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, 2000, 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 2,193 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 was 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 were held, free and clear of mortgage indebtedness, the Partnership had the ability to 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, as described in the following paragraph, the properties of the Partnership will be disposed of, and the Partnership terminated, before December 31, 2019.
As initially stated it its Prospectus, it was expected that the Partnership would be dissolved upon the sale of its last remaining property, which at that time was expected to be within seven to ten years following the date such property was acquired by the Partnership. During 2000, the Partnership sold the last four properties in its portfolio, one of which was held through a joint venture, resulting in the termination of the operations of the Partnership. The Partnership will be dissolved, in accordance with the terms of the Partnership Agreement, as soon as reasonably practicable.
The Partnership's equity real estate investments are subject to various risk factors. 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 previously owned by the Partnership, the Partnership could be exposed to liability and be required to incur substantial remediation costs.
ITEM 1 - BUSINESS (CONTINUED)
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. 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 owned and operated 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 provided 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, 1999, 97.55% was contributed by the Affiliated Joint Venture.
The Quince Orchard Corporate Center was leased to Boehringer Mannheim Pharmaceuticals, Inc. under a ten-year lease that expired in February 2004. The tenant had 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 informed the General Partner that it intended 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 continued to improve in 2000. The supply of such office space was unable to keep pace with the demand, resulting in a slight increase in market rents. Further, this condition gave rise to new development in the area. The General Partner did not anticipate that this new development would negatively impact the market and, therefore, expected market conditions to remain favorable through 2000. The General Partner actively marketed the property for lease, offering competitive leasing packages in an effort to secure prospective tenants for the building.
During the second quarter of 2000, the General Partner received unsolicited offers to purchase Quince Orchard Corporate Center. On September 29, 2000, QOCC-1 Associates sold the property to a non-affiliated buyer for a total net sales price of $12,554,940 after deductions for commissions and selling expenses incurred in connection with the sale of the property. Fifty percent of the net proceeds of the sale, or $6,277,470, was distributed to the Partnership and fifty percent was distributed to Income Fund-II. QOCC-1 Associates was subsequently liquidated in December 2000. During November 2000, the Partnership distributed $6,260,274 of the net sales proceeds of which $5,796,550 was distributed to the Investors and $463,724 was distributed to the John Hancock Limited Partner. The Partnership retained $17,196 of the net proceeds in working capital reserves.
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 declined since the Partnership acquired the property, occupancy levels and rental rates stabilized during recent years. However, market conditions remained competitive due to the new construction of retail space. In consideration of the existing favorable market conditions in the Carrollwood, Hillsborough County, Florida area and the new lease for 24,000 square feet commencing October 1, 2000, the General Partner listed the Palms of Carrollwood for sale during March 2000. On November 10, 2000 the Partnership sold the Palms of Carrollwood Shopping Center to a non-affiliated buyer and received net proceeds of $11,730,094. On December 11, 2000, the Partnership distributed $10,433,788 of the net sales proceeds, of which $9,660,915 was distributed to the Investors and $772,873 was distributed to the John Hancock Limited Partner. The Partnership retained $1,296,305 in working capital reserves. Subsequently, this amount was distributed during February 2001 of which $1,200,282 was distributed to the Investors and $96,023 was distributed to the John Hancock Limited Partner.
ITEM 1 - BUSINESS (CONTINUED)
On July 17, 1991, the Partnership acquired Yokohama Tire Warehouse located in Louisville, Kentucky and 100% leased to the Yokohama Tire Corporation under a lease that expired 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 options. Yokohama Tire Corporation had an additional option to purchase the property for $10,578,173 on April 1, 2001. In addition, the Yokohama Tire Corporation had 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. In consideration of the property's strong leasing position and due to the existing favorable market conditions in the Louisville, Kentucky area, the General Partner listed the Yokohama Tire Warehouse for sale during December 1999. On November 6, 2000, the Partnership sold the Yokohama Tire Warehouse to a non-affiliated buyer and received net sales proceeds of $9,085,227. During November 2000, the Partnership distributed $9,025,228 of the net sales proceeds, of which $8,356,692 was distributed to the Investors and $668,535 was distributed to the John Hancock Limited Partner. The Partnership retained $59,999 in working capital reserves. This amount was subsequently distributed during February 2001, of which $55,555 was distributed to the Investors and $4,444 was distributed to the John Hancock Limited Partner.
On December 27, 1991, the Partnership acquired the Purina Mills Distribution Building located in St. Louis, Missouri. Due to the then existing favorable real estate market conditions in the St. Louis, Missouri area, the General Partner listed the property for sale during January 1999. On May 24, 1999, the Partnership sold the Purina Mills Distribution Building to a non-affiliated buyer and received net sales proceeds of $4,946,400. During August 1999 the Partnership distributed $4,434,360 of the net proceeds of which $4,105,889 was distributed to the Investors and $328,471 was distributed to the John Hancock Limited Partner. The Partnership retained $512,040 in working capital reserves. This amount was subsequently distributed during February 2001, of which $474,111 was distributed to the Investors and $37,929 was distributed to the John Hancock Limited Partner.
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 entered into a Purchase and Sale Agreement on behalf of the Partnership 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 to such non-affiliated buyer and received net sales proceeds of $2,080,039. During May 1999 the Partnership distributed $2,060,673 of the net sales proceeds of which $1,908,031 was distributed to the Investors and $152,642 was distributed to the John Hancock Limited Partner. The Partnership retained $19,366 in working capital reserves.
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. This amount was subsequently distributed during February 2001, of which $10,614 was distributed to the Investors and $849 was distributed to the John Hancock Limited Partner.
ITEM 1 - BUSINESS (CONTINUED)
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 of which was 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") had 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. Subsequently, Forbo has vacated. 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. Given the status of the property and the existing supply and demand conditions in the Bridgeport, NJ area, the General Partner listed the Business Center at Pureland for sale during the first quarter of 2000. On December 20, 2000, the Partnership sold the Business Center at Pureland to a non-affiliated buyer and received net sales proceeds of $3,491,502. During February 2001, the Partnership distributed $1,642,356 of the net sales proceeds to the Investors. The Partnership retained $1,949,146 in working capital reserves.
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
ITEM 2 - PROPERTIES
As of December 31, 2000 the Partnership held no investments in its portfolio.
ITEM 3
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.
A settlement agreement was approved by the Court on December 22, 1999. Under terms of the settlement, the defendants have guaranteed certain returns to class members on their investments and paid fees and expenses to class counsel in an amount determined by the court to be $1.5 million. These terms of the settlement will have no financial impact on the Partnership.
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
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 2000.
PART II
ITEM 5
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
(c) DIVIDEND HISTORY AND RESTRICTIONS
During the fiscal years ended December 31, 2000 and 1999, the Partnership distributed cash in the aggregate amounts of $28,668,573 and $13,275,623, respectively, from Distributable Cash from Operations and Distributable Cash from Sales, Financings or Repayments (as defined in the Partnership Agreement). Distributable cash from operations was 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, 2000:
*Includes Distributable Cash from Sales, Financings or Repayments.
The amount of future cash distributions will be dependent upon the need to draw down working capital reserves. As of the date of this report, all of the properties in the Partnership have been sold. In order to adequately provide for all future contingencies, the General Partner has determined (as permitted by the Partnership Agreement) to retain rather than distribute to investors, net cash provided by the Partnership's normal operations in order to fund cash reserves for contingencies. Accordingly, no cash distributions with respect to Distributable Cash from Operations will be made to the Limited Partners. At such time as all liabilities with respect to the Partnership are resolved, the General Partner will make a final distribution of net assets to the Limited Partners, in accordance with the terms of the Partnership Agreement. Such final distribution, if any, will result in the liquidation and termination of the Partnership. For a further discussion of the financial condition and results of operations of the Partnership see Item 7 of the Report.
In March 1999, the General Partner ended the distribution reinvestment plan 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 interest. Therefore, beginning with the Partnership's cash distribution in May 1999 and in all subsequent cash distributions, those Limited Partners who previously had designated their distribution for reinvestment 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
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, 2000. 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.
(a) The ordinary tax income for the Partnership was allocated as follows:
(b) The ordinary tax income per Unit for the fiscal years ended December 31, 2000, 1999, 1998, 1997, and 1996, as presented above, was computed by dividing the Investors' share of ordinary tax income by the number of Units outstanding during the year. 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, 2000, 1999, 1998, 1997, and 1996.
(c) Represents the actual cash distribution per Unit for the years ended December 31, 2000, 1999, 1998, 1997, and 1996.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 sale of Partnership properties, the dissolution and liquidation of the Partnership, actions that would be taken in the event of lack of liquidity, litigation expenses and indemnification claims, distributions to the General Partner and to Investors 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 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.
LIQUIDITY AND CAPITAL RESOURCES
As initially stated in its Prospectus, it was expected that the Partnership would be dissolved upon the sale of its last remaining property, which at that time was expected to be within seven to ten years following the date such property was acquired by the Partnership. The Partnership sold the last property in its portfolio, Business Center at Pureland, on December 20, 2000. The sale of this last remaining property resulted in the termination of the operations of the Partnership, and the Partnership will be dissolved, in accordance with the terms of the Partnership Agreement as soon as reasonably practicable. At such time as all liabilities with respect to the Partnership are resolved, the General Partner will make a final distribution of net assets to the Limited Partners, as soon as practicable. No assurances can be given as to whether any distribution can be made after all liabilities of the Partnership are resolved. Such final distribution, if any, will result in the liquidation and termination of the Partnership. At such time of such final distribution, the outstanding Units will be canceled and, in accordance with federal securities laws, they will be de-registered with the Securities and Exchange Commission, after which time the Partnership will no longer be required to file periodic reports with the Commission.
At December 31, 2000, the Partnership had $6,436,528 in cash and cash equivalents. The Partnership's cash and cash equivalents increased by $3,537,438 from December 31, 1999 primarily due to the net sales proceeds received from the sale of the Business Center at Pureland Building on December 20, 2000. Cash was later distributed during February 2001.
The Partnership has a working capital reserve with a current balance of approximately $2,700,000. The General Partner anticipates that such amount should be sufficient to satisfy the Partnership's general liquidity requirements as the Partnership business is wound down. The Partnership's liquidity would, however, be materially adversely affected by significant unanticipated operating and liquidation costs, including but not limited to litigation expenses. 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 or short-term loans from the General Partner or its affiliates.
During 2000, cash in the amount of $577,825 was used for the payment of leasing costs primarily incurred at the Palms of Carrollwood Shopping Center property. The Partnership will not incur any leasing costs during 2001.
During 2000, approximately $512,568 of cash generated from the Partnership's operations was used to fund non-recurring maintenance and repair expenses incurred at the Palms of Carrollwood and Business Center at Pureland properties. The Partnership will not incur non-recurring repair and maintenance expenses during 2001.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Cash in the amount of $28,668,573 was distributed to the Partners during 2000. Of this amount $2,949,283 was generated from Distributable Cash from Operations (defined in the Partnership Agreement), and $25,719,290 was distributed from Distributable Cash from Sales, Financings or Repayments (defined in the Partnership Agreement). These amounts were distributed in accordance with the Partnership Agreement and were allocated as follows:
As a result of the disposition by the Partnership of its last four remaining properties during 2000, the General Partner determined that starting with the fourth quarter of 2000 it was in the best interests of the Partnership to retain, rather than distribute to Investors, net cash provided by the Partnership's normal operations (if available) in order to fund cash reserves for contingencies, as permitted by the Partnership Agreement.
The General Partner evaluated the carrying value of each of the Partnership's properties and its joint venture investment as of December 31, 1999 by comparing such carrying value to the related property's future undiscounted cash flows and the then most recent internal appraisal. No impairment in value existed with respect to the Partnership's properties as of December 31, 2000 and, therefore, no write-downs were recorded. As of December 31, 2000, all of the properties in the Partnership have been sold.
RESULTS OF OPERATIONS
Average occupancy for the Partnership's investments was as follows:
(*)As of December 31, 2000, all of the Partnership's properties have been sold.
RESULTS OF OPERATIONS - 2000 COMPARED WITH 1999
Net income for the year ended December 31, 2000 was $4,635,678, as compared to net income of $4,371,090 in 1999. The 2000 results include a net non-recurring gain of $3,151,785 from the sales of the net Yokohama Tire Warehouse, the Palms of Carrollwood Shopping Center and the Business Center of Pureland. The 1999 results include a non-recurring gain of $2,065,783 from the sales of the Allmetal and Purina Mills Distribution Buildings. Excluding the results of these gains, net income for the year ended December 31, 2000 decreased by $821,414, or 36%, as compared to the prior year. This is primarily due to the sales mentioned previously and to lower rental income at the Quince Orchard Corporate Center due to the 100% vacancy of the property starting July 1, 2000.
Rental Income for the year ended December 31, 2000 decreased by $707,580, or 24%, as compared to 1999 primarily due to the sales of previously mentioned properties and to lower average occupancy at the Business Center at Pureland in the current period.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS - 2000 COMPARED WITH 1999 (CONTINUED)
Income from joint venture for the year ended December 31, 2000 decreased by $390,669, or 53%, as compared to 1999. This decrease was primarily due to the tenant leasing 100% of Quince Orchard Corporate Center terminating its lease as of June 30, 2000 as permitted by the lease agreement.
Interest income for the year ended December 31, 2000 increased by $60,182, or 25%, as compared to 1999. This increase was primarily due to the interest earned on the net sales proceeds received from the sales of the Partnership's investment in the Quince Orchard Corporate Center and the Palms of Carrollwood Shopping Center for the periods these proceeds were held before the next distribution date.
Property operating expenses for the year ended December 31, 2000 increased by $324,817, or 61%, as compared to 1999. This increase is primarily due to certain non-recurring maintenance and repair expenses incurred at the Palms of Carrollwood Shopping Center during the current period. Also, recoveries of such expenses from tenants were lower as a result of reduced occupancy at the Business Center at Pureland.
Depreciation expense for the year ended December 31, 2000 decreased by $538,720, or 87%, as compared to 1999 primarily due to the sale of the Stone Container Building in December 1999, the sale of the Allmetal Distribution Building in February 1999, the sale of the Purina Mills Distribution Building in May 1999 and to the reclassification as "Property Held for Sale" in December 1999 of the Yokohama Tire Warehouse and during the first quarter of 2000 of the Palms of Carrollwood Shopping Center and the Business Center at Pureland. Accordingly, no depreciation was recorded on these properties since the time that they were listed for sale.
Amortization expense for the year ended December 31, 2000 decreased by $42,527, or 24%, as compared to 1999 primarily due to the sales and reclassifications of properties as reported above and accordingly no longer amortizing such amounts for these properties.
General and administrative expenses for the year ended December 31, 2000 increased by $39,777, or 17%, as compared to 1999, 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 and to timing differences in the payment audit fees.
RESULTS OF OPERATIONS - 1999 COMPARED WITH 1998
Net income for the year ended December 31, 1999 was $4,371,090, as compared to net income of $3,773,989 in 1998. The 1999 results include a non-recurring gain of $2,065,783 from the sales of the Allmetal and Purina Mills Distribution Buildings. Excluding the results of this gain, net income for the year ended December 31, 1999 decreased by $1,468,682, or 39%, as compared to the prior year. This is primarily due to the sales of the Stone Container Building, the Allmetal Distribution Building and the Purina Mills Distribution Building.
Rental income for the year ended December 31, 1999 decreased by $1,188,349, or 29%, as compared to 1998 primarily due to the sales of the Stone Container, Allmetal and Purina Mills Buildings and to reduced occupancy as of April 1, 1999 at the Business Center at Pureland. This decrease was offset by the $220,000 judgment received for Palms of Carrollwood as discussed in the Liquidity and Capital Resource Section of Item 7. Rental income at the Partnership's other properties was consistent between periods.
Interest income for the year ended December 31, 1999 increased by $86,017, or 56%, as compared to 1998. This increase was primarily due to the interest earned on the net sales proceeds received from the sales of the Stone Container, Allmetal and Purina Mills Buildings for the periods these proceeds were held before the next distribution date.
Property operating expenses for the year ended December 31, 1999 increased by $220,931, or 72%, as compared to 1998. This increase is primarily due to certain non-recurring legal fees and maintenance and repair expenses incurred at the Palms of Carrollwood Shopping Center during the current period. Also, recoveries of such expenses from tenants were lower as a result of reduced occupancy at the Business Center at Pureland.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS - 1999 COMPARED WITH 1998 (CONTINUED)
Depreciation expense for the year ended December 31, 1999 decreased by $160,707, or 21%, as compared to 1998 primarily due to the sale of the Stone Container Building in December 1999, the sale of the Allmetal Distribution Building in February 1999, and to the reclassification of the Purina Mills Distribution Building as "Property Held for Sale" in January 1999. Accordingly, no depreciation was recorded on these properties since the time that they were listed for sale. The Purina Mills Building was sold in May 1999.
Amortization expense for the year ended December 31, 1999 decreased by $195,940, or 53%, as compared to 1998 primarily due to the sales and reclassifications of properties as reported above and accordingly no longer amortizing such amounts for these properties. Also, the acquisition fees paid to the General Partner were fully amortized at March 31, 1999 and, therefore, no amortization expense was recorded since that time.
General and administrative expenses for the year ended December 31, 1999 decreased by $266,434, or 53%, as compared to 1998, primarily due to a decrease in legal fees incurred by the Partnership in connection with the legal proceedings described in Item 3 of Part I of this Report. Excluding such legal fees, general and administrative expenses were consistent between periods.
The General Partner believes that inflation has had no significant impact on the Partnership's income from operations during the last three fiscal years and the General Partner anticipates that it will not have a significant impact during 2001.
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:
(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
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item appears beginning on page of this Report. The financial statements of QOCC-1 Associates, an investee of the Registrant, as of and for the period ending December 13, 2000 and the years ending December 31, 1999, and 1998 are included herewith.
ITEM 9
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
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, 2000 were as follows:
The term of office and other positions held by the persons listed above appear in paragraph (e) below.
(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:
(d) FAMILY RELATIONSHIPS
There exist no family relationships among any of the foregoing directors or officers of the General Partner.
(e) BUSINESS EXPERIENCE
Paul Hahesy (age 54) joined John Hancock in 1968. He was appointed President and Director of the General Partner effective March 16, 2001. Mr. Hahesy has been a Senior Investment Officer of John Hancock since 1987. He holds an A.B. from Salem State College.
John M. Garrison (age 50) joined John Hancock in 1995 as an Investment Officer. He served as President and a Director of the General Partner, Hancock Realty Investors Incorporated and John Hancock Property Investors Corp. from July 1999 to March 2001. Mr. Garrison has been a Senior Investment Officer of John Hancock since November 1999. Prior to joining John Hancock, he held a number of positions with the Metropolitan Life Real Estate Investment Group. He holds an M.B.A. from Yale University and a B.A. from Hamilton College.
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP (CONTINUED)
(e) BUSINESS EXPERIENCE (CONTINUED)
Virginia H. Lomasney (age 39) 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.
Deborah H. McAneny (age 41) joined John Hancock in 1985. She has been a Director of the General Partner since May 2000 and a Director of John Hancock Real Estate Finance since March 2000. Her term as Director of the General Partner expires May 2001. Ms. McAneny has been a Senior Vice President of John Hancock since March 2000. She holds a B.S. from the University of Vermont.
John M. Nagle (age 50) joined John Hancock in 1979. He has been Vice President and Director of the General Partner, John Hancock Realty Services Corp. and Hancock Realty Investors Incorporated since July 1999. His term as Director of the General Partner expires in May 2001. Mr. Nagle has been a Senior Investment Officer of John Hancock since 1987. From 1991 through 1993 he was Vice President of Hancock Realty Investors Incorporated. He holds an M.B.A. and a B.B.A. from the University of Massachusetts at Amherst.
Edward P. Dowd (age 58) joined John Hancock in 1970. He was a Director of Hancock Realty Investors, Incorporated from 1991 to March 2000, and a Director of John Hancock Realty Services Corp. and subsidiaries and John Hancock Property Investors Corp. from 1987 to March 2000. Mr. Dowd was a Senior Vice President of John Hancock since 1991and from 1989 to 1990, he was a Vice President 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.
Malcolm G. Pittman III (age 49) joined John Hancock in 1986 as an Assistant Counsel. He was a Director of the General Partner from November 1991 to May 2000. Mr. Pittman has been a Counsel of John Hancock's 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 48) joined John Hancock in 1985 as an Attorney. She was a Director of the General Partner from November 1991 to May 2000. 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.
(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 2000 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 2000 fiscal year.
ITEM 11
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 2000 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 2000 fiscal year in deliberations regarding the General Partner's compensation as it relates to the Partnership.
ITEM 12
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, 2000, except as follows:
(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
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 2000, 1999, and 1998.
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 2000, 1999, and 1998.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
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 2000, 1999, and 1998.
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 $144,876, $153,216 and $234,860 of such expenses during the years ended December 31, 2000, 1999, and 1998, respectively.
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 2000, 1999 or 1998.
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 $110,592, $168,821 and $219,659 for the years ended December 31, 2000, 1999 and 1998. In accordance with the terms of the Partnership Agreement, the John Hancock Limited Partner was entitled to $172,944 and $309,149 of Distributable Cash from Operations for the years ended December 31, 1999 and 1998, 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 $1,905,133, $481,113 and $195,151 for the years ended December 31, 2000, 1999, and 1998, 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 $122,875, $179,128 and $218,800 during the years ended December 31, 2000, 1999, and 1998, respectively. In accordance with the terms of the Partnership Agreement, the John Hancock Limited Partner was allocated $2,696,299, $170,837 and $316,679 of profits during the years ended December 31, 2000, 1999, and 1998, respectively.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
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, 2000:
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:
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 $7,773, $31,787 and $82,749, relating to the class action complaint in the years ended December 31, 2000, 1999, and 1998, respectively.
PART IV
ITEM 14
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
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED)
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED)
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED)
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED)
(b) There were no reports on Form 8-K filed during the quarter ended December 31, 2000.
(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 S-1.
- ---------- +Filed herewith *Incorporated by reference
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 2nd day of April, 2001.
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
By: John Hancock Realty Equities, Inc. General Partner
By: /s/ Paul F. Hahesy ----------------------------------- Paul F. Hahesy, 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 2nd day of April 1, 2001.
Signatures Title ---------- -----
President (Principal Executive Officer) and /s/ Paul F. Hahesy Director of John Hancock Realty Equities, - ------------------------------- Inc. (General Partner of Registrant) Paul F. Hahesy
Treasurer (Chief Accounting Officer) of /s/ Virginia H. Lomasney John Hancock Realty Equities, Inc. - ------------------------------- (General Partner of Registrant) Virginia H. Lomasney
/s/ Deborah H. McAneny Director of John Hancock Realty Equities, - ------------------------------- Inc. (General Partner of Registrant) Deborah H. McAneny
/s/ John M. Nagle Director of John Hancock Realty Equities, - ------------------------------- Inc. (General Partner of Registrant) John M. Nagle
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, 2000, 1999 AND 1998
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
BOSTON, MASSACHUSETTS
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))
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.
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, 2000 and 1999, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the index at Item 14. 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 auditing standards generally accepted in the United States. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. 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 14, 2001
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP)
BALANCE SHEETS
See Notes to Financial Statements
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
See Notes to Financial Statements
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
See Notes to Financial Statements
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
See Notes to Financial Statements
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, 2000, 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 2,193 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, and as discussed in the following paragraph, the properties of the Partnership will be disposed of, and the Partnership terminated, before December 31, 2019.
As initially stated in its Prospectus, it was expected that the Partnership would be dissolved upon the sale of its last remaining property, which at that time was expected to be within seven to ten years following the date such property was acquired by the Partnership. During 2000, the Partnership sold the last four properties remaining in its portfolio resulting in the termination of the operations of the Partnership. The Partnership will be dissolved, in accordance with the terms of the Partnership Agreement, as soon as reasonably practicable.
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.
Property held for sale is recorded at the lower of its carrying amount, at the time the property is listed for sale, or its fair value, less cost to sell. Carrying amount includes the property's cost, as described below, less accumulated depreciation thereon and less any property write-downs for impairment in value and plus any related unamortized deferred expenses. Operating results for properties held for sale are reported on the statement of operations along with the operations of other investments in property.
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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, 2000, 1999 and 1998 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.
Cash from a Sale or Financing of a Partnership Property, is first used to pay all debts and liabilities of the Partnership then due and then to fund any reserves for contingent liabilities. Cash from Sales or Financings is then distributed and paid in the following order of priority: first, to the Investors and the John Hancock Limited Partner, with the distribution made between the Investors and the John Hancock Limited Partner in proportion to their respective Capital Contributions, until the Investors and the John Hancock Limited Partner have received an amount equal to their Invested Capital; second, to the Investors until they have received, after giving effect to all previous distributions of Distributable Cash from Operations and any previous distributions of Cash from Sales or Financings after the return of their Invested Capital, the Cumulative Return on Investment (defined in the Partnership Agreement); third, to the John Hancock Limited Partner until it has received, after giving effect to all previous distributions of Distributable Cash from Operations and any previous distributions of Cash from Sales or Financings after the return of its Invested Capital, the Cumulative return on Investment; fourth, to the General Partner to pay any Subordinated Disposition Fees then payable pursuant to Section 6.4 (c) of the Partnership Agreement; and fifth, 99% to the Investors and the John Hancock Limited Partner and 1% to the General Partner, with the distribution made between the Investors and the John Hancock Limited Partner in proportion to their respective Capital Contributions.
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. THE PARTNERSHIP AGREEMENT (CONTINUED)
Cash from the sale of the last of the Properties is distributed in the same manner as Cash from Sales and Financings, except that before any other distribution is made to the Partners, each Partner shall first receive from such cash, an amount equal to the then positive balance, if any, in such Partner's Capital Account after crediting of charging to such account the profits or losses for tax purposes from such sale. To the extent, if any, that a Partner is entitled to receive a distribution of cash based upon a positive balance in its capital account prior to such distribution, such distribution will be credited against the amount of such cash that Partner would have been entitle to receive based upon the manner of distribution of Cash from Sales and Financings, as specified in the previous paragraph.
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.
Profits and Losses from Sales and Financings are generally allocated 99% to the Limited Partners and 1% to the General Partner.
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.
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 2000, 1999 and 1998, and to which the General Partner or its affiliates are entitled to reimbursement from the Partnership were $152,876, $153,216 and $234,860, 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, 2000, 1999, and 1998 were $15,773, $31,787, and $82,745, 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, 2000, the Partnership has incurred a total of $217,871 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:
During December 1999, the Yokohama Tire Warehouse was listed for sale. Accordingly, this property is classified as "Property Held for Sale" on the Balance Sheet at December 31, 1999 at its carrying value, which was not in excess of its estimated fair value, less selling costs. On November 6, 2000, the Partnership sold the Yokohama Tire Warehouse and received net proceeds of $9,085,227, resulting in a net gain of $2,160,610, representing the difference between the net sales price and the property's carrying value of $6,924,617.
During the first quarter of 2000, the Palms of Carrollwood Shopping Center was listed for sale. On November 10, 2000, the Partnership sold the Palms of Carrollwood Shopping Center and received net sales proceeds of $11,730,094, after deduction for commissions and selling expenses. This transaction generated a non-recurring gain of $1,550,484, representing the difference between the net sales price and the property's carrying value of $10,180,457.
During the first quarter of 2000, the Pureland Business Center was listed for sale. On December 20, 2000, the Partnership sold the Pureland Business Center and received net sales proceeds of $3,491,502, after deductions for commissions and selling expenses. This transaction generated a non-recurring loss of $559,310, representing the difference between the net sales price and the property's carrying value of $4,050,812.
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENT IN PROPERTY (CONTINUED)
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 leased its properties to non-affiliated tenants primarily under long-term operating leases.
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, 1999, 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 1999, 1998, 1997 and 1996, the partners received a return on invested capital of approximately 12%.
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT IN JOINT VENTURE (CONTINUED)
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.
On September 29, 2000, QOCC-1 Associated sold the Quince Orchard Corporate Center to a non-affiliated buyer for a total net sale price of $12,554,940 after deductions for commissions and selling expenses incurred in connection with the sale of the property. Fifty percent of the net proceeds of the sale, or $6,277,470, was distributed to the Partnership and fifty percent was distributed to Income Fund-II. QOCC-1 Associates was subsequently liquidated in December 2000.
Summarized financial information for QOCC-1 Associates is as follows:
The Affiliated Joint Venture's share of QOCC-1 Associates' partners' equity was $13,456,393 at December 31, 1999. The Affiliated Joint Venture's share of QOCC-1 Associates' net income was $758,337, $1,461,422 and $1,432,312 for the years ended December 31, 2000, 1999 and 1998, respectively. As noted above, the Partnership has a 50% interest in the Affiliated Joint Venture.
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. DEFERRED EXPENSES
Deferred expenses consist of the following:
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:
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
A settlement agreement was approved by the court on December 22, 1999. Under the terms of the settlement, the defendants guaranteed certain minimum returns to class members on their investments and have paid fees and expenses for class counsel in an amount determined by the court to be $1.5 million. Payment under the settlement agreement will have no financial impact on the Partnership.
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.
The Partnership has incurred an aggregate of approximately $544,678 in legal expenses in connection with this matter. Of this amount, approximately $326,807 relates to the Partnership's own defense and approximately $217,871 relates to indemnification of the General Partner and its affiliates for their defense. These expenses are funded from the operations of the Partnership.
10. SUBSEQUENT EVENTS
On February 14, 2001, the Partnership made a cash distribution from Distributable Cash from Sales in the amount of $3,520,438. The amount was distributed in accordance with the Partnership Agreement and allocated as follows:
FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT
QOCC-1 ASSOCIATES
DECEMBER 13, 2000
QOCC-1 Associates
PAGE
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENT
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
NOTES TO FINANCIAL STATEMENT
INDEPENDENT AUDITORS' REPORT
To the Partners QOCC-1 Associates
We have audited the statement of changes in net assets in liquidation of QOCC-1 Associates for the period January 1, 2000 through December 13, 2000. This financial statement is the responsibility of the partnership's management. Our responsibility is to express an opinion on this financial statement 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 statement is 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.
As described in note A to the financial statement, the partnership sold the property on September 30, 2000. As a result, the partnership's financial statement is presented on the liquidation basis of accounting.
In our opinion, the financial statement referred to above presents fairly, in all material respects, the changes in net assets in liquidation for the period January 1, 2000 through December 13, 2000, in conformity with generally accepted accounting principles.
Reznick, Fedder & Silverman
Bethesda, Maryland December 14, 2000
QOCC-1 Associates
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
Period ended December 13, 2000
QOCC-1 Associates
NOTES TO FINANCIAL STATEMENTS
December 13, 2000
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
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 101,114 net rentable square feet in Gaithersburg, Maryland. The building was acquired in December 1988. The partnership conducted its rental operations under a lease agreement with one tenant.
LIQUIDATION BASIS
On September 30, 2000, the partnership sold its net assets which included the office building to an unrelated third party. Prior to the sale, the partnership recorded its results of operations in conformity with generally accepted accounting principles. The partnership sold the property for a sales price of $12,900,000. The transaction resulted in a net gain of $145,349.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affected 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 increases and decreases in net assets in liquidation during the reporting period. Actual results could have differed from those estimates.
Specifically, management reviewed the carrying value of rental property using estimated future cash flows, including estimates from disposition, whenever an event or change in circumstance might have indicated that the asset value may not be recoverable. Because of the inherent uncertainties in estimating future cash flows, it was at least reasonably possible that the estimates used would have changed within the near term.
QOCC-1 Associates
NOTES TO FINANCIAL STATEMENTS
December 13, 2000
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Rental Income
Rental income was recognized using the straight-line method over the term of the lease, which included the rent concession period. The amount applicable to the rent concession was recorded as a deferred asset against which future collections were applied. Rental payments received in advance were deferred until earned. The lease between the partnership and the tenant of the property was an operating lease.
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.
NOTE B - RELATED PARTY TRANSACTION
During the reporting period, the partnership incurred charges of approximately $91,113 for management fees, personnel services and supplies provided by affiliates of one of the partners.
FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT
QOCC-1 ASSOCIATES
DECEMBER 31, 1999
QOOC-1 Associates
PAGE
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS
BALANCE SHEET
STATEMENT OF INCOME
STATEMENT OF PARTNERS' EQUITY
STATEMENT OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Partners QOCC-1 Associates
We have audited the accompanying balance sheet of QOCC-1 Associates as of December 31, 1999, 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, 1999, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles.
Reznick, Fedder & Silverman
Bethesda, Maryland January 10, 2000
QOCC-1 Associates
BALANCE SHEET
December 31, 1999
QOCC-1 Associates
STATEMENT OF INCOME
Year ended December 31, 1999
QOCC-1 Associates
STATEMENT OF PARTNERS' EQUITY
Year ended December 31, 1999
QOCC-1 Associates
STATEMENT OF CASH FLOWS
Year ended December 31, 1999
QOCC-1 Associates
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
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 101,114 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.
Specifically, management reviews the carrying value of rental property using estimated future cash flows, including estimates from disposition, whenever an event or change in circumstance might indicate that the asset value may not be recoverable. Because of the inherent uncertainties in estimating future cash flows, it is at least reasonably possible that the estimates used will change within the near term.
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.
QOCC-1 Associates
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 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, which is June 2000, by notifying the landlord as outlined in the lease agreement. During 1999, the tenant notified the partnership that it will terminate the lease at June 2000. Management of the property has hired a leasing agent who is actively marketing the property. Rental income consists of fixed base rent plus a fixed annual increase and variable lease reimbursement escalation, calculated annually.
NOTE C - RELATED PARTY TRANSACTION
During 1999, the partnership incurred charges of approximately $117,882 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.
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, 1999, the uninsured portion of the cash balances held at the banks was $143,283.
FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT
QOCC-1 ASSOCIATES
DECEMBER 31, 1998
QOCC-1 ASSOCIATES
PAGE
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS
BALANCE SHEET
STATEMENT OF INCOME
STATEMENT OF PARTNERS' EQUITY
STATEMENT OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
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.
Reznick, Fedder & Silverman
Bethesda, Maryland January 11, 1999
QOCC-1 Associates BALANCE SHEET December 31, 1998
See notes to financial statements
QOCC-1 Associates STATEMENT OF INCOME Year ended December 31, 1998
See notes to financial statements
QOCC-1 Associates
STATEMENT OF PARTNERS' EQUITY
Year ended December 31, 1998
See notes to financial statements
QOCC-1 Associates
STATEMENT OF PARTNERS' EQUITY
Year ended December 31, 1998
See notes to financial statements
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.
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:
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.
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP)
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION YEAR ENDED DECEMBER 31, 2000
There are no real estate investments owned as of December 31, 2000.
(1) Reconciliation of Real Estate and Accumulated Depreciation:
S-1