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
For Quarter ended September 30, 1998 Commission File Number 0-8952
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SB PARTNERS
- -------------------------------------------------------------------------
New York 13-6294787
- -------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
666 Fifth Avenue N.Y., N.Y. 10103
- --------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 408-2900
--------------------
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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.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date (applicable only to corporate
issuers).
Not Applicable
SB PARTNERS
INDEX
Part I Financial Information
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 . . . . . . . . 1
Consolidated Statements of Operations
For the three and nine months ended September 30, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Changes in Partners' Capital
For the years ended December 31, 1996 and 1997
and the nine months ended September 30, 1998 . . . . . . 3
Consolidated Statements of Cash Flows
For the nine months ended September 30, 1998 and 1997 . 4
Notes to Consolidated Financial Statements . . . . . . . 5 - 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 10 - 17
Part II Other Information . . . . . . . . . . . . . . . . . . 18
<PAGE>1
<TABLE>
SB PARTNERS
(a New York limited partnership)
------------------------------
CONSOLIDATED BALANCE SHEETS
September 30, 1998 (Not Audited) and
December 31, 1997 (Audited, but not covered by the report of independent accountants)
-------------------------------------------------------------------------------------
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets:
Investments:
Real estate, at cost
Land $ 5,184,653 $ 2,924,653
Buildings, furnishings and improvements 49,986,165 28,867,658
Less - accumulated depreciation (14,185,104) (13,290,104)
----------- ------------
40,985,714 18,502,207
Real estate assets held for sale 0 24,925,795
------------ ------------
40,985,714 43,428,002
Other assets:
Cash and cash equivalents 3,161,480 549,760
Other 1,164,860 1,689,366
------------ ------------
Total assets $ 45,312,054 $ 45,667,128
============ ============
Liabilities:
Mortgage notes and other loans payable $ 24,760,919 $ 28,741,975
Accounts payable and accrued expenses 847,963 628,938
Tenant security deposits 120,909 309,836
------------ ------------
Total liabilities 25,729,791 29,680,749
------------ ------------
Partners' Capital:
Units of partnership interest without par value;
Limited partners - 7,753 units 19,598,172 16,002,752
General partner - 1 unit (15,909) (16,373)
------------ ------------
Total partners' capital 19,582,263 15,986,379
------------ ------------
Total liabilities & partners' capital $ 45,312,054 $ 45,667,128
============ ============
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
<PAGE>2
<TABLE>
SB PARTNERS
(a New York limited partnership)
------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (Not Audited)
---------------------------------------------------
<CAPTION>
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income $1,600,792 $2,131,312 $6,533,788 $6,487,702
Interest on short-term investments 204,149 24,931 248,693 84,674
Other 70,338 21,084 543,171 254,050
---------- ---------- ---------- ----------
Total revenues 1,875,279 2,177,327 7,325,652 6,826,426
---------- ---------- ---------- ----------
Expenses:
Real estate operating expenses 924,711 931,809 3,775,686 2,747,661
Interest on mortgage notes and other loans payable 461,806 581,246 1,495,390 1,779,090
Depreciation and amortization 365,500 476,396 976,890 1,425,114
Real estate taxes 136,683 215,891 519,143 660,493
Management fees 252,446 300,094 626,742 897,651
Other 64,324 3,973 209,650 69,683
---------- ----------- ---------- ----------
Total expenses 2,205,470 2,509,409 7,603,501 7,579,692
---------- ----------- ---------- ----------
Loss from operations (330,191) (332,082) (277,849) (753,266)
Equity in net income of joint venture 0 172,876 0 219,689
Gain (loss) on sale of investments in real estate 0 0 3,873,733 (65,163)
---------- ----------- ---------- ----------
Net income (loss) (330,191) (159,206) 3,595,884 (598,740)
Income (loss) allocated to general partner (43) (21) 464 (77)
---------- ---------- ---------- ----------
Income (loss) allocated to limited partners $ (330,148) $ (159,185) $3,595,420 $ (598,663)
========== ========== ========== ==========
Net Income (Loss) Per Unit of Limited Partnership Interest $ (42.58) $ (20.53) $ 463.75 $ (77.22)
========== ========== ========== ==========
Weighted Average Number of Units of Limited
Partnership Interest Outstanding 7,753 7,753 7,753 7,753
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>3
<TABLE>
SB PARTNERS
(a New York limited partnership)
------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the nine months ended September 30, 1998 (Not Audited) and
for the years ended December 31, 1997 and 1996 (Audited, but not covered by the report of independent public accountants)
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Limited Partners:
Units of
Partnership
Interest Cumulative
----------- Cash Accumulated
Number Amount Distributions Earnings (Loss) Total
------ ------ ------------- --------------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 7,753 $119,968,973 $(97,728,323) $(10,949,039) $11,291,611
Net income for the period 0 0 0 4,311,423 4,311,423
----- ------------ ------------ ------------ -----------
Balance, December 31, 1996 7,753 119,968,973 (97,728,323) (6,637,616) 15,603,034
Net income for the period 0 0 0 399,718 399,718
----- ------------ ------------ ------------ -----------
Balance, December 31, 1997 7,753 119,968,973 (97,728,323) (6,237,898) 16,002,752
Net income for the period 0 0 0 3,595,420 3,595,420
----- ------------ ------------ ------------ -----------
Balance, September 30, 1998 7,753 $119,968,973 $(97,728,323) $ (2,642,478) $19,598,172
===== ============ ============ ============ ===========
General Partner:
Units of
Partnership
Interest Cumulative
----------- Cash Accumulated
Number Amount Distributions Earnings (Loss) Total
----- ------- ------------- --------------- -----
Balance, December 31, 1995 1 $10,000 $(24,559) $(2,422) $(16,981)
Net income for the period 0 0 0 556 556
----- ------- -------- ------- --------
Balance, December 31, 1996 1 10,000 (24,559) (1,866) (16,425)
Net income for the period 0 0 0 52 52
----- ------- -------- ------- --------
Balance, December 31, 1997 1 10,000 (24,559) (1,814) (16,373)
Net income for the period 0 0 0 464 464
----- ------- -------- ------- --------
Balance, September 30, 1998 1 $10,000 $(24,559) $(1,350) $(15,909)
===== ======= ======== ======= ========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>4
<TABLE>
SB PARTNERS
(a New York limited partnership)
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Not Audited)
---------------------------------------------------
<CAPTION>
For the Nine Months Ended
September 30,
---------------------------
1998 1997
----------- ----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income (Loss) $ 3,595,884 $ (598,740)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
(Gain) loss on sale of investments in real estate (3,873,733) 65,163
Equity in net income of joint venture 0 (219,689)
Depreciation and amortization 976,890 1,425,114
Decrease in other assets 292,027 492,006
Increase (decrease) in other liabilities 30,098 (189,600)
------------ -----------
Net cash provided by operating activities 1,021,166 974,254
------------ -----------
Cash Flows From Investing Activities:
Net proceeds from sales of investments in real estate 29,210,371 45,000
Purchase of investment in real estate property (22,671,425) 0
Capital additions to real estate owned (967,336) (701,044)
------------ -----------
Net cash provided by (used in) investing activities 5,571,610 (656,044)
------------ -----------
Cash Flows From Financing Activities:
Proceeds from mortgage notes payable 3,800,000 0
Retirement of mortgage notes and other loans payable (7,514,832) (326,267)
Principal payments on mortgage notes payable (266,224) (246,960)
------------ -----------
Net cash used in financing activities (3,981,056) (573,227)
------------ -----------
Net increase (decrease) in cash and cash equivalents 2,611,720 (255,017)
Cash and cash equivalents at beginning of period 549,760 2,019,321
------------ -----------
Cash and cash equivalents at end of period $ 3,161,480 $ 1,764,304
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 1,514,681 $ 1,647,802
============ ===========
The accompanying notes are an integral part of these consolidated statements.
</TABLE>
<PAGE>5
SB PARTNERS
(A New York Limited Partnership)
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
------------------------------------------------------
FOR THE PERIODS ENDED SEPTEMBER 30, 1998
----------------------------------------
(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 properties. SB Partners Real Estate Corporation (the "General
Partner") serves as the general partner of the Partnership.
The consolidated financial statements as of and for the three and nine
month periods ended September 30, 1998 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 generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Registrant believes that the disclosures are
adequate to make the information presented not misleading. It is
suggested that these financial statements be read in conjunction with
the financial statements and the notes thereto included in the
Registrant's latest annual report on Form 10-K.
The results of operations for the three and nine month periods ended
September 30, 1998 and 1997 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 subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The consolidated financial statements are prepared using the
accrual basis of accounting under generally accepted accounting
principles. Revenues are recognized as earned and expenses are
recognized as incurred. The preparation of financial statements
in conformity with generally accepted accounting 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) Each partner is individually responsible for reporting his share
of the Partnership's taxable income or loss. Accordingly, no
provision has been made in the accompanying financial statements
for Federal, state or local income taxes.
<PAGE>6
(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 by amortizing the cost over the term of the
related mortgage notes. Amortization of leasing commissions and
tenant improvements is computed by amortizing the cost over the
term of the related lease.
(d) Gains on sales of investments in real estate are recognized in
accordance with generally accepted accounting principles
applicable to sales of real estate, which require minimum levels
of initial and continuing investment by the purchaser, and
certain other tests be met, prior to the full recognition of
profit at the time of the sale. When the tests are not met,
gains on sales are recognized on either the installment or cost
recovery methods.
(e) 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 each
period.
(f) For financial reporting purposes, the Partnership considers all
highly liquid, short-term investments with maturities of three
months or less to be cash equivalents.
(g) The Partnership accounted for its investment in a joint venture
using the equity method. Pursuant to the special allocations of
cash flow contained in the joint venture agreement, it
recognized income or loss to the extent of its allocable share
of the change in the net assets of the joint venture, after
taking into account preference distributions, as defined, for
the period.
<PAGE>7
(2) INVESTMENTS IN REAL ESTATE AND REAL ESTATE ASSETS HELD FOR SALE
As of September 30, 1998, the Partnership owned apartment projects in
Reno, Nevada, Orlando and Holiday, Florida, 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 September 30, 1998 and December 31, 1997, and the net carrying
value of the real estate assets held for sale at December 31, 1997:
<TABLE>
<CAPTION>
Real Estate at Cost
No.of Year of -------------------
Type Prop. Acquisition Description 9/30/98 12/31/97
- ---- ----- ----------- ----------- ------- --------
<S> <C> <C> <C> <C> <C>
Residential properties 3 1983-98 1,308 Apt. Units $55,126,431 $31,747,924
Undeveloped land 1 1978 13.9 Acres 44,387 44,387
----------- -----------
55,170,818 31,792,311
Less: Accumulated depreciation (14,185,104) (13,290,104)
----------- -----------
$40,985,714 $18,502,207
=========== ===========
<CAPTION>
Real Estate Held for Sale
No.of Year of -------------------------
Type Prop. Acquisition Description 9/30/98 12/31/97
- ---- ----- ----------- ----------- ------- --------
<S> <C> <C> <C> <C> <C>
Residential property 1 1997 594 Apt. Units $0 $20,832,762
Office property 1 1984-93 138,333 Sq. Ft. 0 4,093,033
-- -----------
$0 $24,925,795
== ===========
<FN>
Note: Information is provided for all properties owned as of the end
of the periods presented. The carrying amount of real estate assets
held for sale is the lower of depreciated cost or fair market value
and is included above at the net carrying amount. Cherry Hill Office
Center was sold on April 16, 1998, and Riverbend Apartments was sold
on June 30, 1998 (see Note 3).
</TABLE>
<PAGE>8
(3) REAL ESTATE TRANSACTIONS
On August 20, 1998, the Partnership purchased Cypress Key Apartments,
a 360 unit apartment community located in Orlando, Florida, for
$22,600,000 in an all cash transaction. The proceeds from the sale of
Riverbend Apartments on June 30, 1998 were used to consummate this
acquisition. Please refer to the Form 8-K filed September 4, 1998, as
amended November 3, 1998, in connection with this transaction.
On June 30, 1998, the Partnership sold Riverbend Apartments for a
contract price of $24,500,000 in an all cash transaction. For
financial reporting purposes, the Partnership recognized a net gain on
sale of investment in real estate of approximately $3,368,000 in
connection with the sale. Please refer to the Form 8-K filed July 15,
1998, in connection with this transaction.
On April 16, 1998, the Partnership sold Cherry Hill Office Center for
a contract price of $4,825,000 in an all cash transaction. The
proceeds from the sale were used, in part, to retire the short-term
bank loan of $4,000,000, the proceeds of which had been used to
finance a portion of the purchase of the forty percent co-venturer's
interest in Riverbend Apartments in December, 1997 (see also Note 4).
As a result of the sale, the Partnership recognized a gain for
financial reporting purposes of approximately $506,000. Please refer
to the Form 8-K filed April 30, 1998, in connection with this
transaction.
In January, 1997, the Partnership sold its 10% interest in an
apartment project in Orlando, Florida. The Partnership had been using
the cost method to account for this investment. In connection with
this sale, the Partnership recognized a loss on sale of real estate
investments of $65,000 for the nine months ended September 30, 1997.
(4) INVESTMENT IN JOINT VENTURE
During 1992, the Partnership and an institutional investor (the
"Investor") entered into a joint venture agreement where the
Partnership contributed Riverbend Apartments for an agreed equity
value of $14,250,000 and the Investor contributed $9,500,000 in cash.
The Partnership and the Investor held interests in the venture of 60%
and 40%, respectively, and the Investor was entitled to a guaranteed
return of 9.5% of its average investment, as defined in the joint
venture agreement. For financial reporting purposes, the Partnership
recorded its investment in the joint venture at its net carrying
amount of the property contributed, and no gain or loss was
recognized. All significant matters affecting the joint venture
required the unanimous consent of the venturers.
On December 15, 1997, the Partnership purchased the 40% interest of
its former co-venturer for $9,800,000 through a wholly owned limited
liability company, and effectively became the sole owner of the
property. All items of income and expense of the property are
included in the consolidated statements of income of the Registrant
for the three and nine months ended September 30, 1998. The assets
and liabilities associated with the property are included in the
consolidated balance sheet of the Registrant at December 31, 1997. As
the Partnership sold Riverbend Apartments on June 30, 1998 (see Note
3), the assets and liabilities of the property have been removed from
the consolidated balance sheet as of September 30, 1998.
<PAGE>9
(5) MORTGAGE NOTES AND OTHER LOANS PAYABLE
Mortgage notes and other loans payable consist of the following first
liens:
<TABLE>
<CAPTION>
Net Carrying Amount
Annual September 30, December 31,
Interest Maturity Installment Amount Due ------------ ------------
Property Rate Date Payments(d) at Maturity(c) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Holiday Park (b) 6.895% 1/08 $ 300,169 $ 3,277,785 $ 3,777,353 $ 3,517,983
Meadow Wood 7.55 1/04 1,914,996 18,979,461 20,983,566 21,223,992
Riverbend (a) Variable 4/98 Interest Only - 0 4,000,000
----------- -----------
$24,760,919 $28,741,975
=========== ===========
<FN>
(a) Unsecured demand note which was repaid and retired in April, 1998.
(See also Note 3.)
(b) Mortgage note was refinanced in January, 1998. (See also Liquidity
and Capital Resources section of Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
(c) The mortgages are nonrecourse to the Partnership.
(d) Annual installment payments include principal and interest.
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
The Partnership is a party to certain actions directly arising from its
normal business operations. While the ultimate outcome is not
presently determinable with certainty, the Partnership believes that
the resolution of these matters will not have a material effect on its
financial position or results of operations.
On November 6, 1997, Hugh Spencer, a limited partner who holds two
units in the Partnership, filed a purported class action complaint, on
behalf of himself and other persons similarly situated, against the
Partnership and its general partner and other affiliates in the Supreme
Court of the State of New York, County of New York, entitled Spencer v.
SB Partners et. al., Index No. 120673/97. The complaint alleges, inter
alia, that the business of the Partnership can only be carried on at a
loss, and that the general partner breached the partnership agreement
and its fiduciary duties, and seeks a court decree of dissolution of
the Partnership pursuant to Sections 63 and 99 of the New York
Partnership Law, an accounting from the general partner, the
appointment of a receiver to wind up the Partnership's affairs and an
award of costs and attorneys' fees to the plaintiff and the putative
class. The Partnership moved to stay the class action and compel
arbitration of any individual claim of the plaintiff. On September 27,
1998, the Supreme Court of the State of New York granted the
Partnership's motion. The Partnership believes that the final outcome
of this matter will not have a material adverse effect on its financial
position or results of operations.
<PAGE>10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------------------
General
-------
The financial statements for the three months ended September 30,
1998 reflect the operations of three residential garden apartment
properties. The financial statements for the nine months ended September
30, 1998 reflect the operations of one office property and four residential
garden apartment properties. The financial statements as of and for the
three and nine months ended September 30, 1997 reflect the operations of
one office property, one shopping center, two residential garden apartment
properties and one joint venture that owned an apartment property.
Total revenues for the three months ended September 30, 1998
decreased $302,000 to approximately $1,875,000 from approximately
$2,177,000 for the three months ended September 30, 1997. Net loss for the
three months ended September 30, 1998 increased $171,000 to approximately
$330,000 from approximately $159,000 for the three months ended September
30, 1997.
Total revenues for the nine months ended September 30, 1998 increased
$500,000 to approximately $7,326,000 from approximately $6,826,000 for the
nine months ended September 30, 1997. Net income after gain on sale of
investments in real estate for the nine months ended September 30, 1998
increased $4,195,000 to approximately $3,596,000 from a net loss of
approximately $599,000 for the nine months ended September 30, 1997.
The changes in total revenues and net income are the results of the
changes from 1997 to 1998 in the composition of the portfolio. In December
1997, the Registrant sold Plantation Shopping Center and purchased from its
former co-venturer the forty-percent interest in the joint venture which
owned Riverbend Apartments, becoming the sole owner of this 594 unit
apartment community. On June 30, 1998, the Registrant then sold Riverbend
Apartments for $24,500,000 in an all cash transaction. In addition, on
April 16, 1998, the Registrant sold Cherry Hill Office Center. Included in
net income for the nine months ended September 30, 1998, is a net gain on
sale of investments in real estate of approximately $3,874,000, $506,000 as
a result of the sale of Cherry Hill Office center and $3,368,000 from the
sale of Riverbend Apartments. Furthermore, on August 20, 1998, the
Registrant used the proceeds from the sale of Riverbend Apartments to
purchase Cypress Key Apartments, a 360 unit apartment community located in
Orlando, Florida. Cypress Key Apartments was purchased for $22,600,000 in
an all cash transaction.
<PAGE>11
The consolidated statements of operations for the three months
ended September 30, 1998 include revenues of $342,000 from Cypress Key
Apartments, but none from the properties it sold during the period between
the financial statement dates. Conversely, the consolidated statements of
operations for the three months ended September 30, 1997 include revenues
from Plantation Shopping Center and Cherry Hill Office Center of $416,000
and $338,000, respectively, but no revenues from Cypress Key Apartments.
The decrease in revenues generated by the Registrant's real estate
investments was partially offset by an increase of $179,000 of interest
income earned on the proceeds of the sale of Riverbend Apartments until the
proceeds were used for the purchase of Cypress Key Apartments. Operating
expenses for the three months ended September 30, 1998, include $85,000 of
depreciation expense for Cypress Key Apartments, but do not include
interest or depreciation expense for the properties that were sold. The
three month period for the previous year includes $106,000 of interest
expense and $114,000 of depreciation expense for Plantation Shopping
Center, and $50,000 of depreciation expense for Cherry Hill Office Center.
Real estate tax expense also decreased $79,000 for the three month period
due to the changes in the composition of the portfolio.
The consolidated statements of operations for the nine months
ended September 30, 1998 include revenues from Cypress Key Apartments of
$342,000, Riverbend Apartments of $2,285,000 and Cherry Hill Office Center
of $417,000. The consolidated statement of operations for the nine months
ended September 30, 1997 do not include revenues from Cypress Key
Apartments, nor are there revenues from Riverbend Apartments in which the
Registrant held a joint venture interest at the time. Conversely, the
consolidated statement of operations for the nine months ended September
30, 1997 includes revenues from Plantation Shopping Center of $1,376,000.
Due to the sale in 1998, revenues from Cherry Hill Office Center decreased
$707,000 to $417,000 from $1,124,000 for the nine month period a year
earlier. A decrease in revenues at Meadow Wood Apartments of $267,000 from
the prior year was partially offset by a net increase of $164,000 of
interest earned on short-term investments. Operating expenses for
Riverbend Apartments totaled $1,542,000 for the nine months ended September
30, 1998, while operating expenses for Plantation Shopping Center and
Cherry Hill Office Center totaled $230,000 and $419,000, respectively, for
the period a year earlier. Interest expense for 1998 includes $96,000
arising from the loan used to purchase the forty percent co-venturer's
interest in Riverbend Apartments, while the period a year earlier includes
$312,000 and $15,000 of interest on the mortgages secured by Plantation
Shopping Center and Cherry Office Center, respectively. Depreciation
expense recorded for the nine month period in 1997 includes $337,000 and
$147,000 for Plantation Shopping Center and Cherry Hill Office Center,
respectively, however, since Plantation Shopping center was sold and Cherry
Hill Office Center and Riverbend Apartments were both classified as real
estate assets held for sale as of September 30, 1997, no depreciation was
recorded for these three properties in 1998.
For additional analysis, please refer to the discussions of the
individual properties below.
<PAGE>12
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. Actual results may differ materially from those
contemplated by the forward looking statements.
YEAR 2000 COMPLIANCE
--------------------
The Registrant is examining the problem presented by the inability of
many computer programs to distinguish the year 2000 from the year 1900
(referred to as the "Year 2000"). The primary software packages used by
the Registrant are designed by outside vendors who have represented that
the software is Year 2000 compliant (that is, not to be negatively affected
by the occurrence or use of a date in the year 2000 or beyond). One
financial reporting software package designed by a third party vendor who
has represented that the current versions being used are Year 2000
compliant will require a Year 2000 programming modification. The Registrant
is in the process of testing all of its systems to ensure Year 2000
compliance and expects the testing to be completed by the end of the
current year, with any software modifications required to be implemented by
mid-year 1999. The Registrant expects that the cost to remediate Year 2000
technology issues will be minimal. Although there can be no assurances, at
the present time the Registrant does not believe problems likely to be
faced by its vendors, lenders or customers because of the Year 2000 problem
would be likely to have a material adverse impact on the Registrant or the
results of its operations. The Registrant could be affected by systemic
problems in the economy resulting from the Year 2000 issue, such as
disruptions of communication systems or overall economic dislocation. In
addition, the Registrant's activities could be disrupted if banks, as a
result of the Year 2000 problem, are unable to effect transactions in the
normal course of business. At the present time, the Registrant does not
believe it is possible to measure the effect of potential complications.
The Registrant will continually monitor and evaluate these areas and
develop contingency plans on an as needed basis.
<PAGE>13
Liquidity and Capital Resources
-------------------------------
As of September 30, 1998, the Registrant had cash and cash
equivalents of $3,161,000 in addition to $709,000 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 $2,618,000 more than cash, cash equivalents, and deposits
held in escrow on December 31, 1997. The increase is primarily due to the
sales of Riverbend Apartments and Cherry Hill Office Center during the nine
months ended September 30, 1998, net of the subsequent investment of cash
for the acquisition of Cypress Key Apartments. Most of the proceeds from
the sale of Cherry Hill Office Center were used to retire the short term
bank note of $4,000,000 which was used for the purchase of the co-
venturer's interest in Riverbend Apartments. Most of the proceeds from the
sale of Riverbend Apartments were used to purchase Cypress Key Apartments.
Most of the cash generated from operations, $1,021,000 was used for capital
additions to real estate owned which totaled $967,000 for the nine months
ended September 30, 1998.
Debt at September 30, 1998 consisted of approximately $24,761,000 of
non-recourse first mortgage notes payable secured by two apartment
properties owned by the Registrant. In January, 1998, the Registrant
successfully refinanced the mortgage note secured by Holiday Park
Apartments with the existing lender. The loan amount was increased to
$3,800,000, the maturity was extended to 2008, and the interest rate was
reduced from 9.00% to 6.895% per annum for the term of the loan. As noted
above, the Registrant used proceeds from the sale of Cherry Hill Office
Center to retire the $4,000,000 unsecured demand note which had been used
to purchase the forty-percent interest in the joint venture which owned
Riverbend Apartments (See also Notes 3 and 5 to the Consolidated Financial
Statements). The Registrant is currently negotiating with a lender for a
mortgage note of approximately $17,000,000 which will be secured by Cypress
Key Apartments. The proceeds of this mortgage note will allow the
Registrant to further expand its investment activities. Scheduled
maturities through regularly scheduled monthly payments of principal and
interest will be approximately $93,000 for the last fiscal quarter of 1998.
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 payments of
principal and interest. The Registrant has no other debt except the normal
trade accounts payable and expenses, and accrued interest on previously
discussed mortgage notes payable.
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.
<PAGE>14
Holiday Park Apartments
-----------------------
Total revenues for the three months ended September 30, 1998
decreased $4,000 to $290,000 from $294,000 for the three months ended
September 30, 1997. Net income after depreciation and mortgage interest
expense for the three months ended September 30, 1998 increased $20,000 to
net income of $7,000 from a net loss of $13,000 for the three months ended
September 30, 1997. The decrease in total revenues is primarily due to a
decrease in average occupancy of 2.9%, to 90.7% from 93.6% from the period
a year earlier, which decreased revenues $14,000, and a decrease in
miscellaneous revenues of $1,000, partially offset by an increase in rental
rates implemented at the property which increased revenues $11,000. The
increase in net income is primarily due to a decrease in financing expenses
of $22,000. The decreased financing expenses resulting from the
refinancing of the mortgage note encumbering the property include a
decrease of $14,000 in interest expense and a decrease of $8,000 in
amortization of costs associated with securing the new loan.
Total revenues for the nine months ended September 30, 1998 increased
$59,000 to $918,000 from $859,000 for the nine months ended September 30,
1997. Net income after depreciation and mortgage interest expense for the
nine month period ended September 30, 1998 increased $72,000 to net income
of $5,000 from a net loss of $67,000 for the nine months ended September
30, 1997. The increase in total revenues was primarily due to rental rate
increases implemented at the property which increased revenues $40,000,
supplemented by an increase in occupancy of 2.5%, to 94.9% from 92.4% for
the period a year earlier, which increased revenues $14,000, while
miscellaneous revenues increased $5,000. The increase in net income is
primarily due to the increase in revenues, coupled with a decrease in
expenses of $13,000 primarily due to a decrease in financing costs.
Interest expense decreased $35,000 due to the refinancing of the mortgage
note secured by the property. This decrease in expense was partially
offset by the write-off of approximately $43,000 of unamortized costs
associated with the loan that was refinanced in January, partially offset
by the decrease in amortization due to lower costs incurred to secure the
new loan.
<PAGE>15
Meadow Wood Apartments
----------------------
Total revenues for the three months ended September 30, 1998
decreased $67,000 to $1,037,000 from $1,104,000 for the three months ended
September 30, 1997. Net loss after depreciation and mortgage interest
expense for the three months ended September 30, 1998 increased $93,000 to
$129,000 from $36,000 for the three months ended September 1997. The
decrease in total revenues is primarily due to a decrease in average
occupancy which decreased revenues $70,000, and a decrease in miscellaneous
income of $5,000, partially offset by a decrease in tenant concessions of
$8,000. The decrease in occupancy is a result of the increasingly
competitive Reno apartment market. Reno is currently experiencing an
oversupply of housing which is expected to persist through the end of 1998.
This is especially true in the northwest and southeast section of the area.
Meadow Wood is working to maintain its market share in the highly
competitive submarket in southeastern Reno, although it has experienced a
decrease in occupancy and increased turnovers of renters. The increase in
net loss is primarily due to the decrease in revenues and a net increase in
expenses. Increased expenses included an increase in advertising and
promotion of $15,000, professional fees of $13,000, payroll costs of
$12,000, real estate taxes of $4,000, and an increase in general and
administrative expenses of $4,000, partially offset by a decrease in
utilities expense of $22,000.
Total revenues for the nine months ended September 30, 1998 decreased
$267,000 to $3,115,000 from $3,382,000 for the nine months ended September
30, 1997. Net loss after depreciation and mortgage interest increased
$307,000 to a net loss of $268,000 from net income of $39,000 for the nine
months ended September 30, 1997. The decrease in total revenues is
primarily the result of a decrease in average occupancy of 5.2%, to 84.8%
for 90.0% for the period a year earlier, as discussed above. The decrease
in average occupancy decreased revenues $236,000, additional tenant
concessions decreased revenues $18,000, and reduced miscellaneous income
decreased revenues $13,000. The increase in the net loss for the period is
primarily due to the decrease in revenues and a net increase in expenses.
Increased expenses included increased advertising and promotion of $32,000,
professional fees of $29,000, payroll costs of $27,000, utility costs of
$13,000, and real estate taxes of $7,000, partially offset by decreased
repairs and maintenance costs of $48,000 and decreased financing costs of
$20,000.
<PAGE>16
Cypress Key Apartments
----------------------
On August 20, 1998, the Registrant purchased Cypress Key Apartments,
a 360 unit apartment community located in Orlando, Florida, for $22,600,000
in an all cash transaction. (See also the Liquidity and Capital Resources
Section and Notes 2 and 3 to the Consolidated Financial Statements.) The
Registrant recognized total revenues of $342,000 for the three and nine
months ended September 30, 1998. Net income after depreciation expense was
$161,000 for the three and nine month periods.
Riverbend Apartments and Investment in Joint Venture
----------------------------------------------------
On December 15, 1997, the Registrant purchased the 40% interest of
its former co-venturer through a wholly owned limited liability company and
effectively became the sole owner of Riverbend Apartments. On June 30,
1998, the Registrant sold Riverbend Apartments for $24,500,000 in an all
cash transaction. (See also the Liquidity and Capital Resources Section
and Notes 3 and 5 to the Consolidated Financial Statements.) The assets
and liabilities associated with the property are included in the
consolidated balance sheet of the Registrant at December 31, 1997. The
items of income and expense associated with ownership of the property are
included in the consolidated statements of operations of the Registrant for
the nine months ended September 30, 1998. For comparative purposes only,
information regarding revenues, expenses and net income of the property is
provided below for the nine month period ended September 30, 1997, although
these items were not included in the consolidated financial statements of
the Registrant.
Equity in net income of joint venture for the three and nine months
ended September 30, 1998 decreased to $-0- from $173,000 and $220,000,
respectively, for the periods a year earlier. (See also Note 1 to the
Consolidated Financial Statements.) All the items of income and expense of
the property were included in the consolidated statements of income of the
Registrant for the current year.
<PAGE>17
Total revenues for the nine months ended September 30, 1998 decreased
$999,000 to $2,285,000 from $3,284,000 for the nine months ended September
30, 1997. Net income before gain on sale and after depreciation and
mortgage interest expense for the nine months ended September 30, 1998
decreased $145,000 to $465,000 from $610 for the nine months ended
September 30, 1997. Due to the sale of the property by the Registrant, the
reporting period for Riverbend Apartments ended on June 30, 1998. The
changes in revenues and net income are substantially due to the shortened
reporting period. Furthermore, as Riverbend Apartments was classified as a
real estate asset held for sale as of September 30, 1998, no depreciation
was charged to expense in the current year, which decreased depreciation
expense $609,000 from the prior year.
Cherry Hill Office Center
-------------------------
The Registrant sold Cherry Hill Office Center on April 16, 1998 for
$4,825,000 in an all cash transaction. (Please refer to Footnote 3 of the
Consolidated Financial Statements and Form 8-K filed April 30, 1998, in
connection with this transaction.)
Total revenues for the nine months ended September 30, 1998 decreased
$707,000 to $417,000 from $1,124,000 for the nine months ended September
30, 1997. Net income before gain on sale and after depreciation and
mortgage interest expense for the nine months ended September 30, 1998
decreased $43,000 to $95,000 from $138,000 for the nine months ended
September 30, 1997. Due to the sale of the property by the Registrant, the
reporting period for the Cherry Hill Office Center ended on April 16, 1998.
The changes in revenues and net income are substantially due to the
shortened reporting period. Furthermore, as Cherry Hill Office Center was
classified as a real estate asset held for sale as of September 30, 1998,
no depreciation was charged to expense in the current year, which decreased
depreciation expense $147,000 from the prior year.
<PAGE>18
PART II - OTHER INFORMATION
ITEM 5. OTHER INFOMATION
----------------
On November 6, 1997, Hugh Spencer, a limited partner who holds
two units in the Registrant, filed a purported class action
complaint, on behalf of himself and other persons similarly
situated, against the Registrant and its general partner and
other affiliates in the Supreme Court of the State of New York,
County of New York, entitled Spencer v. SB Partners et. al.,
Index No. 120673/97. The complaint alleges, inter alia, that
the business of the Registrant can only be carried on at a
loss, and that the general partner breached the partnership
agreement and its fiduciary duties, and seeks a court decree of
dissolution of the partnership pursuant to Sections 63 and 99
of the New York Partnership Law, an accounting from the general
partner, the appointment of a receiver to wind up the
Registrant's affairs and an award of costs and attorneys' fees
to the plaintiff and the putative class. The Registrant moved
to stay the class action and compel arbitration of any
individual claim of the plaintiff. On September 27, 1998 the
Supreme Court of the State of New York granted the
Registrant's motion. The Registrant believes that the final
outcome of this matter will not have a material adverse effect
on its financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
On September 4, 1998, the Registrant filed Form 8-K to
report the purchase on August 20, 1998 of Cypress Key
Apartments. On November 3, 1998, the Registrant filed
Form 8-K/A to amend this filing to include the requisite
financial statements.
On July 15, 1998, the Registrant filed Form 8-K to report
the sale on June 30, 1998 of Riverbend Apartments. Pro-
forma financial statements were included in the filing.
All other item numbers are omitted because they are not
applicable.
<PAGE>19
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: November 16, 1998 By:/s/ John H. Streicker
----------------------------
John H. Streicker
President
Dated: November 16, 1998 By:/s/ Elizabeth B. Longo
----------------------------
Elizabeth B. Longo
Chief Financial Officer
Dated: November 16, 1998 By:/s/ George N. Tietjen
----------------------------
George N. Tietjen III
Vice President
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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