<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, 1999 Number 0-16865
----------------- -------
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP
(exact name of small business issuer as specified in its charter)
Massachusetts 04-2948435
- --------------------------- --------------------------------
(State of organization) (IRS Employer Identification No.)
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
--------------
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
(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 $4,396,000.
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
2
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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 $11,000. See "Item 7, Financial Statements - Note 3."
On June 30, 1999 the Partnership sold to an unaffiliated third party
the property located at 20 Wanoma Way, Nantucket, Massachusetts for
approximately $20,000. See "Item 7, Financial Statements - Note 3."
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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, 1999 and 1998:
Average
Occupancy
Average Rate Rate
------------ ----
1999 1998 1999 1998
---- ---- ---- ----
$45.64 $40.77 100% 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, which had a principal
balance of $12,000,000, bore interest at the rate of LIBOR plus 1.75% (as
compared to LIBOR plus 3.25% to 3.75% on the prior loan) and was scheduled to
mature on June 10, 2001 at which time a balloon payment of $11,264,000 was to be
due, was refinanced on February 2, 2000 (the "Refinanced Loan") with a new
$18,500,000 loan. The Refinanced Loan bears interest at 9.03% per annum,
requires monthly payments of interest and principal based on a 30 year
amortization schedule and is matures in March 2010 at which time a balloon
payment of approximately $16,578,000 will be due. See "Item 6. Management's
Discussion and Analysis or Plan of Operation" for additional information
relating to the Refinanced Loan.
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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, 2000 through December 31, 2009):
<TABLE>
<CAPTION>
# of Tenants Aggregate SF Annualized Rental For Percentage of Total
Whose Leases Covered By Expiring Leases Expiring Annualized Rental
Expire Leases --------------- -----------------
------ ------
<S> <C> <C> <C> <C>
2000 45 27,087 1,411,598 36.7%
2001 20 28,594 1,206,746 31.4%
2002 14 8,538 555,950 14.4%
2003 2 3,346 98,000 2.5%
2004 6 5,338 388,466 10.1%
2005 - - - -
2006 1 5,050 187,000 4.9%
2007 - - - -
2008 - - - -
2009
</TABLE>
Set forth below is a table showing the gross carrying value and
accumulated depreciation and federal tax basis of the Retail Properties taken as
a whole as of December 31, 1999:
<TABLE>
<CAPTION>
Gross Carrying Accumulated Federal Tax
Value Depreciation Rate Method Basis
------ ------------- ---- ------ -----
<S> <C> <C> <C> <C>
$24,995,000 $7,238,000 5-30 yrs. S/L $26,592,000
</TABLE>
The realty tax rate and realty taxes paid for the Retail Properties in
1999 were $10.71/1,000 and $493,070, respectively.
The Registrant believes that its Retail Properties are adequately
insured.
For information with respect to capital improvements performed at the
Properties in 1999 and anticipated capital improvements in 2000, see "Item 6,
Management's Discussion and Analysis or Plan of Operation."
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, 1999, Sherburne Associates' cumulative share of the
environmental cleanup totaled approximately $138,000. 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.
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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.
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 agreed that certain modifications are required. The Managing
General partner does not believe these costs will have a material adverse effect
on the Registrant.
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 except as follows:
Frederic D. Nemer et al., vs. Winthrop Securities Co., Inc., et al.,
Superior Court, Suffolk County, Massachusetts, Civil Action No. 98-5536C. In
October 1998, plaintiffs filed an action in Massachusetts state court as a
purported class and derivative action on behalf of themselves and limited
partners in the Registrant against the Registrant and certain affiliates. The
October 1998 complaint was never served upon any of the defendants. In July
1999, plaintiffs filed and served an Amended Class Action Complaint which
purports to allege class and derivative claims against the Registrant and its
affiliates (the "Winthrop Defendants"), as well as certain unaffiliated
defendants, seeking damages and equitable relief. The Amended Class Action
Complaint purported to allege claims for unjust enrichment, violation of the
Massachusetts securities laws, breach of fiduciary duty, gross negligence, fraud
and deceit, civil conspiracy, intentional and negligent misrepresentation,
violation of the Massachusetts consumer protection statute, breach of contract
and breach of covenant. Plaintiffs contend in substance that in connection with
a 1996 offering of preferred limited partnership units in the Partnership and a
1998 sale of property, the Winthrop Defendants preferred their own interests to
those of the limited partners in the Registrant. Plaintiffs also allege that
events and information occurring in 1996 and 1998 caused them to be misled as to
the terms of the original 1987 offering of limited partnership units in the
Registrant.
The Winthrop Defendants and the other defendants have filed motions to
dismiss which are presently pending. Discovery has not commenced. The defendants
believe the claims are without merit and intend to contest this action.
6
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Lewis Jacobs et al., vs. Winthrop Financial Associates, et al., United
States District Court for the District of Massachusetts, Civil Action No.
99CV11363WGY. In June 1999, plaintiffs filed an action in the United States
District Court for the District of Massachusetts as a purported class action on
behalf of themselves and limited partners in the Registrant against certain
affiliates of the Registrant. Plaintiffs' complaint purported to allege class
claims for fraud under the federal securities laws, breach of fiduciary duty,
breach of contract, and unjust enrichment. Plaintiffs contend in substance that
in connection with a 1996 offering of preferred limited partnership units in the
Registrant and a 1998 sale of property, the defendants preferred their own
interests to those of the limited partners in the Registrant. Plaintiffs seek an
unspecified amount of damages and an accounting.
The defendants filed a motion to dismiss in response to the complaint,
arguing that the plaintiffs had failed to state a claim for violation of the
federal securities laws, and that the court should decline to exercise
supplemental jurisdiction over the state law claims included in the complaint.
The court heard argument on that motion on October 20, 1999, and granted the
motion to dismiss the federal securities claims. In February, 2000, the Court
ordered the remaining claims remanded to Massachusetts state court. In November
1999, however, the same plaintiffs had filed another purported class action in
the Chancery Court in Delaware as described below. It is unknown whether
plaintiffs will pursue both actions. Discovery has not commenced. The defendants
believe the claims are without merit and intend to contest this action.
Richard Anisfield, et. al., vs. Three Winthrop Properties, Inc. et.
al., Court of Chancery for New Castle County, Delaware, CA. No. 17379NC. In
August 1999, the plaintiffs brought suit, as a class action, against the general
partner of the Registrant and one of its affiliates alleging breach of fiduciary
duty in connection with the rights offering as described in the preceding
paragraphs. In September 1999, the defendants filed a motion to stay the action
pending the outcome of the two actions identified above. That motion has not yet
been briefed or argued. The defendants believe the claims are without merit and
intend to contest this action.
Lewis Jacobs, et al. vs. Winthrop Financial Associates, et al., Court
of Chancery for New Castle County, Delaware, CA. No. 17602NC. In November 1999,
two investors in the Registrant, brought suit, as a class action, against the
general partner of the Registrant and certain related entities alleging claims
for breach of contract and breach of fiduciary duty. The plaintiffs are the same
plaintiffs who filed the federal court action described above and their claims
purport to be based on the same set of facts. In January 2000, the defendants
filed a motion to stay the action pending the outcome of the actions identified
above. That motion has not yet been briefed or argued. The defendants believe
the claims are without merit and intend to contest this action.
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.
7
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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,
2000, there were 797 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. 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. The Registrant did not make any distributions to
Limited Partners during 1999. A distribution of $4,855,225 ($6,185 per unit) was
made to the limited partners from the refinancing proceeds in March 2000. An
affiliate of the General Partner earned $185,000 in refinancing fees. See "Item
6, Management's Discussion and Analysis or Plan of Operation," for information
relating to the Registrant's ability to make future distributions.
Over the past few years many companies have begun making "mini-tenders"
(offers to purchase an aggregate of less than 5% of the total outstanding units)
for limited partnership interests in the Registrant. Pursuant to the rules of
the Securities and Exchange Commission, when a tender offer is commenced for
Units the Registrant is required to provide limited partners with a statement
setting forth whether it believes limited partners should tender or whether it
is remaining neutral with respect to the offer. Unfortunately, the rules of the
Securities and Exchange Commission do not require that the bidders in certain
tender offers provide the Registrant with a copy of their offer. As a result,
the General Partner often does not become aware of such offers until shortly
before they are scheduled to expire or even after they have expired.
Accordingly, the General Partner does not have sufficient time to advise you of
its position on the tender. In this regard, please be advised that pursuant to
the discretionary right granted to the General Partner of your partnership in
the Partnership Agreement to reject any transfers of units, the General Partner
will not permit the transfer of any Unit in connection with a tender offer
unless: (i) the Registrant is provided with a copy of the bidder's offering
materials, including amendments thereto, simultaneously with their distribution
to the limited partners; (ii) the offer provides for withdrawal rights at any
time prior to the expiration date of the offer and, if payment is not made by
the bidder within 60 days of the date of the offer, after such 60 day period;
and (iii) the offer must be open for at least 20 business days and, if a
material change is made to the offer, for at least 10 business days following
such change.
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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 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.
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.
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 $11,000. The carrying value
of the property sold was approximately $267,000 and the Registrant realized a
gain of approximately $122,000. On June 30, 1999 the Registrant sold to an
unaffiliated third party the property located at 20 Wanoma Way, Nantucket, for
approximately $20,000. The remaining commercial rental properties owned by the
Registrant are not currently being marketed for sale, as the General Partner
believes that the Nantucket retail market for these properties will continue to
improve and that marketing the commercial rental properties today would be
premature.
Due to restrictions imposed by the lender on the amount of unrestricted
cash available, the level of liquidity based upon the Registrant's cash and cash
equivalents experienced no change at December 31, 1999 as compared to December
31, 1998. The Registrant's $1,406,000 provided by operating activities was
offset by $1,049,000 used in investing activities and $357,000 used in financing
activities. Investing activities consisted of $409,000 of proceeds from the sale
of properties, a $1,386,000 increase in restricted cash reserves to be used for
capital improvements and operating deficits and $72,000 of improvements to
property and equipment. Financing activities consisted of principal payments on
long-term debt of $280,000 and $77,000 of refinancing costs. At December 31,
1999 the Registrant's unrestricted cash reserves were $100,000 and the
restricted cash balance was $3,077,000, as compared to $100,000 of unrestricted
cash and $1,691,000 of restricted cash at December 31, 1998. The unrestricted
cash and restricted cash reserves are invested in money market accounts.
As owner of the commercial properties along the wharf, the Registrant
is responsible for maintaining the bulkheads. The Registrant anticipates
spending approximately $3,500,000 over the next five years for bulkhead
replacement. The Registrant expects to utilize restricted cash,
9
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which will be released upon refinancing (see below) and 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 General
Partner does not believe these costs will have a material adverse effect on the
Registrant.
On February 2, 2000, the Registrant refinanced the $12,000,000 floating
rate loan, which was scheduled to mature in June 2001 with a new loan secured by
the properties in the amount of $18,500,000. The new loan, which requires
monthly payments of interest at 9.03% and principal based on a 30 year
amortization schedule, matures in March 2010, with a balloon payment of
approximately $16,578,000. Monthly principal and interest payments are $149,255.
An additional $53,560 per month payment is required for real estate tax escrows
and reserves. The Registrant incurred approximately $800,000 in fees and
expenses in connection with the refinancing. Prepayment of the loan is
permitted, only if certain conditions required by the loan agreement are met
after the third year of the loan. The General Partner has guaranteed $5,000,000
of the loan. The Registrant received approximately $5,540,000 after the
satisfaction of the former loan, payment of closing costs, escrows and reserves.
A distribution of $4,855,225 ($6,185 per unit) was made to the limited partners
from the refinancing proceeds in March 2000. An affiliate of the General Partner
earned $185,000 in refinancing fees.
Results of Operations
The Registrant's net income before extraordinary loss on extinguishment
of debt increased by $215,000 for the year ended December 31, 1999, as compared
to 1998.
Total revenue decreased by $1,135,000 for the year ended December 31,
1999, as compared to 1998 due to the sale of Sherburne's properties in June 1998
and January 1999. The income from the remaining commercial properties increased
by $375,000 for the year ended December 31, 1999 as compared to 1998 due to an
increase in percentage rent and rental rates.
Operating expenses decreased by $3,115,000 for the year ended December
31, 1999, as compared to 1998 due to the property sales. The commercial
properties had an overall increase of $114,000, which was a result of increases
in operating expenses and real estate tax expense.
Interest expense decreased by $666,000, due to the reduction in the
mortgage principal balance. Interest income decreased by $29,000 due to an
overall decrease in cash available for investment.
The results of operations in future quarters may differ from the result
of operations for the year ended December 31, 1999, as weather conditions could
adversely affect operating results
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due to the short seasonal nature of the business. Inflation and changing
economic conditions could also affect occupancy levels, rental rates and
operating expenses.
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Item 7. Financial Statements
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
INDEX
Page
----
Independent Auditors' Report.............................................F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998.............F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998...............................................F-4
Consolidated Statements of Partners' Equity (Deficit)
for the Years Ended December 31, 1999 and 1998...........................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998...............................................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
We have audited the accompanying consolidated balance sheets of Nantucket Island
Associates Limited Partnership (the "Partnership") and its subsidiaries as of
December 31, 1999 and 1998, 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, 1999 and 1998, 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 4, 2000
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 1999 1998
- ------ --------------------- ---------------------
<S> <C> <C>
Cash and cash equivalents $ 100 $ 100
Restricted cash 3,077 1,691
Accounts receivable 54 82
Real estate tax escrow and other current assets 574 485
--------------------- ---------------------
Total current assets 3,805 2,358
Property and equipment, net of accumulated depreciation
of $7,238 (1999) and $7,176 (1998) 17,757 18,520
Deferred rent receivable 353 279
Deferred costs, net of accumulated amortization of
$1,072 (1999) and $933 (1998) 619 680
--------------------- ---------------------
Total assets $ 22,534 $ 21,837
===================== =====================
LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
Accounts payable and other liabilities $ 928 $ 948
Current maturity of long-term debt 284 278
Related party note payable 1,300 1,300
--------------------- ---------------------
Total current liabilities 2,512 2,526
Long-term debt 11,460 11,746
--------------------- ---------------------
Total liabilities 13,972 14,272
--------------------- ---------------------
Commitments and Contingencies
Partners' equity:
Limited partners equity; 785 units authorized,
issued, and outstanding 19,625 18,813
General partners' (deficit) (11,063) (11,248)
--------------------- ---------------------
Total partners' equity 8,562 7,565
--------------------- ---------------------
Total liabilities and partners' equity $ 22,534 $ 21,837
===================== =====================
</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,
------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Revenue:
Hotel operations $ - $ 920
Restaurant operations - 421
Commercial rental operations 4,396 4,021
Boat basin operations - 169
----------------- ----------------
Total revenue 4,396 5,531
----------------- ----------------
Operating expenses:
Hotel - 1,511
Restaurant - 1,158
Commercial rental 962 865
Boat basin - 314
Real estate taxes 493 482
Insurance 218 363
Management and administrative 370 386
Amortization 99 163
Depreciation 568 583
----------------- ----------------
Total operating expenses 2,710 5,825
----------------- ----------------
Income (loss) from operations 1,686 (294)
----------------- ----------------
Other income (expense):
Interest income 127 156
Interest expense (958) (1,624)
Gain on sale of properties 142 2,544
----------------- ----------------
Total other (expense) income, net (689) 1,076
----------------- ----------------
Net income before extraordinary loss 997 782
Extraordinary loss on extinguishment of debt - (403)
----------------- ----------------
Net income $ 997 379
================= ================
Net income (loss) allocated to general partners $ 185 (83)
================= ================
Net income (loss) allocated to limited partners $ 812 (1,412)
================= ================
Net income allocated to preferred limited partners $ - 1,874
================= ================
Net income (loss) per limited partnership unit:
Income (loss) before extraordinary item $ 1,034.39 (1,417.84)
Extraordinary item - loss on extinguishment of debt - (380.89)
----------------- ----------------
Net income (loss) $ 1,034.39 (1,798.73)
================= ================
Net income per preferred limited partnership unit:
Income before extraordinary item $ - 2,494.27
Extraordinary item - loss on extinguishment of debt - (107.01)
----------------- ----------------
Net income $ - 2,387.26
================= ================
</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, 1999 AND 1998
(In Thousands, Except Unit Data)
<TABLE>
<CAPTION>
Preferred Preferred
Units of Units of Investor Investor
Limited Limited Limited Limited
Partnership Partnership Partners' Partners'
Interest Interest Equity Equity
----------------- --------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Balance - January 1, 1998 785 785 $ 35,186 $ 9,916
Distribution - (27,538)
Net income (loss) (1,412) 1,874
Redemption of Preferred Limited
Partners' Equity - (785) (14,961) 15,748
----------------- --------------------- --------------------- -------------------
Balance - December 31, 1998 785 - $ 18,813 -
Net income 812 -
----------------- --------------------- --------------------- -------------------
Balance - December 31, 1999 785 $ - $ 19,625 $ -
================= ===================== ===================== ===================
</TABLE>
<TABLE>
<CAPTION>
General Total
Partners' Partners'
Deficit Equity
-------------------- --------------------
<S> <C> <C>
Balance - January 1, 1998 $ (10,378) $ 34,724
Distribution - (27,538)
Net income (loss) (83) 379
Redemption of Preferred Limited
Partners' Equity (787) -
-------------------- --------------------
Balance - December 31, 1998 $ (11,248) $ 7,565
Net income 185 997
-------------------- --------------------
Balance - December 31, 1999 $ (11,063) $ 8,562
==================== ====================
</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,
----------------------------------------------
1999 1998
------------------------ --------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 9
<S> <C> <C>
Net income $ 997 $ 379
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 707 835
Gain on sale of properties (142) (2,544)
Extraordinary loss on extinguishment of debt - 403
Provision for bad debts - (42)
Changes in operating assets and liabilities:
Accounts receivable 28 208
Inventories - 34
Real estate tax escrow and other current assets (90) 493
Deferred rent receivable (74) 107
Accounts payable and other liabilities (20) (854)
-------- --------
Net cash provided by (used in) operating activities 1,406 (981)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (decrease) in restricted cash reserves (1,386) 3,146
Expenditures for property and equipment (72) (864)
Net proceeds from sale of properties 409 36,530
-------- --------
Net cash (used in) provided by investing activities (1,049) 38,812
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Related party note payable - 1,300
Satisfaction of mortgage payable - (23,140)
Proceeds from mortgage refinancing - 12,000
Principal payments on long-term debt (280) (337)
Deferred costs paid (77) (191)
Distributions to partners - (27,538)
-------- --------
Net cash used in financing activities (357) (37,906)
-------- --------
Net decrease in cash and cash equivalents - (75)
Cash and cash equivalents, beginning of year 100 175
-------- --------
Cash and cash equivalents, end of year $ 100 $ 100
======== ========
Supplemental Information -
Cash paid for interest $ 840 $ 1,452
======== ========
Supplemental Disclosure of Non-Cash Investing Activity:
Accrued expenses on sale of the properties - $ 425
======== ========
</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, 1999 AND 1998
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. Sherburne Associates was converted to a limited
liability company in January 2000. 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.
Income and losses of the Partnership from operations are allocated 95%
to the limited partners and 5% to the General Partner. Gain on sale of
properties is allocated to the general partner until the general
partner no longer has a negative capital account. In accordance with
the Amended and Restated Partnership Agreement (the "Agreement"),
effective November 8, 1996 and while the Preferred Units were
outstanding, losses were 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 were
outstanding, cash flow from operations and capital proceeds (as defined
in
F - 7
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
-----------------------------------------------------------------------
Organization (Continued)
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.
In accordance with the Agreement, the Partnership distributed
approximately $27,538,000 ($35,080 per Preferred Unit) to the Preferred
Unitholders in 1998. The distributions were funded by sale and
refinancing proceeds, a loan of $1,300,000 from an affiliate of the
Partnership's general 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 for the year ended
December 31, 1998.
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, 1999 AND 1998
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.
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 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 $40,000 and $89,000 for the years ended
December 31, 1999 and 1998, 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.
F - 9
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
-----------------------------------------------------------------------
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, 1999 and 1998 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.
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.
New Accounting Pronouncement
During 1998 and subsequently amended in 1999, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement requires companies
to recognize all derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for
hedge accounting. This Statement is effective for fiscal quarters
beginning after June 15, 2000. The Partnership will adopt this
Statement at that time. The adoption of SFAS 133 is not expected to
have any effect on the financial statements of the Partnership.
F - 10
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
2. PROPERTY AND EQUIPMENT
Investment Properties and Accumulated Depreciation:
<TABLE>
<CAPTION>
1999 1998
---------------------- -----------------------
<S> <C> <C>
Land $ 9,298,000 $ 9,434,000
Buildings, improvements and personal property 15,697,000 16,262,000
---------------------- -----------------------
24,995,000 25,696,000
Less: accumulated depreciation (7,238,000) (7,176,000)
---------------------- -----------------------
Property and equipment, net $ 17,757,000 $ 18,520,000
====================== =======================
</TABLE>
3. SALE OF PROPERTIES
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 $11,000. The
carrying value of the property sold was approximately $267,000 and the
Partnership realized a gain of approximately $122,000.
On June 30, 1999 the Partnership sold to an unaffiliated third party
the property located at 20 Wanoma Way, Nantucket, Massachusetts for
approximately $20,000.
On June 10, 1998, the Partnership sold to an unaffiliated third party
all the Partnership's 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:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
<S> <C> <C>
Mortgage loan $ 11,645,000 $ 11,887,000
Note payable - related party 1,300,000 1,300,000
Other mortgage notes payable 99,000 137,000
----------------------- -----------------------
Total long-term debt 13,044,000 13,324,000
Less: current maturity of long term debt (1,584,000) (1,578,000)
----------------------- -----------------------
Long-term debt $ 11,460,000 $ 11,746,000
======================= =======================
</TABLE>
F - 11
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
4. LONG-TERM DEBT (Continued)
--------------------------
Mortgage Loan
The mortgage loan encumbering the Partnership's properties was
refinanced upon the sale of the Properties. The $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, 1999 was approximately
8%. The loan requires monthly payments of interest and principal based
on a 20-year amortization schedule and was scheduled to mature in June
2001, with a balloon payment of approximately $11,264,000.
On February 2, 2000, the Partnership refinanced the above loan, secured
by the properties in the amount of $18,500,000. The loan, which
requires monthly payments of interest at 9.03% and principal based on a
30 year amortization schedule, matures in March 2010, with a balloon
payment of approximately $16,578,000. Monthly principal and interest
payments are $149,255. An additional $53,560 per month payment is
required for real estate tax escrows and reserves. The Partnership
incurred approximately $800,000 in fees and expenses in connection with
the refinancing. Prepayment of the loan is permitted, only if certain
conditions required by the loan agreement are met after the third year
of the loan. The General Partner has guaranteed $5,000,000 of the loan.
The Partnership received approximately $5,540,000 after the
satisfaction of the former loan, payment of closing costs, escrows and
reserves. An affiliate of the General Partner earned $185,000 in
refinancing fees.
Aggregate principal maturities due on long-term debt (including the
refinanced loan) at December 31, 1999 are as follows:
2000 $ 113,000
2001 148,000
2002 162,000
2003 177,000
2004 191,000
5. RENTAL INCOME UNDER OPERATING LEASES
The aggregate future minimum lease payments under non-cancelable
operating leases at December 31, 1999 are as follows:
2000 $ 3,602,000
2001 2,310,000
2002 1,179,000
2003 662,000
2004 558,000
Thereafter 364,000
--------------------------
$ 8,675,000
==========================
F - 12
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
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
$326,000 and $187,000, for the years ended December 31, 1999 and 1998,
respectively, and are included in commercial rental income. The
Partnership recognizes contingent rental income when earned.
6. TRANSACTIONS WITH RELATED PARTIES
The Partnership and Sherburne have paid or accrued 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:
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
Partnership administration fee $ 285,000 $ 269,000
Management Fees 85,000 87,000
Reimbursement for administrative expenses 49,000 51,000
Transaction fee for sale - 384,000
</TABLE>
The Partnership also rents certain facilities from affiliates of the
General Partner. These rents amounted to approximately $9,000 for the
year ended December 31, 1998.
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 accrued interest amounted to $121,000 and $43,000
for the years ended December 31, 1999 and 1998, respectively.
7. COMMITMENTS AND CONTINGENCIES
Environmental Cleanup Costs
The General Partner was aware at the time of acquisition of the
Properties that petroleum products had seeped into 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, 1999 AND 1998
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 $138,000 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, was 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 exceeds 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 refinancing or sale of the properties for the
years ended December 31, 1998 and 1999.
F - 14
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
7. COMMITMENTS AND CONTINGENCIES (Continued)
-----------------------------------------
Contingent Purchase Price Payments (Continued)
Based on the fair value of the remaining properties, the Partnership
believes that it will not be obligated to make any Contingent Purchase
Price Payments upon sale of the remaining properties.
Capital Improvements
As owner of the commercial properties along the wharf, the Partnership
is responsible for maintaining the bulkheads. The Partnership
anticipates spending approximately $3,500,000 over the next five years
for bulkhead replacement. The Partnership expects to utilize restricted
cash, which will be released upon refinancing and cash flow from
operations to fund these improvements.
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.
Legal Proceedings
There are four lawsuits, each purporting to represent a class of
investor limited partners against the Partnership, its general partners
and certain related and unrelated parties. The lawsuits claim unjust
enrichment, violation of the Massachusetts securities laws, breach of
fiduciary duty, fraud, deceit, misrepresentation, conspiracy, breach of
contract, negligence, and violation of Massachusetts consumer
protection laws on behalf of themselves and the purported class. The
plaintiffs appear to contend in substance, that a 1996 offering of
preferred limited partnership units in the Partnership and the
subsequent sale of certain Partnership assets violated their rights as
limited partners. The lawsuits are in their early stages and it is not
possible to predict the likely outcome of these actions at this time.
8. TAXABLE INCOME
The taxable income of the Partnership, the Operating Partnership and
Sherburne differs from the consolidated net income 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
F - 15
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
8. TAXABLE INCOME (Continued)
tax purposes. A reconciliation of consolidated net income for financial
reporting purposes to federal income tax basis net income for the years
ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- --------------------
<S> <C> <C>
Consolidated net income for financial reporting purposes $ 997,000 $ 379,000
Tax basis amortization over that used for financial reporting purposes
(134,000) (74,000)
Tax basis depreciation over that used for financial reporting purposes
(320,000) (1,163,000)
Revenue for tax reporting purposes not recognized for financial reporting
purposes 17,000 177,000
Difference in gain on sale for tax reporting purposes (122,000) --
Revenue for financial reporting purposes not recognized for tax reporting
purposes
(168,000) --
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
Other (1,000) 176,000
----------- -----------
Federal income tax basis net income $ 269,000 $ 2,970,000
=========== ===========
</TABLE>
Partners' capital account balances for federal income tax purposes were
approximately $16,312,000 and $4,950,000 as of December 31, 1999 and 1998,
respectively.
F - 16
<PAGE>
NANTUCKET ISLAND ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
9. SEGMENT INFORMATION
The Partnership had two reportable segments, during 1998 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 1999 and 1998 is shown in the tables
below (in thousands).
<TABLE>
<CAPTION>
Commercial Hotel
Operations Operations Other Total
---------------- ---------------- -------------- ---------------
Year Ended December 31, 1999:
<S> <C> <C> <C> <C>
Revenue $ 4,396 $ - $ - $ 4,396
Depreciation 568 - - 568
Amortization 99 - - 99
Partnership administration fee - - 285 285
Income (loss) from operations 1,971 - (285) 1,686
Identifiable assets 22,534 - - 22,534
Capital expenditures 72 - - 72
<CAPTION>
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
Partnership administration fee - - 269 269
Income (loss) from operations 1,822 (1,847) (269) (294)
Identifiable assets 21,837 - - 21,837
Capital expenditures 45 819 - 864
</TABLE>
F - 17
<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 1999 or 1998 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, 2000, the names of the directors and executive officers
of the General Partner and the position held by each of them, are as follows:
<TABLE>
<CAPTION>
Position Held with the Has Served as a Director or
Name Managing General Partner Officer Since
- ---- ------------------------ -------------
<S> <C> <C>
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
</TABLE>
Michael L. Ashner, age 47, 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 44, 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 48, 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
29
<PAGE>
Assistant Secretary of Fischbach Corporation, a publicly traded, international
real estate and construction firm.
Patrick J. Foye, age 42, 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 33, 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
Residential Associates I, A Limited Partnership; Winthrop Residential Associates
II, A Limited Partnership; Winthrop Residential Associates III, A Limited
Partnership; 1999 Broadway Associates 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; and Winthrop
Growth Investors I 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, 1999 and
1998:
Type of Fee 1999 1998
----------- ---- ----
Partnership Administration Fee $285,000 $269,000
Management Fees 85,000 87,000
Reimbursement for administrative expenses 49,000 51,000
Transaction Fee for Sale -- 384,000
During 1998, the Registrant also rented certain facilities from
affiliates of WFA. These rents amounted to approximately $9,000 for 1998.
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 in June 1998 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 29, 2000
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.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature/Name Title Date
- -------------- ----- ----
/s/ Michael Ashner Chief Executive Officer March 29, 2000
- ------------------
Michael Ashner and Director
/s/ Thomas Staples Chief Financial Officer March 29, 2000
- ------------------
Thomas Staples
/s/ Peter Braverman Executive Vice President March 29, 2000
- ------------------
Peter Braverman and Director
</TABLE>
33
<PAGE>
Index to Exhibits
<TABLE>
<CAPTION>
Number Exhibit Page
- ------ ------- ----
<S> <C> <C>
3,4. Amended and Restated Limited Partnership Agreement of Nantucket Island (3)
Associates Limited Partnership dated November 8, 1996
4. Amended and Restated Certificate of Limited Partnership of Nantucket (1)
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 Associates, (2)
Sherburne Associates Realty Trust and Winthrop Financial Associates, A
Limited Partnership to Bankers Trust Company dated April 28, 1989
10(c) Note, dated February 26, 1997, in the principal amount of $24,200,000, (5)
from Sherburne Associates and Sherburne Associates Realty Trust to The
First National Bank of Boston ("Bank of Boston")
10(d) Loan Agreement, dated February 26, 1997, between Sherburne Associates (5)
Realty Trust and Sherburne Associates, as borrowers, and Bank of
Boston, as lender
10(e) Mortgage and Security Agreement, dated as of February 26, 1997, among (5)
Sherburne Associates Realty Trust and Sherburne Associates, and Bank of
Boston
10(f) Indemnity Agreement Regarding Hazardous Materials, dated as of February (5)
26, 1997, among Sherburne Associates Realty Trust and Sherburne
Associates, and Bank of Boston
10(g) Unconditional Guaranty of Payment and Performance from the Registrant (5)
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
</TABLE>
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>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,177,000 <F1>
<SECURITIES> 0
<RECEIVABLES> 54,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,805,000
<PP&E> 24,995,000
<DEPRECIATION> (7,238,000)
<TOTAL-ASSETS> 22,534,000
<CURRENT-LIABILITIES> 2,512,000
<BONDS> 11,744,000
<COMMON> 0
0
0
<OTHER-SE> 8,562,000
<TOTAL-LIABILITY-AND-EQUITY> 22,534,000
<SALES> 0
<TOTAL-REVENUES> 4,396,000
<CGS> 0
<TOTAL-COSTS> 2,710,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 958,000
<INCOME-PRETAX> 997,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 997,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 997,000
<EPS-BASIC> (1,034.39)
<EPS-DILUTED> (1,034.39)
<FN>
<F1>
Cash includes $3,077,000 of restricted cash
</FN>
</TABLE>
