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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from N/A
Commission file number 0-18563
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Massachusetts 04-3025607
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Clarendon Street, Boston, MA 02116
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (800) 722-5457
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Assignee Units
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by
reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to
the date of filing. (See definition of affiliate in Rule 405.) Not
applicable, since the securities are non-voting
NOTE: If a determination as to whether a particular person or entity is an
affiliate cannot be made without involving unreasonable effort and expense,
the aggregate market value of the common stock held by non-affiliates may
be calculated on the basis of assumptions reasonable under the
circumstances, provided that the assumptions are set forth in this Form.
Exhibit Index on Pages 28 - 34
Page 1 of 34
<PAGE>
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 10
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 25
Item 13 Certain Relationships and Related Transactions 25
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 28
Signatures 35
2
<PAGE>
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, 1997, 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 2,508
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
<PAGE>
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, 1997, 97.55% has been
contributed by the Affiliated Joint Venture. The Affiliated Joint Venture
continues to hold a 75% interest in QOCC-1 Associates.
4
<PAGE>
Item 1 - Business (continued)
The Quince Orchard Corporate Center is 100% occupied by Boehringer Mannheim
Pharmaceuticals, Inc. under a ten-year lease that expires in February 2004.
The tenant has two options under the lease agreement, one, to terminate the
lease at the end of 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.
During the first quarter of 1998, Hoffman-LaRoche, Inc. received approval
from the Federal Trade Commission to acquire Boehringer Mannheim
Pharmaceuticals, Inc. As a result, Hoffman-LaRoche, Inc. has indicated
that it will terminate operations at the Quince Orchard Corporate Center
and exercise its right to terminate the lease in June 2000. The General
Partner understands that Hoffman-LaRoche, Inc. is seeking to sublease the
property. The General Partner does not believe that this situation will
have a materially adverse affect on the Partnership's liquidity.
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 1998 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% leased. 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.
<TABLE>
<CAPTION>
Property Lessee Lease Expiration
--------- ------ ----------------
<S> <C> <C>
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, 2008
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
</TABLE>
5
<PAGE>
Item 1 - Business (continued)
During the first quarter of 1998, Purina Mills, Inc., ("PMI") the lessee at
the Purina Mills Distribution Building, notified the Partnership of its
intention to exercise its option to terminate the lease, in accordance with
the terms of its lease agreement, on December 1, 1998. The General Partner
will attempt to secure a lease with the current subtenant as well as seek a
replacement tenant for the building.
During the fourth quarter of 1997, one of the tenants at the Business
Center at Pureland, National Polystyrene Recycling Co., L.P., ("NPRC")
vacated its space at the property and began seeking to sublease the
property. The Partnership continues to receive all rental payments due
under the lease and the General Partner does not believe that this
situation will have a materially adverse effect on the Partnership's
liquidity.
The General Partner anticipates that the warehouse properties should
provide the Partnership with stable income performance during 1998.
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, 1997 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.
6
<PAGE>
Item 2 - Properties (continued)
JH Quince Orchard Partners (continued)
- --------------------------
On December 28, 1988, the Affiliated Joint Venture contributed 98% of the
invested capital of, and acquired a 75% interest in, QOCC-1 Associates, an
existing partnership that owns and operates the Quince Orchard Corporate
Center, a three-story office building and related land and improvements
located in Gaithersburg, Maryland. The partnership agreement of QOCC-1
Associates provides that the Affiliated Joint Venture shall contribute 95%
of any required additional capital contributions. Of the cumulative total
invested capital in QOCC-1 Associates at December 31, 1997, 97.55% has been
contributed by the Affiliated Joint Venture. The Affiliated Joint Venture
continues to hold a 75% interest in QOCC-1 Associates.
The average occupancy for the Quince Orchard Corporate Center for the year
ended December 31, 1997 was 100%.
Palms of Carrollwood
- --------------------
On December 28, 1989, the Partnership acquired the Palms of Carrollwood
Shopping Center, located in Tampa, Florida, from a non-affiliated seller.
The property contains approximately 161,000 rentable square feet, including
approximately 10,000 square feet of office space, situated on a 15 acre
site.
The average occupancy for the Palms of Carrollwood Shopping Center for the
year ended December 31, 1997 was 79%. As of the date hereof, the property
is 81% 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.
7
<PAGE>
Item 2 - Properties (continued)
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.
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. PMI's lease contains a one-
time option to terminate the lease on December 1, 1998 upon the payment of
$240,815 to the Partnership. During the first quarter of 1998, PMI
notified the General Partner that it will exercise its option and terminate
its lease. The General Partner is seeking a replacement tenant for this
property, including the subtenant currently in occupancy.
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., whose lease was scheduled to
expire in August 1998. During the third quarter of 1997 this tenant
extended its lease through August 2008. The tenant also has an option to
extend the term of the lease for an additional five-year period. The
Partnership incurred leasing costs of $169,939 in connection with this
extension.
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 building currently contains
approximately 76,000 square feet of warehouse space and 6,000 square feet
of office space.
The property is 100% leased to Stone Container Corporation under a lease
which expires on December 31, 2011.
8
<PAGE>
Item 2 - Properties (continued)
Business Center at Pureland
- ---------------------------
On March 27, 1992, the Partnership acquired the Business Center at Pureland
located in Bridgeport, New Jersey, from a non-affiliated seller. The
property is situated on 10.5 acres of land and contains two buildings
consisting of an aggregate of 119,651 rentable square feet of warehouse
space.
One building (consisting of 60,535 sq. ft.) is 100% leased to Forbo
Wallcoverings, Inc. under a lease which expires on December 31, 1998. The
second building (consisting of 59,116 sq. ft.) is 100% leased to National
Polystyrene Recycling Co., L.P. under a lease which expires on May 31,
2001. During the fourth quarter of 1997, NPRC vacated the property and is
currently seeking to sublease its space. The Partnership continues to
receive all rental payments due under the lease.
The foregoing investments of the Partnership are further described in Item
7 of this Report.
Item 3 - Legal Proceedings
In February 1996, a putative class action complaint was filed in the
Superior Court in Essex County, New Jersey by a single investor in a
limited partnership affiliated with the Partnership. The complaint named
as defendants the Partnership, the General Partner, certain other
Affiliates of the General Partner, and certain unnamed officers, directors,
employees and agents of the named defendants.
The plaintiff sought unspecified damages stemming from alleged
misrepresentations and omissions in the marketing and offering materials
associated with the Partnership and two limited partnerships affiliated
with the Partnership. The complaint alleged, among other things, that the
marketing materials for the Partnership and the affiliated limited
partnerships did not contain adequate risk disclosures.
On March 18, 1997, the court certified a class of investors who were
original purchasers in the Partnership. The certification order should not
be construed as suggesting that any member of the class is entitled to
recover, or will recover, any amount in the action.
The General Partner believes the allegations are totally without merit and
will continue to vigorously contest the action.
There are no other material pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Partnership, to which
the Partnership is a party or to which any of its properties is subject.
Item 4 - Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders of the
Partnership during the fourth quarter of 1997.
9
<PAGE>
Part II
Item 5 - Market for the Partnership's Securities and Related Security
Holder Matters
(a) Market Information
The Partnership's outstanding securities consist of 2,415,229 Units
originally sold for $20 per Unit. The Units were offered and sold to the
public during the period from February 17, 1989 to February 15, 1991. No
established public market exists on which the Units may be traded.
Consequently, holders of Units may not be able to liquidate their
investments in the event of an emergency, or for any other reason.
Additionally, the assignment or other transfer of Units would be subject to
compliance with the minimum investment and suitability standards imposed by
the Partnership and by applicable law, including state "Blue Sky" laws.
(B) Number of Security Holders
Number of Number of Units
record holders as of outstanding as of
Title of Class December 31, 1997 December 31, 1997
-------------- ----------------- -----------------
Assignee Units 2,508 2,415,229
(c) Dividend History and Restrictions
During the fiscal years ended December 31, 1997 and 1996, the Partnership
distributed cash in the aggregate amounts of $3,844,027 and $3,645,723,
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, 1997:
<TABLE>
<CAPTION>
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
------------ ------------ -------------- ---------------- ------------ -------
<S> <C> <C> <C> <C> <C>
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
February 14, 1997 961,006 48,050 67,626 845,330 0.35
May 15, 1997 961,007 48,050 67,627 845,330 0.35
August 15, 1997 961,007 48,051 67,626 845,330 0.35
November 14, 1997 961,007 48,050 67,627 845,330 0.35
</TABLE>
10
<PAGE>
Item 5 - Market for the Partnership's Securities and Related Security
Holder Matters (continued)
(c) Dividend History and Restrictions (continued)
The source of future distributions from cash from operations is dependent
upon cash generated by the Partnership's investments and the use of working
capital reserves for leasing costs and capital expenditures. Distributions
of Cash from Operations during the year ended 1997 and 1996 represent a 7%
return on Investors' Invested Capital (defined in the Partnership
Agreement). The General Partner anticipates that the Partnership will make
distributions of Cash from Operations in 1998 comparable to those made
during both 1997 and 1996. For further discussion on the financial
condition and results of operations of the Partnership see Item 7 of the
Report. Should any of the Partnership's properties be sold, the General
Partner will make a distribution of Distributable Cash from Sales or
Financings, as provided in the
Partnership Agreement.
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, 1997. This information should be read in
conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Financial Statements and Notes
thereto, which are included in Items 7 and 8, respectively, of this Report.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Rental income $3,600,452 $3,606,964 $3,404,659 $3,407,133 $3,397,962
Income from joint venture 704,292 701,988 755,198 541,187 221,739
Interest income 142,959 145,734 162,332 105,917 107,122
Net income 2,579,607 2,616,017 2,776,632 2,543,261 2,228,039
Net income per Unit (b) 0.88 0.89 1.07 0.98 0.86
Ordinary tax income (a) 2,707,074 2,969,975 2,782,263 2,605,072 2,396,730
Ordinary tax income per Unit (b) 0.94 1.04 1.08 1.01 0.93
Cash distributions per Unit (c) 1.40 1.35 1.20 1.20 1.20
Cash and cash equivalents
at December 31 2,505,729 2,663,859 2,431,272 2,637,722 3,270,201
Total assets at December 31 39,595,199 40,896,886 41,824,552 42,079,427 42,528,624
</TABLE>
11
<PAGE>
Item 6 - Selected Financial Data (continued)
(a) The ordinary tax income for the Partnership was allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
General Partner $176,436 $189,088 $178,928 $168,666 $155,012
John Hancock Limited Partner 262,772 280,404 - - -
Investor Limited Partners 2,267,866 2,500,483 2,603,335 2,436,406 2,241,718
---------- ---------- ---------- ---------- ----------
Total $2,707,074 $2,969,975 $2,782,263 $2,605,072 $2,396,730
========== ========== ========== ========== ==========
</TABLE>
(b) The actual ordinary tax income per Unit has not been presented because
the actual ordinary tax income is allocated between tax-exempt and tax-
paying entities based upon the respective number of Units held by each
entity at December 31, 1997, 1996, 1995, 1994 and 1993. The ordinary
tax income per Unit for the fiscal years ended December 31, 1997,
1996, 1995, 1994 and 1993 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, 1997, 1996, 1995, 1994 and 1993.
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
- -------
During the offering period, from February 17, 1989 to February 15, 1991,
the Partnership sold 2,415,229 Units representing gross proceeds (exclusive
of the John Hancock Limited Partner's contribution which was used to pay
sales commissions) of $48,304,580. The proceeds of the offering were used
to acquire investment properties, fund reserves, and pay acquisition fees
and organizational and offering expenses. These investments are described
more fully in Items 1 and 2 and Notes 5 and 6 to the Financial Statements
included in Item 8 of this Report.
Impact of Year 2000
- -------------------
The General Partner and John Hancock Mutual Life Insurance Company, the
General Partner's ultimate parent (together, John Hancock) along with the
Partnership, have developed a plan to modify or replace significant
portions of the Partnership's computer information and automated
technologies so that its systems will function properly with respect to the
dates in the year 2000 and thereafter. The Partnership presently believes
that with modifications to existing systems and conversions to new
technologies, the year 2000 will not pose significant operational problems
for its computer systems. However, if certain modifications and
conversions are not made, or are not completed timely, the year 2000 issue
could have an adverse impact on the operations of the Partnership.
12
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Impact of Year 2000 (continued)
- -------------------
John Hancock as early as 1994 had begun assessing, modifying and converting
the software related to its significant systems and has initiated formal
communications with its significant business partners and customers to
determine the extent to which John Hancock's interface systems are
vulnerable to those third parties' failure to remediate their own year 2000
issues. While John Hancock is developing alternative third party
processing arrangements as it deems appropriate, there is no guarantee that
the systems of other companies on which the Partnership's systems rely will
be converted timely or will not have an adverse effect on the Partnership's
systems.
The Partnership expects the project to be substantially complete by early
1999. This completion target was derived utilizing numerous assumptions of
future events, including availability of certain resources and other
factors. However, there can be no guarantee that this completion target
will be achieved.
Forward-looking Statements
- --------------------------
In addition to historical information, certain statements contained herein
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Those statements appear in a number of
places in this Report and include statements regarding the intent, belief
or expectations of the General Partner with respect to, among other things,
the prospective sale of Partnership properties, actions that would be taken
in the event of lack of liquidity, unanticipated leasing costs, repair and
maintenance expenses, distributions to the General Partner and to
Investors, the possible effects of tenants vacating space at Partnership
properties, the absorption of existing retail space in certain geographical
areas, and the impact of inflation.
Forward-looking statements involve numerous known and unknown risks and
uncertainties, and they are not guarantees of future performance. The
following factors, among others, could cause actual results or performance
of the Partnership and future events to differ materially from those
expressed or implied in the forward-looking statements: general economic
and business conditions; any and all general risks of real estate
ownership, including without limitation adverse changes in general economic
conditions and adverse local conditions, the fluctuation of rental income
from properties, changes in property taxes, utility costs or maintenance
costs and insurance, fluctuations of real estate values, competition for
tenants, uncertainties about whether real estate sales under contract will
close; the ability of the Partnership to sell its properties; and other
factors detailed from time to time in the filings with the Securities and
Exchange Commission.
Readers are cautioned not to place undue reliance on forward-looking
statements, which reflect the General Partner's analysis only as of the
date hereof. The Partnership assumes no obligation to update forward-
looking statements. See also the Partnership's reports to be filed from
time to time with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended.
13
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources
- -------------------------------
At December 31, 1997, the Partnership had $2,505,729 in cash and cash
equivalents and $110,056 in restricted cash.
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. 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 1997, cash in the aggregate amount of $233,648 was used for the
payment of leasing costs incurred at the Allmetal Distribution Center and
the Palms of Carrollwood Shopping Center properties. The General Partner
anticipates that the Partnership will incur approximately $285,000 in
leasing costs in 1998, substantially all of which is expected 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.
During 1997, approximately $13,000 of cash generated from the Partnership's
operations was used to fund non-recurring maintenance and repair expenses
incurred at Palms of Carrollwood and the Business Center at Pureland
properties. The General Partner anticipates that during 1998 the
Partnership will incur non-recurring repair and maintenance expenses of
approximately $138,000 and $50,000 at the Palms of Carrollwood and the
Business Center at Pureland properties, respectively. These expenses will
be funded from the operations of the Partnership's properties and are not
expected to have a significant impact on the Partnership's liquidity.
Cash in the amount of $3,844,027, 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, 1997.
These amounts were distributed in accordance with the Partnership Agreement
and were allocated as follows:
Investors $3,381,320
John Hancock Limited Partner 270,506
General Partner 192,201
----------
Total $3,844,027
==========
The General Partner anticipates that the Partnership will be able to make
comparable distributions during 1998.
14
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
One of the anchor tenants at the Palms of Carrollwood vacated the property
during June 1995. In July 1995, the General Partner secured a new anchor
tenant to occupy this space under a lease commencing in November 1995. At
that time, three tenants' leases at the Palms of Carrollwood contained
clauses that made reference to the situation in which the former anchor
tenant ceased operations at the property. One of these tenants paid all
amounts due under its lease through the lease's scheduled expiration in
February 1997. Each of the other two tenants reduced their rental payments
by 25%. As a result of a settlement negotiated with the General Partner,
one of the other tenants recommenced making its rental payments at 100% of
the contracted amount. The Partnership brought an action against the other
tenant, who had reduced its rental payments during November 1995, to obtain
collection of 100% of the amounts due under the lease agreement. The
tenant claimed that it had the right to pay the reduced rent for the
remainder of the lease term until November 2004. During the first quarter
of 1998, this action was heard in a Florida court. The court held orally
in favor of the Partnership, ruling that the tenant had only a limited
period of time (approximately six months) that it could pay the reduced
rent. After that, the tenant must pay the full amount of rent specified in
the lease. The General Partner expects a judgment and written ruling to be
issued in April 1998. The tenant may appeal the ruling upon issuance of
the judgment.
As of the date hereof, the Palms of Carrollwood is 81% occupied. During
1998, no significant leases are scheduled to expire. The General Partner
will continue to offer competitive leasing packages in an effort to secure
lease renewals with existing tenants as well as to secure new tenants for
the remaining vacant space.
During the third quarter of 1997, Allmetal, Inc., the sole tenant at the
Allmetal Distribution Building, whose lease was scheduled to expire in
August 1998, extended the term of its lease through August 2008. The
tenant has an option to renew the lease for an additional five-year period.
The Partnership incurred leasing costs in the amount of $169,939 in
connection with this extension.
The Partnership's Affiliated Joint Venture property and warehouse
properties are presently 100% leased. 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.
15
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
<TABLE>
<CAPTION>
Property Lessee Lease Expiration
--------- ------ ----------------
<S> <C> <C>
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, 2008
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
Quince Orchard Corporate Center Boehringer Mannheim
Pharmaceuticals June 30, 2000
</TABLE>
During the first quarter of 1998, Purina Mills, Inc., ("PMI") the lessee at
the Purina Mills Distribution Building, notified the Partnership of its
intention to exercise its option to terminate the lease, in accordance with
the terms of its lease agreement, on December 1, 1998. The General Partner
will attempt to secure a lease with the current subtenant as well as seek a
replacement tenant for the building.
One of the tenants at the Business Center at Pureland, National Polystyrene
Recycling Co., L.P., ceased operations and vacated its space during the
fourth quarter of 1997. NPRC is seeking to sublet this space. The
Partnership continues to receive all rental payments due under the lease.
The General Partner does not currently believe that there will be a
materially adverse affect on the Partnership's liquidity resulting from
NPRC vacating the property.
During the first quarter of 1998, Hoffman-LaRoche, Inc. received approval
from the Federal Trade Commission to acquire Boehringer Mannheim
Pharmaceuticals, Inc. As a result, Hoffman-LaRoche, Inc. has indicated
that it will terminate operations at the Quince Orchard Corporate Center
and exercise its right to terminate the lease in June 2000. The General
Partner understands that Hoffman-LaRoche, Inc. is seeking to sublease the
property. The General Partner does not believe that this situation will
have a materially adverse affect on the Partnership's liquidity.
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 1998.
16
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
During the third quarter of 1997, the General Partner had the Quince
Orchard Corporate Center property independently appraised. Based upon the
appraiser's investigation and analysis, the property's market value was
estimated to be approximately $14,600,000 and the value of the
Partnership's investment in the Affiliated Joint Venture was estimated to
be approximately $7,125,000. The carrying value of the Partnership's
Affiliated Joint Venture investment of approximately $7,349,000 was
evaluated comparison to estimated future undiscounted cash flows and the
independent appraisal. Based on such evaluation, the General Partner
determined the Partnership's share of the property's estimated future
undiscounted cash flows are expected to exceed its carrying value and,
therefore, a write-down in value was not required. The Partnership's
cumulative investment in the Affiliated Joint Venture is approximately
$8,697,000.
The General Partner evaluated the carrying value of each of the
Partnership's other properties as of December 31, 1997 by comparing such
carrying value to the related property's future undiscounted cash flows and
the then most recent internal appraisal in order to determine whether an
impairment in value existed. Based upon such evaluations, the General
Partner determined that no impairment in values existed and, therefore, no
write-downs were recorded as of December 31, 1997.
The General Partner will continue to conduct property valuations, using
internal or independent appraisals, in order to assist in its evaluation of
whether an impairment in value exists on any of the Partnership's
properties.
Results of Operations
- ---------------------
Average occupancy for the Partnership's investments was as follows:
Years ended December 31,
1997 1996 1995
---- ---- ----
Palms of Carrollwood Shopping Center 79% 80% 76%
Yokohama Tire Warehouse 100% 100% 100%
Purina Mills Distribution Building 100% 100% 100%
Allmetal Distribution Building 100% 100% 100%
Stone Container Building 100% 100% 100%
Business Center at Pureland 100% 100% 100%
Quince Orchard Corporate Center
(Affiliated Joint Venture) 100% 100% 100%
Results of Operations - 1997 compared with 1996
Net income for the year ended December 31, 1997 was $2,579,607 as compared
to net income of $2,616,017 in 1996.
17
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
- ---------------------
Amortization of deferred expenses in 1997 increased by $39,849, or 12%, as
compared to 1996. This is primarily due to the amortization of leasing
costs associated with the leasing activity which occurred at the Palms of
Carrollwood, Allmetal Distribution, Stone Container, and the Business
Center at Pureland properties during the second half of 1996 and during
1997.
The Partnership's share of property operating expenses was consistent
between 1997 and 1996. However, non-recurring maintenance and repair
expenses of approximately $13,000 and $112,000 were incurred at its
properties during 1997 and 1996, respectively. Excluding these amounts,
the Partnership's share of property operating expenses increased by 42%
primarily due to legal fees incurred in connection with efforts to collect
past due rent from an existing tenant at the Palms of Carrollwood property
(described above).
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 was 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 paid 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 was due to the manner in which the
partnership agreement of QOCC-1 Associates allocates income 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).
18
<PAGE>
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 was
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 Partnership's 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. The Partnership's
share of property operating expenses at each of the Partnership's warehouse
properties was 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 was 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 was
primarily due to legal fees incurred by the Partnership in connection with
the class action complaint in which the Partnership remains a defendant
(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.
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 1998.
19
<PAGE>
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:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities (a) $3,919,545 $4,250,925 $3,743,803 $3,580,615 $3,382,661
Net change in operating assets
and liabilities (a) 146,780 (209,228) 111,983 (10,043) 40,419
---------- ---------- ---------- ---------- ----------
Net cash provided by operations (a) 4,066,325 4,041,697 3,855,786 3,570,572 3,423,080
Increase in working capital reserves (222,297) (197,669) (804,971) (519,757) (372,265)
---------- ---------- ---------- ---------- ----------
Cash from operations (b) 3,844,028 3,844,028 3,050,815 3,050,815 3,050,815
Decrease in working capital reserves - - - - -
---------- ---------- ---------- ---------- ----------
Distributable cash from operations (b) $3,844,028 $3,844,028 $3,050,815 $3,050,815 $3,050,815
========== ========== ========== ========== ==========
Allocation to General Partner $192,201 $192,201 $152,541 $152,541 $152,541
Allocation to John Hancock
Limited Partner 270,506 270,506 - - -
Allocation to Investors 3,381,321 3,381,321 2,898,274 2,898,274 2,898,274
---------- ---------- ---------- ---------- ----------
$3,844,028 $3,844,028 $3,050,815 $3,050,815 $3,050,815
========== ========== ========== ========== ==========
</TABLE>
(a) Net cash provided by operating activities, net change in operating
assets and liabilities, and net cash provided by operations are as
calculated in the Statements of Cash Flows included in Item 8 of this
Report.
(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 13, 1998, 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, 1997 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 the remainder of 1998 comparable to those
made during 1997.
20
<PAGE>
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, 1997, 1996 and 1995
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 54
Malcolm G. Pittman, III Director 46
Susan M. Shephard Director 45
Richard E. Frank Treasurer (Chief Accounting Officer) 36
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
<PAGE>
Item 10 - Directors and Executive Officers of the Partnership (continued)
(c) Identification of certain significant persons (continued)
Name Title Age
---- ----- ---
Edward P. Dowd Senior Vice President of 55
John Hancock's Real Estate
Investment Group
Kevin McGuire Vice President of John Hancock's 51
Real Estate Investment Group;
President of John Hancock Realty
Services Corp. and subsidiaries
Stephen Kindl Senior Investment Officer of John 40
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 54), 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 1998. 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 46), 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 1998. 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 45), 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 1998. 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
<PAGE>
Item 10 - Directors and Executive Officers of the Partnership (continued)
(e) Business Experience (continued)
Richard E. Frank (age 36), 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 55), 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 51), 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 40), 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.
23
<PAGE>
Item 10 - Directors and Executive Officers of the Partnership (continued)
Compliance with Section 16(a) of the Exchange Act
Under Section 16(a) of the Securities Exchange Act of 1934, as amended, the
General Partner's directors and executive officers, as well as any person
holding more than ten percent of the Units, are required to report their
initial ownership to the Securities and Exchange Commission and the
Partnership (such requirements hereinafter referred to as "Section 16(a)
filing requirements"). Specific time deadlines for Section 16(a) filing
requirements have been established.
To the Partnership's knowledge, no officer or director of the General
Partner has or had an ownership interest in the Partnership during the 1996
fiscal year or as of the date hereof. In addition, to the Partnership's
knowledge, the County Employees' Annuity and Benefit Fund of Cook County,
the greater than 10% holder of Units, was not required to file any reports
relating to Section 16(a) filing requirements during the 1997 fiscal year.
Item 11 - Executive Compensation
None of the officers or directors of the General Partner or any of the
members of the Real Estate Investment Committee referred to in Item 10(c)
receive any current direct remuneration from the Partnership in their
capacities as officers, directors or members of the Real Estate Investment
Committee, pursuant to any standard arrangements or otherwise, nor is any
such remuneration currently proposed. In addition, the Partnership has not
given and does not propose to give any options, warrants or rights,
including stock appreciation rights, to any such person in such capacities.
No remuneration plan or arrangement exists with any such person in such
capacities resulting from resignation, retirement or any other termination.
Therefore, tables relating to these topics have been omitted.
Compensation Committee Interlocks and Insider Participation:
The Partnership did not have a Compensation Committee in 1997 and does not
currently have such a committee. No current or former officer or employer
of the General Partner or its Affiliates participated during the 1997
fiscal year in deliberations regarding the General Partner's compensation
as it relates to the Partnership.
24
<PAGE>
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, 1997, 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
33 N. Dearborn St.
Chicago, IL
(b) Security ownership of management
By virtue of its organization as a Limited Partnership, the Partnership has
no officers or directors. Neither the General Partner nor any officer or
director of the General Partner possesses the right to acquire a beneficial
ownership of Units.
(c) Changes in Control
The Partnership does not know of any arrangements the operations of which
may at a subsequent date result in a change in control of the Partnership.
Item 13 - Certain Relationships and Related Transactions
See Note 4 of the Notes to the Financial Statements included in Item 8 of
this Report for a description of certain transactions and related amounts
payable by the Partnership to the General Partner and its Affiliates during
1997, 1996 and 1995.
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 1997, 1996 or 1995.
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 1997, 1996 or 1995.
25
<PAGE>
Item 13 - Certain Relationships and Related Transactions (continued)
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 $244,487, $179,330 and $156,119 of such expenses
during the years ended December 31, 1997, 1996 and 1995, 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 1997, 1996
or 1995.
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 each of the two years ended December 31, 1997
and 1996, and $152,541 for the year ended December 31, 1995. 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 years ended December 31, 1997 and 1996. The John Hancock Limited
Partner's share was $270,506 for each of the two years ended December 31,
1997 and 1996. Distributable Cash from Operations was insufficient to
provide the John Hancock Limited Partner with a distribution during the
year ended December 31, 1995.
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 1997, 1996 or 1995 and, therefore, no such
distributions were made.
26
<PAGE>
Item 13 - Certain Relationships and Related Transactions (continued)
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 $176,436, $189,088 and $178,928 during
the years ended December 31, 1997, 1996 and 1995, respectively. In
accordance with the terms of the Partnership Agreement, the John Hancock
Limited Partner was allocated $262,772 and $280,404 of profits during the
years ended December 31, 1997 and 1996, respectively. The John Hancock
Limited Partner was not allocated any such profits or losses during the
year ended December 31, 1995.
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, 1997:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating Expenses $244,487 $179,330 $156,119
General Partner Share of Distributable
Cash from Operations 192,201 192,201 152,541
John Hancock Limited Partner's share
of Distributable Cash from Operations 270,506 270,506 -
General Partner Share of Profits or
Losses for tax purposes 176,436 189,088 178,928
John Hancock Limited Partner's share
of Profits or Losses for tax purposes 262,772 280,404 -
</TABLE>
The Partnership provides indemnification to the General Partner and its
Affiliates for acts or omissions of the General Partner or its Affiliates
performed in good faith on behalf of the Partnership, subject to certain
specified exceptions, as described in the following paragraph:
27
<PAGE>
Item 13 - Certain Relationships and Related Transactions (continued)
The Partnership Agreement provides that neither the General Partner nor any
Affiliate of the General Partner shall be liable, responsible or
accountable in damages to any of the Partners or the Partnership for any
act or omission of the General Partner or such Affiliate in good faith on
behalf of the Partnership within the scope of the authority granted to the
General Partner by the Partnership Agreement and in the best interest of
the Partnership, except for acts or omissions constituting fraud,
negligence, misconduct or breach of fiduciary duty. The General Partner
and its Affiliates performing services on behalf of the Partnership shall
be entitled to indemnity from the Partnership for any loss, damage, or
claim by reason of any act performed or omitted to be performed by the
General Partner or such Affiliates in good faith on behalf of the
Partnership and in a manner within the scope of the authority granted to
the General Partner by the Partnership Agreement and in the best interest
of the Partnership, except that they shall not be entitled to be
indemnified in respect of any loss, damage, or claim incurred by reason of
fraud, negligence, misconduct, or breach of fiduciary duty. Any indemnity
shall be provided out of and to the extent of Partnership assets only.
The General Partner believes that this indemnification applies to costs
incurred in the class action complaint described in Item 3 of Part I of
this Report. Accordingly, the Partnership indemnified the General Partner
and its Affiliates for costs of $54,092, $41,475 and $0, relating to the
class action complaint in the years ended December 31, 1997, 1996 and 1995.
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)
28
<PAGE>
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
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)
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)
29
<PAGE>
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
(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)
(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)
30
<PAGE>
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
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)
(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 Travelers Insurance Company the Partnership's
and John Hancock Realty report on Form 8-K
Income Fund-III Limited dated February 11, 1992
Partnership* (File 0-18563)
31
<PAGE>
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
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
between World Park Limited the Partnership's
Partnership and John Hancock report on 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
February 28, 1992 between the Partnership's report
World Park Limited Partnership on report on Form 8-K
and John Hancock Realty Income dated 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)
(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)
32
<PAGE>
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
(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)
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*
33
<PAGE>
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
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, 1997.
(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
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the
31st day of March, 1998.
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, 1998.
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
35
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, 1997
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
BOSTON, MASSACHUSETTS
F-1
<PAGE>
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, 1997 and 1996 F-4
Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 F-5
Statements of Partners' Equity for the Years Ended
December 31, 1997, 1996 and 1995 F-6
Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 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, 1997 F-21
Statement of Operations for the Year
Ended December 31, 1997 F-22
Statement of Partners' Equity for the
Year Ended December 31, 1997 F-23
Statement of Cash Flows for the Year
Ended December 31, 1997 F-24
Notes to Financial Statements F-25
Report of Independent Auditors F-30
Balance Sheet at December 31, 1996 F-31
Statement of Operations for the Year
Ended December 31, 1996 F-32
Statement of Partners' Equity for the
Year Ended December 31, 1996 F-33
Statement of Cash Flows for the Year
Ended December 31, 1996 F-34
Notes to Financial Statements F-35
Report of Independent Auditors F-40
Balance Sheet at December 31, 1995 F-41
Statement of Operations for the Year
Ended December 31, 1995 F-42
Statement of Partners' Equity for the
Year Ended December 31, 1995 F-43
Statement of Cash Flows for the Year
Ended December 31, 1995 F-44
Notes to Financial Statements F-45
(2) Financial Statement Schedule
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
<PAGE>
Report of Independent Auditors
To the Partners
John Hancock Realty Income Fund-III Limited Partnership
We have audited the accompanying balance sheets of John Hancock Realty
Income Fund-III Limited Partnership (the "Partnership") as of December 31,
1997 and 1996, and the related statements of operations, partners' equity
and cash flows for each of the three years in the period ended December 31,
1997. Our audits also included the financial statement schedule listed in
the index at Item 14(a). These financial statements and schedule are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits. The financial statements of QOCC-1 Associates (a limited
partnership in which JH Quince Orchard Partners, a joint venture in which
the Partnership has a 50% interest, has a 75% interest) have been audited
by other auditors whose reports have been furnished to us; insofar as our
opinion on the financial statements relates to data included for QOCC-1
Associates, it is based solely on their reports.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
and the reports of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of John Hancock Realty Income Fund-III
Limited Partnership at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1997, 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 13, 1998
F-3
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
BALANCE SHEETS
ASSETS
December 31,
1997 1996
---- ----
Cash and cash equivalents $2,505,729 $2,663,859
Restricted cash 110,056 107,959
Other assets 287,958 180,542
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 5,478,701 4,649,036
----------- -----------
27,874,374 28,704,039
Investment in joint venture 7,349,298 7,638,805
Deferred expenses, net of accumulated
amortization of $1,373,339 in 1997 and
$1,025,259 in 1996 1,467,784 1,601,682
----------- -----------
Total assets $39,595,199 $40,896,886
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $212,129 $287,374
Accounts payable to affiliates 131,445 93,467
----------- -----------
Total liabilities 343,574 380,841
Partners' equity/(deficit):
General partners (52,449) (43,423)
Limited partners 39,304,074 40,559,468
----------- -----------
Total partners' equity 39,251,625 40,516,045
----------- -----------
Total liabilities and partners'
equity $39,595,199 $40,896,886
=========== ===========
See Notes to Financial Statements
F-4
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF OPERATIONS
Years Ended December 31,
1997 1996 1995
---- ---- ----
Income:
Rental income $3,600,452 $3,606,964 $3,404,659
Income from joint venture 704,292 701,988 755,198
Interest income 142,959 145,734 162,332
---------- ---------- ----------
Total income 4,447,703 4,454,686 4,322,189
Expenses:
Depreciation 829,665 829,665 829,665
Amortization of deferred expenses 367,546 327,697 209,655
Property operating expenses 314,874 323,918 264,629
General and administrative expenses 356,011 357,389 241,608
---------- ---------- ----------
Total expenses 1,868,096 1,838,669 1,545,557
---------- ---------- ----------
Net income $2,579,607 $2,616,017 $2,776,632
========== ========== ==========
Allocation of net income:
General Partner $183,175 $183,416 $186,708
John Hancock Limited Partner 276,868 276,653 -
Investors 2,119,564 2,155,948 2,589,924
---------- ---------- ----------
$2,579,607 $2,616,017 $2,776,632
========== ========== ==========
Net Income per Unit $0.88 $0.89 $1.07
========== ========== ==========
See Notes to Financial Statements
F-5
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
Partners' equity/(deficit) at January 1, 1995
(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
Less: Cash distributions (192,201) (3,651,826) (3,844,027)
Add: Net income 183,175 2,396,432 2,579,607
--------- ---------- ----------
Partners' equity/(deficit) at December 31, 1997
(2,415,234 Units outstanding) ($52,449) $39,304,074 $39,251,625
========= =========== ===========
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $2,579,607 $2,616,017 $2,776,632
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 829,665 829,665 829,665
Amortization of deferred expenses 367,546 327,697 209,655
Cash distributions over equity
in income from joint venture 289,507 268,318 39,834
---------- ---------- ----------
4,066,325 4,041,697 3,855,786
Changes in operating assets and liabilities:
(Increase)/decrease in restricted cash (2,097) (9,751) 5,695
(Increase)/decrease in other assets (107,416) 116,939 (136,986)
(Decrease)/increase in accounts payable and
accrued expenses (75,245) 46,985 10,949
Increase in accounts payable
to affiliates 37,978 55,055 8,359
---------- ---------- ----------
Net cash provided by operating activities 3,919,545 4,250,925 3,743,803
Investing activities:
Acquisition of deferred expenses
and other assets (233,648) (372,615) (899,438)
---------- ---------- ----------
Net cash used in investing activities (233,648) (372,615) (899,438)
Financing activities:
Cash distributed to Partners (3,844,027) (3,645,723) (3,050,815)
---------- ---------- ----------
Net cash used in financing activities (3,844,027) (3,645,723) (3,050,815)
---------- ---------- ----------
Net (decrease)/increase in cash and
cash equivalents (158,130) 232,587 (206,450)
Cash and cash equivalents at beginning
of year 2,663,859 2,431,272 2,637,722
---------- ---------- ----------
Cash and cash equivalents at end
of year $2,505,729 $2,663,859 $2,431,272
========== ========== ==========
</TABLE>
See Notes to Financial Statements
F-7
<PAGE>
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, 1997, 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 2,508
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
<PAGE>
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.
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.
The Partnership measures impairment in value in accordance with
Financial Accounting Standards Board Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of" ("Statement
121"). Statement 121 requires impairment losses to be recorded on
long-lived assets used in operations where indicators of impairment
are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts.
Depreciation has been provided on a straight-line basis over the
estimated useful lives of the various assets: thirty years for the
buildings and five years for related improvements. Maintenance and
repairs are charged to operations as incurred.
Investment in joint venture is recorded using the equity method.
Acquisition fees for the joint venture investment have been deferred
and are being amortized on a straight-line basis over a period of
thirty-one and a half years. Other deferred acquisition fees are
being amortized on a straight-line basis over a period of eighty-four
months. Capitalized tenant improvements and lease commissions are
being amortized on a straight-line basis over the terms of the leases
to which they relate.
No provision for income taxes has been made in the financial
statements as such taxes are the responsibility of the individual
partners and not of the Partnership.
F-9
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
2. Significant Accounting Policies (continued)
-------------------------------
The net income per Unit for the years ended December 31, 1997, 1996
and 1995 is calculated by dividing the Investors' share of net income
by the number of Units outstanding during each year.
Certain 1996 amounts have been reclassified to be consistent with the
1997 presentation.
3. The Partnership Agreement
-------------------------
Distributable Cash from Operations (defined in the Partnership
Agreement) is distributed 5% to the General Partner and the remaining
95% in the following order of priority: first, to the Investors until
they receive a 7% non-cumulative, non-compounded annual cash return on
their Invested Capital (defined in the Partnership Agreement); second,
to the John Hancock Limited Partner until it receives a 7%
non-cumulative, non-compounded annual cash return on its Invested
Capital; and third, to the Investors and the John Hancock Limited
Partner in proportion to their respective Capital Contributions
(defined in the Partnership Agreement). However, any Distributable
Cash from Operations which is available as a result of a reduction in
working capital reserves funded by Capital Contributions of the
Investors will be distributed 100% to the Investors.
Profits for tax purposes from the normal operations of the Partnership
for each fiscal year are allocated to the Partners in the same amounts
as Distributable Cash from Operations for that year. If such profits
are less than Distributable Cash from Operations for any year, they
are allocated in proportion to the amounts of Distributable Cash from
Operations for that year. If such profits are greater than
Distributable Cash from Operations for any year, they are allocated 5%
to the General Partner and 95% to the John Hancock Limited Partner and
the Investors, with the allocation made between the John Hancock
Limited Partner and the Investors in proportion to their respective
Capital Contributions. Losses for tax purposes from the normal
operations of the Partnership are allocated 1% to the General Partner
and 99% to the John Hancock Limited Partner and the Investors, with
the allocation made between the John Hancock Limited Partner and the
Investors in proportion to their respective Capital Contributions.
However, all tax aspects of the Partnership's payment of the sales
commissions from the Capital Contributions made by the John Hancock
Limited Partner are allocated 1% to the General Partner and 99% to the
John Hancock Limited Partner, and not to the Investors. Depreciation
deductions are allocated 1% to the General Partner and 99% to the
Investors, and not to the John Hancock Limited Partner.
F-10
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
3. The Partnership Agreement (continued)
------------------------
Neither the General Partner nor any affiliate of the General Partner
shall be liable, responsible or accountable in damages to any of the
Partners or the Partnership for any act or omission of the General
Partner or such affiliate in good faith on behalf of the Partnership
within the scope of the authority granted to the General Partner by
the Partnership Agreement and in the best interest of the Partnership,
except for acts or omissions constituting fraud, negligence,
misconduct or breach of fiduciary duty. The General Partner and its
affiliates performing services on behalf of the Partnership shall be
entitled to indemnity from the Partnership for any loss, damage, or
claim by reason of any act performed or omitted to be performed by the
General Partner or such affiliates in good faith on behalf of the
Partnership and in a manner within the scope of the authority granted
to the General Partner by the Partnership Agreement and in the best
interest of the Partnership, except that they shall not be entitled to
be indemnified in respect of any loss, damage, or claim incurred by
reason of fraud, negligence, misconduct, or breach of fiduciary duty.
Any indemnity shall be provided out of and to the extent of
Partnership assets only. The Partnership shall not advance any funds
to the General Partner or its affiliates for legal expenses and other
costs incurred as a result of any legal action initiated against the
General Partner or its affiliates by a Limited Partner in the
Partnership.
4. Transactions with the General Partner and Affiliates
----------------------------------------------------
Fees, commissions and other costs incurred or paid by the General
Partner or its affiliates during the three years ended December 31,
1997, 1996 and 1995, and to which the General Partner or its
affiliates are entitled to reimbursement from the Partnership were
$244,487, $179,330 and $156,119, respectively.
The Partnership provides indemnification to the General Partner and
its affiliates for any acts or omissions of the General Partner good
faith on behalf of the Partnership, except for acts or omissions
constituting fraud, negligence, misconduct or breach of fiduciary
duty. The General Partner believes that this indemnification applies
to the class action complaint described in Note 9. Accordingly,
included in the Statements of Operations for the years ended December
31, 1997, 1996, and 1995 were $54,092, $41,475, and $0, respectively,
representing the Partnership's share of costs incurred by the General
Partner and its affiliates relating to the class action complaint. As
of December 31, 1997, the Partnership has incurred a total of $95,567
as its share of the costs incurred by the General Partner and its
affiliates resulting from this matter.
F-11
<PAGE>
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,
1997 1996
---- ----
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
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
5. Investment in Property
----------------------
At December 31, 1997, future minimum rentals on non-cancelable leases
relating to the above properties were as follows:
1998 $3,922,245
1999 2,228,921
2000 1,917,209
2001 1,584,872
2002 1,430,803
Thereafter 6,512,258
-----------
Total $17,596,308
===========
6. Investment in Joint Venture
---------------------------
On December 28, 1988, the Partnership invested $75,000 to acquire a
0.5% interest in JH Quince Orchard Partners (the "Affiliated Joint
Venture"), a joint venture between the Partnership and John Hancock
Realty Income Fund-II Limited Partnership ("Income Fund-II"). The
Partnership had an initial 0.5% interest and Income Fund-II had an
initial 99.5% interest in the Affiliated Joint Venture. Pursuant to
the partnership agreement of the Affiliated Joint Venture, the
Partnership had the option, exercisable prior to December 31, 1990, to
increase its investment and interest in the Affiliated Joint Venture
to 50%. During the second quarter of 1989, the Partnership exercised
such option and Income Fund-II transferred a 49.5% interest in the
Affiliated Joint Venture to the Partnership for cash in the aggregate
amount of $7,325,672. The Partnership has held a 50% interest in the
Affiliated Joint Venture since the second quarter of 1989.
On December 28, 1988, the Affiliated Joint Venture contributed 98% of
the invested capital of, and acquired a 75% interest in, QOCC-1
Associates, an existing partnership which owns and operates the Quince
Orchard Corporate Center, a three-story office building and related
land and improvements located in Gaithersburg, Maryland. The
partnership agreement of QOCC-1 Associates provides that the
Affiliated Joint Venture contribute 95% of any required additional
capital contributions. Of the cumulative total invested capital in
QOCC-1 Associates at December 31, 1997, 97.55% has been contributed by
the Affiliated Joint Venture. The Affiliated Joint Venture continues
to hold a 75% interest in QOCC-1 Associates.
F-13
<PAGE>
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 1997 and 1996, the partners received a return on
invested capital of approximately 12%. 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,
1997 1996
---- ----
Current assets $148,840 $152,573
Deferred expenses, net 1,530,759 1,835,645
Other assets 1,544,230 1,724,493
Investment in property, net 11,951,074 12,304,945
----------- -----------
Total assets $15,174,903 $16,017,656
=========== ===========
Current liabilities $251,928 $476,658
Partners' equity 14,922,975 15,540,998
----------- -----------
Total liabilities and equity $15,174,903 $16,017,656
=========== ===========
Results of Operations
Years Ended December 31,
1997 1996 1995
---- ---- ----
Total income $2,761,035 $2,754,712 $2,719,151
Total expenses 1,212,058 1,220,531 1,180,460
---------- ---------- ----------
Net income $1,548,977 $1,534,181 $1,538,691
========== ========== ==========
F-14
<PAGE>
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 $14,634,651 and $15,213,661 at December 31, 1997 and 1996,
respectively. The Affiliated Joint Venture's share of QOCC-1
Associates' net income was $1,408,588, $1,403,992 and $1,510,397 for
the years ended December 31, 1997, 1996 and 1995, respectively. As
noted above, the Partnership has a 50% interest in the Affiliated
Joint Venture.
7. Deferred Expenses
-----------------
Deferred expenses consist of the following:
<TABLE>
<CAPTION>
Unamortized Balance at
December 31,
Description 1997 1996
----------- ---- ----
<S> <C> <C>
$152,880 of acquisition fees for
investment in the Affiliated Joint
Venture. This amount
is amortized over a period
of 31.5 years. $109,402 $114,256
$1,119,446 of tenant improvements. These
amounts are amortized over the terms
of the leases to which they relate. 775,877 900,220
$495,177 of lease commissions. These
amounts are amortized over the terms
of the leases to which they relate. 390,787 242,114
$1,073,621 of acquisition fees paid to the
General Partner. This amount
is amortized over a period of
eighty-four months. 191,718 345,092
---------- ----------
$1,467,784 $1,601,682
---------- ----------
</TABLE>
F-15
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
8. Federal Income Taxes
-------------------
A reconciliation of the net income reported in the Statements of
Operations to the net income reported for federal income tax purposes
is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income per Statements of Operations $2,579,607 $2,616,017 $2,776,632
Add/(less): Excess of book depreciation
over tax depreciation 138,779 141,284 142,021
Excess of book amortization
over tax amortization 189,010 159,378 59,511
Other income (211,950) (48,622) (195,901)
Other expenses 11,628 101,918 -
---------- ---------- ----------
Net income for federal income tax purposes $2,707,074 $2,969,975 $2,782,263
========== ========== ==========
</TABLE>
A reconciliation of the Partnership's properties' aggregate cost for
book and federal income tax purposes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Aggregate cost, book purposes $33,353,075 $33,353,075 $33,353,075
Add/(deduct): Costs capitalized for federal
income tax purposes, cumulative 148,114 136,486 34,568
Book basis property write-downs,
cumulative 1,431,400 1,431,400 1,431,400
----------- ----------- -----------
Aggregate cost, federal income tax purposes $34,932,589 $34,920,961 $34,819,043
========== ========== ==========
</TABLE>
F-16
<PAGE>
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.
The Partnership has incurred an aggregate of approximately $239,000 in
legal expenses in connection with this matter. Of this amount,
approximately $143,000 relates to the Partnership's own defense and
approximately $96,000 relates to indemnification of the General
Partner and its affiliates for their defense. These expenses are
funded from the operations of the Partnership.
At the present time, the General Partner cannot estimate the aggregate
amount of legal expenses and indemnification claims to be incurred and
their impact on the Partnership's Financial Statements, taken as a
whole. Accordingly, no provision for any liability that could result
from the eventual outcome of these matters has been made in the
accompanying financial statements. However, while it is still too
early to estimate potential damages, they could possibly be material.
10. Subsequent Events
-----------------
On February 13, 1998, 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, 1997 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.
F-17
<PAGE>
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
QOCC-1 ASSOCIATES
DECEMBER 31, 1997
F-18
<PAGE>
QOCC-1 ASSOCIATES
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
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners
QOCC-1 Associates
We have audited the accompanying balance sheet of QOCC-1 Associates as
of December 31, 1997, and the related statements of income, partners'
equity and cash flows for the year then ended. These financial statements
are the responsibility of the partnership's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of QOCC-1
Associates as of December 31, 1997, and the results of its operations and
its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
REZNICK FEDDER & SILVERMAN
Bethesda, Maryland
January 8, 1998
F-20
<PAGE>
QOCC-1 Associates
BALANCE SHEET
December 31, 1997
ASSETS
RENTAL PROPERTY
Land $ 3,670,000
Land improvements 35,425
Building 11,461,343
Building improvements 79,896
-----------
15,246,664
Less accumulated depreciation 3,295,590
-----------
11,951,074
OTHER ASSETS
Cash and cash equivalents 280,798
Prepaid taxes and insurance 99,999
Prepaid leasing commissions 215,803
Deferred rent concessions 1,312,273
Leasing costs, less accumulated amortization of 1,314,956
$837,831
------------
3,223,829
------------
$ 15,174,903
============
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 19,971
Security deposit 231,957
-----------
251,928
COMMITMENT -
PARTNERS' EQUITY 14,922,975
------------
$ 15,174,903
============
See notes to financial statements
F-21
<PAGE>
QOCC-1 Associates
STATEMENT OF INCOME
Year ended December 31, 1997
Revenue
Rental income - base $ 2,691,797
Rental income - reimbursements 67,665
Interest income 1,573
-----------
Total revenue 2,761,035
Expenses
Accounting $ 8,250
Miscellaneous 2,637
Commissions 86,320
Depreciation and amortization 589,198
Insurance 5,772
Management fees 51,691
Personnel services 73,941
Repairs and maintenance 188,130
Supplies 2,137
Taxes 197,519
Utilities 6,463
---------
Total expenses 1,212,058
-----------
NET INCOME $ 1,548,977
===========
See notes to financial statements
F-22
<PAGE>
QOCC-1 Associates
STATEMENT OF PARTNERS' EQUITY
Year ended December 31, 1997
Equity at Net Distributions Equity at
January income December
1, 1997 31, 1997
JH Quince Orchard $15,213,661 $ 1,408,588 $ (1,987,598) $ 14,634,651
Partners
Quad Properties, Inc. 327,337 140,389 (179,402) 288,324
---------- ----------- ------------ ----------
$15,540,998 $ 1,548,977 $ (2,167,000) $ 14,922,975
========== ========== ============ ==========
See notes to financial statements
F-23
<PAGE>
QOCC-1 Associates
STATEMENT OF CASH FLOWS
Year ended December 31, 1997
Cash flows from operating activities
Net income $ 1,548,977
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 589,198
Increase in prepaid taxes and insurance (3,904)
Decrease in accounts payable and accrued expenses (9,599)
Decrease in prepaid leasing commissions 86,319
Decrease in prepaid rent and security deposit (215,131)
Increase in deferred rent concessions (34,868)
-----------
Net cash provided by operating activities 1,960,992
-----------
Cash flows from investing activities
Investment in rental property (16,760)
-----------
Net cash used in investing activities (16,760)
----------
Cash flows from financing activities
Distributions to partners (2,167,000)
-----------
Net cash used in financing activities (2,167,000)
-----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (222,768)
Cash and cash equivalents, beginning 503,566
-----------
Cash and cash equivalents, end $ 280,798
===========
See notes to financial statements
F-24
<PAGE>
QOCC-1 Associates
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The partnership was organized on December 27, 1988, as a general
partnership under the laws of the State of Maryland for the purpose of
operating an office building with approximately 99,782 net rentable
square feet in Gaithersburg, Maryland. The building was acquired in
December 1988. The partnership conducts its rental operations under a
lease agreement with one tenant.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Rental Property
---------------
Rental property is carried at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives by use of the straight-line method.
Cash Equivalents
----------------
For purposes of the statement of cash flows, the partnership considers
all highly liquid investments with original maturities of 90 days or less
to be cash equivalents.
Rental Income
-------------
Rental income is recognized using the straight-line method over the term
of the lease, which includes the rent concession period. The amount
applicable to the rent concession is recorded as a deferred asset against
which future collections are applied. Rental payments received in
advance are deferred until earned. The lease between the partnership and
the tenant of the property is an operating lease.
F-25
<PAGE>
QOCC-1 Associates
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Income Taxes
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and
is reportable by, the partners individually.
Prepaid Leasing Commissions
Prepaid leasing commissions are charged to operations using the straight-
line method over 76 months.
Leasing Costs
Leasing costs were incurred to obtain a new tenant for the office
building and improve the rental space. These costs are being written off
using the straight-line method over the ten-year term of the lease.
NOTE B - RENTAL INCOME UNDER OPERATING LEASE
The partnership has leased the office building to a new tenant effective
March 1994 under a ten-year term with a five-year renewal option at the
discretion of the lessee. The tenant may terminate the lease after the
76th calendar month of the term by notifying the landlord as outlined in
the lease agreement. Rental income consists of fixed base rent plus a
fixed annual increase and variable lease reimbursement escalation,
calculated annually.
Future minimum base rental payments due under the noncancelable operating
lease are as follows:
Year ending
December 31,
1998 $ 2,723,352
1999 2,791,436
2000 2,861,222
2001 2,932,752
2002 3,006,071
Thereafter 3,596,856
-----------
$ 17,911,689
===========
F-26
<PAGE>
QOCC-1 Associates
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
NOTE C - RELATED PARTY TRANSACTION
During 1997, the partnership incurred charges of approximately $125,809
for management fees, personnel services and supplies provided by
affiliates of one of the partners.
NOTE D - COMMITMENT
The partnership has entered into a lease commission agreement with Carey
Winston. The agreement provides for $546,696 of commissions to be paid
for the first 76 months of the tenant's lease, which began March 1994. If
the tenant does not exercise its option to terminate the lease after the
76th month, additional commissions in the amount of $376,198 for the
remaining 44 months of the tenant's lease will be due at that time.
NOTE E - CONCENTRATION OF CREDIT RISK
The partnership maintains its cash balances in two banks. The balances
are insured by the Federal Deposit Insurance Corporation up to $100,000
by each bank. As of December 31, 1997, the uninsured portion of the cash
balances held at the banks was $131,957.
F-27
<PAGE>
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
QOCC-1 ASSOCIATES
DECEMBER 31, 1996
F-28
<PAGE>
QOCC-1
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
<PAGE>
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-30
<PAGE>
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 $ 29,570
expenses
Prepaid rent and security deposit 447,088
-----------
476,658
COMMITMENT -
PARTNERS= EQUITY 15,540,998
-----------
$ 16,017,656
===========
See notes to financial statements
F-31
<PAGE>
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-32
<PAGE>
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, 361,521 130,189 (164,373) 327,337
Inc.
--------- --------- --------- ---------
$ 16,111,817 $ 1,534,181 $ (2,105,000) $ 15,540,998
========== ========== ========== ==========
See notes to financial statements
F-33
<PAGE>
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-34
<PAGE>
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-35
<PAGE>
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
Thereaf 6,602,927
ter
----------
$ 20,568,618
==========
F-36
<PAGE>
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-37
<PAGE>
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
QOCC-1 ASSOCIATES
DECEMBER 31, 1995
F-38
<PAGE>
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
<PAGE>
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-40
<PAGE>
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-41
<PAGE>
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-42
<PAGE>
QOCC-1 Associates
STATEMENT OF PARTNERS' EQUITY
Year ended December 31, 1995
<TABLE>
<CAPTION>
Equity at Equity at
January Net Distri- December
1, 1995 Income butions 31, 1995
------- ------ ------- --------
<S> <C> <C> <C> <C>
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
=========== ========== =========== ===========
</TABLE>
See notes to financial statements
F-43
<PAGE>
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-44
<PAGE>
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-45
<PAGE>
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-46
<PAGE>
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-47
<PAGE>
<TABLE>
<CAPTION>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
Year Ended December 31, 1997
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)
- ----------- ------------ ---- ------------ -------------------------- ---- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
== ========== =========== ======= ========== ========== =========== ===========
</TABLE>
F-48
<PAGE>
<TABLE>
<CAPTION>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
SCHEDULE III (Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION
Year Ended December 31, 1997
Life on Which
Depreciation in
Latest Statement
Accumulated Date of Date of Operations
Description Depreciation (5) Construction Acquired is Computed
----------- ---------------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Palms of Carrollwood
Shopping Center
Tampa, FL $1,538,870 1984 12/28/89 30 Years
Yokohama Tire Warehouse
Louisville, KY 1,853,590 1991 7/17/91 30 Years
Purina Mills Distribution
Building
St. Louis, MI 726,602 1991 12/27/91 30 Years
Allmetal Distribution Building
Carrollton, TX 266,982 1987 3/6/92 30 Years
Stone Container Building
Cincinnati, OH 308,354 1991 3/16/92 30 Years
Business Center at Pureland
Bridgeport, NJ 784,303 1989 3/27/92 30 Years
----------
$5,478,701
==========
(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.
</TABLE>
F-49
<PAGE>
<TABLE>
<CAPTION>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
SCHEDULE III (continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION
Year Ended December 31, 1997
(2) The Partnership's properties' aggregate cost for federal income tax
purposes at December 31, 1997 are as follows:
Property Amount
-------- -------
Palms of Carrollwood Shopping Center $12,487,470
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 5,164,638
-----------
$34,932,589
===========
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,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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 $4,649,036 $3,819,371 $2,989,706
Additions charged to costs and expenses 829,665 829,665 829,665
---------- ---------- ----------
Balance at end of year $5,478,701 $4,649,036 $3,819,371
========== ========== ==========
</TABLE>
F-50
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000842741
<NAME> JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,615,785
<SECURITIES> 0
<RECEIVABLES> 273,070
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,903,743
<PP&E> 33,353,075
<DEPRECIATION> 5,478,701
<TOTAL-ASSETS> 39,595,199
<CURRENT-LIABILITIES> 343,574
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 39,251,625
<TOTAL-LIABILITY-AND-EQUITY> 39,595,199
<SALES> 0
<TOTAL-REVENUES> 4,447,703
<CGS> 0
<TOTAL-COSTS> 670,885
<OTHER-EXPENSES> 1,197,211
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,579,607
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,579,607
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,579,607
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.88
</TABLE>
