<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, 1998 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
- ------------------------------------------------------- ---------
(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
----
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 $5,531,000.
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, until June 10, 1998,
owned and operated a portfolio of properties located on Nantucket Island,
Massachusetts. This portfolio included 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. Effective June 10, 1998, Sherburne sold
all of its properties other than the 48 retail buildings (the "Retail
Properties"). See "Disposition of Assets" below. 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").
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.
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
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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. As
a result of a sale of all but the Retail Properties in June 1998 and the
Registrant's subsequent distribution to Preferred Unitholders, the priority
distribution was satisfied and the Preferred Units were retired.
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
Retail Properties dependent upon the ultimate proceeds realized. See "Item 7,
Financial Statements - Note 7" for additional information with respect to this
obligation.
The Registrant's sole business is to own and operate the Retail
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
Retail Properties appears to be advantageous to the Registrant. See "Item 2,
Description of Properties" for information with respect to the Retail
Properties.
Disposition of Assets
After marketing its properties for sale through a third party broker,
on June 10, 1998 Sherburne sold to an unaffiliated third party its Hotel
properties (other than one single family house operated in conjunction with
the Harbor House which was sold on January 13, 1999 (see below)), rental units
located in the Wharf Cottages, employee housing and Boat Basin. The purchase
price paid to Sherburne for the assets sold was approximately $38,425,000 net
of adjustments. The Partnership received net proceeds from the sale of
approximately $12,966,000 after mortgage satisfaction and closing costs of
approximately $2,319,00 which were distributed to the Preferred Unitholders in
full satisfaction of their priority return .
On January 13, 1999, Sherburne sold to an unaffiliated third party
the property located at 82 Easton Street for approximately $400,000. Sherburne
incurred closing costs of $10,000. See "Item 7, Financial Statements - Note
10."
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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. Prior to their sale, management of the
hotels, the Wharf Cottages and the Boat Basin was performed by Interstate
Hotels Corporation, which is not affiliated with the General Partner.
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 Retail Properties.
The Retail Properties contain 78,003 square feet of leasable space.
They were acquired originally acquired in December 1986 for a purchase price
of $24,901,631.
The following table sets forth the average annual occupancy rate
and/or the average monthly per square foot rate at the Retail Properties for
the years ended December 31, 1998 and 1997:
Average
Occupancy
Average Rate Rate
--------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
$40.77 $41.94 100% 100%
The mortgage loan encumbering Sherburne's properties was refinanced
in February 1997 with a new $23,600,000 floating rate loan. In connection with
the sale of all of Sherburne's properties other than the Retail Properties,
Sherburne retired this refinanced loan by making a cash payment from the sale
proceeds of approximately $11,550,000 and simultaneously with the sale of the
properties, refinancing its remaining retail properties with BankBoston, N.A.
("BankBoston"). The refinanced BankBoston mortgage loan has a principal
balance of $12,000,000, bears interest at the rate of LIBOR plus 1.75% (as
compared to LIBOR plus 3.25% to 3.75% on the prior loan) and matures on June
10, 2001 at which time a balloon payment of $11,264,000 will be due. The loan
requires monthly payments of interest and principal based upon a 20 year
amortization schedule. As with the prior loan, the newly refinanced loan
continues to prohibit Sherburne from making any distributions to its partners
except in certain instances. See "Item 7, Financial Statements-Note 4."
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The following table sets forth certain information concerning lease
expirations at the Retail Properties (assuming no renewals for the period from
January 1, 1999 through December 31, 2008):
# of Tenants Aggregate SF Annualized Percentage of
Whose Leases Covered By Rental for Total Annualized
Expire Expiring Leases Leases Expiring Rental
------------ --------------- --------------- -----------------
1999 36 25,621 1,041,352 30.1%
2000 25 18,409 991,239 28.6%
2001 17 23,294 971,496 28.1%
2002 2 1,133 117,500 3.4%
2003 1 2,496 56,000 1.6%
2004 1 2,000 95,500 2.8%
2005 -- -- -- --
2006 1 5,050 187,000 5.4%
2007 -- -- -- --
2008 -- -- -- --
Set forth below is a table showing the gross carrying value and
accumulated depreciation and federal tax basis of the Retail Properties and 82
Easton Street taken as a whole as of December 31, 1998:
Gross Carrying Accumulated Federal Tax
Value Depreciation Rate Method Basis
--------------- ------------ ---- ------ -----------
$25,696,000 $7,176,000 5-30 yrs. S/L $15,889,000
The realty tax rate and realty taxes paid for the Retail Properties in
1998 were $10.71/1,000 and $422,230, respectively.
The Registrant believes that its Retail Properties are adequately
insured.
For information with respect to capital improvements performed at the
Properties in 1998 and anticipated capital improvements in 1999, 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 had 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,
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up to an aggregate payment by the Sellers of $1.25 million. As of December 31,
1998, Sherburne Associates' cumulative share of the environmental cleanup
totaled approximately $131,000. 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.
Three of the five sites have been closed on the Department of
Environmental Protection's ("DEP") active files. 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.
6
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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,
1999, there were 795 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."
Pursuant to the loan encumbering the Retail Properties, 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. During
1998, the Registrant made a $27,538,000 distribution to its Preferred
Unitholders which fully-satisfied the priority return payable to the Preferred
Unitholders. See "Item 6, Management's Discussion and Analysis or Plan of
Operation," for information relating to the Registrant's ability to make
future distributions.
7
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Item 6. Management's Discussion and Analysis or Plan of Operation
Liquidity and Capital Resources
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 disclosures 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 liquidity, capital resources 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 operations. 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.
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.
On June 10, 1998, the Registrant sold to an unaffiliated third party
all the Registrant's properties (the "Properties") with the exception of the
commercial properties for approximately $38,425,000 net of adjustments. As a
condition of the sale, an affiliate of the general partner was required to
sell properties consisting of a tennis club, employee housing and a
maintenance facility. The affiliate received approximately $1,300,000 for the
sale of the properties. The affiliate subsequently loaned the proceeds of the
sale to the Registrant for distribution. The Registrant received net sale
proceeds of approximately $12,966,000 after mortgage satisfaction and closing
costs of approximately $2,319,000. The carrying value of the properties sold
was approximately $33,562,000 and the Registrant realized a gain for financial
reporting purposes of approximately $2,544,000. On January 13, 1999 the
Registrant sold to an unaffiliated third party the property located at 82
Easton Street for approximately $400,000. The Registrant incurred closing
costs of approximately $10,000. The carrying value of the property sold was
approximately $266,000 and the Registrant realized a gain of approximately
$124,000. The rest of the commercial rental properties owned by the Registrant
are not currently 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.
The level of liquidity based upon the Registrant's cash and cash
equivalents experienced a decrease of $75,000 at December 31, 1998, as
compared to December 31, 1997. The decrease was due to $38,812,000 of cash
provided by investing activities, which was more than offset by $37,906,000 of
cash used in financing activities and $981,000 of cash used in operating
activities. Investing activities consisted of net sales proceeds of
approximately $36,530,000 and a decrease in restricted cash reserves of
$3,146,000, which was partially offset by improvements to property and
equipment of $864,000. Financing activities consisted primarily of
distributions of $27,538,000 ($35,080 per preferred unit) to preferred
investor limited partners (from the sale of the properties) and $23,140,000
paid in satisfaction of a mortgage loan, which was partially
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offset by refinancing proceeds of $12,000,000 and a loan from an affiliate of
$1,300,000. At December 31, 1998, the Registrant's unrestricted cash reserves
were $100,000 and the restricted cash balance was $1,691,000, as compared to
$175,000 and $4,837,000, respectively, at December 31, 1997. The unrestricted
and restricted cash reserves are invested in money market accounts.
During 1998 the Registrant spent $864,000 on capital improvements,
which included approximately $496,000 on bulkhead improvements. As owner of
the commercial properties along the wharf, the Registrant is responsible for
maintaining the bulkheads. The Registrant anticipates spending approximately
$3,000,000 over the next five years for bulkhead replacement. The Registrant
expects to utilize cash flow from operations to fund these improvements.
The Registrant has received a letter from the U.S. Department of
Justice relating to potential non-compliance with the American Disabilities
Act (the "Act"). After review of the commercial properties compliance with the
Act, the Registrant agrees that certain modifications are required. The cost
and time period of these modifications cannot be determined at this time. The
Managing General partner does not believe these costs will have material
adverse effect on the Registrant.
The mortgage loan encumbering the Registrant's properties was
refinanced upon the sale of the Properties. The new $12,000,000 floating rate
note adjusts to the lower of the bank's base rate or the Euro dollar rate plus
1.75%. The rate at December 31, 1998 was approximately 7%. The loan requires
monthly payments of interest and principal based on a 20 year amortization
schedule and matures in June 2001, with a balloon payment of approximately
$11,264,000. The Registrant incurred $191,000 in fees and expenses in
connection with the refinancing, including the purchase of the interest rate
collar.
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. It is anticipated that any cash flow from
operations that is not used for improvements to properties, will be utilized
as a reserve towards refinancing the debt, which matures in June 2001.
9
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Results of Operations
The Registrant's net income before extraordinary loss on
extinguishment of debt increased by $800,000 for the year ended December 31,
1998 as compared to 1997. This increase is attributable to the sale of
properties on June 10, 1998.
Total revenue decreased due to the sale of the Properties on June 10,
1998. Income from the remaining commercial properties, increased by $224,000
due to an increase in rental rates on lease renewals. The commercial
properties were fully occupied during 1998 and 1997.
The decrease in operating expenses was also due to the sale of the
properties. The commercial properties had an overall increase in expenses of
$170,000 which was the result of increases in commercial operating expenses.
Other expenses remained relatively constant.
Interest expense decreased by $1,026,000, primarily due to the
reduction in mortgage principal balance, which was a result of the sale of the
Properties and to a $270,000 payment in 1997 of additional interest to a
previous lender. Interest income decreased by $94,000 due to a decrease in
restricted cash available for investment.
The results of operations in future years may differ from the results
of operations for the year ended December 31, 1998, 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.
Year 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. The
Registrant is dependent upon the General Partner and its affiliates for
management and administrative services. Any computer programs or hardware that
have date-sensitive software or embedded chips may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. During the first half of 1998,
the General Partner and its affiliates completed their assessment of the
various computer software and hardware used in connection with the management
of the Registrant. This review indicated that significantly all of the
computer programs used by the General Partner and its affiliates are
off-the-shelf "packaged" computer programs which are easily upgraded to be
Year 2000 compliant. In addition, to the extent that custom programs are
utilized by the General Partner and its affiliates, such custom programs are
Year 2000 compliant. Following the completion of its assessment of the
computer software and hardware, the General Partner and its affiliates began
upgrading those systems which required upgrading. To date, significantly all
of these systems have been upgraded. The Registrant has to date not borne, nor
is it expected that the Registrant will bear any significant cost, in
connection with the upgrade of those systems to requiring remediation. It is
expected that all systems will be remediated, tested and implemented during
the first half of 1999.
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To date, the General Partner is not aware of any external agent with
a Year 2000 issue that would materially impact the Registrant's results of
operations, liquidity or capital resources. However, the General Partner has
no means of ensuring that external agents will be Year 2000 compliant. The
General Partner does not believe that the inability of external agents to
complete their Year 2000 resolution process in a timely manner will have a
material impact on the financial position or results of operations of the
Registrant. However, the effect of non-compliance by external agents is not
readily determinable.
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Item 7. Financial Statements
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998
INDEX
Page
----
Independent Auditors' Report............................................. F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997............. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997............................................... F-4
Consolidated Statements of Partners' Equity (Deficit)
for the Years Ended December 31, 1998 and 1997........................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997............................................... F-6
Notes to Consolidated Financial Statements............................... F-7
F-1
<PAGE>
Independent Auditors' Report
To the Partners
Nantucket Island Associates Limited Partnership and Subsidiaries
We have audited the accompanying consolidated balance sheets of Nantucket
Island Associates Limited Partnership (the "Partnership") and its subsidiaries
as of December 31, 1998 and 1997, 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 audits.
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, 1998 and 1997, and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
Certified Public Accountants
New York, New York
February 19, 1999
F-2
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NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Unit Data)
DECEMBER 31,
--------------
1998 1997
---- ----
ASSETS
- ------
Cash and cash equivalents $ 100 $ 75
Restricted cash 1,691 4,837
Accounts receivable, less allowance for doubtful
accounts of $ - (1998) and $42 (1997) 82 248
Inventories -- 313
Real estate tax escrow and other current assets 485 978
-------- --------
Total current assets 2,358 6,551
Property and equipment, net of accumulated depreciation
of $7,176 (1998) and $23,269 (1997) 18,520 50,883
Deferred rent receivable 279 386
Deferred costs, net of accumulated amortization of
$933 (1998) and $2,443 (1997) 680 1,782
-------- --------
Total assets $ 21,837 $ 59,602
======== ========
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
- ------------------------------------------
Accounts payable and other liabilities $ 948 $ 1,377
Current maturity of long-term debt 278 470
Related party note payable 1,300 --
-------- --------
Total current liabilities 2,526 1,847
Long-term debt 11,746 23,031
-------- --------
Total liabilities 14,272 24,878
-------- --------
Commitments and Contingencies
Partners' equity:
Limited partners equity; 785 units authorized,
issued, and outstanding 18,813 35,186
Preferred limited partners equity, 785 units
at December 31, 1997 -- 9,916
General partners' (deficit) (11,248) (10,378)
--------- ---------
Total partners' equity 7,565 34,724
-------- --------
Total liabilities and partners' equity $ 21,837 $ 59,602
========= =========
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)
DECEMBER 31,
------------------
1998 1997
---- ----
Revenue:
Hotel operations $ 920 $ 7,672
Restaurant operations 421 2,765
Commercial rental operations 4,021 4,026
Boat basin operations 169 2,656
----------- --------
Total revenue 5,531 17,119
--------- --------
Operating expenses:
Hotel 1,511 4,350
Restaurant 1,158 3,438
Commercial rental 865 695
Boat basin 314 1,849
Bad debt expense -- 32
Real estate taxes 482 619
Insurance 363 555
Management and administrative 386 604
Amortization 163 232
Depreciation 583 2,363
----------- --------
Total operating expenses 5,825 14,737
----------- --------
(Loss) income from operations (294) 2,382
----------- --------
Other income (expense):
Interest income 156 250
Interest expense (1,624) (2,650)
Gain on sale of properties 2,544 --
---------- --------
Total other income (expense), net 1,076 (2,400)
---------- --------
Net income (loss) before extraordinary loss 782 (18)
Extraordinary loss on extinguishment of debt (403) --
----------- --------
Net income (loss) $ 379 $ (18)
========== ========
Net loss allocated to general partners $ (83) $ (1)
Net loss allocated to limited partners $ (1,412) $ (13)
=========== ========
Net income (loss) allocated to preferred
limited partners $ 1,874 $ (4)
========== ========
Net loss per limited partnership unit:
Loss before extraordinary item $(1,417.84) $(16.56)
Extraordinary item - loss on extinguishment
of debt (380.89) --
----------- --------
Net loss $(1,798.73) $(16.56)
=========== ========
Net income (loss) per preferred limited
partnership unit:
Income (loss) before extraordinary item $ 2,494.27 $ (5.10)
Extraordinary item - loss on extinguishment
of debt (107.01) --
----------- --------
Net income (loss) $ 2,387.26 $ (5.10)
=========== ========
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, 1998 AND 1997
(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, 1997 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
Distribution (27,538) -- (27,538)
Net income (loss) (1,412) 1,874 (83) 379
Redemption of Preferred
Limited Partners' Equity (785) (14,961) 15,748 (787) --
---- ----- --------- --------- --------- ---------
Balance--December 31, 1998 785 -- $ 18,813 $ -- $(11,248) $ 7,565
=== ===== ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
DECEMBER 31,
------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 379 $ (18)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 835 2,741
Gain on sale of properties (2,544) --
Extraordinary loss on extinguishment of debt 403 --
Provision for bad debts (42) 19
Changes in operating assets and liabilities:
Accounts receivable 208 229
Receivables from related parties -- 74
Inventories 34 (41)
Real estate tax escrow and other current assets 493 (404)
Deferred rent receivable 107 6
Accounts payable and other liabilities (854) (143)
--------- ---------
Net cash (used in) provided by operating activities (981) 2,463
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted cash reserves 3,146 (4,095)
Expenditures for property and equipment (864) (5,131)
Net proceeds from sale of properties 36,530 --
--------- ---------
Net cash provided by (used in) investing activities 38,812 (9,226)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Related party note payable 1,300 --
Satisfaction of mortgage payable (23,140) (26,000)
Proceeds from mortgage refinancing 12,000 23,600
Principal payments on long-term debt (337) (354)
Deferred costs paid at refinancing (191) (703)
Distributions to partners (27,538) --
Syndication costs -- (1)
--------- ---------
Net cash used in financing activities (37,906) (3,458)
--------- ---------
Net decrease in cash and cash equivalents (75) (10,221)
Cash and cash equivalents, beginning of year 175 10,396
--------- ---------
Cash and cash equivalents, end of year $ 100 $ 175
========= =========
Supplemental Information--
Cash paid for interest $ 1,452 $ 2,527
========= =========
Supplemental Disclosure of Non-Cash Investing Activity:
Accrued expenses on sale of the properties $ 425 $ --
========= =========
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, 1998 AND 1997
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 included two hotels, commercial
rental properties, 24 rental units located in the Wharf Cottages, a
boat basin accommodating approximately 250 yachts and employee
housing (collectively, the "Properties"). On June 10, 1998, the
Partnership sold all of its properties with the exception of the
commercial rental properties (see Note 3).
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) 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 (the
"Affiliate") 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 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
F-7
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
In accordance with the Amended and Restated Partnership Agreement,
the Partnership distributed approximately $27,538,000 ($35,080 per
Preferred Unit) to the Preferred Unitholders. The distributions were
funded by sale (see note 3) and refinancing proceeds, a loan of
$1,300,000 from an affiliate of the Partnership's general partner
(see note 6) and the release of restricted cash. Since the Preferred
Unitholders have been paid in full, their units have been redeemed in
accordance with the Agreement and they will receive no future
distributions or income/loss allocations.
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, which is included in hotel, restaurant and boat
basin operating expenses, was approximately $281,000 and $568,000 for
the years ended December 31, 1998 and 1997, 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.
F-8
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
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 in prior years consisted of food and beverage, linens,
glassware, china and silver and were 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 costs 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 $89,000 and $146,000 for the years
ended December 31, 1998 and 1997, 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.
F-9
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
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, 1998 and 1997, 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 1997 balances to
conform to the 1998 presentation.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which is effective for years beginning after December
15, 1997. SFAS 131 established standards for the way that public
business enterprises report information about operating segments in
annual financial statements and requires that those enterprises
report selected information about operating segments in interim
financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. See "Note 9 - Segment Information" for detailed
disclosures
F-10
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
2. PROPERTY AND EQUIPMENT
Investment Properties and Accumulated Depreciation:
1998 1997
---- ----
Land $ 9,434,000 $ 15,606,000
Buildings, improvements and
personal property 16,262,000 55,898,000
Construction in progress -- 2,648,000
------------ -------------
25,696,000 74,152,000
Less: accumulated depreciation (7,176,000) (23,269,000)
------------ -------------
Property and equipment, net $18,520,000 $ 50,883,000
============ =============
3. SALE OF PROPERTIES
On June 10, 1998, the Partnership sold to an unaffiliated third party
all the Partnership's properties (the "Properties") with the
exception of the commercial properties for approximately $38,425,000,
net of adjustments. As a condition of the sale, an affiliate of the
general partner was required to sell properties consisting of a
tennis club, employee housing and a maintenance facility. The
affiliate received approximately $1,300,000 for the sale of the
properties. The affiliate subsequently loaned the proceeds of the
sale to the Partnership for distribution. The Partnership received
net sale proceeds of approximately $12,966,000 after mortgage
satisfaction and closing costs of approximately $2,319,000. The
carrying value of the properties sold was approximately $33,562,000
and the Partnership realized a gain for financial reporting purposes
of approximately $2,544,000.
4. LONG-TERM DEBT
The following is a summary of the Partnership's debt at December 31:
1998 1997
---- ----
Mortgage loan $11,887,000 $23,311,000
Note payable--related party 1,300,000 --
Other mortgage notes payable 137,000 190,000
------------ ------------
Total long-term debt 13,324,000 23,501,000
Less: current maturity of
long term debt (1,578,000) (470,000)
------------ ------------
Long-term debt $11,746,000 $23,031,000
============ ============
F-11
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
4. LONG-TERM DEBT (Continued)
Mortgage Loan
The mortgage loan encumbering the Partnership's properties was
refinanced upon the sale of the Properties. The new $12,000,000
floating rate note adjusts to the lower of the bank's base rate or
the Euro dollar rate plus 1.75%. The rate at December 31, 1998 was
approximately 7%. The loan requires monthly payments of interest and
principal based on a 20 year amortization schedule and matures in
June 2001, with a balloon payment of approximately $11,264,000. The
Partnership incurred $191,000 in fees and expenses in connection with
the refinancing, including the purchase of an interest rate collar.
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.
The General Partner has guaranteed approximately $4,887,000 of the
loan.
The Partnership recognized an extraordinary loss on extinguishment of
debt of $403,000 on refinancing. The extraordinary loss resulted from
the write-off unamortized mortgage costs.
Aggregate principal maturities due on all long-term debt
(including the current portion) at December 31, 1998 are as follows:
1999 $ 278,000
2000 286,000
2001 11,395,000
2002 15,000
2003 16,000
Thereafter 34,000
-----------
$12,024,000
===========
5. RENTAL INCOME UNDER OPERATING LEASES
The aggregate future minimum lease payments under non-cancelable
operating leases at December 31, 1998 are as follows:
1999 $3,196,000
2000 2,284,000
2001 1,361,000
2002 412,000
2003 311,000
Thereafter 630,000
----------
$8,194,000
==========
F-12
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
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
$187,000 and $219,000, for the years ended December 31, 1998 and 1997,
respectively, and are included in commercial rental income.
6. 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:
1998 1997
---- ----
Asset Management Fee $269,000 $253,000
Management Fees 87,000 89,000
Reimbursement for administrative expenses 51,000 43,000
Transaction fee for sale 384,000 --
The Partnership also rents certain facilities from affiliates of the
General Partner. These rents amounted to approximately $9,000 and
$65,000 for the years ended December 31, 1998 and 1997, respectively.
As discussed in Note 3, an affiliate of the general partner loaned
approximately $1,300,000 to the Partnership in connection with the
sale of the Properties. The note, which is payable on demand, bears
interest at six percent. The interest accrued for the period ended
December 31, 1998 amounted to $43,000.
7. COMMITMENTS AND CONTINGENCIES
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 the
remediation of 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.
F-13
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
7. COMMITMENTS AND CONTINGENCIES (Continued)
Environmental Cleanup Costs (Continued)
The sellers deposited $1,250,000 in escrow as security for the sellers'
indemnification. The Partnership has incurred approximately $131,000 as
its one-half share of cleanup costs, to date. 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. The sellers were
not entitled to any contingent purchase price payments for the 1998
property sales or refinancing.
F-14
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
7. COMMITMENTS AND CONTINGENCIES (Continued)
Capital Improvements
As owner of the commercial properties along the wharf, the Partnership
is responsible for maintaining the bulkheads. The Partnership
anticipates spending approximately $3,000,000 over the next five years
for bulkhead replacement.
The Partnership has received a letter from the U.S. Department of
Justice relating to potential non-compliance with the American
Disabilities Act (the "Act"). After review of the commercial properties
compliance with the Act, the Partnership agrees that certain
modifications are required. The cost and time period of these
modifications cannot be determined at this time.
8. TAXABLE INCOME (LOSS)
The taxable income (loss) of the Partnership, the Operating Partnership
and Sherburne differs from the consolidated net income (loss) reported
for financial reporting purposes, primarily due to timing differences
in the recognition of depreciation and amortization expense, commercial
rental revenue and gain on sale for tax purposes. A reconciliation of
consolidated net income (loss) for financial reporting purposes to
federal income tax basis net income (loss) for the years ended December
31, 1998 and 1997 is as follows:
1998 1997
---- ----
Consolidated net income (loss) for
financial reporting purposes $ 379,000 $ (18,000)
Tax basis amortization over that used for
financial reporting purposes (74,000) --
Tax basis depreciation over that used for
financial reporting purposes (1,163,000) (406,000)
Revenue for tax reporting purposes not
recognized for financial reporting
purposes 177,000 6,000
Gain on sale for tax reporting purposes
(not recognized) for financial
reporting purposes 2,994,000 --
Extraordinary loss on extinguishment of
debt not recognized for tax purposes 403,000 --
Capitalized interest 78,000 362,000
Other 176,000 (17,000)
----------- ----------
Federal income tax basis net
income (loss) $ 2,970,000 $ (73,000)
=========== ==========
Partners' capital account balances for federal income tax purposes
were approximately $4,950,000 and $29,518,000 as of December 31, 1998
and 1997, respectively.
F-15
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
9. SEGMENT INFORMATION
The Partnership has two reportable segments, hotel operations and
commercial rental operations. The Partnership evaluates performance
based on net operating income, which is income from operations before
depreciation, amortization, interest, gain on sale of properties,
extraordinary and non-operating items. Hotel operations include the
restaurants (which are located in the hotels) and the boat basin. The
hotel properties were sold on June 10, 1998.
Segment information for the years 1998 and 1997 is shown in the tables
below (in thousands).
Commercial Hotel
Operations Operations Other Total
---------- ---------- ----- -----
Year Ended December 31, 1998:
Revenue $ 4,021 $ 1,510 $ -- $ 5,531
Depreciation 583 -- -- 583
Amortization 106 57 -- 163
Asset management fees -- -- 269 269
Income (loss) from operations 1,822 (1,847) (269) (294)
Identifiable assets 21,837 -- -- 21,837
Capital expenditures 45 819 -- 864
Year Ended December 31, 1997:
Revenue $ 4,026 $13,093 $ -- $17,119
Depreciation 566 1,797 -- 2,363
Amortization 109 123 -- 232
Asset management fees -- -- 253 253
Income (loss) from operations 2,001 634 (253) 2,382
Identifiable assets 20,618 38,984 -- 59,602
Capital expenditures 63 5,068 -- 5,131
10. SUBSEQUENT EVENT
On January 13, 1999 the Partnership sold to an unaffiliated third party
the property located at 82 Easton Street for approximately $400,000.
The Partnership incurred closing costs of approximately $10,000. The
carrying value of the property sold was approximately $266,000 and the
Partnership realized a gain of approximately $124,000.
F-16
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
There were no disagreements with Imowitz Koenig & Co., LLP regarding
the 1998 or 1997 audits of the Partnership's financial statements.
28
<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, 1999, 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 a
Position Held with the Managing Director or
Name General Partner Officer Since
- ---- -------------------------------- ----------------
Michael L. Ashner Chief Executive Officer and Director 1-96
Thomas C. Staples Chief Financial Officer 1-99
Peter Braverman Executive Vice President and Director 1-96
Patrick J. Foye Vice President--Residential and Director 10-98
Carolyn Tiffany Chief Operating Officer and Clerk 10-95
Michael L. Ashner, age 46, has been the Chief Executive Officer of
Winthrop Financial Associates, A Limited Partnership ("WFA") and the Managing
General Partner 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.
Thomas C. Staples, age 43, has been the Chief Financial Officer of
WFA since January 1, 1999. From March 1996 through December 1998, Mr.
Staples was Vice President/Corporate Controller of WFA. From May 1994 through
February 1996, Mr. Staples was the Controller of the Residential Division of
Winthrop Management.
Peter Braverman, age 47, has been a Vice President of WFA and the
Managing General Partner 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.
29
<PAGE>
Patrick J. Foye, age 41, has been Vice President-Residential and
Director of the Managing General Partner since October 1, 1998. Mr. Foye has
served as Executive Vice President of Apartment Investment and Management
Company ("AIMCO") since May 1998. Prior to joining AIMCO, Mr. Foye was a
partner in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from
1989 to 1998 and was Managing Partner of the firm's Brussels, Budapest and
Moscow offices from 1992 through 1994. Mr. Foye is also Deputy Chairman of the
Long Island Power Authority and serves as a member of the New York State
Privatization Council. He received a B.A. from Fordham College and a J.D. from
Fordham University Law School.
Carolyn Tiffany, age 32, 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. Ms. Tiffany was a Vice
President in the asset management and investor relations departments of WFA from
October 1995 to December 1997, at which time she became the Chief Operating
Officer 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 Growth Investors I Limited Partnership;
Winthrop Interim Partners I, A Limited Partnership; Southeastern Income
Properties Limited Partnership; and Southeastern Income Properties II 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.
30
<PAGE>
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.
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, 1998 and
1997:
Type of Fee 1998 1997
----------- ---- ----
Partnership Administration Fee $269,000 $253,000
Management Fees 87,000 89,000
Reimbursement for administrative expenses 51,000 43,000
Transaction Fee for Sale 384,000 --
The Registrant also rents certain facilities from affiliates of
WFA. These rents amounted to approximately $9,000 and $65,000 for the years
ended December 31, 1998 and 1997, respectively.
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
31
<PAGE>
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 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. This priority return was fully
satisfied from the proceeds of the sale of Sherburne's properties other than the
Retail Properties and the Preferred Units were retired.
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
32
<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.
Managing General Partner
By: /s/ Michael L. Ashner
---------------------------
Michael Ashner
Chief Executive Officer
Date: March 26, 1999
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 Ashner Chief Executive Officer March 26, 1999
- ------------------ and Director
Michael Ashner
/s/ Thomas Staples Chief Financial Officer March 26, 1999
- -------------------
Thomas Staples
/s/ Peter Braverman Executive Vice President March 26, 1999
- ------------------- and Director
Peter Braverman
33
<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 Operating (2)
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 (5)
$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 (5)
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, (5)
among Sherburne Associates Realty Trust and Sherburne Associates,
and Bank of Boston
10(f) Indemnity Agreement Regarding Hazardous Materials, dated as of (5)
February 26, 1997, among Sherburne Associates Realty Trust and
Sherburne Associates, and Bank of Boston
10(g) Unconditional Guaranty of Payment and Performance from the (5)
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 36
34
<PAGE>
- --------------------
(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
35
<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
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,791,000 <F1>
<SECURITIES> 0
<RECEIVABLES> 82,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,358,000
<PP&E> 25,696,000
<DEPRECIATION> (7,176,000)
<TOTAL-ASSETS> 21,837,000
<CURRENT-LIABILITIES> 2,526,000
<BONDS> 12,024,000
<COMMON> 0
0
0
<OTHER-SE> 7,565,000
<TOTAL-LIABILITY-AND-EQUITY> 21,837,000
<SALES> 0
<TOTAL-REVENUES> 5,629,000
<CGS> 0
<TOTAL-COSTS> 5,923,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,624,000
<INCOME-PRETAX> 782,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 782,000
<DISCONTINUED> 0
<EXTRAORDINARY> (403,000)
<CHANGES> 0
<NET-INCOME> 379,000
<EPS-PRIMARY> (1,798.73) <F2>
<EPS-DILUTED> (1,798.73) <F2>
<FN>
<F1>
Cash includes $1,692,000 of restricted cash
<F2>
Primary EPS and Diluted EPS are $2,387.26 per Limited Partnership Preferred Unit
</FN>
</TABLE>
