SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
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 (IRS Employer
Incorporation or Organization) Identification No.)
200 Berkeley Street, Boston, MA 02117
(Address of Principal Executive Office) (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 the 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: Not applicable, since securities are non-voting.
Documents incorporated by reference: None.
Exhibit Index on Pages 25 - 30
Page 1 of 49
TABLE OF CONTENTS
PART I
Item 1 Business 3
Item 2 Properties 6
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote
of Security Holders 9
PART II
Item 5 Market for the Partnership's Securities and Related
Security Holder Matters 9
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 8 Financial Statements and Supplementary Data 19
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 19
PART III
Item 10 Directors and Executive Officers of the Partnership 19
Item 11 Executive Compensation 22
Item 12 Security Ownership of Certain Beneficial Owners
and Management 22
Item 13 Certain Relationships and Related Transactions 23
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 25
Signatures 31
2
Part I
Item 1 - Business
The Registrant, John Hancock Realty Income Fund-III Limited Partnership
(the "Partnership"), is a Limited Partnership organized on November 4, 1988
under the Massachusetts Uniform Limited Partnership Act. As of December
31, 1995, 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 2,671
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 specfied in the Partnership Agreement.
The latest date on which the Partnership is due to terminate is December
31, 2019, unless it is sooner terminated in accordance with the terms of
the Partnership Agreement. It is expected that in the ordinary course of
the Partnership's business, the properties of the Partnership will be
disposed of, and the Partnership terminated, before December 31, 2019.
3
Item 1 - Business (continued)
The Partnership's equity real estate investments are subject to various
risk factors. Although the risks of equity investing are reduced when
properties are acquired on an unleveraged basis, the major risk of owning
income-producing properties is the possibility that the properties will not
generate income sufficient to meet operating expenses and to fund adequate
reserves for repair, replacements, contingencies and anticipated
obligations. The income from properties may be affected by many factors,
including: i) adverse changes in general economic conditions and local
conditions, such as competitive overbuilding, a decrease in employment, or
adverse changes in real estate zoning laws, which may reduce the
desirability of real estate in the area or ii) other circumstances over
which the Partnership may have little or no control, such as fires,
earthquakes and floods. To the extent that the Partnership's properties
are leased in any substantial portion to a specific retail, industrial or
office tenant, the financial failure of any such major tenant, resulting in
the termination of the tenant's lease or non-payment of rentals due, would
likely cause at least a temporary reduction in cash flow from any such
property and might result in a decrease in the market value of that
property.
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 Affiliated Joint Venture then 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"). 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. Since the second quarter of 1989 the Partnership has held a
50% interest in the Affiliated Joint Venture. During the years ended
December 31, 1994 and 1993, the partners in QOCC-1 Associates were required
to make additional capital contributions towards the funding of leasing
costs incurred at the property. In accordance with the terms of the
partnership agreement of QOCC-1 Associates, the Affiliated Joint Venture
contributed 95% of such additional capital. Of the cumulative total
invested capital in QOCC-1 Associates at December 31, 1995, 97.55% has been
contributed by the Affiliated Joint Venture. The Affiliated Joint Venture
continues to hold a 75% interest in QOCC-1 Associates.
The Quince Orchard Corporate Center is occupied by Boehringer Mannheim
Pharmaceuticals, Inc. under a ten-year lease which expires in February
2004. The tenant has two options under the lease agreement, one, to
terminate the lease at the end of the seventy-sixth month of the lease, or
June 2000, and, two, to extend the term of the lease for an additional five-
year period.
4
Item 1 - Business (continued)
On December 28, 1989, the Partnership acquired the Palms of Carrollwood
Shopping Center, a neighborhood shopping center located in Tampa, Florida.
During the fourth quarter of 1994, one of the anchor tenants which occupied
22% of the rentable space at the property informed the General Partner that
it was seeking to sublease its space. The anchor tenant vacated the
property during June 1995 and during July 1995, the General Partner secured
a new anchor tenant. The former anchor tenant's lease obligations were
terminated as of July 31, 1995 in consideration of the tenant not
subleasing its space at the property. The new anchor tenant's lease
commenced in November 1995 and is for a ten-year term.
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 stablilized during 1994 and increased during 1995. As a result, the
General Partner anticipates relatively favorable retail market conditions
in Tampa and at the property during 1996.
The Partnership acquired the following warehouse properties on the
following dates. On July 17, 1991, the Partnership acquired Yokohama Tire
Warehouse located in Louisville, Kentucky. On December 27, 1991, the
Partnership acquired the Purina Mills Distribution Building located in St.
Louis, Missouri. On March 6, 1992, the Partnership acquired the Allmetal
Distribution Building located in Carrollton, Texas. On March 16, 1992, the
Partnership acquired the Stone Container Building located in Cincinnati,
Ohio. On March 27, 1992, the Partnership acquired the Business Center at
Pureland located in Bridgeport, New Jersey.
The Partnership's warehouse properties are presently 100% occupied. The
following table sets forth the names of the lessees at each of the
Partnership's warehouse properties and the earliest date on which the
applicable lessee's lease obligations may terminate.
Property Lessee Lease Expiration
-------- ------ ----------------
Yokohama Tire Warehouse Yokohama Tire Corp. March 31, 2006
Purina Mills Distribution Building Purina Mills, Inc. December 1, 1998
Allmetal Distribution Building Allmetal, Inc. August 31, 1998
Stone Container Building Stone Container Corp. December 31, 2011
Business Center at Pureland Forbo Wallcoverings, Inc. December 31, 1998
Business Center at Pureland National Polystyrene
Recycling Co., L.P. May 31, 2001
The General Partner anticipates that the warehouse properties should
provide the Partnership with stable income performance during 1996.
5
Item 1 - Business (continued)
Within the power accorded to the General Partner under the terms of the
Partnership Agreement, the General Partner contracted, effective as of
January 1, 1992, with Hancock Realty Investors Incorporated ("HRI"), a
wholly-owned, indirect subsidiary of John Hancock Mutual Life Insurance
Company ("John Hancock"), to assist the General Partner in the performance
of its management duties as enumerated in the Partnership Agreement.
Effective May 28, 1993, HRI subcontracted with John Hancock to assist HRI
in the performance of its duties as enumerated in the January 1, 1992
contract. The Partnership has not incurred any additional costs or
expenses as a result of these agreements. The General Partner is further
described in Item 10 of this Report.
Industry segment information has not been provided since the Partnership is
engaged in only one industry segment.
Item 2 - Properties
As of December 31, 1995 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 Partnerhsip 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 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 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 requires the Affiliated Joint Venture to contribute 95% of
additional capital contributions. Of the cumulative total invested capital
in QOCC-1 Associates at December 31, 1995, 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, 1995 was 100%.
6
Item 2 - Properties (continued)
Palms of Carrollwood
- --------------------
On December 28, 1989, the Partnership acquired the Palms of Carrollwood
Shopping Center, located in Tampa, Florida, from a non-affiliated seller.
The property contains approximately 161,000 rentable square feet, including
approximately 10,000 square feet of office space, situated on a 15 acre
site.
The average occupancy for the Palms of Carrollwood Shopping Center for the
year ended December 31, 1995 was 76%.
Yokohama Tire Warehouse
- -----------------------
On July 17, 1991, the Partnership acquired the Yokohama Tire Warehouse,
located in Louisville, Kentucky, from a non-affiliated seller. The
property is situated on 24 acres of land and contains an aggregate of
309,791 rentable square feet, of which 297,391 square feet is warehouse
space and 12,400 square feet is office space.
The warehouse is 100% leased to the Yokohama Tire Corporation under a lease
which expires on March 31, 2006. Under the terms of the lease agreement,
the Yokohama Tire Corporation had the option to purchase the property for
$10,228,173 on April 1, 1996, but did not choose to exercise such option.
Yokohama Tire Corporation has additional options to purchase the property
for $10,478,173 on April 1, 1999 and for $10,578,173 on April 1, 2001. In
addition, the Yokohama Tire Corporation has the option, exercisable at any
time during the term of the lease, to expand the square footage of the
facility by any area of up to 220,000 square feet.
Purina Mills Distribution Building
- ----------------------------------
On December 27, 1991, the Partnership acquired the Purina Mills
Distribution Building, located in St. Louis, Missouri, from a non-
affiliated seller. The property is situated on 7.3 acres of land and
contains an aggregate of 126,400 rentable square feet, of which 114,800 is
warehouse space and 11,600 square feet is office space.
Purina Mills Distribution Building is 100% leased to Purina Mills,
Incorporated ("PMI") under a lease which expires on November 30, 2001. The
lease contains a one-time option to terminate the lease on December 1, 1998
upon the payment of $240,815 to the Partnership. During 1993, PMI was sold
by its parent company, BP Nutrition, Incorporated ("BPN"), and during March
1994, PMI assigned its right, title and interest in the lease to BPN. PMI
remains fully liable to perform all of its obligations under the lease and
BPN, as assignee, is also liable to perform all obligations under the
lease. In addition, BP America, Incorporated, the parent company of BPN,
has provided a guaranty to the Partnership for any monetary obligations
under the lease. PMI has vacated the property and, during the second
quarter of 1994, secured a tenant to sublease the space through November
1998.
7
Item 2 - Properties (continued)
Allmetal Distribution Building
- ------------------------------
On March 6, 1992, the Partnership acquired the Allmetal Distribution
Building, located in Carrollton, Texas, from a non-affiliated seller. The
property is situated on 3 acres of land and contains an aggregate of 56,531
rentable square feet, of which 51,531 square feet is warehouse space and
5,000 square feet is office space.
The property is 100% leased to Allmetal, Inc. under a lease which expires
on August 31, 1998.
Stone Container Building
- ------------------------
On March 16, 1992, the Partnership acquired the Stone Container Building,
located in Cincinnati, Ohio, from a non-affiliated seller. The property is
situated on 5.5 acres of land and contains an aggregate of 80,000 rentable
square feet, of which 76,000 square feet is warehouse space and 4,000
square feet is office space.
The property is 100% leased to Stone Container Corporation under a lease
which expires on December 31, 2011. During 1995, Stone Container
Corporation requested approval to construct additional office space within
the existing 80,000 square foot area of the building. The General Partner
agreed to construct the additional office space in exchange for i) an
increase in the tenant's rental rate in an amount equivalent to the total
cost of constructing the additional office space, through the end of the
existing term of the lease (December 2001) and ii) the tenant exercising
its two five-year options to extend the term of the lease to December 2011.
Business Center at Pureland
- ---------------------------
On March 27, 1992, the Partnership acquired the Business Center at Pureland
located in Bridgeport, New Jersey, from a non-affiliated seller. The
property is situated on 10.5 acres of land and contains two buildings
consisting of an aggregate of 119,651 rentable square feet of warehouse
space.
One building (consisting of 60,535 sq. ft.) is 100% leased to Forbo
Wallcoverings, Inc. under a lease which expires on December 31, 1998. The
second building (consisting of 59,116 sq. ft.) is 100% leased to National
Polystyrene Recycling Company, L.P. under a lease which expires on May 31,
2001.
The foregoing investments of the Partnership are further described in Item
7 of this Report.
8
Item 3 - Legal Proceedings
In February 1996, a putative class action complaint was filed in the
Superior Court in Essex County, New Jersey by a single investor in a
limited partnership affiliated with the Partnership. The complaint named
as defendants the Partnership, the General Partner, certain other
Affiliates of the General Partner, and certain unnamed officers, directors,
employees and agents of the named defedants.
The plaintiff sought unspecified damages stemming from alleged
misrepresentatins 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.
The General Partner believes the allegations are totally without merit and
will 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 1995.
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, 1995 December 31, 1995
-------------- ----------------- -----------------
Assignee Units 2,671 2,415,229
9
Item 5 - Market for the Partnership's Securities and Related Security
Holder Matters
(c) Dividend History and Restrictions
During the fiscal years ended December 31, 1995 and 1994 the Partnership
distributed each year cash in the aggregate amount of $3,050,815 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, in accordance with the terms of the Partnership
Agreement. The John Hancock Limited Partner did not receive any
Distributable Cash from Operations during such periods.
The following table reflects cash distributions made during the two year
period ended December 31, 1995:
Date of Amount of Amount Paid to Amount Paid Distribution
Distribution Distribution General Partner to Investors Per Unit
------------ ------------ --------------- ------------ --------
February 15, 1994 $762,704 $38,135 $724,569 $0.30
May 14, 1994 762,704 38,135 724,569 0.30
August 15, 1994 762,704 38,136 724,568 0.30
November 15, 1994 762,703 38,135 724,568 0.30
February 15, 1995 762,704 38,135 724,569 0.30
May 15, 1995 762,704 38,135 724,569 0.30
August 15, 1995 762,704 38,136 724,568 0.30
November 15, 1995 762,703 38,135 724,568 0.30
The General Partner anticipates that the Partnership will make cash
distributions in 1996 comparable to those made in both 1995 and 1994. For
a further discussion of the financial condition and results of operations
of the Partnership see Item 7 of this Report.
10
Item 6 - Selected Financial Data
The following table sets forth selected financial information regarding the
Partnership's financial position and operating results for the five year
period ended December 31, 1995. This information should be read in
conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Financial Statements and Notes
thereto, which are included in Items 7 and 8, respectively, of this Report.
Years Ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Rental income $3,404,659 $3,407,133 $3,397,962 $3,211,958 $1,565,269
Income from joint venture 755,198 541,187 221,739 432,782 445,670
Interest income 162,332 105,917 107,122 195,768 1,242,935
Net income 2,776,632 2,543,261 2,228,039 2,334,283 1,015,490
Net income per Unit (b) 1.07 0.98 0.86 0.90 0.39
Ordinary tax income (a) 2,782,263 2,605,072 2,396,730 2,476,791 2,517,096
Ordinary tax income per Unit (b) 1.08 1.01 0.93 0.96 0.98
Cash distributions per Unit (c) 1.20 1.20 1.20 1.20 1.25
Cash and cash equivalents
at December 31 2,431,272 2,637,722 3,270,201 3,146,887 11,572,628
Total assets at December 31 41,824,552 42,079,427 42,528,624 43,378,299 44,133,488
(a) The ordinary tax income for the Partnership was allocated as follows:
Years Ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
General Partner $178,928 $168,666 $155,012 $156,969 $147,160
John Hancock Limited Partner - - - - -
Investor Limited Partners 2,603,335 2,436,406 2,241,718 2,319,822 2,369,936
---------- ---------- ---------- ---------- ----------
Total $2,782,263 $2,605,072 $2,396,730 $2,476,791 $2,517,096
========== ========== ========== ========== ==========
(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, 1995, 1994, 1993, 1992 and 1991. The ordinary
tax income per Unit for the fiscal years ended December 31, 1995,
1994, 1993 and 1992 was computed by dividing the Investors' share of
ordinary tax income by the number of Units outstanding during the
year. The ordinary tax income per Unit for the fiscal year ended
December 31, 1991 was computed by dividing the Investors' share of
ordinary tax income by the weighted average number of Units
outstanding during the year.
11
Item 6 - Selected Financial Data (continued)
(c) Represents the actual cash distribution per Unit for the years ended
December 31, 1995, 1994, 1993 and 1992. The offering period was
completed during 1991, resulting in some Investors owning their Units
for a partial year during the year ended December 31, 1991.
Therefore, this table reflects an average cash distribution per Unit
for the year ended December 31, 1991. For the year ended December 31,
1991, the actual cash distribution per Unit is based upon the
respective dates on which the Investors were admitted to the
Partnership.
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.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1995, the Partnership had $2,431,272 in cash and cash
equivalents, $6,323 in restricted cash and $91,885 in long-term restricted
cash.
The Partnership has a working capital reserve with a current balance of
approximately 4% of the offering proceeds. The General Partner anticipates
that such amount should be sufficient to satisfy the Partnership's general
liquidity requirements. Liquidity would, however, be materially adversely
affected if there were a significant reduction in revenues or significant
unanticipated operating costs or unanticipated capital expenditures. If
any or all of these events were to occur, to the extent that working
capital reserves 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.
12
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
During the fourth quarter of 1994, one of the anchor tenants at the Palms
of Carrollwood Shopping Center property ("Palms of Carrollwood") that
occupied 22% of the rentable space at the property, under a lease scheduled
to expire in February 2005, informed the General Partner of its intention
to sublease its space and vacate the property. The anchor tenant vacated
the property during June 1995 and in July 1995, the General Partner secured
a new anchor tenant to occupy this space. The former anchor tenant's lease
obligations were terminated as of July 31, 1995 in consideration of the
former tenant not subleasing its space at the property. The new anchor
tenant's lease commenced in November 1995 and is for a ten-year term.
During the year ended December 31, 1995, the Partnership incurred
approximately $814,000 in leasing costs in connection with the new anchor
tenant's lease.
Three tenants at the Palms of Carrollwood have leases that contain clauses
that may be exercisable if the former anchor tenant ceased operations at
the property and an acceptable replacement tenant, in accordance with the
terms of the respective tenants' leases, was not secured. The following
table sets forth the approximate amount of square footage leased by these
three tenants, their applicable lease expiration dates and the applicable
lease clauses relating to the replacement of the former anchor tenant:
<CAPION>
Amount of Lease
Square Feet Expiration
Leased Date Lease Clause Relating to Replacement of Former Anchor Tenant
------ ---- ------------------------------------------------------------
38,000 November 2004 Reduce rental payments by 25%
10,500 January 2005 Reduce rental payments by 25% or terminate lease obligations
10,500 February 1997 Terminate lease obligations
The tenant leasing approximately 38,000 square feet reduced its rental
payments effective November 28, 1995. In the General Partner's opinion,
the replacement tenant is acceptable (in accordance with the terms of the
tenant's lease) and, therefore, the tenant does not have the right to such
a reduction. During March 1996, the General Partner filed a complaint
against this tenant demanding payment of all amounts due under the lease
agreement. The General Partner will continue to use all available legal
remedies in order to obtain collection of any outstanding amounts due under
the lease agreement.
The two tenants leasing approximately 10,500 square feet continue to make
scheduled rental payments.
The General Partner does not believe that the replacement of the original
anchor tenant, any reduction in rental payments or any possible lease
terminations will have a material adverse affect on the Partnership's
liquidity.
13
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
In addition, two former tenants at the Palms of Carrollwood with leases
representing an aggregate of approximately 12,000 square feet, or 7% of the
rentable space at the property, vacated the property prior to the
expiration of their lease obligations and are delinquent in making rental
payments. The General Partner filed complaints demanding payment from both
of these tenants for delinquent rental amounts as well as all future
obligations due under their respective lease agreements and the Partnership
obtained judgments against both former tenants in the approximate amounts
of $48,000 and $57,000, respectively. However, the former tenant owing the
Partnership approximately $48,000 declared bankruptcy and in January 1996,
the Partnership received approximately $7,100 from the bankruptcy court as
final settlement of the Partnership's judgment amount. As of the date
hereof, the Partnership has not received payment from the former tenant
owing $57,000 and the General Partner continues to pursue collection of the
judgment amount. Based upon the financial condition of this former tenant,
there can be no assurance that the Partnership will be able to collect upon
this amount. The General Partner secured a replacement tenant to take
occupancy of approximately 8,600 square feet of such vacated space under a
lease that commenced in March 1995. The General Partner continues to seek
new tenants for the remaining vacant space at the property.
At December 31, 1995, Palms of Carrollwood was 83% occupied. During 1996,
no significant leases are scheduled to expire at the property. The General
Partner will continue to offer competitive leasing packages in an attempt
to secure lease renewals with existing tenants as well as to secure new
tenants for the remaining vacant space at the property.
During the second quarter of 1995, a tenant holding a lease for
approximately 60,500 square feet, or 51% of the Business Center at Pureland
property renewed its lease for an additional three-year term commencing in
January 1996. During the year ended December 31, 1995, the Partnership
paid approximately $34,500 in leasing costs in connection with this
renewal. The Partnership expects to spend an additional $142,000 in
leasing costs in connection with this renewal during 1996. The current
balance in the working capital reserve should be sufficient to pay such
leasing costs.
During 1995, Stone Container Corporation, the sole tenant at the Stone
Container Building, requested approval to construct additional office space
within the existing 80,000 square foot area of the building. The General
Partner agreed to construct the additional office space in exchange for i)
an increase in the tenant's rental rate in an amount equivalent to the
total cost of constructing the additional office space, through the end of
the existing term of the lease (December 2001) and ii) the tenant
exercising its two five-year options to extend the term of the lease to
December 2011. The General Partner expects to incur aproximately $124,000
in construction costs during 1996 in connection with this transaction. The
General Partner believes that the construction of this additional space and
the extension of the tenant's lease at the property should have a favorable
impact on the market value of the property.
14
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
Cash in the aggregate amount of $899,438 was used during 1995 for the
payment of leasing costs incurred at the Palms of Carrollwood Shopping
Center and Business Center at Pureland properties. The General Partner
anticipates that the Partnership will incur an aggregate of approximately
$569,000 in leasing costs at its properties during 1996. The current
balance in the working capital reserve should be sufficient to pay such
leasing costs.
During 1995, approximately $11,000 of cash generated from the Partnership's
operations was used to fund non-recurring repair and maintenance expenses
incurred at the Allmetal Distribution Building and the Business Center at
Pureland. The General Partner anticipates that the Partnership will incur
non-recurring repair and maintenance expenses in the aggregate amount of
approximately $223,000 at its properties during 1996. 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 aggregate amount of $3,050,815, generated from the
Partnership's operations, was distributed to the General Partner and the
Investors during 1995. The General Partner anticipates that the
Partnership will be able to make comparable distributions during 1996.
The General Partner had the Business Center at Pureland property
independently appraised during the first quarter of 1995. Based upon the
appraiser's investigation and analysis, the property's market value was
estimated to be approximately $4,500,000. The net book value of the
Business Center at Pureland property of approximately $4,631,000 at
December 31, 1995 was evaluated in comparison to its estimated future
undiscounted cash flows and the recent independent appraisal and, based
upon such evaluation, the General Partner determined that no permanent
impairment in value existed and that a write-down in value was not
required. The Partnership's cumulative investment in the property, before
accumulated depreciation, is approximately $5,142,000.
The General Partner had the Palms of Carrollwood Shopping Center property
independently appraised during the third quarter of 1995. Based upon the
appraiser's investigation and analysis, the property's market value was
estimated to be approximately $10,000,000. The net book value of the Palms
of Carrollwood Shopping Center property of approximately $9,763,000 at
December 31, 1995 was evaluated in comparison to its estimated future
undiscounted cash flows and the recent independent appraisal and, based
upon such evaluation, the General Partner determined that no permanent
impairment in value existed and that a write-down in value was not
required. The Partnership's cumulative investment in the property, before
accumulated depreciation and property write-downs, is approximately
$12,361,978.
15
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
The General Partner also evaluated the carrying value of each of the
Partnership's other properties and joint venture investment as of December
31, 1995 by comparing such carrying value to its respective future
undiscounted cash flows and most recent internal appraisal in order to
determine whether a permanent impairment in value exists. Based on such
evaluations, the General Partner determined that no permanent impairment in
values exists and, therefore, no write-downs were recorded during 1995.
The General Partner will continue to conduct property and investment
valuations, using internal or independent appraisals, in order to determine
whether future write-downs, if any, are required.
Results of Operations
- ---------------------
Net income for the year ended December 31, 1995 was $2,776,632, as compared
to net income of $2,543,261 and $2,228,039 in 1994 and 1993, respectively.
Average occupancy for the Partnership's investments was as follows:
Years ended December 31,
1995 1994 1993
---- ---- ----
Palms of Carrollwood Shopping Center 76% 80% 89%
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% 83% 75%
The Partnership's allocation of income from the Affiliated Joint Venture
for the year ended December 31, 1995 increased by $214,011, or 40%, and by
$533,459, or 241%, as compared to 1994 and 1993, respectively. The
increase in 1995 as compared to 1994 is primarily due to a 17% increase in
average occupancy at the Quince Orchard Corporate Center. The increase in
1995 as compared to 1993 is due to a 25% increase in average occupancy at
the Quince Orchard Corporate Center as well as the fact that the current
lease on the property obligates the tenant to pay a rental rate greater
than that which the former tenant's lease required.
Interest income in 1995 increased by $56,415, or 53%, as compared to 1994
and by $55,210, or 52%, as compared to 1993. Both of these increases are
primarily due to an increase in the interest rates earned on the
Partnership's working capital reserves as well as an increase in the amount
of such reserves.
The Partnership's share of property operating expenses in 1995 was
consistent with 1994 and decreased by $20,120, or 7%, as compared to 1993.
16
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
- ---------------------
Property operating expenses incurred at the Allmetal Distribution Building
during 1995 were consistent with 1994 and decreased by 23% as compared to
1993 due to an adjustment made during 1993 in the method of calculating
tenant expense reimbursements, as negotiated with the tenant. This
adjustment was made retro-active to 1992 and resulted in lower tenant
reimbursements for operating expenses. Therefore, 1993 results include a
one-time retroactive adjustment to account for the decrease in tenant
expense reimbursements in 1992.
Property operating expenses incurred at the Business Center at Pureland in
1995 were consistent with 1994 and decreased as compared to 1993 due to
certain non-recurring maintenance and repair expenses incurred during 1993.
Property operating expenses incurred at the Palms of Carrollwood Shopping
Center decreased by 5% as compared to 1994 and increased by 5% as compared
to 1993. The decrease in 1995 as compared to 1994 is primarily due to
legal fees which were incurred in 1994 relating to tenants that are
delinquent in fulfilling their rental obligations and to a slight decline
in maintenance and repair expenses. The increase in property operating
expenses in 1995 as compared to 1993 is primarily a result of a decline in
average occupancy between periods and, therefore, a decrease in tenant
reimbursements.
Amortization of deferred expenses in 1995 decreased by $16,501, or 7%, as
compared to 1994, and increased by $14,540, or 7%, as compared to 1993.
Included in the 1994 results is a deferred expense write-off of $47,880
resulting from tenants who vacated their spaces prior to the termination of
their respective leases. Excluding this write-off, amortization of
deferred expenses in 1995 increased by 18% as compared to 1994. The
increase in 1995 as compared to both 1994 and 1993 is primarily due to an
increase in deferred expenses relating to leasing costs incurred at the
Palms of Carrollwood Shopping Center and the Business Center at Pureland.
General and administrative expenses in 1995 increased by $52,765, or 28%,
as compared to 1994 and by $52,353, or 28%, as compared to 1993. These
increases are primarily due to an increase in the time required to be
expended by the General Partner and expenses incurred in connection with
securing a new anchor tenant at the Palms of Carrollwood Shopping Center
and in attempting to collect delinquent rental amounts from two former
tenants at the Palms of Carrollwood.
The General Partner believes that inflation has had no significant impact
on income from operations during the last three fiscal years and the
General Partner anticipates that it will not have a significant impact
during 1996.
17
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Cash Flow
- ---------
The following table provides the calculations of Cash from Operations and
Distributable Cash from Operations, which are calculated in accordance with
Section 17 of the Partnership Agreement:
Years Ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Net cash provided by operating
activities (a) $3,743,803 $3,580,615 $3,382,661 $3,334,499 $3,291,058
Net change in operating assets
and liabilities (a) 111,983 (10,043) 40,419 111,775 (226,516)
---------- ---------- ---------- ---------- ----------
Net cash provided by operations (a) 3,855,786 3,570,572 3,423,080 3,446,274 3,064,542
Increase in working capital reserves (804,971) (519,757) (372,265) (395,461) (18,423)
---------- ---------- ---------- ---------- ----------
Cash from operations (b) 3,050,815 3,050,815 3,050,815 3,050,813 3,046,119
Decrease in working capital reserves - - - - -
---------- ---------- ---------- ---------- ----------
Distributable cash from operations (b) $3,050,815 $3,050,815 $3,050,815 $3,050,813 $3,046,119
========== ========== ========== ========== ==========
Allocation to General Partner $152,541 $152,541 $152,541 $152,541 $152,306
Allocation to John Hancock Limited
Partner - - - - -
Allocation to Investors 2,898,274 2,898,274 2,898,274 2,898,272 2,893,813
---------- ---------- ---------- ---------- ----------
$3,050,815 $3,050,815 $3,050,815 $3,050,813 $3,046,119
========== ========== ========== ========== ==========
(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 15, 1996, the Partnership made a cash distribution of $724,569
to the Investors, representing a 6% annualized return to Investors of
record on December 31, 1995, based on Distributable Cash from Operations
for the quarter then ended. The General Partner anticipates that the
Partnership will be able to make cash distributions during 1996 comparable
to those made during 1995.
18
Item 8 - Financial Statements and Supplementary Data
The response to this Item appears beginning on page F-1 of this Report.
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 52
Malcolm G. Pittman, III Director 44
Susan M. Shephard Director 43
Richard E. Frank Treasurer (Chief Accounting Officer) 34
(c) Identification of certain significant persons
The General Partner is responsible for the identification, analysis,
purchase, operation, and disposal of specific Partnership real estate
investments. The General Partner has established a Real Estate Investment
Committee utilizing senior real estate personnel of John Hancock and its
affiliates to review each proposed investment. The members of the Real
Estate Investment Committee are designated each year at the annual meeting
of the Board of Directors of John Hancock Realty Equities, Inc. The
current members of the committee are as follows:
Name Title Age
---- ----- ---
Edward P. Dowd Senior Vice President of 53
John Hancock's Real Estate
Investment Group
Kevin McGuire Vice President of John Hancock's 49
Real Estate Investment Group,
President of John Hancock Realty
Services Corp. and subsidiaries
19
Item 10 - Directors and Executive Officers of the Partnership (continued)
(c) Identification of certain significant persons (continued)
Name Title Age
---- ----- ---
Stephen Kindl Senior Investment Officer of John 38
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 52), 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 1996. 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 a B.A. from Boston College.
Malcolm G. Pittman, III (age 44), 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 1996. 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 43), 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 1996. Ms.
Shephard has been a Mortgage Investment Officer of John Hancock since 1991.
From 1988 to 1991, she was an Associate Counsel of John Hancock and from
1987 to 1988, she was an Assistant Counsel of John Hancock. She holds a
J.D. from Georgetown University Law Center and a B.A. from the University
of Rhode Island.
Richard E. Frank (age 34), 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.
20
Item 10 - Directors and Executive Officers of the Partnership (continued)
(e) Business Experience (continued)
Edward P. Dowd (age 53), 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 49), 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 a B.A. from Boston College.
Stephen Kindl (age 38), joined John Hancock in 1995 as a Senior Real Estate
Investment Officer. Prior to joining John Hancock, he held a number of
positions with Aetna Real Estate Investment, Inc., including Managing
Director and Director. He holds an M.B.A. from the University of Hartford
and a B.S. from the University of Connecticut
(f) Involvement in certain legal proceedings
None.
Compliance with Section 16(a) of the Exchange Act
Under Section 16(a) of the Securities Exchange Act of 1934, as amended, the
General Partner's directors and executive officers, as well as any person
holding more than ten percent of the Units, are required to report their
initial ownership to the Securities and Exchange Commission and the
Partnership (such requirements hereinafter referred to as "Section 16(a)
filing requirements"). Specific time deadlines for Section 16(a) filing
requirements have been established.
To the Partnership's knowledge, no officer or director of the General
Partner has or had an ownership interest in the Partnership during the 1995
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 1995 fiscal year.
21
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 in their capacities as officers,
directors or members of the Real Estate Investment Committee, pursuant to
any standard arrangements or otherwise, from the Partnership 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 1995 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 1995
fiscal year in deliberations regarding the General Partner's compensation
as it relates to the Partnership.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners
No person or group, including the General Partner, is known by the General
Partner to own beneficially more than 5% of the Partnership's 2,415,229
outstanding Units as of December 31, 1995, except as follows:
Title of Name and Address of Amount and Nature of Percent of
Class Beneficial Owner Beneficial Ownership Class
----- ---------------- -------------------- -----
Assignee County Employees 806,451 Units 33.39%
Units Annuity and Benefit owned directly
Fund of Cook County
118 N. Clark St.
Chicago, IL
(b) Security ownership of management
By virtue of its organization as a Limited Partnership, the Partnership has
no officers or directors. Neither the General Partner nor any officer or
director of the General Partner possesses the right to acquire a beneficial
ownership of Units.
(c) Changes in Control
The Partnership does not know of any arrangements the operations of which
may at a subsequent date result in a change of control of the Partnership.
22
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
1995, 1994 and 1993.
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 1995, 1994 or 1993.
An Affiliate of the General Partner is entitled to 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 1995, 1994 or
1993.
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 $156,119, $121,196 and $122,220 of such expenses
during the years ended December 31, 1995, 1994 and 1993, 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 1995, 1994
or 1993.
23
Item 13 - Certain Relationships and Related Transactions (continued)
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 $152,541 for each of the three years ended December 31,
1995, 1994 and 1993, respectively. In accordance with the terms of the
Partnership Agreement, the John Hancock Limited Partner was not entitled to
receive any such distributions during the years ended 1995, 1994 or 1993.
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 1995, 1994 or 1993 and, therefore, no such
distributions were made.
A Share of the Partnership's Profits or Losses for tax purposes is
allocable to the General Partner and to the Investors and the John Hancock
Limited Partner. Such allocation generally approximates, insofar as
practicable, their percentage share of Distributable Cash from Operations
and of Cash from Sales or Financings. The General Partner will generally
be allocated 1% of Partnership Losses for tax purposes, and the John
Hancock Limited Partner will be allocated tax losses associated with the
Partnership's sales commissions funded by the John Hancock Limited
Partner's Capital Contributions. The General Partner's Share of such
Profits or Losses were profits of $178,928, $168,666 and $155,012 during
the years ended December 31, 1995, 1994 and 1993, respectively. In
accordance with the terms of the Partnership Agreement, the John Hancock
Limited Partner was not entitled to any such allocation during the years
ended 1995, 1994 or 1993.
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, 1995:
Years Ended December 31,
1995 1994 1993
---- ---- ----
Operating Expenses $156,119 $121,196 $122,220
General Partner Share of Distributable
Cash from Operations 152,541 152,541 152,541
General Partner Share of Profits or
Losses for tax purposes 178,928 168,666 155,012
24
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) - Listed on Index to Financial Statements and Financial
Statement Schedules.
(3) - Listing of Exhibits
Exhibit Number Page Number or
Under Incorporation by
Regulation S-K Description Reference
4 Instruments defining the rights
of security holders
4.1 Amended and Restated Exhibit A to the
Agreement of Limited Prospectus
Partnership* filed under
the Partnership's
Amendment No. 1 to
Form S-11
Registration
Statement
(File 33-25298)
4.2 Subscription Agreement Exhibit D to the
Signature Page and Power of Prospectus
Attorney whereby a subscriber filed under
agrees to purchase Units and the Partnership's
adopts the provisions of the Amendment No. 1 to
Amended Agreement of Limited Form S-11
Partnership* Registration
Statement
(File 33-25298)
4.3 Copy of Certificate of Exhibit 4.3 to the
Limited Partnership filed Partnership's
with the Massachusetts Secretary Amendment No. 1 to
of State on November 4, 1988* Form S-11
Registration
Statement
(File 33-25298)
4.4 Copy of First Amendment and Exhibit 4.4 to the
Restatement of Certificate Partnership's
of Limited Partnership filed Amendment No. 1 to
with the Massachusetts Secretary Form S-11
of State on February 8, 1989* Registration
Statement
(File 33-25298)
25
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
10 Material contracts and other
documents
10.1 Form of Escrow Agreement* Exhibit 10.1 to
the Partnership's
Amendment No. 1 to
Form S-11
Registration Statement
(File 33-25298)
10.2 Documents relating to Quince
Orchard CorporateCenter
(a) Investment Agreement dated Exhibit 10.2(a) to
December 27, 1988, among the Partnership's
JH Quince Orchard Partners, Amendment No. 1 to
Quad Properties, Inc. and Form S-11
General Electric Real Estate Registration Statement
Credit Operations* (File 33-25298)
(b) Amended and Restated Partnership Exhibit 10.2(b) to
Agreement for QOCC-1 Associates the Partnership's
dated December 27, 1988, among Amendment No. 1 to
JH Quince Orchard Partners, Form S-11
Quad Properties, Inc. and Registration
General Electric Real Estate Statement
Credit Operations* (File 33-25298)
(c) Property Management Agreement Exhibit 10.2(c) to
dated December 27, 1988, the Partnership's
between QOCC-1 Associates and Amendment No. 1 to
Quadrangle Development Form S-11
Corporation* Registration Statement
(File 33-25298)
(d) Partnership Agreement for Exhibit 10.2(d) to
JH Quince Orchard Partners the Partnership's
dated as of December 23, 1988, Amendment No. 1 to
between John Hancock Realty Form S-11
Income Fund-II Limited Registration
Partnership and John Hancock Statement
Realty Income Fund-III Limited (File 33-25298)
Partnership*
(d) Audited financial statements of Page 32
QOCC-1 Associates for the year
ended December 31, 1995+
10.3 Documents relating to Palms
of Carrollwood Shopping Center
26
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
(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)
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
27
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
(a) Agreement of Purchase and Sale Exhibit 1 to the
dated November 25, 1991 between Partnership's report on
Perkinson Realty Corporation and Form 8-K dated
John Hancock Realty Income December 27, 1991
Fund-III 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 report
and John Hancock Realty on Form 8-K dated
Income Fund-III Limited February 11, 1992
Partnership* (File 0-18563)
10.7 Documents relating to the Stone
Container Building
(a) Agreement of Purchase and Exhibit 1 to Amendment
Sale dated January 30, 1992 Number 2 on Form 8 to
between World Park Limited the Partnership's report
Partnership and John Hancock 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 Form 8-K dated
and John Hancock Realty Income February 11, 1992
Fund-III Limited Partnership* (File 0-18563)
(c) Lease dated March 2, 1992 Exhibit 3 to Amendment
relating to the Stone Number 2 on Form 8 to
Container Building* 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
28
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
(a) Agreement of Purchase and Sale Exhibit 1 to Amendment
dated January 24, 1992 between Number 3 on Form 8 to
The Prentiss/Copley Investment the Partnership's report
Group and John Hancock Realty 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 to
between The Prentiss/Copley the Partnership's report
Investment Group and John 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 Number 3 on Form 8 to
at the Business Center at the Partnership's report
Pureland* 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
to Building Number One at the the Partnership's report
Business Center at Pureland* on Form 8-K dated
February 11, 1992
(File 0-18563)
(e) Lease Agreement dated Exhibit 5 to Amendment
December 7, 1989 relating to Number 3 on Form 8 to
Building Number Two at the the Partnership's report
Business Center at Pureland* 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
to Building Number Two at the the Partnership's report
Business Center at Pureland* 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
to Building Number Two at the the Partnership's report
Business Center at Pureland* on Form 8-K dated
February 11, 1992
(File 0-18563)
29
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
(h) Third Amendment to Lease Exhibit 8 to Amendment
dated September 17, 1990 Number 3 on Form 8 to
relating to Building Number the Partnership's report
Two at the Business Center 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*
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, 1995.
(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-16.
----------------------
+Filed herewith
*Incorporated by reference
30
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
29th day of March, 1996.
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 29th day of March, 1996.
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
31
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, 1995
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
BOSTON, MASSACHUSETTS
F-1
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) Financial Statements Page
Report of Independent Auditors F-3
Balance Sheets at December 31, 1995 and 1994 F-4
Statements of Operations for the Years Ended
December 31, 1995, 1994 and 1993 F-5
Statements of Partners' Equity for the Years Ended
December 31, 1995, 1994 and 1993 F-6
Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 F-7
Notes to Financial Statements F-8
(2) Financial Statement Schedules
Schedule III: Real Estate and Accumulated Depreciation F-16
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.
F-2
Report of Independent Auditors
To the Partners
John Hancock Realty Income Fund-III Limited Partnership
We have audited the accompanying balance sheets of John Hancock Realty
Income Fund-III Limited Partnership as of December 31, 1995 and 1994, and
the related statements of operations, partners' equity and cash flows for
each of the three years in the period ended December 31, 1995. 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.
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
provide 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 John Hancock Realty
Income Fund-III Limited Partnership at December 31, 1995 and 1994, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1995, 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 9, 1996,
except for Note 9,
as to which the
date is February
15, 1996
F-3
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
BALANCE SHEETS
ASSETS
December 31,
1995 1994
---- ----
Current assets:
Cash and cash equivalents $2,431,272 $2,637,722
Restricted cash 6,323 55,657
Other current assets 282,343 154,155
----------- -----------
2,719,938 2,847,534
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 3,819,371 2,989,706
----------- -----------
29,533,704 30,363,369
Investment in joint venture 7,907,123 7,946,957
Long-term restricted cash 91,885 48,246
Deferred expenses, net of accumulated
amortization of $724,584 in 1995,
and $529,212 in 1994 1,556,764 866,981
Other assets 15,138 6,340
----------- -----------
Total assets $41,824,552 $42,079,427
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $240,389 $229,440
Accounts payable to affiliates 38,412 30,053
----------- -----------
Total current liabilities 278,801 259,493
Partners' equity/(deficit):
General partner's (44,553) (78,720)
Limited partners' 41,590,304 41,898,654
----------- -----------
Total partners' equity 41,545,751 41,819,934
----------- -----------
Total liabilities and partners'
equity $41,824,552 $42,079,427
=========== ===========
See Notes to Financial Statements
F-4
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF OPERATIONS
Years Ended December 31,
1995 1994 1993
---- ---- ----
Income:
Rental income $3,404,659 $3,407,133 $3,397,962
Income from joint venture 755,198 541,187 221,739
Interest income 162,332 105,917 107,122
---------- ---------- ----------
Total income 4,322,189 4,054,237 3,726,823
Expenses:
Depreciation 829,665 829,665 829,665
Property operating expenses 264,629 266,312 284,749
Amortization of deferred expenses 209,655 226,156 195,115
General and administrative expenses 241,608 188,843 189,255
---------- ---------- ----------
Total expenses 1,545,557 1,510,976 1,498,784
---------- ---------- ----------
Net income $2,776,632 $2,543,261 $2,228,039
========== ========== ==========
Allocation of net income:
General Partner $186,708 $175,393 $152,596
John Hancock Limited Partner - - -
Investors 2,589,924 2,367,868 2,075,443
---------- ---------- ----------
$2,776,632 $2,543,261 $2,228,039
========== ========== ==========
Net Income per Unit $1.07 $0.98 $0.86
========== ========== ==========
See Notes to Financial Statements
F-5
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
General Limited
Partner Partners Total
------- --------- -----
Partners' equity/(deficit) at January 1, 1993
(2,415,234 Units outstanding) ($101,627) $43,251,891 $43,150,264
Less: Cash distributions (152,541) (2,898,274) (3,050,815)
Add: Net income 152,596 2,075,443 2,228,039
-------- ----------- ----------
Partners' equity/(deficit) at December 31, 1993
(2,415,234 Units outstanding) (101,572) 42,429,060 42,327,488
Less: Cash distributions (152,541) (2,898,274) (3,050,815)
Add: Net income 175,393 2,367,868 2,543,261
-------- ----------- ----------
Partners' equity/(deficit) at December 31, 1994
(2,415,234 Units outstanding) (78,720) 41,898,654 41,819,934
Less: Cash distributions (152,541) (2,898,274) (3,050,815)
Add: Net income 186,708 2,589,924 2,776,632
-------- ----------- ----------
Partners' equity/(deficit) at December 31, 1995
(2,415,234 Units outstanding) ($44,553) $41,590,304 $41,545,751
======== =========== ===========
See Notes to Financial Statements
F-6
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF CASH FLOWS
Years Ended December 31,
1995 1994 1993
---- ---- ----
Operating activities:
Net income $2,776,632 $2,543,261 $2,228,039
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 829,665 829,665 829,665
Amortization of deferred expenses 209,655 226,156 195,115
Cash distributions over/(under) equity
in income from joint venture 39,834 (28,510) 170,261
---------- ---------- ----------
3,855,786 3,570,572 3,423,080
Changes in operating assets and liabilities:
Decrease/(increase) in restricted cash 5,695 (8,957) (420)
Increase in other current assets (128,188) (39,357) (13,100)
Increase in other assets (8,798) - -
Increase/(decrease) in accounts payable and
accrued expenses 10,949 40,954 (12,747)
Increase/(decrease) in accounts payable
to affiliates 8,359 17,403 (14,152)
---------- ---------- ----------
Net cash provided by operating activities 3,743,803 3,580,615 3,382,661
Investing activities:
Increase in investment in joint venture - (1,104,902) (177,340)
Acquisition of deferred expenses
and other assets (899,438) (57,377) (31,192)
---------- ---------- ----------
Net cash used in investing activities (899,438) (1,162,279) (208,532)
Financing activities:
Cash distributed to Partners (3,050,815) (3,050,815) (3,050,815)
---------- ---------- ----------
Net cash used in financing activities (3,050,815) (3,050,815) (3,050,815)
---------- ---------- ----------
Net increase/(decrease) in cash and
cash equivalents (206,450) (632,479) 123,314
Cash and cash equivalents at beginning
of year 2,637,722 3,270,201 3,146,887
---------- ---------- ----------
Cash and cash equivalents at end
of year $2,431,272 $2,637,722 $3,270,201
========== ========== ==========
See Notes to Financial Statements
F-7
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Organization of Partnership
---------------------------
John Hancock Realty Income Fund-III Limited Partnership (the
"Partnership") was formed under the Massachusetts Uniform Limited
Partnership Act on November 4, 1988. As of December 31, 1995, 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 2,671
Unitholders (the "Investors"). The Assignor Limited Partner holds
five Investor Limited Partnership Interests for its own account and
2,415,229 Assignee Units (the "Units"), representing economic and
certain other rights attributable to Investor Limited Partnership
Interests in the Partnership, for the benefit of the Investors. The
John Hancock Limited Partner, the Assignor Limited Partner and the
Investors are collectively referred to as the Limited Partners. The
General Partner and the Limited Partners are collectively referred to
as the Partners. The initial capital of the Partnership was $2,100,
representing capital contributions of $1,000 from the General Partner,
$1,000 from the John Hancock Limited Partner, and $100 from the
Assignor Limited Partner. The Amended Agreement of Limited
Partnership of the Partnership (the "Partnership Agreement")
authorized the issuance of up to 5,000,000 Units at $20 per unit.
During the offering period, which terminated on February 15, 1991,
2,415,229 Units were sold and the John Hancock Limited Partner made
additional capital contributions of $3,863,366. There were no changes
in the number of Units outstanding subsequent to the termination of
the offering period. The Partnership is engaged solely in the
business of acquiring, holding for investment and disposing of
existing income-producing retail, industrial and office properties on
an all-cash basis, free and clear of mortgage indebtedness. Although
the Partnership's properties were acquired and are held free and clear
of mortgage indebtedness, the Partnership may incur mortgage
indebtedness under certain circumstances as specified in the
Partnership Agreement.
The latest date on which the Partnership is due to terminate is
December 31, 2019, unless it is sooner terminated in accordance with
the terms of the Partnership Agreement. It is expected that, in the
ordinary course of the Partnership's business, the properties of the
Partnership will be disposed of, and the Partnership terminated,
before December 31, 2019.
F-8
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
2. Significant Accounting Policies
-------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results may differ
from those estimates.
The Partnership maintains its accounting records and recognizes rental
revenue on the accrual basis.
Cash equivalents are highly liquid investments with maturities of
three months or less when purchased. These investments are recorded
at cost plus accrued interest, which approximates market value.
Restricted cash represents funds restricted for tenant security
deposits and has been designated as current or long-term based upon
the term of the related lease agreement.
Investments in property are recorded at cost less any property write-
downs for permanent impairment in value. Cost includes the initial
purchase price of the property plus acquisition and legal fees, other
miscellaneous acquisition costs, and the cost of significant
improvements.
Depreciation has been provided on a straight-line basis over the
estimated useful lives of the various assets: thirty years for the
buildings and five years for related improvements. Maintenance and
repairs are charged to operations as incurred.
Investment in joint venture is recorded using the equity method.
Acquisition fees for the joint venture investment have been deferred
and are being amortized on a straight-line basis over a period of
thirty-one and a half years. Other deferred acquisition fees are
being amortized on a straight-line basis over a period of eighty-four
months. Capitalized tenant improvements and lease commissions are
being amortized on a straight-line basis over the terms of the leases
to which they relate.
No provision for income taxes has been made in the financial
statements as such taxes are the responsibility of the individual
partners and not of the Partnership.
The net income per Unit for the years ended December 31, 1995, 1994
and 1993 is calculated by dividing the Investors' share of net income
by the number of Units outstanding during each year.
F-9
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
2. Significant Accounting Policies (continued)
-------------------------------
In March 1995, the Financial Accounting Standards Board Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of", which requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying value.
Statement No. 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Partnership adopted
Statement No. 121 in the fourth quarter of 1995. The effect of
adoption is not material.
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
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
4. Transactions with the General Partner and Affiliates
----------------------------------------------------
Fees, commissions and other costs incurred or paid by the General
Partner or its Affiliates during the three years ended December 31,
1995, 1994 and 1993, and to which the General Partner or its
Affiliates are entitled to reimbursement from the Partnership were
$156,119, $121,196 and $122,220, respectively. These expenses are
included in expenses on the Statements of Operations.
Accounts payable to Affiliates represents amounts due to the General
Partner and its Affiliates for various services provided to the
Partnership.
The General Partner serves in a similar capacity for three 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,
1995 1994
---- ----
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.
F-11
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
5. Investment in Property (continued)
----------------------
The Partnership leases its properties to non-affiliated tenants
primarily under long-term operating leases.
At December 31, 1995, future minimum rentals on non-cancelable leases
relating to the above properties were as follows:
1996 $3,679,923
1997 3,564,227
1998 3,612,212
1999 1,725,764
2000 1,451,611
Thereafter 6,339,433
-----------
Total $20,373,170
===========
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 transfered 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. During the
years ended December 31, 1994 and 1993, the partners in QOCC-1
Associates were required to make additional capital contributions
towards the funding of leasing costs incurred at the property. In
accordance with the terms of the partnership agreement of QOCC-1
Associates, the Affiliated Joint Venture contributed 95% of such
additional capital, the Partnership's share of which amounted to an
aggregate of $1,282,242. Of the cumulative total invested capital in
QOCC-1 Associates at December 31, 1995, 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-12
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: first, to the payment of all debts and liabilities
of QOCC-1 Associates and to fund reserves deemed reasonably necessary;
second, to the partners in proportion to their respective invested
capital until each has received a 9% return on invested capital;
third, the balance, if any, to the partners in proportion to their
interests. Since its inception, QOCC-1 Associates has not provided
the partners with a return in excess of 9% on their invested capital.
Summarized financial information for QOCC-1 Associates is as follows:
Financial Position at
December 31,
1995 1994
---- ----
Current assets $168,756 $185,785
Deferred expenses, net 2,140,529 2,428,865
Other assets 1,623,912 1,004,518
Investment in property, net 12,644,363 13,013,140
----------- -----------
Total assets $16,577,560 $16,632,308
=========== ===========
Current liabilities $465,743 $429,182
Minority interest 361,521 373,162
Partners' equity 15,750,296 15,829,964
----------- -----------
Total liabilities and equity $16,577,560 $16,632,308
=========== ===========
Results of Operations
Years Ended December 31,
1995 1994 1993
---- ---- ----
Total income $2,719,151 $2,243,942 $1,294,989
Total expenses 1,180,460 1,144,080 853,695
---------- ---------- ----------
Net income $1,538,691 $1,099,862 $441,294
========== ========== ==========
F-13
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
7. Deferred Expenses
-----------------
Deferred expenses consist of the following:
Unamortized Balance
at December 31,
Description 1995 1994
----------- ---- ----
$152,880 of acquisition fees for
investment in the Affiliated Joint
Venture. This amount
is amortized over a period
of 31.5 years. $119,109 $123,962
$782,979 of tenant improvements. These
amounts are amortized over the terms
of the leases to which they relate. 719,916 13,332
$271,868 of lease commissions. These
amounts are amortized over the terms
of the leases to which they relate. 219,273 77,846
$1,073,621 of acquisition fees paid to the
General Partner. This amount
is amortized over a period of
eighty-four months. 498,466 651,841
---------- --------
$1,556,764 $866,981
========== ========
8. Federal Income Taxes
-------------------
A reconciliation of the net income reported in the Statements of
Operations to the net income reported for federal income tax purposes
is as follows:
Years Ended December 31,
1995 1994 1993
---- ---- ----
Net income per Statements of Operations $2,776,632 $2,543,261 $2,228,039
Add/(less): Excess of book depreciation
over tax depreciation 142,021 142,890 142,276
Excess of book amortization
over tax amortization 59,511 81,580 8,180
Other income (195,901) (183,625) (16,333)
Other expenses - 20,966 34,568
---------- ---------- ----------
Net income for federal income tax purposes $2,782,263 $2,605,072 $2,396,730
========== ========== ==========
F-14
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
9. Subsequent Events
-----------------
On February 15, 1996, the Partnership made a cash distribution in the
aggregate amount of $762,704, based on Distributable Cash from
Operations for the quarter then ended. This amount was allocated 5%
($38,135) to the General Partner and 95% ($724,569) to the Investors,
in accordance with the Partnership Agreement, and represents a 6%
annualized return to all Investors of record on December 31, 1995.
F-15
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
Year Ended December 31, 1995
Costs
Capitalized
Initial Costs to Subsequent to Gross Amount
Partnership Acquisition At Which Carried at Close of Period
---------------------- ----------------------- -----------------------------------
Buildings Buildings
and and
Description Encumbrances Land Improvements ImprovementsWrite-down (1) Land Improvements Total (2)
- ----------- ------------ ---- ------------ -------------------------- ---- ------------ ---------
Palms of Carrollwood
Shopping Center
Tampa, FL - $6,000,000 $ 6,359,816 $2,162 ($1,431,400) $ 5,305,135 $5,625,443 $10,930,578
Yokohama Tire Warehouse
Louisville, KY - 742,000 8,610,221 - - 742,000 8,610,221 9,352,221
Purina Mills Distribution
Building
St. Louis, MI - 570,400 3,633,006 - - 570,400 3,633,006 4,203,406
Allmetal Distribution Building
Carrollton, TX - 263,000 1,373,050 - - 263,000 1,373,050 1,636,050
Stone Container Building
Cincinnati, OH - 480,000 1,608,804 - - 480,000 1,608,804 2,088,804
Business Center at Pureland
Bridgeport, NJ - 1,050,000 4,092,016 - - 1,050,000 4,092,016 5,142,016
-- ---------- ----------- ------- ---------- ---------- ----------- -----------
- $9,105,400 $25,676,913 $2,162 ($1,431,400) $8,410,535 $24,942,540 $33,353,075
== ========== =========== ======= ========== ========== =========== ===========
F-16
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
SCHEDULE III (Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION
Year Ended December 31, 1995
Life on Which
Depreciation in
Latest Statement
Accumulated Date of Date of Operations
Description Depreciation (5) Construction Acquired is Computed
----------- ---------------- ------------ -------- -----------
Palms of Carrollwood
Shopping Center
Tampa, FL $1,167,347 1984 12/28/89 30 Years
Yokohama Tire Warehouse
Louisville, KY 1,279,575 1991 7/17/91 30 Years
Purina Mills Distribution
Building
St. Louis, MI 484,401 1991 12/27/91 30 Years
Allmetal Distribution Building
Carrollton, TX 175,445 1987 3/6/92 30 Years
Stone Container Building
Cincinnati, OH 201,101 1991 3/16/92 30 Years
Business Center at Pureland
Bridgeport, NJ 511,502 1989 3/27/92 30 Years
$3,819,371
(1) This write-down of carrying value represents a deterioration 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.
(2) The Partnership's properties' aggregate cost for federal income tax purposes
at December 31, 1995 are as follows:
Property Amount
-------- ------
Palms of Carrollwood Shopping Center $12,375,787
Yokohama Tire Warehouse 9,352,221
Purina Mills Distribution Building 4,203,406
Allmetal Distribution Building 1,636,050
Stone Container 2,088,804
Business Center at Pureland 5,162,776
-----------
$34,819,044
===========
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.
F-17
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
SCHEDULE III (Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION
Year Ended December 31, 1995
(3) Reconciliation of Real Estate and Accumulated Depreciation:
Years Ended December 31,
1995 1994 1993
---- ---- ----
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 $2,989,706 $2,160,041 $1,330,376
Additions charged to costs and expenses 829,665 829,665 829,665
----------- ----------- -----------
Balance at end of year $3,819,371 $2,989,706 $2,160,041
=========== =========== ===========
F-18