<PAGE> 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
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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
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Commission file number 0-18563
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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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
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<PAGE> 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
<TABLE>
<CAPTION>
Number of Number of Units
record holders as of outstanding as of
Title of Class December 31, 1998 December 31, 1998
-------------- -------------------- -----------------
<S> <C> <C>
Assignee Units 2,321 2,415,229
</TABLE>
(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:
<TABLE>
<CAPTION>
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
------------ ------------ --------------- --------------- ------------ --------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(a) The ordinary tax income for the Partnership was allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
========== ========== ========== ========== ==========
</TABLE>
(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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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%
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
========== ========== ========== ========== ==========
</TABLE>
(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
<PAGE> 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:
<TABLE>
<CAPTION>
Dist. Cash Dist. Cash From
From Operations Sales or Financings
--------------- -------------------
<S> <C> <C>
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
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
Name Title Age
---- ----- ---
<S> <C> <C>
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
</TABLE>
The term of office and other positions held by the persons listed above appear
in paragraph (e) below.
15
<PAGE> 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:
<TABLE>
<CAPTION>
Name Title Age
---- ----- ---
<S> <C> <C>
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.
</TABLE>
(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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Title of Name and Address of Amount and Nature of Percent of
Class Beneficial Owner Beneficial Ownership Class
-------- ------------------- -------------------- ----------
<S> <C> <C> <C>
Assignee County Employees' 806,451 Units owned 33.39%
Units Annuity and Benefit directly
Fund of Cook County
33 N. Dearborn St.
Chicago, IL
</TABLE>
(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
<PAGE> 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:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
EXHIBIT NUMBER PAGE NUMBER OR
UNDER INCORPORATION BY
REGULATION S-K DESCRIPTION REFERENCE
-------------- ----------- ----------------
<S> <C> <C>
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)
</TABLE>
20
<PAGE> 21
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<S> <C> <C>
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)
</TABLE>
21
<PAGE> 22
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<S> <C> <C>
(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*
</TABLE>
22
<PAGE> 23
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<S> <C> <C>
(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)
</TABLE>
23
<PAGE> 24
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<S> <C> <C>
(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)
</TABLE>
24
<PAGE> 25
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<S> <C> <C>
(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)
</TABLE>
(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
<PAGE> 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
<PAGE> 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
<PAGE> 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))
<TABLE>
<CAPTION>
(1) (a) Financial Statements of the Registrant Page
----
<S> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 30
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
LIABILITIES AND PARTNERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
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
============ ============
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE> 31
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 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
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- ------------ ------------
<S> <C> <C> <C>
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
======== ============ ============
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 33
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
December 31,
1998 1997
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
F-10
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
<S> <C>
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
============
</TABLE>
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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Financial Position at
December 31,
1998 1997
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
<TABLE>
<CAPTION>
Results of Operations
Years Ended December 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
Unamortized Balance at
December 31,
Description 1998 1997
- ------------------------------------------ --------- -----------
<S> <C> <C>
$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
========= ===========
</TABLE>
F-14
<PAGE> 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:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Dist. Cash Dist. Cash From
From Operations Sales or Financings
--------------- -------------------
<S> <C> <C>
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
=========== ===========
</TABLE>
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
<PAGE> 43
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
QOCC-1 ASSOCIATES
DECEMBER 31, 1998
F-17
<PAGE> 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
<PAGE> 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
<PAGE> 46
QOCC-1 Associates
BALANCE SHEET
December 31, 1998
<TABLE>
<S> <C>
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
===========
</TABLE>
See notes to financial statements
F-20
<PAGE> 47
QOCC-1 Associates
STATEMENT OF INCOME
Year ended December 31, 1998
<TABLE>
<S> <C> <C>
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
==========
</TABLE>
See notes to financial statements
F-21
<PAGE> 48
QOCC-1 Associates
STATEMENT OF PARTNERS' EQUITY
Year ended December 31, 1998
<TABLE>
<CAPTION>
Equity at Equity at
January 1, December 31,
1998 Net Income Distributions 1998
----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
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
=========== ========== =========== ===========
</TABLE>
See notes to financial statements
F-22
<PAGE> 49
QOCC-1 Associates
STATEMENT OF CASH FLOWS
Year ended December 31, 1998
<TABLE>
<S> <C>
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
===========
</TABLE>
See notes to financial statements
F-23
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
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
===========
</TABLE>
F-25
<PAGE> 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
<PAGE> 53
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
QOCC-1 ASSOCIATES
DECEMBER 31, 1997
F-27
<PAGE> 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
<PAGE> 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
<PAGE> 56
QOCC-1 Associates
BALANCE SHEET
December 31, 1997
<TABLE>
<S> <C>
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
===========
</TABLE>
See notes to financial statements
F-30
<PAGE> 57
QOCC-1 Associates
STATEMENT OF INCOME
Year ended December 31, 1997
<TABLE>
<S> <C> <C>
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
==========
</TABLE>
See notes to financial statements
F-31
<PAGE> 58
QOCC-1 Associates
STATEMENT OF PARTNERS' EQUITY
Year ended December 31, 1997
<TABLE>
<CAPTION>
Equity at Equity at
January 1, December 31,
1997 Net income Distributions 1997
----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
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
=========== ========== =========== ===========
</TABLE>
See notes to financial statements
F-32
<PAGE> 59
QOCC-1 Associates
STATEMENT OF CASH FLOWS
Year ended December 31, 1997
<TABLE>
<S> <C>
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
===========
</TABLE>
See notes to financial statements
F-33
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Year ending
December 31,
-----------
<S> <C>
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
===========
</TABLE>
F-35
<PAGE> 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
<PAGE> 63
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
QOCC-1 ASSOCIATES
DECEMBER 31, 1996
F-37
<PAGE> 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
<PAGE> 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
<PAGE> 66
QOCC-1 Associates
BALANCE SHEET
December 31, 1996
<TABLE>
<S> <C>
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
===========
</TABLE>
See notes to financial statements
F-40
<PAGE> 67
QOCC-1 Associates
STATEMENT OF INCOME
Year ended December 31, 1996
<TABLE>
<S> <C> <C>
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
==========
</TABLE>
See notes to financial statements
F-41
<PAGE> 68
QOCC-1 Associates
STATEMENT OF PARTNERS' EQUITY
Year ended December 31, 1996
<TABLE>
<CAPTION>
Equity at Equity at
January 1, December 31,
1996 Net income Distributions 1996
----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
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
=========== ========== =========== ===========
</TABLE>
See notes to financial statements
F-42
<PAGE> 69
QOCC-1 Associates
STATEMENT OF CASH FLOWS
Year ended December 31, 1996
<TABLE>
<S> <C>
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
===========
</TABLE>
See notes to financial statements
F-43
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
----------- -----------
<S> <C>
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
===========
</TABLE>
F-45
<PAGE> 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
<PAGE> 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
<TABLE>
<CAPTION>
Costs Capitalized
Initial Costs to Partnership Subsequent to Acquisition
------------------------------------------ --------------------------------
Buildings and Write-down of
Description Encumbrances Land Improvements Improvements Carrying Value(1)
- ----------- ------------ ---- ------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
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)
====== ========== =========== ====== ===========
<CAPTION>
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
- ----------- ---- ------------- ------- -------------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
========== =========== =========== ==========
</TABLE>
(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
<PAGE> 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:
<TABLE>
<CAPTION>
Property Amount
-------- ------
<S> <C>
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
===========
</TABLE>
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:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
F-48
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,954,338
<SECURITIES> 0
<RECEIVABLES> 348,339
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,302,677
<PP&E> 29,628,221
<DEPRECIATION> 5,633,631
<TOTAL-ASSETS> 39,797,736
<CURRENT-LIABILITIES> 616,150
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 39,181,586
<TOTAL-LIABILITY-AND-EQUITY> 39,797,736
<SALES> 0
<TOTAL-REVENUES> 5,741,280
<CGS> 0
<TOTAL-COSTS> 815,889
<OTHER-EXPENSES> 1,151,402
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,773,989
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,773,989
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,773,989
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
</TABLE>
