-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DZFuwAheeWVSjvDFKiMg0m1PCm/9f5sY3rVFwDPONEX3QCoN+PPMro4aobUB7Uj+ uLe5DOVILuqivn6Y0ekosQ== 0000950135-99-001737.txt : 19990402 0000950135-99-001737.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950135-99-001737 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN REALTY INCOME FUND III LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000842741 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 043025607 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18563 FILM NUMBER: 99581363 BUSINESS ADDRESS: STREET 1: 200 BERKELEY STREET CITY: BOSTON STATE: MA ZIP: 02117 BUSINESS PHONE: 8007225457 10-K405 1 JOHN HANCOCK REALTY INCOME FUND III 1 .FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the Fiscal Year Ended December 31, 1998 ------------------------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from N/A ------------------------------------------------- Commission file number 0-18563 --------------------------------------------------------- JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-3025607 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 200 Clarendon Street, Boston, MA 02116 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (800) 722-5457 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Assignee Units 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-K 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-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405.) Not applicable, since the securities are non-voting NOTE: If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form. Exhibit Index on Pages 19 - 24 Page 1 of 25 2 TABLE OF CONTENTS PART I Item 1 Business 3 Item 2 Properties 5 Item 3 Legal Proceedings 7 Item 4 Submission of Matters to a Vote of Security Holders 7 PART II Item 5 Market for the Partnership's Securities and Related Security Holder Matters 8 Item 6 Selected Financial Data 9 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8 Financial Statements and Supplementary Data 15 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 15 PART III Item 10 Directors and Executive Officers of the Registrant 15 Item 11 Executive Compensation 17 Item 12 Security Ownership of Certain Beneficial Owners and Management 18 Item 13 Certain Relationships and Related Transactions 18 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 20 Signatures 26 2 3 PART I ITEM 1 - BUSINESS The Registrant, John Hancock Realty Income Fund-III Limited Partnership (the "Partnership"), is a Limited Partnership organized on November 4, 1988 under the Massachusetts Uniform Limited Partnership Act. As of December 31, 1998, the partners in the Partnership consisted of a General Partner, John Hancock Realty Equities, Inc. (the "General Partner"), John Hancock Realty Funding, Inc. (the "John Hancock Limited Partner"), John Hancock Income Fund-III Assignor, Inc. (the "Assignor Limited Partner") and 2,321 Unitholders (the "Investors"). The Assignor Limited Partner holds 5 Limited Partnership Interests for its own account and 2,415,229 Assignee Units (the "Units") for the benefit of the Investors. The John Hancock Limited Partner, the Assignor Limited Partner and the Investors are collectively referred to as the Limited Partners. The initial capital of the Partnership was $2,100, representing capital contributions of $1,000 from the General Partner, $1,000 from the John Hancock Limited Partner and $100 from the Assignor Limited Partner. During the offering period, the John Hancock Limited Partner made additional capital contributions of $3,863,366. The Amended Agreement of Limited Partnership of the Partnership (the "Partnership Agreement") authorized the sale of up to 5,000,000 Assignee Units, representing economic and certain other rights attributable to Investor Limited Partnership Interests. The Units were offered and sold to the public during the period from February 17, 1989 to February 15, 1991 pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933. The Partnership sold the Units for $20 per Unit. No established public market exists on which the Units may be traded. The Partnership is engaged solely in the business of acquiring, improving, holding for investment and disposing of existing, income-producing, retail, industrial, and office properties on an all-cash basis, free and clear of mortgage indebtedness. Although the Partnership's properties were acquired, and are held, free and clear of mortgage indebtedness, the Partnership may incur mortgage indebtedness on its properties under certain circumstances, as specified in the Partnership Agreement. The latest date on which the Partnership is due to terminate is December 31, 2019, unless it is sooner terminated in accordance with the terms of the Partnership Agreement. It is expected that in the ordinary course of the Partnership's business, the properties of the Partnership will be disposed of, and the Partnership terminated, before December 31, 2019. The Partnership's equity real estate investments are subject to various risk factors. Although the risks of equity investing are reduced when properties are acquired on an unleveraged basis, the major risk of owning income-producing properties is the possibility that the properties will not generate income sufficient to meet operating expenses and to fund adequate reserves for repair, replacements, contingencies and anticipated obligations. The income from properties may be affected by many factors, including: i) adverse changes in general economic conditions and local conditions, such as competitive overbuilding, a decrease in employment, or adverse changes in real estate zoning laws, which may reduce the desirability of real estate in the area or ii) other circumstances over which the Partnership may have little or no control, such as fires, earthquakes and floods. To the extent that the Partnership's properties are leased in any substantial portion to a specific retail, industrial or office tenant, the financial failure of any such major tenant, resulting in the termination of the tenant's lease or non-payment of rentals due, would likely cause at least a temporary reduction in cash flow from any such property and might result in a decrease in the market value of that property. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. If any such substances were found in or on any property owned by the Partnership, the Partnership could be exposed to liability and be required to incur substantial remediation costs. The presence of such substances or the failure to undertake proper remediation could adversely affect the ability to finance, refinance or dispose of such property. On December 28, 1988, the Partnership acquired a 0.5% interest in JH Quince Orchard Partners (the "Affiliated Joint Venture"), a joint venture between the Partnership and John Hancock Realty Income Fund-II Limited Partnership ("Income Fund-II"). Pursuant to the terms of the partnership agreement of the Affiliated Joint Venture, the Partnership had the option, exercisable prior to December 31, 1990, to increase its investment and interest in the Affiliated Joint Venture to 50%. During the second quarter of 1989, the Partnership exercised such option and Income Fund-II transferred a 49.5% interest in the Affiliated Joint Venture to the Partnership. The Partnership has since held a 50% interest in the Affiliated Joint Venture. 3 4 ITEM 1 - BUSINESS (CONTINUED) On December 28, 1988, the Affiliated Joint Venture contributed 98% of the invested capital of, and acquired a 75% interest in, QOCC-1 Associates, an existing partnership which owns and operates a three-story office building and related land and improvements located in Gaithersburg, Maryland (the "Quince Orchard Corporate Center"). The partnership agreement of QOCC-1 Associates provides that the Affiliated Joint Venture shall contribute 95% of any required additional capital contributions. Of the cumulative total invested capital in QOCC-1 Associates at December 31, 1998, 97.55% has been contributed by the Affiliated Joint Venture. The Affiliated Joint Venture continues to hold a 75% interest in QOCC-1 Associates. The Quince Orchard Corporate Center is leased to Boehringer Mannheim Pharmaceuticals, Inc. under a ten-year lease that expires in February 2004. The tenant has two options under the lease agreement, one, to terminate the lease at the end of its seventy-sixth month of the lease, or June 2000, and, two, to extend the term of the lease for an additional five- year period. During the first quarter of 1998, Hoffman-LaRoche, Inc. received approval from the Federal Trade Commission to acquire Boehringer Mannheim Pharmaceuticals, Inc. Subsequently, Hoffman-LaRoche vacated and subleased 100% of the space. Hoffman-LaRoche has informed the General Partner that it intends to exercise its right to terminate the lease in June 2000. Real estate conditions in the Washington D.C. area for office space similar to the Quince Orchard Corporate Center continue to improve. The supply of such office space has been unable to keep pace with the demand, resulting in a slight increase in market rents. Further, this condition has given rise to new development in the area. The General Partner does not anticipate that this new development will negatively impact the market and, therefore, expects market conditions to remain favorable through 1999. On December 28, 1989, the Partnership acquired the Palms of Carrollwood Shopping Center, a neighborhood shopping center located in Tampa, Florida. Although real estate market conditions for retail properties in the market in which the Palms of Carrollwood Shopping Center is located have declined since the Partnership acquired the property, occupancy levels and rental rates have stabilized during recent years. However, market conditions remain competitive due to the new construction of retail space. The General Partner anticipates that retail market conditions will remain competitive during 1999 and, therefore, will continue to offer competitive leasing packages in order to attract new tenants as well as retain existing tenants at the property. On July 17, 1991, the Partnership acquired Yokohama Tire Warehouse located in Louisville, Kentucky. The Property is 100% leased to the Yokohama Tire Corporation under a lease that expires on March 31, 2006. Under the terms of the lease agreement, the Yokohama Tire Corporation had options to purchase the property for $10,228,173 on April 1, 1996, and $10,478,173 on April 1, 1999 but did not choose to exercise such option. Yokohama Tire Corporation has an additional option to purchase the property for $10,578,173 on April 1, 2001. In addition, the Yokohama Tire Corporation has the option, exercisable at any time during the term of the lease, to expand the square footage of the facility by any area of up to 220,000 square feet. On December 27, 1991, the Partnership acquired the Purina Mills Distribution Building located in St. Louis, Missouri. During the first quarter of 1998, Purina Mills, Inc., ("PMI") the lessee at the Purina Mills Distribution Building, notified the Partnership of its intention to exercise its option to terminate the lease on December 1, 1998, in accordance with the terms of its lease agreement. PMI was required to pay a lease termination fee in the approximate amount of $241,000. PMI had previously vacated the property and secured a tenant to sublease the space. The General Partner then secured a lease with the subtenant to occupy the entire property under a seven-year lease that commenced in December 1998. Due to this lease at the property and the existing favorable real estate market conditions in the St. Louis, Missouri area, the General Partner listed the property for sale during January 1999. On March 6, 1992, the Partnership acquired the Allmetal Distribution Building located in Carrollton, Texas. During the third quarter of 1997, Allmetal, Inc., the sole tenant at the Allmetal Distribution Building, extended the term of its lease through August 2008. As a result of this lease extension and the existing favorable conditions of the Carrollton, Texas real estate market, the General Partner listed the Allmetal Distribution Building for sale during June 1998. The General Partner had entered into a Purchase and Sale Agreement (the "First Allmetal Agreement") on behalf of the Partnership for the sale of the Allmetal Distribution Building to a non-affiliated buyer for a gross sales price of $2,300,000. However, the prospective buyer exercised its right to rescind the First Allmetal Agreement and to terminate the proposed transaction prior to the scheduled date of sale. Accordingly, the General Partner resumed its efforts to locate another buyer for the property. 4 5 ITEM 1 - BUSINESS (CONTINUED) The General Partner entered into a second Purchase and Sale Agreement on behalf of the Partnership (the "Second Allmetal Agreement") on February 5, 1999 for the sale of the Allmetal Distribution Building to a non-affiliated buyer for a gross sales price of $2,180,000. On February 25, 1999, the Partnership sold the Allmetal Distribution Building and received net sales proceeds of approximately $2,080,000, after deductions for commissions and selling expenses. During the first quarter of 1999, the General Partner intends to make a cash distribution from the net sales proceeds, in accordance with the Partnership Agreement. On March 16, 1992, the Partnership acquired the Stone Container Building located in Cincinnati, Ohio. During June 1998, the General Partner listed the Stone Container Building for sale because of the sole tenant at the property's long-term lease on the property and the existing favorable conditions in the Cincinnati real estate market. On December 29, 1998, the Partnership sold the Stone Container Building to a non-affiliated buyer and received net sales proceeds of $2,645,995. On February 12, 1999, the Partnership distributed $2,634,532 of the net sales proceeds, of which $2,439,381 was distributed to the Investors and $195,191 was distributed to the John Hancock Limited Partner. The Partnership retained $11,463 in working capital reserves. On March 27, 1992, the Partnership acquired the Business Center at Pureland located in Bridgeport, New Jersey. The property contains two buildings of approximately 60,000 square feet each and each are 100% occupied by a single tenant. One of the tenants at the Business Center at Pureland, National Polystyrene Recycling Co., L.P., ("NPRC") ceased operations and vacated its space during the fourth quarter of 1997. A replacement tenant was located to occupy this space during the third quarter of 1998. NPRC's lease obligations were terminated as of September 30, 1998 in consideration of NPRC paying a lease buyout fee of approximately $230,000. The new tenant's lease obligations commenced October 1, 1998 for a 32-month term. The other tenant at the Business Center at Pureland, Forbo Wallcoverings, Inc. ("Forbo") has a lease that was scheduled to expire on December 31, 1998; however, the tenant requested, and the General Partner agreed, to extend the term of the lease through March 31, 1999, by which time the tenant intends to have vacated the property. The Bridgeport, New Jersey real estate market currently has a relatively high amount of vacant space. In addition, there is a significant amount of land available for development. The General Partner anticipates that market conditions will remain competitive during 1999 and, therefore, will offer competitive rental rates and concessions in an effort to lease the available space at the property. Within the power accorded to the General Partner under the terms of the Partnership Agreement, the General Partner contracted, effective as of January 1, 1992, with Hancock Realty Investors Incorporated ("HRI"), a wholly-owned, indirect subsidiary of John Hancock Mutual Life Insurance Company ("John Hancock"), to assist the General Partner in the performance of its management duties as enumerated in the Partnership Agreement. Effective May 28, 1993, HRI subcontracted with John Hancock to assist HRI in the performance of its duties as enumerated in the January 1, 1992 contract. The Partnership has not incurred any additional costs or expenses as a result of these agreements. The General Partner is further described in Item 10 of this Report. Industry segment information has not been provided since the Partnership is engaged in only one industry segment. ITEM 2 - PROPERTIES As of December 31, 1998 the Partnership held the following investments in its portfolio: JH QUINCE ORCHARD PARTNERS On December 28, 1988, the Partnership acquired a 0.5% interest in JH Quince Orchard Partners (the "Affiliated Joint Venture"), a joint venture between the Partnership and John Hancock Realty Income Fund-II Limited Partnership ("Income Fund-II"). The Partnership had an initial 0.5% interest and Income Fund-II had an initial 99.5% interest in the Affiliated Joint Venture. Pursuant to the partnership agreement of the Affiliated Joint Venture, the Partnership had the option, exercisable prior to December 31, 1990, to increase its investment and interest in the Affiliated Joint Venture to 50%. During the second quarter of 1989, the Partnership exercised such option and Income Fund-II transferred a 49.5% interest in the Affiliated Joint Venture to the Partnership. The Partnership has since held a 50% interest in the Affiliated Joint Venture. 5 6 ITEM 2 - PROPERTIES (CONTINUED) On December 28, 1988, the Affiliated Joint Venture contributed 98% of the invested capital of, and acquired a 75% interest in, QOCC-1 Associates, an existing partnership that owns and operates the Quince Orchard Corporate Center, a three-story office building and related land and improvements located in Gaithersburg, Maryland. The partnership agreement of QOCC-1 Associates provides that the Affiliated Joint Venture shall contribute 95% of any required additional capital contributions. Of the cumulative total invested capital in QOCC-1 Associates at December 31, 1998, 97.55% has been contributed by the Affiliated Joint Venture. The Affiliated Joint Venture continues to hold a 75% interest in QOCC-1 Associates. The average occupancy for the Quince Orchard Corporate Center for the year ended December 31, 1998 was 100%. PALMS OF CARROLLWOOD On December 28, 1989, the Partnership acquired the Palms of Carrollwood Shopping Center, located in Tampa, Florida, from a non-affiliated seller. The property contains approximately 161,000 rentable square feet, including approximately 10,000 square feet of office space, situated on a 15 acre site. For the year ended December 31, 1998 the average occupancy for the Palms of Carrollwood Shopping Center was 81%. At December 31, 1998 the property's occupancy was 81% YOKOHAMA TIRE WAREHOUSE On July 17, 1991, the Partnership acquired the Yokohama Tire Warehouse, located in Louisville, Kentucky, from a non-affiliated seller. The property is situated on 24 acres of land and contains an aggregate of 309,791 rentable square feet, of which 297,391 square feet is warehouse space and 12,400 square feet is office space. The warehouse is 100% leased to the Yokohama Tire Corporation under a lease which expires on March 31, 2006. Under the terms of the lease agreement, the Yokohama Tire Corporation had options to purchase the property for $10,228,173 on April 1, 1996 and for $10,478,173 on April 1, 1999, but did not choose to exercise such options. Yokohama Tire Corporation has an additional option to purchase the property for $10,578,173 on April 1, 2001. In addition, the Yokohama Tire Corporation has the option, exercisable at any time during the term of the lease, to expand the square footage of the facility by any area of up to 220,000 square feet. PURINA MILLS DISTRIBUTION BUILDING On December 27, 1991, the Partnership acquired the Purina Mills Distribution Building, located in St. Louis, Missouri, from a non-affiliated seller. The property is situated on 7.3 acres of land and contains an aggregate of 126,400 rentable square feet, of which 114,800 is warehouse space and 11,600 square feet is office space. Purina Mills Distribution Building is 100% leased to Lear Seating Corp. under a lease that expires on November 30, 2005. ALLMETAL DISTRIBUTION BUILDING On March 6, 1992, the Partnership acquired the Allmetal Distribution Building, located in Carrollton, Texas, from a non-affiliated seller. The property is situated on 3 acres of land and contains an aggregate of 56,531 rentable square feet, of which 51,531 square feet is warehouse space and 5,000 square feet is office space. The property is 100% leased to Allmetal, Inc. through August 2008. 6 7 ITEM 2 - PROPERTIES (CONTINUED) BUSINESS CENTER AT PURELAND On March 27, 1992, the Partnership acquired the Business Center at Pureland located in Bridgeport, New Jersey, from a non-affiliated seller. The property is situated on 10.5 acres of land and contains two buildings consisting of an aggregate of 119,651 rentable square feet of warehouse space. One building (consisting of 60,535 sq. ft.) is 100% leased to Forbo Wallcoverings, Inc. under a lease that expires on March 31, 1999. The second building's (consisting of 59,116 sq. ft.) is 100% leased to National Paintball Supply, Inc. through May 31, 2001. The foregoing investments of the Partnership are further described in Item 7 of this Report and Notes 5 and 6 to the Financial Statements included in Item 8 of this Report.. ITEM 3 - LEGAL PROCEEDINGS In February 1996, a putative class action complaint was filed in the Superior Court in Essex County, New Jersey by a single investor in a limited partnership affiliated with the Partnership. The complaint named as defendants the Partnership, the General Partner, certain other Affiliates of the General Partner, and certain unnamed officers, directors, employees and agents of the named defendants. The plaintiff sought unspecified damages stemming from alleged misrepresentations and omissions in the marketing and offering materials associated with the Partnership and two limited partnerships affiliated with the Partnership. The complaint alleged, among other things, that the marketing materials for the Partnership and the affiliated limited partnerships did not contain adequate risk disclosures. On March 18, 1997, the court certified a class of investors who were original purchasers in the Partnership. The certification order should not be construed as suggesting that any member of the class is entitled to recover, or will recover, any amount in the action. The Partnership and the other defendants have answered the complaint, denying the material allegations and raising numerous affirmative defenses. Discovery has commenced, and the Partnership and other defendants have produced documents relating to the plaintiff's claims. No depositions are scheduled. The court has heard the defendants' motion to dismiss certain claims on grounds of the expiration of the statutes of limitations and has stated it intends to hold a further hearing on that matter to determine whether the case can be resolved by the disposition of certain claims. The Partnership and the other defendants intend to move to decertify the class and for summary judgment dismissing the breach of contract claims. The General Partner believes the allegations are totally without merit and will continue to vigorously contest the action. There are no other material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Partnership, to which the Partnership is a party or to which any of its properties is subject. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders of the Partnership during the fourth quarter of 1998. 7 8 PART II ITEM 5 - MARKET FOR THE PARTNERSHIP'S SECURITIES AND RELATED SECURITY HOLDER MATTERS (a) MARKET INFORMATION The Partnership's outstanding securities consist of 2,415,229 Units originally sold for $20 per Unit. The Units were offered and sold to the public during the period from February 17, 1989 to February 15, 1991. No established public market exists on which the Units may be traded. Consequently, holders of Units may not be able to liquidate their investments in the event of an emergency, or for any other reason. Additionally, the assignment or other transfer of Units would be subject to compliance with the minimum investment and suitability standards imposed by the Partnership and by applicable law, including state "Blue Sky" laws. (b) NUMBER OF SECURITY HOLDERS
Number of Number of Units record holders as of outstanding as of Title of Class December 31, 1998 December 31, 1998 -------------- -------------------- ----------------- Assignee Units 2,321 2,415,229
(c) DIVIDEND HISTORY AND RESTRICTIONS During the fiscal years ended December 31, 1998 and 1997, the Partnership distributed cash in the aggregate amounts of $3,844,028 and $3,844,027, respectively, from Distributable Cash from Operations (as defined in the Partnership Agreement). These amounts were allocated 5% to the General Partner and 95% to the Investors and the John Hancock Limited Partner, in accordance with the terms of the Partnership Agreement. The following table reflects cash distributions made during the two year period ended December 31, 1998:
Amount Paid Date of Amount of Amount Paid to to John Hancock Amount Paid Distribution Distribution Distribution General Partner Limited Partner to Investors Per Unit ------------ ------------ --------------- --------------- ------------ -------- February 14, 1997 961,006 48,050 67,626 845,330 0.35 May 15, 1997 961,007 48,050 67,627 845,330 0.35 August 15, 1997 961,007 48,051 67,626 845,330 0.35 November 14, 1997 961,007 48,050 67,627 845,330 0.35 February 13, 1998 961,007 48,050 67,627 845,330 0.35 May 15, 1998 961,007 48,050 67,627 845,330 0.35 August 14, 1998 961,007 48,051 67,626 845,330 0.35 November 13, 1998 961,007 48,050 67,627 845,330 0.35
The source of future distributions from cash from operations is dependent upon cash generated by the Partnership's investments and the use of working capital reserves for leasing costs and capital expenditures. Distributions of Cash from Operations represented a 7% return on Investors' Invested Capital during the year ended 1998 and 1997 (defined in the Partnership Agreement). For further discussion on the financial condition and results of operations of the Partnership see Item 7 of the Report. Should any of the Partnership's properties be sold, the General Partner will make a distribution of Distributable Cash from Sales or Financings, as provided in the Partnership Agreement. 8 9 ITEM 5 - MARKET FOR THE PARTNERSHIP'S SECURITIES AND RELATED SECURITY HOLDER MATTERS (CONTINUED) (c) DIVIDEND HISTORY AND RESTRICTIONS (CONTINUED) SUBSEQUENT EVENT. In March 1999, the General Partner decided to end the distribution reinvestment previously in effect for the Partnership. The General Partner took this action pursuant to the Partnership Agreement and in what it considers to be the Partnership's best interests. Therefore, beginning with the Partnership's next cash distribution in May 1999 and in all future cash distributions, those Limited Partners who previously had designated their distribution for reinvestment will instead receive the amount of their distribution by check. Similarly, the distribution reinvestment plan will no longer purchase or arrange the purchase of Units of Limited Partners who submitted offers to sell Units through the plan. Limited Partners who wish to purchase or sell Units may wish to consult their securities advisors or contact a commercial matching service that deals in limited partnership interests. The General Partner cannot and does not purport to advise Limited Partners as to whether they should purchase or sell Units, at what price or times, or through what mechanism. ITEM 6 - SELECTED FINANCIAL DATA The following table sets forth selected financial information regarding the Partnership's financial position and operating results for the five-year period ended December 31, 1998. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements and Notes thereto, which are included in Items 7 and 8, respectively, of this Report.
Years Ended December 31, 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Rental income $ 4,019,476 $ 3,600,452 $ 3,606,964 $ 3,404,659 $ 3,407,133 Income from joint venture 716,157 704,292 701,988 755,198 541,187 Interest income 150,593 142,959 145,734 162,332 105,917 Gain/(loss) on sale of property 783,054 -- -- -- -- Net income 3,773,989 2,579,607 2,616,017 2,776,632 2,543,261 Net income per Unit (b) 1.35 0.88 0.89 1.07 0.98 Ordinary tax income (a) 4,196,411 2,707,074 2,969,975 2,782,263 2,605,072 Ordinary tax income per Unit (b) 1.52 0.94 1.04 1.08 1.01 Cash distributions per Unit (c) 1.40 1.40 1.35 1.20 1.20 Cash and cash equivalents at December 31 5,874,797 2,505,729 2,663,859 2,431,272 2,637,722 Total assets at December 31 39,797,736 39,595,199 40,896,886 41,824,552 42,079,427
(a) The ordinary tax income for the Partnership was allocated as follows:
Years Ended December 31, 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- General Partner $ 218,800 $ 176,436 $ 189,088 $ 178,928 $ 168,666 John Hancock Limited Partner 316,679 262,772 280,404 -- -- Investor Limited Partners 3,660,932 2,267,866 2,500,483 2,603,335 2,436,406 ---------- ---------- ---------- ---------- ---------- Total $4,196,411 $2,707,074 $2,969,975 $2,782,263 $2,605,072 ========== ========== ========== ========== ==========
(b) The actual ordinary tax income per Unit has not been presented because the actual ordinary tax income is allocated between tax-exempt and tax-paying entities based upon the respective number of Units held by each entity at December 31, 1998, 1997, 1996, 1995 and 1994. The ordinary tax income per Unit for the fiscal years ended December 31, 1998, 1997, 1996, 1995 and 1994 was computed by dividing the Investors' share of ordinary tax income by the number of Units outstanding during the year. (c) Represents the actual cash distribution per Unit for the years ended December 31, 1998, 1997, 1996, 1995 and 1994. 9 10 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL During the offering period, from February 17, 1989 to February 15, 1991, the Partnership sold 2,415,229 Units representing gross proceeds (exclusive of the John Hancock Limited Partner's contribution which was used to pay sales commissions) of $48,304,580. The proceeds of the offering were used to acquire investment properties, fund reserves, and pay acquisition fees and organizational and offering expenses. These investments are described more fully in Items 1 and 2 and Notes 5 and 6 to the Financial Statements included in Item 8 of this Report. IMPACT OF YEAR 2000 The General Partner and John Hancock Mutual Life Insurance Company, the General Partner's ultimate parent (together, John Hancock) along with the Partnership, have developed a plan to modify or replace significant portions of the Partnership's computer information and automated technologies so that its systems will function properly with respect to the dates in the year 2000 and thereafter. The Partnership presently believes that with modifications to existing systems and conversions to new technologies, the year 2000 will not pose significant operational problems for its computer systems. However, if certain modifications and conversions are not made, or are not completed timely, the year 2000 issue could have an adverse impact on the operations of the Partnership. John Hancock as early as 1994 had begun assessing, modifying and converting the software related to its significant systems and has initiated formal communications with its significant business partners and customers to determine the extent to which John Hancock's interface systems are vulnerable to those third parties' failure to remediate their own year 2000 issues. While John Hancock is developing alternative third party processing arrangements as it deems appropriate, there is no guarantee that the systems of other companies on which the Partnership's systems rely will be converted timely or will not have an adverse effect on the Partnership's systems. The Partnership expects the project to be substantially complete by early 1999. This completion target was derived utilizing numerous assumptions of future events, including availability of certain resources and other factors. However, there can be no guarantee that this completion target will be achieved. FORWARD-LOOKING STATEMENTS In addition to historical information, certain statements contained herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements appear in a number of places in this Report and include statements regarding the intent, belief or expectations of the General Partner with respect to, among other things, the prospective sale of Partnership properties, actions that would be taken in the event of lack of liquidity, unanticipated leasing costs, repair and maintenance expenses, distributions to the General Partner and to Investors, the possible effects of tenants vacating space at Partnership properties, the absorption of existing retail space in certain geographical areas, impact of the year 2000 in computer systems and the impact of inflation. Forward-looking statements involve numerous known and unknown risks and uncertainties, and they are not guarantees of future performance. The following factors, among others, could cause actual results or performance of the Partnership and future events to differ materially from those expressed or implied in the forward-looking statements: general economic and business conditions; any and all general risks of real estate ownership, including without limitation adverse changes in general economic conditions and adverse local conditions, the fluctuation of rental income from properties, changes in property taxes, utility costs or maintenance costs and insurance, fluctuations of real estate values, competition for tenants, uncertainties about whether real estate sales under contract will close; the ability of the Partnership to sell its properties; and other factors detailed from time to time in the filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect the General Partner's analysis only as of the date hereof. The Partnership assumes no obligation to update forward-looking statements. See also the Partnership's reports to be filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. 10 11 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Partnership had $5,874,797 in cash and cash equivalents and $79,541 in restricted cash. The Partnership's cash and cash equivalents increased by $3,369,068 from December 31, 1998 primarily due to the sale of the Stone Container Building on December 29, 1998. The Partnership has a working capital reserve with a current balance of approximately 3% of Investors Invested Capital (as defined in the Partnership Agreement). The General Partner anticipates that such amount should be sufficient to satisfy the Partnership's general liquidity requirements. The Partnership's liquidity would, however, be materially adversely affected if there were a significant reduction in revenues or significant unanticipated operating costs, unanticipated leasing costs or unanticipated capital expenditures. If any or all of these events were to occur, to the extent that the working capital reserve would be insufficient to satisfy the cash requirements of the Partnership, it is anticipated that additional funds would be obtained through a reduction of cash distributions to Investors, bank loans, short-term loans from the General Partner or its affiliates, or the sale or financing of Partnership investments. During June 1998, the General Partner listed the Stone Container Building for sale because of the long-term lease with the sole tenant at the property and current favorable conditions in the Cincinnati real estate market. On December 29, 1998, the Partnership sold the Stone Container Building and received net sales proceeds of $2,645,995, after deductions for commissions and selling expenses. This transaction generated a gain of $783,054, representing the difference between the net sales price and the property's carrying value of 1,862,941. For the year ending December 31, 1998, the Stone Container Building generated approximately 5% of the Partnerships net cash provided by operations. During 1998, cash in the aggregate amount of $130,715 was used for the payment of leasing costs incurred at the Purina Mills Distribution Building and the Palms of Carrollwood Shopping Center properties. The General Partner anticipates that the Partnership will incur approximately $318,000 in leasing costs in 1999, substantially all of which is expected to be incurred at the Palms of Carrollwood and Business Center at Pureland. The current balance in the working capital reserve should be sufficient to pay such leasing costs. During 1998, approximately $78,000 of cash generated from the Partnership's operations was used to fund non-recurring maintenance and repair expenses incurred at Palms of Carrollwood, Business Center at Pureland and Allmetal Distribution Building properties. The General Partner anticipates that during 1999 the Partnership will incur non-recurring repair and maintenance expenses of approximately $311,000 at the Partnership's properties. These expenses will be funded from the operations of the Partnership's properties and are not expected to have a significant impact on the Partnership's liquidity. Cash in the amount of $3,844,028, generated from the Partnership's operations, was distributed to the General Partner, the John Hancock Limited Partner and the Investors during the year ended December 31, 1998. These amounts were distributed in accordance with the Partnership Agreement and were allocated as follows: Investors $3,381,321 John Hancock Limited Partner 270,506 General Partner 192,201 ---------- Total $3,844,028 ========== The General Partner anticipates that the Partnership will be able to make comparable distributions during 1999. 11 12 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) One of the anchor tenants at the Palms of Carrollwood vacated the property during June 1995. In July 1995, the General Partner secured a new anchor tenant to occupy this space under a lease commencing in November 1995. At that time, three tenants' leases at the Palms of Carrollwood contained clauses that made reference to the situation in which the former anchor tenant ceased operations at the property. One of these tenants paid all amounts due under its lease through the lease's scheduled expiration in February 1997. Each of the other two tenants reduced their rental payments by 25%. As a result of a settlement negotiated with the General Partner, one of the other tenants recommenced making its rental payments at 100% of the contracted amount. The Partnership brought an action against the other tenant, who had reduced its rental payments during November 1995, to obtain collection of 100% of the amounts due under the lease agreement. The tenant claimed that it had the right to pay the reduced rent for the remainder of the lease term that is until November 2004. During the first quarter of 1998, this action was heard in a Florida court. The court issued a judgment and written ruling during the second quarter of 1998, finding that the tenant had only a limited period of time (approximately six months) during which it could pay the reduced rent. After that, the tenant must pay the full amount of rent specified in the lease. A judgment and written ruling were issued during the second quarter of 1998. The tenant has appealed the ruling. No assurances can be given that the Partnership will ultimately recover amounts due under the lease pursuant to the ruling of the court. As of the date hereof, the Palms of Carrollwood is 80% occupied. During 1999, no significant leases are scheduled to expire. The General Partner will continue to offer competitive leasing packages in an effort to secure lease renewals with existing tenants as well as to secure new tenants for the remaining vacant space. During the third quarter of 1997, Allmetal, Inc., the sole tenant at the Allmetal Distribution Building, extended the term of its lease through August 2008. As a result of this lease extension and the existing favorable conditions of the Carrollton, Texas real estate market, the Allmetal Distribution Building was listed for sale by the General Partner during June 1998. The General Partner had entered into a Purchase and Sale Agreement (the "Allmetal Agreement") on behalf of the Partnership for the sale of the Allmetal Distribution Building to a non-affiliated buyer for a gross sales price of $2,300,000. However, the prospective buyer exercised its right to rescind the First Allmetal Agreement and to terminate the proposed transaction prior to the scheduled date of sale. Accordingly, the General Partner resumed its efforts to locate another buyer for the property. The General Partner entered into a second Purchase and Sale Agreement on behalf of the Partnership (the "Second Allmetal Agreement") on February 5, 1999 for the sale of the Allmetal Distribution Building to a non-affiliated buyer. On February 25, 1999, the Partnership sold the Allmetal Distribution Building and received net sales proceeds of approximately $2,080,000, after deductions for commissions and selling expenses. This transaction generated a gain of approximately $576,000, representing the difference between the net sales price and the property's carrying value of 1,504,448. The General Partner intends to make a cash distribution from the net sales proceeds, in accordance with Partnership Agreement, during the second quarter of 1999. During the first quarter of 1998, Purina Mills, Inc., ("PMI") the lessee at the Purina Mills Distribution Building, notified the Partnership of its intention to exercise its option to terminate the lease on December 1, 1998, in accordance with the terms of its lease agreement. PMI was required to pay a lease termination fee in the approximate amount of $241,000. PMI had previously vacated the property and secured a tenant to sublease the space. The General Partner then secured a lease with the subtenant to occupy the entire property under a seven-year lease that commenced in December 1998. Due to this lease at the property and the existing favorable real estate market conditions in the St. Louis, Missouri area, the General Partner listed the property for sale during January 1999. 12 13 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) One of the tenants at the Business Center at Pureland, National Polystyrene Recycling Co., L.P., ("NPRC") ceased operations and vacated its space during the fourth quarter of 1997. A replacement tenant was located to occupy this space during the third quarter of 1998. NPRC's lease obligations were terminated as of September 30, 1998 in consideration of NPRC paying a lease buyout fee of approximately $230,000. The new tenant's lease obligations commenced October 1, 1998 for a 32-month term. The other tenant at the Business Center at Pureland, Forbo Wallcoverings, Inc. ("Forbo") has a lease that was scheduled to expire on December 31, 1998. However, Forbo requested, and the General Partner agreed, to extend the term of the lease through March 31, 1999. The Bridgeport, New Jersey real estate market currently has a relatively high amount of vacant space. In addition, there is a significant amount of land available for development. The General Partner anticipates competitive market conditions during 1999 and, therefore, will offer competitive rental rates and concessions in an effort to lease the available space at the property. The Quince Orchard Corporate Center is leased to Boehringer Mannheim Pharmaceuticals, Inc. under a ten-year lease that expires in February 2004. The tenant has two options under the lease agreement, one, to terminate the lease at the end of its seventy-sixth month of the lease, or June 2000, and, two, to extend the term of the lease for an additional five- year period. During the first quarter of 1998, Hoffman-LaRoche, Inc. received approval from the Federal Trade Commission to acquire Boehringer Mannheim Pharmaceuticals, Inc. Subsequently, Hoffman-LaRoche vacated and subleased the space. Hoffman-LaRoche has informed the General Partner that it intends to exercise its right to terminate the lease in June 2000. Real estate conditions in the Washington D.C. area for office space similar to the Quince Orchard Corporate Center continue to improve. The supply of such office space has been unable to keep pace with the demand, resulting in a slight increase in market rents. Further, this condition has given rise to new development in the area. The General Partner does not anticipate that this new development will negatively impact the market and, therefore, expects market conditions to remain favorable through 1999. The General Partner evaluated the carrying value of each of the Partnership's properties and its joint venture investment as of December 31, 1998 by comparing such carrying value to the related property's future undiscounted cash flows and the then most recent internal appraisal in order to determine whether an impairment in value existed. Based upon such evaluations, the General Partner determined that no impairment in values existed and, therefore, no write-downs were recorded as of December 31, 1998. The General Partner will continue to conduct property valuations, using internal or independent appraisals, in order to assist in its evaluation of whether an impairment in value exists on any of the Partnership's properties. RESULTS OF OPERATIONS Average occupancy for the Partnership's investments was as follows:
Years ended December 31, 1998 1997 1996 ---- ---- ---- Palms of Carrollwood Shopping Center 81% 79% 80% Yokohama Tire Warehouse 100% 100% 100% Purina Mills Distribution Building 100% 100% 100% Allmetal Distribution Building 100% 100% 100% Stone Container Building 100% 100% 100% Business Center at Pureland 100% 100% 100% Quince Orchard Corporate Center (Affiliated Joint Venture) 100% 100% 100%
RESULTS OF OPERATIONS - 1998 COMPARED WITH 1997 Net income for the year ended December 31, 1998 was $3,773,989 as compared to net income $2,579,607 for the year ended December 31, 1997. This increase is due to the results for 1998 including a $783,054 non-recurring gain from the sale of the Stone Container Building, as well as lease termination payments received from tenants at the Business Center at Pureland and Purina Mills Distribution Building. 13 14 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS - 1997 COMPARED WITH 1996 Rental income during 1998 increased by $491,024, or 14%, as compared to 1997. Included in the results for 1998 is a lease termination fee of approximately $241,000 from the tenant at the Purina Mills Distribution Building and a lease buyout fee of approximately $230,000 from one of the tenants at the Business Center at Pureland. Excluding these amounts, rental income was consistent between periods. Depreciation during 1998 decreased by $49,698, or 6%, as compared to 1997. This decrease is primarily due to the reclassification of the Stone Container Building and Allmetal Distribution building as "Property Held for Sale" during 1998. Accordingly, no depreciation has been recorded on these properties since the time that they were listed for sale. General and administrative expenses increased during 1998 by $151,223, or 42%, as compared to the 1997. This increase is primarily due to an increase in legal fees incurred by the Partnership in connection with the legal proceedings described in Item 3 of Part I of this Report. Net income for the year ended December 31, 1997 was $2,579,607 as compared to net income of $2,616,017 in 1996. Amortization of deferred expenses in 1997 increased by $39,849, or 12%, as compared to 1996. This is primarily due to the amortization of leasing costs associated with the leasing activity which occurred at the Palms of Carrollwood, Allmetal Distribution, Stone Container, and the Business Center at Pureland properties during the second half of 1996 and during 1997. The Partnership's share of property operating expenses was consistent between 1997 and 1996. However, non-recurring maintenance and repair expenses of approximately $13,000 and $112,000 were incurred at its properties during 1997 and 1996, respectively. Excluding these amounts, the Partnership's share of property operating expenses increased by 42% primarily due to legal fees incurred in connection with efforts to collect past due rent from an existing tenant at the Palms of Carrollwood property (described above). The General Partner believes that inflation has had no significant impact on income from operations during the last three fiscal years and the General Partner anticipates that it will not have a significant impact during 1999 CASH FLOW The following table provides the calculations of Cash from Operations and Distributable Cash from Operations, which are calculated in accordance with Section 17 of the Partnership Agreement:
Years Ended December 31, 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Net cash provided by operating activities (a) $4,697,816 $3,919,545 $4,250,925 $3,743,803 $3,580,615 Net change in operating assets and liabilities (a) (242,710) 146,780 (209,228) 111,983 (10,043) ---------- ---------- ---------- ---------- ---------- Net cash provided by operations (a) 4,455,106 4,066,325 4,041,697 3,855,786 3,570,572 Increase in working capital reserves (61,932) (222,297) (197,669) (804,971) (519,757) ---------- ---------- ---------- ---------- ---------- Cash from operations (b) 4,393,174 3,844,028 3,844,028 3,050,815 3,050,815 Decrease in working capital reserves -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Distributable cash from operations (b) $4,393,174 $3,844,028 $3,844,028 $3,050,815 $3,050,815 ========== ========== ========== ========== ========== Allocation to General Partner $ 219,659 $ 192,201 $ 192,201 $ 152,541 $ 152,541 Allocation to John Hancock Limited Partner 309,149 270,506 270,506 - - Allocation to Investors 3,864,366 3,381,321 3,381,321 2,898,274 2,898,274 ---------- ---------- ---------- ---------- ---------- $4,393,174 $3,844,028 $3,844,028 $3,050,815 $3,050,815 ========== ========== ========== ========== ==========
(a) Net cash provided by operating activities, net change in operating assets and liabilities, and net cash provided by operations are as calculated in the Statements of Cash Flows included in Item 8 of this Report. 14 15 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CASH FLOW (CONTINUED) (b) As defined in the Partnership Agreement. Distributable Cash from Operations should not be considered as an alternative to net income (i.e. not an indicator of performance) or to reflect cash flows or availability of discretionary funds. On February 12, 1999, the Partnership made a cash distribution in the aggregate amount of $4,144,685. Of this amount, $1,510,154 was generated from Distributable Cash from Operations for the year ended December 31, 1998 less amounts previously distributed, and $2,634,531 was generated from Distributable Cash from Sales, Financings or Repayments during the year ended December 31, 1998. These amounts were distributed in accordance with the Partnership Agreement and were allocated as follows:
Dist. Cash Dist. Cash From From Operations Sales or Financings --------------- ------------------- Investors $1,328,376 $2,439,381 John Hancock Limited Partner 106,270 195,151 General Partner 75,508 -- ---------- ---------- Total $1,510,154 $2,634,532 ========== ==========
SUBSEQUENT EVENT. In March 1999, the General Partner decided to end the distribution reinvestment previously in effect for the Partnership. The General Partner took this action pursuant to the Partnership Agreement and in what it considers to be the Partnership's best interests. Therefore, beginning with the Partnership's next cash distribution in May 1999 and in all future cash distributions, those Limited Partners who previously had designated their distribution for reinvestment will instead receive the amount of their distribution by check. Similarly, the distribution reinvestment plan will no longer purchase or arrange the purchase of Units of Limited Partners who submitted offers to sell Units through the plan. Limited Partners who wish to purchase or sell Units may wish to consult their securities advisors or contact a commercial matching service that deals in limited partnership interests. The General Partner cannot and does not purport to advise Limited Partners as to whether they should purchase or sell Units, at what price or times, or through what mechanism. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item appears beginning on page F-1 of this Report. The financial statements of QOCC-1 Associates, an investee of the Registrant, as of and for the years ending December 31, 1998, 1997 and 1996 are included herewith. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No events requiring disclosure under this Item have occurred. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP (a-b) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS By virtue of its organization as a limited partnership, the Partnership has no directors or executive officers. As indicated in Item 1 of this Report, the General Partner of the Partnership is John Hancock Realty Equities, Inc., a Delaware corporation. Pursuant to the terms of the Partnership Agreement, the General Partner is solely responsible for the management of the Partnership's business. The names and ages of the directors and executive officers of the General Partner at December 31, 1998 were as follows:
Name Title Age ---- ----- --- William M. Fitzgerald President and Director 55 Malcolm G. Pittman, III Director 47 Susan M. Shephard Director 46 Richard E. Frank Treasurer (Chief Accounting Officer) 37
The term of office and other positions held by the persons listed above appear in paragraph (e) below. 15 16 ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP (CONTINUED) (c) IDENTIFICATION OF CERTAIN SIGNIFICANT PERSONS The General Partner is responsible for the identification, analysis, purchase, operation, and disposal of specific Partnership real estate investments. The General Partner has established a Real Estate Investment Committee utilizing senior real estate personnel of John Hancock and its affiliates to review each proposed investment. The members of the Real Estate Investment Committee are designated each year at the annual meeting of the Board of Directors of John Hancock Realty Equities, Inc. The current members of the committee are as follows:
Name Title Age ---- ----- --- Edward P. Dowd Senior Vice President of 56 John Hancock's Real Estate Investment Group Kevin McGuire Vice President of John Hancock's 52 Real Estate Investment Group; President of John Hancock Realty Services Corp. and subsidiaries Stephen Kindl Senior Investment Officer of John 41 Hancock's Real Estate Investment Group; Assistant Vice President of John Hancock Realty Equities, Inc.
(d) FAMILY RELATIONSHIPS There exist no family relationships among any of the foregoing directors or officers of the General Partner. (e) BUSINESS EXPERIENCE William M. Fitzgerald (age 55), joined John Hancock in 1968. He has been President and a Director of the General Partner, and a Senior Investment Officer of John Hancock, since June 1993 and a Director of Hancock Realty Investors Incorporated since November 1991. His term as a Director of the General Partner expires in May 1999. From 1987 to 1991, Mr. Fitzgerald was a Senior Vice President of John Hancock Properties, Inc. Prior to that time, he held a number of positions including Senior Real Estate Management Officer and Real Estate Management Officer of John Hancock. He holds an M.B.A. from Boston University and an A.B. from Boston College. Malcolm G. Pittman, III (age 47), joined John Hancock in 1986 as an Assistant Counsel. He has been a Director of the General Partner since November 1991. His term as a Director of the General Partner expires in May 1999. Mr. Pittman has been a Counsel of John Hancock's Mortgage and Real Estate Law Division since 1993. From 1989 to 1993, he was an Associate Counsel of John Hancock. He holds a J.D. from Yale Law School and a B.A. from Oberlin College. Susan M. Shephard (age 46), joined John Hancock in 1985 as an Attorney. She has been a Director of the General Partner since November 1991. Her term as a Director of the General Partner expires in May 1999. Ms. Shephard has been a Mortgage Investment Officer of John Hancock since 1991. From 1988 to 1991, she was an Associate Counsel of John Hancock and from 1987 to 1988, she was an Assistant Counsel of John Hancock. She holds a J.D. from Georgetown University Law Center and a B.A. from the University of Rhode Island. Richard E. Frank (age 37), joined John Hancock in 1983. He served as Treasurer of the General Partner from June 1993 until March 1999. Mr. Frank had been an Associate Investment Officer of John Hancock since January 1995. From 1993 to 1995, he was a Senior Financial Administrator of John Hancock; from 1991 to 1993, he was an Associate of Hancock Realty Investors, Incorporated; from 1990 to 1991, he held the position of Assistant Treasurer of John Hancock Realty Services Corp. He holds a B.S. from Stonehill College. 16 17 ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP (CONTINUED) (e) BUSINESS EXPERIENCE (CONTINUED) Edward P. Dowd (age 56), joined John Hancock in 1970. He has been a Director of Hancock Realty Investors, Incorporated since 1991, and a Director of John Hancock Realty Services Corp. and subsidiaries and John Hancock Property Investors Corp. since 1987. Mr. Dowd has been a Senior Vice President of John Hancock since 1991. From 1989 to 1990, he was a Vice President of John Hancock and from 1986 to 1989, he was a Second Vice President of John Hancock. Prior to that time, he held a number of positions including Senior Real Estate Investment Officer and Real Estate Investment Officer of John Hancock. From July 1982 to May 1986, Mr. Dowd was President of the General Partner. He holds an A.B. from Boston College. Kevin McGuire (age 52), joined John Hancock in 1968. He has been a Vice President of John Hancock since June 1993 and President of John Hancock Realty Services Corp. and subsidiaries since July 1993. He has been a Managing Director and a Director of Hancock Realty Investors, Incorporated since 1991, and a Director of John Hancock Property Investors Corp. since 1987. Mr. McGuire served as an interim basis President of the General Partner from May 1991 to November 1991 and was President of John Hancock Properties, Inc. from 1987 to 1991. Prior to that time, he held a number of positions including Second Vice President, Senior Real Estate Investment Officer and Real Estate Investment Officer of John Hancock. He holds an M.B.A. from Babson College and an A.B. from Boston College. Stephen Kindl (age 41), joined John Hancock in 1995 as a Senior Real Estate Investment Officer. Prior to joining John Hancock, he held a number of positions with Aetna Real Estate Investment, Inc., including Managing Director and Director. He holds an M.B.A. from the University of Hartford and a B.S. from the University of Connecticut Virginia H. Lomasney (age 37) joined John Hancock in 1983. She was appointed Treasurer of the General Partner effective March 25, 1999. Ms. Lomasney has been an Associate Investment Officer of John Hancock since 1993. She holds an M.B.A. from Bentley College and a B.S. from Boston University. (f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS None. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Under Section 16(a) of the Securities Exchange Act of 1934, as amended, the General Partner's directors and executive officers, as well as any person holding more than ten percent of the Units, are required to report their initial ownership to the Securities and Exchange Commission and the Partnership (such requirements hereinafter referred to as "Section 16(a) filing requirements"). Specific time deadlines for Section 16(a) filing requirements have been established. To the Partnership's knowledge, no officer or director of the General Partner has or had an ownership interest in the Partnership during the 1996 fiscal year or as of the date hereof. In addition, to the Partnership's knowledge, the County Employees' Annuity and Benefit Fund of Cook County, the greater than 10% holder of Units, was not required to file any reports relating to Section 16(a) filing requirements during the 1997 fiscal year. ITEM 11 - EXECUTIVE COMPENSATION None of the officers or directors of the General Partner or any of the members of the Real Estate Investment Committee referred to in Item 10(c) receive any current direct remuneration from the Partnership in their capacities as officers, directors or members of the Real Estate Investment Committee, pursuant to any standard arrangements or otherwise, nor is any such remuneration currently proposed. In addition, the Partnership has not given and does not propose to give any options, warrants or rights, including stock appreciation rights, to any such person in such capacities. No remuneration plan or arrangement exists with any such person in such capacities resulting from resignation, retirement or any other termination. Therefore, tables relating to these topics have been omitted. Compensation Committee Interlocks and Insider Participation: The Partnership did not have a Compensation Committee in 1997 and does not currently have such a committee. No current or former officer or employer of the General Partner or its Affiliates participated during the 1997 fiscal year in deliberations regarding the General Partner's compensation as it relates to the Partnership. 17 18 ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS No person or group, including the General Partner, is known by the General Partner to own beneficially more than 5% of the Partnership's 2,415,229 outstanding Units as of December 31, 1998, except as follows:
Title of Name and Address of Amount and Nature of Percent of Class Beneficial Owner Beneficial Ownership Class -------- ------------------- -------------------- ---------- Assignee County Employees' 806,451 Units owned 33.39% Units Annuity and Benefit directly Fund of Cook County 33 N. Dearborn St. Chicago, IL
(b) SECURITY OWNERSHIP OF MANAGEMENT By virtue of its organization as a Limited Partnership, the Partnership has no officers or directors. Neither the General Partner nor any officer or director of the General Partner possesses the right to acquire a beneficial ownership of Units. (c) CHANGES IN CONTROL The Partnership does not know of any arrangements the operations of which may at a subsequent date result in a change in control of the Partnership. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Note 4 of the Notes to the Financial Statements included in Item 8 of this Report for a description of certain transactions and related amounts payable by the Partnership to the General Partner and its Affiliates during 1998, 1997 and 1996. In accordance with the terms of the Partnership Agreement, the General Partner and its Affiliates (as defined in the Partnership Agreement) are entitled to the following types of compensation, fees, profits/(losses), expense reimbursements and distributions: A reimbursement for Acquisition Expenses (as defined in the Partnership Agreement) incurred by the General Partner or its Affiliates was payable at cost to the General Partner or its Affiliates. The Partnership completed its property acquisitions on March 27, 1992 and, therefore, did not pay any such reimbursements during the years ended 1998, 1997 or 1996. An Affiliate of the General Partner may receive a Property Management Fee for providing property management services for the Partnership's properties. The Partnership is obligated to pay a fee equal to the amount customarily charged in arms-length transactions by other entities rendering comparable services for comparable properties in the localities where the Partnership's properties are located but in no event may such fee exceed 6% of the gross receipts of the property under management. To date, no Affiliate of the General Partner has provided property management services to the Partnership. Therefore, the Partnership did not pay any such fees during the years ended 1998, 1997 or 1996. The General Partner and its Affiliates are also entitled to Reimbursement for Expenses relating to the administrative services necessary to the prudent operation of the Partnership, such as legal, accounting, computer, transfer agent and other services. The amounts charged to the Partnership for such administrative services may not exceed the lesser of the General Partner's or such Affiliate's costs or 90% of those which the Partnership would be required to pay to independent parties for comparable services in the same geographic area. The Partnership reimbursed the General Partner or its Affiliates for $234,860, $244,487 and $179,330 of such expenses during the years ended December 31, 1998, 1997 and 1996, respectively. 18 19 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED) A Subordinated Disposition Fee (as defined in the Partnership Agreement) for selling properties is payable to the General Partner in the amount of 3% of the sales price of each property sold. However, no such Subordinated Disposition Fee may be paid to the General Partner unless and until the Investors and the John Hancock Limited Partner have received a return of their total Invested Capital (as defined in the Partnership Agreement) plus the Cumulative Return on Investment (as defined in the Partnership Agreement) of 12% per annum for all fiscal years ended prior to the date of payment. Such Subordinated Disposition Fee may not exceed 50% of the competitive real estate commissions in the area where the property is located or, together with any other brokerage commission payable to or by any other person, exceed 6% of the contract sales price of such property. The Partnership did not pay any such fees during the years ended 1998, 1997 or 1996. In accordance with Section 8 of the Partnership Agreement (as described more fully in Note 3 to the Financial Statements included in Item 8 of this Report), 5% of Distributable Cash from Operations is distributable to the General Partner and the remaining 95% in the following order of priority: first, to the Investors in an amount sufficient to provide a non-cumulative, non-compounded cash return equal to 7% per annum on their Invested Capital; second, to the John Hancock Limited Partner in an amount sufficient to provide a non-cumulative, non-compounded cash return equal to 7% per annum on its Invested Capital; and third, to the Investors and the John Hancock Limited Partner in proportion to their respective capital contributions. The General Partner's share of Distributable Cash from Operations was $219,659, $192,201 and $192,201 for the years ended December 31, 1998, 1997 and 1996. In accordance with the terms of the Partnership Agreement, the John Hancock Limited Partner was entitled to $309,149, $270,506 and $270,506 of Distributable Cash from Operations for the years ended December 31, 1998, 1997 and 1996, respectively. A Share of Cash from Sales or Financings may be distributed to the General Partner and the John Hancock Limited Partner. Cash from Sales or Financings are distributable in accordance with Section 8 of the Partnership Agreement (as described more fully in Note 3 to the Financial Statements included in Item 8 of this Report). The John Hancock Limited Partner's share of Cash from Sales or Financings was $195,150, $0 and $0 for the years ended December 31, 1998, 1997 and 1996, respectively. A Share of the Partnership's Profits or Losses for tax purposes is allocable to the General Partner and to the Investors and the John Hancock Limited Partner. Such allocation generally approximates, insofar as practicable, their percentage share of Distributable Cash from Operations and of Cash from Sales or Financings. The General Partner will generally be allocated 1% of Partnership Losses for tax purposes, and the John Hancock Limited Partner will be allocated tax losses associated with the Partnership's sales commissions funded by the John Hancock Limited Partner's Capital Contributions. The General Partner's Share of such Profits or Losses were profits of $218,800, $176,436 and $189,088 during the years ended December 31, 1998, 1997 and 1996, respectively. In accordance with the terms of the Partnership Agreement, the John Hancock Limited Partner was allocated $316,679, $262,772 and $280,404 of profits during the years ended December 31, 1998, 1997 and 1996, respectively. The following table reflects all compensation, fees, profits/(losses), expense reimbursements and distributions from the Partnership to the General Partner and/or its Affiliates for the three years ended December 31, 1998:
Years Ended December 31, 1998 1997 1996 ---- ---- ---- Operating Expenses $234,860 $244,487 $179,330 General Partner Share of Distributable Cash from Operations 219,659 192,201 192,201 John Hancock Limited Partner's share of Distributable Cash from Operations 309,149 270,506 270,506 General Partner Share of Profits or Losses for tax purposes 218,800 176,436 189,088 John Hancock Limited Partner's share of Profits or Losses for tax purposes 316,679 262,772 280,404
The Partnership provides indemnification to the General Partner and its Affiliates for acts or omissions of the General Partner or its Affiliates performed in good faith on behalf of the Partnership, subject to certain specified exceptions, as described in the following paragraph: 19 20 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED) The Partnership Agreement provides that neither the General Partner nor any Affiliate of the General Partner shall be liable, responsible or accountable in damages to any of the Partners or the Partnership for any act or omission of the General Partner or such Affiliate in good faith on behalf of the Partnership within the scope of the authority granted to the General Partner by the Partnership Agreement and in the best interest of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner and its Affiliates performing services on behalf of the Partnership shall be entitled to indemnity from the Partnership for any loss, damage, or claim by reason of any act performed or omitted to be performed by the General Partner or such Affiliates in good faith on behalf of the Partnership and in a manner within the scope of the authority granted to the General Partner by the Partnership Agreement and in the best interest of the Partnership, except that they shall not be entitled to be indemnified in respect of any loss, damage, or claim incurred by reason of fraud, negligence, misconduct, or breach of fiduciary duty. Any indemnity shall be provided out of and to the extent of Partnership assets only. The General Partner believes that this indemnification applies to costs incurred in the class action complaint described in Item 3 of Part I of this Report. Accordingly, the Partnership indemnified the General Partner and its Affiliates for costs of $82,744, $54,092 and $41,475, relating to the class action complaint in the years ended December 31, 1998, 1997 and 1996, respectively. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) and (2) - Listed on Index to Financial Statements and Financial Statement Schedules. (3) - Listing of Exhibits
EXHIBIT NUMBER PAGE NUMBER OR UNDER INCORPORATION BY REGULATION S-K DESCRIPTION REFERENCE -------------- ----------- ---------------- 4 Instruments defining the rights of security holders 4.1 Amended and Restated Exhibit A to the Prospectus Agreement of Limited Partnership* filed under the Partnership's Amendment No. 1 to Form S-11 Registration Statement (File 33-25298) 4.2 Subscription Agreement Exhibit D to the Prospectus Signature Page and Power of filed under the Partnership' Attorney whereby a subscriber Amendment No. 1 to agrees to purchase Units and Form S-11 Registration Statement adopts the provisions of the (File 33-25298) Amended Agreement of Limited Partnership* 4.3 Copy of Certificate of Exhibit 4.3 to the Limited Partnership filed Partnership's with the Massachusetts Secretary Amendment No. 1 to of State on November 4, 1988* Form S-11 Registration Statement (File 33-25298)
20 21 ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) 4.4 Copy of First Amendment and Exhibit 4.4 to the Restatement of Certificate Partnership's of Limited Partnership filed Amendment No. 1 to with the Massachusetts Secretary Form S-11 Registration Statement of State on February 8, 1989* (File 33-25298) 10 Material contracts and other documents 10.1 Form of Escrow Agreement* Exhibit 10.1 to the Partnership's Amendment No. 1 to Form S-11 Registration Statement 10.2 Documents relating to Quince Orchard Corporate Center (a) Investment Agreement dated Exhibit 10.2(a) to December 27, 1988, among the Partnership's JH Quince Orchard Partners, Amendment No. 1 to Quad Properties, Inc. and Form S-11 General Electric Real Estate Registration Statement Credit Operations* (File 33-25298) (b) Amended and Restated Partnership Exhibit 10.2(b) to Agreement for QOCC-1 Associates the Partnership's dated December 27, 1988, among Amendment No. 1 to JH Quince Orchard Partners, Form S-11 Quad Properties, Inc. and Registration General Electric Real Estate Statement Credit Operations* (File 33-25298) (c) Property Management Agreement Exhibit 10.2(c) to dated December 27, 1988, the Partnership's between QOCC-1 Associates and Amendment No. 1 to Quadrangle Development Form S-11 Corporation* Registration Statement (File 33-25298) (d) Partnership Agreement for Exhibit 10.2(d) to JH Quince Orchard Partners the Partnership's dated as of December 23, 1988, Amendment No. 1 to between John Hancock Realty Form S-11 Income Fund-II Limited Partnership Registration Statement and John Hancock Realty Income (File 33-25298) Fund-III Limited Partnership* 10.3 Documents relating to Palms of Carrollwood Shopping Center (a) Letter Agreement dated November 9, Exhibit 1 to the 1989 between Special Asset Partnership's Report Holdings, Inc. and John Hancock on Form 8-K dated Realty Equities, Inc.* December 29, 1989 (File 33-25298)
21 22 ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (b) Amendment to Agreement of Purchase Exhibit 2 to the and Sale dated August 28, 1989 Partnership's Report between Special Asset Holding Inc. on Form 8-K dated and John Hancock Realty Equities, December 29, 1989 Inc.* (File 33-25298) (c) Agreement of Purchase and Sale Exhibit 3 to the dated June 22, 1989, between Partnership's Report on Special Asset Holding Inc. and Form 8-K dated John Hancock Realty Equities, December 29, 1989 Inc.* (File 33-25298) (d) Warranty and Guaranty dated Exhibit 4 to the December 28, 1989 between Partnership's Report Pittsburgh National Bank and on Form 8-K dated John Hancock Realty Income Fund - December 29, 1989 III Limited Partnership.* (File 33-25298) (e) Rental Escrow Agreement dated Exhibit 5 to the December 28, 1989 relating to Partnership's Report Palms of Carrollwood Shopping on Form 8-K dated Center.* December 29, 1989 (File 33-25298) 10.4 Documents relating to Yokohama Tire Warehouse (a) Agreement of Purchase and Sale Exhibit to the dated June 25, 1991 between D/S Partnership's Report Louisville Joint Venture and John on Form 8-K dated Hancock Realty Income Fund-III July 25, 1991 Limited Partnership.* (File 0-18563) (b) Lease/Purchase option dated Exhibit to the October 12, 1989 relating to Partnership's Report Yokohama Tire Warehouse* on Form 8-K dated July 25, 1991 (File 0-18563) (c) Amendment to lease dated Exhibit to the September 24, 1990 relating to Partnership's Report Yokohama Tire Warehouse* on Form 8-K dated July 25, 1991 (File 0-18563) 10.5 Documents relating to the Purina Mills Distribution Building (a) Agreement of Purchase and Sale dated Exhibit 1 to the Partnership's November 25, 1991 between report on Form 8-K dated Perkinson Realty Corporation and December 27, 1991 John Hancock Realty Income Fund-III (File 0-18563) Limited Partnership*
22 23 ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (b) Office/Warehouse lease dated Exhibit 2 to the Partnership's April 16, 1991 relating to the report on Form 8-K dated Purina Mills Distribution Building* December 27, 1991 (File 0-18563) 10.6 Documents relating to the Allmetal Distribution Building (a) Real Estate Sale Agreement Exhibit 1 to Amendment dated January 31, 1992 between Number 1 on Form 8 to the The Travelers Insurance Company Partnership's report on Form 8-K and John Hancock Realty dated February 11, 1992 Income Fund-III Limited Partnership* (File 0-18563) 10.7 Documents relating to the Stone Container Building (a) Agreement of Purchase and Exhibit 1 to Amendment Sale dated January 30, 1992 Number 2 on Form 8 to the between World Park Limited Partnership's report on Form Partnership and John Hancock 8-K dated February 11, 1992 Realty Income Fund-III (File 0-18563) Limited Partnership* (b) Amendment to Purchase Exhibit 2 to Amendment and Sale Agreement dated Number 2 on Form 8 to the February 28, 1992 between Partnership's report on Form World Park Limited Partnership 8-K dated February 11, 1992 and John Hancock Realty Income (File 0-18563) Fund-III Limited Partnership* (c) Lease dated March 2, 1992 relating Exhibit 3 to Amendment Number to the Stone Container Building* 2 on Form 8 to the Partnership's report on Form 8-K dated February 11, 1992 (File 0-18563) (d) Agreement of Purchase and Sale dated Exhibit 1 to the Partnership October 22, 1998 between TJ Squared, LLC report on Form 8-K dated and John Hancock Realty Income December 29, 1998 Fund-III Limited Partnership* (File 0-18563) 10.8 Documents relating to the Business Center at Pureland (a) Agreement of Purchase and Sale Exhibit 1 to Amendment Number dated January 24, 1992 between 3 on Form 8 to the Partnership's The Prentiss/Copley Investment Group report on Form 8-K dated and John Hancock Realty Income February 11, 1992 Fund-III Limited Partnership* (File 0-18563)
23 24 ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (b) Amendment to Purchase and Sale Exhibit 2 to Amendment Number Agreement dated March 5, 1992 3 on Form 8 to the Partnership's between The Prentiss/Copley report on Form 8-K dated Investment Group and John February 11, 1992 Hancock Realty Income Fund-III (File 0-18563) Limited Partnership* (c) Lease dated February 5, 1991 Exhibit 3 to Amendment Number relating to Building Number One at 3 on Form 8 to the Partnership's the Business Center at Pureland* report on Form 8-K dated February 11, 1992 (File 0-18563) (d) First Amendment to Lease Exhibit 4 to Amendment Number dated March 26, 1992 relating 3 on Form 8 to the Partnership's to Building Number One at the report on Form 8-K dated Business Center at Pureland* February 11, 1992 (File 0-18563) (e) Lease Agreement dated Exhibit 5 to Amendment Number December 7, 1989 relating to 3 on Form 8 to the Partnership's Building Number Two at the Business report on Form 8-K dated Center at Pureland* February 11, 1992 (File 0-18563) (f) First Amendment to Lease Exhibit 6 to Amendment Number dated January 4, 1990 relating 3 on Form 8 to the Partnership's to Building Number Two at the report on Form 8-K dated Business Center at Pureland* February 11, 1992 (File 0-18563) (g) Second Amendment to Lease Exhibit 7 to Amendment Number dated March 16, 1990 relating 3 on Form 8 to the Partnership's to Building Number Two at the report on Form 8-K dated Business Center at Pureland* February 11, 1992 (File 0-18563) (h) Third Amendment to Lease Exhibit 8 to Amendment Number dated September 17, 1990 3 on Form 8 to the Partnership's relating to Building Number report on Form 8-K dated Two at the Business Center February 11, 1992 at Pureland* (File 0-18563) 10.9 Documents relating to the Management Agreement (a) Management Agreement dated January Exhibit 10.9(a) to the Partnership's 1, 1992 between Hancock Realty Investors report on Form 10-K dated Incorporated and John Hancock Realty December 31, 1992 Equities, Inc.* (File 0-18563)
24 25 ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (b) Agreement Concerning Subcontracting Exhibit 10.9(b) to the Partnership's of Management Services Pertaining to report on Form 10-K dated John Hancock Realty Income Fund-III December 31, 1993 Limited Partnership dated May 28, 1993 (File 0-18563) between John Hancock Realty Equities, Inc., Hancock Realty Investors, Inc. and John Hancock Mutual Life Insurance Company* 10.10 Documents relating to Executive Compensation Plans and Arrangements (a) Amended and Restated Agreement of Exhibit A to the Prospectus Limited Partnership* filed under the Partnership's Amendment No. 1 to Form S-11 Registration Statement (File 33-25298)
(b) There were no reports on Form 8-K filed during the quarter ended December 31, 1998. (c) Exhibits - See Item 14 (a) (3) of this Report. (d) Financial Statement Schedules - The response to this portion of Item 14 is submitted as a separate section of this Report commencing on Page F-45. - -------------------------------------------- +Filed herewith *Incorporated by reference 25 26 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 by the undersigned, thereunto duly authorized, on the 31st day of March, 1999. JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP By: John Hancock Realty Equities, Inc. General Partner By: William M. Fitzgerald, President 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 indicated on the 31st day of March, 1999. SIGNATURES TITLE ---------- ----- President (Principal Executive Officer) and Director of John Hancock Realty Equities, - ----------------------------- Inc. (General Partner of Registrant) William M. Fitzgerald Treasurer (Chief Accounting Officer) of John Hancock Realty Equities, Inc. - ----------------------------- (General Partner of Registrant) Virginia H. Lomasney Director of John Hancock Realty Equities, - ----------------------------- Inc. (General Partner of Registrant) Malcolm G. Pittman, III Director of John Hancock Realty Equities, - ----------------------------- Inc. (General Partner of Registrant) Susan M. Shephard 26 27 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14 (a) (1) AND (2), (c) AND (d) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES YEARS ENDED DECEMBER 31, 1998, 1997, 1996 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP BOSTON, MASSACHUSETTS F-1 28 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (ITEMS 8 AND 14 (A) (1) AND (2))
(1) (a) Financial Statements of the Registrant Page ---- Report of Independent Auditors F-3 Balance Sheets at December 31, 1998 and 1997 F-4 Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996 F-5 Statements of Partners' Equity for the Years Ended December 31, 1998, 1997 and 1996 F-6 Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 F-7 Notes to Financial Statements F-8 (b) Financial Statements of the Investee Report of Independent Auditors F-19 Balance Sheet at December 31, 1998 F-20 Statement of Operations for the Year Ended December 31, 1998 F-21 Statement of Partners' Equity for the Year Ended December 31, 1998 F-22 Statement of Cash Flows for the Year Ended December 31, 1998 F-23 Notes to Financial Statements F-24 Report of Independent Auditors F-29 Balance Sheet at December 31, 1997 F-30 Statement of Operations for the Year Ended December 31, 1997 F-31 Statement of Partners' Equity for the Year Ended December 31, 1997 F-32 Statement of Cash Flows for the Year Ended December 31, 1997 F-33 Notes to Financial Statements F-34 Report of Independent Auditors F-39 Balance Sheet at December 31, 1996 F-40 Statement of Operations for the Year Ended December 31, 1996 F-41 Statement of Partners' Equity for the Year Ended December 31, 1996 F-42 Statement of Cash Flows for the Year Ended December 31, 1996 F-43 Notes to Financial Statements F-44 (2) Financial Statement Schedules Schedule III: Real Estate and Accumulated Depreciation F-47
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. F-2 29 REPORT OF INDEPENDENT AUDITORS To the Partners John Hancock Realty Income Fund-III Limited Partnership We have audited the accompanying balance sheets of John Hancock Realty Income Fund-III Limited Partnership (the "Partnership") as of December 31, 1998 and 1997, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The financial statements of QOCC-1 Associates (a limited partnership in which JH Quince Orchard Partners, a joint venture in which the Partnership has a 50% interest, has a 75% interest) have been audited by other auditors whose reports have been furnished to us; insofar as our opinion on the financial statements relates to data included for QOCC-1 Associates, it is based solely on their reports. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of John Hancock Realty Income Fund-III Limited Partnership at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. ERNST & YOUNG LLP Boston, Massachusetts February 8, 1999 F-3 30 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) BALANCE SHEETS ASSETS
DECEMBER 31, 1998 1997 ------------ ------------ Cash and cash equivalents $ 5,874,797 $ 2,505,729 Restricted cash 79,541 110,056 Other assets 348,339 287,958 Property held for sale 1,504,448 -- Investment in property: Land 7,667,535 8,410,535 Building and improvements 21,960,686 24,942,540 ------------ ------------ 29,628,221 33,353,075 Less: accumulated depreciation 5,633,631 5,478,701 ------------ ------------ 23,994,590 27,874,374 Investment in joint venture 7,036,529 7,349,298 Deferred expenses, net of accumulated amortization of $1,718,411 in 1998 and $1,373,339 in 1997 959,492 1,467,784 ------------ ------------ Total assets $ 39,797,736 $ 39,595,199 ============ ============
LIABILITIES AND PARTNERS' EQUITY
Liabilities: Accounts payable and accrued expenses $ 383,720 $ 212,129 Accounts payable to affiliates 232,430 131,445 ------------ ------------ Total liabilities 616,150 343,574 Partners' equity/(deficit): General partners (38,068) (52,449) Limited partners 39,219,654 39,304,074 ------------ ------------ Total partners' equity 39,181,586 39,251,625 ------------ ------------ Total liabilities and partners' equity $ 39,797,736 $ 39,595,199 ============ ============
See Notes to Financial Statements. F-4 31 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 1997 1996 ----------- ----------- ----------- Income: Rental income $ 4,091,476 $ 3,600,452 $ 3,606,964 Income from joint venture 716,157 704,292 701,988 Interest income 150,593 142,959 145,734 Gain on sale 783,054 -- -- ----------- ----------- ----------- Total income 5,741,280 4,447,703 4,454,686 Expenses: Depreciation 779,967 829,665 829,665 Amortization of deferred expenses 371,435 367,546 327,697 Property operating expenses 308,655 314,874 323,918 General and administrative expenses 507,234 356,011 357,389 ----------- ----------- ----------- Total expenses 1,967,291 1,868,096 1,838,669 ----------- ----------- ----------- Net income $ 3,773,989 $ 2,579,607 $ 2,616,017 =========== =========== =========== Allocation of net income: General Partner $ 206,582 $ 183,175 $ 183,416 John Hancock Limited Partner 302,616 276,868 276,653 Investors 3,264,791 2,119,564 2,155,948 ----------- ----------- ----------- $ 3,773,989 $ 2,579,607 $ 2,616,017 =========== =========== =========== Net Income per Unit $ 1.35 $ 0.88 $ 0.89 =========== =========== ===========
See Notes to Financial Statements F-5 32 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) STATEMENTS OF PARTNERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
GENERAL LIMITED PARTNER PARTNERS TOTAL --------- ------------ ------------ Partners' equity/(deficit) at January 1, 1996 (2,415,234 Units outstanding) (44,553) 41,590,304 41,545,751 Less: Cash distributions (182,286) (3,463,437) (3,645,723) Add: Net income 183,416 2,432,601 2,616,017 --------- ------------ ------------ Partners' equity/(deficit) at December 31, 1996 (2,415,234 Units outstanding) (43,423) 40,559,468 40,516,045 Less: Cash distributions (192,201) (3,651,826) (3,844,027) Add: Net income 183,175 2,396,432 2,579,607 --------- ------------ ------------ Partners' equity/(deficit) at December 31, 1997 (2,415,234 Units outstanding) (52,449) 39,304,074 39,251,625 Less: Cash distributions (192,201) (3,651,827) (3,844,028) Add: Net income 206,582 3,567,407 3,773,989 -------- ------------ ------------ Partners' equity/(deficit) at December 31, 1998 (2,415,234 Units outstanding) ($ 38,068) $ 39,219,654 $ 39,181,586 ======== ============ ============
See Notes to Financial Statements F-6 33 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 1997 1996 ----------- ----------- ----------- Operating activities: Net income $ 3,773,989 $ 2,579,607 $ 2,616,017 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of property (783,054) -- -- Depreciation 779,967 829,665 829,665 Amortization of deferred expenses 371,435 367,546 327,697 Cash distributions over equity in income from joint venture 312,769 289,507 268,318 ----------- ----------- ----------- 4,455,106 4,066,325 4,041,697 Changes in operating assets and liabilities: (Increase)/decrease in restricted cash 30,515 (2,097) (9,751) (Increase)/decrease in other assets (60,381) (107,416) 116,939 (Decrease)/increase in accounts payable and accrued expenses 171,591 (75,245) 46,985 Increase in accounts payable to affiliates 100,985 37,978 55,055 ----------- ----------- ----------- Net cash provided by operating activities 4,697,816 3,919,545 4,250,925 Investing activities: Proceeds from sale of property 2,645,995 -- -- Increase in deferred expenses and other assets (130,715) (233,648) (372,615) ------------ ----------- ----------- Net cash provided by/(used) in investing activities 2,515,280 (233,648) (372,615) Financing activities: Cash distributed to Partners (3,844,028) (3,844,027) (3,645,723) ------------ ----------- ----------- Net cash used in financing activities (3,844,028) (3,844,027) (3,645,723) ------------ ----------- ----------- Net (decrease)/increase in cash and cash equivalents 3,369,068 (158,130) 232,587 Cash and cash equivalents at beginning of year 2,505,729 2,663,859 2,431,272 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 5,874,797 $ 2,505,729 $ 2,663,859 =========== =========== ===========
See Notes to Financial Statements F-7 34 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION OF PARTNERSHIP John Hancock Realty Income Fund-III Limited Partnership (the "Partnership") was formed under the Massachusetts Uniform Limited Partnership Act on November 4, 1988. As of December 31, 1998, the Partnership consisted of John Hancock Realty Equities, Inc. (the "General Partner"), a wholly-owned, indirect subsidiary of John Hancock Mutual Life Insurance Company; John Hancock Realty Funding, Inc. (the "John Hancock Limited Partner"); John Hancock Income Fund-III Assignor, Inc. (the "Assignor Limited Partner"); and 2,321 Unitholders (the "Investors"). The Assignor Limited Partner holds five Investor Limited Partnership Interests for its own account and 2,415,229 Assignee Units (the "Units"), representing economic and certain other rights attributable to Investor Limited Partnership Interests in the Partnership, for the benefit of the Investors. The John Hancock Limited Partner, the Assignor Limited Partner and the Investors are collectively referred to as the Limited Partners. The General Partner and the Limited Partners are collectively referred to as the Partners. The initial capital of the Partnership was $2,100, representing capital contributions of $1,000 from the General Partner, $1,000 from the John Hancock Limited Partner, and $100 from the Assignor Limited Partner. The Amended Agreement of Limited Partnership of the Partnership (the "Partnership Agreement") authorized the issuance of up to 5,000,000 Units at $20 per unit. During the offering period, which terminated on February 15, 1991, 2,415,229 Units were sold and the John Hancock Limited Partner made additional capital contributions of $3,863,366. There were no changes in the number of Units outstanding subsequent to the termination of the offering period. The Partnership is engaged solely in the business of acquiring, holding for investment and disposing of existing income-producing retail, industrial and office properties on an all-cash basis, free and clear of mortgage indebtedness. Although the Partnership's properties were acquired and are held free and clear of mortgage indebtedness, the Partnership may incur mortgage indebtedness under certain circumstances as specified in the Partnership Agreement. The latest date on which the Partnership is due to terminate is December 31, 2019, unless it is sooner terminated in accordance with the terms of the Partnership Agreement. It is expected that, in the ordinary course of the Partnership's business, the properties of the Partnership will be disposed of, and the Partnership terminated, before December 31, 2019. 2. SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. The Partnership maintains its accounting records and recognizes rental revenue on the accrual basis. Cash equivalents are highly liquid investments with original maturities of three months or less when purchased. These investments are recorded at cost plus accrued interest, which approximates market value. Restricted cash represents funds restricted for tenant security deposits. Investments in property are recorded at cost less any property write-downs for impairment in value. Cost includes the initial purchase price of the property plus acquisition costs and the cost of significant improvements. The Partnership measures impairment in value in accordance with Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" ("Statement 121"). Statement 121 requires impairment losses to be recorded on long-lived assets used in operations where indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. F-8 35 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Depreciation has been provided on a straight-line basis over the estimated useful lives of the various assets: thirty years for the buildings and five years for related improvements. Maintenance and repairs are charged to operations as incurred. Investment in joint venture is recorded using the equity method. Acquisition fees for the joint venture investment have been deferred and are being amortized on a straight-line basis over a period of thirty-one and a half years. Other deferred acquisition fees are being amortized on a straight-line basis over a period of eighty-four months. Capitalized tenant improvements and lease commissions are being amortized on a straight-line basis over the terms of the leases to which they relate. No provision for income taxes has been made in the financial statements as such taxes are the responsibility of the individual partners and not of the Partnership. The net income per Unit for the years ended December 31, 1998, 1997 and 1996 is calculated by dividing the Investors' share of net income by the number of Units outstanding during each year. 3. THE PARTNERSHIP AGREEMENT Distributable Cash from Operations (defined in the Partnership Agreement) is distributed 5% to the General Partner and the remaining 95% in the following order of priority: first, to the Investors until they receive a 7% non-cumulative, non-compounded annual cash return on their Invested Capital (defined in the Partnership Agreement); second, to the John Hancock Limited Partner until it receives a 7% non-cumulative, non-compounded annual cash return on its Invested Capital; and third, to the Investors and the John Hancock Limited Partner in proportion to their respective Capital Contributions (defined in the Partnership Agreement). However, any Distributable Cash from Operations which is available as a result of a reduction in working capital reserves funded by Capital Contributions of the Investors will be distributed 100% to the Investors. Profits for tax purposes from the normal operations of the Partnership for each fiscal year are allocated to the Partners in the same amounts as Distributable Cash from Operations for that year. If such profits are less than Distributable Cash from Operations for any year, they are allocated in proportion to the amounts of Distributable Cash from Operations for that year. If such profits are greater than Distributable Cash from Operations for any year, they are allocated 5% to the General Partner and 95% to the John Hancock Limited Partner and the Investors, with the allocation made between the John Hancock Limited Partner and the Investors in proportion to their respective Capital Contributions. Losses for tax purposes from the normal operations of the Partnership are allocated 1% to the General Partner and 99% to the John Hancock Limited Partner and the Investors, with the allocation made between the John Hancock Limited Partner and the Investors in proportion to their respective Capital Contributions. However, all tax aspects of the Partnership's payment of the sales commissions from the Capital Contributions made by the John Hancock Limited Partner are allocated 1% to the General Partner and 99% to the John Hancock Limited Partner, and not to the Investors. Depreciation deductions are allocated 1% to the General Partner and 99% to the Investors, and not to the John Hancock Limited Partner. F-9 36 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. THE PARTNERSHIP AGREEMENT (CONTINUED) Neither the General Partner nor any affiliate of the General Partner shall be liable, responsible or accountable in damages to any of the Partners or the Partnership for any act or omission of the General Partner or such affiliate in good faith on behalf of the Partnership within the scope of the authority granted to the General Partner by the Partnership Agreement and in the best interest of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner and its affiliates performing services on behalf of the Partnership shall be entitled to indemnity from the Partnership for any loss, damage, or claim by reason of any act performed or omitted to be performed by the General Partner or such affiliates in good faith on behalf of the Partnership and in a manner within the scope of the authority granted to the General Partner by the Partnership Agreement and in the best interest of the Partnership, except that they shall not be entitled to be indemnified in respect of any loss, damage, or claim incurred by reason of fraud, negligence, misconduct, or breach of fiduciary duty. Any indemnity shall be provided out of and to the extent of Partnership assets only. The Partnership shall not advance any funds to the General Partner or its affiliates for legal expenses and other costs incurred as a result of any legal action initiated against the General Partner or its affiliates by a Limited Partner in the Partnership. 4. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES Fees, commissions and other costs incurred or paid by the General Partner or its affiliates during the three years ended December 31, 1998, 1997 and 1996, and to which the General Partner or its affiliates are entitled to reimbursement from the Partnership were $234,860, $244,487 and $179,330, respectively. The Partnership provides indemnification to the General Partner and its affiliates for any acts or omissions of the General Partner good faith on behalf of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner believes that this indemnification applies to the class action complaint described in Note 9. Accordingly, included in the Statements of Operations for the years ended December 31, 1998, 1997, and 1996 were $82,745, $54,092, and $41,475, respectively, representing the Partnership's share of costs incurred by the General Partner and its affiliates relating to the class action complaint. As of December 31, 1998, the Partnership has incurred a total of $178,312 as its share of the costs incurred by the General Partner and its affiliates resulting from this matter. Accounts payable to affiliates represents amounts due to the General Partner or its affiliates for various services provided to the Partnership, including amounts to indemnify the General Partner or its affiliates for claims incurred by them in connection with their actions as General Partner of the Partnership. All amounts accrued by the Partnership to indemnify the General Partner or its affiliates for legal fees incurred by them shall not be paid unless or until all conditions set forth in the Partnership Agreement for such payment have been fulfilled. The General Partner serves in a similar capacity for two other affiliated real estate limited partnerships. 5. INVESTMENT IN PROPERTY Investment in property at cost, less any write-downs, consists of managed, fully-operating, commercial real estate as follows:
December 31, 1998 1997 ------------ ------------ Palms of Carrollwood Shopping Center $ 10,930,578 $ 10,930,578 Yokohama Tire Warehouse 9,352,221 9,352,221 Purina Mills Distribution Building 4,203,406 4,203,406 Allmetal Distribution Building -- 1,636,050 Stone Container Building -- 2,088,804 Business Center at Pureland 5,142,016 5,142,016 ------------ ------------ $ 29,628,221 $ 33,353,075 ============ ============
F-10 37 On December 29, 1998, the Partnership sold the Stone Container Building and received net sales proceeds of $2,645,995, after deductions for commissions and selling expenses. This transaction generated a gain of $783,054, representing the difference between the net sales price and the property's carrying value of 1,862,941. F-11 38 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INVESTMENT IN PROPERTY (CONTINUED) During June 1998, the Allmetal Distribution Building was listed for sale. Accordingly, this property is classified as "Property Held for Sale" on the Balance Sheet at December 31, 1998 at its carrying value, which is not in excess of its estimated fair value, less selling costs. The real estate market is cyclical in nature and is materially affected by general economic trends and economic conditions in the market where a property is located. As a result, determination of real estate values involves subjective judgments. These judgments are based on current market conditions and assumptions related to future market conditions. These assumptions involve, among other things, the availability of capital, occupancy rates, rental rates, interest rates and inflation rates. Amounts ultimately realized from each property may vary significantly from the values presented and the differences could be material. Actual market values of real estate can be determined only by negotiation between the parties in a sales transaction. The Partnership leases its properties to non-affiliated tenants primarily under long-term operating leases. At December 31, 1999, future minimum rentals on non-cancelable leases relating to the above properties were as follows:
1999 2,363,674 2000 2,053,693 2001 1,789,492 2002 1,670,579 2003 1,655,420 Thereafter 3,608,060 ------------ Total $ 13,140,917 ============
6. INVESTMENT IN JOINT VENTURE On December 28, 1988, the Partnership invested $75,000 to acquire a 0.5% interest in JH Quince Orchard Partners (the "Affiliated Joint Venture"), a joint venture between the Partnership and John Hancock Realty Income Fund-II Limited Partnership ("Income Fund-II"). The Partnership had an initial 0.5% interest and Income Fund-II had an initial 99.5% interest in the Affiliated Joint Venture. Pursuant to the partnership agreement of the Affiliated Joint Venture, the Partnership had the option, exercisable prior to December 31, 1990, to increase its investment and interest in the Affiliated Joint Venture to 50%. During the second quarter of 1989, the Partnership exercised such option and Income Fund-II transferred a 49.5% interest in the Affiliated Joint Venture to the Partnership for cash in the aggregate amount of $7,325,672. The Partnership has held a 50% interest in the Affiliated Joint Venture since the second quarter of 1989. On December 28, 1988, the Affiliated Joint Venture contributed 98% of the invested capital of, and acquired a 75% interest in, QOCC-1 Associates, an existing partnership which owns and operates the Quince Orchard Corporate Center, a three-story office building and related land and improvements located in Gaithersburg, Maryland. The partnership agreement of QOCC-1 Associates provides that the Affiliated Joint Venture contribute 95% of any required additional capital contributions. Of the cumulative total invested capital in QOCC-1 Associates at December 31, 1997, 97.55% has been contributed by the Affiliated Joint Venture. The Affiliated Joint Venture continues to hold a 75% interest in QOCC-1 Associates. Net cash flow from QOCC-1 Associates is distributed in the following order of priority: (i) to the payment of all debts and liabilities of QOCC-1 Associates and to fund reserves deemed reasonably necessary; ii), to the partners in proportion to their respective invested capital until each has received a 9% return on invested capital and iii) the balance, if any, to the partners in proportion to their interests. Prior to 1996, QOCC-1 Associates had not provided the partners with a return in excess of 9% on their invested capital. During 1998, 1997 and 1996, the partners received a return on invested capital of approximately 12%. F-12 39 Income and gains of QOCC-1 Associates, other than the gains allocated arising from a sale other similar event with respect to the Quince Orchard Corporate Center, are allocated in the following order of priority: i) to the partners who are entitled to receive a distribution of net cash flow, pro rata in the same order and amounts as such distributions are made and ii) the balance, if any, to the partners, pro rata in accordance with their interests. F-13 40 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. INVESTMENT IN JOINT VENTURE (CONTINUED) Summarized financial information for QOCC-1 Associates is as follows:
Financial Position at December 31, 1998 1997 ------------ ------------ Current assets $ 535,140 $ 148,840 Deferred expenses, net 1,280,719 1,530,759 Other assets 1,330,111 1,544,230 Investment in property, net 11,590,339 11,951,074 ------------ ------------ Total assets $ 14,736,309 $ 15,174,903 ============ ============ Current liabilities $ 484,303 $ 251,928 Partners' equity 14,252,006 14,922,975 ------------ ------------ Total liabilities and equity $ 14,736,309 $ 15,174,903 ============ ============
Results of Operations Years Ended December 31, 1998 1997 1996 ----------- ----------- ----------- Total income $ 2,788,939 $ 2,761,035 $ 2,754,712 Total expenses 1,198,608 1,212,058 1,220,531 ----------- ----------- ----------- Net income $ 1,590,331 $ 1,548,977 $ 1,534,181 =========== =========== ===========
The Affiliated Joint Venture's share of QOCC-1 Associates' partners' equity was $14,009,111 and $14,634,651 at December 31, 1998 and 1996, respectively. The Affiliated Joint Venture's share of QOCC-1 Associates' net income was $1,432,312, $1,408,588 and $1,403,992 for the years ended December 31, 1998, 1997 and 1996, respectively. As noted above, the Partnership has a 50% interest in the Affiliated Joint Venture. 7. DEFERRED EXPENSES Deferred expenses consist of the following:
Unamortized Balance at December 31, Description 1998 1997 - ------------------------------------------ --------- ----------- $152,880 of acquisition fees for investment in the Affiliated Joint Venture. This amount is amortized over a period of 31.5 years. $ 104,549 $ 109,402 $1,002,755 of tenant improvements. These amounts are amortized over the terms of the leases to which they relate. 519,358 775,877 $448,648 of lease commissions. These amounts are amortized over the terms of the leases to which they relate. 297,241 390,787 $1,073,620 of acquisition fees paid to the General Partner. This amount is amortized over a period of eighty-four months. 38,344 191,718 --------- ----------- $ 959,492 $ 1,467,784 ========= ===========
F-14 41 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. FEDERAL INCOME TAXES A reconciliation of the net income reported in the Statements of Operations to the net income reported for federal income tax purposes is as follows:
Years Ended December 31, 1998 1997 1996 ----------- ----------- ----------- Net income per Statements of Operations $ 3,773,989 $ 2,579,607 $ 2,616,017 Add/(less): Excess of book depreciation over tax depreciation 91,319 138,779 141,284 Excess of book amortization over tax amortization 187,342 189,010 159,378 Other income (56,079) (211,950) (48,622) Other expenses 199,840 11,628 101,918 ----------- ----------- ----------- Net income for federal income tax purposes $ 4,196,411 $ 2,707,074 $ 2,969,975 =========== =========== ===========
9. CONTINGENCIES In February 1996, a putative class action complaint was filed in the Superior Court in Essex County, New Jersey by a single investor in a limited partnership affiliated with the Partnership. The complaint named as defendants the Partnership, the General Partner, certain other affiliates of the General Partner, and certain unnamed officers, directors, employees and agents of the named defendants. The plaintiff sought unspecified damages stemming from alleged misrepresentations and omissions in the marketing and offering materials associated with the Partnership and two limited partnerships affiliated with the Partnership. On March 18, 1997, the court certified a class of investors who were original purchasers in the Partnership. The Partnership and the other defendants have answered the complaint, denying the material allegations and raising numerous affirmative defenses. Discovery has commenced, and the Partnership and other defendants have produced documents relating to the plaintiff's claims. No depositions are scheduled. The court has heard the defendants' motion to dismiss certain claims on grounds of the expiration of the statutes of limitations and has stated it intends to hold a further hearing on that matter to determine whether the case can be resolved by the disposition of certain claims. The Partnership and the other defendants intend to move to decertify the class and for summary judgment dismissing the breach of contract claims. The Partnership provides indemnification to the General Partner and its affiliates for acts or omissions of the General Partner in good faith on behalf of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner believes that this indemnification applies to the class action complaint described above. F-15 42 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. CONTINGENCIES (CONTINUED) The Partnership has incurred an aggregate of approximately $446,000 in legal expenses in connection with this matter. Of this amount, approximately $268,000 relates to the Partnership's own defense and approximately $178,000 relates to indemnification of the General Partner and its affiliates for their defense. These expenses are funded from the operations of the Partnership. At the present time, the General Partner cannot estimate the aggregate amount of legal expenses and indemnification claims to be incurred and their impact on the Partnership's Financial Statements, taken as a whole. Accordingly, no provision for any liability that could result from the eventual outcome of these matters has been made in the accompanying financial statements. However, while it is still too early to estimate potential damages, they could possibly be material. 10. SUBSEQUENT EVENTS On February 12, 1999, the Partnership made a cash distribution in the aggregate amount of $4,144,685. Of this amount, $1,510,154 was generated from Distributable Cash from Operations for the year ended December 31, 1998 less amounts previously distributed, and $2,634,531 was generated from Distributable Cash from Sales, Financings or Repayments during the year ended December 31, 1998. These amounts were distributed in accordance with the Partnership Agreement and were allocated as follows:
Dist. Cash Dist. Cash From From Operations Sales or Financings --------------- ------------------- Investors $ 1,328,376 $ 2,439,381 John Hancock Limited Partner 106,270 195,151 General Partner 75,508 -- ----------- ----------- Total $ 1,510,154 $ 2,634,532 =========== ===========
On February 25, 1999, the Partnership sold the Allmetal Distribution Building and received net sales proceeds of approximately $2,080,000, after deductions for commissions and selling expenses. This transaction generated a gain of approximately $576,000, representing the difference between the net sales price and the property's carrying value of 1,504,448. F-16 43 FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT QOCC-1 ASSOCIATES DECEMBER 31, 1998 F-17 44 QOCC-1 ASSOCIATES TABLE OF CONTENTS PAGE INDEPENDENT AUDITORS' REPORT F-19 FINANCIAL STATEMENTS BALANCE SHEET F-20 STATEMENT OF INCOME F-21 STATEMENT OF PARTNERS' EQUITY F-22 STATEMENT OF CASH FLOWS F-23 NOTES TO FINANCIAL STATEMENTS F-24 F-18 45 INDEPENDENT AUDITORS' REPORT To the Partners QOCC-1 Associates We have audited the accompanying balance sheet of QOCC-1 Associates as of December 31, 1998, and the related statements of income, partners' equity and cash flows for the year then ended. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of QOCC-1 Associates as of December 31, 1998, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Bethesda, Maryland January 11, 1999 F-19 46 QOCC-1 Associates BALANCE SHEET December 31, 1998 ASSETS RENTAL PROPERTY Land $ 3,670,000 Land improvements 35,425 Building 11,461,343 Building improvements 92,888 15,259,656 Less accumulated depreciation 3,669,317 11,590,339 OTHER ASSETS Cash and cash equivalents 535,140 Prepaid taxes and insurance 103,669 Prepaid leasing commissions 129,482 Deferred rent concessions 1,280,719 Leasing costs, less accumulated amortization of $1,056,405 1,096,960 ----------- $14,736,309 =========== LIABILITIES AND PARTNERS' EQUITY LIABILITIES Accounts payable and accrued expenses $ 16,806 Security deposit 231,957 Advanced rent 235,540 484,303 COMMITMENT -- PARTNERS' EQUITY 14,252,006 ----------- $14,736,309 ===========
See notes to financial statements F-20 47 QOCC-1 Associates STATEMENT OF INCOME Year ended December 31, 1998 Revenue Rental income-base $2,691,797 Rental income-reimbursements 83,409 Interest income 13,733 ---------- Total revenue 2,788,939 Expenses Accounting $ 8,565 Miscellaneous 1,537 Commissions 86,320 Depreciation and amortization 592,307 Insurance 5,749 Management fees 52,983 Personnel services 66,152 Repairs and maintenance 173,209 Supplies 2,836 Taxes 205,711 Utilities 3,239 -------- Total expenses 1,198,608 ---------- NET INCOME $1,590,331 ==========
See notes to financial statements F-21 48 QOCC-1 Associates STATEMENT OF PARTNERS' EQUITY Year ended December 31, 1998
Equity at Equity at January 1, December 31, 1998 Net Income Distributions 1998 ----------- ---------- ------------- ----------- JH Quince Orchard Partners $14,634,651 $1,432,312 $(2,057,852) $14,009,111 Quad Properties, Inc. 288,324 158,019 (203,448) 242,895 ----------- ---------- ----------- ----------- $14,922,975 $1,590,331 $(2,261,300) $14,252,006 =========== ========== =========== ===========
See notes to financial statements F-22 49 QOCC-1 Associates STATEMENT OF CASH FLOWS Year ended December 31, 1998 Cash flows from operating activities Net income $ 1,590,331 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 592,307 Increase in prepaid taxes and insurance (3,669) Decrease in prepaid leasing commissions 86,320 Decrease in deferred rent concessions 31,555 Increase in leasing costs (584) Decrease in accounts payable and accrued expenses (3,168) Increase in advanced rent 235,540 Net cash provided by operating activities 2,528,632 ----------- Cash flows from investing activities Investment in rental property (12,990) Net cash used in investing activities (12,990) ----------- Cash flows from financing activities Distributions to partners (2,261,300) Net cash used in financing activities (2,261,300) ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS 254,342 Cash and cash equivalents, beginning 280,798 Cash and cash equivalents, end $ 535,140 ===========
See notes to financial statements F-23 50 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS December 31, 1998 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The partnership was organized on December 27, 1988, as a general partnership under the laws of the State of Maryland for the purpose of operating an office building with approximately 99,782 net rentable square feet in Gaithersburg, Maryland. The building was acquired in December 1988. The partnership conducts its rental operations under a lease agreement with one tenant. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. RENTAL PROPERTY Rental property is carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method. CASH EQUIVALENTS For purposes of the statement of cash flows, the partnership considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. RENTAL INCOME Rental income is recognized using the straight-line method over the term of the lease, which includes the rent concession period. The amount applicable to the rent concession is recorded as a deferred asset against which future collections are applied. Rental payments received in advance are deferred until earned. The lease between the partnership and the tenant of the property is an operating lease. F-24 51 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS December 31, 1998 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) INCOME TAXES No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. PREPAID LEASING COMMISSIONS Prepaid leasing commissions are charged to operations using the straight-line method over 76 months. LEASING COSTS Leasing costs were incurred to obtain a new tenant for the office building and improve the rental space. These costs are being written off using the straight-line method over the ten-year term of the lease. NOTE B - RENTAL INCOME UNDER OPERATING LEASE The partnership has leased the office building to a new tenant effective March 1994 under a ten-year term with a five-year renewal option at the discretion of the lessee. The tenant may terminate the lease after the 76th calendar month of the term by notifying the landlord as outlined in the lease agreement. Rental income consists of fixed base rent plus a fixed annual increase and variable lease reimbursement escalation, calculated annually. Future minimum base rental payments due under the noncancelable operating lease are as follows:
Year ending December 31, ------------ 1999 $ 2,791,436 2000 2,861,222 2001 2,932,752 2002 3,006,071 2003 3,081,223 Thereafter 515,633 ----------- $15,188,337 ===========
F-25 52 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS December 31, 1998 NOTE C - RELATED PARTY TRANSACTION During 1998, the partnership incurred charges of approximately $121,827 for management fees, personnel services and supplies provided by affiliates of one of the partners. NOTE D - COMMITMENT The partnership has entered into a lease commission agreement with Carey Winston. The agreement provides for $546,696 of commissions to be paid for the first 76 months of the tenant's lease, which began March 1994. If the tenant does not exercise its option to terminate the lease after the 76th month, additional commissions in the amount of $376,198 for the remaining 44 months of the tenant's lease will be due at that time. NOTE E - CONCENTRATION OF CREDIT RISK The partnership maintains its cash balances in two banks. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000 by each bank. As of December 31, 1998, the uninsured portion of the cash balances held at the banks was $131,957. F-26 53 FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT QOCC-1 ASSOCIATES DECEMBER 31, 1997 F-27 54 QOCC-1 ASSOCIATES TABLE OF CONTENTS PAGE INDEPENDENT AUDITORS' REPORT F-29 FINANCIAL STATEMENTS BALANCE SHEET F-31 STATEMENT OF INCOME F-31 STATEMENT OF PARTNERS' EQUITY F-32 STATEMENT OF CASH FLOWS F-33 NOTES TO FINANCIAL STATEMENTS F-34 F-28 55 INDEPENDENT AUDITORS' REPORT To the Partners QOCC-1 Associates We have audited the accompanying balance sheet of QOCC-1 Associates as of December 31, 1997, and the related statements of income, partners' equity and cash flows for the year then ended. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of QOCC-1 Associates as of December 31, 1997, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Bethesda, Maryland January 8, 1998 F-29 56 QOCC-1 Associates BALANCE SHEET December 31, 1997 ASSETS RENTAL PROPERTY Land $ 3,670,000 Land improvements 35,425 Building 11,461,343 Building improvements 79,896 ----------- 15,246,664 Less accumulated depreciation 3,295,590 ----------- 11,951,074 OTHER ASSETS Cash and cash equivalents 280,798 Prepaid taxes and insurance 99,999 Prepaid leasing commissions 215,803 Deferred rent concessions 1,312,273 Leasing costs, less accumulated amortization of $837,831 1,314,956 ----------- 3,223,829 ----------- $15,174,903 =========== LIABILITIES AND PARTNERS' EQUITY LIABILITIES Accounts payable and accrued expenses $ 19,971 Security deposit 231,957 ----------- 251,928 COMMITMENT -- PARTNERS' EQUITY 14,922,975 ----------- $15,174,903 ===========
See notes to financial statements F-30 57 QOCC-1 Associates STATEMENT OF INCOME Year ended December 31, 1997 Revenue Rental income - base $2,691,797 Rental income - reimbursements 67,665 Interest income 1,573 ---------- Total revenue 2,761,035 Expenses Accounting $ 8,250 Miscellaneous 2,637 Commissions 86,320 Depreciation and amortization 589,198 Insurance 5,772 Management fees 51,691 Personnel services 73,941 Repairs and maintenance 188,130 Supplies 2,137 Taxes 197,519 Utilities 6,463 -------- Total expenses 1,212,058 ---------- NET INCOME $1,548,977 ==========
See notes to financial statements F-31 58 QOCC-1 Associates STATEMENT OF PARTNERS' EQUITY Year ended December 31, 1997
Equity at Equity at January 1, December 31, 1997 Net income Distributions 1997 ----------- ---------- ------------- ----------- JH Quince Orchard Partners $15,213,661 $1,408,588 $(1,987,598) $14,634,651 Quad Properties, Inc. 327,337 140,389 (179,402) 288,324 ----------- ---------- ----------- ----------- $15,540,998 $1,548,977 $(2,167,000) $14,922,975 =========== ========== =========== ===========
See notes to financial statements F-32 59 QOCC-1 Associates STATEMENT OF CASH FLOWS Year ended December 31, 1997 Cash flows from operating activities Net income $ 1,548,977 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 589,198 Increase in prepaid taxes and insurance (3,904) Decrease in accounts payable and accrued expenses (9,599) Decrease in prepaid leasing commissions 86,319 Decrease in prepaid rent and security deposit (215,131) Increase in deferred rent concessions (34,868) ----------- Net cash provided by operating activities 1,960,992 ----------- Cash flows from investing activities Investment in rental property (16,760) ----------- Net cash used in investing activities (16,760) ----------- Cash flows from financing activities Distributions to partners (2,167,000) ----------- Net cash used in financing activities (2,167,000) ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (222,768) Cash and cash equivalents, beginning 503,566 ----------- Cash and cash equivalents, end $ 280,798 ===========
See notes to financial statements F-33 60 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS December 31, 1997 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The partnership was organized on December 27, 1988, as a general partnership under the laws of the State of Maryland for the purpose of operating an office building with approximately 99,782 net rentable square feet in Gaithersburg, Maryland. The building was acquired in December 1988. The partnership conducts its rental operations under a lease agreement with one tenant. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. RENTAL PROPERTY Rental property is carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method. CASH EQUIVALENTS For purposes of the statement of cash flows, the partnership considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. RENTAL INCOME Rental income is recognized using the straight-line method over the term of the lease, which includes the rent concession period. The amount applicable to the rent concession is recorded as a deferred asset against which future collections are applied. Rental payments received in advance are deferred until earned. The lease between the partnership and the tenant of the property is an operating lease. F-34 61 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS December 31, 1997 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) INCOME TAXES No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. PREPAID LEASING COMMISSIONS Prepaid leasing commissions are charged to operations using the straight-line method over 76 months. LEASING COSTS Leasing costs were incurred to obtain a new tenant for the office building and improve the rental space. These costs are being written off using the straight-line method over the ten-year term of the lease. NOTE B - RENTAL INCOME UNDER OPERATING LEASE The partnership has leased the office building to a new tenant effective March 1994 under a ten-year term with a five-year renewal option at the discretion of the lessee. The tenant may terminate the lease after the 76th calendar month of the term by notifying the landlord as outlined in the lease agreement. Rental income consists of fixed base rent plus a fixed annual increase and variable lease reimbursement escalation, calculated annually. Future minimum base rental payments due under the noncancelable operating lease are as follows:
Year ending December 31, ----------- 1998 $ 2,723,352 1999 2,791,436 2000 2,861,222 2001 2,932,752 2002 3,006,071 Thereafter 3,596,856 ----------- $17,911,689 ===========
F-35 62 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS December 31, 1997 NOTE C - RELATED PARTY TRANSACTION During 1997, the partnership incurred charges of approximately $125,809 for management fees, personnel services and supplies provided by affiliates of one of the partners. NOTE D - COMMITMENT The partnership has entered into a lease commission agreement with Carey Winston. The agreement provides for $546,696 of commissions to be paid for the first 76 months of the tenant's lease, which began March 1994. If the tenant does not exercise its option to terminate the lease after the 76th month, additional commissions in the amount of $376,198 for the remaining 44 months of the tenant's lease will be due at that time. NOTE E - CONCENTRATION OF CREDIT RISK The partnership maintains its cash balances in two banks. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000 by each bank. As of December 31, 1997, the uninsured portion of the cash balances held at the banks was $131,957. F-36 63 FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT QOCC-1 ASSOCIATES DECEMBER 31, 1996 F-37 64 QOCC-1 TABLE OF CONTENTS PAGE INDEPENDENT AUDITORS' REPORT F-39 FINANCIAL STATEMENTS BALANCE SHEET F-40 STATEMENT OF INCOME F-41 STATEMENT OF PARTNERS' EQUITY F-42 STATEMENT OF CASH FLOWS F-43 NOTES TO FINANCIAL STATEMENTS F-44 F-38 65 INDEPENDENT AUDITORS' REPORT To the Partners QOCC-1 Associates We have audited the accompanying balance sheet of QOCC-1 Associates as of December 31, 1996, and the related statements of income, partners' equity and cash flows for the year then ended. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of QOCC-1 Associates as of December 31, 1996, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Bethesda, Maryland January 8, 1997 F-39 66 QOCC-1 Associates BALANCE SHEET December 31, 1996 ASSETS RENTAL PROPERTY Land $ 3,670,000 Land improvements 35,425 Building 11,461,343 Building improvements 63,136 ----------- 15,229,904 Less accumulated depreciation 2,924,959 ----------- 12,304,945 ----------- OTHER ASSETS Cash and cash equivalents 503,566 Prepaid taxes and insurance 96,095 Prepaid leasing commissions 302,122 Deferred rent 1,277,405 Leasing costs, less accumulated amortization of $619,264 1,533,523 3,712,711 $16,017,656 =========== LIABILITIES AND PARTNERS= EQUITY LIABILITIES Accounts payable and accrued expenses $ 29,570 Prepaid rent and security deposit 447,088 ----------- 476,658 COMMITMENT -- PARTNERS= EQUITY 15,540,998 ----------- $16,017,656 ===========
See notes to financial statements F-40 67 QOCC-1 Associates STATEMENT OF INCOME Year ended December 31, 1996 Revenue Rental income - base $2,691,797 Rental income - escalations 61,015 Interest income 1,900 ---------- Total revenue 2,754,712 Expenses Accounting 8,100 Advertising and promotion 1,271 Bad debts 576 Commissions 86,320 Depreciation and amortization 588,496 Insurance 5,503 Legal 1,371 Management fees 50,430 Personnel services 76,801 Repairs and maintenance 199,601 Supplies 2,145 Taxes 191,609 Travel 21 Utilities 8,287 Total expenses ------- 1,220,531 ---------- NET INCOME $1,534,181 ==========
See notes to financial statements F-41 68 QOCC-1 Associates STATEMENT OF PARTNERS' EQUITY Year ended December 31, 1996
Equity at Equity at January 1, December 31, 1996 Net income Distributions 1996 ----------- ---------- ------------- ----------- JH Quince Orchard Partners $15,750,296 $1,403,992 $(1,940,627) $15,213,661 Quad Properties, Inc. 361,521 130,189 (164,373) 327,337 ----------- ---------- ----------- ----------- $16,111,817 $1,534,181 $(2,105,000) $15,540,998 =========== ========== =========== ===========
See notes to financial statements F-42 69 QOCC-1 Associates STATEMENT OF CASH FLOWS Year ended December 31, 1996 Cash flows from operating activities Net income $ 1,534,181 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 588,496 Decrease in accounts receivable - other 2,186 Increase in prepaid taxes and insurance (1,418) Increase in accounts payable and accrued expenses 10,005 Decrease in prepaid leasing commissions 86,320 Increase in prepaid rent and security deposit 910 Increase in deferred rent (99,671) ----------- Net cash provided by operating activities 2,121,009 ----------- Investment in rental property (30,514) ----------- Net cash used in investing activities (30,514) ----------- Cash flows from financing activities Distributions to partners (2,105,000) ----------- Net cash used in financing activities (2,105,000) NET DECREASE IN CASH AND CASH EQUIVALENTS (14,505) Cash and cash equivalents, beginning 518,071 ----------- Cash and cash equivalents, end $ 503,566 ===========
See notes to financial statements F-43 70 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS December 31, 1996 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The partnership was organized on December 27, 1988, as a general partnership under the laws of the State of Maryland for the purpose of operating an office building with approximately 99,782 of net rentable square feet in Gaithersburg, Maryland. The building was acquired in December 1988. The partnership conducts its rental operations under a lease agreement with one tenant. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. RENTAL PROPERTY Rental property is carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method. CASH EQUIVALENTS For purposes of the statement of cash flows, the partnership considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. RENTAL INCOME Rental income is recognized as rentals become due. For instances in which rent concession periods are involved, rental income is recognized using the straight-line method over the term of the lease, which includes the rent concession period. The amount applicable to the rent concession is recorded as a deferred asset against which future collections are applied. Rental payments received in advance are deferred until earned. The lease between the partnership and the tenant of the property is an operating lease. F-44 71 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) INCOME TAXES No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. PREPAID LEASING COMMISSIONS Prepaid leasing commissions are charged to operations using the straight-line method over 76 months. LEASING COSTS Leasing costs were incurred to obtain a new tenant for the office building and improve the rental space. These costs are being written off using the straight-line method over the ten-year term of the lease. NOTE B - RENTAL INCOME UNDER OPERATING LEASE The partnership has leased the office building to a new tenant effective March 1994 under a ten-year term with a five-year renewal option at the discretion of the lessee. The tenant may terminate the lease after the 76th calendar month of the term by notifying the landlord as outlined in the lease agreement. Rental income consists of fixed base rent and variable lease escalation reimbursements, calculated annually. Future minimum base rental payments due under the noncancelable operating lease are as follows:
Year Ending December 31, Amount ----------- ----------- 1997 $ 2,656,929 1998 2,723,352 1999 2,791,436 2000 2,861,222 2001 2,932,752 Thereafter 6,602,927 ----------- $20,568,618 ===========
F-45 72 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 NOTE C - RELATED PARTY TRANSACTION During 1996, the partnership incurred charges of approximately $129,376 for management fees, personnel services and supplies provided by affiliates of one of the partners. NOTE D - COMMITMENT The partnership has entered into a lease commission agreement with Carey Winston. The agreement provides for $546,696 of commissions to be paid for the first 76 months of the tenant's lease, which began March 1994. If the tenant does not exercise its option to terminate the lease after the 76th month, additional commissions in the amount of $376,198 for the remaining 44 months of the tenant's lease will be due at that time. NOTE E - CONCENTRATION OF CREDIT RISK The partnership maintains its cash balances in two banks. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000 by each bank. As of December 31, 1996, the uninsured portion of the cash balances held at the banks was $303,566. F-46 73 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION YEAR ENDED DECEMBER 31, 1998
Costs Capitalized Initial Costs to Partnership Subsequent to Acquisition ------------------------------------------ -------------------------------- Buildings and Write-down of Description Encumbrances Land Improvements Improvements Carrying Value(1) - ----------- ------------ ---- ------------- ------------ ---------------- Palms of Carrollwood Shopping Center Tampa, FL -- $6,000,000 $6,359,816 $2,162 $(1,431,400) Yokohama Tire Warehouse Louisville, KY -- 742,000 8,610,221 -- -- Purina Mills Distribution Building St. Louis, MI -- 570,400 3,633,006 -- -- Business Center at Pureland Bridgeport, NJ -- 1,050,000 4,092,016 -- -- ------ ---------- ----------- ------ ----------- -- $8,362,400 $22,695,059 $2,162 $(1,431,400) ====== ========== =========== ====== =========== Life on Which Gross Amount Depreciation At Which Carried At Close of Period in Latest ------------------------------------ Statement of Buildings and Accumulated Date of Date Operations is Description Land Improvements Total(2) Depreciation(3) Construction Acquired Computed - ----------- ---- ------------- ------- -------------- ------------ -------- -------------- Palms of Carrollwood Shopping Center Tampa, FL $5,305,135 $ 5,625,443 $10,930,578 $1,724,630 1984 12/28/89 30 Years Yokohama Tire Warehouse Louisville, KY 742,000 8,610,221 9,352,221 2,140,596 1991 7/17/91 30 Years Purina Mills Distribution Building St. Louis, MI 570,400 3,633,006 4,203,406 847,701 1991 12/27/91 30 Years Business Center at Pureland Bridgeport, NJ 1,050,000 4,092,016 5,142,016 920,704 1989 3/27/92 30 Years ---------- ----------- ----------- ---------- $7,667,535 $21,960,686 $29,628,221 $5,633,631 ========== =========== =========== ==========
(1) This write-down of carrying value represents an impairment in the value of the property based upon the General Partner's estimate. F-47 74 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) SCHEDULE III (CONTINUED) REAL ESTATE AND ACCUMULATED DEPRECIATION YEAR ENDED DECEMBER 31, 1998 (2) The Partnership's properties' aggregate cost for federal income tax purposes at December 31, 1998 are as follows:
Property Amount -------- ------ Palms of Carrollwood Shopping Center $13,393,545 Yokohama Tire Warehouse 9,352,221 Purina Mills Distribution Building 4,203,406 Business Center at Pureland 5,335,677 ----------- $32,284,849 ===========
The Partnership's aggregate cost for federal income tax purposes may differ from the aggregate cost for Financial Statement purposes. The tax basis excludes property write-downs which were recognized for Financial Statement purposes. (3) Reconciliation of Real Estate and Accumulated Depreciation:
Years Ended December 31, ------------------------------------------ 1998 1997 1996 ----------- ----------- ----------- Investment in Real Estate Balance at beginning of year $33,353,075 $33,353,075 $33,353,075 Other acquisitions -- -- -- Sale of property (2,088,804) -- -- ----------- ----------- ----------- Balance at end of year $31,264,271 $33,353,075 $33,353,075 =========== =========== =========== Accumulated Depreciation Balance at beginning of year $ 5,478,701 $ 4,649,036 $ 3,819,371 Additions charged to costs and expenses 779,967 829,665 829,665 ----------- ----------- ----------- Balance at end of year $ 6,258,668 $ 5,478,701 $ 4,649,036 =========== =========== ===========
F-48 EX-27 2 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 DEC-31-1998 5,954,338 0 348,339 0 0 6,302,677 29,628,221 5,633,631 39,797,736 616,150 0 0 0 0 39,181,586 39,797,736 0 5,741,280 0 815,889 1,151,402 0 0 3,773,989 0 3,773,989 0 0 0 3,773,989 1.35 1.35
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