SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 2003
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to
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(Amended by Exch Act Rel No. 312905. eff 4/26/93.)
Commission File Number: 0-8952
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SB PARTNERS
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(Exact name of registrant as specified in its charter)
New York 13-6294787
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1251 Avenue of the Americas, N.Y., N.Y. 10020
- --------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
(212) 408-5000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report.)
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. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ] Yes [ ] No
Not Applicable
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Not Applicable
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SB PARTNERS
INDEX
Part I Financial Information (Unaudited)
Consolidated Balance Sheets as of
June 30, 2003 and December 31, 2002...............................1
Consolidated Statements of Operations
for the three and six months ended June 30, 2003 and 2002.........2
Consolidated Statements of Changes in Partners' Capital
for the six months ended June 30, 2003............................3
Consolidated Statements of Cash Flows
for the six months ended June 30, 2003 and 2002...................4
Notes to Consolidated Financial Statements........................5 - 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations................9 - 16
Quantitative and Qualitative Disclosures about Market Risk...........17
Controls and Procedures..............................................17
Part II
Other Information....................................................17
Signatures...........................................................18
Exhibit 31......................................................19 - 20
Exhibit 32...........................................................21
1
ITEM 1. FINANCIAL STATEMENTS
SB PARTNERS
(A New York Limited Partnership)
------------------------------
CONSOLIDATED BALANCE SHEETS
June 30, 2003 (Unaudited) and December 31, 2002
-----------------------------------------------
June 30, December 31,
2003 2002
----------- -----------
Assets:
Investments -
Real estate, at cost
Land $ 5,780,842 $ 5,780,842
Buildings, furnishings and improvements 55,724,789 55,557,251
Less - accumulated depreciation (7,967,040) (7,166,894)
----------- -----------
53,538,591 54,171,199
Investment in joint venture 3,224,832 3,385,182
----------- -----------
56,763,423 57,556,381
Other assets -
Cash and cash equivalents 282,253 1,693,069
Cash held by lenders in escrow 960,753 590,631
Other 487,676 668,275
----------- -----------
Total assets $58,494,105 $60,508,356
=========== ===========
Liabilities:
Mortgage notes payable $32,785,148 $30,239,203
Accounts payable and accrued expenses 773,236 712,056
Tenant security deposits 249,398 245,221
----------- -----------
Total liabilities 33,807,782 31,196,480
----------- -----------
Partners' Capital:
Units of partnership interest without par value;
Limited partners - 7,753 units 24,701,575 29,326,531
General partner - 1 unit (15,252) (14,655)
----------- -----------
Total partners' capital 24,686,323 29,311,876
----------- -----------
Total liabilities and partners' capital $58,494,105 $60,508,356
=========== ===========
See notes to consolidated financial statements.
2
SB PARTNERS
(A New York Limited Partnership)
------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
------------------------------------------------
For The Three Months For The Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
2003 2002 2003 2002
---------- ----------- ---------- -----------
Revenues:
Base rental income $1,791,463 $ 2,357,735 $3,709,370 $ 5,418,708
Other rental income 205,576 132,508 353,862 291,774
Interest on short-term investments 1,294 18,108 6,044 23,567
---------- ----------- ---------- -----------
Total revenues 1,998,333 2,508,351 4,069,276 5,734,049
---------- ----------- ---------- -----------
Expenses:
Real estate operating expenses 934,803 1,180,961 1,831,340 2,538,682
Interest on mortgage notes payable 551,966 1,854,436 1,090,368 2,771,506
Depreciation and amortization 419,060 461,947 838,053 840,363
Real estate taxes 253,635 230,997 508,437 516,469
Management fees 177,132 185,000 353,665 396,204
Other 19,970 12,435 31,459 26,560
---------- ----------- ---------- -----------
Total expenses 2,356,566 3,925,776 4,653,322 7,089,784
---------- ----------- ---------- -----------
Loss from operations (358,233) (1,417,425) (584,046) (1,355,735)
Equity in net loss of joint venture (43,741) (13,378) (164,757) (13,378)
Net gain on sale of investment in real estate
property, including $379,725 net gain
on sale of water rights 0 17,101,155 0 17,480,880
---------- ----------- ---------- -----------
Net income (loss) (401,974) 15,670,352 (748,803) 16,111,767
Income (loss) allocated to general partner (52) 2,021 (97) 2,078
---------- ----------- ---------- -----------
Income (loss) allocated to limited partners $ (401,922) $15,668,331 $ (748,706) $16,109,689
========== =========== ========== ===========
Net Income (Loss)
Per Unit of Limited Partnership Interest
(Basic and Diluted) $ (51.84) $ 2,021.07 $ (96.58) $ 2,078.00
========== =========== ========== ===========
Weighted Average Number of Units of Limited
Partnership Interest Outstanding 7,753 7,753 7,753 7,753
========== =========== ========== ===========
See notes to consolidated financial statements.
3
SB PARTNERS
(A New York Limited Partnership)
------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the six months ended June 30, 2003 (Unaudited)
-------------------------------------------------------
Limited Partners:
Units of
Partnership
Interest Cumulative Accumulated
-------------------- Cash Earnings
Number Amount Distributions (Losses) Total
------ ------------ ------------- ----------- -----------
Balance, January 1, 2003 7,753 $119,968,973 $(100,945,611) $10,303,169 $29,326,531
Cash distributions 0 0 (3,876,250) 0 (3,876,250)
Net loss for the period 0 0 0 (748,706) (748,706)
----- ------------ ------------- ----------- -----------
Balance, June 30, 2003 7,753 $119,968,973 $(104,821,861) $ 9,554,463 $24,701,575
===== ============ ============= =========== ===========
General Partner:
Units of
Partnership
Interest Cumulative Accumulated
-------------------- Cash Earnings
Number Amount Distributions (Losses) Total
----- ------- ------------- ----------- --------
Balance, January 1, 2003 1 $10,000 $(24,974) $319 $(14,655)
Cash distributions 0 0 (500) 0 (500)
Net loss for the period 0 0 0 (97) (97)
---- ------- -------- ---- --------
Balance, June 30, 2003 1 $10,000 $(25,474) $222 $(15,252)
==== ======= ======== ==== ========
See notes to consolidated financial statements.
4
SB PARTNERS
(A New York Limited Partnership)
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
------------------------------------------------
For the Six Months Ended
June 30,
----------------------------
2003 2002
----------- ------------
Cash Flows From Operating Activities:
Net income (loss) $ (748,803) $ 16,111,767
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Net gain on sale of investment in real estate property,
including net gain on sale of water rights 0 (17,480,880)
Equity in net loss of joint venture 164,757 13,378
Depreciation and amortization 838,053 840,363
Net (increase) decrease in operating assets (227,430) 436,459
Net increase (decrease) in operating liabilities 65,357 (63,093)
----------- ------------
Net cash provided by (used in) operating activities 91,934 (142,006)
----------- ------------
Cash Flows From Investing Activities:
Capital additions to real estate owned (167,538) (384,922)
Investment in joint venture (4,407) (3,394,125)
Acquisition of real estate property 0 (4,713,385)
Proceeds from sale of investment in real estate
property, including water rights 0 31,389,975
----------- ------------
Net cash provided by (used in) investing activities (171,945) 22,897,453
----------- ------------
Cash Flows From Financing Activities:
Borrowings under revolving credit facility 2,750,000 3,750,000
Repayments of borrowings under revolving credit facility 0 (4,500,000)
Principal payments on mortgage notes payable (204,055) (368,575)
Retirement of mortgage note payable 0 (19,591,390)
Distributions paid to partners (3,876,750) (775,350)
----------- ------------
Net cash used in financing activities (1,330,805) (21,485,315)
----------- ------------
Net increase (decrease) in cash and cash equivalents (1,410,816) 1,270,222
Cash and cash equivalents at beginning of period 1,693,069 634,029
----------- ------------
Cash and cash equivalents at end of period $ 282,253 $ 1,904,251
=========== ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,084,375 $ 2,899,164
=========== ============
See notes to consolidated financial statements.
5
SB PARTNERS
Notes to Consolidated Financial Statements
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
SB Partners, a New York limited partnership, and its subsidiaries
(collectively, the "Partnership"), have been engaged since April 1971 in
acquiring, operating, and holding for investment a varying portfolio of real
estate interests. SB Partners Real Estate Corporation (the "General Partner")
serves as the general partner of the Partnership.
The consolidated financial statements as of June 30, 2003 and for the
three and six month periods ended June 30, 2003 and 2002 included herein are
unaudited; however, the information reflects all adjustments (consisting solely
of normal recurring adjustments) that are, in the opinion of management,
necessary to a fair presentation of the financial position, results of
operations and cash flows for the interim periods. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations,
although management believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Partnership's latest annual
report on Form 10-K.
The results of operations for the three and six month periods ended
June 30, 2003 and 2002 are not necessarily indicative of the results to be
expected for a full year.
The significant accounting and financial reporting policies of the
Partnership are as follows:
(a) The accompanying consolidated financial statements include the
accounts of SB Partners and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated. The consolidated financial statements are prepared
using the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of
America. Revenues are recognized as earned and expenses are
recognized as incurred. The preparation of financial statements
in conformity with such principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(b) In connection with the mortgage financing on certain of its
properties, the Partnership placed the assets and liabilities of
those properties into single asset limited partnerships, limited
liability companies or land trusts which hold title to the
properties. The Partnership has effective control over such
entities and holds 100% of the beneficial interest. Accordingly,
the financial statements of these subsidiaries are consolidated
with those of the Partnership.
(c) Depreciation of buildings, furnishings and improvements is
computed using the straight-line method of depreciation, based
upon the estimated useful lives of the related properties, as
follows:
Buildings and improvements 5 to 40 years
Furnishings 5 to 7 years
Expenditures for maintenance and repairs are expensed as incurred.
Expenditures for improvements, renewals and betterments, which
increase the useful life of the real estate, are capitalized.
Upon retirement or sale of property, the related cost and
accumulated depreciation are removed from the accounts.
Amortization of deferred financing and refinancing costs is
computed on a straight-line basis over the terms of the related
mortgage notes.
(d) Real estate properties are regularly evaluated on a
property-by-property basis to determine if it is appropriate to
write down carrying values to recognize an impairment of value.
Impairment is determined by calculating the sum of the estimated
undiscounted future cash flows including the projected
undiscounted future net proceeds from the sale of the property.
In the event such sum is less than the net carrying value of the
property, the property is written down to estimated fair value.
Based on the Partnership's long-term hold strategy for its
investments in real estate, the carrying value of its properties
at June 30, 2003 is estimated to be fully realizable.
6
(e) Real estate held for sale is carried at the lower of cost or fair
value less selling costs. Upon determination that a property is
held for sale, all depreciation of such property is ceased.
(f) For financial reporting purposes, the Partnership considers all
highly liquid, short-term investments with maturities of three
months or less when purchased to be cash equivalents.
(g) The Partnership accounts for its investment in joint venture under
the equity method of accounting as the Partnership owns a
non-controlling interest in the joint venture.
(h) Tenant leases at the residential properties generally have terms
of one year or less. Rental income at the residential properties
is recognized when earned pursuant to the terms of the leases.
Leases at the industrial flex property have terms that exceed one
year. Rental income at the industrial flex property is recognized
on a straight-line basis over the terms of the leases.
(i) Gains on sales of investments in real estate are recognized in
accordance with accounting principles generally accepted in the
United States of America applicable to sales of real estate, which
require that the purchaser maintain minimum levels of initial and
continuing investment, and that certain other tests be met, prior
to the full recognition of profit at the time of the sale.
(j) Each partner is individually responsible for reporting its share
of the Partnership's taxable income or loss. Accordingly, no
provision has been made in the accompanying consolidated financial
statements for Federal, state or local income taxes.
(k) Net income (loss) per unit of partnership interest has been
computed based on the weighted average number of units of
partnership interest outstanding during each period. There were no
potentially dilutive securities outstanding during the periods
presented.
(l) The Partnership is engaged in only one industry segment, real
estate investment, and therefore information regarding industry
segments is not applicable and is not included in these
consolidated financial statements.
(m) On January 1, 2002, the Partnership adopted Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (the "Statement").
The Statement requires the operations related to properties that
have been sold or properties that are intended to be sold be
presented as discontinued operations in the statements of
operations for all periods presented, and that properties intended
to be sold be designated as "held for sale" on the balance sheet.
However, long-lived assets classified as held for sale prior to
the initial application of the Statement are required to continue
to be accounted for in accordance with SFAS No. 121.
(n) In April 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 145, "Rescission of SFAS No. 4, 22 and 64,
Amendment of SFAS No. 13 and Technical Corrections". SFAS
No. 145, among other things, rescinds SFAS No. 4, "Reporting Gains
and Losses from Extinguishment of Debt", and accordingly, the
reporting of gains or losses from the early extinguishment of debt
as extraordinary items will only be required if they meet the
specific criteria for extraordinary items included in Accounting
Principles Board Opinion No. 30, "Reporting the Results of
Operations". Although the rescission of SFAS No. 4 became
mandatory as of January 1, 2003, management adopted SFAS No. 145
prior to that date (See Note 3).
(o) Certain prior year amounts have been reclassified to conform with
the current year presentation.
7
(2) INVESTMENTS IN REAL ESTATE
As of June 30, 2003, the Partnership owned apartment projects in
St. Louis, Missouri; Greenville, South Carolina; and Holiday and
Orlando, Florida; as well as an industrial flex property in Maple
Grove, Minnesota and 13.9 acres of land in Holiday, Florida. The
following is the cost basis and accumulated depreciation of the real
estate investments owned by the Partnership at June 30, 2003 and
December 31, 2002:
Real Estate at Cost
No.of Year of ---------------------------
Type Prop. Acquisition Description 6/30/03 12/31/02
- ---- ----- ----------- ----------- ----------- -----------
Residential properties 4 1991-99 1,042 Apts. $56,699,581 $56,539,616
Industrial flex property 1 2002 60,345 sf 4,761,663 4,754,090
Undeveloped land 1 1978 13.9 Acres 44,387 44,387
----------- -----------
Total cost 61,505,631 61,338,093
Less: accumulated depreciation (7,967,040) (7,166,894)
----------- -----------
Net book value $53,538,591 $54,171,199
=========== ===========
(3) REAL ESTATE TRANSACTIONS
In February 2002, the Partnership sold the water rights at Meadowwood
Apartments for $389,725. As there was no identifiable cost basis for
the rights, the receipt, net of costs incurred in the transaction, has
been recognized as income and is reflected as a component of net gain
on sale of investment in real estate property on the accompanying
consolidated statements of operations for the six months ended
June 30, 2002.
On April 30, 2002, the Partnership purchased a 75% non-controlling
interest in a partnership that owns Waterview Apartments in West
Chester, Pennsylvania. The Partnership paid approximately $3,270,000 in
cash for this non-controlling interest. The purchase price reflects an
agreed upon value of $18,500,000 for the apartment property, net of a
first mortgage loan of approximately $14,230,000 and certain related
assets and liabilities. Waterview Apartments comprises 203 apartment
units and 6,000 square feet of commercial space.
On May 9, 2002, the Partnership sold Meadowwood Apartments in Reno,
Nevada for $31,350,000 in an all cash transaction. The proceeds from
the sale were used, in part, to retire the mortgage note of
approximately $19,600,000 that had been secured by the property. In
accordance with SFAS No. 145, the Partnership has included the yield
maintenance payment on the mortgage note, approximately $1,056,000, in
interest expense in the consolidated statements of operations for the
three and six months ended June 30, 2002. The sale of Meadowwood
Apartments resulted in a net gain for financial reporting purposes of
approximately $17,100,000.
On June 12, 2002, the Partnership purchased Eagle Lake Business
Center IV in Maple Grove, Minnesota for approximately $4,700,000 in an
all cash transaction. The property contains approximately 60,000 square
feet of industrial flex space.
8
(4) MORTGAGE NOTES PAYABLE
Mortgage notes payable consist of the following non-recourse first liens:
Net Carrying Amount
Annual June 30, December 31,
Interest Maturity Installment Amount Due ----------- -----------
Property Rate Date Payments(a) at Maturity 2003 2002
- ---------------------------------------------------------------------------------------------------
Halton Place(b) 3.2687% 09/03 Interest Only $ 3,000,000 $ 3,000,000 $ 250,000
Holiday Park 6.895% 02/08 $ 300,169 3,277,785 3,554,864 3,581,850
Cypress Key 6.605% 01/09 1,322,707 14,772,418 16,292,272 16,413,232
Le Coeur du Monde 7.805% 10/09 890,447 9,075,763 9,938,012 9,994,121
----------- -----------
$32,785,148 $30,239,203
=========== ===========
(a) Annual installment payments include principal and interest.
(b) On March 1, 2001, the Partnership entered into a revolving credit facility
agreement with a bank in the amount of $7,500,000 which is secured by
Halton Place Apartments. The term of the agreement has been extended an
additional two months to September 1, 2003. The Partnership is in
negotiations with the lender to further extend the term of the credit
facility. Borrowings bear interest at the one-month LIBOR plus 1.95%. The
agreement requires the Partnership to maintain a ratio of NOI, as defined,
to actual debt service, as defined, of not less than 1.2 to 1. As of
June 30, 2003, the Partnership is in compliance with the covenant. In
connection with this credit facility, the Partnership is subject to market
risk relating to potential future changes in interest rates.
(5) DISTRIBUTIONS
In March 2003, the Partnership paid a cash distribution of $500 per
unit to Unitholders of record as of December 31, 2002, which totaled
$3,876,750 based on 7,753.5 units outstanding.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AS OF JUNE 30, 2003
AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
-------------------------------------------------------------
General
- -------
The consolidated financial statements for the three and six months ended
June 30, 2003 reflect the operations of four residential garden apartment
properties, a joint venture interest purchased April 30, 2002 and an industrial
flex property purchased June 12, 2002. The consolidated financial statements for
the three and six months ended June 30, 2002 reflect the operations of five
residential garden apartment properties, including Meadowwood Apartments which
was sold on May 9, 2002, and the aforementioned joint venture and industrial
flex property as of the dates of purchase through June 30, 2002.
Total revenues for the three months ended June 30, 2003 decreased $510,000
to approximately $1,998,000 from approximately $2,508,000 for the three months
ended June 30, 2002. Net income decreased $16,072,000, to a net loss of
approximately $402,000 for the three months ended June 30, 2003, from net income
of approximately $15,670,000 for the three months ended June 30, 2002. Net
income for the three months ended June 30, 2002 includes net gain on sale of
approximately $17,100,000.
Total revenues for the six months ended June 30, 2003 decreased $1,665,000
to approximately $4,069,000 from approximately $5,734,000 for the six months
ended June 30, 2002. Net income decreased approximately $16,861,000, to a net
loss of approximately $749,000 for the six months ended June 30, 2003, from net
income of approximately $16,112,000 for the six months ended June 30, 2002. Net
income for the six months ended June 30, 2002 includes net gain on sale of
approximately $17,480,000.
The changes in financial condition, total revenues and net income/loss are
the result of the changes from 2002 to 2003 in the composition of the portfolio.
On April 30, 2002, the Registrant purchased a 75% non-controlling interest in a
partnership that owns Waterview Apartments, a 203-unit apartment community in
West Chester, Pennsylvania. On May 9, 2002, the Registrant sold Meadowwood
Apartments, a 704-unit apartment community in Reno, Nevada, for $31,350,000 in
an all cash transaction, and retired the mortgage note payable that had been
secured by the property. In addition, on June 12, 2002, the Registrant purchased
Eagle Lake Business Center IV, a 60,345 square foot industrial flex property in
Maple Grove, Minnesota, for $4,700,000, in an all cash transaction.
10
During the three and six months ended June 30, 2002, rental revenues
collected at Meadowwood Apartments totaled approximately $510,000 and
$1,784,000, respectively. In 2003, there were no revenues from Meadowwood
Apartments as the property was sold on May 9, 2002. Partially offsetting the
lack of revenues from the apartment property were the revenues collected from
the industrial flex property, Eagle Lake Business Center IV, which totaled
approximately $206,000 and $432,000, respectively, for the three and six months
ended June 30, 2003. Revenues generated by the apartment property owned by the
partnership in which the Registrant has a 75% non-controlling joint venture
interest are not included in total revenues. However, the equity in net loss of
joint venture is net of the revenues collected from those apartments for the
three and six months ended June 30, 2003.
Total expenses for the three and six months ended June 30, 2003 decreased
approximately $1,569,000 and $2,436,000, respectively, primarily because no
expenses were attributable to Meadowwood Apartments for the three and six months
ended June 30, 2003. For the three and six months ended June 30, 2002,
Meadowwood Apartments incurred expenses totaling approximately $1,702,000 and
$2,648,000, respectively. In contrast, the industrial flex property in
Maple Grove, Minnesota incurred expenses of approximately $102,000 and $213,000,
respectively, for the three and six months ended June 30, 2003 as compared to
approximately $17,000 for the three and six months ended June 30, 2002. Expenses
incurred for Waterview Apartments are net against income and reflected as equity
in net loss of joint venture.
For additional analysis, please refer to the discussions of the individual
properties below.
This report on Form 10-Q includes statements that constitute "forward
looking statements" within the meaning of Section 27(A) of the Securities Act of
1933 and Section 21(E) of the Securities Exchange Act of 1934 and that are
intended to come within the safe harbor protection provided by those sections.
By their nature, all forward looking statements involve risks and uncertainties
as further described in the Registrant's latest annual report on Form 10-K.
Actual results may differ materially from those contemplated by the forward
looking statements.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Partnership's critical accounting policies are described in its Annual
Report on Form 10-K for the year ended December 31, 2002; there were no
significant changes to such policies in 2003.
11
Liquidity and Capital Resources
- -------------------------------
As of June 30, 2003, the Registrant had cash and cash equivalents of
approximately $282,000 in addition to approximately $961,000 of deposits held in
escrow by certain lenders for the payment of insurance, real estate taxes and
certain capital and maintenance costs. These balances are approximately
$1,041,000 less than the cash, cash equivalents and deposits held in escrow on
December 31, 2002. After adding approximately $370,000 to deposits held in
escrow, operating activities generated approximately $92,000 of cash flow during
the six months ended June 30, 2003. During the same period, the Registrant
borrowed an additional $2,750,000 under the revolving credit facility that is
secured by Halton Place Apartments. Uses of cash during the period included
distributions amounting to approximately $3,877,000 that were paid to
Unitholders of record as of December 31, 2002. Capital additions to existing
real estate properties totaled approximately $168,000 during the period, and
principal payments of approximately $204,000 were made on mortgage notes
payable.
Total outstanding debt at June 30, 2003 consisted of approximately
$29,785,000 of long-term non-recourse first mortgage notes, and $3,000,000 under
a revolving credit facility, all secured by real estate owned by the Registrant
(see Note 4 to the Consolidated Financial Statements). The maturity date of the
credit facility was extended to September 1, 2003 and the Registrant is in
negotiations with the lender to further extend the term. Scheduled maturities
through regularly scheduled monthly payments will be approximately $211,000 for
the remainder of 2003. The terms of certain mortgage notes require monthly
escrow of estimated annual real estate tax, insurance, and reserves for repairs,
maintenance and improvements to the secured property, in addition to the payment
of principal and interest. The Registrant has no other debt except normal trade
accounts payable and accrued interest on mortgage notes payable.
Inflation and changing prices during the current period did not
significantly affect the markets in which the Registrant conducts its business,
or the Registrant's business overall.
In March 2003, the Registrant made a distribution of $500 per unit to
Unitholders of record as of December 31, 2002. This is the fifth consecutive
annual distribution since the repositioning of the portfolio in the late 1990's.
However, there is no requirement to make such distributions, nor can there be
any assurance that future operations will generate cash available for
distributions.
The Registrant's properties are expected to generate sufficient cash flow
to cover operating, financing, capital improvement costs, and other working
capital requirements of the Registrant for the foreseeable future.
12
Holiday Park Apartments (Holiday, Florida)
- -----------------------
Total revenues for the three months ended June 30, 2003 increased
$7,000 to $349,000 from $342,000 for the three months ended June 30, 2002. Net
income, which includes deductions for depreciation and mortgage interest
expense, for the three months ended June 30, 2003 increased $1,000 to $38,000
from $37,000 for the three months ended June 30, 2002. Higher revenues were due
to an increase in average occupancy of approximately 6.1%, to 95.9% from 89.8%
for the three months ended June 30, 2002, which added approximately $14,000 to
revenues. Higher rental rates on new and renewing leases added approximately
$9,000 to revenues. However, these increases in revenues were partially offset
by increased rental concessions, which lowered revenues approximately $16,000.
The increase in net income was the result of higher revenue, partially offset by
a $6,000 increase in expenses, primarily due to additional insurance costs of
$8,000 in the current period, reflecting a general rise in rates charged by the
insurance industry.
Total revenues for the six months ended June 30, 2003 increased $12,000
to $705,000 from $693,000 for the six months ended June 30, 2002. Net income,
which includes deductions for depreciation and mortgage interest expense, for
the six months ended June 30, 2003 increased $10,000 to $95,000 from $85,000 for
the six months ended June 30, 2002. Increased revenue is due to an increase in
average occupancy at the property of 4.7%, to 96.1% from 91.4% for the six
months ended June 30, 2002, which increased revenues approximately $21,000, and
a rise in rental rates implemented at the property on new and renewing leases
which increased revenues approximately $18,000. In addition, utility income was
approximately $16,000 higher in the current period as a result of greater
collections from the water and sewer billback program, and miscellaneous
receipts increased $6,000. However, these increases in revenues were partially
offset by increased rental concessions, which lowered revenues approximately
$33,000, and a decrease in termination fees and security deposit forfeiture
income of $10,000 and $5,000, respectively, as more tenants are remaining
through the end of the lease term. The increase in net income was the result of
higher revenues, partially offset by a $3,000 increase in expenses, primarily
due to the additional cost of insurance in the current period. Insurance expense
increased $16,000 as higher insurance premiums were paid for coverage in the
current period. Depreciation expense was $3,000 higher as depreciation was
computed on additional assets placed into service over the course of the last
year, and real estate taxes increased $4,000. These increases in expenses were
partially offset by lower repair and maintenance costs, which were reduced
$21,000, primarily due to lower apartment turnover costs, replacement costs and
landscaping costs in the current period.
13
Cypress Key Apartments (Orlando, Florida)
- ----------------------
Total revenues for the three months ended June 30, 2003 decreased $60,000
to $678,000 from $738,000 for the three months ended June 30, 2002. Net loss,
which includes deductions for depreciation and mortgage interest expense, for
the three months ended June 30, 2003 increased $59,000 to $152,000 from $93,000
for the three months ended June 30, 2002. Although rental rates on new and
renewing leases were raised which added $12,000 to revenues, and fee income
increased $7,000, total revenues declined $27,000 due to a decrease in average
occupancy of approximately 3.9%, to 87.0% from 90.9% for the three months ended
June 30, 2002. Collection losses increased, which reduced revenues $25,000 from
the period in the prior year. In addition, an increase in tenant concessions at
the property lowered revenues $27,000. The increase in net loss was primarily a
result of lower revenues, partially offset by a marginal decrease in expenses of
$2,000 as compared to the same period in 2002. Repairs and maintenance costs
decreased $10,000 primarily due to lower replacement costs in the current
period. Payroll costs were $8,000 lower, as certain positions on the staff were
unfilled for brief periods during 2003. These lower expenses were partially
offset by an increase in insurance expense of $13,000, as higher insurance
premiums were paid for coverage in the current period, and additional utilities
expense of $3,000.
Total revenues for the six months ended June 30, 2003 decreased $90,000 to
$1,390,000 from $1,480,000 for the six months ended June 30, 2002. Net loss,
which includes deductions for depreciation and mortgage interest expense, for
the six months ended June 30, 2003 increased $79,000 to $266,000 from $187,000
for the six months ended June 30, 2002. Average occupancy decreased 3.6%, to
87.7% from 91.3% for the comparable period in 2002, which reduced revenues
$54,000. Although rental rates on new and renewing leases were raised, greater
concessions were offered to prospective tenants, resulting in a net decrease in
rental revenues of $24,000, and collection losses increased, which lowered
revenues $19,000. Partially offsetting the lower income was additional fee
income of $7,000. The increase in net loss was a result of lower revenues,
partially offset by a decrease of $11,000 in expenses. Payroll expenses for the
current period were $23,000 lower, as certain positions on the staff were
unfilled for brief periods during 2003. Repairs and maintenance costs decreased
$12,000, primarily as a result of lower replacement costs in the current period.
These decreases in expenses were partially offset by an increase in insurance
expense of $26,000, reflecting a general increase in the cost of insurance
premiums.
14
Halton Place Apartments (Greenville, South Carolina)
- -----------------------
Total revenues for the three months ended June 30, 2003 decreased $42,000
to $347,000 from $389,000 for the three months ended June 30, 2002. Net income,
which includes deductions for depreciation and interest expense, for the six
months ended June 30, 2003 decreased $66,000 to $8,000 from $74,000 for the six
months ended June 30, 2002. The decrease in revenues is due primarily to lower
occupancy and tenant concessions at the property. Average occupancy for the
three months ended June 30, 2003 decreased 4.4%, to 82.4% from 86.8% for the
three months ended June 30, 2002, which reduced revenues $24,000. In addition,
greater tenant concessions further reduced revenues $21,000. Lower revenues and
an increase in expenses of $24,000 resulted in the decrease in net income.
Interest expense increased $7,000, as average borrowings under the revolving
credit facility rose in 2003. Insurance expense rose $7,000, reflecting an
overall increase in insurance premiums, and real estate taxes increased $6,000.
Payroll expense was $4,000 higher, as a full-time groundskeeper was hired in
late 2002, filling a position that had been open in the prior year.
Total revenues for the six months ended June 30, 2003 decreased $85,000 to
$694,000 from $779,000 for the six months ended June 30, 2002. Net income, which
includes deductions for depreciation and interest expense, for the six months
ended June 30, 2003 decreased $133,000 to $26,000 from $159,000 for the six
months ended June 30, 2002. Although rental rates were increased marginally,
greater tenant concessions resulted in a net decrease in revenues of $50,000.
Average occupancy decreased 3.5%, to 82.0% from 85.5% for the comparable period
in 2002, which reduced rental revenue $35,000. The decrease in net income was a
result of lower revenues and a $47,000 increase in expenses. Additional
insurance costs of $15,000 resulted from higher premiums charged by the
insurance industry. Payroll expense increased $13,000 as a full-time
groundskeeper was hired in late 2002, filling a position that had been open in
the prior year. Utility expense increased $11,000 due to usage and rate
increases. Interest expense for the period increased $7,000, as the average
balance outstanding under the credit facility secured by the property was higher
in the current period.
15
Le Coeur du Monde Apartments (St. Louis, Missouri)
- ----------------------------
Total revenues for the three months ended June 30, 2003 decreased $55,000
to $417,000 from $472,000 for the three months ended June 30, 2002. Net loss,
which includes deductions for depreciation and mortgage interest expense, for
the three months ended June 30, 2003 increased $66,000 to $80,000 from $14,000
for the three months ended June 30, 2002. Although rental rates were raised on
new and renewing leases at the property, which added $7,000 to revenues, average
occupancy decreased 10.2%, to 85.8% from 96.0% for the same period in 2002,
which reduced revenues $48,000. In addition, increased tenant concessions
further reduced revenues by $14,000. The increase in net loss was a result of
lower revenues and a $10,000 increase in expenses. Insurance expense increased
$6,000 due to increases in insurance premiums, and repair and maintenance costs
increased $5,000.
Total revenues for the six months ended June 30, 2003 decreased $96,000 to
$839,000 from $935,000 for the six months ended June 30, 2002. Net loss, which
includes deductions for depreciation and mortgage interest expense, for the six
months ended June 30, 2003 increased $104,000 to $141,000 from $37,000 for the
six months ended June 30, 2002. The average occupancy rate declined 9.3%, to
86.1% in the current year from 95.4% for the same period in the prior year,
which lowered total revenues $88,000. Although rental rates were raised on new
and renewing leases, which added $13,000 to total revenues, tenant concessions
were increased, which reduced total revenues $21,000. The increase in net loss
was a result of lower revenues and a $9,000 increase in expenses, primarily due
to additional insurance costs of $11,000 resulting from higher premiums charged
when the policies were renewed.
16
Eagle Lake Business Center IV (Maple Grove, Minnesota)
- -----------------------------
On June 12, 2002, the Registrant purchased Eagle Lake Business Center IV,
a 60,345 square foot industrial flex property located in Maple Grove, Minnesota,
for $4,700,000 in an all cash transaction. The property is currently 100%
occupied.
Total revenues for the three and six months ended June 30, 2003 were
$206,000 and $432,000, respectively. Total revenues for the three and six months
ended June 30, 2002 were $37,000. Net income, which includes deductions for
depreciation expense, for the three and six months ended June 30, 2003, was
$103,000 and $219,000, respectively. Net income, which includes deductions for
depreciation expense, for the three and six months ended June 30, 2002, was
$20,000.
Total revenues for the three months ended June 30, 2003 was comprised of
rental revenue of approximately $106,000 and escalation income of approximately
$100,000. Expenses for the three months ended June 30, 2003, related primarily
to real estate taxes of approximately $44,000, depreciation expense of
approximately $28,000, repairs and maintenance expenses of approximately $8,000,
insurance expense of approximately $3,000 and other miscellaneous expenses which
totaled approximately $20,000.
Total revenues for the six months ended June 30, 2003 was comprised of
rental revenue of approximately $291,000 and escalation income of approximately
$141,000. Expenses for the six months ended June 30, 2003, related primarily to
real estate taxes of approximately $89,000, depreciation expense of
approximately $55,000, repairs and maintenance expenses of approximately
$23,000, payroll expense of approximately $8,000, insurance expense of
approximately $6,000, and other miscellaneous expenses which totaled
approximately $32,000.
Investment in Joint Venture (West Chester, Pennsylvania)
- ---------------------------
On April 30, 2002, the Registrant purchased a 75% non-controlling interest
in a partnership that owns Waterview Apartments in West Chester, Pennsylvania.
Waterview Apartments comprises 203 apartment units and 6,000 square feet of
commercial space.
Equity in net loss of joint venture for the three and six months ended
June 30, 2003 was approximately $44,000 and $165,000, respectively, which is net
of $88,500 and $177,000, respectively, that is the Registrant's portion of
depreciation charged on the books of the joint venture.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
AS OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003
----------------------------------------------------------
On March 1, 2001, the Registrant entered into a revolving credit facility
agreement with a bank under which interest incurred is determined based on
current market rates that fluctuate with LIBOR. As such, the Registrant has
market risk to the extent interest rates fluctuate during the term of the credit
facility and funds are advanced by the bank under the agreement. Based on the
weighted average outstanding balance under the credit facility for the three and
six months ended June 30, 2003, a 1% change in LIBOR would impact the
Registrant's three and six month net loss and cash flows by approximately $7,500
and $10,300, respectively.
ITEM 4. CONTROLS AND PROCEDURES
-------------------------------
(a) The President and the Chief Financial Officer of the general partner
of SB Partners have evaluated the disclosure controls and procedures
relating to the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 2003 as filed with the Securities and Exchange
Commission and have judged such controls and procedures to be
effective.
(b) There have been no changes in the Registrant's internal controls
during the quarter ended June 30, 2003 that could significantly affect
those controls subsequent to the date of evaluation.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------------
Exhibit 31 - Incorporated herein.
Exhibit 32 - Incorporated herein.
18
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SB PARTNERS
-----------------------------
(Registrant)
By: SB PARTNERS REAL ESTATE
CORPORATION
-----------------------------
General Partner
Dated: August 14, 2003 By:/s/ John H. Streicker
------------------------------
John H. Streicker
President
Dated: August 14, 2003 By:/s/ Elizabeth B. Longo
------------------------------
Elizabeth B. Longo
Chief Financial Officer
(Principal Financial Officer)
Dated: August 14, 2003 By:/s/ George N. Tietjen III
------------------------------
George N. Tietjen III
Vice President
(Principal Accounting Officer)
19
Exhibit 31
- ----------
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John H. Streicker, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of SB Partners;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
(4) The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) disclosed in this quarterly report any change in the Registrant's
internal control over financial reporting that occurred during the
Registrant's most recent fiscal quarter (the Registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the Registrant's internal control over financial reporting; and
(5) The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation over internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Registrant's ability
to record, process, summarize and report financial information;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: August 14, 2003 /s/ John H. Streicker
-------------------------
John H. Streicker
President
20
I, Elizabeth B. Longo, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of SB Partners;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
(4) The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the Registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) disclosed in this quarterly report any change in the Registrant's
internal control over financial reporting that occurred during the
Registrant's most recent fiscal quarter (the Registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the Registrant's internal control over financial reporting; and
(5) The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation over internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Registrant's ability
to record, process, summarize and report financial information;
and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: August 14, 2003 /s/ Elizabeth B. Longo
---------------------------
Elizabeth B. Longo
Chief Financial Officer
21
Exhibit 32
- ----------
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of SB Partners (the "Partnership") on
Form 10-Q for the period ended June 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof we hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:
(1) The report fully complies with the requirements of section 13(a) or
15(d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
Date: August 14, 2003 /s/ John H. Streicker
-------------------------
John H. Streicker
President
In connection with the Quarterly Report of SB Partners (the "Partnership") on
Form 10-Q for the period ended June 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof we hereby certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:
(1) The report fully complies with the requirements of section 13(a) or
15(d) of the Securities and Exchange Act of 1934; and
(2) The information contained in the report fairly presents, in all
material respects, the financial condition and results of operations
of the Partnership.
Date: August 14, 2003 /s/ Elizabeth B. Longo
---------------------------
Elizabeth B. Longo
Chief Financial Officer