<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of Securities Exchange Act of 1934
Commission File
For the fiscal year ended December 31, 1996 Number 0-16865
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP
(exact name of small business issuer as specified in its charter)
Massachusetts 04-2948435
(State of organization) (IRS Employer Identification No.)
One International Place, Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (617) 330-8600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest and
Preferred Units of Limited Partnership Interest
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
Cover Page Continued on Next Page
<PAGE>
Cover page 2 of 2
Registrant's revenues for its most recent fiscal year were $15,755,000
No market exists for the limited partnership interests of the Registrant, and,
therefore, a market value for such interests cannot be determined.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-KSB Document
In Which Document is --------
Incorporated
- -----------------------
PART I The Confidential Memorandum of Nantucket
Island Associates Limited Partnership,
dated March 9, 1987, included as Exhibit
28(c) to the Registration Statement on
Form 10 filed on April 29, 1988.
Amendment No. 1 to the Registrant's
Registration Statement on Form S-3
(Registration No. 22-07571), as
filed with the Securities and Exchange
Commission on September 20, 1996.
Transitional Small Business Disclosure Format: Yes ___ No X
2
<PAGE>
PART I
Item 1. Description of Business.
Development
Nantucket Island Associates Limited Partnership (the "Registrant") was
organized on December 17, 1986, under the laws of Delaware for the purpose of
owning a 99.98% beneficial interest in Sherburne Associates ("Sherburne"), a
Massachusetts general partnership that owns and operates a portfolio of
properties located on Nantucket Island, Massachusetts. This portfolio includes
two hotels (the Harbor House and White Elephant Hotel), 24 rental units located
in the Wharf Cottages, 48 retail buildings, the Nantucket Boat Basin
(accommodating approximately 250 yachts) and employee housing for approximately
150 persons (collectively, the "Properties"). The interest in Sherburne is held
through a 99.99% general partnership interest in NIA Operating Associates
Limited Partnership, a Massachusetts limited partnership ("NIA") which owns a
99.99% general partnership interest in Sherburne. The general partner of the
Registrant is Three Winthrop Properties, Inc., a Massachusetts corporation
("Three Winthrop" or the "General Partner") (see "Change in Control").
The Registrant was initially capitalized with contributions totaling
$100.00 from the original general partners. As of June 30, 1987, the Registrant
had raised a total of $62.8 million in capital contributions through an offering
(the "Offering") of 785 Units of limited partnership interests (the "Units") in
a private placement pursuant to Regulation D under the Securities Act of 1933,
as amended. As of June 30, 1987, all of the 785 Units had been sold to 784
investor limited partners (the "Limited Partners"). Of the $62.8 million,
approximately $44.6 million was paid in cash upon admission of the Limited
Partners. The balance was financed by promissory notes (the "LP Notes") payable
in two installments, the last of which was paid in full as of March 1, 1989.
In order to fund required capital improvements, reduce the Registrant's
indebtedness (including repayment of the outstanding loan to the General
Partner) and increase working capital, the General Partner determined that it
was necessary to increase the Registrant's equity by means of an offering of
subscription rights (the "Rights") to Limited Partners to purchase preferred
3
<PAGE>
partnership interests (the "Preferred Units"). The Registrant filed offering
materials with the Securities and Exchange Commission and commenced the offering
during the third quarter of 1996. An affiliate of the General Partner (the
"Affiliate") agreed to subscribe for all preferred partnership units which were
not subscribed for by Limited Partners. As a result of the offering, the
Registrant received approximately $10,466,000 in net proceeds from this
offering. In connection with the offering, the Affiliate acquired 652.25 Rights.
Profits and losses of the Registrant from normal operations had been
allocated 95% to the Limited Partners, 4% to Three Winthrop and 1% to Winthrop
Financial Associates ("WFA") through December 31, 1993. From January 1, 1994
through November 8, 1996, profits and losses of the Registrant from normal
operations had been allocated 95% to the Limited Partners and 5% to Three
Winthrop. In connection with the Rights offering, however, the Agreement of
Limited Partnership of the Registrant was amended and restated to provide for,
among other things, (i) losses to be allocated 5% to the general partners and
95% to the limited partners (including the holders of Preferred Units) in
proportion to and to the extent of their positive capital account balances, (ii)
a cumulative preferred annual return of 8% per Preferred Unit which is to be
paid out of available cash flow, and (iii) a priority distribution to holders of
Preferred Units from net proceeds from a capital transaction or upon liquidation
of Registrant (which distribution is prior to any distributions on account of
non-preferred limited partnership interests and to the general partner) equal to
250% of the initial capital invested by such holders for each Preferred Unit.
For additional information with respect to the Rights offering and the
amendments to the Registrant's partnership agreement effected thereby, reference
is made to Amendment No. 1 to the Registrant's Registration Statement on Form
S-3 (Registration No. 33-07571), as filed with the Securities and Exchange
Commission on September 20, 1996.
The Registrant acquired its interest in Sherburne in December 1986 from
unrelated third parties ("Sellers"). The purchase price was approximately $50.6
million, of which approximately $31.1 million was paid in cash, approximately
$8.4 million was paid by the issuance of a promissory note from the Registrant
to an affiliate of the Sellers and the remaining approximately $11.1 million was
paid by the assumption of certain mortgages and other debts of Sherburne
Associates. The Registrant remains obligated to make a contingent purchase price
4
<PAGE>
payment to the Sellers upon the sale or refinancing of the properties dependent
upon the ultimate proceeds realized. See "Item 7, Financial Statements - Note
7."
The Registrant's sole business is to own and operate the Properties
through its interest in Sherburne, with a view toward preserving and protecting
partnership capital and increasing capital appreciation and cash distributions
until such time, if any, that a sale of all or any portion of the Properties
appears to be advantageous to the Registrant. See "Item 2, Description of
Properties" for information with respect to the Properties.
Employees
None of the Registrant, NIA nor Sherburne has employees. Services are
performed for the Registrant, NIA and Sherburne by their respective general
partners and the agents retained by them. Winthrop Management, an affiliate of
WFA, oversees the direct day-to-day management of the Registrant's commercial
properties. Management of the hotels, the Wharf Cottages and the Boat Basin is
performed by Interstate Hotels Corporation, which is not affiliated with WFA.
Partnership Agreement Amendment
In August 1995, the General Partner amended the Registrant's
partnership agreement to clarify and remove certain ambiguities pertaining to
the requirements for calling and voting at a meeting of limited partners, or
taking action by written consent of partners in lieu thereof. Such requirements
include, among other matters, that any action by written consent may be
initiated only by the General Partner or by one or more Limited Partners holding
not less than 10% of the outstanding Units. In addition, in connection with the
Rights offering discussed above, the Registrant's partnership agreement was
substantially amended. The Registrant's partnership agreement was further
amended as discussed above in connection with the Rights offering.
Change in Control
Through December 31, 1993, the general partners of the Registrant were
Winthrop Financial Associates, A Limited Partnership, a Maryland public limited
partnership ("WFA") and Three Winthrop. Three Winthrop is wholly-owned by First
Winthrop Corporation ("First Winthrop"), which is wholly owned by WFA.
5
<PAGE>
Collectively, WFA and Three Winthrop are referred to as the "Original General
Partners." The general partner of WFA is Linnaeus Associates Limited Partnership
("Linnaeus"), a Maryland limited partnership. On December 31, 1993, WFA
transferred and assigned all of its rights, title and interest in and to its
general partner interest to Three Winthrop. WFA subsequently withdrew as a
partner of the Registrant and Three Winthrop elected to continue the business of
the Registrant as its sole general partner.
Until December 22, 1994, Arthur J. Halleran, Jr. was the sole general
partner of Linnaeus. On December 22, 1994, pursuant to an Investment Agreement
entered into among Nomura Asset Capital Corporation ("NACC"), Mr. Halleran and
certain other individuals who comprised the senior management of WFA, the
general partnership interest in Linnaeus was transferred to W.L. Realty, L.P.
("W.L. Realty"). W.L. Realty is a Delaware limited partnership, the general
partner of which was, until July 18, 1995, A.I. Realty Company, LLC
("Realtyco"). The equity securities of Realtyco were held by certain employees
of NACC. On July 18, 1995 Londonderry Acquisition II Limited Partnership, a
Delaware limited partnership ("Londonderry II"), an affiliate of Apollo Real
Estate Advisors, L.P. ("Apollo"), acquired, among other things, Realtyco's
general partner interest in W.L. Realty and a sixty four percent (64%) limited
partnership interest in W.L. Realty. WFA owns the remaining thirty-five percent
(35%) limited partnership interest. As a result of the foregoing acquisitions,
Londonderry II is the sole general partner of W.L. Realty which is the sole
general partner of Linnaeus, which in turn is the sole general partner of WFA.
As a result of the foregoing, effective July 18, 1995, Londonderry II became the
controlling entity of the General Partner. In connection with the transfer of
control, the officers and directors of WFA resigned and Londonderry II appointed
new officers and directors. See "Item 9, Directors, Executive Officers,
Promoters and Control Persons; Compliance With Section 16(a) of the Exchange
Act."
Item 2. Description of Properties.
The Registrant does not own any property other than its general
partnership interest in Sherburne. The following sets forth certain information
with respect to the Properties.
6
<PAGE>
Sherburne operates the Properties using four different operating units
relating to the Nantucket hotel and leisure industry: hotel, hotel restaurant,
boat basin and commercial rental properties. The hotels consist of the Harbor
House Hotel, the White Elephant Hotel and the Wharf Cottages, as well as related
employee housing; the hotel restaurants consist of the Regatta and Hearth
restaurants located within the White Elephant and Harbor House hotels,
respectively; the boat basin (the "Boat Basin") consists of the Nantucket Boat
Basin dockage activity; and the commercial rental (the "Commercial Rental")
consists of the properties leased to retail, restaurant and other tenants.
The following tables set forth the acquisition date, use, either the
number of units or rooms or total rentable square feet, and original purchase
price for the Properties:
Units/Rooms/
Acquisition Square Feet/ Acquisition
Property Name Date Dock Slips Cost
- ------------- ----------- ------------ -----------
Harbor House Hotel 12/86 112 $ 7,397,720
White Elephant Hotel 12/86 82 5,403,876
Wharf Cottage 12/86 24 6,544,280
Nantucket Boat Basin 12/86 242 6,544,280
Commercial Rental 12/86 80,419 24,734,844
Sherburne's business is highly seasonal, being dependent in large part
upon the level of tourism on Nantucket Island. During the winter, the level of
tourism on Nantucket drops substantially and, accordingly, portions of the
Properties are operated only on a seasonal basis. The tourist industry on
Nantucket is highly competitive. The various commercial properties owned by
Sherburne Associates face different types and levels of competition. While there
are more than 150 hotels, inns, motels and guest houses on Nantucket Island, the
General Partner believes that, based on comparable rates, location, amenities
and size, the two hotels owned by Sherburne compete directly with only two other
hotels on Nantucket Island.
7
<PAGE>
The following table sets forth the average annual occupancy rate and,
as applicable, either the monthly per unit, the daily average room rate, the
monthly average dock slip rental rate or the average monthly per square foot
rate at the Registrant's properties for the years ended December 31, 1996 and
1995:
Average Occupancy
Average Rate Rate
--------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
Harbor House Hotel(1) $228 $205 36.6% 41.8%
White Elephant Hotel(1) $228 $205 36.6% 41.8%
Wharf Cottage(1) $228 $205 36.6% 41.8%
Nantucket Boat Basin N/A N/A N/A N/A
Commercial Rental $41.68 $37.65 100% 100%
(1) Represents the collective average rate and occupancy at The Harbor
House Hotel, White Elephant Hotel and Wharf Cottage.
The mortgage loan encumbering Sherburne's properties was refinanced in
February 1997. The new $23,600,000 floating rate note adjusts annually,
depending on debt service coverage, to a rate between LIBOR plus 3.25% and LIBOR
plus 3.75%. The current rate on the loan is LIBOR plus 3.5% (approximately 9%).
As a condition to the loan, Sherburne purchased interest rate protection in the
form of an interest rate "Collar" arrangement. The Collar arrangement
effectively eliminates Sherburne's exposure to any increase in the LIBOR rate
above 7% and caps Sherburne's benefit from any decrease in the LIBOR rate below
5%. The loan requires monthly payments of interest and principal based on a 20
year amortization schedule and matures in February 2000 with a balloon payment
of approximately $22,343,000. The Registrant has two one year options to extend
the loan. The loan documents prohibit Sherburne from making any distributions to
its partners except in certain instances. See "Item 6, Management's Discussion
and Analysis or Plan of Operation". The Registrant paid approximately $675,000
in fees and expenses, including the cost of the interest rate Collar. The loan
agreement also provides for an additional $600,000 draw down to be used for the
construction of four new cottages (containing 12 guest rooms) at the White
Elephant Hotel. As a condition to the making of this loan, the Registrant was
required to unconditionally guaranty the payment of all amounts due under the
loan and WFA was required to
8
<PAGE>
unconditionally guaranty the payment of 25% of the principal amount of the loan.
The following table sets forth certain information concerning lease
expirations at the Commercial Rental (assuming no renewals for the period from
January 1, 1997 through December 31, 2006):
Aggregate SF Annualized Percentage
Number of Covered by Rental for of Total
Tenants Whose Expiring Leases Annualized
Leases Expire Leases Expiring Rental
------------- ------------ ---------- ----------
1997 28 11,459 $ 565,769 18.59%
1998 31 30,933 1,329,378 51.11%
1999 13 10,494 768,917 59.22%
2000 6 5,423 201,572 38.91%
2001 2 5,850 206,300 67.64%
2002 - - - -
2003 - - - -
2004 1 2,000 84,500 30.62%
2005 - - - -
2006 - - - -
Set forth below is a table showing the gross carrying value and
accumulated depreciation and federal tax basis of the Partnership's properties
taken as a whole as of December 31, 1996:
Gross
Carrying Accumulated Federal
Value Depreciation Rate Method Tax Basis
-------- ------------ ---- ------ ---------
$69,021,000 $20,906,000 Var. S/L $42,102,000
The following table sets forth the realty tax rate and realty taxes
paid for each Property in 1996:
Property Tax Rate Taxes Paid
- -------- -------- ----------
Harbor House Hotel 6.74 and 12.74/1000 $ 80,375
White Elephant Hotel 6.74 and 12.74/1000 51,104
Wharf Cottage 12.58/1000 13,000
Nantucket Boat Basin 12.58/1000 22,197
Commercial Rental 12.58/1000 483,292
9
<PAGE>
The Registrant believes that its Properties are adequately insured.
For information with respect to capital improvements performed at the
Properties in 1996 and anticipated capital improvements in 1997, see "Item 6,
Management's Discussion and Analysis or Plan of Operation."
In addition to the Capital Improvement Program and ongoing capital
improvements, during the last five years certain renovations have been required
as a result of damage caused by natural disasters.
During the formation of the Registrant an engineering study was
performed which revealed that petroleum hydrocarbon products had leaked out of
five separate portions of the Properties (the "sites"). Under applicable
Massachusetts law, the owner of the property on which such hazardous wastes have
been released is responsible for the entire cost of cleaning up such wastes. In
connection with the Registrant's acquisition of Sherburne, the Sellers agreed to
indemnify the Registrant for one-half of the costs of an environmental cleanup
of the Properties, up to an aggregate payment by the Sellers of $1.25 million.
As of December 31, 1996, Sherburne Associates' cumulative share of the
environmental cleanup totaled approximately $91,000. These costs included
removal of old gasoline tanks, installation of monitoring wells and installation
of recovery wells, as well as professional fees paid to engineers who analyzed
the potential future costs of cleaning up the Properties and who also served as
representatives of the Registrant in discussions with Massachusetts
environmental officials.
Two of the five sites have been deleted from the Department of
Environmental Protection's ("DEP") active files, one site has been closed with a
waiver completion statement and the remaining two sites are waivered sites which
are currently the subject of risk assessments which, when completed, will
outline the actions required to close the sites, either through waiver
completion statements or through deed restrictions. Waivered sites allow the
Registrant to proceed with evaluations and action under the supervision of the
consultant of record and without direct involvement of DEP.
10
<PAGE>
Item 3. Legal Proceedings.
To the best of the General Partner's knowledge, there are no material
pending legal proceedings to which the Registrant is a party or of which any of
their property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the period
covered by this report.
11
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
There is no established trading market for the Units. As of March 1,
1997, there were 803 holders of 785 outstanding limited partnership units (the
"Units") and 78 holders of 785 outstanding preferred limited partnership
interests (the "Preferred Units"). In addition, the Registrant's partnership
agreement places significant restrictions on the rights of Limited Partners to
transfer or assign their interests in the Registrant. Accordingly, transfers of
Units and Preferred Units are infrequent and occur only through private
transactions.
For information as to allocations of profit and loss and distributions
to the holders of Units and Preferred Units see Item 1, "Description of
Business."
There are no restrictions on the Registrant's present or future ability
to make distributions to its partners. However, pursuant to the new loan
documents, Sherburne is prohibited from making distributions to its partners
except in limited circumstances. In light of the extensive capital improvement
project ongoing at the Properties, no distributions were paid or accrued for
1996 or 1995. See "Item 6, Management's Discussion and Analysis or Plan of
Operation," for information relating to Registrant's future distributions.
12
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Resources
The Registrant requires cash to pay operating expenses, debt service
payments and capital improvements. The seasonal nature of the Registrant's
business results in the Registrant having to supplement deficiencies in its cash
flows with its reserves during the first, second and fourth quarters of each
year.
The level of liquidity based upon the Registrant's cash and equivalents
experienced a $10,117,000 increase at December 31, 1996, as compared to December
31, 1995. The Registrant's $9,498,000 provided by financing activities and
$1,578,000 provided by operating activities was partially offset by $959,000
used for improvements to property and equipment. The Registrant's financing
activities consisted of $10,466,000 of capital contributions received from the
offering of subscription rights for preferred limited partnership units which
was partially offset by syndication costs of $208,000 and principal payments of
$760,000 on long-term debt. Cash from operating activities increased primarily
due to improved operations.
In order to fund required capital improvements, reduce the Registrant's
indebtedness (including repayment of an outstanding loan to the General Partner)
and increase working capital, the General Partner determined that it was
necessary to increase the Registrant's equity by means of an offering of
subscription rights (the "Rights") to holders of limited partner interests (the
"Unitholders") to purchase preferred partnership units (the "Preferred Units").
The Registrant filed offering materials with the Securities and Exchange
Commission and commenced the offering during the third quarter of 1996. An
affiliate of the General Partner (the "Affiliate") agreed to subscribe for all
Preferred Units which were not subscribed for by the Unitholders. As of November
8, 1996, the expiration date of the offering, 132.75 Rights (at a cost of
$13,333 per Right) were subscribed for by the Unitholders (other than the
Affiliate). Accordingly, pursuant to the terms of the offer, the Affiliate
acquired 652.25 Rights. The Registrant received gross proceeds of approximately
$10,466,000 from the sale of the Preferred Units.
The Registrant incurred approximately $959,000 during 1996 in
connection with the initiation of an extensive capital
13
<PAGE>
improvements program. This program includes bulkhead improvements, refurbishing
hotel guest rooms at the Breakers and the Wharf Cottages; exterior painting of
the Wharf Cottages; employee housing roof repairs; awning replacement;
renovations of the hotel restaurants, lounges and meeting rooms; and minor
improvements to the commercial properties. An additional $5,500,000 is expected
to be incurred during 1997 in connection with this program. The cost of these
capital improvements will be financed from the offering proceeds. The two year
capital bulkhead project consists of installing a new steel bulkhead along
approximately 780 linear feet of the Boat Basin, along with the replacement of
both the north and south wave screens which act as wave barriers for the Boat
Basin. The Registrant is currently evaluating the necessity of dredging limited
portions of the Boat Basin prior to the 1998 season. The Registrant is aware of
significant structural damage caused to a free standing building during 1991 and
1992 storms. An evaluation of repairs so that the building can be occupied is
underway.
The General Partner loaned $600,000 to the Registrant in the second
quarter of 1996 to fund the payment of real estate taxes and capital
improvements. The demand note bore interest at prime plus 1%. In the fourth
quarter of 1996, the loan was repaid from proceeds from the offering.
The Registrant's $26,000,000 mortgage note, which was scheduled to
mature on February 28, 1997, was refinanced in February 1997. The new
$23,600,000 floating rate note adjusts annually, depending on debt service
coverage, to a rate between LIBOR plus 3.25% and LIBOR plus 3.75%. The current
rate is LIBOR plus 3.5%. The loan requires monthly payments of interest and
principal based on a 20 year amortization schedule and matures in February 2000
with a balloon payment of approximately $22,343,000. The Partnership has two one
year options to extend the debt. The Partnership paid approximately $675,000 in
fees and expenses, including the purchase of an interest rate collar. The loan
agreement also provides for an additional $600,000 draw down to be used for the
construction of four new cottages (containing twelve guest rooms) at the White
Elephant Hotel. It is anticipated that construction, which is still subject to
government and regulatory approval, will be completed, if at all, prior to the
summer of 1998.
Pursuant to the terms of the new loan documents, Sherburne is
prohibited from making any distributions to its partners
14
<PAGE>
(including the Registrant) except for distributions by Sherburne to the
Registrant from funds from operations of such amounts necessary to pay the
Registrant's administrative fees, expenses and reimbursements as well as the
General Partner's legal fees associated with Sherburne's properties. Upon a sale
of a property which is approved by the lender, Sherburne is permitted to
distribute to its partners up to 25% of the net proceeds of such sale over an
agreed upon release price for such property. In addition, such a distribution is
contingent upon the satisfaction of other conditions including the maintenance
of a specified loan to value ratio. As a result of the restrictions set forth in
the loan agreement, the expansive capital improvement program instituted at the
properties and the preferred return to be paid to the Preferred Unitholders, it
is not expected that any distributions will be made to unitholders in the
foreseeable future.
The Registrant has obtained a current appraisal which values
Registrant's hotel properties at $9,850,000. In 1993, Registrant's commercial
properties and the boat basin had an appraised value of approximately $29
million. Although Registrant has not obtained a more recent appraisal, it
believes, based upon a discounted cash flow analysis (the same methodology as
that employed in 1993), that the commercial properties have a current value of
approximately $23.6 million and the boat basin has a current value of
approximately $7 million. Accordingly, the book value of Registrant's properties
exceeds their current value by approximately $8 million. However, based on the
General Partner's analysis of current and projected future operating results and
the undiscounted cash flows associated with the Registrant's real estate assets,
no write-down in accordance with SFAS No. 121 is required at this time.
Results of Operations
Net loss decreased by $1,443,000 for the year ended December 31, 1996,
as compared to 1995.
Revenues decreased by $72,000 for the year ended December 31, 1996, as
compared to 1995, due to decreases in restaurant revenue of $385,000, boat basin
revenue of $121,000 and hotel revenue of $96,000, which were partially offset by
an increase in commercial rental operations of $530,000. Restaurant and hotel
operating revenues decreased as the restaurants and hotels were closed during
the quarter ended March 31, 1996 and were in operation during the quarter ended
March 31, 1995. The decline in occupancy at the hotels was substantially offset
by an increase in average
15
<PAGE>
daily room rates. Boat basin operating revenue decreased due to the frequency of
inclement weather experienced during the summer of 1996. Commercial rental
operating revenue increased due to an increase in retail rental rates.
Operating expenses decreased by $1,334,000 for the year ended December
31, 1996 as compared to 1995, primarily due to decreases in hotel operating
expenses of $397,000, restaurant operating expenses of $788,000 and boat basin
operating expenses of $102,000. Hotel operating expenses declined due to hotels
being closed for the first quarter of 1996 and due to the closing of the gift
shop and a delicatessen. Restaurant operating expenses decreased primarily due
to the restaurant being closed for the first quarter of 1996 in addition to
decreases in payroll and related costs. Marketing and promotion expenses
decreased due to a change in the managing agent's reservation fee structure.
Commercial rental operating expenses increased primarily due to an increase in
on-site administrative and building maintenance payroll.
Administrative costs remained relatively constant. Depreciation expense
increased by $62,000 due to capital improvements incurred during 1996 and 1995.
Interest expense decreased by $127,000 for the year ended December 31, 1996, due
to a decrease in average mortgage principal balance outstanding and a reduction
in interest rates.
The results of operations in future years may differ from the results
of operations for the year ended December 31, 1996, as weather conditions could
adversely affect operating results due to the short seasonal nature of the
resort business. Inflation and changing economic conditions, could also affect
occupancy levels, rental rates and operating expenses.
16
<PAGE>
Item 7. Financial Statements
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1996
INDEX
Page
Independent Auditors' Reports..............................................F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995...............F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995.................................................F-5
Consolidated Statements of Partners' Equity (Deficit)
for the Years Ended December 31, 1996 and 1995.............................F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995.................................................F-7
Notes to Consolidated Financial Statements.................................F-8
F - 1
<PAGE>
To the Partners
Nantucket Island Associates Limited Partnership
Boston, Massachusetts
Independent Auditors' Report
We have audited the accompanying consolidated balance sheet of Nantucket Island
Associates Limited Partnership (the "Partnership") and its subsidiaries as of
December 31, 1996, and the related consolidated statements of operations,
partners' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nantucket Island
Associates Limited Partnership and its subsidiaries as of December 31, 1996, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Imowitz Koenig & Co., LLP
New York, New York
February 3, 1997, except for Note 9,
which is dated March 11, 1997
F - 2
<PAGE>
Independent Auditors' Report
----------------------------
The Partners
Nantucket Island Associates Limited Partnership:
We have audited the accompanying consolidated balance sheet of Nantucket Island
Associates Limited Partnership and subsidiaries (the "Partnership") as of
December 31, 1995, and the related consolidated statements of operations,
partners' capital (deficit), and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Partnership as
of December 31, 1995, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
March 15, 1996
F - 3
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Unit Data)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
ASSETS 1996 1995
------------ -----------
<S> <C> <C>
Cash and cash equivalents $ 10,396 $ 279
Restricted cash 742 1,116
Accounts receivable, less allowance for doubtful
accounts of $23 (1996) and $49 (1995) 496 360
Receivable from related parties 74 124
Inventories 272 373
Prepaid expenses and other current assets 395 335
------------ -----------
Total current assets 12,375 2,587
Property and equipment, net of accumulated depreciation
of $20,906 (1996) and $18,612 (1995) 48,115 49,450
Deferred rent receivable 392 346
Deferred costs, net of accumulated amortization of
$2,065 (1996) and $1,765 (1995) 1,457 1,757
Security deposits and other restricted cash 179 172
------------ -----------
Total assets $ 62,518 $ 54,312
============ ===========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Accounts payable $ 146 $ 270
Accrued expenses 796 811
Advance deposits 150 248
Current maturity of long-term debt 26,053 736
Payables to related parties -- 59
Accrued interest 428 446
------------ -----------
Total current liabilities 27,573 2,570
Long-term debt 202 26,279
------------ -----------
Total liabilities 27,775 28,849
------------ -----------
Commitments
Partners' equity:
Limited partners equity; 785 units authorized,
issued, and outstanding 35,199 35,828
Preferred limited partners equity, 785 units
authorized, issued, and outstanding 9,921 --
General partners' (deficit) (10,377) (10,365)
------------ -----------
Total partners' equity 34,743 25,463
------------ -----------
Total liabilities and partners' equity $ 62,518 $ 54,312
============ ===========
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Unit Data)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenue:
Hotel operations $ 7,071 $ 7,167
Restaurant operations 2,020 2,405
Commercial rental operations 4,032 3,502
Boat basin operations 2,474 2,595
------------ ------------
Total revenue 15,597 15,669
------------ ------------
Operating expenses:
Hotel 4,693 5,090
Restaurant 2,639 3,427
Commercial rental 685 684
Boat basin 1,744 1,846
Bad debt expense 15 23
Real estate taxes 812 881
Insurance 553 584
Management and administrative 547 538
Amortization 299 310
Depreciation 2,294 2,232
------------ ------------
Total operating expenses 14,281 15,615
------------ ------------
Income from operations 1,316 54
------------ ------------
Other income (expense):
Interest income 119 104
Other income (expense) 39 --
Interest expense (2,452) (2,579)
------------ ------------
Total other income (expense), net (2,294) (2,475)
------------ ------------
Net Loss $ (978) $ (2,421)
============ ============
Net loss allocated to general partners $ (12) $ (121)
============ ============
Net loss allocated to limited partners $ (629) $ (2,300)
============ ============
Net loss allocated to preferred limited partners $ (337) $ --
============ ============
Net Loss per Limited Partnership Unit $ (801.27) $ (2,929.94)
============ ============
Net Loss per Limited Partnership Preferred Unit $ (429.30) $ --
============ ============
</TABLE>
See notes to consolidated financial statements.
F - 5
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1995
(In Thousands, Except Unit Data)
<TABLE>
<CAPTION>
Preferred
Units of Preferred Units Investor Investor
Limited of Limited Limited Limited General Total
Partnership Partnership Partners' Partners' Partners' Partners'
Interest Interest Equity Equity Deficit Equity
----------- -------------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1995 ................ 785 -- $ 38,128 $ -- $(10,244) $ 27,884
Net loss ................................. -- -- (2,300) -- (121) (2,421)
-------- -------- -------- -------- -------- --------
Balance - December 31, 1995 .............. 785 0 $ 35,828 $ 0 $(10,365) $ 25,463
Capital Contributions .................... 785 -- 10,466 -- 10,466
Syndication Costs ........................ -- (208) -- (208)
Net loss ................................. (629) (337) (12) (978)
-------- -------- -------- -------- -------- --------
Balance - December 31, 1996 .............. 785 785 $ 35,199 $ 9,921 $(10,377) $ 34,743
======== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
F - 6
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (978) $ (2,421)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,593 2,542
Provision for bad debts (26) 23
Changes in operating assets and liabilities:
Restricted cash and cash equivalents 374 (1,116)
Accounts receivable (110) 536
Receivables from related parties 50 178
Inventories 101 (142)
Prepaid expenses and other current assets (59) (8)
Deferred rent receivable (46) (71)
Security deposits and other restricted cash (7) (9)
Accrued interest (18) 195
Accounts payable (124) 21
Accrued expenses (15) (586)
Payables to related parties (59) 7
Advance deposits (98) 165
------------- ------------
Net cash provided by (used in) operating activities 1,578 (686)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (959) (636)
------------- ------------
Cash used in investing activities (959) (636)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions 10,466 --
Syndication costs (208) --
Principal payments on long-term debt (760) (535)
Payments of deferred costs -- (292)
------------- ------------
Net cash provided by (used in) financing activities 9,498 (827)
------------- ------------
Net increase (decrease) in cash and cash equivalents 10,117 (2,149)
Cash and cash equivalents, beginning of year 279 2,428
------------- ------------
Cash and cash equivalents, end of year $ 10,396 $ 279
============= ============
Supplemental Information -
Cash paid for interest $ 2,466 $ 2,384
============ ============
</TABLE>
See notes to consolidated financial statements.
F - 7
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Nantucket Island Associates Limited Partnership (the "Partnership") was
formed on December 17, 1986 under the laws of Delaware for the purpose
of owning a 99.98% beneficial interest in Sherburne Associates
("Sherburne"), a Massachusetts general partnership, which owns and
operates a portfolio of properties located on Nantucket Island,
Massachusetts. This portfolio includes two hotels, 48 retail buildings,
24 rental units located in the Wharf Cottages, a boat basin
accommodating approximately 250 yachts and employee housing
(collectively, the "Properties"). The Partnership owns its interest in
Sherburne through a 99.99% general partnership interest in NIA
Operating Associates Limited Partnership (the "Operating Partnership"),
which owns a 99.99% general partnership interest in Sherburne. The
Partnership will terminate on December 31, 2035, or earlier, upon
dissolution in accordance with the terms of the partnership agreement.
The general partner of the Partnership is Three Winthrop Properties,
Inc. ("Three Winthrop" or the "General Partner"), a wholly owned
subsidiary of First Winthrop Corporation ("First Winthrop"). First
Winthrop is a wholly owned subsidiary of Winthrop Financial Associates,
A Limited Partnership ("WFA").
In order to fund required capital improvements (see Note 7), reduce the
Partnership's indebtedness (including repayment of an outstanding loan
to the General Partner - see Note 6) and increase working capital, the
General Partner determined that it was necessary to increase the
Partnership's equity by means of an offering of subscription rights
(the "Rights") to holders of limited partner interests (the
"Unitholders") to purchase preferred partnership units (the "Preferred
Units"). The Partnership filed offering materials with the Securities
and Exchange Commission and commenced the offering during the third
quarter of 1996. An affiliate of the General Partner (the "Affiliate")
agreed to subscribe for all Preferred Units which were not subscribed
for by the Unitholders. As of November 8, 1996, the expiration date of
the offering, 132.75 Rights (at a cost of $13,333 per Right) were
subscribed for by the Unitholders (other than the Affiliate).
Accordingly, pursuant to the terms of the offer, the Affiliate acquired
652.25 Rights. The Partnership received gross proceeds of approximately
$10,466,000 from the sale of the Preferred Units.
The Partnership Agreement provides that the Partnership may sell
additional limited partnership interests to raise additional equity, if
the General Partner determines that such additional funds are required.
Through October 31, 1996 income and losses of the Partnership from
operations were allocated 95% to the limited partners and 5% to the
General Partner. In accordance with the amended partnership agreement
(the "Agreement"), effective November 1, 1996 and while the Preferred
Units are outstanding, losses are allocated 5% to the General Partner
and 95% to the limited partners, in
F - 8
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
proportion to and to the extent of the positive balances in the limited
partners' capital accounts. The Agreement also provides that while the
Preferred Units are outstanding, cash flow and capital proceeds (as
defined in the Agreement) shall be distributed first to the Preferred
Unitholders in an amount equal to a cumulative annual 8% compounded
return on their preferred invested capital; and in the case of capital
proceeds only, second, to the Preferred Unitholders in a cumulative
amount equal to $33,333 per Preferred Unit. Cash flow is then
distributed 99% to the limited partners and 1% to the General Partner
until the limited partners have received an amount equal to an annual
6% per annum noncumulative, noncompounded return on their Invested
Capital and the balance, if any, 95% to the limited partners, and 5% to
the General Partners. Cash distribution from a Non-Terminating Capital
Transaction will be distributed in accordance with the partnership
agreement.
Basis of Accounting
The accompanying consolidated financial statements have been prepared
using the accrual basis of accounting in accordance with generally
accepted accounting principles and includes the accounts of the
Partnership consolidated with the Operating Partnership and Sherburne.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
Advertising
The Partnership expenses the costs of advertising as incurred.
Advertising expense, included in operating expenses, was approximately
$688,000 and $906,000 for the years ended December 31, 1996 and 1995,
respectively.
Accounting Change
Property and equipment are stated at cost. On January 1, 1996, the
Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", which requires impairment
losses to be recognized for long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
are not sufficient to recover the asset's carrying amount. The
impairment loss is measured by comparing the fair value of the asset to
its carrying amount. The adoption of the SFAS had no effect on the
Partnership's financial statements.
F - 9
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Cash Equivalents
The Partnership considers all highly liquid investments with an
original maturity at time of purchase of three months or less to be
cash equivalents.
Concentration of Credit Risk
The Partnership maintains cash balances at financial institutions
insured up to $100,000 by the Federal Deposit Insurance Corporation.
Balances exceeded these insured amounts during the year.
Inventories
Inventories consist of food and beverage, linens, glassware, china and
silver and are valued at the lower of cost (as determined using the
first-in, first-out method) or market.
Depreciation
Depreciation is calculated using the straight-line method, using
estimated useful lives of 30 years for buildings and improvements, 20
years for land improvements and 5 years for furniture, fixtures and
equipment.
Deferred Costs
Deferred mortgage costs are capitalized and amortized using the
straight-line method over the term of the related agreement. Costs
related to the acquisition of the Partnership's investment in the
Properties are capitalized and amortized over the lives of the
properties acquired.
Deferred Rent Receivable
The Partnership has determined that all leases associated with the
rental of commercial property are operating leases. Commercial rental
income is recognized on a straight-line basis over the terms of the
related leases. The excess of commercial rental income recognized over
rental payments required by the leases is reflected as deferred rent
receivable in the accompanying consolidated financial statements.
Income Taxes
Taxable income or loss of the Partnership is reported in the income tax
returns of its partners. Accordingly, no provision for income taxes is
made in the financial statements of the Partnership.
F- 10
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Risk Concentration
The Properties are located on Nantucket Island, Massachusetts, and are
highly dependent on tourists as a source of operating revenues. Tourism
on the island is concentrated during the summer months. Unfavorable
weather or economic conditions could adversely affect tourism on the
island.
2. DEFERRED COSTS
The following is a summary of deferred costs at December 31:
<TABLE>
<CAPTION>
Amortization
Period 1996 1995
--------------------------- -------------- --------------
<S> <C> <C> <C>
Acquisition costs 19 years $ 3,027,000 $ 3,027,000
Mortgage costs 25 months to 5 years 495,000 495,000
------------- -------------
3,522,000 3,522,000
Less accumulated amortization (2,065,000) (1,765,000)
------------- -------------
Deferred costs, net $ 1,457,000 $ 1,757,000
============= ============
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment is composed of the following as of December 31:
1996 1995
-------------- -------------
Land $ 15,606,000 $ 15,606,000
Land improvements 11,080,000 11,080,000
Buildings and improvements 35,759,000 35,383,000
Furniture and fixtures 4,190,000 4,052,000
Machinery, equipment and vehicles 2,065,000 1,941,000
Construction in progress 321,000 -
-------------- --------------
69,021,000 68,062,000
Less accumulated depreciation (20,906,000) (18,612,000)
-------------- --------------
Property and equipment, net $ 48,115,000 $ 49,450,000
============== =============
F - 11
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
4. LONG-TERM DEBT
The following is a summary of the Partnership's debt at December 31:
1996 1995
------------- ------------
Mortgage loan $ 26,000,000 $ 26,600,000
Notes payable 3,000 27,000
Other mortgage notes payable 252,000 313,000
Note payable-equipment - 75,000
------------- ------------
Total long-term debt 26,255,000 27,015,000
Less current maturity of long term debt (26,053,000) (736,000)
------------- ------------
Long-term debt $ 202,000 $ 26,279,000
============= ============
Mortgage Loan
The mortgage loan in the amount of $26,000,000 was scheduled to mature
on February 28, 1997 (see Note 9) and is secured by the Properties and
a first lien security interest in furniture, fixtures, equipment and
other property of Sherburne. Sherburne also made a collateral
assignment of all of its rental and other income. First Winthrop and
Three Winthrop have collectively guaranteed repayment of up to
$4,200,000 of the first $15,000,000 of the mortgage loan.
The loan required monthly payments of interest at LIBOR plus 3% during
1995 through February 29, 1996 and at LIBOR plus 3.5% until maturity.
The interest rate at December 31, 1996 was approximately 9%. The
Partnership paid a mandatory principal payment of $600,000 on September
30, 1996.
Sherburne and the Partnership were prohibited from making any
distribution of Partnership assets to any partner. Additionally,
Sherburne had to establish a restricted cash account with Bankers Trust
into which all net revenues from operations (as defined) are deposited.
The Partnership can make withdrawals from the restricted cash account
subject to the approval of Bankers Trust. The balance in this account
of $742,000 and $1,116,000 at December 31, 1996 and 1995, respectively,
is recorded as restricted cash in the accompanying consolidated
financial statements.
The mortgage was refinanced in February 1997 (see Note 9).
F - 12
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
4. LONG-TERM DEBT (Continued)
Notes Payable and Other Mortgage Notes Payable
In connection with the acquisition of Sherburne, the Partnership
assumed notes payable, mortgage loans and accrued interest thereon, as
discussed below:
Notes payable - An unsecured note payable and accrued interest thereon
is owed to a party related to the original sellers. Payments of
principal and interest totaled approximately $25,000 for the years
ended December 31, 1996 and 1995.
Other mortgage notes payable - Other mortgage notes payable are secured
by various properties. Payments of principal and interest totaled
approximately $97,000 and $136,000 for the years ended December 31,
1996 and 1995, respectively.
Aggregate principal maturities due on all long-term debt at December
31, 1996 are as follows:
1997 $ 26,053,000
1998 54,000
1999 40,000
2000 22,000
2001 14,000
Thereafter 72,000
-------------
$ 26,255,000
=============
The Partnership's long-term debt approximates fair value based on the
terms of the February 1997 refinancing (see note 9).
5. RENTAL INCOME UNDER OPERATING LEASES
The aggregate future minimum lease payments under non-cancelable
operating leases at December 31, 1996 are as follows:
1997 $ 3,044,000
1998 2,600,000
1999 1,298,000
2000 518,000
2001 305,000
Thereafter 276,000
-------------
$ 8,041,000
=============
F - 13
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
5. RENTAL INCOME UNDER OPERATING LEASES (Continued)
The leases for the majority of the commercial properties provide for
contingent rentals, which are based on sales volume or other
activity-related criteria, and include property tax escalation clauses.
Aggregate future lease rentals do not include these contingent rental
or escalation amounts. Contingent rentals amounted to approximately
$253,000 and $241,000, for the years ended December 31, 1996 and 1995,
respectively, and are included in commercial rental income.
6. TRANSACTIONS WITH RELATED PARTIES
The Partnership, the Operating Partnership and Sherburne have incurred
charges by and commitments to companies affiliated by common ownership
and management with the general partners. Related- party transactions
with WFA and its affiliates include the following for the years ended
December 31:
1996 1995
--------- ---------
Partnership Administration Fee $ 239,000 $ 226,000
Management Fees $ 77,000 $ 69,000
Reimbursement for administrative expenses $ 64,000 $ 181,000
The Partnership also rents certain facilities from affiliates of WFA.
These rents amounted to approximately $157,000 and $216,000 for the
years ended December 31, 1996 and 1995, respectively.
In addition, the Partnership paid $30,000 in interest expense to the
General Partner on a loan of $600,000, which was repaid in November of
1996. The loan bore interest at prime plus 1%.
7. COMMITMENTS
Environmental Cleanup Costs
The General Partner of the Partnership was aware at the time of
acquisition of the Properties that petroleum products had seeped onto
certain sections of the Properties. Under Massachusetts law, the owner
of such property is responsible for the entire cost of cleaning up such
hazardous wastes. In connection with the Partnership's acquisition of
Sherburne, the sellers indemnified the Partnership for one-half of the
expenses incurred by it in connection with the cleanup operations for a
maximum aggregate amount of $1,250,000. The sellers deposited
$1,250,000 in escrow as security for the sellers' indemnification.
During 1992, the Partnership entered into an agreement with a third
party responsible for part of the cost of the cleanup whereby the third
party paid the Partnership $30,000 per annum for three years, ending
October 1994, in consideration of the Partnership assuming the
liability of the third party for the cleanup. These receipts were
shared by the Partnership and the sellers. The obligation of the third
party to reimburse the Partnership under the agreement has been
fulfilled. The Partnership has incurred approximately $91,000 as its
one-half share of cleanup costs, to date. These
F - 14
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
7. COMMITMENTS (Continued)
Environmental Cleanup Costs
costs included expenses of removing certain underground tanks from the
Properties and the professional services of engineers in analyzing the
potential costs of future cleanup and serving as the Partnership's
representatives in discussions with the Massachusetts Department of
Environmental Protection in determining the best course of action.
Based on the magnitude of the cost incurred during the last few years,
the current status of the project, and management's experience with
other environmental clean-up projects, management believes that the
future costs related to the environmental clean up will not have a
material impact on the Partnership's financial statements.
Contingent Purchase Price Payments
Under agreements entered into at the time of the Partnership's
acquisition of Sherburne, at the time of a sale or refinancing of the
Properties or any portion thereof, Sherburne is obligated to make a
payment (the "Contingent Purchase Price Payment") to the sellers equal
to 12% of the amount by which the proceeds from the sale or refinancing
exceed the Agreed Base Value of the Properties or the parcel, as
adjusted. The aggregate Agreed Base Value of the Properties, which was
determined by the parties at the time of the acquisition, is
approximately $50,800,000, which amount has been allocated over the
various parcels of the Properties. In determining the amount, if any,
by which the amount of the sale or refinancing proceeds exceed the
Agreed Base Value of the Properties or the parcels being sold, the
following amounts will be added to the Agreed Base Value of the
Properties or the parcel being sold: (i) the out-of-pocket expenses
incurred by the Partnership in connection with any such sale or
refinancing; (ii) amounts expended on capital improvements of the
Properties or such parcels by Sherburne; (iii) amounts expended by
Sherburne on the Properties as a whole for environmental cleanup; and
(iv) any prepayment or other penalty in connection with the sale. After
December 31, 1997, the sellers may require Sherburne to purchase the
sellers' rights to receive the Contingent Purchase Price Payments (the
"Put Option"). After December 31, 2000, Sherburne may require the
sellers to sell such rights to Sherburne (the "Call Option"). Upon the
exercise of either the Put Option or the Call Option, Sherburne shall
pay the fair market value of such rights to the sellers. The fair
market value shall be determined by the agreement of Sherburne and the
sellers or, if no such agreement can be reached, by an independent
appraiser.
Capital Improvements
The Partnership expects to incur approximately $5,500,000 during 1997
for capital improvements, including: bulkhead replacement at the boat
basin, improvements to hotel rooms and restaurants, and construction of
4 new cottages.
F - 15
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
8. TAXABLE LOSS
The taxable loss of the Partnership, the Operating Partnership and
Sherburne differs from the consolidated net loss reported for financial
reporting purposes, primarily due to timing differences in the
recognition of depreciation expense and commercial rental revenue. A
reconciliation of consolidated net loss for financial reporting
purposes to federal income tax basis net loss for the years ended
December 31, 1996 and 1995 is as follows:
1996 1995
------------- -------------
Consolidated net loss for financial
reporting purposes $ (978,000) $ (2,421,000)
Tax basis depreciation over that
used for financial reporting purposes (276,000) (456,000)
Revenue for tax reporting purposes
over that recognized for financial
reporting purposes (56,000) (103,000)
Expenses for financial reporting
purposes over (under) that allowed
for tax reporting purposes (140,000) 325,000
------------- -------------
Federal income tax basis net loss $ (1,450,000) $ (2,655,000)
============= =============
Partners' capital account balances for federal income tax purposes were
approximately $29,600,000 and $20,800,000 as of December 31, 1996 and
1995, respectively.
9. SUBSEQUENT EVENT - DEBT REFINANCING
The mortgage loan encumbering the property was refinanced in February
1997. The new $23,600,000 floating rate note adjusts annually,
depending on debt service coverage, to a rate between LIBOR plus 3.25%
and LIBOR plus 3.75%. The current rate is approximately 9% (LIBOR plus
3.5%). The loan requires monthly payments of interest and principal
based on a 20 year amortization schedule and matures in February 2000
with a balloon payment of approximately $22,343,000. The Partnership
has two one year options to extend the debt. The Partnership paid
approximately $675,000 in fees and expenses, including the purchase of
an interest rate collar. The loan agreement also provides for an
additional $600,000 draw down to be used for the construction of four
cottages at the Properties.
F - 16
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
KPMG Peat Marwick LLP was previously the principal accountants of the
Registrant. On September 27, 1996, KPMG Peat Marwick LLP's appointment as
principal accountants was terminated and Imowitz Koenig & Co., LLP was engaged
as its principal accountants. The decision to change accountants was approved by
the Registrant's managing general partner's directors.
In connection with the audits of the two fiscal years ended December
31, 1995, and the subsequent interim period through September 27, 1996, there
were no disagreements with KPMG Peat Marwick LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which disagreements if not resolved to their satisfaction would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement.
The audit reports of KPMG Peat Marwick LLP on the consolidated
financial statements of the Registrant as of and for the years ended December
31, 1995 and 1994, did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles, except KPMG Peat Marwick LLP auditors' report on the
consolidated financial statements of the Registrant as of and for the years
ended December 31, 1994 and 1993 contained a separate paragraph stating "As
discussed in Note 5 to the consolidated financial statements, the mortgage debt
encumbering the Partnership is in default effective January 31, 1995. The
Partnership has reached a preliminary agreement with the mortgage holder for a
thirty-two month extension of the maturity date. Should future negotiations to
extend the term of the mortgage loan fail, it is uncertain whether the
Partnership will be able to secure funds from other sources to pay-off the
mortgage loan. If the Partnership is unable to refinance the loan or cannot
reach an agreement with the mortgage holder, the mortgage holder could attempt
to foreclose on the Property."
The Partnership believes that the cautionary language which was set
forth in the auditors' report of KPMG Peat Marwick LLP as of and for the years
ended December 31, 1994 and 1993 has been rendered moot as a result of the
refinancing of the loan encumbering Sherburne Associates' properties. See Item
2, "Description of Properties."
17
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The Registrant has no officers or directors. The General Partner
manages and controls substantially all of the Registrant's affairs and has
general responsibility and ultimate authority in all matters affecting its
business. As of March 1, 1997, the names of the directors and executive officers
of the General Partner and the position held by each of them, are as follows:
Has Served as
Position Held with a Director or
Name the General Partner Officer Since
- ---- ------------------- -------------
Michael L. Ashner Chief Executive Officer 1-96
and Director
Richard J. McCready President and
Chief Operating Officer 7-95
Jeffrey Furber Executive Vice President 7-95
and Clerk
Edward Williams Chief Financial Officer 4-96
Vice President and
Treasurer
Peter Braverman Senior Vice President 1-96
Michael L. Ashner, age 45, has been the Chief Executive Officer of
Winthrop Financial Associates, A Limited Partnership ("WFA") since January 15,
1996. From June 1994 until January 1996, Mr. Ashner was a Director, President
and Co-chairman of National Property Investors, Inc., a real estate investment
company ("NPI"). Mr. Ashner was also a Director and executive officer of NPI
Property Management Corporation ("NPI Management") from April 1984 until January
1996. In addition, since 1981 Mr. Ashner has been President of Exeter Capital
Corporation, a firm which has organized and administered real estate limited
partnerships.
18
<PAGE>
Richard J. McCready, age 38, is the President and Chief Operating
Officer of WFA and its subsidiaries. Mr. McCready previously served as a
Managing Director, Vice President and Clerk of WFA and a Director, Vice
President and Clerk of the Managing General Partner and all other
subsidiaries of WFA. Mr. McCready joined the Winthrop organization in 1990.
Jeffrey Furber, age 37, has been the Executive Vice President of WFA
and the President of Winthrop Management since January 1996. Mr. Furber served
as a Managing Director of WFA from January 1991 to December 1995 and as a Vice
President from June 1984 until December 1990.
Edward V. Williams, age 56, has been the Chief Financial Officer of WFA
since April 1996. From June 1991 through March 1996, Mr. Williams was Controller
of NPI and NPI Management. Prior to 1991, Mr. Williams held other real estate
related positions including Treasurer of Johnstown American Companies and Senior
Manager at Price Waterhouse.
Peter Braverman, age 45, has been a Senior Vice President of WFA since
January 1996. From June 1995 until January 1996, Mr. Braverman was a Vice
President of NPI and NPI Management. From June 1991 until March 1994, Mr.
Braverman was President of the Braverman Group, a firm specializing in
management consulting for the real estate and construction industries. From 1988
to 1991, Mr. Braverman was a Vice President and Assistant Secretary of Fischbach
Corporation, a publicly traded, international real estate and construction firm.
One or more of the above persons are also directors or officers of a
general partner (or general partner of a general partner) of the following
limited partnerships which either have a class of securities registered pursuant
to Section 12(g) of the Securities and Exchange Act of 1934, or are subject to
the reporting requirements of Section 15(d) of such Act: Winthrop Partners 79
Limited Partnership; Winthrop Partners 80 Limited Partnership; Winthrop Partners
81 Limited Partnership; Winthrop Residential Associates I, A Limited
Partnership; Winthrop Residential Associates II, A Limited Partnership; Winthrop
Residential Associates III, A Limited Partnership; 1626 New York Associates
Limited Partnership; 1999 Broadway Associates Limited Partnership; Indian River
Citrus Investors Limited Partnership; One Financial Place Limited Partnership;
Presidential Associates I Limited Partnership; Riverside Park Associates Limited
19
<PAGE>
Partnership; Springhill Lake Investors Limited Partnership; Twelve AMH
Associates Limited Partnership; Winthrop California Investors Limited
Partnership; Winthrop Growth Investors I Limited Partnership; Winthrop Interim
Partners I, A Limited Partnership; Southeastern Income Properties Limited
Partnership; Southeastern Income Properties II Limited Partnership; Winthrop
Miami Associates Limited Partnership; and Winthrop Apartment Investors Limited
Partnership.
Except as indicated above, neither the Registrant nor the General
Partner has any significant employees within the meaning of Item 401(b) of
Regulation S-B. There are no family relationships among the officers and
directors of the General Partner.
Item 10. Executive Compensation.
The Registrant is not required to and did not pay any compensation to
the officers or directors of the General Partner. The General Partner does not
presently pay any compensation to any of its officers and directors (See "Item
12, Certain Relationships and Related Transactions").
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The Registrant has issued and outstanding Units of Limited Partnership
Interests (the "Units") and Preferred Units of Limited Partnership Interests
(the "Preferred Units"). The Units and the Preferred Units are not voting
securities, except that the consent of the holders of the Units and Preferred
Units is required to approve or disapprove certain transactions, including the
removal of a General Partner, the amendment of the Registrant partnership
agreement, the dissolution or sale of all or substantially all of the assets of
the Registrant, or any material amendment to the Registrant's agreement proposed
by the General Partner. No holder of Units owns beneficially more than 5% of the
Units. Zero Main Associates Limited Partnership, the partners of which are
affiliates of the General Partner, holds 652.25 Preferred Units, which represent
approximately 83.1% of the total outstanding Preferred Units and until the such
time as a priority return is made on account of the Preferred Units (as
described in Item 12 below), a right to receive 83.1% of all allocations of
profit and loss and distributions.
20
<PAGE>
There exists no arrangement, known to the Registrant, which would
result in a change in control of the Registrant.
Item 12. Certain Relationships and Related Transactions.
The Registrant, the Operating Partnership and Sherburne have incurred
charges by and commitments to companies affiliated by common ownership and
management with the General Partner. Related party transactions with WFA and its
affiliates included the following for the years ended December 31, 1996 and
1995:
Type of Fee 1996 1995
----------- ---- ----
Partnership Administration Fee $239,000 $226,000
Management Fees 77,000 69,000
Reimbursement for administrative expenses 64,000 181,000
The Registrant also rents certain facilities from affiliates of WFA.
These rents amounted to approximately $157,000 and $216,000 for the years ended
December 31, 1996 and 1995, respectively.
In addition, the Registrant paid $30,000 in interest expense to the
General Partner on a loan of $600,000, which was repaid in November 1996. The
loan bore interest at prime plus 1%.
In order to fund required capital improvements, reduce the Registrant's
indebtedness (including repayment of the outstanding loan to the General
Partner) and increase working capital, the General Partner determined that it
was necessary to increase the Registrant's equity by means of an offering of
subscription rights (the "Rights") to Limited Partners to purchase preferred
partnership interests. The Registrant filed offering materials with the
Securities and Exchange Commission and commenced the offering during the third
quarter of 1996. An affiliate of the General Partner (the "Affiliate") agreed to
subscribe for all preferred partnership units which were not subscribed for by
Limited Partners. As a result of the offering, the Registrant received
approximately $10,466,000 in net proceeds from this offering. In connection with
the offering, the Affiliate acquired 652.25 Rights.
Profits and losses of the Registrant from normal operations had been
allocated 95% to the Limited Partners, 4% to Three
21
<PAGE>
Winthrop and 1% to Winthrop Financial Associates ("WFA") through December 31,
1993. From January 1, 1994 through November 8, 1996, profits and losses of the
Registrant from normal operations had been allocated 95% to the Limited Partners
and 5% to Three Winthrop. In connection with the Rights offering, however, the
Agreement of Limited Partnership of the Registrant was amended and restated to
provide for, among other things, (i) losses to be allocated 5% to the general
partners and 95% to the limited partners (including the holders of Preferred
Units) in proportion to and to the extent of their positive capital account
balances, (ii) a cumulative preferred annual return of 8% per Preferred Unit
which is to be paid out of available cash flow, and (iii) a priority
distribution to holders of Preferred Units from net proceeds from a capital
transaction or upon liquidation of Registrant (which distribution is prior to
any distributions on account of non-preferred limited partnership interests and
to the general partner) equal to 250% of the initial capital invested by such
holders for each Preferred Unit.
22
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The Exhibits listed on the accompanying Index to Exhibits are
filed as part of this Annual Report and incorporated in this
Annual Report as set forth in said Index.
(b) Reports on Form 8-K - None
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf of the undersigned, thereunto duly authorized.
NANTUCKET ISLAND ASSOCIATES
LIMITED PARTNERSHIP
By: THREE WINTHROP PROPERTIES, INC.,
General Partner
By: /s/ Michael L. Ashner
______________________________
Michael L. Ashner
Chief Executive Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature/Name Title Date
- -------------- ----- ----
/s/ Michael L. Ashner Chief Executive March 28, 1997
- --------------------- Officer and Director
Michael L. Ashner
/s/ Edward V. Williams Chief Financial Officer March 28, 1997
- ----------------------
Edward V. Williams
24
<PAGE>
Index to Exhibits
Number Exhibit Page
- ------ ----------------- ----
3,4. Amended and Restated Limited Partnership Agreement of (3)
Nantucket Island Associates Limited Partnership dated
November 8, 1996
4. Amended and Restated Certificate of Limited Partnership of (1)
Nantucket Island Associates Limited Partnership, as filed
with Secretary of State of Delaware on April 23, 1987
10(a) Collateral Assignment of Contracts by and between NIA (2)
Operating Associates Limited Partnership, Sherburne
Associates and Bankers Trust Company dated as of April 28,
1989
10(b) Hazardous Substance Agreement and Indemnity from Sherburne (2)
Associates, Sherburne Associates Realty Trust and Winthrop
Financial Associates, A Limited Partnership to Bankers Trust
Company dated April 28, 1989
10(c) Note, dated February 26, 1997, in the principal amount of
$24,200,000, from Sherburne Associates and Sherburne Associates
Realty Trust to The First National Bank of Boston ("Bank of
Boston")
10(d) Loan Agreement, dated February 26, 1997, between Sherburne
Associates Realty Trust and Sherburne Associates, as borrowers,
and Bank of Boston, as lender
10(e) Mortgage and Security Agreement, dated as of February 26, 1997,
among Sherburne Associates Realty Trust and Sherburne Associates,
and Bank of Boston
10(f) Indemnity Agreement Regarding Hazardous Materials, dated as
of February 26, 1997, among Sherburne Associates Realty Trust and
Sherburne Associates, and Bank of Boston
25
<PAGE>
10(g) Unconditional Guaranty of Payment and Performance from the
Registrant to Bank of Boston with respect to the loan from Bank
of Boston to Sherburne Associates Realty Trust and Sherburne
Associates.
16 Letter dated October 3, 1996 from KPMG Peat Marwick LLP. (4)
27 Financial Data Schedule
- --------------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form 10 filed on April 29, 1988 and amended on September 14, 1988 (File No.
0-16865)
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on September 22, 1989
(3) Incorporated by reference to Exhibit 4.1 to Amendment No 1 to
Registrant's Registration Statement on Form S-3 (Registration
No. 33-07571), as filed with the Securities Exchange Commission on
September 20, 1996
(4) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated October 3, 1996
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Nantucket
Island Associates Limited Partnership and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,138,000 <F1>
<SECURITIES> 0
<RECEIVABLES> 593,000 <F2>
<ALLOWANCES> (23,000)
<INVENTORY> 272,000
<CURRENT-ASSETS> 12,375,000
<PP&E> 69,021,000
<DEPRECIATION> (20,906,000)
<TOTAL-ASSETS> 62,518,000
<CURRENT-LIABILITIES> 27,573,000
<BONDS> 26,255,000 <F3>
0
0
<COMMON> 0
<OTHER-SE> 34,743,000
<TOTAL-LIABILITY-AND-EQUITY> 62,518,000
<SALES> 0
<TOTAL-REVENUES> 15,636,000
<CGS> 0
<TOTAL-COSTS> 14,281,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,452,000
<INCOME-PRETAX> (978,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (978,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (978,000)
<EPS-PRIMARY> (801.27)<F4>
<EPS-DILUTED> (801.27)<F4>
<FN>
<F1>Cash includes restricted cash of $742,000.
<F2>Receivables include receivables from related parties of $74,000.
<F3>Long term portion is $202,000.
<F4>Primary EPS and diluted EPS are ($429.30) per Limited Partnership
Preferred Unit.
</FN>
</TABLE>
