FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A
Commission file number 0-18563
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Massachusetts 04-3025607
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Clarendon Street, Boston, MA 02116
(Address of principal executive offices)
(Zip Code)
(800) 722-5457
Registrant's telephone number, including area code:
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filling requirements for the past 90 days.
Yes X No
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
INDEX
PART I: FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements:
Balance Sheets at March 31, 1997 and
December 31, 1996 3
Statements of Operations for the Three
Months Ended March 31, 1997 and 1996 4
Statements of Partners' Equity for the
Three Months Ended March 31, 1997 and
for the Year Ended December 31, 1996 5
Statements of Cash Flows for the Three
Months Ended March 31, 1997 and 1996 6
Notes to Financial Statements 7-15
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-21
PART II: OTHER INFORMATION 22
2
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
BALANCE SHEETS
(Unaudited)
ASSETS
March 31, December 31,
1997 1996
---- ----
Cash and cash equivalents $2,670,219 $2,663,859
Restricted cash 111,334 107,959
Other assets 213,988 180,542
Deferred expenses, net of accumulated
amortization of $1,115,773 in 1997 and
$1,025,259 in 1996 1,534,195 1,601,682
Investment in joint venture 7,583,467 7,638,805
Investment in property:
Land 8,410,535 8,410,535
Building and improvements 24,942,540 24,942,540
----------- -----------
33,353,075 33,353,075
Less: accumulated depreciation 4,856,452 4,649,036
----------- -----------
28,496,623 28,704,039
----------- -----------
Total assets $40,609,826 $40,896,886
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $279,166 $287,374
Accounts payable to affiliates 125,699 93,467
----------- -----------
Total liabilities 404,865 380,841
Partners' equity/(deficit):
General partner's (45,433) (43,423)
Limited partners' 40,250,394 40,559,468
----------- -----------
Total partners' equity 40,204,961 40,516,045
----------- -----------
Total liabilities and
partners' equity $40,609,826 $40,896,886
=========== ===========
See Notes to Financial Statements
3
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1997 1996
---- ----
Income:
Rental income $907,242 $889,435
Income from joint venture 188,537 181,516
Interest income 32,193 32,725
---------- ----------
Total income 1,127,972 1,103,676
Expenses:
Depreciation 207,416 207,416
General and administrative expenses 117,354 51,816
Amortization of deferred expenses 90,514 75,242
Property operating expenses 62,766 56,352
---------- ----------
Total expenses 478,050 390,826
---------- ----------
Net income $649,922 $712,850
========== ==========
Allocation of net income:
General Partner $46,040 $48,576
John Hancock Limited Partner 69,562 -
Investors 534,320 664,274
---------- ----------
$649,922 $712,850
========== ==========
Net Income per Unit $0.22 $0.28
===== =====
See Notes to Financial Statements
4
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY
(Unaudited)
Three Months Ended March 31, 1997 and
Year Ended December 31, 1996
General Limited
Partner Partners Total
------- -------- -----
Partners' equity/(deficit) at January 1, 1996
(2,415,234 Units outstanding) ($44,553) $41,590,304 $41,545,751
Less: Cash distributions (182,286) (3,463,437) (3,645,723)
Add: Net income 183,416 2,432,601 2,616,017
-------- ----------- -----------
Partners' equity/(deficit) at December 31, 1996
(2,415,234 Units outstanding) (43,423) 40,559,468 40,516,045
Less: Cash distributions (48,050) (912,956) (961,006)
Add: Net income 46,040 603,882 649,922
-------- ----------- -----------
Partners' equity/(deficit) at March 31, 1997
(2,415,234 Units outstanding) ($45,433) $40,250,354 $40,204,961
======== =========== ===========
See Notes to Financial Statements
5
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1997 1996
---- ----
Operating activities:
Net income $649,922 $712,850
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 207,416 207,416
Amortization of deferred expenses 90,514 75,242
Cash distributions over equity
in income from joint venture 55,338 94,064
---------- ----------
1,003,190 1,089,572
Changes in operating assets and liabilities:
Increase in restricted cash (3,375) (2,608)
Decrease/(increase) in other assets (33,446) 125,604
Decrease in accounts payable and
accrued expenses (8,208) (4,665)
Increase in accounts payable to affiliates 32,232 6,321
---------- ----------
Net cash provided by operating activities 990,393 1,214,224
Investing activities:
Acquisition of deferred expenses (23,027) (67,111)
---------- ----------
Net cash used in investing activities (23,027) (67,111)
Financing activities:
Cash distributed to Partners (961,006) (762,704)
---------- ----------
Net cash used in financing activities (961,006) (762,704)
---------- ----------
Net increase in cash and cash
equivalents 6,360 384,409
Cash and cash equivalents at beginning
beginning of year 2,663,859 2,431,272
---------- ----------
Cash and cash equivalents at end
of period $2,670,219 $2,815,681
========== ==========
See Notes to Financial Statements
6
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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 March 31, 1997, the
Partnership consisted of John Hancock Realty Equities, Inc. (the
"General Partner"), a wholly-owned, indirect subsidiary of John
Hancock Mutual Life Insurance Company; John Hancock Realty Funding,
Inc. (the "John Hancock Limited Partner"); John Hancock Income
Fund-III Assignor, Inc. (the "Assignor Limited Partner"); and 2,596
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.
7
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Significant Accounting Policies
-------------------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. For further information, refer to the
financial statements and footnotes thereto included in the
Partnership's Annual Report on Form 10-K for the year ended December
31, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results may differ
from those estimates.
The Partnership maintains its accounting records and recognizes rental
revenue on the accrual basis.
Cash equivalents are highly liquid investments with maturities of
three months or less when purchased. These investments are recorded
at cost plus accrued interest, which approximates market value.
Restricted cash represents funds restricted for tenant security
deposits.
Investments in property are recorded at cost less any property write-
downs for impairment in value. Cost includes the initial purchase
price of the property plus acquisition and legal fees, other
miscellaneous acquisition costs, and the cost of significant
improvements.
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.
8
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Significant Accounting Policies (continued)
-------------------------------
Acquisition fees for the joint venture investment have been deferred
and are amortized on a straight-line basis over a period of thirty-one
and a half years. Other deferred acquisition fees are amortized on a
straight-line basis over a period of eighty-four months. Capitalized
tenant improvements and lease commissions are 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 three months ended March 31, 1997 and
1996 is calculated by dividing the Investors' share of net income by
the number of Units outstanding at the end of such periods.
Certain 1996 amounts have been reclassified to be consistent with the
1997 presentation.
3. The Partnership Agreement
-------------------------
Distributable Cash from Operations (defined in the Partnership
Agreement) is distributed 5% to the General Partner and the remaining
95% in the following order of priority: first, to the Investors until
they receive a 7% non-cumulative, non-compounded annual cash return on
their Invested Capital (defined in the Partnership Agreement); second,
to the John Hancock Limited Partner until it receives a 7%
non-cumulative, non-compounded annual cash return on its Invested
Capital; and third, to the Investors and the John Hancock Limited
Partner in proportion to their respective Capital Contributions
(defined in the Partnership Agreement). However, any Distributable
Cash from Operations which is available as a result of a reduction in
working capital reserves funded by Capital Contributions of the
Investors will be distributed 100% to the Investors.
9
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. The Partnership Agreement (continued)
------------------------
Profits for tax purposes from the normal operations of the Partnership
for each fiscal year are allocated to the Partners in the same amounts
as Distributable Cash from Operations for that year. If such profits
are less than Distributable Cash from Operations for any year, they
are allocated in proportion to the amounts of Distributable Cash from
Operations for that year. If such profits are greater than
Distributable Cash from Operations for any year, they are allocated 5%
to the General Partner and 95% to the John Hancock Limited Partner and
the Investors, with the allocation made between the John Hancock
Limited Partner and the Investors in proportion to their respective
Capital Contributions. Losses for tax purposes from the normal
operations of the Partnership are allocated 1% to the General Partner
and 99% to the John Hancock Limited Partner and the Investors, with
the allocation made between the John Hancock Limited Partner and the
Investors in proportion to their respective Capital Contributions.
However, all tax aspects of the Partnership's payment of the sales
commissions from the Capital Contributions made by the John Hancock
Limited Partner are allocated 1% to the General Partner and 99% to the
John Hancock Limited Partner, and not to the Investors. Depreciation
deductions are allocated 1% to the General Partner and 99% to the
Investors, and not to the John Hancock Limited Partner.
Neither the General Partner nor any Affiliate of the General Partner
shall be liable, responsible or accountable in damages to any of the
Partners or the Partnership for any act or omission of the General
Partner or such Affiliate in good faith on behalf of the Partnership
within the scope of the authority granted to the General Partner by
the Partnership Agreement and in the best interest of the Partnership,
except for acts or omissions constituting fraud, negligence,
misconduct or breach of fiduciary duty.
The Partnership shall not advance any funds to the General Partner or
its Affiliates for legal expenses and other costs incurred as a result
of any legal action initiated against the General Partner or its
Affiliates by a Limited Partner in the Partnership.
The General Partner and its Affiliates performing services on behalf
of the Partnership shall be entitled to indemnity from the Partnership
for any loss, damage, or claim by reason of any act performed or
omitted to be performed by the General Partner or such Affiliates in
good faith on behalf of the Partnership and in a manner within the
scope of the authority granted to the General Partner by the
Partnership Agreement and in the best interest of the Partnership,
except that they shall not be entitled to be indemnified in respect of
any loss, damage, or claim incurred by reason of fraud, negligence,
misconduct, or breach of fiduciary duty. Any indemnity shall be
provided out of and to the extent of Partnership assets only.
10
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 months ended March 31, 1997
and 1996, and to which the General Partner or its Affiliates are
entitled to reimbursement from the Partnership were $114,858 and
$44,733, respectively.
The Partnership provides indemnification to the General Partner and
its Affiliates for any acts or omissions of the General Partner or
such Affiliate in good faith on behalf of the Partnership, except for
acts or omissions constituting fraud, negligence, misconduct or breach
of fiduciary duty. The General Partner believes that this
indemnification applies to the class action complaint described in
Note 9. Accordingly, the Partnership has accrued $31,579 for the
quarter ended March 31, 1997, which amount is included in the
Statements of Operations and represents the Partnership's share of
costs incurred by the General Partner and its Affiliates relating to
the class action complaint. As of March 31, 1997, the Partnership has
accrued a total of $73,054 as its share of the costs incurred by the
General Partner and its Affiliates resulting from this matter.
Accounts payable to affiliates represents amounts due to the General
Partner or its Affiliates for various services provided to the
Partnership, including amounts to indemnify the General Partner or its
Affiliates for claims incurred by them in connection with their
actions as General Partner of the Partnership. All amounts accrued by
the Partnership to indemnify the General Partner or its affiliates for
legal fees incurred by them shall not be paid unless or until all
conditions set forth in the Partnership Agreement for such payment
have been fulfilled.
The General Partner serves in a similar capacity for two other
affiliated real estate limited partnerships.
5. Investment in Property
----------------------
Investment in property at cost, less any write-downs, consists of
managed, fully-operating, commercial real estate as follows:
March 31, 1997 December 31, 1996
-------------- -----------------
Palms of Carrollwood Shopping
Center $10,930,578 $10,930,578
Yokohama Tire Warehouse 9,352,221 9,352,221
Purina Mills Distribution
Building 4,203,406 4,203,406
Allmetal Distribution Building 1,636,050 1,636,050
Stone Container Building 2,088,804 2,088,804
Business Center at Pureland 5,142,016 5,142,016
----------- -----------
$33,353,075 $33,353,075
=========== ===========
11
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Investment in Property (continued)
----------------------
The real estate market is cyclical in nature and is materially
affected by general economic trends and economic conditions in the
market where a property is located. As a result, determination of
real estate values involves subjective judgments. These judgments are
based on current market conditions and assumptions related to future
market conditions.
These assumptions involve, among other things, the availability of
capital, occupancy rates, rental rates, interest rates and inflation
rates. Amounts ultimately realized from each property may vary
significantly from the 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.
6. Investment in Joint Venture
---------------------------
On December 28, 1988, the Partnership invested $75,000 to acquire a
0.5% interest in JH Quince Orchard Partners (the "Affiliated Joint
Venture"), a joint venture between the Partnership and John Hancock
Realty Income Fund-II Limited Partnership ("Income Fund-II"). The
Partnership had an initial 0.5% interest and Income Fund-II had an
initial 99.5% interest in the Affiliated Joint Venture.
Pursuant to the partnership agreement of the Affiliated Joint Venture,
the Partnership had the option, exercisable prior to December 31,
1990, to increase its investment and interest in the Affiliated Joint
Venture to 50%. During the second quarter of 1989, the Partnership
exercised such option and Income Fund-II transferred a 49.5% interest
in the Affiliated Joint Venture to the Partnership for cash in the
aggregate amount of $7,325,672. The Partnership has held a 50%
interest in the Affiliated Joint Venture since the second quarter of
1989.
On December 28, 1988, the Affiliated Joint Venture contributed 98% of
the invested capital of, and acquired a 75% interest in, QOCC-1
Associates, an existing partnership which owns and operates the Quince
Orchard Corporate Center, a three-story office building and related
land and improvements located in Gaithersburg, Maryland. The
partnership agreement of QOCC-1 Associates provides that the
Affiliated Joint Venture contribute 95% of any required additional
capital contributions. Of the cumulative total invested capital in
QOCC-1 Associates at March 31, 1997, 97.55% has been contributed by
the Affiliated Joint Venture. The Affiliated Joint Venture continues
to hold a 75% interest in QOCC-1 Associates.
12
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Investment in Joint Venture (continued)
---------------------------
Net cash flow from QOCC-1 Associates is distributed in the following
order of priority: (i) to the payment of all debts and liabilities of
QOCC-1 Associates and to fund reserves deemed reasonably necessary;
ii), to the partners in proportion to their respective invested
capital until each has received a 9% return on invested capital and
iii) the balance, if any, to the partners in proportion to their
interests. Prior to 1996, QOCC-1 Associates had not provided the
partners with a return in excess of 9% on their invested capital.
During 1996, the partners received a return on invested capital of
approximately 12%.
Income and gains of QOCC-1 Associates, other than the gains allocated
arising from a sale other similar event with respect to the Quince
Orchard Corporate Center, are allocated in the following order of
priority: i) to the partners who are entitled to receive a
distribution of net cash flow, pro rata in the same order and amounts
as such distributions are made and ii) the balance, if any, to the
partners, pro rata in accordance with their interests.
7. Deferred Expenses
-----------------
Deferred expenses consist of the following:
Unamortized Unamortized
Balance At Balance At
Description March 31, 1997 December 31, 1996
----------- -------------- -----------------
$152,880 of acquisition fees for
investment in the Affiliated Joint
Venture. This amount
is amortized over a period
of 31.5 years. $113,042 $114,256
$1,096,746 of tenant improvements. These
amounts are amortized over the terms
of the leases to which they relate. 871,031 900,220
$326,721 of lease commissions. These
amounts are amortized over the terms
of the leases to which they relate. 243,374 242,114
$1,073,621 of acquisition fees paid to the
General Partner. This amount
is amortized over a period of
eighty-four months. 306,748 345,092
---------- ----------
$1,534,195 $1,606,682
========== ==========
13
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
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:
Three Months Ended March 31,
1997 1996
---- ----
Net income per Statements of Operations $649,922 $712,850
Add/(less): Excess of book depreciation
over tax depreciation 34,864 35,505
Excess of book amortization
over tax amortization 46,858 33,432
Other income (4,252) (39,792)
-------- --------
Net income for federal income tax purposes $727,392 $741,995
======== ========
9. Contingencies
-------------
In February 1996, a putative class action complaint was filed in the
Superior Court in Essex County, New Jersey by a single investor in a
limited partnership affiliated with the Partnership. The complaint
named as defendants the Partnership, the General Partner, certain
other Affiliates of the General Partner, and certain unnamed officers,
directors, employees and agents of the named defendants. The
plaintiff sought unspecified damages stemming from alleged
misrepresentations and omissions in the marketing and offering
materials associated with the Partnership and two limited partnerships
affiliated with the Partnership. On March 18, 1997, the court
certified a class of investors who were original purchasers in the
Partnership.
14
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Contingencies (continued)
-------------
The Partnership provides indemnification to the General Partner and
its Affiliates for acts or omissions of the General Partner in good
faith on behalf of the Partnership, except for acts or omissions
constituting fraud, negligence, misconduct or breach of fiduciary
duty. The General Partner believes that this indemnification applies
to the class action complaint described above. Accordingly, the
Partnership has accrued $31,579 for the quarter ended March 31, 1997,
which amount is included in the Statement of Operations and represents
the Partnership's share of costs incurred by the General Partner and
its Affiliates relating to the class action complaint. As of March
31, 1997, the Partnership has accrued a total of $73,054 as its share
of the costs incurred by the General Partner and its Affiliates
resulting from this matter.
At the present time, the General Partner can not estimate the impact,
if any, of the potential indemnification claims on the Partnership's
Financial Statements, taken as a whole. Accordingly, no provision for
any liability which could result from the eventual outcome of these
matters has been made in the accompanying financial statements.
15
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
ITEM 2: 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 Notes 5 and 6 to the Financial Statements included in Item 1
of this Report.
Liquidity and Capital Resources
- - -------------------------------
At March 31, 1997, the Partnership had $2,670,219 in cash and cash
equivalents and $111,334 in restricted cash.
The Partnership has a working capital reserve with a current balance of
approximately 3.3% of the offering proceeds. The General Partner
anticipates that such amount will be sufficient to satisfy the
Partnership's general liquidity requirements. The Partnership's liquidity
would, however, be materially adversely affected if there were a
significant reduction in revenues or significant unanticipated operating
costs (including but not limited to litigation expenses), unanticipated
leasing costs or unanticipated capital expenditures. If any or all of
these events were to occur, to the extent that the working capital reserve
would be insufficient to satisfy the cash requirements of the Partnership,
it is anticipated that additional funds would be obtained through a
reduction of cash distributions to Investors, bank loans, short-term loans
from the General Partner or its affiliates, or the sale or financing of
Partnership investments.
During the three months ended March 31, 1997, cash from working capital
reserves in the aggregate amount of $23,027 was used for the payment of
leasing costs incurred at the Palms of Carrollwood Shopping Center ("Palms
of Carrollwood") property. The General Partner anticipates that the
Partnership will incur an aggregate of approximately $464,000 of additional
leasing costs at two of its properties during the remainder of 1997, the
majority of which would be incurred at Palms of Carrollwood. The General
Partner anticipates that the current balance in the working capital reserve
should be sufficient to pay such leasing costs.
During the three months ended March 31, 1997, $2,247 of cash generated from
the Partnership's operations was used to fund non-recurring maintenance and
repair expenses incurred at Palms of Carrollwood. The General Partner
anticipates that the Partnership will incur additional non-recurring repair
and maintenance expenses in the aggregate amount of approximately $155,000
at its properties during the remainder of 1997. These additional 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.
16
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- - -------------------------------
Cash in the amount of $961,006, generated from the Partnership's
operations, was distributed to the General Partner, the John Hancock
Limited Partner and the Investors during the three months ended March 31,
1997. These amounts were distributed in accordance with the Partnership
Agreement and were allocated as follows:
Investors $845,330
John Hancock Limited Partner 67,626
General Partner 48,050
--------
Total $961,006
========
As of March 31, 1997, the Partnership has incurred approximately $183,000
in legal expenses in connection with the class action lawsuit (see Part II,
Item 1 of this Report). Of this amount, approximately $110,000 relates to
the Partnership's own defense and approximately $73,000 relates to
indemnification of the General Partner and its Affiliates for their
defense. These expenses are funded from the operations of the Partnership.
At the present time, the General Partner cannot estimate the aggregate
amount of legal expenses and indemnification claims to be incurred and
their impact on the Partnership's future operations. Liquidity would,
however, be materially adversely affected by a significant increase in such
legal expenses and related indemnification costs. If such increases were
to occur, to the extent that cash from operations and the working capital
reserve would be insufficient to satisfy the cash requirements of the
Partnership, it is anticipated that additional funds would be obtained
through a reduction of cash distributions to Investors, bank loans, short-
term loans from the General Partner or its Affiliates, or the sale or
financing of Partnership properties.
One of the anchor tenants at the Palms of Carrollwood vacated the property
during June 1995. In July 1995, the General Partner secured a new anchor
tenant to occupy this space under a lease commencing in November 1995.
Three tenants' leases at the Palms of Carrollwood contain clauses that make
reference to the situation in which the former anchor tenant ceases
operations at the property. One of these tenants paid all amounts due
under its lease through the lease's scheduled expiration in February 1997
and two of the tenants reduced their rental payments by 25%. As a result
of a compromise negotiated with the General Partner, one of these two
tenants recommenced making its rental payments at 100% of the contracted
amount. The General Partner is using all available legal remedies to
obtain collection from the other tenant of all outstanding amounts due.
The General Partner does not believe that any reduction in rental payments
resulting from the replacement of the original anchor tenant will have a
material adverse affect on the Partnership's liquidity.
17
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- - -------------------------------
At March 31, 1997, Palms of Carrollwood was 78% occupied. During the
remainder of 1997, no significant leases are scheduled to expire at the
property. The General Partner will continue to offer competitive leasing
packages in an effort to improve the property's occupancy.
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 the remainder
of 1997.
The General Partner evaluated the carrying value of each of the
Partnership's properties and its investment in the Affiliated Joint Venture
as of December 31, 1996 by comparing such carrying value to the related
property's future undiscounted cash flows and the then most recent internal
appraisal in order to determine whether a permanent impairment in value
existed. Based upon such evaluations, the General Partner determined that
no permanent impairment in values existed and, therefore, no write-downs
were recorded as of December 31, 1996.
The General Partner will continue to conduct property valuations, using
internal or independent appraisals, in order to determine whether a
permanent impairment in value exists on any of the Partnership's
properties.
Results of Operations
- - ---------------------
Net income for the three months ended March 31, 1997 was $649,922, as
compared to net income of $712,850 for the same period in 1996,
representing a decrease of in net income of 9%. This decline is primarily
due to legal fees incurred in connection with the class action lawsuit
(described in Item 1 of Part II of this Report).
18
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
- - ---------------------
Average occupancy for the Partnership's investments was as follows:
Three Months Ended March 31,
1997 1996
---- ----
Palms of Carrollwood Shopping Center 79% 81%
Quince Orchard Corporate Center
(Affiliated Joint Venture) 100% 100%
Yokohama Tire Warehouse 100% 100%
Purina Mills Distribution Building 100% 100%
Allmetal Distribution Building 100% 100%
Stone Container Building 100% 100%
Business Center at Pureland 100% 100%
General and administrative expenses for the quarter ended March 31, 1997
increased by $65,538, or 126%, primarily due to legal fees incurred by the
Partnership in connection with the class action complaint (see Part II,
Item 1 of this Report). Excluding such legal fees, general and
administrative expenses were consistent between periods. At the present
time, the General Partner cannot estimate the aggregate legal fees and
indemnification claims to be incurred with respect to the class action
lawsuit and their impact on the Partnership's future operations.
Operations would, however, be materially adversely affected by a
significant increase in such legal expenses and related indemnification
costs. If such increases were to occur, to the extent that cash from
operations and the working capital reserve would be insufficient to satisfy
the cash requirements of the Partnership, it is anticipated that additional
funds would be obtained through a reduction of cash distributions to
Investors, bank loans, short-term loans from the General Partner or its
Affiliates, or the sale or financing of Partnership properties.
Amortization of deferred expenses for the three months ended March 31, 1997
increased by $15,272, or 20%, as compared to the same period in 1996. This
increase is primarily due to the leasing activity which occurred at the
Business Center at Pureland property during 1996 and the amortization of
the leasing costs associated with this new lease as well as the
amortization of the expenses associated with the tenant improvements at the
Stone Container property.
The Partnership's share of property operating expenses for the three months
ended March 31, 1997 increased by $6,414, or 11%, as compared to the same
period in 1996. This increase is primarily due to increases in the
Partnership's share of property operating expenses at the Palms of
Carrollwood property due to legal costs incurred in connection with the
Partnership's efforts to collect past due rent from a delinquent tenant.
The General Partner believes that inflation has had no significant impact
on the Partnership's income from operations during the three months ended
March 31, 1997, and the General Partner anticipates that it will not have a
significant impact during the remainder of 1997.
19
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
ITEM 2: 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:
Three Months Ended March 31,
1997 1996
---- ----
Net cash provided by operating
activities (a) $990,393 $1,214,224
Net change in operating assets
and liabilities (a) 12,797 (124,652)
---------- ----------
Net cash provided by operations (a) 1,003,190 1,089,572
Increase in working capital reserves (42,184) (199,751)
---------- ----------
Cash from operations (b) 961,006 889,821
Decrease in working capital reserves - -
---------- ----------
Distributable cash from operations (b) $961,006 $889,821
========== ==========
Allocation to General Partner $48,050 $44,491
Allocation to John Hancock Limited Partner 67,626 -
Allocation to Investors 845,330 845,330
---------- ----------
$961,006 $889,821
========== ==========
(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 1 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.
During the second quarter of 1997, the Partnership will make a cash
distribution in the amount of $961,006 to the General Partner and Limited
Partners. This amount is allocated 5% to the General Partner and 95% to
the Limited Partners, in accordance with the Partnership Agreement. Of the
amount to be distributed to the Limited Partners, the Investors will
receive $845,330 and the John Hancock Limited Partner will receive $67,626.
Such amounts represent a 7% annualized return on Limited Partners' Invested
Capital.
20
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Cash Flow (continued)
- - ---------
The source of future cash distributions is dependent upon cash generated by
the Partnership's properties and the use of working capital reserves. The
General Partner currently anticipates that the Partnership's Distributable
Cash from Operations during each of the three remaining quarters of 1997
will be comparable to that generated during the first quarter of 1997.
21
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In February 1996, a putative class action complaint was filed in
the Superior Court in Essex County, New Jersey by a single
investor in a limited partnership affiliated with the
Partnership. The complaint named as defendants the Partnership,
the General Partner, certain other affiliates of the General
Partner, and certain unnamed officers, directors, employees and
agents of the named defendants.
The plaintiff sought unspecified damages stemming from alleged
misrepresentations and omissions in the marketing and offering
materials associated with the Partnership and two limited
partnerships affiliated with the Partnership. The complaint
alleged, among other things, that the marketing materials for the
Partnership and the affiliated limited partnerships did not
contain adequate risk disclosures.
On March 18, 1997, the court certified a class of investors who
were original purchasers in the Partnership. The certification
order should not be construed as suggesting that any member of
the class is entitled to recover, or will recover, any amount in
the action.
The General Partner believes the allegations are totally without
merit and intends to vigorously contest the action.
There are no other material pending legal proceedings, other than
ordinary routine litigation incidental to the business of the
Partnership, to which the Partnership is a party or to which any
of its properties is subject.
Item 2. Changes in Securities
There were no changes in securities during the first quarter of
1997.
Item 3. Defaults Upon Senior Securities
There were no defaults upon senior securities during the first
quarter of 1997.
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 first quarter of 1997.
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
(a) There are no exhibits to this report.
(b) There were no Reports on Form 8-K filed during the first
quarter of 1997.
22
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
Signatures
----------
Pursuant to the requirements 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 15th day of May, 1997.
John Hancock Realty Income Fund-III
Limited Partnership
By: John Hancock Realty Equities, Inc.,
General Partner
By: WILLIAM M.FITZGERALD
--------------------------------
William M. Fitzgerald, President
By: RICHARD E. FRANK
--------------------------------
Richard E. Frank, Treasurer
(Chief Accounting Officer)
23