-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EGHPx8xAYhHGVRo+EigGTiPswNmWkrtg2ugfcSPqfzPlRpkZEO8rzhGVyoxrVxnE Gh/b3R01SE9c93inp20utQ== 0000746262-97-000004.txt : 19970402 0000746262-97-000004.hdr.sgml : 19970402 ACCESSION NUMBER: 0000746262-97-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970401 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN REALTY INCOME FUND III LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000842741 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 043025607 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18563 FILM NUMBER: 97572032 BUSINESS ADDRESS: STREET 1: 200 BERKELEY STREET CITY: BOSTON STATE: MA ZIP: 02117 BUSINESS PHONE: 8007225457 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the Fiscal Year Ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from N/A Commission file number 0-18563 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Massachusetts 04-3025607 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 200 Clarendon Street, Boston, MA 02116 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (800) 722-5457 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Assignee Units Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filling requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. (See definition of affiliate in Rule 405.) Not applicable, since the securities are non-voting NOTE: If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form. Exhibit Index on Pages 28 - 33 Page 1 of 34 TABLE OF CONTENTS PART I Item 1 Business 3 Item 2 Properties 6 Item 3 Legal Proceedings 9 Item 4 Submission of Matters to a Vote of Security Holders 9 PART II Item 5 Market for the Partnership's Securities and Related Security Holder Matters 9 Item 6 Selected Financial Data 11 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 8 Financial Statements and Supplementary Data 21 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21 PART III Item 10 Directors and Executive Officers of the Registrant 21 Item 11 Executive Compensation 24 Item 12 Security Ownership of Certain Beneficial Owners and Management 24 Item 13 Certain Relationships and Related Transactions 25 PART IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 28 Signatures 34 2 Part I Item 1 - Business The Registrant, John Hancock Realty Income Fund-III Limited Partnership (the "Partnership"), is a Limited Partnership organized on November 4, 1988 under the Massachusetts Uniform Limited Partnership Act. As of December 31, 1996, 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 2,612 Unitholders (the "Investors"). The Assignor Limited Partner holds 5 Limited Partnership Interests for its own account and 2,415,229 Assignee Units (the "Units") for the benefit of the Investors. The John Hancock Limited Partner, the Assignor Limited Partner and the Investors are collectively referred to as the Limited Partners. The initial capital of the Partnership was $2,100, representing capital contributions of $1,000 from the General Partner, $1,000 from the John Hancock Limited Partner and $100 from the Assignor Limited Partner. During the offering period, the John Hancock Limited Partner made additional capital contributions of $3,863,366. The Amended Agreement of Limited Partnership of the Partnership (the "Partnership Agreement") authorized the sale of up to 5,000,000 Assignee Units, representing economic and certain other rights attributable to Investor Limited Partnership Interests. The Units were offered and sold to the public during the period from February 17, 1989 to February 15, 1991 pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933. The Partnership sold the Units for $20 per Unit. No established public market exists on which the Units may be traded. The Partnership is engaged solely in the business of acquiring, improving, holding for investment and disposing of existing, income-producing, retail, industrial, and office properties on an all-cash basis, free and clear of mortgage indebtedness. Although the Partnership's properties were acquired, and are held, free and clear of mortgage indebtedness, the Partnership may incur mortgage indebtedness on its properties under certain circumstances, as specified in the Partnership Agreement. The latest date on which the Partnership is due to terminate is December 31, 2019, unless it is sooner terminated in accordance with the terms of the Partnership Agreement. It is expected that in the ordinary course of the Partnership's business, the properties of the Partnership will be disposed of, and the Partnership terminated, before December 31, 2019. 3 Item 1 - Business (continued) The Partnership's equity real estate investments are subject to various risk factors. Although the risks of equity investing are reduced when properties are acquired on an unleveraged basis, the major risk of owning income-producing properties is the possibility that the properties will not generate income sufficient to meet operating expenses and to fund adequate reserves for repair, replacements, contingencies and anticipated obligations. The income from properties may be affected by many factors, including: i) adverse changes in general economic conditions and local conditions, such as competitive overbuilding, a decrease in employment, or adverse changes in real estate zoning laws, which may reduce the desirability of real estate in the area or ii) other circumstances over which the Partnership may have little or no control, such as fires, earthquakes and floods. To the extent that the Partnership's properties are leased in any substantial portion to a specific retail, industrial or office tenant, the financial failure of any such major tenant, resulting in the termination of the tenant's lease or non-payment of rentals due, would likely cause at least a temporary reduction in cash flow from any such property and might result in a decrease in the market value of that property. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. If any such substances were found in or on any property owned by the Partnership, the Partnership could be exposed to liability and be required to incur substantial remediation costs. The presence of such substances or the failure to undertake proper remediation could adversely affect the ability to finance, refinance or dispose of such property. On December 28, 1988, the Partnership acquired a 0.5% interest in JH Quince Orchard Partners (the "Affiliated Joint Venture"), a joint venture between the Partnership and John Hancock Realty Income Fund-II Limited Partnership ("Income Fund-II"). Pursuant to the terms of the partnership agreement of the Affiliated Joint Venture, the Partnership had the option, exercisable prior to December 31, 1990, to increase its investment and interest in the Affiliated Joint Venture to 50%. During the second quarter of 1989, the Partnership exercised such option and Income Fund-II transferred a 49.5% interest in the Affiliated Joint Venture to the Partnership. The Partnership has since held a 50% interest in the Affiliated Joint Venture. On December 28, 1988, the Affiliated Joint Venture contributed 98% of the invested capital of, and acquired a 75% interest in, QOCC-1 Associates, an existing partnership which owns and operates a three-story office building and related land and improvements located in Gaithersburg, Maryland (the "Quince Orchard Corporate Center"). The partnership agreement of QOCC-1 Associates provides that the Affiliated Joint Venture shall contribute 95% of any required additional capital contributions. Of the cumulative total invested capital in QOCC-1 Associates at December 31, 1996, 97.55% has been contributed by the Affiliated Joint Venture. The Affiliated Joint Venture continues to hold a 75% interest in QOCC-1 Associates. 4 Item 1 - Business (continued) The Quince Orchard Corporate Center is 100% occupied by Boehringer Mannheim Pharmaceuticals, Inc. under a ten-year lease which expires in February 2004. The tenant has two options under the lease agreement, one, to terminate the lease at the end of the seventy-sixth month of the lease, or June 2000, and, two, to extend the term of the lease for an additional five- year period. On December 28, 1989, the Partnership acquired the Palms of Carrollwood Shopping Center, a neighborhood shopping center located in Tampa, Florida. Although real estate market conditions for retail properties in the market in which the Palms of Carrollwood Shopping Center is located have declined since the Partnership acquired the property, occupancy levels and rental rates have stabilized during recent years. However, market conditions remain competitive due to the new construction of retail space. The General Partner anticipates that retail market conditions will remain competitive during 1996 and, therefore, will continue to offer competitive leasing packages in order to attract new tenants as well as retain existing tenants at the property. The Partnership acquired the following warehouse properties on the following dates. On July 17, 1991, the Partnership acquired Yokohama Tire Warehouse located in Louisville, Kentucky. On December 27, 1991, the Partnership acquired the Purina Mills Distribution Building located in St. Louis, Missouri. On March 6, 1992, the Partnership acquired the Allmetal Distribution Building located in Carrollton, Texas. On March 16, 1992, the Partnership acquired the Stone Container Building located in Cincinnati, Ohio. On March 27, 1992, the Partnership acquired the Business Center at Pureland located in Bridgeport, New Jersey. The Partnership's warehouse properties are presently 100% occupied. The following table sets forth the names of the lessees at each of the Partnership's warehouse properties and the earliest date on which the applicable lessee's lease obligations may terminate.
Property Lessee Lease Expiration --------- ------ ---------------- Yokohama Tire Warehouse Yokohama Tire Corp. March 31, 2006 Purina Mills Distribution Building Purina Mills, Inc. December 1, 1998 Allmetal Distribution Building Allmetal, Inc. August 31, 1998 Stone Container Building Stone Container Corp. December 31, 2011 Business Center at Pureland Forbo Wallcoverings, Inc. December 31, 1998 Business Center at Pureland National Polystyrene Recycling Co., L.P. May 31, 2001
The General Partner anticipates that the warehouse properties should provide the Partnership with stable income performance during 1997. 5 Item 1 - Business (continued) Within the power accorded to the General Partner under the terms of the Partnership Agreement, the General Partner contracted, effective as of January 1, 1992, with Hancock Realty Investors Incorporated ("HRI"), a wholly-owned, indirect subsidiary of John Hancock Mutual Life Insurance Company ("John Hancock"), to assist the General Partner in the performance of its management duties as enumerated in the Partnership Agreement. Effective May 28, 1993, HRI subcontracted with John Hancock to assist HRI in the performance of its duties as enumerated in the January 1, 1992 contract. The Partnership has not incurred any additional costs or expenses as a result of these agreements. The General Partner is further described in Item 10 of this Report. Industry segment information has not been provided since the Partnership is engaged in only one industry segment. Item 2 - Properties As of December 31, 1996 the Partnership held the following investments in its portfolio: JH Quince Orchard Partners - -------------------------- On December 28, 1988, the Partnership acquired a 0.5% interest in JH Quince Orchard Partners (the "Affiliated Joint Venture"), a joint venture between the Partnership and John Hancock Realty Income Fund-II Limited Partnership ("Income Fund-II"). The Partnership had an initial 0.5% interest and Income Fund-II had an initial 99.5% interest in the Affiliated Joint Venture. Pursuant to the partnership agreement of the Affiliated Joint Venture, the Partnership had the option, exercisable prior to December 31, 1990, to increase its investment and interest in the Affiliated Joint Venture to 50%. During the second quarter of 1989, the Partnership exercised such option and Income Fund-II transferred a 49.5% interest in the Affiliated Joint Venture to the Partnership. The Partnership has since held a 50% interest in the Affiliated Joint Venture. On December 28, 1988, the Affiliated Joint Venture contributed 98% of the invested capital of, and acquired a 75% interest in, QOCC-1 Associates, an existing partnership that owns and operates the Quince Orchard Corporate Center, a three-story office building and related land and improvements located in Gaithersburg, Maryland. The partnership agreement of QOCC-1 Associates provides that the Affiliated Joint Venture shall contribute 95% of any required additional capital contributions. Of the cumulative total invested capital in QOCC-1 Associates at December 31, 1996, 97.55% has been contributed by the Affiliated Joint Venture. The Affiliated Joint Venture continues to hold a 75% interest in QOCC-1 Associates. The average occupancy for the Quince Orchard Corporate Center for the year ended December 31, 1996 was 100%. 6 Item 2 - Properties (continued) Palms of Carrollwood - -------------------- On December 28, 1989, the Partnership acquired the Palms of Carrollwood Shopping Center, located in Tampa, Florida, from a non-affiliated seller. The property contains approximately 161,000 rentable square feet, including approximately 10,000 square feet of office space, situated on a 15 acre site. The average occupancy for the Palms of Carrollwood Shopping Center for the year ended December 31, 1996 was 80%. As of the date hereof, the property is 78% occupied. Yokohama Tire Warehouse - ----------------------- On July 17, 1991, the Partnership acquired the Yokohama Tire Warehouse, located in Louisville, Kentucky, from a non-affiliated seller. The property is situated on 24 acres of land and contains an aggregate of 309,791 rentable square feet, of which 297,391 square feet is warehouse space and 12,400 square feet is office space. The warehouse is 100% leased to the Yokohama Tire Corporation under a lease which expires on March 31, 2006. Under the terms of the lease agreement, the Yokohama Tire Corporation had the option to purchase the property for $10,228,173 on April 1, 1996, but did not choose to exercise such option. Yokohama Tire Corporation has additional options to purchase the property for $10,478,173 on April 1, 1999 and for $10,578,173 on April 1, 2001. In addition, the Yokohama Tire Corporation has the option, exercisable at any time during the term of the lease, to expand the square footage of the facility by any area of up to 220,000 square feet. Purina Mills Distribution Building - ---------------------------------- On December 27, 1991, the Partnership acquired the Purina Mills Distribution Building, located in St. Louis, Missouri, from a non- affiliated seller. The property is situated on 7.3 acres of land and contains an aggregate of 126,400 rentable square feet, of which 114,800 is warehouse space and 11,600 square feet is office space. Purina Mills Distribution Building is 100% leased to Purina Mills, Incorporated ("PMI") under a lease which expires on November 30, 2001. The lease contains a one-time option to terminate the lease on December 1, 1998 upon the payment of $240,815 to the Partnership. During 1993, PMI was sold by its parent company, BP Nutrition, Incorporated ("BPN"), and during March 1994, PMI assigned its right, title and interest in the lease to BPN. PMI remains fully liable to perform all of its obligations under the lease and BPN, as assignee, is also liable to perform all obligations under the lease. In addition, BP America, Incorporated, the parent company of BPN, has provided a guaranty to the Partnership for any monetary obligations under the lease. PMI has vacated the property and has subleased the space through November 1998. 7 Item 2 - Properties (continued) Allmetal Distribution Building - ------------------------------ On March 6, 1992, the Partnership acquired the Allmetal Distribution Building, located in Carrollton, Texas, from a non-affiliated seller. The property is situated on 3 acres of land and contains an aggregate of 56,531 rentable square feet, of which 51,531 square feet is warehouse space and 5,000 square feet is office space. The property is 100% leased to Allmetal, Inc. under a lease which expires on August 31, 1998. Stone Container Building - ------------------------ On March 16, 1992, the Partnership acquired the Stone Container Building, located in Cincinnati, Ohio, from a non-affiliated seller. The property is situated on 5.5 acres of land. The property is 100% leased to Stone Container Corporation under a lease which expires on December 31, 2011. During 1995, Stone Container Corporation requested approval to construct additional office space within the existing 80,000 square foot area of the building. The General Partner agreed to construct the additional office space in exchange for i) an increase in the tenant's rental rate in an amount equivalent to the total cost of constructing the additional office space, through the end of the existing term of the lease (December 2001) and ii) the tenant exercising its two five-year options to extend the term of the lease to December 2011. As a result, the net rentable square feet at the property increased by approximately 2,000 square feet. The building currently contains approximately 76,000 square feet of warehouse space and 6,000 square feet of office space. Business Center at Pureland - --------------------------- On March 27, 1992, the Partnership acquired the Business Center at Pureland located in Bridgeport, New Jersey, from a non-affiliated seller. The property is situated on 10.5 acres of land and contains two buildings consisting of an aggregate of 119,651 rentable square feet of warehouse space. One building (consisting of 60,535 sq. ft.) is 100% leased to Forbo Wallcoverings, Inc. under a lease which expires on December 31, 1998. The second building (consisting of 59,116 sq. ft.) is 100% leased to National Polystyrene Recycling Company, L.P. under a lease which expires on May 31, 2001. The foregoing investments of the Partnership are further described in Item 7 of this Report. 8 Item 3 - Legal Proceedings In February 1996, a putative class action complaint was filed in the Superior Court in Essex County, New Jersey by a single investor in a limited partnership affiliated with the Partnership. The complaint named as defendants the Partnership, the General Partner, certain other Affiliates of the General Partner, and certain unnamed officers, directors, employees and agents of the named defendants. The plaintiff sought unspecified damages stemming from alleged misrepresentations and omissions in the marketing and offering materials associated with the Partnership and two limited partnerships affiliated with the Partnership. The complaint alleged, among other things, that the marketing materials for the Partnership and the affiliated limited partnerships did not contain adequate risk disclosures. On March 18, 1997, the court certified a class of investors who were original purchasers in the Partnership. The certification order should not be construed as suggesting that any member of the class is entitled to recover, or will recover, any amount in the action. The General Partner believes the allegations are totally without merit and will continue to vigorously contest the action. There are no other material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Partnership, to which the Partnership is a party or to which any of its properties is subject. Part II 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 1996. Item 5 - Market for the Partnership's Securities and Related Security Holder Matters (a) Market Information The Partnership's outstanding securities consist of 2,415,229 Units originally sold for $20 per Unit. The Units were offered and sold to the public during the period from February 17, 1989 to February 15, 1991. No established public market exists on which the Units may be traded. Consequently, holders of Units may not be able to liquidate their investments in the event of an emergency, or for any other reason. Additionally, the assignment or other transfer of Units would be subject to compliance with the minimum investment and suitability standards imposed by the Partnership and by applicable law, including state "Blue Sky" laws. (B) Number of Security Holders Number of Number of Units record holders as of outstanding as of Title of Class December 31, 1996 December 31, 1996 -------------- ----------------- ----------------- Assignee Units 2,612 2,415,229 9 Item 5 - Market for the Partnership's Securities and Related Security Holder Matters (Continued) (c) Dividend History and Restrictions During the fiscal years ended December 31, 1996 and 1995, the Partnership distributed cash in the aggregate amounts of $3,645,723 and $3,050,815, respectively, from Distributable Cash from Operations (as defined in the Partnership Agreement). These amounts were allocated 5% to the General Partner and 95% to the Investors and the John Hancock Limited Partner, in accordance with the terms of the Partnership Agreement. The following table reflects cash distributions made during the two year period ended December 31, 1996:
Amount Paid to the Date of Amount of Amount Paid to John Hancock Amount Paid Distribution Distribution Distribution General Partner Limited Partner to Investors Per Unit ------------ ------------ -------------- ---------------- ------------ ------- February 15, 1995 $762,704 $38,135 $- $724,569 $0.30 May 15, 1995 762,704 38,135 - 724,569 0.30 August 15, 1995 762,704 38,136 - 724,568 0.30 November 15, 1995 762,703 38,135 - 724,568 0.30 February 15, 1996 762,704 38,135 - 724,569 0.30 May 15, 1996 889,821 44,491 - 845,330 0.35 August 15, 1996 1,032,192 51,610 135,253 845,329 0.35 November 15, 1996 961,006 48,050 67,626 845,330 0.35
During 1996, the General Partner estimated that the Partnership's Cash from Operations for the year then ending would be sufficient to provide the Limited Partners with cash distributions at an annualized rate of 7%. Therefore, effective with the May 15, 1996 quarterly cash distribution, the Partnership increased cash distributions to Investors from an annualized rate of 6% to an annualized rate of 7%. The Partnership also made cash distributions to the John Hancock Limited Partner at an annualized rate of 7% during 1996. The General Partner anticipates that the Partnership's Cash from Operations will be sufficient to make cash distributions in 1997 comparable to those made in 1996. For a further discussion of the financial condition and results of operations of the Partnership see Item 7 of this Report. 10 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, 1996. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Financial Statements and Notes thereto, which are included in Items 7 and 8, respectively, of this Report.
Years Ended December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Rental income $3,606,964 $3,404,659 $3,407,133 $3,397,962 $3,211,958 Income from joint venture 701,988 755,198 541,187 221,739 432,782 Interest income 145,734 162,332 105,917 107,122 195,768 Net income 2,616,017 2,776,632 2,543,261 2,228,039 2,334,283 Net income per Unit (b) 0.89 1.07 0.98 0.86 0.90 Ordinary tax income (a) 2,969,975 2,782,263 2,605,072 2,396,730 2,476,791 Ordinary tax income per Unit (b) 1.04 1.08 1.01 0.93 0.96 Cash distributions per Unit (c) 1.35 1.20 1.20 1.20 1.20 Cash and cash equivalents at December 31 2,663,859 2,431,272 2,637,722 3,270,201 3,146,887 Total assets at December 31 40,896,886 41,824,552 42,079,427 42,528,624 43,378,299
(a) The ordinary tax income for the Partnership was allocated as follows:
Years Ended December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- General Partner $189,088 $178,928 $168,666 $155,012 $156,969 John Hancock Limited Partner - - - - - Investor Limited Partners 2,500,483 2,603,335 2,436,406 2,241,718 2,319,822 ---------- ---------- ---------- ---------- ---------- Total $2,969,975 $2,782,263 $2,605,072 $2,396,730 $2,476,791 ========== ========== ========== ========== ==========
(b) The actual ordinary tax income per Unit has not been presented because the actual ordinary tax income is allocated between tax-exempt and tax- paying entities based upon the respective number of Units held by each entity at December 31, 1996, 1995, 1994, 1993 and 1992. The ordinary tax income per Unit for the fiscal years ended December 31, 1996, 1995, 1994, 1993 and 1992 was computed by dividing the Investors' share of ordinary tax income by the number of Units outstanding during the year. (c) Represents the actual cash distribution per Unit for the years ended December 31, 1996, 1995, 1994, 1993 and 1992. 11 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations General - ------- During the offering period, from February 17, 1989 to February 15, 1991, the Partnership sold 2,415,229 Units representing gross proceeds (exclusive of the John Hancock Limited Partner's contribution which was used to pay sales commissions) of $48,304,580. The proceeds of the offering were used to acquire investment properties, fund reserves, and pay acquisition fees and organizational and offering expenses. These investments are described more fully in Items 1 and 2 and Notes 5 and 6 to the Financial Statements included in Item 8 of this Report. At December 31, 1996, the Partnership had $2,663,859 in cash and cash equivalents, $17,739 in restricted cash and $90,220 in long-term restricted cash. Liquidity and Capital Resources - ------------------------------- The Partnership has a working capital reserve with a current balance of approximately 3.3% of the offering proceeds. The General Partner anticipates that such amount should be sufficient to satisfy the Partnership's general liquidity requirements. Based upon the balance of the working capital reserve and the projected level of cash flows to be generated from the Partnership's properties, the General Partner determined that the Partnership's Cash from Operations would be sufficient to provide the Limited Partners with quarterly cash distributions at an annualized rate of 7%. Therefore, effective with the May 15, 1996 cash distribution, the Partnership increased quarterly cash distributions to Investors from an annualized rate of 6% to an annualized rate of 7%. The Partnership also made cash distributions to the John Hancock Limited Partner at an annualized rate of 7% during 1996. The Partnership's liquidity would, however, be materially adversely affected if there were a significant reduction in revenues or significant unanticipated operating costs, unanticipated leasing costs or unanticipated capital expenditures. If any or all of these events were to occur, to the extent that the working capital reserve would be insufficient to satisfy the cash requirements of the Partnership, it is anticipated that additional funds would be obtained through a reduction of cash distributions to Investors, bank loans, short-term loans from the General Partner or its affiliates, or the sale or financing of Partnership investments. During 1996, cash in the aggregate amount of $372,615 was used for the payment of leasing costs incurred at the Business Center at Pureland, the Stone Container Building and the Palms of Carrollwood Shopping Center properties. The General Partner anticipates that the Partnership will incur an aggregate of approximately $487,000 in leasing costs at two of its properties during 1997, the majority of which is forecasted to be incurred at the Palms of Carrollwood property. The current balance in the working capital reserve should be sufficient to pay such leasing costs. 12 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------- During 1996, approximately $112,000 of cash generated from the Partnership's operations was used to fund non-recurring maintenance and repair expenses incurred at Palms of Carrollwood. The General Partner anticipates that the Partnership will incur non-recurring repair and maintenance expenses in the aggregate amount of approximately $157,000 at its properties during 1997. These expenses will be funded from the operations of the Partnership's properties and are not expected to have a significant impact on the Partnership's liquidity. Cash in the amount of $3,645,723, generated from the Partnership's operations, was distributed to the General Partner, the John Hancock Limited Partner and the Investors during the year ended December 31, 1996. These amounts were distributed in accordance with the Partnership Agreement and were allocated as follows: Investors $3,260,558 John Hancock Limited Partner 202,879 General Partner 182,286 ---------- Total $3,645,723 ========== The General Partner anticipates that the Partnership will be able to make comparable distributions during each of the four quarters in 1997. One of the anchor tenants at the Palms of Carrollwood vacated the property during June 1995. In July 1995, the General Partner secured a new anchor tenant to occupy this space under a lease commencing in November 1995. Three tenants' leases at the Palms of Carrollwood contain clauses that make reference to the situation in which the former anchor tenant ceases operations at the property. The following table sets forth the approximate amount of square feet leased by these three tenants, their applicable lease expiration dates and the applicable lease clauses relating to the replacement of the former anchor tenant:
Amount of Lease Square Feet Expiration Leased Date Lease Clause Relating to Replacement of Former Anchor Tenant ------ ---- ------------------------------------------------------------ 38,000 November 2004 Reduce rental payments by 25% if an acceptable replacement tenant, in accordance with the terms of the lease, is not secured. 10,500 January 2005 Reduce rental payments by 25% if the replacement tenant is not a food store, in accordance with the terms of the lease, or terminate lease obligations if former anchor tenant ceases to operate for more than 90 days. 10,500 February 1997 Terminate lease obligations if a similar replacement tenant is not secured.
13 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------- The tenant leasing approximately 38,000 square feet reduced its rental payments effective November 28, 1995. In the General Partner's opinion, the replacement tenant is acceptable (in accordance with the terms of the tenant's lease) and, therefore, the tenant does not have the right to such a reduction. During March 1996, the General Partner filed a complaint against this tenant demanding payment in full of all unpaid rent. The General Partner will continue to use all available legal remedies in order to obtain collection of all outstanding amounts due under the lease agreement resulting from this rental reduction. The tenant leasing approximately 10,500 square feet, and whose lease is due to expire in January 2005, reduced its rental payments from May through August 1996. Subsequently, the General Partner negotiated an agreement pursuant to which all future rental payments will be made by the tenant at 100% of the contracted amount, but unpaid deficiencies in back rent from May through August 1996, in the aggregate amount of approximately $6,500, will be forgiven. In addition, the General Partner agreed that the tenant could vacate an adjacent space of approximately 1,300 square feet without further rental liability. The other tenant leasing approximately 10,500 square feet made its scheduled rental payments through February 1997, at which time the lease expired. With respect to the 38,000 square foot tenant mentioned above, the General Partner does not believe that any reduction in its rental payments resulting from the replacement of the original anchor tenant will have a materially adverse affect on the Partnership's liquidity. In addition, the General Partner obtained legal judgments against two former tenants that vacated the Palms of Carrollwood and ceased paying rent prior to the expiration of their respective leases. During January 1996, the Partnership received approximately $7,100 from a bankruptcy court, representing the final settlement of the Partnership's judgment amount against one of these delinquent tenants. With respect to the other delinquent tenant, although the Partnership continues to pursue collection of a summary judgment in the amount of $57,000, based upon such tenant's financial condition, it is doubtful that the Partnership will be able to collect all, or any, of this amount. As of the date hereof, the Palms of Carrollwood is 78% occupied. During the remainder of 1997, no significant leases are scheduled to expire. The General Partner will continue to offer competitive leasing packages in an effort to secure lease renewals with existing tenants as well as to secure new tenants for the remaining vacant space. 14 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------- The Partnership's Affiliated Joint Venture property and warehouse properties are presently 100% occupied. The following table sets forth the names of the lessees at each of the Partnership's warehouse properties and the earliest date on which the applicable lessee's lease obligations may terminate.
Property Lessee Lease Expiration --------- ------ ---------------- Yokohama Tire Warehouse Yokohama Tire Corp. March 31, 2006 Purina Mills Distribution Building Purina Mills, Inc. December 1, 1998 Allmetal Distribution Building Allmetal, Inc. August 31, 1998 Stone Container Building Stone Container Corp. December 31, 2011 Business Center at Pureland Forbo Wallcoverings, Inc. December 31, 1998 Business Center at Pureland National Polystyrene Recycling Co., L.P. May 31, 2001
The General Partner anticipates that the Partnership's warehouse properties and Affiliated Joint Venture investment should, in the aggregate, provide the Partnership with stable income performance during 1997. During 1995, a tenant holding a lease for approximately 60,500 square feet, or 51%, of the Business Center at Pureland property, renewed its lease for an additional three-year term which commenced in January 1996. During 1996, the Partnership paid approximately $169,000 in leasing costs in connection with this renewal. During 1995, Stone Container Corporation, the sole tenant at the Stone Container Building, requested approval from the Partnership to construct additional office space within the existing 80,000 square foot area of the building. The General Partner agreed to construct the additional office space in exchange for i) an increase in the tenant's rental rate in an amount equivalent to the total cost of constructing the additional office space through the end of the then existing term of the lease (December 2001) and ii) the tenant exercising its two five-year lease options to extend the term of the lease to December 2011. The General Partner incurred approximately $124,000 in construction costs in connection with this transaction during 1996. 15 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------- The General Partner had the Stone Container Building property independently appraised during the first quarter of 1996. Based upon the appraiser's investigation and analysis, the property's market value was estimated to be approximately $2,100,000. Further, the appraiser estimated that, upon completion of the additional office space described above, the property's market value would be approximately $2,200,000. The carrying value of the Stone Container Building property of approximately $1,956,000 at December 31, 1996 was evaluated in comparison to its estimated future undiscounted cash flows, the independent appraisal and a recent internal appraisal. Based upon such evaluation, the General Partner determined that the property's estimated future undiscounted cash flows were expected to exceed its carrying value. Therefore, no impairment in value existed and a write- down in value was not required. The Partnership's cumulative investment in the property, before accumulated depreciation, is approximately $2,089,000. The General Partner had the Allmetal Distribution Building property independently appraised during the second quarter of 1996. Based upon the appraiser's investigation and analysis, the property's market value was estimated to be approximately $1,750,000. The net book value of the Allmetal Distribution Building property of approximately $1,415,000 at December 31, 1996 was evaluated in comparison to its estimated future undiscounted cash flows, the independent appraisal and a recent internal appraisal. Based upon such evaluation, the General Partner determined that the property's estimated future undiscounted cash flows were expected to exceed its carrying value. Therefore, no impairment in value existed and a write-down in value was not required. The Partnership's cumulative investment in the property, before accumulated depreciation, is approximately $1,636,000. The General Partner had the Yokohama Tire Warehouse property independently appraised during the third quarter of 1996. Based upon the appraiser's investigation and analysis, the property's market value was estimated to be approximately $10,000,000. The net book value of the Yokohama Tire Warehouse property of approximately $7,786,000 at December 31, 1996 was evaluated in comparison to its estimated future undiscounted cash flows, the independent appraisal and a recent internal appraisal. Based upon such evaluation, the General Partner determined that the property's estimated future undiscounted cash flows were expected to exceed its carrying value. Therefore, no impairment in value existed and a write-down in value was not required. The Partnership's cumulative investment in the property, before accumulated depreciation, is approximately $9,352,000. The General Partner evaluated the carrying value of each of the Partnership's other properties and its investment in the Affiliated Joint Venture as of December 31, 1996 by comparing such carrying value to the related property's future undiscounted cash flows and the then most recent internal appraisal in order to determine whether a impairment in value existed. Based upon such evaluations, the General Partner determined that no impairment in values existed and, therefore, no write-downs were recorded as of December 31, 1996. 16 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------- The General Partner will continue to conduct property valuations, using internal or independent appraisals, in order to determine whether an impairment in value exists on any of the Partnership's properties. Results of Operations - --------------------- Average occupancy for the Partnership's investments was as follows: Years ended December 31, 1996 1995 1994 ---- ---- ---- Palms of Carrollwood Shopping Center 80% 76% 80% Yokohama Tire Warehouse 100% 100% 100% Purina Mills Distribution Building 100% 100% 100% Allmetal Distribution Building 100% 100% 100% Stone Container Building 100% 100% 100% Business Center at Pureland 100% 100% 100% Quince Orchard Corporate Center (Affiliated Joint Venture) 100% 100% 83% Results of Operations - 1996 compared with 1995 Net income for the year ended December 31, 1996 was $2,616,017 as compared to net income of $2,776,632 in 1995. Rental income for the year ended December 31, 1996 increased by $202,305, or 6%, as compared to 1995. This increase is primarily due to increases in rental income at the Palms of Carrollwood, Yokohama Tire Warehouse, Allmetal Distribution Building, Stone Container Building and Business Center at Pureland properties. Rental income increased at the Palms of Carrollwood property primarily due to the fact that a new anchor tenant at the property pays a rental rate greater than that which the former anchor tenant paid. In addition, a 4% increase in average occupancy at the property between periods contributed to the increase in rental income. However, this increase in rental income at the Palms of Carrollwood was partially offset by another anchor tenant at the property reducing its rental payments, as described above. Increases in the rental rates paid by the sole tenants at the Yokohama Tire Warehouse, Allmetal Distribution Building and Stone Container Building properties and by one of the tenants at the Business Center at Pureland property, in accordance with the terms of their leases, resulted in increased rental income from these properties during 1996 as compared to 1995. Rental income from the Purina Mills Distribution Building was consistent between the years. The Partnership's allocation of income from the Affiliated Joint Venture for the year ended December 31, 1996 decreased by $53,210, or 7%, as compared to 1995. This decrease is due the manner in which the partnership agreement of QOCC-1 Associates calculates the income allocation to its partners. (see Note 6 included in Item 8 of this Report and the audited financial statements of QOCC-1 Associates filed as an Exhibit to this Report for additional information). 17 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) - --------------------------------- Interest income for the year ended December 31, 1996 decreased by $16,598, or 10%, as compared to the same period in 1995. This decrease is primarily due to a decrease in the interest rates earned on the Partnership's working capital reserves as well as a decrease in the amount of the Partnerships working capital reserves. The Partnership's share of property operating expenses increased by $59,289, or 22%, as compared to 1995 primarily due to an increase in such expenses at the Palms of Carrollwood Shopping Center. Property operating expenses at each of the Partnership's warehouse properties were consistent between years. Property operating expenses incurred at the Palms of Carrollwood Shopping Center during 1996 increased by 35% as compared to 1995. The property incurred approximately $112,000 and $6,000 of non-recurring maintenance and repair expenses during 1996 and 1995, respectively. These amounts were incurred to maintain the property's competitive position within its market. Excluding these amounts, the partnership's share of property operating expenses decreased by 24%. This decrease is primarily due to the increase in tenant reimbursements paid by the new anchor tenant as compared to the former anchor tenant. Amortization of deferred expenses for the year ended December 31, 1996 increased by $118,042, or 56%, as compared to 1995. This increase was primarily due to the leasing activity which occurred at the Palms of Carrollwood and the Business Center at Pureland properties during 1995 and the amortization of the leasing costs associated with these new leases. General and administrative expenses for the year ended December 31, 1996 increased by $115,781, or 48%, as compared to 1995. This increase is primarily due to legal fees incurred by the Partnership in connection with the class action complaint in which the Partnership is one of the defendants (See Item 3 of this Report for information regarding the class action complaint). Excluding such legal fees, general and administrative expenses were consistent between periods. Results of Operations - 1995 compared with 1994 Net income for the year ended December 31, 1995 was $2,776,632 as compared to net income of $2,543,261 in 1994. The Partnership's allocation of income from the Affiliated Joint Venture for the year ended December 31, 1995 increased by $214,011, or 40%, as compared to 1994 primarily due to a 17% increase in average occupancy at the Quince Orchard Corporate Center. Interest income for the year ended December 31, 1995 increased by $56,415, or 53%, as compared to 1994 primarily due to an increase in the interest rates earned on the Partnership's working capital reserves as well as an increase in the amount of such reserves. 18 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) - --------------------------------- Amortization of deferred expenses in 1995 decreased by $16,501, or 7%, as compared to 1994. Included in the 1994 results is a deferred expense write- off of $47,880 resulting from tenants who vacated their spaces prior to the termination of their respective leases. Excluding this write-off, amortization of deferred expenses in 1995 increased by 18% as compared to 1994, primarily due to an increase in deferred expenses relating to leasing costs incurred at the Palms of Carrollwood and the Business Center at Pureland properties. General and administrative expenses in 1995 increased by $52,765, or 28%, as compared to 1994. This increase is primarily due to an increase in the time required to be expended by the General Partner and the expenses incurred in connection with securing a new anchor tenant at the Palms of Carrollwood Shopping Center and in attempting to collect delinquent rental amounts from two former tenants at the Palms of Carrollwood. The General Partner believes that inflation has had no significant impact on income from operations during the last three fiscal years and the General Partner anticipates that it will not have a significant impact during 1997. 19 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Cash Flow - --------- The following table provides the calculations of Cash from Operations and Distributable Cash from Operations, which are calculated in accordance with Section 17 of the Partnership Agreement:
Years Ended December 31, 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Net cash provided by operating activities (a) $4,250,925 $3,743,803 $3,580,615 $3,382,661 $3,334,499 Net change in operating assets and liabilities (a) (209,228) 111,983 (10,043) 40,419 111,775 ---------- ---------- ---------- ---------- ---------- Net cash provided by operations (a) 4,041,697 3,855,786 3,570,572 3,423,080 3,446,274 Increase in working capital reserves (197,669) (804,971) (519,757) (372,265) (395,461) ---------- ---------- ---------- ---------- ---------- Cash from operations (b) 3,844,028 3,050,815 3,050,815 3,050,815 3,050,813 Decrease in working capital reserves - - - - - ---------- ---------- ---------- ---------- ---------- Distributable cash from operations (b) $3,844,028 $3,050,815 $3,050,815 $3,050,815 $3,050,813 ========== ========== ========== ========== ========== Allocation to General Partner $192,201 $152,541 $152,541 $152,541 $152,541 Allocation to John Hancock Limited Partner 270,506 - - - - Allocation to Investors 3,381,321 2,898,274 2,898,274 2,898,274 2,898,272 ---------- ---------- ---------- ---------- ---------- $3,844,028 $3,050,815 $3,050,815 $3,050,815 $3,050,813 ========== ========== ========== ========== ==========
(a) Net cash provided by operating activities, net change in operating assets and liabilities, and net cash provided by operations are as calculated in the Statements of Cash Flows included in Item 8 of this Report. (b) As defined in the Partnership Agreement. Distributable Cash from Operations should not be considered as an alternative to net income (i.e. not an indicator of performance) or to reflect cash flows or availability of discretionary funds. On February 14, 1997, the Partnership made a cash distribution in the aggregate amount of $961,006 to the General Partner and Limited Partners. This distribution was based on Distributable Cash from Operations for the year ended December 31, 1996 less amounts previously distributed. This amount was allocated 5% to the General Partner and 95% to the Limited Partners, in accordance with the terms of the Partnership Agreement. Of the amount distributed to the Limited Partners, the Investors received $845,330, and the John Hancock Limited Partner received $67,626. Such amounts represent a 7% annualized return on Limited Partners' Invested Capital. The General Partner anticipates that the Partnership will be able to make cash distributions during 1997 comparable to those made during 1996. 20 Item 8 - Financial Statements and Supplementary Data The response to this Item appears beginning on page F-1 of this Report. The financial statements of QOCC-1 Associates, an investee of the Registrant, as of and for the years ending December 31, 1996, 1995 and 1994 are included herewith. Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No events requiring disclosure under this Item have occurred. Part III Item 10 - Directors and Executive Officers of the Partnership (a-b) Identification of Directors and Executive Officers By virtue of its organization as a limited partnership, the Partnership has no directors or executive officers. As indicated in Item 1 of this Report, the General Partner of the Partnership is John Hancock Realty Equities, Inc., a Delaware corporation. Pursuant to the terms of the Partnership Agreement, the General Partner is solely responsible for the management of the Partnership's business. The names and ages of the directors and executive officers of the General Partner are as follows: Name Title Age ---- ----- --- William M. Fitzgerald President and Director 53 Malcolm G. Pittman, III Director 45 Susan M. Shephard Director 44 Richard E. Frank Treasurer (Chief Accounting Officer) 35 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: 21 Item 10 - Directors and Executive Officers of the Partnership (continued) Name Title Age ---- ----- --- Edward P. Dowd Senior Vice President of 54 John Hancock's Real Estate Investment Group Kevin McGuire Vice President of John Hancock's 50 Real Estate Investment Group, President of John Hancock Realty Services Corp. and subsidiaries Stephen Kindl Senior Investment Officer of John 39 Hancock's Real Estate Investment Group, Assistant Vice President of John Hancock Realty Equities, Inc. (d) Family relationships There exist no family relationships among any of the foregoing directors or officers of the General Partner. (e) Business Experience William M. Fitzgerald (age 53), joined John Hancock in 1968. He has been President and a Director of the General Partner, and a Senior Investment Officer of John Hancock, since June 1993 and a Director of Hancock Realty Investors Incorporated since November 1991. His term as a Director of the General Partner expires in May 1997. From 1987 to 1991, Mr. Fitzgerald was a Senior Vice President of John Hancock Properties, Inc. Prior to that time, he held a number of positions including Senior Real Estate Management Officer and Real Estate Management Officer of John Hancock. He holds an M.B.A. from Boston University and an A.B. from Boston College. Malcolm G. Pittman, III (age 45), joined John Hancock in 1986 as an Assistant Counsel. He has been a Director of the General Partner since November 1991. His term as a Director of the General Partner expires in May 1997. Mr. Pittman has been a Counsel of John Hancock's Mortgage and Real Estate Law Division since 1993. From 1989 to 1993, he was an Associate Counsel of John Hancock. He holds a J.D. from Yale Law School and a B.A. from Oberlin College. Susan M. Shephard (age 44), joined John Hancock in 1985 as an Attorney. She has been a Director of the General Partner since November 1991. Her term as a Director of the General Partner expires in May 1997. 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. 22 Item 10 - Directors and Executive Officers of the Partnership (continued) Richard E. Frank (age 35), joined John Hancock in 1983. He has been Treasurer of the General Partner since June 1993. Mr. Frank has been an Associate Investment Officer of John Hancock since January 1995. From 1993 to 1995, he was a Senior Financial Administrator of John Hancock; from 1991 to 1993, he was an Associate of Hancock Realty Investors, Incorporated; from 1990 to 1991, he held the position of Assistant Treasurer of John Hancock Realty Services Corp. He holds a B.S. from Stonehill College. Edward P. Dowd (age 54), joined John Hancock in 1970. He has been a Director of Hancock Realty Investors, Incorporated since 1991, and a Director of John Hancock Realty Services Corp. and subsidiaries and John Hancock Property Investors Corp. since 1987. Mr. Dowd has been a Senior Vice President of John Hancock since 1991. From 1989 to 1990, he was a Vice President of John Hancock and from 1986 to 1989, he was a Second Vice President of John Hancock. Prior to that time, he held a number of positions including Senior Real Estate Investment Officer and Real Estate Investment Officer of John Hancock. From July 1982 to May 1986, Mr. Dowd was President of the General Partner. He holds an A.B. from Boston College. Kevin McGuire (age 50), joined John Hancock in 1968. He has been a Vice President of John Hancock since June 1993 and President of John Hancock Realty Services Corp. and subsidiaries since July 1993. He has been a Managing Director and a Director of Hancock Realty Investors, Incorporated since 1991, and a Director of John Hancock Property Investors Corp. since 1987. Mr. McGuire served as an interim basis President of the General Partner from May 1991 to November 1991 and was President of John Hancock Properties, Inc. from 1987 to 1991. Prior to that time, he held a number of positions including Second Vice President, Senior Real Estate Investment Officer and Real Estate Investment Officer of John Hancock. He holds an M.B.A. from Babson College and an A.B. from Boston College. Stephen Kindl (age 39), joined John Hancock in 1995 as a Senior Real Estate Investment Officer. Prior to joining John Hancock, he held a number of positions with Aetna Real Estate Investment, Inc., including Managing Director and Director. He holds an M.B.A. from the University of Hartford and a B.S. from the University of Connecticut (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. 23 Item 10 - Directors and Executive Officers of the Partnership (continued) To the Partnership's knowledge, no officer or director of the General Partner has or had an ownership interest in the Partnership during the 1996 fiscal year or as of the date hereof. In addition, to the Partnership's knowledge, the County Employees Annuity and Benefit Fund of Cook County, the greater than 10% holder of Units, was not required to file any reports relating to Section 16(a) filing requirements during the 1996 fiscal year. Item 11 - Executive Compensation None of the officers or directors of the General Partner or any of the members of the Real Estate Investment Committee referred to in Item 10(c) receive any current direct remuneration from the Partnership in their capacities as officers, directors or members of the Real Estate Investment Committee, pursuant to any standard arrangements or otherwise, nor is any such remuneration currently proposed. In addition, the Partnership has not given and does not propose to give any options, warrants or rights, including stock appreciation rights, to any such person in such capacities. No remuneration plan or arrangement exists with any such person in such capacities resulting from resignation, retirement or any other termination. Therefore, tables relating to these topics have been omitted. Compensation Committee Interlocks and Insider Participation: The Partnership did not have a Compensation Committee in 1996 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 1996 fiscal year in deliberations regarding the General Partner's compensation as it relates to the Partnership. 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, 1996, except as follows: Title of Name and Address of Amount and Nature of Percent of Class Beneficial Owner Beneficial Ownership Class ----- ---------------- -------------------- ----- Assignee County Employees 806,451 Units 33.39% Units Annuity and Benefit owned directly Fund of Cook County 118 N. Clark St. Chicago, IL (b) Security ownership of management By virtue of its organization as a Limited Partnership, the Partnership has no officers or directors. Neither the General Partner nor any officer or director of the General Partner possesses the right to acquire a beneficial ownership of Units. 24 Item 12 - Security Ownership of Certain Beneficial Owners and Management (continued) (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 of control of the Partnership. Item 13 - Certain Relationships and Related Transactions See Note 4 of the Notes to the Financial Statements included in Item 8 of this Report for a description of certain transactions and related amounts payable by the Partnership to the General Partner and its Affiliates during 1996, 1995 and 1994. 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 Limited 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. 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 1996, 1995 or 1994. 25 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 1996, 1995 or 1994. 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 $179,330, $156,119 and $121,196 of such expenses during the years ended December 31, 1996, 1995 and 1994, 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 1996, 1995 or 1994. 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 $192,201 for the year ended December 31, 1996 and $152,541 for each of the two years ended December 31, 1995 and 1994, respectively. In accordance with the terms of the Partnership Agreement, the John Hancock Limited Partner was entitled to a share of Distributable Cash from Operations for the year ended December 31, 1996. The John Hancock Limited Partner's share for 1996 was $270,506. Distributable Cash from Operations was insufficient to provide the John Hancock Limited Partner with such a distribution during the either of the years ended 1995 or 1994. 26 Item 13 - Certain Relationships and Related Transactions (continued) 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). No Sales or Financings have occurred during the years ended 1996, 1995 or 1994 and, therefore, no such distributions were made. 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 $189,088, $178,928 and $168,666 during the years ended December 31, 1996, 1995 and 1994, respectively. In accordance with the terms of the Partnership Agreement, the John Hancock Limited Partner was allocated $280,404 of profits during the year ended December 31, 1996. The John Hancock Limited Partner was not allocated any such profits or losses during either of the years ended 1995 or 1994. 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, 1996: Years Ended December 31, 1996 1995 1994 ---- ---- ---- Operating Expenses $179,330 $156,119 $121,196 General Partner Share of Distributable Cash from Operations 192,201 152,541 152,541 John Hancock Limited Partner's share of Distributable Cash from Operations 270,506 - - General Partner Share of Profits or Losses for tax purposes 189,088 178,928 168,666 John Hancock Limited Partner's share of Profits or Losses for tax purposes 280,404 - - 27 Part IV Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) and (2) - Listed on Index to Financial Statements and Financial Statement Schedules. (3) - Listing of Exhibits Exhibit Number Page Number or Under Incorporation by Regulation S-K Description Reference - --------------- ----------- ---------- 4 Instruments defining the rights of security holders 4.1 Amended and Restated Exhibit A to the Agreement of Limited Prospectus Partnership* filed under the Partnership's Amendment No. 1 to Form S-11 Registration Statement (File 33-25298) 4.2 Subscription Agreement Exhibit D to the Signature Page and Power of Prospectus Attorney whereby a subscriber filed under agrees to purchase Units and the Partnership's adopts the provisions of the Amendment No. 1 to Amended Agreement of Limited Form S-11 Partnership* Registration Statement (File 33-25298) 4.3 Copy of Certificate of Exhibit 4.3 to the Limited Partnership filed Partnership's with the Massachusetts Secretary Amendment No. 1 to of State on November 4, 1988* Form S-11 Registration Statement (File 33-25298) 4.4 Copy of First Amendment and Exhibit 4.4 to the Restatement of Certificate Partnership's of Limited Partnership filed Amendment No. 1 to with the Massachusetts Secretary Form S-11 of State on February 8, 1989* Registration Statement (File 33-25298) 28 Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) 10 Material contracts and other documents 10.1 Form of Escrow Agreement* Exhibit 10.1 to the Partnership's Amendment No. 1 to Form S-11 Registration Statement (File 33-25298) 10.2 Documents relating to Quince Orchard Corporate Center (a) Investment Agreement dated Exhibit 10.2(a) to December 27, 1988, among the Partnership's JH Quince Orchard Partners, Amendment No. 1 to Quad Properties, Inc. and Form S-11 General Electric Real Estate Registration Statement Credit Operations* (File 33-25298) (b) Amended and Restated Partnership Exhibit 10.2(b) to Agreement for QOCC-1 Associates the Partnership's dated December 27, 1988, among Amendment No. 1 to JH Quince Orchard Partners, Form S-11 Quad Properties, Inc. and Registration General Electric Real Estate Statement Credit Operations* (File 33-25298) (c) Property Management Agreement Exhibit 10.2(c) to dated December 27, 1988, the Partnership's between QOCC-1 Associates and Amendment No. 1 to Quadrangle Development Form S-11 Corporation* Registration Statement (File 33-25298) (d) Partnership Agreement for Exhibit 10.2(d) to JH Quince Orchard Partners the Partnership's dated as of December 23, 1988, Amendment No. 1 to between John Hancock Realty Form S-11 Income Fund-II Limited Partnership Registration Statement and John Hancock Realty Income (File 33-25298) Fund-III Limited Partnership* 10.3 Documents relating to Palms of Carrollwood Shopping Center (a) Letter Agreement dated November 9, Exhibit 1 to the 1989 between Special Asset Partnership's Report Holdings, Inc. and John Hancock on Form 8-K dated Realty Equities, Inc.* December 29, 1989 (File 33-25298) 29 Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (b) Amendment to Agreement of Purchase Exhibit 2 to the and Sale dated August 28, 1989 Partnership's Report between Special Asset Holding Inc. on Form 8-K dated and John Hancock Realty Equities, December 29, 1989 Inc.* (File 33-25298) (c) Agreement of Purchase and Sale Exhibit 3 to the dated June 22, 1989, between Partnership's Report on Special Asset Holding Inc. and Form 8-K dated John Hancock Realty Equities, December 29, 1989 Inc.* (File 33-25298) (d) Warranty and Guaranty dated Exhibit 4 to the December 28, 1989 between Partnership's Report Pittsburgh National Bank and on Form 8-K dated John Hancock Realty Income Fund - December 29, 1989 III Limited Partnership.* (File 33-25298) (e) Rental Escrow Agreement dated Exhibit 5 to the December 28, 1989 relating to Partnership's Report Palms of Carrollwood Shopping on Form 8-K dated Center.* December 29, 1989 (File 33-25298) 10.4 Documents relating to Yokohama Tire Warehouse (a) Agreement of Purchase and Sale Exhibit to the dated June 25, 1991 between D/S Partnership's Report Louisville Joint Venture and John on Form 8-K dated Hancock Realty Income Fund-III July 25, 1991 Limited Partnership.* (File 0-18563) (b) Lease/Purchase option dated Exhibit to the October 12, 1989 relating to Partnership's Report Yokohama Tire Warehouse* on Form 8-K dated July 25, 1991 (File 0-18563) (c) Amendment to lease dated Exhibit to the September 24, 1990 relating to Partnership's Report Yokohama Tire Warehouse* on Form 8-K dated July 25, 1991 (File 0-18563) 10.5 Documents relating to the Purina Mills Distribution Building (a) Agreement of Purchase and Sale dated Exhibit 1 to the November 25, 1991 between Partnership's report Perkinson Realty Corporation and on Form 8-K dated John Hancock Realty Income Fund-III December 27, 1991 Limited Partnership* (File 0-18563) 30 Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (b) Office/Warehouse lease dated Exhibit 2 to the April 16, 1991 relating to the Partnership's report on Purina Mills Distribution Form 8-K dated Building* December 27, 1991 (File 0-18563) 10.6 Documents relating to the Allmetal Distribution Building (a) Real Estate Sale Agreement Exhibit 1 to Amendment dated January 31, 1992 between Number 1 on Form 8 to the The Travelers Insurance Company Partnership's report on and John Hancock Realty Form 8-K Income Fund-III Limited dated February 11, 1992 Partnership* (File 0-18563) 10.7 Documents relating to the Stone Container Building (a) Agreement of Purchase and Exhibit 1 to Amendment Sale dated January 30, 1992 Number 2 on Form 8 to the between World Park Limited Partnership's report on Partnership and John Hancock Form 8-K dated Realty Income Fund-III February 11, 1992 Limited Partnership* (File 0-18563) (b) Amendment to Purchase Exhibit 2 to Amendment and Sale Agreement dated Number 2 on Form 8 to the February 28, 1992 between Partnership's report on World Park Limited Partnership Form 8-K dated and John Hancock Realty Income February 11, 1992 Fund-III Limited Partnership* (File 0-18563) (c) Lease dated March 2, 1992 relating Exhibit 3 to Amendment to the Stone Container Building* Number 2 on Form 8 to the Partnership's report on Form 8-K dated February 11, 1992 (File 0-18563) 10.8 Documents relating to the Business Center at Pureland (a) Agreement of Purchase and Sale Exhibit 1 to Amendment dated January 24, 1992 between Number 3 on Form 8 The Prentiss/Copley Investment to the Partnership's Group and John Hancock Realty report on Form 8-K dated Income Fund-III Limited February 11, 1992 Partnership* (File 0-18563) 31 Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (b) Amendment to Purchase and Sale Exhibit 2 to Amendment Agreement dated March 5, 1992 Number 3 on Form 8 between The Prentiss/Copley to the Partnership's Investment Group and John report on Form 8-K dated Hancock Realty Income Fund-III February 11, 1992 Limited Partnership* (File 0-18563) (c) Lease dated February 5, 1991 Exhibit 3 to Amendment relating to Building Number One at Number 3 on Form 8 the Business Center at Pureland* to the Partnership's report on Form 8-K dated February 11, 1992 (File 0-18563) (d) First Amendment to Lease Exhibit 4 to Amendment dated March 26, 1992 relating Number 3 on Form 8 to Building Number One at the to the Partnership's Business Center at Pureland* report on Form 8-K dated February 11, 1992 (File 0-18563) (e) Lease Agreement dated Exhibit 5 to Amendment December 7, 1989 relating to Number 3 on Form 8 Building Number Two at the to the Partnership's Business Center at Pureland* report on Form 8-K dated February 11, 1992 (File 0-18563) (f) First Amendment to Lease Exhibit 6 to Amendment dated January 4, 1990 relating Number 3 on Form 8 to Building Number Two at the to the Partnership's Business Center at Pureland* report on Form 8-K dated February 11, 1992 (File 0-18563) (g) Second Amendment to Lease Exhibit 7 to Amendment dated March 16, 1990 relating Number 3 on Form 8 to Building Number Two at the to the Partnership's Business Center at Pureland* report on Form 8-K dated February 11, 1992 (File 0-18563) (h) Third Amendment to Lease Exhibit 8 to Amendment dated September 17, 1990 Number 3 on Form 8 relating to Building Number to the Partnership's Two at the Business Center report on Form 8-K dated at Pureland* February 11, 1992 (File 0-18563) 32 Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) 10.9 Documents relating to the Management Agreement (a) Management Agreement dated January Exhibit 10.9(a) to the 1, 1992 between Hancock Realty Partnership's report on Investors Incorporated and Form 10-K dated John Hancock Realty Equities, December 31, 1992 Inc.* (File 0-18563) (b) Agreement Concerning Subcontracting Exhibit 10.9(b) to the of Management Services Pertaining Partnership's report to John Hancock Realty Income on Form 10-K dated Fund-III Limited Partnership December 31, 1993 dated May 28, 1993between John (File 0-18563) Hancock Realty Equities, Inc., Hancock Realty Investors, Incorporated and John Hancock Mutual Life Insurance Company* 10.10 Documents relating to Executive Compensation Plans and Arrangements (a) Amended and Restated Agreement of Exhibit A to the Limited Partnership* Prospectus filed under the Partnership's Amendment No. 1 to Form S-11 Registration Statement (File 33-25298) (b) There were no reports on Form 8-K filed during the quarter ended December 31, 1996. (c) Exhibits - See Item 14 (a) (3) of this Report. (d) Financial Statement Schedules - The response to this portion of Item 14 is submitted as a separate section of this Report commencing on Page F-48. +Filed herewith *Incorporated by reference 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 31st day of March, 1997. JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP By: John Hancock Realty Equities, Inc. General Partner By: WILLIAM M. FITZGERALD --------------------- William M. Fitzgerald, President Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 31st day of March, 1997. Signatures Title ---------- ----- President (Principal Executive Officer) and Director of John Hancock Realty Equities, WILLIAM M. FITZGERALD Inc. (General Partner of Registrant) --------------------- William M. Fitzgerald Treasurer (Chief Accounting Officer) of John Hancock Realty Equities, Inc. RICHARD E. FRANK (General Partner of Registrant) --------------------- Richard E. Frank Director of John Hancock Realty Equities, MALCOLM G. PITTMAN Inc. (General Partner of Registrant) --------------------- Malcolm G. Pittman, III Director of John Hancock Realty Equities, SUSAN M. SHEPHARD Inc. (General Partner of Registrant) --------------------- Susan M. Shephard 34 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 YEAR ENDED DECEMBER 31, 1996 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)) (1) (a) Financial Statements of the Registrant Page Report of Independent Auditors F-3 Balance Sheets at December 31, 1996 and 1995 F-4 Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 F-5 Statements of Partners' Equity for the Years Ended December 31, 1996, 1995 and 1994 F-6 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 F-7 Notes to Financial Statements F-8 (b) Financial Statements of the Investee Report of Independent Auditors F-20 Balance Sheet at December 31, 1996 F-21 Statement of Operations for the Year Ended December 31, 1996 F-22 Statement of Partners' Equity for the Year Ended December 31, 1996 F-23 Statement of Cash Flows for the Year Ended December 31, 1996 F-24 Notes to Financial Statements F-25 Report of Independent Auditors F-30 Balance Sheet at December 31, 1995 F-31 Statement of Operations for the Year Ended December 31, 1995 F-32 Statement of Partners' Equity for the Year Ended December 31, 1995 F-33 Statement of Cash Flows for the Year Ended December 31, 1995 F-34 Notes to Financial Statements F-35 Report of Independent Auditors F-40 Balance Sheet at December 31, 1994 F-41 Statement of Operations for the Year Ended December 31, 1994 F-42 Statement of Partners' Equity for the Year Ended December 31, 1994 F-43 Statement of Cash Flows for the Year Ended December 31, 1994 F-44 Notes to Financial Statements F-45 (2) Financial Statement Schedules Schedule III: Real Estate and Accumulated Depreciation F-48 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. F-2 Report of Independent Auditors To the Partners John Hancock Realty Income Fund-DIII Limited Partnership We have audited the accompanying balance sheets of John Hancock Realty Income Fund III Limited Partnership as of December 31, 1996 and 1995, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the index at Item 14(a). 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 audits. The financial statements of QOCC-1 Associates (a limited partnership in which JH Quince Orchard Partners, a joint venture in which the Partnership has a 50% interest, has a 75% interest) have been audited by other auditors whose reports have been furnished to us; insofar as our opinion on the financial statements relates to data included for QOCC-1 Associates, it is based solely on their reports. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of John Hancock Realty Income Fund-III Limited Partnership at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. ERNST & YOUNG LLP Boston, Massachusetts February 14, 1997, except for Note 9, as to which the date is March 18, 1997 F-3 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) BALANCE SHEETS ASSETS December 31, 1996 1995 ---- ---- Current assets: Cash and cash equivalents $2,663,859 $2,431,272 Restricted cash 17,739 6,323 Other current assets 165,654 282,343 ----------- ----------- 2,847,252 2,719,938 Investment in property: Land 8,410,535 8,410,535 Building and improvements 24,942,540 24,942,540 ----------- ----------- 33,353,075 33,353,075 Less: accumulated depreciation 4,649,036 3,819,371 ----------- ----------- 28,704,039 29,533,704 Investment in joint venture 7,638,805 7,907,123 Long-term restricted cash 90,220 91,885 Deferred expenses, net of accumulated amortization of $1,025,259 in 1996 and $724,584 in 1995 1,601,682 1,556,764 Other assets 14,888 15,138 ----------- ----------- Total assets $40,896,886 $41,824,552 =========== =========== LIABILITIES AND PARTNERS' EQUITY Current liabilities: Accounts payable and accrued expenses $287,374 $240,389 Accounts payable to affiliates 93,467 38,412 ----------- ----------- Total current liabilities 380,841 278,801 Partners' equity/(deficit): General partners (43,423) (44,553) Limited partners 40,559,468 41,590,304 ----------- ----------- Total partners' equity 40,516,045 41,545,751 ----------- ----------- Total liabilities and partners' equity $40,896,886 $41,824,552 =========== =========== See Notes to Financial Statements F-4 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF OPERATIONS Years Ended December 31, 1996 1995 1994 ---- ---- ---- Income: Rental income $3,606,964 $3,404,659 $3,407,133 Income from joint venture 701,988 755,198 541,187 Interest income 145,734 162,332 105,917 ----------- ---------- ---------- Total income 4,454,686 4,322,189 4,054,237 Expenses: Depreciation 829,665 829,665 829,665 Property operating expenses 323,918 264,629 266,312 Amortization of deferred expenses 327,697 209,655 226,156 General and administrative expenses 357,389 241,608 188,843 ----------- ---------- ---------- Total expenses 1,838,669 1,545,557 1,510,976 ----------- ---------- ---------- Net income $2,616,017 $2,776,632 $2,543,261 ========== ========== ========== Allocation of net income: General Partner $183,416 $186,708 $175,393 John Hancock Limited Partner 276,653 - - Investors 2,155,948 2,589,924 2,367,868 ----------- ---------- ---------- $2,616,017 $2,776,632 $2,543,261 ========== ========== ========== Net Income per Unit $0.89 $1.07 $0.98 ========== ========== ========== See Notes to Financial Statements F-5 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF PARTNERS' EQUITY Years Ended December 31, 1996, 1995 and 1994
General Limited Partner Partners Total ------- --------- ----- Partners' equity/(deficit) at January 1, 1994 (2,415,234 Units outstanding) ($101,572) $42,429,060 $42,327,488 Less: Cash distributions (152,541) (2,898,274) (3,050,815) Add: Net income 175,393 2,367,868 2,543,261 -------- ----------- ---------- Partners' equity/(deficit) at December 31, 1994 (2,415,234 Units outstanding) (78,720) 41,898,654 41,819,934 Less: Cash distributions (152,541) (2,898,274) (3,050,815) Add: Net income 186,708 2,589,924 2,776,632 -------- ----------- ---------- Partners' equity/(deficit) at December 31, 1995 (2,415,234 Units outstanding) (44,553) 41,590,304 41,545,751 Less: Cash distributions (182,286) (3,463,437) (3,645,723) Add: Net income 183,416 2,432,601 2,616,017 -------- ----------- ---------- Partners' equity/(deficit) at December 31, 1996 (2,415,234 Units outstanding) ($43,423) $40,559,468 $40,516,045 ======== =========== ===========
See Notes to Financial Statements F-6 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 1995 1994 ---- ---- ---- Operating activities: Net income $2,616,017 $2,776,632 $2,543,261 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 829,665 829,665 829,665 Amortization of deferred expenses 327,697 209,655 226,156 Cash distributions over/(under) equity in income from joint venture 268,318 39,834 (28,510) ---------- ---------- ---------- 4,041,697 3,855,786 3,570,572 Changes in operating assets and liabilities: Decrease/(increase) in restricted cash (9,751) 5,695 (8,957) Increase in other current assets 116,689 (128,188) (39,357) Increase in other assets 250 (8,798) - Increase/(decrease) in accounts payable and accrued expenses 46,985 10,949 40,954 Increase/(decrease) in accounts payable to affiliates 55,055 8,359 17,403 ---------- ---------- ---------- Net cash provided by operating activities 4,250,925 3,743,803 3,580,615 Investing activities: Increase in investment in joint venture - - (1,104,902) Acquisition of deferred expenses and other assets (372,615) (899,438) (57,377) ---------- ---------- ---------- Net cash used in investing activities (372,615) (899,438) (1,162,279) Financing activities: Cash distributed to Partners (3,645,723) (3,050,815) (3,050,815) ---------- ---------- ---------- Net cash used in financing activities (3,645,723) (3,050,815) (3,050,815) ---------- ---------- ---------- Net increase/(decrease) in cash and cash equivalents 232,587 (206,450) (632,479) Cash and cash equivalents at beginning of year 2,431,272 2,637,722 3,270,201 ---------- ---------- ---------- Cash and cash equivalents at end of year $2,663,859 $2,431,272 $2,637,722 ========== ========== ==========
See Notes to Financial Statements F-7 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, 1996, 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 2,612 Unitholders (the "Investors"). The Assignor Limited Partner holds five Investor Limited Partnership Interests for its own account and 2,415,229 Assignee Units (the "Units"), representing economic and certain other rights attributable to Investor Limited Partnership Interests in the Partnership, for the benefit of the Investors. The John Hancock Limited Partner, the Assignor Limited Partner and the Investors are collectively referred to as the Limited Partners. The General Partner and the Limited Partners are collectively referred to as the Partners. The initial capital of the Partnership was $2,100, representing capital contributions of $1,000 from the General Partner, $1,000 from the John Hancock Limited Partner, and $100 from the Assignor Limited Partner. The Amended Agreement of Limited Partnership of the Partnership (the "Partnership Agreement") authorized the issuance of up to 5,000,000 Units at $20 per unit. During the offering period, which terminated on February 15, 1991, 2,415,229 Units were sold and the John Hancock Limited Partner made additional capital contributions of $3,863,366. There were no changes in the number of Units outstanding subsequent to the termination of the offering period. The Partnership is engaged solely in the business of acquiring, holding for investment and disposing of existing income-producing retail, industrial and office properties on an all-cash basis, free and clear of mortgage indebtedness. Although the Partnership's properties were acquired and are held free and clear of mortgage indebtedness, the Partnership may incur mortgage indebtedness under certain circumstances as specified in the Partnership Agreement. The latest date on which the Partnership is due to terminate is December 31, 2019, unless it is sooner terminated in accordance with the terms of the Partnership Agreement. It is expected that, in the ordinary course of the Partnership's business, the properties of the Partnership will be disposed of, and the Partnership terminated, before December 31, 2019. F-8 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 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 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 and has been designated as current or long-term based upon the term of the related lease agreement. 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 and legal fees, other miscellaneous acquisition costs, and the cost of significant improvements. 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, 1996, 1995 and 1994 is calculated by dividing the Investors' share of net income by the number of Units outstanding during each year. F-9 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 2. Significant Accounting Policies (continued) ------------------------------- In the fourth quarter of 1995, the Partnership adopted the Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (the "Statement 121"). Statement 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The adoption of Statement 121 had no effect on the Partnership's financial statements at December 31, 1996. 3. The Partnership Agreement ------------------------- 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. 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. F-10 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 3. The Partnership Agreement (continued) ------------------------- 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. 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, 1996, 1995 and 1994, and to which the General Partner or its Affiliates are entitled to reimbursement from the Partnership were $179,330, $156,119 and $121,196, respectively. The Partnership provides indemnification to the General Partner and its Affiliates for any acts or omissions of the General Partner or such Affiliate 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 in Note 9. Accordingly, the Partnership has accrued $41,475 for the year ended December 31, 1996, which amount is included in the Statements of Operations and represents the Partnership's share of costs incurred by the General Partner and its affiliates relating to the class action complaint. F-11 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 (continued) ---------------------------------------------------- Accounts payable to affiliates represents amounts due to the General Partner or its Affiliates for various services provided to the Partnership, including amounts to indemnify the General Partner or its Affiliates for claims incurred by them in connection with their actions as General Partner of the Partnership. All amounts accrued by the Partnership to indemnify the General Partner or its affiliates for legal fees incurred by them shall not be paid unless or until all conditions set forth in the Partnership Agreement for such payment have been fulfilled. The General Partner serves in a similar capacity for two other affiliated real estate limited partnerships. 5. Investment in Property ---------------------- Investment in property at cost, less any write-downs, consists of managed, fully-operating, commercial real estate as follows: December 31, 1996 1995 ---- ---- Palms of Carrollwood Shopping Center $10,930,578 $10,930,578 Yokohama Tire Warehouse 9,352,221 9,352,221 Purina Mills Distribution Building 4,203,406 4,203,406 Allmetal Distribution Building 1,636,050 1,636,050 Stone Container Building 2,088,804 2,088,804 Business Center at Pureland 5,142,016 5,142,016 ----------- --------- $33,353,075 $33,353,075 =========== =========== 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 market values presented and the differences could be material. Actual market values of real estate can be determined only by negotiation between the parties in a sales transaction. The Partnership leases its properties to non-affiliated tenants primarily under long-term operating leases. F-12 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 5. Investment in Property (continued) ---------------------- At December 31, 1996, future minimum rentals on non-cancelable leases relating to the above properties were as follows: 1997 $3,637,831 1998 3,717,530 1999 1,843,124 2000 1,536,773 2001 1,234,610 Thereafter 4,706,639 ---------- Total $16,676,507 =========== 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, 1996, 97.55% has been contributed by the Affiliated Joint Venture. The Affiliated Joint Venture continues to hold a 75% interest in QOCC-1 Associates. F-13 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 6. Investment in Joint Venture (continued) --------------------------- 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. During 1996, the partners received a return on invested capital in excess of 9%. Prior to 1996, QOCC-1 Associates had not provided the partners with a return in excess of 9% on their invested capital 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. Summarized financial information for QOCC-1 Associates is as follows: Financial Position at December 31, 1996 1995 ---- ---- Current assets $152,573 $168,756 Deferred expenses, net 1,835,645 2,140,529 Other assets 1,724,493 1,623,912 Investment in property, net 12,304,945 12,644,363 ------------ ----------- Total assets $16,017,656 $16,577,560 =========== =========== Current liabilities $476,658 $465,743 Partners' equity 15,540,998 16,111,817 ------------ ----------- Total liabilities and equity $16,017,656 $16,577,560 =========== =========== Results of Operations Years Ended December 31, 1996 1995 1994 ---- ---- ---- Total income $2,754,712 $2,719,151 $2,243,942 Total expenses 1,220,531 1,180,460 1,144,080 ---------- ---------- ---------- Net income $1,534,181 $1,538,691 $1,099,862 ========== ========== ========== F-14 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 6. Investment in Joint Venture (continued) --------------------------- The Affiliated Joint Venture's share of QOCC-1 Associates' partners' equity was $15,540,998 and $16,111,817 at December 31, 1996 and 1995, respectively. The Affiliated Joint Venture's share of QOCC-1 Associates' net income was $1,403,992, $1,510,397 and $1,082,373 for the years ended December 31, 1996, 1995 and 1994, respectively. As noted above, the Partnership has a 50% interest in the Affiliated Joint Venture. 7. Deferred Expenses ----------------- Deferred expenses consist of the following:
Unamortized Balance at December 31, Description 1996 1995 ----------- ---- ---- $152,880 of acquisition fees for investment in the Affiliated Joint Venture. This amount is amortized over a period of 31.5 years. $114,256 $119,109 $1,087,190 of tenant improvements. These amounts are amortized over the terms of the leases to which they relate. 900,220 719,916 $313,250 of lease commissions. These amounts are amortized over the terms of the leases to which they relate. 242,114 219,273 $1,073,621 of acquisition fees paid to the General Partner. This amount is amortized over a period of eighty-four months. 345,092 498,466 ---------- ---------- $1,601,682 $1,556,764 ========== ==========
F-15 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) 8. Federal Income Taxes -------------------- A reconciliation of the net income reported in the Statements of Operations to the net income reported for federal income tax purposes is as follows:
Years Ended December 31, 1996 1995 1994 ---- ---- ---- Net income per Statements of Operations $2,616,017 $2,776,632 $2,543,261 Add/(less): Excess of book depreciation over tax depreciation 141,284 142,021 142,890 Excess of book amortization over tax amortization 159,378 59,511 81,580 Other income (48,622) (195,901) (183,625) Other expenses 101,918 - 20,966 ---------- ---------- ---------- Net income for federal income tax purposes $2,969,975 $2,782,263 $2,605,072 ========== ========== ==========
A reconciliation of the Partnership's properties' aggregate cost for book and federal income tax purposes is as follows:
Years Ended December 31, 1996 1995 1994 ---- ---- ---- Aggregate cost, book purposes $33,353,075 $33,353,075 $33,353,075 Add/(deduct): Costs capitalized for federal income tax purposes, cumulative 136,486 34,568 34,568 Book basis property write-downs, cumulative 1,431,400 1,431,400 1,431,400 ---------- ---------- ---------- Aggregate cost, federal income tax purposes $34,920,961 $34,819,043 $34,819,043 ========== ========== ==========
F-16 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. 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. Accordingly, the Partnership has accrued $41,475 for the year ended December 31, 1996, which amount is included in the Statement of Operations and represents the Partnership's share of costs incurred by the General Partner and its Affiliates relating to the class action complaint. At the present time, the General Partner can not estimate the impact, if any, of the potential indemnification claims on the Partnership's Financial Statements, taken as a whole. Accordingly, no provision for any liability which could result from the eventual outcome of these matters has been made in the accompanying financial statements. 10. Subsequent Events ----------------- On February 14, 1997, the Partnership made a cash distribution in the aggregate amount of $961,006, based on Distributable Cash from Operations for the year ended December 31, 1996 less amounts previously distributed. This amount was allocated 5%, or $48,050 to the General Partner and 95%, or $912,956 to the Limited Partners, in accordance with the Partnership Agreement. Of the amount distributed to the Limited Partners, the Investors received $845,330 and the John Hancock Limited Partner received $67,626. Such amounts represent a 7% annualized return on Limited Partners Invested Capital. F-17 FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT QOCC-1 ASSOCIATES DECEMBER 31, 1996 F-18 QOCC-1 TABLE OF CONTENTS PAGE INDEPENDENT AUDITORS' REPORT F-20 FINANCIAL STATEMENTS BALANCE SHEET F-21 STATEMENT OF INCOME F-22 STATEMENT OF PARTNERS' EQUITY F-23 STATEMENT OF CASH FLOWS F-24 NOTES TO FINANCIAL STATEMENTS F-25 F-19 INDEPENDENT AUDITORS' REPORT To the Partners QOCC-1 Associates We have audited the accompanying balance sheet of QOCC-1 Associates as of December 31, 1996, and the related statements of income, partners' equity and cash flows for the year then ended. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of QOCC-1 Associates as of December 31, 1996, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. REZNICK FEDDER & SILVERMAN Bethesda, Maryland January 8, 1997 F-20 QOCC-1 Associates BALANCE SHEET December 31, 1996 ASSETS RENTAL PROPERTY Land $ 3,670,000 Land improvements 35,425 Building 11,461,343 Building improvements 63,136 ----------- 15,229,904 Less accumulated depreciation 2,924,959 ----------- 12,304,945 ----------- OTHER ASSETS Cash and cash equivalents 503,566 Prepaid taxes and insurance 96,095 Prepaid leasing commissions 302,122 Deferred rent 1,277,405 Leasing costs, less accumulated amortization of $619,264 1,533,523 ----------- 3,712,711 ----------- $ 16,017,656 =========== LIABILITIES AND PARTNERS' EQUITY LIABILITIES Accounts payable and accrued expenses $ 29,570 Prepaid rent and security deposit 447,088 ----------- 476,658 COMMITMENT - PARTNERS= EQUITY 15,540,998 ----------- $ 16,017,656 =========== See notes to financial statements F-21 QOCC-1 Associates STATEMENT OF INCOME Year ended December 31, 1996 Revenue Rental income - base $ 2,691,797 Rental income - escalations 61,015 Interest income 1,900 --------- Total revenue 2,754,712 Expenses Accounting $ 8,100 Advertising and promotion 1,271 Bad debts 576 Commissions 86,320 Depreciation and amortization 588,496 Insurance 5,503 Legal 1,371 Management fees 50,430 Personnel services 76,801 Repairs and maintenance 199,601 Supplies 2,145 Taxes 191,609 Travel 21 Utilities 8,287 Total expenses --------- 1,220,531 --------- NET INCOME $ 1,534,181 ========= See notes to financial statements F-22 QOCC-1 Associates STATEMENT OF PARTNERS' EQUITY Year ended December 31, 1996 Equity at Net Distri- Equity at January income butions December 1, 1996 31, 1996 --------- --------- --------- -------- JH Quince Orchard $ 15,750,296 $ 1,403,992 $ (1,940,627) $ 15,213,661 Partners Quad Properties, Inc. 361,521 130,189 (164,373) 327,337 --------- --------- --------- --------- $ 16,111,817 $ 1,534,181 $ (2,105,000) $ 15,540,998 ========== ========== ========== ========== See notes to financial statements F-23 QOCC-1 Associates STATEMENT OF CASH FLOWS Year ended December 31, 1996 Cash flows from operating activities Net income $ 1,534,181 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 588,496 Decrease in accounts receivable - other 2,186 Increase in prepaid taxes and insurance (1,418) Increase in accounts payable and accrued 10,005 expenses Decrease in prepaid leasing commissions 86,320 Increase in prepaid rent and security deposit 910 Increase in deferred rent (99,671) -------- Net cash provided by operating activities 2,121,009 -------- Cash flows from investing activities Investment in rental property (30,514) -------- Net cash used in investing activities (30,514) -------- Cash flows from financing activities Distributions to partners (2,105,000) -------- Net cash used in financing activities (2,105,000) -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (14,505) Cash and cash equivalents, beginning 518,071 -------- Cash and cash equivalents, end $ 503,566 ======== See notes to financial statements F-24 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS December 31, 1996 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The partnership was organized on December 27, 1988, as a general partnership under the laws of the State of Maryland for the purpose of operating an office building with approximately 99,782 of net rentable square feet in Gaithersburg, Maryland. The building was acquired in December 1988. The partnership conducts its rental operations under a lease agreement with one tenant. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Rental Property --------------- Rental property is carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method. Cash Equivalents ---------------- For purposes of the statement of cash flows, the partnership considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. Rental Income ------------- Rental income is recognized as rentals become due. For instances in which rent concession periods are involved, rental income is recognized using the straight-line method over the term of the lease, which includes the rent concession period. The amount applicable to the rent concession is recorded as a deferred asset against which future collections are applied. Rental payments received in advance are deferred until earned. The lease between the partnership and the tenant of the property is an operating lease. F-25 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually. Prepaid Leasing Commissions --------------------------- Prepaid leasing commissions are charged to operations using the straight- line method over 76 months. Leasing Costs ------------- Leasing costs were incurred to obtain a new tenant for the office building and improve the rental space. These costs are being written off using the straight-line method over the ten-year term of the lease. NOTE B - RENTAL INCOME UNDER OPERATING LEASE The partnership has leased the office building to a new tenant effective March 1994 under a ten-year term with a five-year renewal option at the discretion of the lessee. The tenant may terminate the lease after the 76th calendar month of the term by notifying the landlord as outlined in the lease agreement. Rental income consists of fixed base rent and variable lease escalation reimbursements, calculated annually. Future minimum base rental payments due under the noncancelable operating lease are as follows: Year Ending December 31, Amount ------------ ---------- 1997 $ 2,656,929 1998 2,723,352 1999 2,791,436 2000 2,861,222 2001 2,932,752 Thereafter 6,602,927 ---------- $ 20,568,618 ========== F-26 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996 NOTE C - RELATED PARTY TRANSACTION During 1996, the partnership incurred charges of approximately $129,376 for management fees, personnel services and supplies provided by affiliates of one of the partners. NOTE D - COMMITMENT The partnership has entered into a lease commission agreement with Carey Winston. The agreement provides for $546,696 of commissions to be paid for the first 76 months of the tenant's lease, which began March 1994. If the tenant does not exercise its option to terminate the lease after the 76th month, additional commissions in the amount of $376,198 for the remaining 44 months of the tenant's lease will be due at that time. NOTE E - CONCENTRATION OF CREDIT RISK The partnership maintains its cash balances in two banks. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000 by each bank. As of December 31, 1996, the uninsured portion of the cash balances held at the banks was $303,566. F-27 FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT QOCC-1 ASSOCIATES DECEMBER 31, 1995 F-28 QOCC-1 Associates TABLE OF CONTENTS PAGE INDEPENDENT AUDITORS' REPORT F-30 FINANCIAL STATEMENTS: BALANCE SHEET F-31 STATEMENT OF INCOME F-32 STATEMENT OF PARTNERS' EQUITY F-33 STATEMENT OF CASH FLOWS F-34 NOTES TO FINANCIAL STATEMENTS F-35 F-29 INDEPENDENT AUDITORS' REPORT To the Partners QOCC-1 Associates We have audited the accompanying balance sheet of QOCC-1 Associates as of December 31, 1995, 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, 1995, 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, 1996 F-30 QOCC-1 Associates BALANCE SHEET December 31, 1995 ASSETS RENTAL PROPERTY Land $3,670,000 Land improvements 35,425 Building 11,461,343 Building improvements 32,622 ----------- 15,199,390 Less accumulated depreciation 2,555,027 ----------- 12,644,363 ----------- OTHER ASSETS Cash and cash equivalents 518,071 Accounts receivable - other 2,186 Prepaid taxes and insurance 94,677 Prepaid leasing commissions 388,442 Deferred rent 1,177,734 Leasing costs, less accumulated amortization of $400,701 1,752,087 ----------- 3,933,197 ----------- $16,577,560 =========== LIABILITIES AND PARTNERS' EQUITY LIABILITIES Accounts payable and accrued expenses $19,565 Prepaid rent and security deposit 446,178 ----------- 465,743 COMMITMENT - PARTNERS' EQUITY 16,111,817 ----------- $16,577,560 =========== See notes to financial statements F-31 QOCC-1 Associates STATEMENT OF INCOME Year ended December 31, 1995 Revenue Rental income - base $2,691,797 Rental income - escalations 25,100 Interest income 1,975 Other revenue 279 ----------- Total revenue 2,719,151 Expenses Accounting $7,800 Advertising and promotion 441 Commissions 103,584 Depreciation and amortization 553,531 Insurance 5,392 Management fees 49,200 Personnel services 66,996 Repairs and maintenance 196,099 Supplies 4,099 Taxes 185,376 Travel 506 Utilities 7,436 ----------- Total expenses 1,180,460 ----------- NET INCOME $1,538,691 =========== See notes to financial statements F-32 QOCC-1 Associates STATEMENT OF PARTNERS' EQUITY Year ended December 31, 1995
Equity at Equity at January Net Distri- December 1, 1995 Income butions 31, 1995 ------- ------ ------- -------- JH Quince Orchard Partners $15,829,964 $1,510,397 $(1,590,065) $15,750,296 Quad Properties, Inc. 373,162 28,294 (39,935) 361,521 ----------- ---------- ----------- ----------- $16,203,126 $1,538,691 $(1,630,000) $16,111,817 =========== ========== =========== ===========
See notes to financial statements F-33 QOCC-1 Associates STATEMENT OF CASH FLOWS Year ended December 31, 1995 Cash flows from operating activities Net income $1,538,691 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 553,531 Decrease in accounts receivable - other 1,546 Increase in accounts receivable - rent concessions (586,098) Increase in prepaid taxes and insurance (4,051) Increase in accounts payable and accrued expenses 3,263 Decrease in prepaid leasing commissions 103,584 Increase in prepaid rent and security deposit 33,296 ---------- Net cash provided by operating activities 1,643,762 ---------- Cash flows from financing activities Distributions to partners (1,630,000) ---------- Net cash used in financing activities (1,630,000) ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 13,762 Cash and cash equivalents, beginning 504,309 ---------- Cash and cash equivalents, end $518,071 ========== See notes to financial statements F-34 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS December 31, 1995 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The partnership was organized on December 27, 1988 as a general partnership under the laws of the State of Maryland for the purpose of operating an office building with approximately 99,782 of net rentable square feet in Gaithersburg, Maryland. The building was acquired in December, 1988. The partnership conducts its rental operations under a lease agreement with one tenant. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Rental Property --------------- Rental property is carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method. Cash Equivalents ---------------- For purposes of the statement of cash flows, the partnership considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. The fair value of cash equivalents approximates its carrying amount. Rental Income ------------- Rental income is recognized as rentals become due. For instances in which rent concession periods are involved, rental income is recognized using the straight-line method over the term of the lease, which includes the rent concession period. The amount applicable to the rent concession is recorded as a deferred asset against which future collections are applied. Rental payments received in advance are deferred until earned. The lease between the partnership and the tenant of the property is an operating lease. F-35 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS December 31, 1995 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 seventy-six months. Leasing Costs ------------- Leasing costs were incurred to obtain a new tenant for the office building and improve the rental space. These costs are being written off using the straight-line method over the ten-year term of the lease. NOTE B - RENTAL INCOME UNDER OPERATING LEASE The partnership has leased the office building to a new tenant effective March 1994 under a ten-year term with a five-year renewal option at the discretion of the lessee. The tenant may terminate the lease after the 76th calendar month of the term by notifying the landlord as outlined in the lease agreement. Rental income consists of fixed base rent and variable lease escalation reimbursements, calculated annually. Future minimum base rental payments due under the noncancelable operating lease are as follows: Year Ending December 31, Amount ------------ ------ 1996 $2,592,126 1997 2,656,929 1998 2,723,352 1999 2,791,436 2000 2,861,222 Thereafter 9,535,611 ----------- $23,160,745 =========== F-36 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS December 31, 1995 NOTE C - RELATED PARTY TRANSACTION During 1995, the partnership incurred charges of approximately $120,295 for management fees, personnel services and reimbursable maintenance expenses 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, 1995, the uninsured portion of the cash balances held at the banks was $293,643. F-37 FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT QOCC-1 ASSOCIATES DECEMBER 31, 1994 F-38 QOCC-1 Associates TABLE OF CONTENTS PAGE INDEPENDENT AUDITORS' REPORT F-40 FINANCIAL STATEMENTS BALANCE SHEET F-41 STATEMENT OF INCOME F-42 STATEMENT OF PARTNERS' EQUITY F-43 STATEMENT OF CASH FLOWS F-44 NOTES TO FINANCIAL STATEMENTS F-45 F-39 INDEPENDENT AUDITORS' REPORT To the Partners QOCC-1 Associates We have audited the accompanying balance sheet of QOCC-1 Associates as of December 31, 1994, 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, 1994, 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 4, 1995 F-40 QOCC-1 Associates BALANCE SHEET December 31, 1994 ASSETS RENTAL PROPERTY Land $3,670,000 Land improvements 35,425 Building 11,461,343 Building improvements 32,622 Less accumulated depreciation (2,186,250) ---------- 13,013,140 ---------- OTHER ASSETS Cash and cash equivalents 504,309 Accounts receivable - rent concessions 591,636 Accounts receivable - other 3,732 Prepaid taxes and insurance 90,626 Prepaid leasing commissions 492,026 Leasing costs, less accumulated amortization of $215,947 1,936,839 --------- 3,619,168 --------- $16,632,308 ========== LIABILITIES AND PARTNERS' EQUITY LIABILITIES Accounts payable and accrued expenses $16,300 Prepaid rent and security deposit 412,882 ---------- 429,182 COMMITMENT - PARTNERS' EQUITY 16,203,126 ---------- $16,632,308 ========== See notes to financial statements F-41 QOCC-1 Associates STATEMENT OF INCOME Year ended December 31, 1994 Revenue Rental income - base $2,243,164 Other revenue 778 --------- Total revenue 2,243,942 Expenses Accounting $7,500 Advertising and promotion 353 Amortization 215,947 Commissions 54,670 Depreciation 370,855 Insurance 8,217 Management fees 42,001 Personnel services 68,351 Repairs and maintenance 153,142 Supplies 2,393 Taxes 180,306 Travel 362 Utilities 39,983 ------- Total expenses 1,144,080 --------- NET INCOME $1,099,862 ========= See notes to financial statements F-42 QOCC-1 Associates STATEMENT OF PARTNERS' EQUITY Year ended December 31, 1994
Equity at Equity at January Net Distri- Contri- December 1, 1994 Income butions butions 31, 1994 ------- ------ ------- -------- -------- JH Quince Orchard Partners $13,563,142 $1,082,373 $(1,025,356) $2,209,805 $15,829,964 Quad Properties, Inc. 265,122 17,489 (25,754) 116,305 373,162 ----------- ---------- ----------- ----------- ----------- $13,828,264 $1,099,862 $(1,051,110) $2,326,110 $16,203,126 =========== ========== ============ ========== ===========
See notes to financial statements F-43 QOCC-1 Associates STATEMENT OF CASH FLOWS Year ended December 31, 1994 Cash flows from operating activities Net income $1,099,862 Adjustments to reconcile net income to net cash used in operating activities Depreciation 370,855 Amortization 215,947 Decrease in accounts receivable - other 335,585 Increase in accounts receivable - rent concessions (591,636) Increase in prepaid taxes and insurance (730) Increase in leasing costs (1,596,791) Decrease in accounts payable and accrued expenses (812,003) Increase in prepaid leasing commissions (218,678) Increase in prepaid rent and security deposit 412,882 --------- Net cash used in operating activities (784,707) --------- Cash flows from investing activities Building improvements (29,784) --------- Net cash used in investing activities (29,784) --------- Cash flows from financing activities Distributions to partners (1,051,110) Contributions from partners 2,326,110 Repayments to affiliates (5,576) --------- Net cash provided by financing activities 1,269,424 --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 454,933 Cash and cash equivalents, beginning 49,376 --------- Cash and cash equivalents, end $504,309 ========= See notes to financial statements F-44 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS December 31, 1994 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The partnership was organized on December 27, 1988 as a general partnership under the laws of the State of Maryland for the purpose of operating an office building with approximately 99,782 of net rentable square feet in Gaithersburg, Maryland. The building was acquired in December, 1988. Rental Property --------------- Rental property is carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method. Cash Equivalents ---------------- For purposes of the statement of cash flows, the partnership considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. Rental Income ------------- Rental income is recognized as rentals become due. For instances in which rent concession periods are involved, rental income is recognized using the straight-line method over the term of the lease, which includes the rent concession period. The amount applicable to the rent concession is accrued as an account receivable 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 the ten year term of the lease. F-45 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1994 NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Leasing Costs ------------- Leasing costs were incurred to obtain a new tenant for the office building. The tenant has executed a lease beginning March, 1994. These costs are amortized using the straight-line method over the ten year term of the lease. NOTE B - RENTAL INCOME UNDER OPERATING LEASE The partnership has leased the office building to a new tenant effective March 1994 under a ten-year term with a five-year renewal option at the discretion of the lessee. The tenant may terminate the lease after the 76th calendar month of the term by notifying the landlord as outlined in the lease agreement. Rental income consists of fixed base rent and variable lease escalation reimbursements, calculated annually. Future minimum base rental payments due under the noncancelable operating lease are as follows: Year Ending December 31, Amount ------------ --------- 1995 $2,105,699 1996 2,592,126 1997 2,656,929 1998 2,723,352 1999 2,791,436 Thereafter 12,396,902 ---------- $25,266,444 ========== NOTE C - RELATED PARTY TRANSACTION During 1994, the partnership incurred charges of approximately $112,745 for management fees, personnel services and reimbursable maintenance expenses provided by affiliates of one of the partners. F-46 QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1994 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. Of this amount, during 1994 the partnership paid the remaining balance due of $273,348 upon commencement of the lease. 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, 1994, the uninsured portion of the cash balances held at the banks was $304,309. F-47
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION Year Ended December 31, 1996 Costs Capitalized Initial Costs to Subsequent to Gross Amount Partnership Acquisition At Which Carried at Close of Period ---------------------- ----------------------- ----------------------------------- Buildings Buildings and and Description Encumbrances Land Improvements ImprovementsWrite-down (1) Land Improvements Total (2) - ----------- ------------ ---- ------------ -------------------------- ---- ------------ --------- Palms of Carrollwood Shopping Center Tampa, FL - $6,000,000 $6,359,816 $2,162 ($1,431,400) $5,305,135 $5,625,443 $10,930,578 Yokohama Tire Warehouse Louisville, KY - 742,000 8,610,221 - - 742,000 8,610,221 9,352,221 Purina Mills Distribution Building St. Louis, MI - 570,400 3,633,006 - - 570,400 3,633,006 4,203,406 Allmetal Distribution Building Carrollton, TX - 263,000 1,373,050 - - 263,000 1,373,050 1,636,050 Stone Container Building Cincinnati, OH - 480,000 1,608,804 - - 480,000 1,608,804 2,088,804 Business Center at Pureland Bridgeport, NJ - 1,050,000 4,092,016 - - 1,050,000 4,092,016 5,142,016 -- ---------- ----------- ------- ---------- ---------- ----------- ----------- - $9,105,400 $25,676,913 $2,162 ($1,431,400) $8,410,535 $24,942,540 $33,353,075 == ========== =========== ======= ========== ========== =========== ===========
F-48
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) SCHEDULE III (Continued) REAL ESTATE AND ACCUMULATED DEPRECIATION Year Ended December 31, 1996 Life on Which Depreciation in Latest Statement Accumulated Date of Date of Operations Description Depreciation (5) Construction Acquired is Computed ----------- ---------------- ------------ -------- ----------- Palms of Carrollwood Shopping Center Tampa, FL $1,353,108 1984 12/28/89 30 Years Yokohama Tire Warehouse Louisville, KY 1,566,583 1991 7/17/91 30 Years Purina Mills Distribution Building St. Louis, MI 605,501 1991 12/27/91 30 Years Allmetal Distribution Building Carrollton, TX 221,214 1987 3/6/92 30 Years Stone Container Building Cincinnati, OH 254,727 1991 3/16/92 30 Years Business Center at Pureland Bridgeport, NJ 647,903 1989 3/27/92 30 Years ---------- $4,649,036 ========== (1) This write-down of carrying value represents an impairment in the value of the property based upon the General Partner's estimate. For further discussion relating to the determination of property write-downs, please see "Management's Discussion and Analysis of Financial Condition" included in Item 7 of this Report.
F-49
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) SCHEDULE III (continued) REAL ESTATE AND ACCUMULATED DEPRECIATION Year Ended December 31, 1996 (2) The Partnership's properties' aggregate cost for federal income tax purposes at December 31, 1996 are as follows: Property Amount Palms of Carrollwood Shopping Center $12,477,704 Yokohama Tire Warehouse 9,352,221 Purina Mills Distribution Building 4,203,406 Allmetal Distribution Building 1,636,050 Stone Container 2,088,804 Business Center at Pureland 5,162,776 ----------- $34,920,961 =========== The Partnership's aggregate cost for federal income tax purposes may differ from the aggregate cost for Financial Statement purposes. The tax basis excludes property write-downs which were recognized for Financial Statement purposes. (3) Reconciliation of Real Estate and Accumulated Depreciation: Years Ended December 31, 1996 1995 1994 ---- ---- ---- Investment in Real Estate Balance at beginning of year $33,353,075 $33,353,075 $33,353,075 Other acquisitions - - - Adjustment to purchase price - - - ----------- ----------- ----------- Balance at end of year $33,353,075 $33,353,075 $33,353,075 =========== =========== =========== Accumulated Depreciation Balance at beginning of year $3,819,371 $2,989,706 $2,160,041 Additions charged to costs and expenses 829,665 829,665 829,665 ----------- ----------- ----------- Balance at end of year $4,649,036 $3,819,371 $2,989,706 =========== =========== ===========
F-50 EX-27 2
5 0000842741 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP YEAR DEC-31-1996 DEC-31-1996 2,771,818 0 165,654 0 0 2,847,252 33,353,075 4,649,036 40,896,886 380,841 0 0 0 0 40,516,045 40,896,886 0 4,454,686 0 681,307 1,157,362 0 0 2,616,017 0 2,616,017 0 0 0 2,616,017 0.89 0.89
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