<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, 1997 Number 0-16865
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NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP
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(exact name of small business issuer as specified in its charter)
Massachusetts 04-2948435
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(State of organization) (IRS Employer Identification No.)
5 Cambridge Center, 9th Floor, Cambridge, Massachusetts 02142
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (617) 234-3000
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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
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(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
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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. [ ]
Registrant's revenues for its most recent fiscal year were $17,119,000.
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
None
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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 the
State 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 242 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 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. As a result of the offering, the Registrant
received approximately $10,466,000 in net proceeds from this offering.
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Profits and losses of the Registrant from normal operations had
been allocated 95% to the Limited Partners and 5% to Three Winthrop from
January 1, 1994 through November 8, 1996. 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 Partner 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.
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 payment
to the Sellers upon the sale or refinancing of the properties dependent
upon the ultimate proceeds realized. See "Item 7, Financial Statements -
Note 6."
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 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. In this regard, the Registrant is currently
marketing its Properties, other than the retail buildings, for sale. It
is expected that these Properties will be sold, if at all, during the
second or third quarter of 1998.
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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 LLC, an affiliate of the General Partner, 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
the General Partner.
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. The Registrant's partnership agreement was further
amended as discussed above in connection with the Rights offering.
Change in Control
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, a general partner interest in W.L. Realty L.P.
("W.L. Realty") and a sixty four percent (64%) limited partnership
interest in W.L. Realty. Winthrop Financial Associates, A Limited
Partnership ("WFA"), which is the controlling shareholder of the sole
shareholder of the General Partner, 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 was, until
October 27, 1997, the sole, and currently is the managing, 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."
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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.
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 (the "Hotels"), 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. See "Item 6, Management's Discussion and
Analysis or Plan of Operation" for
information with respect to the marketing for the sale of the Properties
other than the Commercial Rental.
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 $7,122,264
White Elephant Hotel 12/86 82 5,435,412
Wharf Cottages/Employee 12/86 24 6,583,221
Housing
Nantucket Boat Basin 12/86 242 6,582,472
Commercial Rental 12/86 80,419 24,901,631
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 Hotels compete directly with only two other hotels on
Nantucket Island.
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
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the average monthly per square foot rate at the Registrant's properties for
the years ended December 31, 1997 and 1996:
Average
Occupancy
Average Rate Rate
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1997 1996 1997 1996
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The Hotels (1) $250 $228 36.4% 36.6%
Nantucket Boat Basin N/A N/A N/A N/A
Commercial Rental $41.94 $41.68 100% 100%
(1) Represents the collective average rate and occupancy at The Harbor
House Hotel, White Elephant Hotel and Wharf Cottages.
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 rate on the loan at March 1,
1998 was LIBOR plus 3.5% (approximately 9.375%). 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 $703,000 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. At present, Sheburne has not begun
construction of these new cottages. As a condition to the making of this
loan, the Registrant, NIA and Three Winthrop were required to
unconditionally guaranty the payment of all amounts due under the loan
and WFA was required to unconditionally guaranty the payment of 25% of
the principal amount of the loan.
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The following table sets forth certain information concerning
lease expirations at the Commercial Rental (assuming no renewals for the
period from January 1, 1998 through December 31, 2007):
# of Tenants
Whose Aggregate SF Annualized Rental Percentage of
Leases Covered by for Leases Total Annualized
Expire Expiring Leases Expiring Rental
------------ --------------- ----------------- ----------------
1998 46 42,409 $1,471,227 44.22%
1999 19 12,741 977,500 50.67%
2000 12 9,096 469,347 46.74%
2001 5 13,800 446,600 80.49%
2002 1 373 24,500 21.68%
2003 - - - -
2004 1 2,000 84,500 100.00%
2005 - - - -
2006 - - - -
2007 - - - -
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, 1997:
Gross
Carrying Accumulated Federal
Value Depreciation Rate Method Tax Basis
----- ------------ ---- ------ ---------
$74,152,000 $23,269,000 Var. S/L $46,344,000
The following table sets forth the realty tax rate and realty
taxes paid for each Property in 1997:
Property Tax Rate Taxes Paid
- -------- -------- ----------
Harbor House Hotel 6.74 and 12.58/1000 $ 97,509
White Elephant Hotel 6.74 and 12.58/1000 81,954
Wharf Cottage/Boat Basin 5.80/1000 31,071
Commercial Rental 9.71/1000 346,303
The Registrant believes that its Properties are adequately
insured.
For information with respect to capital improvements performed
at the Properties in 1997 and anticipated capital improvements in 1998,
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
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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, 1997, Sherburne Associates' cumulative share of the
environmental cleanup totaled approximately $117,000. 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 and, one site has been
closed with a waiver completion statement. Risk assessments were
completed on the remaining two sites. The two sites qualified for
temporary closure which states that a temporary solution has been
achieved. Periodic evaluations of conditions at both sites must
continue. It is anticipated that it may take a prolonged period of time
to reach a final closure at both sites.
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.
8
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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, 1998, there were 882 holders of 785 outstanding limited
partnership units (the "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 1997 or 1996. See "Item 6, Management's
Discussion and Analysis or Plan of Operation," for information relating
to the potential sale of the Properties and Registrant's ability to make
future distributions.
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Item 6. Management's Discussion and Analysis or Plan of Operation
The matters discussed in this Form 10-KSB contain certain
forward-looking statements and involve risks and uncertainties
(including changing market conditions, competitive and regulatory
matters, etc.) detailed in the disclosure contained in this Form 10-KSB
and the other filings with the Securities and Exchange Commission made
by the Registrant from time to time. The discussion of the Registrant's
business and results of operations, including forward-looking statements
pertaining to such matters, does not take into account the effects of
any changes to the Registrant's business and results of operation.
Accordingly, actual results could differ materially from those projected
in the forward-looking statements as a result of a number of factors,
including those identified herein.
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.
In January 1998, the General Partner of the Registrant hired an
unaffiliated third party broker to market for sale all the Properties
with the exception of the 48 retail buildings (the "Properties") as the
General Partner believes that, as a result of the recent renovation to
the Properties, improvements in the hotel industry and the recovery of
the overall area economy, the Properties are well positioned for sale.
The commercial rental properties owned by the Registrant are not being
marketed for sale as the General Partner believes that the rental market
will continue to improve and that marketing the commercial rental
properties today would be premature. 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 the Unitholders from the sale of the Properties. Future
distributions to the Unitholders will be dependent on the commercial
properties rental operations.
The level of liquidity based upon the Registrant's cash and
cash equivalents experienced a $10,221,000 decrease at December 31,
1997, as compared to December 31, 1996. The Registrant's $9,226,000 used
in investing and $3,458,000 used in financing activities was partially
offset by $2,463,000 provided by operating activities. Financing
activities consisted of the
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satisfaction of the mortgage of $26,000,000 and payment of deferred costs of
$703,000, associated with the mortgage refinancing. These payments were
partially offset by $23,600,000 of proceeds from the mortgage refinancing.
Investing activities consisted of $5,131,000 of improvements to property and
equipment and $4,095,000 of cash transferred to restricted reserve accounts to
be used for major capital improvements, debt service payments and to fund
future operating deficits. Included in cash used in operating activities is
$270,000 of additional interest paid to the previous lender upon satisfaction
of the mortgage in accordance with the loan agreement. At December 31, 1997,
the Registrant's unrestricted cash reserves were $175,000 and the restricted
cash balance was $4,837,000.
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") at a cost of $13,333 per
Right. 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 agreed to subscribe for all
Preferred Units which were not subscribed for by the Unitholders. The
Offering closed on November 8, 1996 and the Registrant received gross
proceeds of approximately $10,466,000 from the sale of the Preferred
Units, including those Preferred Units acquired by an affiliate of the
General Partner.
In 1996, the Registrant initiated an extensive capital
improvements program. This program includes bulkhead improvements,
refurbishing hotel guest rooms at the White Elephant, 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. As of December 31, 1997, the renovation of the
restaurant and the common areas at the White Elephant and Breakers have
been completed, together with the refurbishment of most of the
guestrooms. A substantial portion of the bulkhead improvement work was
completed prior to the 1997 summer season. The balance of the bulkhead
improvements are anticipated to be completed in early 1998. For the
twelve months ended December 31, 1997, $5,131,000 was spent on
construction and capital improvements. The cost of these capital
improvements is being financed from the net proceeds from the offering
of subscription rights completed in 1996.
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The Registrant expects to incur approximately $1,300,000 during
1998 for capital improvements, including, bulkhead replacement at the
boat basin. Some of these improvements will be financed from the balance
of the 1996 Rights 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 rate at December 31,
1997 was 9.375%. 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 debt. The Registrant
paid approximately $703,000 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 new
cottages.
Pursuant to the terms of the new loan, Sherburne is prohibited
from making any distributions to its partners (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 a portion of the net proceeds of such sale
so long as certain loan to value ratios and other conditions are
satisfied.
The Registrant is dependent upon the General Partner and the
management agent for management and administrative services. The General
Partner and the managing agent have completed an assessment and believe
that their computer systems will function properly with respect to dates
in the year 2000 and thereafter (the "Year 2000 Issue"). Accordingly, it
is not expected that the Registrant will incur any material costs
associated with, or be materially affected by, the Year 2000 Issue.
Results of Operations
The Registrant's net loss for the year ended December 31, 1997,
was approximately $18,000 as compared to a net loss of approximately
$978,000 for the year ended December 31, 1996.
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Total revenue increased by $1,639,000 for the year ended
December 31, 1997, as compared to 1996, due to increases in hotel and
restaurant operations of $1,346,000, commercial rental operations of
$111,000 and boat basin operations of $182,000. Hotel operations
increased due to an overall increase in the average room rate while the
occupancy remained relatively stable. Restaurant revenue increased due
to increased food and beverage prices and substantially higher volume of
business following the renovation of the restaurant facilities.
Commercial rental revenue increased due to an increase in rental rates.
Boat basin revenue increased due to favorable weather, as compared to
1996.
Operating expenses increased by $703,000 for the year ended
December 31, 1997, as compared to 1996, due to increases in restaurant
expenses of $787,000, boat basin expenses of $94,000, depreciation and
amortization expenses of $132,000, and management and administrative
expenses of $57,000 which were partially offset by decreases in hotel
expenses of $220,000, commercial rental expenses of $90,000 and real
estate taxes of $76,000.
Restaurant expenses increased due to an increase in labor and
costs associated with repositioning of the restaurant at the White
Elephant. Boat basin expenses increased due to an increase in electric,
fuel and oil costs. Depreciation expense increased due to fixed assets
of $2,804,000 being placed in service in 1997 and amortization expense
increased due to an increase in deferred costs associated with the
refinancing in 1997. Management and administrative expenses increased
primarily due to an increase in management fees, which increased due to
an increase in revenues. Hotel costs decreased primarily due to
decreases in laundry costs and reservation expenses. Commercial rental
expenses decreased due to decreases in labor costs. Real estate taxes
decreased due to a real tax refund received for the prior years in the
current year.
Interest income increased by $131,000 due to an increase in
restricted cash reserves available for investment. Interest expense
increased due to a one time payment of additional interest of $270,000
made to the previous lender in accordance with the prior loan agreement,
which was partially offset by a reduction in mortgage principal balance.
The results of operations in future years may differ from the
results of operations for the year ended December 31, 1997, 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 effect occupancy levels, rental rates and
operating expenses.
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Item 7. Financial Statements
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
INDEX
Page
----
Independent Auditors' Report ..................................... F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996...... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996 ....................................... F-4
Consolidated Statements of Partners' Equity (Deficit)
for the Years Ended December 31, 1997 and 1996 ................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 ....................................... F-6
Notes to Consolidated Financial Statements ....................... F-7
F-1
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Independent Auditors' Report
To the Partners
Nantucket Island Associates Limited Partnership and Subsidiaries
Boston, Massachusetts
We have audited the accompanying consolidated balance sheets of Nantucket Island
Associates Limited Partnership (the "Partnership") and its subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, partners' equity (deficit) and cash flows for the years 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Nantucket Island Associates Limited Partnership and its
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ Imowitz Koenig & Co., LLP
New York, New York
February 2, 1998
F-2
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NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Unit Data)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
ASSETS 1997 1996
--------------------- --------------------
<S> <C> <C>
Cash and cash equivalents $ 175 $ 10,396
Restricted cash 4,837 742
Accounts receivable, less allowance for doubtful
accounts of $42 (1997) and $23 (1996) 248 496
Receivable from related parties - 74
Inventories 313 272
Prepaid expenses and other current assets 414 395
--------------------- --------------------
Total current assets 5,987 12,375
Property and equipment, net of accumulated depreciation
of $23,269 (1997) and $20,906 (1996) 50,883 48,115
Deferred rent receivable 386 392
Deferred costs, net of accumulated amortization of
$2,443 (1997) and $2,065 (1996) 1,782 1,457
Other assets 564 179
--------------------- --------------------
Total assets $ 59,602 $ 62,518
===================== ====================
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Accounts payable and other liabilities $ 1,377 $ 1,520
Current maturity of long-term debt 470 26,053
--------------------- --------------------
Total current liabilities 1,847 27,573
Long-term debt 23,031 202
--------------------- --------------------
Total liabilities 24,878 27,775
--------------------- --------------------
Commitments
Partners' equity:
Limited partners equity; 785 units authorized,
issued, and outstanding 35,186 35,199
Preferred limited partners equity, 785 units
authorized, issued, and outstanding 9,916 9,921
General partners' (deficit) (10,378) (10,377)
--------------------- --------------------
Total partners' equity 34,724 34,743
--------------------- --------------------
Total liabilities and partners' equity $ 59,602 $ 62,518
===================== ====================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Unit Data)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1997 1996
--------------------- --------------------
<S> <C> <C>
Revenue:
Hotel operations $ 7,672 $ 7,071
Restaurant operations 2,765 2,020
Commercial rental operations 4,026 3,915
Boat basin operations 2,656 2,474
--------------------- --------------------
Total revenue 17,119 15,480
--------------------- --------------------
Operating expenses:
Hotel 4,473 4,693
Restaurant 3,426 2,639
Commercial rental 595 685
Boat basin 1,838 1,744
Bad debt expense 32 15
Real estate taxes 619 695
Insurance 555 553
Management and administrative 604 547
Amortization 232 169
Depreciation 2,363 2,294
--------------------- --------------------
Total operating expenses 14,737 14,034
--------------------- --------------------
Income from operations 2,382 1,446
--------------------- --------------------
Other income (expense):
Interest income 250 119
Other income (expense) - 39
Interest expense (2,650) (2,582)
--------------------- --------------------
Total other income (expense), net (2,400) (2,424)
--------------------- --------------------
Net loss $ (18) $ (978)
===================== ====================
Net loss allocated to general partners $ (1) $ (12)
===================== ====================
Net loss allocated to limited partners $ (13) $ (629)
===================== ====================
Net loss allocated to preferred limited partners $ (4) $ (337)
===================== ====================
Net Loss per Limited Partnership Unit $ (16.56) $ (801.27)
===================== ====================
Net Loss per Limited Partnership Preferred Unit $ (5.10) $ (429.30)
===================== ====================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997 AND 1996
(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, 1996 785 - $ 35,828 $ - $ (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
Syndication Costs (1) (1)
Net loss (13) (4) (1) (18)
------------- ------------- ------------- ------------- ------------- -------------
Balance - December 31, 1997 785 785 $ 35,186 $ 9,916 $ (10,378) $ 34,724
============= ============= ============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1997 1996
--------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (18) $ (978)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,741 2,593
Provision for bad debts 19 (26)
Changes in operating assets and liabilities:
Accounts receivable 229 (110)
Receivables from related parties 74 50
Inventories (41) 101
Prepaid expenses and other current assets (19) (59)
Deferred rent receivable 6 (46)
Other assets (385) (7)
Accounts payable and other liabilities (143) (314)
--------------------- --------------------
Net cash provided by operating activities 2,463 1,204
--------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in restricted cash reserves (4,095) 374
Expenditures for property and equipment (5,131) (959)
--------------------- --------------------
Net cash used in investing activities (9,226) (585)
--------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Satisfaction of mortgage (26,000) -
Proceeds from mortgage refinancing 23,600 -
Principal payments on long-term debt (354) (760)
Deferred costs paid at refinancing (703) -
Capital contributions - 10,466
Syndication costs (1) (208)
--------------------- ------------------
Net cash (used in) provided by financing activities (3,458) 9,498
--------------------- --------------------
Net (decrease) increase in cash and cash equivalents (10,221) 10,117
Cash and cash equivalents, beginning of year 10,396 279
--------------------- --------------------
Cash and cash equivalents, end of year $ 175 $ 10,396
===================== ====================
Supplemental Information -
Cash paid for interest $ 2,527 $ 2,466
===================== ====================
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
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 controlled by Winthrop Financial Associates, a Limited
Partnership ("WFA").
In order to fund required capital improvements, reduce the
Partnership's indebtedness (including repayment of an
outstanding loan to the General Partner - see Note 5) 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") at a cost
of $13,333 per Right. 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 agreed to subscribe for all Preferred Units
which were not subscribed for by the Unitholders. The Offering
closed on November 8, 1996 and the Partnership received gross
proceeds of approximately $10,466,000 from the sale of the
Preferred
F-7
<PAGE>
Units, including those Preferred Units acquired by an affiliate of
the General Partner.
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 8,
1996 and while the Preferred Units are outstanding, losses are
allocated 5% to the General Partner and 95% to the limited
partners, in 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 from operations 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 (as defined in the Agreement) and the balance, if any,
95% to the limited partners, and 5% to the General Partners.
Cash distributions from a Non-Terminating Capital Transaction
will be distributed in accordance with the partnership
agreement.
In January 1998, the General Partner hired an unaffiliated
third party broker to market for sale all of the Partnership's
properties, with the exception of the 48 retail buildings, as
the General Partner believes that, as a result of the recent
renovation to the properties, improvements in the hotel
industry and the recovery of the overall area economy, the
properties are well positioned for sale. The gross carrying
amount of the properties to be sold at December 31, 1997, was
approximately $52,000,000 and the accumulated depreciation was
approximately $17,000,000.
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
F-8
<PAGE>
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, which is included in hotel, restaurant,
commercial rental and boat basin operating expenses, was
approximately $568,000 and $688,000 for the years ended
December 31, 1997 and 1996, respectively.
Property and Equipment
Property and equipment is carried at cost, adjusted for
depreciation and impairment of value. In accordance with
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," the Partnership records
impairment losses 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 Partnership's
adoption of the SFAS in 1996 had no effect on the consolidated
financial statements.
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
F-9
<PAGE>
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 costs consist of mortgage and costs related to the
acquisition of the Partnership's investment Properties.
Deferred mortgage costs which consist of an interest rate
collar, commitment fee, legal and professional fees, and title
insurance, are amortized using the straight-line method over
the term of the related agreement. The amortization relating to
the interest rate collar and commitment fee is charged to
interest expense. The amortization charged to interest expense
was $146,000 and $130,000 for the years ended December 31, 1997
and 1996, respectively. Costs related to the acquisition of the
Partnership's investment in the Properties are amortized
primarily over 19 years.
Deferred Rent Receivable
The Partnership has determined that all leases associated with
the rental of the commercial properties 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.
Risk Concentration
F-10
<PAGE>
The Properties are located on Nantucket Island, Massachusetts,
and are highly dependent on tourism 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.
Fair Value of Financial Instruments
"Statement of Financial Accounting Standards ("SFAS") No. 107,
Disclosure about Fair Value of Financial Instruments," as
amended by "SFAS No. 119, Disclosures about Derivative
Financial Instruments and Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet,
for which it is practicable to estimate fair value. Fair value
is defined in the SFAS as the amount at which the instruments
could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The
Partnership believes that the carrying amount of its financial
instruments (except for long term debt) approximates their fair
value due to the short term maturity of these instruments. The
fair value of the Partnership's long term debt, after
discounting the scheduled loan payments to maturity,
approximates its carrying balance.
Restricted Cash
Restricted cash at December 31, 1997 and 1996, represents funds
provided for and maintained by the Partnership, pursuant to the
mortgage note payable agreement, to meet future capital
requirements, debt service payments and operational needs.
Reclassification
Certain reclassifications have been made to the 1996 balances
to conform to the 1997 presentation.
2. PROPERTY AND EQUIPMENT
Investment Properties and Accumulated Depreciation:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
<S> <C> <C>
Land $ 15,606,000 $ 15,606,000
Buildings, improvements and personal property 55,898,000 53,094,000
Construction in progress 2,648,000 321,000
----------------------- -----------------------
74,152,000 69,021,000
Less: accumulated depreciation (23,269,000) (20,906,000)
----------------------- -----------------------
Property and equipment, net $ 50,883,000 $ 48,115,000
======================= =======================
</TABLE>
F-11
<PAGE>
3. LONG-TERM DEBT
The following is a summary of the Partnership's debt at
December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------ --------------------------
<S> <C> <C>
Mortgage loan $ 23,311,000 $ 26,000,000
Notes payable - 3,000
Other mortgage notes payable 190,000 252,000
------------------------ --------------------------
Total long-term debt 23,501,000 26,255,000
Less: current maturity of
long term debt (470,000) (26,053,000)
------------------------ --------------------------
Long-term debt $ 23,031,000 $ 202,000
======================== ==========================
</TABLE>
Mortgage Loan
The mortgage loan encumbering the Properties, 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 rate at December 31,
1997 was 9.375% (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 $703,000 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 at the Properties. The
Partnership, The Operating Partnership and Three Winthrop have
unconditionally guaranteed repayment of the loan. WFA has
unconditionally guaranteed the payment of 25% of the principal
amount of the loan.
Pursuant to the terms of the new loan, Sherburne is prohibited
from making any distributions to its partners (including the
Partnership) except for distributions by Sherburne to the
Partnership from funds from operations of such amounts
necessary to pay the Partnership'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
F-12
<PAGE>
approved by the lender, Sherburne is permitted to distribute to
its partners a portion of the net proceeds of such sale so long
as certain loan to value ratios and other conditions are satisfied.
Other Mortgage Notes Payable
Other mortgage notes payable are secured by various properties,
bear interest at rates between 3% and 10% and mature at various
dates through 2004.
Aggregate principal maturities due on all long-term debt at
December 31, 1997 are as follows:
1998 $ 470,000
1999 505,000
2000 22,447,000
2001 14,000
2002 15,000
Thereafter 50,000
-------------
$ 23,501,000
=============
4. RENTAL INCOME UNDER OPERATING LEASES
The aggregate future minimum lease payments under
non-cancelable operating leases at December 31, 1997 are as
follows:
1998 $ 3,327,000
1999 1,929,000
2000 1,004,000
2001 555,000
2002 113,000
Thereafter 188,000
--------------
$ 7,116,000
==============
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 $219,000 and
$137,000, for the years ended December 31, 1997 and 1996,
respectively, and are included in commercial rental income.
F-13
<PAGE>
5. TRANSACTIONS WITH RELATED PARTIES
The 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:
1997 1996
---- ----
Partnership Administration Fee $ 253,000 $ 239,000
Management Fees $ 89,000 $ 77,000
Reimbursement for administrative expenses $ 43,000 $ 64,000
The Partnership also rents certain facilities from affiliates
of the General Partner. These rents amounted to approximately
$65,000 and $157,000 for the years ended December 31, 1997 and
1996, respectively.
In 1996, 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%.
6. 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 Partnership
has incurred approximately $117,000 as its one-half share of
cleanup costs, to date.
F-14
<PAGE>
These 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 (as defined in the agreement) 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.
F-15
<PAGE>
Capital Improvements
The Partnership has committed to expend approximately $600,000,
during 1998, to complete the bulkhead replacement at the boat
basin.
7. 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, 1997 and 1996
is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Consolidated net loss for financial reporting $ (18,000) $ (978,000)
purposes
Tax basis depreciation over that used for (406,000) (276,000)
financial reporting purposes
Revenue for tax reporting purposes recognized 6,000 (56,000)
(not recognized) for financial reporting purposes
Capitalized interest 362,000 --
Other (17,000) (140,000)
-------------- --------------
Federal income tax basis net loss $ (73,000) $ (1,450,000)
============== ==============
</TABLE>
Partners' capital account balances for federal income tax purposes were
approximately $29,500,000 and $29,600,000 as of December 31, 1997 and
1996, respectively.
F-16
<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, 1998, 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
Edward Williams Chief Financial Officer 4-96
Vice President and
Treasurer
Peter Braverman Senior Vice President 1-96
And Director
Carroll Vinson Vice President - Residential 10-97
and Director
Carolyn Tiffany Vice President and Clerk 10-95
Michael L. Ashner, age 46, 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.
Edward V. Williams, age 57, 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
32
<PAGE>
positions including Treasurer of Johnstown American Companies and Senior
Manager at Price Waterhouse.
Peter Braverman, age 46, 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.
Carroll D. Vinson, age 57, has been Vice President -
Residential and a Director of the General Partner since October 1997. He
has acted as Chief Operating Officer of Insignia Properties Trust since
May 1997. During 1993 to August 1994, Mr. Vinson was affiliated with
Crisp, Hughes & Co. (regional CPA firm) and engaged in various other
investment and consulting activities which included portfolio
acquisitions, asset dispositions, debt restructurings and financial
reporting. Briefly, in early 1993, Mr. Vinson served as President and
Chief Executive Officer of Angeles Corporation, a real estate investment
firm.
Carolyn Tiffany, age 31, has been employed with WFA since
January 1993. From 1993 to September 1995, Ms. Tiffany was a Senior
Analyst and Associate in WFA's accounting and asset management
departments. From October 1995 to present Ms. Tiffany has been a Vice
President in the asset management and investor relations departments of
WFA.
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; One Financial
Place Limited Partnership; Presidential Associates I Limited
Partnership; Riverside Park Associates Limited Partnership; Springhill
Lake Investors Limited Partnership; Twelve AMH Associates Limited
Partnership; Winthrop California Investors Limited Partnership; Winthrop Group
with Investors I Limited Partnership; Winthrop Interim Partners I, A
33
<PAGE>
Limited Partnership; Southeastern Income Properties Limited Partnership;
Southeastern Income Properties II Limited Partnership; and Winthrop
Miami Associates 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.
Based solely upon a review of Forms 3 and 4 and amendments
thereto furnished to the Partnership under Rule 16a-3(e) during the
Partnership's most recent fiscal year and Forms 5 and amendments thereto
furnished to the Partnership with respect to its most recent fiscal
year, the Partnership is not aware of any director, officer or
beneficial owner of more than ten percent of the units of limited
partnership interest in the Partnership that failed to file on a timely
basis, as disclosed in the above Forms, reports required by section
16(a) of the Exchange Act during the most recent fiscal year or prior
fiscal years.
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.
34
<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, 1997 and 1996:
Type of Fee 1997 1996
----------- ---- ----
Partnership Administration Fee $253,000 $239,000
Management Fees 89,000 77,000
Reimbursement for administrative expenses 43,000 64,000
The Registrant also rents certain facilities from affiliates of
WFA. These rents amounted to approximately $65,000 and $157,000 for the
years ended December 31, 1997 and 1996, 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.
As a result of the offering, the Registrant received approximately
$10,466,000 in net proceeds from this offering.
Profits and losses of the Registrant from normal operations had
been allocated 95% to the Limited Partners and 5% to Three Winthrop from
January 1, 1994 through November 8, 1996. 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 the limited partners' positive
capital account
35
<PAGE>
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.
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
36
<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 23, 1998
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 23, 1998
- ---------------------- Officer and Director
Michael L. Ashner
/s/ Edward V. Williams Chief Financial Officer March 23, 1998
- ----------------------
Edward V. Williams
/s/ Peter Braverman Senior Vice President March 23, 1998
- ---------------------- and Director
Peter Braverman
37
<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 (1)
of 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 (2)
Sherburne 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 (5)
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 (5)
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 (5)
26, 1997, among Sherburne Associates Realty Trust and
Sherburne Associates, and Bank of Boston
10(f) Indemnity Agreement Regarding Hazardous Materials, dated (5)
as of February 26, 1997, among Sherburne Associates
Realty Trust and Sherburne Associates, and Bank of
Boston
38
<PAGE>
10(g) Unconditional Guaranty of Payment and Performance from (5)
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 40
- --------------------
(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
(5) Incorporated by reference to the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1996.
39
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from
Nantucket Island Associates Limited Partnership and Subsidiaries and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,012,000 <F1>
<SECURITIES> 0
<RECEIVABLES> 290,000
<ALLOWANCES> (42,000)
<INVENTORY> 313,000
<CURRENT-ASSETS> 5,987,000
<PP&E> 74,152,000
<DEPRECIATION> (23,269,000)
<TOTAL-ASSETS> 59,602,000
<CURRENT-LIABILITIES> 1,847,000
<BONDS> 23,501,000
<COMMON> 0
0
0
<OTHER-SE> 34,724,000
<TOTAL-LIABILITY-AND-EQUITY> 59,602,000
<SALES> 0
<TOTAL-REVENUES> 17,119,000
<CGS> 0
<TOTAL-COSTS> 14,737,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,650,000
<INCOME-PRETAX> (18,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,000)
<EPS-PRIMARY> (16.56) <F2>
<EPS-DILUTED> (16.56) <F2>
<FN>
<F1>
Cash includes $4,837,000 of restricted cash
<F2>
Primary EPS and Diluted EPS are $(5.10) per Limited Partnership Preferred Unit
</FN>
</TABLE>
