Promotional Retail Center 100% 98%
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 September 30, 1999, tenants at the Tri-City Properties 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 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 third quarter of 1999.
The 7 percentage point increase in occupancy from September 30, 1998 to
September 30, 1999 at Two Vanderbilt is attributed to the expansion of an
existing tenant's leased space.
The 5 percentage point increase in occupancy from September 30, 1998 to
September 30, 1999 at Service Retail Center is attributed to the leasing of
2,574 square feet of previously vacant space to three new tenants.
The 5 percentage point increase in occupancy from September 30, 1998 to
September 30, 1999 at Carnegie Business Center I is attributed to the leasing of
4,122 square feet of previously vacant space to two new tenants. Management is
currently negotiating lease expansion with two existing tenants for a total of
6,049 square feet of space. Management is also negotiating lease terms with a
prospective tenant for approximately 9,700 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 and other income decreased $2,000, or 1%, and $89,000, or 69%, during
the nine and three months ended September 30, 1999, compared to the nine and
three months ended September 30, 1998, respectively, due to a lower average cash
balance in 1999 as a result of the $4,000,000 distribution of cash from the
Shadowridge sale in the fourth quarter of 1998.
The gain on sale of rental property of $5,468,000 for the nine months ended
September 30, 1998 resulted from the June 1998 sale of Shadowridge.
Page 17 of 21
<PAGE>
Expenses
Operating expenses decreased $175,000, or 8%, for the nine months ended
September 30, 1999, compared to the nine months ended September 30, 1998, due
primarily to the June 1998 sale of Shadowridge. This decrease was partially
offset by an increase in property operating expenses attributable to the
commencement of operations of Office Max and Mimi's Cafe. Operating expenses
increased $97,000, or 16%, for the three months ended September 30, 1999,
compared to the three months ended September 30, 1998, due to the increase in
property operating expenses attributable to the commencement of operations of
Office Max and Mimi's Cafe and the overall increase in occupancy at the Tri-City
Properties.
Interest expense decreased $230,000, or 17%, and $6,000, or 2%, for the nine and
three months ended September 30, 1999, compared to the nine and three months
ended September 30, 1998, respectively, due primarily to the payoff of the
$5,800,000, 7.95% fixed rate loan secured by Shadowridge.
Depreciation and amortization increased $155,000, or 15%, and $53,000, or 15%,
for the nine and three months ended September 30, 1999, compared to the nine and
three months ended September 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 nine months ended September
30, 1999 resulted from the sale of the Perris land. The loss on sale of real
estate of $11,000 for the nine months ended September 30, 1998 resulted from the
sale of a Rancon Towne Village parcel.
Expenses associated with undeveloped land decreased $56,000, or 14%, for the
nine months ended September 30, 1999, compared to the nine months ended
September 30, 1998, due to: (i) the reduction of expenses as a result of the
completion of construction of Office Max and Mimi's Cafe during the last quarter
of 1998; and (ii) the elimination of property taxes as a result of the sale of
the Perris land in January 1999. Expenses associated with undeveloped land
increased $6,000, or 5%, for the three months ended September 30, 1999, compared
to the three months ended September 30, 1998, due to the receipt of a real
estate tax refund in September 1998.
General and administrative expenses decreased $190,000, or 20%, and $63,000, or
20%, for the nine and three months ended September 30, 1999, compared to the
nine and three months ended September 30, 1998, respectively, primarily due to a
decrease in asset management fees resulting from the 1998 sale of Shadowridge.
The proposed dissolution costs of $292,000 and $48,000 for the nine months ended
September 30, 1999 and 1998, respectively, represent charges for work performed
and expenses incurred relating to the Solicitation and the Asset Sale and
Dissolution Proposal.
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
Page 18 of 21
<PAGE>
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 have been 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 were 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 completed a testing program during 1999. In addition,
the Partnership has communicated 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 were 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 been
completed and tested. To the best of Glenborough's knowledge, the Partnership
has no Property Systems, the failure of which would have a material effect on
its operations.
Costs of Addressing Year 2000 issues. Given the information known at this time
about systems that are non-compliant, coupled with ongoing, normal course-of
business efforts to upgrade or replace critical systems, as necessary, the
Partnership has not incurred Year 2000 compliance costs that have had 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 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 has developed a contingency plan for all
operations which addresses the most reasonably likely worst case scenario
regarding Year 2000 compliance. Such a plan, however, recognizes material
limitations on the ability to respond to major regional or industrial failures
such as power outages or communications breakdowns.
Page 19 of 21
<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 20 of 21
<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: November 15, 1999 By: /s/ DANIEL L. STEPHENSON
--------------------------
Daniel L. Stephenson, President
Date: November 15, 1999 By: /s/ DANIEL L. STEPHENSON
--------------------------
Daniel L. Stephenson, General Partner
Page 21 of 21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000743870
<NAME> RANCON REALTY FUND IV
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,646
<SECURITIES> 0
<RECEIVABLES> 118
<ALLOWANCES> 0
<INVENTORY> 2,481
<CURRENT-ASSETS> 4,764
<PP&E> 37,123
<DEPRECIATION> 13,786
<TOTAL-ASSETS> 44,687
<CURRENT-LIABILITIES> 850
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 27,957
<TOTAL-LIABILITY-AND-EQUITY> 44,687
<SALES> 0
<TOTAL-REVENUES> 5,093
<CGS> 0
<TOTAL-COSTS> 2,325
<OTHER-EXPENSES> 2,243
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,142
<INCOME-PRETAX> (617)
<INCOME-TAX> 0
<INCOME-CONTINUING> (617)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (617)
<EPS-BASIC> (8.03)
<EPS-DILUTED> (8.03)
</TABLE>
