FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-16467
RANCON REALTY FUND V,
A CALIFORNIA LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
California 33-0098488
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 South El Camino Real, Suite 1100
San Mateo, California 94402-1708
(Address of principal (Zip Code)
executive offices)
(650) 343-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Total number of units outstanding as of June 30, 1999: 96,442
Page 1 of 19
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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RANCON REALTY FUND V,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Balance Sheets
(in thousands, except unit amounts)
June 30, December 31,
1999 1998
(Unaudited) (Audited)
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Assets
Investments in real estate:
Rental property, net of accumulated depreciation
of $17,410 and $16,666 at June 30, 1999 and
December 31, 1998, respectively $ 28,675 $ 28,572
Rental property held for sale, net -- 3,970
Land held for development 2,704 2,702
Land held for sale -- 597
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Total real estate investments 31,379 35,841
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Cash and cash equivalents 10,500 3,073
Pledged cash -- 353
Accounts receivable 1,239 1,239
Notes receivable 6,190 --
Deferred financing costs and other fees, net of
accumulated amortization of $2,168 and $2,259
at June 30, 1999 and December 31, 1998, respectively 959 998
Prepaid expenses and other assets 615 6,121
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Total assets $ 50,882 $ 47,625
============= =============
Liabilities and Partners' Equity (Deficit)
Liabilities:
Notes payable $ 13,413 $ 13,508
Accounts payable and other liabilities 282 230
Deferred income 3,717 --
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Total liabilities 17,412 13,738
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Commitments and contingent liabilities (see Note 4) -- --
Partners' Equity (Deficit):
General partners (975) (971)
Limited partners, 96,442 and 96,444 limited
partnership units outstanding at June 30, 1999
and December 31, 1998, respectively 34,445 34,858
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Total partners' equity 33,470 33,887
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Total liabilities and partners' equity $ 50,882 $ 47,625
============= =============
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See accompanying notes to financial statements.
Page 2 of 19
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RANCON REALTY FUND V,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Operations
(in thousands, except per unit amounts and units outstanding)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------------------------- ---------------------------
1999 1998 1999 1998
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Revenues:
Rental income $ 1,486 $ 1,578 $ 3,064 $ 3,235
Interest and other income 282 82 487 179
---------- ---------- ----------- ----------
Total revenues 1,768 1,660 3,551 3,414
---------- ---------- ----------- ----------
Expenses:
Operating 757 784 1,553 1,533
Interest expense 317 321 635 643
Depreciation and amortization 444 424 868 908
Loss on sale of real estate -- -- 6 --
Expenses associated with
undeveloped land 31 159 148 315
General and administrative 304 348 603 645
Proposed dissolution costs 115 -- 154 22
---------- ---------- ----------- ----------
Total expenses 1,968 2,036 3,967 4,066
---------- ---------- ----------- ----------
Net loss $ (200) $ (376) $ (416) $ (652)
========== ========== =========== ==========
Net loss per limited partnership unit $ (2.05) $ (3.85) $ (4.27) $ (6.67)
========== ========== =========== ==========
Weighted average number of limited
partnership units outstanding during
each period used to compute net loss
per limited partnership unit 96,442 96,559 96,442 96,635
========== ========== =========== ==========
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See accompanying notes to financial statements.
Page 3 of 19
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RANCON REALTY FUND V,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statement of Partners' Equity (Deficit)
For the six months ended June 30, 1999
(in thousands)
(Unaudited)
General Limited
Partners Partners Total
-------- ---------- ----------
Balance at December 31, 1998 $ (971) $ 34,858 $ 33,887
Retirement of limited partnership units -- (1) (1)
Net loss (4) (412) (416)
-------- --------- ----------
Balance at June 30, 1999 $ (975) $ 34,445 $ 33,470
======== ========== ==========
See accompanying notes to financial statements.
Page 4 of 19
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RANCON REALTY FUND V,
A CALIFORNIA LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six months ended
June 30,
------------------------------
1999 1998
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Cash flows from operating activities:
Net loss $ (416) $ (652)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Net loss on sale of real estate 6 --
Depreciation and amortization 868 908
Amortization of loan fees, included in
interest expense 27 27
Changes in certain assets and liabilities:
Accounts receivable -- 39
Notes receivable -- 22
Deferred financing costs and other fees (112) (60)
Prepaid expenses and other assets 5,506 (97)
Accounts payable and other liabilities 52 (309)
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Net cash provided by (used for) operating activities 5,931 (122)
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Cash flows from investing activities:
Net proceeds from sales of land 2,088 --
Additions to real estate investments (849) --
Funds released from pledged cash 353 (89)
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Net cash provided by (used for) investing activities 1,592 (89)
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Cash flows from financing activities:
Notes payable principal payments (95) (86)
Retirement of limited partnership units (1) (86)
-------------- ------------
Net cash used for financing activities (96) (172)
-------------- ------------
Net increase (decrease) in cash and cash equivalents 7,427 (383)
Cash and cash equivalents at beginning of period 3,073 4,361
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Cash and cash equivalents at end of period $ 10,500 $ 3,978
============= ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 609 $ 617
============= ============
</TABLE>
See accompanying notes to financial statements.
Page 5 of 19
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RANCON REALTY FUND V,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
Note 1. THE PARTNERSHIP AND ITS SIGNIFICANT ACCOUNTING POLICIES
In the opinion of Rancon Financial Corporation ("RFC") and Daniel Lee Stephenson
(the "Sponsors" or "General Partner") and Glenborough Corporation, the
Partnership's asset and property manager ("Glenborough"), the accompanying
unaudited consolidated financial statements contain all adjustments (consisting
of only normal accruals) necessary to present fairly the financial position of
Rancon Realty Fund V, A California Limited Partnership (the "Partnership") as of
June 30, 1999 and December 31, 1998, and the related consolidated statements of
operations and cash flows for the six months ended June 30, 1999 and 1998.
Asset Sale and Dissolution Proposal - The General Partner is currently seeking
the Limited Partners' consent to sell all of the Partnership's real estate
assets ("Asset Sale") and liquidate the Partnership ("Dissolution"). A Consent
Solicitation Statement was sent to the Limited Partners on July 6, 1999,
detailing the Asset Sale and Dissolution Proposal (incorporated by reference to
the Schedule 14A - Preliminary Proxy Statement filed with the United States
Securities and Exchange Commission ("Commission") in the second quarter of
1999). Assuming the Asset Sale and Dissolution Proposal is approved by the
Limited Partners, the General Partner currently intends to sell all of the
Partnership's properties within approximately six months after consent has been
obtained, distribute the proceeds and liquidate the Partnership after all of the
properties are sold and the cash proceeds thereof received. The General Partner
does not expect the Dissolution to occur until at least early 2000 (and
potentially not until 2001) as some of the properties may be sold with the
purchase price payable on an installment basis.
The Partnership has not, as of the date of the filing of this Quarterly Report
on Form 10-Q with the Commission, entered into any agreement for the sale of its
properties, although the Partnership has, in 1997, granted to Glenborough Realty
Trust Incorporated, a Maryland corporation ("GLB"), a right to match offers for
the purchase of the Partnership's properties ("GLB Matching Right"). The GLB
Matching Right applies to the Partnership's properties. GLB is not an affiliate
of the Partnership.
If the Limited Partners consent to the Asset Sale and Dissolution Proposal, the
General Partner currently intends to offer the Partnership's properties for sale
by soliciting bids from various potential purchasers.
If the Asset Sale and Dissolution Proposal is not approved by the Limited
Partners, the General Partner currently intends to continue to manage the
Partnership and its properties and will continue to entertain and consider
indications of interest from third parties to acquire all or a portion of the
properties. The Partnership will continue to operate the properties and attempt
to sell such properties in single or multiple sales and develop properties it
believes are developable and would improve its return on investment.
Page 6 of 19
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RANCON REALTY FUND V,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
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 90% to the limited partners and 10% to the
general partners. Net losses other than net losses from operations are allocated
99% to the limited partners and 1% to the general partners. Such net losses will
be allocated among limited partners as necessary to equalize their capital
accounts in proportion to their limited partnership units ("Units"), and
thereafter will be allocated in proportion to their Units. If a partner's
capital account is reduced to zero, additional net losses will be allocated
entirely to those partners with positive capital balances until such balances
are reduced to zero. In no event shall the general partners be allocated less
than 1% of the net losses for any period.
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
Page 7 of 19
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RANCON REALTY FUND V,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
sale of assets ($759,000 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 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 May 1996, the Partnership formed Rancon Realty Fund V
Tri-City Limited Partnership, a Delaware limited partnership ("RRF V Tri-City").
As required by the lender (Bear, Stearns Funding, Inc.) of a $9,600,000 loan
obtained by the Partnership in 1996, the Partnership contributed three of its
operating properties to RRF V Tri-City to provide a bankruptcy remote borrower
for the lender. The loan, secured by the properties in RRF V Tri-City, has a
principal balance of $9,268,000 at June 30, 1999, and matures on August 1, 2006
with a 9.39% fixed interest rate and a 25-year amortization of principal. The
limited partner of RRF V Tri-City is the Partnership and the general partner is
Rancon Realty Fund V, Inc. ("RRF V, Inc."), a corporation wholly owned by the
Partnership. Since the Partnership owns 100% of RRF V, Inc. and indirectly owns
100% of RRF V Tri-City, the financial statements of RRF V, Inc. and RRF V
Tri-City have been consolidated with those of the Partnership. All intercompany
balances and transactions have been eliminated in the consolidation.
Reclassifications - Certain prior year balances have been reclassified to
conform with the current year presentation.
Page 8 of 19
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RANCON REALTY FUND V,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
Note 2. REFERENCE TO 1998 AUDITED FINANCIAL STATEMENTS
These unaudited consolidated financial statements should be read in conjunction
with the Notes to Financial Statements included in the December 31, 1998 audited
consolidated financial statements.
Note 3. SALES OF REAL ESTATE
On January 20, 1999, the Partnership sold approximately 24 acres of land
(referred to as the Perris-Ethanac land) located in Perris, Riverside County,
California, to an unaffiliated entity for $502,200. The Partnership realized a
$6,000 loss on the sale which is reflected in the accompanying consolidated
statement of operations for the six months ended June 30, 1999. The sale
generated net proceeds of $446,000, which were added to the Partnership's cash
reserves.
On January 29, 1999, the Partnership sold five distribution-center buildings
(referred to as Rancon Centre Ontario) located in Ontario, California, to an
unaffiliated entity for $7,650,000. As part of the terms of the sale, the
Partnership loaned $5,715,000 to the buyer (the "RCO Note"). The RCO Note is
secured by a deed of trust encumbering the Rancon Centre Ontario property, bears
interest at 8% per annum and matures on March 1, 2000, with an option to extend
the maturity date to June 1, 2000. The note also provides that the borrower may
prepay up to, but no more than, $3,000,000 of the principal balance prior to
January 1, 2000 and the entire balance after January 1, 2000. The sale proceeds
totaling $1,529,000 were net of selling costs and expenses incurred through June
30, 1999, and were added to the Partnership's cash reserves. Since the sale of
Rancon Centre Ontario included a $5,715,000 loan from the Partnership to the
buyer, the Partnership will defer recognition of the $3,274,000 gain on the sale
until collection of the note is assured. As of June 30, 1999, the Partnership
recognized interest income totaling $193,000 from the RCO Note which is included
in interest and other income in the accompanying consolidated statement of
operations for the six months ended June 30, 1999.
Also on January 29, 1999, the Partnership sold approximately 60 acres of land
(referred to as the Perris-Nuevo land) located in Perris, Riverside County,
California, to an unaffiliated entity for $675,000. As part of the terms of the
sale, the Partnership loaned $475,000 to the buyer (the "Nuevo Note"). The Nuevo
Note is secured by a deed of trust encumbering the Perris-Nuevo land, bears
interest at 6% per annum and matures on November 15, 1999. The sale generated
net proceeds of $113,000, which were added to the Partnership's cash reserves.
Since the sale of the Perris-Nuevo land included a $475,000 loan from the
Partnership to the buyer, the Partnership will defer recognition of the $443,000
gain on the sale until collection of the note is assured. As of June 30, 1999,
the Partnership recognized interest income totaling $12,000 from the Nuevo Note
which is included in interest and other income in the accompanying consolidated
statement of operations for the six months ended June 30, 1999.
Page 9 of 19
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RANCON REALTY FUND V,
A CALIFORNIA LIMITED PARTNERSHIP
Notes to Consolidated Financial Statements
June 30, 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 $102,000 at June 30, 1999 for
sales that transpired in previous years. The subordinated real estate
commissions are payable only after the Limited Partners have received
distributions equal to their original invested capital plus a cumulative
non-compounded return of six percent per annum on their adjusted invested
capital, which is not expected to be achieved as a result of the Asset Sale. As
a result, such subordinated real estate commissions will not be paid to the
General Partner and will be eliminated.
Note 5. NOTES PAYABLE
The following notes payable were outstanding as of June 30, 1999 and December
31, 1998 (in thousands):
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1999 1998
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Note payable with a lender with a 9.39% fixed rate of interest,
monthly principal and interest payments (based on a 25-year
amortization) of $83 and a maturity date of August 1, 2006. The
loan is secured by first deeds of trust on Lakeside Tower, One
Parkside and Two Carnegie Plaza. $ 9,268 $ 9,330
Note payable with a lender with an 8.25% fixed rate of interest,
monthly principal and interest payments (based on a 25-year
amortization) of $34 and a maturity date of December 1, 2001. The
loan is secured by first deed of trust on One Carnegie Plaza. 4,145 4,178
---------- ----------
Total notes payable $ 13,413 $ 13,508
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Note 6. DEFERRED INCOME
The Partnership's deferred income of $3,717,000 as of June 30, 1999, consists of
the deferred gains on the sales of Rancon Centre Ontario and the Perris-Nuevo
land.
Note 7. PROPOSED DISSOLUTION COSTS
The General Partner is currently seeking the Limited Partners' consent to the
Asset Sale and Dissolution Proposal (see Note 1 above). Costs totaling $154,000
and $22,000 related to the proposal have been incurred and are reflected in the
accompanying consolidated statements of operations for the six months ended June
30, 1999 and 1998, respectively.
Page 10 of 19
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Partnership had cash of $10,500,000. The remainder of the
Partnership's assets consist primarily of its net investments in real estate,
totaling approximately $31,379,000 at June 30, 1999, which includes $28,675,000
in rental properties and $2,704,000 of land held for development.
The Partnership's business strategy has been to focus on the eventual
disposition of its assets at the optimal time and sales price. As discussed in
Note 1 of the Notes to Consolidated Financial Statements, the General Partner is
currently seeking the Limited Partners' consent to sell all of the Partnership's
real estate assets ("Asset Sale") and liquidate the Partnership ("Dissolution").
A Consent Solicitation Statement was sent to the Limited Partners on July 6,
1999, detailing the Asset Sale and Dissolution Proposal (incorporated by
reference to the Schedule 14A - Preliminary Proxy Statement filed with the
United States Securities and Exchange Commission ("Commission") in the second
quarter of 1999). Assuming the Asset Sale and Dissolution Proposal is approved
by the Limited Partners, the General Partner currently intends to sell all of
the Partnership's properties within six months after consent has been obtained,
distribute the proceeds and liquidate the Partnership after all of the
properties are sold and the cash proceeds thereof received. The General Partner
does not expect the Dissolution to occur until at least early 2000 (and
potentially not until 2001) as some of the properties may be sold with the
purchase price payable on an installment basis.
The Partnership has not, as of the date of the filing of this Quarterly Report
on Form 10-Q with the Commission, entered into any agreement for the sale of its
properties, although the Partnership has, in 1997, granted to Glenborough Realty
Trust Incorporated, a Maryland corporation ("GLB"), a right to match offers for
the purchase of the Partnership's properties ("GLB Matching Right"). The GLB
Matching Right applies to the Partnership's properties. GLB is not an affiliate
of the Partnership.
If the Limited Partners consent to the Asset Sale and Dissolution Proposal, the
General Partner currently intends to offer the Partnership's properties for sale
by soliciting bids from various potential purchasers.
If the Asset Sale and Dissolution Proposal is not approved by the Limited
Partners, the General Partner currently intends to continue to manage the
Partnership and its properties and will continue to entertain and consider
indications of interest from third parties to acquire all or a portion of the
properties. The Partnership will continue to operate the properties and attempt
to sell such properties in single or multiple sales and develop properties it
believes are developable and would improve its return on investment.
Assuming consummation of the Asset Sale and Dissolution, prior to completion of
the sale of all of the Partnership's properties and the receipt in cash of the
proceeds thereof, the General Partner currently intends to, but is not
obligated, to make interim distributions to the Limited Partners, from time to
time, of all or a portion of the net proceeds from sale of the properties. The
General Partner will not receive any of the net proceeds from sale of the
properties or upon dissolution with respect to its general partnership
Page 11 of 19
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interests. The General Partner also intends to distribute in 1999 the net
proceeds of certain sales of Partnership properties which occurred in December
1998 and January 1999 (see "General Matters" below).
The discussion above contains forward-looking statements regarding the
Partnership's plans, goals and expectations, including statements regarding the
Partnership's estimates of sales proceeds and future distributions resulting
from the Asset Sale, estimates of the timing of the sale of the properties, the
dissolution of the Partnership and the distribution of sales proceeds.
Forward-looking statements are necessarily speculative, there being certain
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in the forward-looking statements. All
forward-looking statements included in this document are based on information
available to the Partnership on the date hereof, and reflect the best judgment
of the management of the Partnership. The General Partner's current plans are
subject to change, including in the event of changes in general business and
economic conditions as well as changes in the local real estate markets where
the Partnership's properties are located. There can be no assurance that the
Asset Sale and Dissolution Proposal will be approved by the Limited Partners, or
if and when the properties will be sold, the proceeds distributed, and the
Partnership liquidated. The timing of any sale of the Partnership's properties,
the distribution of proceeds, and the liquidation of the Partnership are subject
to various and significant uncertainties, many of which are beyond the
Partnership's control and which could delay any sale of the Partnership's
properties, liquidation of the Partnership, and distribution of proceeds
significantly beyond the time periods estimated above. Among such uncertainties
are the date when consent of the Limited Partners is obtained (assuming it is
obtained), the demand for the Partnership's properties by potential purchasers,
the availability of capital for potential purchasers, the actual dates when
properties are sold, and the duration of any installment sales of any of the
properties.
Operationally, the Partnership's primary source of funds consists of cash
provided by its rental activities. Other sources of funds may include permanent
financing, property sales, interest income from certificates of deposit and note
receivables, and other deposits of funds invested temporarily. Cash generated
from property sales are generally added to the Partnership's cash reserves,
pending use in the development of properties, or are distributed to the
partners.
The majority of the Partnership's assets are located in the Tri-City Corporate
Centre, in San Bernardino, California. Tri-City is in the heart of the Inland
Empire, a submarket of Southern California and is the most densely populated
area of San Bernardino and Riverside counties. Tri-City's office space market
continues to improve despite business mergers and recent completion of new
buildings within the neighboring area. Tri-City's industrial space market
appears to be improving due to the demand for space for both warehouse and
distribution facilities. Management currently believes that the overall real
estate market in the Inland Empire will remain strong through 1999, with
conditions beyond such time being less predictable.
Tri-City
The Partnership's properties consist of approximately 14 acres of unimproved
land and approximately 478,000 square feet of improved properties. The
Partnership's improved properties in the Tri-City Corporate Centre are as
follows:
Page 12 of 19
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Property Type Square Feet
--------------------------- ------------------------------- -----------
One Carnegie Plaza Two, two-story office buildings 107,276
Two Carnegie Plaza Two-story office building 68,956
Carnegie Business Center II Two R & D buildings 50,867
Santa Fe One-story office building 36,288
Lakeside Tower Six-story office building 112,747
One Parkside Four-story office building 70,069
Bally's Health Club Health club facility 25,000
Outback Steakhouse Restaurant 6,500
General Matters
The $3,970,000 or 100% decrease in rental property held for sale at June 30,
1999 compared to December 31, 1998 is due to the January 29, 1999 sale of five
distribution center buildings referred to as Rancon Centre Ontario ("RCO
Buildings"). The Partnership received net sale proceeds totaling $3,274,000 and
took back a $5,715,000 note receivable ("RCO Note") secured by the RCO
Buildings. See terms of the RCO Note below.
The $597,000 or 100% decrease in land held for sale at June 30, 1999 compared to
December 31, 1998 is due to the January 1999 sales of the Perris-Ethanac land
and the Perris-Nuevo land. The Partnership received net sale proceeds totaling
$559,000 and took back a $475,000 note receivable ("Nuevo Note") secured by the
Perris-Nuevo land. See terms of the Nuevo Note below.
The $353,000 or 100 % decrease in pledged cash at June 30, 1999 compared to
December 31, 1998 is due to the release of the collateral for subdivision
improvement bonds related to the Perris-Nuevo land. The cash collateral was
released to the Partnership upon the sale of the Perris-Nuevo land in January
1999.
The $6,190,000 or 100% increase in notes receivable at June 30, 1999 compared to
December 31, 1998 is due to the Partnership's receipt of the RCO Note and the
Nuevo Note as part of the terms of the sales of the RCO Buildings and the
Perris-Nuevo land. The RCO Note bears interest of 8% per annum and matures on
March 1, 2000 with an option to extend the maturity date to June 1, 2000. The
RCO Note also provides that the borrower may prepay up to, but no more than,
$3,000,000 of the principal balance prior to January 1, 2000 and the entire
balance after January 1, 2000. The Nuevo Note bears interest at 6% per annum and
is due on November 15, 1999.
The $5,506,000 or 90% decrease in prepaid expenses and other assets at June 30,
1999 compared to December 31, 1998 is primarily due to the receipt of the net
sale proceeds related to the 38.5 acres of unimproved land at Rancon Centre
Ontario ("Ontario land"). The Ontario land was sold on December 31, 1998 and the
sale proceeds were held in an escrow account (included in other assets at
December 31, 1998) until January 1999.
The $13,413,000 notes payable at June 30, 1999 consist of two secured loans
encumbering properties with an aggregate net book value of approximately
$21,789,000 and maturity dates of December 1, 2001 and August 1, 2006. These
notes payable require monthly principal and interest payments, and bear fixed
interest rates of 8.25% and 9.39%.
Page 13 of 19
<PAGE>
The $3,717,000 deferred income at June 30, 1999 consists of the deferred gain on
sales of the RCO Buildings and the Perris-Nuevo land.
Management believes that the Partnership's cash balance at June 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 foregoing and the current plan to potentially sell all of the
Partnership's properties and liquidate the Partnership, the Partnership knows of
no demands, commitments, events or uncertainties, which might effect its
liquidity or capital resources in any material respect. In addition, the
Partnership is not subject to any covenants pursuant to its secured debt that
would constrain its ability to obtain additional capital.
RESULTS OF OPERATIONS
Revenues
Rental income decreased $171,000 or 5% and $92,000 or 6% during the six and
three months ended June 30, 1999, compared to the six and three months ended
June 30, 1998, respectively, as a result of the loss of rental income due to the
sale of the RCO Buildings and the decrease in occupancy at Carnegie Business
Center II and Two Carnegie Plaza. This decrease in rental revenue was slightly
offset by the increased occupancy at One Carnegie Plaza, Lakeside Tower and One
Parkside.
Occupancy rates at the Tri-City properties as of June 30, 1999 and 1998 were as
follows:
June 30,
---------------------------
1999 1998
------- ------
One Carnegie Plaza 58% 48%
Two Carnegie Plaza 79% 82%
Carnegie Business Center II 59% 72%
Lakeside Tower 96% 84%
Santa Fe 100% 100%
One Parkside 100% 66%
Bally's Health Club 100% 100%
Outback Steakhouse 100% 100%
As of June 30, 1999, tenants at the Tri-City occupying substantial portions of
leased rental space included: (i) Atchison, Topeka and Santa Fe Railway Company
with a lease through September 2004; (ii) Chicago Title with a lease through
February 2004; (iii) Sterling Software with a lease through November 2000; (iv)
Holiday Spa Health Club with a lease through December 2010; and (v) New York
Life with a lease through May 2004. These five tenants, in the aggregate,
occupied approximately 140,000 square feet of the 478,000 total leasable square
feet at Tri-City and accounted for approximately 32% of the total rental income
of the Partnership during the second quarter of 1999.
Page 14 of 19
<PAGE>
The 10% increase in occupancy from June 30, 1998 to June 30, 1999 at One
Carnegie Plaza is attributed to leasing of 16,211 square feet of space to one
tenant and the expansion of two tenants to an aggregate 2,539 square feet of
space. Slightly offsetting these increases in occupancy was the relocation of a
13,855 square foot tenant to 6,220 square feet of space due to the tenant's need
to downsize. Management is currently in negotiations with a prospective tenant
to lease a 4,000 square feet suite and is marketing the other vacant space to
potential tenants.
The 3% decrease in occupancy from June 30, 1998 to June 30, 1999 at Two Carnegie
Plaza is a result of a 1,968 square foot tenant vacating its space upon its
lease expiration of January 1999. Management has executed a five year lease
(commencing September 1999) for this space, expanded an existing tenant by 2,200
square feet and is currently negotiating lease renewals for three tenants
occupying a total of 6,700 square feet of space.
The 13% decrease in occupancy from June 30, 1998 to June 30, 1999 at Carnegie
Business Center II is attributed to two tenants, occupying 6,575 square feet of
space in the aggregate, vacating their space upon their respective lease
expirations, and the relocation of an 18,840 square foot tenant to a 13,381
square feet suite. Slightly offsetting these decreases in occupancy was the
leasing of an aggregate of 5,784 square feet of space to two new tenants.
Management is marketing the other vacant space for lease.
The 12% increase in occupancy from June 30, 1998 to June 30, 1999 at Lakeside
Tower is attributed to the leasing of 14,950 square feet of space to five new
tenants.
The 34% increase in occupancy from June 30, 1998 to June 30, 1999 at One
Parkside is attributed to the expansion of three tenants by 20,395 square feet
and the leasing of 3,500 square feet of space to a new tenant.
Interest and other income increased $308,000 or 172% and $200,000 or 244% during
the six and three months ended June 30, 1999, compared to the six and three
months ended June 30, 1998, respectively, due to: (i) the increase in interest
income on the higher average invested cash balance resulting from the recent
sales of real estate; and (ii) the interest income from the promissory notes
related to the recent sales of real estate.
Expenses
Operating expenses increased $20,000 or 1% for the six months ended June 30,
1999 compared to the six months ended June 30, 1998 due to: (i) the increased
occupancy at One Carnegie Plaza, Lakeside Tower and One Parkside; (ii) the
payment of tax appeal fees in February 1999; and (iii) the recognition of prior
year bad debt in the first quarter of 1999 as a result of failed collection
efforts from a tenant who vacated its space upon lease expiration. Partially
offsetting these increases in operating expenses was the elimination of
operating expenses as a result of the sale of the RCO Buildings. Operating
expenses decreased $27,000 or 3% for the three months ended June 30, 1999
compared to the three months ended June 30, 1998 due primarily to the
elimination of operating expenses as a result of the January 1999 sale of the
RCO Buildings.
Depreciation and amortization decreased $40,000 or 4% for the six months ended
June 30, 1999 compared to the six months ended June 30, 1998 due to the
elimination of depreciation and amortization associated with the RCO Buildings.
Offsetting this decrease was the increase from the depreciation of additions to
Page 15 of 19
<PAGE>
rental properties. Depreciation and amortization increased $20,000 or 5% for the
three months ended June 30, 1999 compared to the three months ended June 30,
1998 due primarily to the depreciation of additions to rental properties.
The loss on sale of real estate of $6,000 for the six months ended June 30, 1999
resulted from the sale of the Perris-Ethanac land.
Expenses associated with undeveloped land decreased $167,000 or 53% and $128,000
or 81% for the six and three months ended June 30, 1999, compared to the six and
three months ended June 30, 1998, respectively, due to the reduction of property
taxes as a result of the recent land sales and the receipt of real estate tax
refunds in the second quarter of 1999.
General and administrative expenses decreased $42,000 or 7% and $44,000 or 13%
for the six and three months ended June 30, 1999, compared to the six and three
months ended June 30, 1998, respectively, primarily due to a decrease in asset
management fees resulting from the sale of the RCO Buildings.
The proposed dissolution costs of $154,000 and $22,000 during the six and three
months ended June 30, 1999 and 1998, respectively, represent charges for work
performed and expenses incurred while exploring the possibilities of having the
Partnership sell all of its properties and liquidate thereafter, and costs
relating to the preparation of preliminary proxy materials in the quarter ended
June 30, 1999.
Year 2000 Compliance
State of Readiness. Glenborough Corporation ("Glenborough"), the Partnership's
asset and property manager, utilizes a number of computer software programs and
operating systems. These programs and systems primarily comprise information
technology systems ("IT Systems") (i.e., software programs and computer
operating systems) that serve the management operations. Although the
Partnership does not utilize any significant IT Systems of its own, it does
utilize embedded systems such as devices used to control, monitor or assist the
operation of equipment and machinery systems (e.g., HVAC, fire safety and
security) at its properties ("Property Systems"). To the extent that software
applications contain a source code that is unable to appropriately interpret the
upcoming calendar year "2000" and beyond, some level of modification or
replacement of these IT Systems and Property Systems will be necessary.
IT Systems. Employing a team made up of internal personnel and third-party
consultants, Glenborough has completed an identification of IT Systems,
including hardware components that are not yet Year 2000 compliant. To the best
of Glenborough's knowledge based on available information and a reasonable level
of inquiry and investigation, such upgrading as appears to be called for under
the circumstances has been completed in accordance with prevailing industry
practice. Glenborough has commenced a testing program which will be completed
during 1999. In addition, the Partnership is currently communicating with third
parties with whom it does significant business, such as financial institutions,
tenants and vendors, to determine their readiness for Year 2000 compliance.
Property Systems. An identification of Property Systems, including hardware
components, that are not yet Year 2000 compliant, has also been completed.
Upgrading of such systems as appears to be called for under the circumstances
based on available information and a reasonable level of inquiry and
Page 16 of 19
<PAGE>
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 17 of 19
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Incorporated herein by reference to Note 1 of the Notes to Consolidated
Financial Statements.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K (incorporated herein by reference):
None.
Page 18 of 19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RANCON REALTY FUND V,
a California limited partnership
By Rancon Financial Corporation
a California corporation,
its General Partner
Date: August 13, 1999 By: /s/ DANIEL L. STEPHENSON
--------------------------
Daniel L. Stephenson, President
Date: August 13, 1999 By: /s/ DANIEL L. STEPHENSON
--------------------------
Daniel L. Stephenson, General Partner
Page 19 of 19
<PAGE>
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<CIK> 0000769131
<NAME> RANCON REALTY FUND V
<MULTIPLIER> 1000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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