FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 March 31, 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)
March 31, December 31,
1999 1998
(Unaudited) (Audited)
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Assets
Investments in real estate:
Rental property, net of accumulated depreciation of
$13,069 and $12,723 at March 31, 1999 and December
31, 1998, respectively $ 33,651 $ 33,781
Land held for development 1,579 1,575
Land held for sale 2,441 2,741
------------ ------------
Total real estate investments 37,671 38,097
Cash and cash equivalents 4,365 4,297
Restricted cash 369 369
Deferred financing costs and other fees, net of
accumulated amortization of $1,261 and $1,195
at March 31, 1999 and December 31, 1998, respectively 1,412 1,312
Prepaid expenses and other assets 1,435 1,434
------------ -----------
Total assets $ 45,252 $ 45,509
============ ===========
Liabilities and Partners' Equity (Deficit)
Liabilities:
Notes payable $ 15,965 $ 16,005
Accounts payable and other liabilities 845 929
------------ -----------
Total liabilities 16,810 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 March 31, 1999 and December 31,
1998, respectively 29,100 29,233
------------ -----------
Total partners' equity 28,442 28,575
------------ -----------
Total liabilities and partners' equity $ 45,252 $ 45,509
============ ===========
</TABLE>
See accompanying notes to financial statements.
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statement of Operations
(in thousands, except per unit amounts and units outstanding)
Three months ended
March 31,
---------------------------
1999 1998
----------- -----------
Revenues:
Rental income $ 1,623 $ 1,910
Interest and other income 76 10
----------- -----------
Total revenues 1,699 1,920
----------- -----------
Expenses:
Operating 652 823
Interest expense 374 508
Depreciation and amortization 389 347
Loss on sales of real estate 4 11
Expenses associated with undeveloped land 124 139
General and administrative 243 288
Proposed dissolution costs 45 22
----------- -----------
Total expenses 1,831 2,138
----------- -----------
Net loss $ (132) $ (218)
=========== ===========
Net loss per limited partnership unit $ (1.72) $ (2.83)
=========== ===========
Weighted average number of limited partnership
units outstanding during each period used to
compute net loss per limited partnership unit 76,766 76,940
=========== ===========
See accompanying notes to financial statements.
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statement of Partners' Equity (Deficit)
For the three months ended March 31, 1999
(in thousands)
General Limited
Partners Partners Total
--------- --------- ---------
Balance at December 31, 1998 $ (658) $ 29,233 $ 28,575
Retirement of limited partnership units -- (1) (1)
Net loss -- (132) (132)
--------- --------- ---------
Balance at March 31, 1999 $ (658) $ 29,100 $ 28,442
========= ========= =========
See accompanying notes to financial statements.
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(in thousands)
Three months ended
March 31,
---------------------------
1999 1998
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Cash flows from operating activities:
Net loss $ (132) $ (218)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Loss on sales of real estate 4 11
Depreciation and amortization 389 347
Amortization of loan fees, included in
interest expense 23 28
Changes in certain assets and liabilities:
Accounts and interest receivable -- (75)
Deferred financing costs and other fees (166) (71)
Prepaid expenses and other assets (1) (51)
Accounts payable and other liabilities (84) 263
Interest payable -- 17
---------- ----------
Net cash provided by operating activities 33 251
---------- ----------
Cash flows from investing activities:
Net proceeds from sales of land 296 241
Net additions to real estate investments (220) (174)
---------- ----------
Net cash provided by investing activities 76 67
---------- ----------
Cash flows from financing activities:
Notes payable principal payments (40) (63)
Retirement of limited partnership units (1) (86)
---------- ----------
Net cash used for financing activities (41) (149)
---------- ----------
Net increase in cash and cash equivalents 68 169
Cash and cash equivalents at beginning of period 4,297 788
---------- ----------
Cash and cash equivalents at end of period $ 4,365 $ 957
========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 352 $ 463
========== ==========
</TABLE>
See accompanying notes to financial statements.
Page 5 of 17
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
March 31, 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 financial statements contain all adjustments (consisting of only
normal accruals) necessary to present fairly the financial position of Rancon
Realty Fund IV, A California Limited Partnership (the "Partnership") as of March
31, 1999 and December 31, 1998, and the related statements of operations and
cash flows for the three months ended March 31, 1999 and 1998.
Proposed Asset Sale and Dissolution - The General Partner currently plans to
seek the Limited Partners' consent to sell all of the Partnership's remaining
properties and liquidate the Partnership and has filed preliminary consent
solicitation materials with the United States Securities and Exchange Commission
(the "Commission") with the goal of mailing consent solicitation materials to
the Limited Partners in the quarter ending June 30, 1999. Assuming a proposal to
sell all of the Partnership's remaining properties and liquidate the Partnership
is submitted to and approved by the Limited Partners, the General Partner
currently intends to sell all of the Partnership's remaining properties in 1999,
distribute the proceeds and liquidate the Partnership after all of the
properties are sold and the cash proceeds thereof received, which the General
Partner does not expect to occur prior to 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
remaining properties. If the Limited Partners consent to the Partnership selling
all of its remaining properties and then liquidating, the General Partner
currently intends to offer the Partnership's remaining properties for sale by
soliciting bids from various potential purchasers.
If a proposal for the sale of the Partnership's properties and liquidation of
the Partnership is submitted to the Limited Partners, but not approved, the
Partnership currently intends to 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,
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
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 Unitholder'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 Matters - 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% 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 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.
Page 7 of 17
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
The consent of the partners to a proposal to sell all of the Partnership's
remaining 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 $6,268,000 at March 31, 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 Partnership considers all
assets owned by RRF IV, Inc. and RRF IV Tri-City to be owned by the Partnership.
Reclassifications - Certain prior year balances have been reclassified to
conform with the current year presentation.
Note 2. REFERENCE TO 1998 AUDITED FINANCIAL STATEMENTS
These unaudited 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.
Page 8 of 17
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RANCON REALTY FUND IV,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
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 March 31, 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. Since the circumstances under which these commissions would be payable
are limited, the liability has not been recognized in the accompanying financial
statements; however, the amount will be recorded when and if it becomes payable.
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 March 31, 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 financial statements; however, the amount will
be recognized prior to recording any gain on the sale of the related land.
Page 9 of 17
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Partnership had cash of $4,365,000 (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 $37,671,000 at
March 31, 1999, which includes $33,651,000 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 Item 1, the General Partner currently plans to seek the Limited
Partners' consent to sell all of the Partnership's remaining properties and
liquidate the Partnership and has filed preliminary consent solicitation
materials with the United States Securities and Exchange Commission (the
"Commission") with the goal of mailing consent solicitation materials to the
Limited Partners in the quarter ending June 30, 1999. Assuming a proposal to
sell all of the Partnership's remaining properties and liquidate the Partnership
is submitted to and approved by the Limited Partners, the General Partner
currently intends to sell all of the Partnership's remaining properties in 1999,
distribute the proceeds and liquidate the Partnership after all of the
properties are sold and the cash proceeds thereof received, which the General
Partner does not expect to occur prior to 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
remaining properties. If the Limited Partners consent to the Partnership selling
all of its remaining properties and then liquidating, the General Partner
currently intends to offer the Partnership's remaining properties for sale by
soliciting bids from various potential purchasers.
If a proposal for the sale of the Partnership's properties and liquidation of
the Partnership is submitted to the Limited Partners, but not approved, the
Partnership currently intends to 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.
The discussion above contains forward-looking statements regarding the
Partnership's plans, goals and expectations, including statements regarding the
Partnership's estimate of the timing of the sale of the Partnership's remaining
properties, the distribution of proceeds and the liquidation of the Partnership.
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. The General
Partners' 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 regulatory approval will be obtained, if and when consent
solicitation materials will be mailed to Limited Partners, that a proposal for
the sale of all of the Partnership's remaining properties and liquidation of the
Partnership will be approved, 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 remaining properties, the distribution of proceeds, and the
liquidation of the Partnership are subject to various and significant
uncertainties, many of which
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are beyond the Partnership's control and which could delay any sale of the
Partnership's remaining properties, liquidation of the Partnership, and
distribution of proceeds significantly beyond the time periods estimated above.
Among such uncertainties are the date when any consent solicitation materials
are mailed to the Limited Partners, 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 consist 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. The Partnership's Tri City "Class
A" office buildings such as One Vanderbilt and Two Vanderbilt experienced strong
leasing activity over the past two quarters. Tri City's retail space continued
to experience strong leasing activity during the first quarter ended March 31,
1999 even though the retail sector in general has been adversely affected by the
presence of outlet retailers. The market for industrial space 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 remains strong through 1999, with conditions beyond such time
being less predictable.
Tri-City
The Partnership currently owns the following ten properties in Tri-City
Corporate Center:
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
The Partnership also owns approximately 23 acres of unimproved land in the
Tri-City area.
Lake Elsinore Property
The Partnership owns approximately 24.8 acres of undeveloped, commercially zoned
land in Lake Elsinore, Riverside County, California. The Lake Elsinore property
is reflected as land held for sale in the accompanying consolidated balance
sheets.
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Perris
On January 15, 1999, the Partnership sold approximately 17 acres of land located
in Perris, Riverside County, California, to an unaffiliated third party for
$334,800. The Partnership realized a $4,000 loss on the sale and $296,000 of net
sales proceeds, which were added to cash reserves.
Temecula Property
The Partnership owns two parcels of undeveloped, commercially zoned land in
Temecula, Riverside County, California (referred to as Rancon Towne Village),
and is 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 March 31, 1999 compared to
December 31, 1998 was due to the sale of the Perris property.
The $100,000 or 8% increase in deferred financing costs and other fees at March
31, 1999 compared to December 31, 1998 is due to the payment of lease
commissions relating to new tenants at One Vanderbilt and the new leases for
Office Max and Mimi's Cafe.
Management believes that the Partnership's cash balance at March 31, 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 foregoing and the current plan to potentially sell all of the
Partnership's remaining 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 $287,000 or 15% for the three months ended March 31,
1999 compared to the three months ended March 31, 1998, 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 One Vanderbilt, Two Vanderbilt and Carnegie Business Center I.
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Occupancy rates at the Partnership's Tri-City properties as of March 31, 1999
and 1998 were as follows:
March 31,
-------------------------------
1999 1998
--------------- -----------
One Vanderbilt 91% 75%
Two Vanderbilt 100% 93%
Service Retail Center 84% 100%
Carnegie Business Center I 78% 69%
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 March 31, 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 which expires 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 57% of the total rental income of the
Partnership during the first quarter of 1999.
The sixteen percentage point increase in occupancy from March 31, 1998 to March
31, 1999 at One Vanderbilt is attributed to the expansion of the leased space of
two existing tenants.
The seven percentage point increase in occupancy from March 31, 1998 to March
31, 1999 at Two Vanderbilt is attributed to the expansion of the leased space of
an existing tenant.
The sixteen percentage point decrease in occupancy from March 31, 1998 to March
31, 1999 at Service Retail Center is a result of 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, with construction to commence in May 1999. Management is
currently negotiating lease terms with a prospective tenant for approximately
1,100 square feet of space, and has been marketing other vacant space to
potential tenants.
The nine percentage point increase in occupancy from March 31, 1998 to March 31,
1999 at Carnegie Business Center is attributed to leasing of 5,730 square feet
of space to three new tenants.
The construction of Office Max and Mimi's Cafe, 23,500 and 6,455 square feet
build-to-suit retail buildings, were completed during 1998, with lease
commencements in October, 1998 and January, 1999, respectively.
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Interest income increased $66,000 for the three months ended March 31, 1999
compared to the three months ended March 31, 1998 as a result of the increase in
cash reserves resulting from the sale of Shadowridge.
Expenses
Operating expenses decreased $171,000 or 21% for the three months ended March
31, 1999, compared to the three months ended March 31, 1998 primarily due to the
sale of Shadowridge. This increase 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 $134,000 or 26% for the three months ended March 31,
1999 compared to the three months ended March 31, 1998 due to the payoff of the
$5,800,000, 7.95% fixed rate loan secured by Shadowridge.
Depreciation and amortization increased $42,000 or 12% for the three months
ended March 31, 1999 compared to the three months ended March 31, 1998 due
primarily to the commencement of operations of Office Max and Mimi's Cafe and
depreciation of additions to rental properties.
The loss on sale of real estate of $4,000 for the three months ended March 31,
1999 resulted from the sale of Perris property. The loss on sale of real estate
of $11,000 for the three months ended March 31, 1998 resulted from the sale of a
Rancon Towne Village parcel.
Expenses associated with undeveloped land decreased $15,000 or 11% for the three
months ended March 31, 1999 compared to the three months ended March 31, 1998
due to: (i) the reduction of property taxes as a result of the sale of the
Perris property in January 1999; and (ii) 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 $45,000 or 16% for the three
months ended March 31, 1999 compared to the three months ended March 31, 1998
primarily due to a decrease in asset management fees resulting from the 1998
sale of Shadowridge.
The proposed dissolution costs of $45,000 and $22,000 for the three months ended
March 31, 1999 and 1998, respectively, represent charges for work performed and
expenses incurred while exploring the possibilities of having the Partnership
sell of all of its properties and then liquidate, and preparation of preliminary
proxy materials in the quarter ended March 31, 1999. See Item 1 of Part I for
further details.
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
Page 14 of 17
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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
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 15 of 17
<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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
On March 31, 1999, the Partnership filed Amendment No. 1 on Form
8-K/A relating to its Current Report on Form 8-K dated July 6,
1998 and filed with the Commission on July 9, 1998 relating to
the sale of the Shadowridge Woodbend Apartments. The Form
8-K/A: (i) amends Item 7 of the Form 8-K to incorporate notes
to the pro forma financial statements contained in the Form
8-K and amend certain pro forma adjustments; and (ii) restates
Items 2 and 7 of the Form 8-K in their entirety.
Page 16 of 17
<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: May 12, 1999 By: /s/ DANIEL L. STEPHENSON
--------------------------
Daniel L. Stephenson,
President
Date: May 12, 1999 By: /s/ DANIEL L. STEPHENSON
--------------------------
Daniel L. Stephenson,
General Partner
Page 17 of 17
<PAGE>
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