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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, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM N/A
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COMMISSION FILE NUMBER 0-18563
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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 FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
Yes _X_ No ___
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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, 2000 and
December 31, 1999 3
Statements of Operations for the Three
Months Ended March 31, 2000 and 1999 4
Statements of Partners' Equity for the
Three Months Ended March 31, 2000 and
for the Year Ended December 31, 1999 5
Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999 6
Notes to Financial Statements 7-12
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-17
PART II: OTHER INFORMATION 18
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JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
-------- ------------
ASSETS
Cash and cash equivalents $ 2,736,431 $ 2,899,090
Restricted cash 88,845 88,844
Other assets 114,562 110,669
Property held for sale 20,584,389 6,924,617
Investment in property:
Land -- 6,355,135
Building and improvements -- 9,717,459
------------ ------------
-- 16,072,594
Less: accumulated depreciation -- 2,967,494
------------ ------------
-- 13,105,100
Investment in joint venture 6,908,683 6,760,170
Deferred expenses, net of accumulated
amortization of $54,398 in 2000 and
$816,472 in 1999 98,482 761,854
------------ ------------
Total assets $ 30,531,392 $ 30,650,344
============ ============
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 236,498 $ 205,003
Accounts payable to affiliates 118,107 168,288
------------ ------------
Total liabilities 354,605 373,291
Partners' equity/(deficit):
General partner's (64,517) (67,086)
Limited partners' 30,241,304 30,344,139
------------ ------------
Total partners' equity 30,176,787 30,277,053
------------ ------------
Total liabilities and partners' equity $ 30,531,392 $ 30,650,344
============ ============
See Notes to Financial Statements
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JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
Income:
Rental income $ 613,349 $ 796,684
Income from joint venture 223,813 201,402
Interest income 39,617 57,178
Gain on sale -- 575,591
---------- ----------
Total income 876,779 1,630,855
Expenses:
Depreciation 80,540 162,384
General and administrative expenses 54,458 81,574
Amortization of deferred expenses 31,659 72,027
Property operating expenses 72,946 84,232
---------- ----------
Total expenses 239,603 400,217
---------- ----------
Net income $ 637,176 $1,230,638
========== ==========
Allocation of net income:
General Partner $ 39,595 $ 49,551
John Hancock Limited Partner -- --
Investors 597,581 1,181,087
---------- ----------
$ 637,176 $1,230,638
========== ==========
Net Income per Unit $ 0.25 $ 0.49
========== ==========
See Notes to Financial Statements
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JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND
YEAR ENDED DECEMBER 31, 1999
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- -----
Partners' equity/(deficit) at January 1, 1999
(2,415,234 Units outstanding) $ (38,068) $ 39,219,654 $ 39,181,586
Less: Cash distributions (207,302) (13,068,321) (13,275,623)
Add: Net income 178,284 4,192,806 4,371,090
------------ ------------ ------------
Partners' equity/(deficit) at December 31, 1999
(2,415,234 Units outstanding) (67,086) 30,344,139 30,277,053
Less: Cash distributions (37,026) (700,416) (737,442)
Add: Net income 39,595 597,581 637,176
------------ ------------ ------------
Partners' equity/(deficit) at March 31, 2000
(2,415,234 Units outstanding) $ (64,517) $ 30,241,304 $ 30,176,787
============ ============ ============
See Notes to Financial Statements
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JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
Operating activities:
Net income $ 637,176 $ 1,230,638
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 80,540 162,384
Amortization of deferred expenses 31,659 72,027
Cash distributions over (under) equity
in income from joint venture (148,513) 52,354
Gain on sale of property -- (575,591)
----------- -----------
600,862 941,812
Changes in operating assets and liabilities:
(Increase)/decrease in other assets (3,893) 80,944
Increase/(decrease) in accounts payable and
accrued expenses 31,495 (69,762)
Increase (decrease) in accounts payable to affiliates (50,181) (3,135)
----------- -----------
Net cash provided by operating activities 578,283 949,859
Investing activities:
Proceeds from sale of property -- 2,080,039
Increase in deferred expenses (3,500) (1,784)
----------- -----------
Net cash provided by (used in) investing activities (3,500) 2,078,255
Financing activities:
Cash distributed to Partners (737,442) (4,144,685)
----------- -----------
Net cash used in financing activities (737,442) (4,144,685)
----------- -----------
Net decrease in cash and cash equivalents (162,659) (1,116,571)
Cash and cash equivalents at beginning
of year 2,899,090 5,874,797
----------- -----------
Cash and cash equivalents at end
of period $ 2,736,431 $ 4,758,226
=========== ===========
See Notes to Financial Statements
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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, 2000, the Partnership consisted of John
Hancock Realty Equities, Inc. (the "General Partner"), a wholly-owned,
indirect subsidiary of John Hancock Mutual Life Insurance Company; John
Hancock Realty Funding, Inc. (the "John Hancock Limited Partner"); John
Hancock Income Fund-III Assignor, Inc. (the "Assignor Limited Partner");
and 2,222 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.
As initially stated in its Prospectus, it was expected that the Partnership
would be dissolved upon the sale of its last remaining property, which at
that time was expected to be within seven to ten years following the date
such property was acquired by the Partnership. As of March 31, 2000, the
Partnership has four properties remaining it its portfolio, three of which
are listed for sale and one of which will be listed for sale later in 2000.
Upon the sale of the last remaining property, the operations of the
Partnership will terminate, and the Partnership will be dissolved, in
accordance with the terms of the Partnership Agreement, as soon as
reasonable practicable.
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, 2000 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2000
or 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, 1999.
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.
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JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Property held for sale is recorded at the lower of its carrying amount, at
the time the property is listed for sale, or its fair value, less cost to
sell. Carrying amount includes the property's cost, as described below,
less accumulated depreciation thereon and less any property write-downs for
impairment in value and plus any related unamortized deferred expenses.
Operating results for properties held for sale are reported on the
statement of operations along with the operations of other investments in
property.
Investments in property are recorded at cost less any property write-downs
for impairment in value. Cost includes the initial purchase price of the
property plus acquisition and legal fees, other miscellaneous acquisition
costs, and the cost of significant improvements.
The Partnership measures impairment in value in accordance with Financial
Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of" ("Statement 121").
Statement 121 requires impairment losses to be recorded on long-lived
assets used in operations where indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amounts.
Depreciation has been provided on a straight-line basis over the estimated
useful lives of the various assets: thirty years for the buildings and five
years for related improvements. Maintenance and repairs are charged to
operations as incurred. Property held for the sale is not depreciated.
Investment in joint venture is recorded using the equity method.
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, 2000 and 1999
is calculated by dividing the Investors' share of net income by the number
of Units outstanding at the end of such periods.
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.
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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
General Partner and its affiliates performing services on behalf of the
Partnership shall be entitled to indemnity from the Partnership for any
loss, damage, or claim by reason of any act performed or omitted to be
performed by the General Partner or such affiliates in good faith on behalf
of the Partnership and in a manner within the scope of the authority
granted to the General Partner by the Partnership Agreement and in the best
interest of the Partnership, except that they shall not be entitled to be
indemnified in respect of any loss, damage, or claim incurred by reason of
fraud, negligence, misconduct, or breach of fiduciary duty. Any indemnity
shall be provided out of and to the extent of Partnership assets only. The
Partnership shall not advance any funds to the General Partner or its
affiliates for legal expenses and other costs incurred as a result of any
legal action initiated against the General Partner or its affiliates by a
Limited Partner in the Partnership.
4. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES
Fees, commissions and other costs incurred or paid by the General Partner
or its Affiliates during the three months ended March 31, 2000 and 1999,
and to which the General Partner or its Affiliates are entitled to
reimbursement from the Partnership were $26,350 and $38,793, 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 10. Accordingly, included in the
Statement of Operations for the three months ended March 31, 2000 and 1999
are $0 and $12,191, respectively, representing the Partnership's share of
costs incurred by the General Partner and its Affiliates relating to the
class action complaint. Through March 31, 2000, the Partnership has accrued
a total of $210,098 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.
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JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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, 2000 DECEMBER 31, 1999
-------------- -----------------
Palms of Carrollwood Shopping Center $ -- $10,930,578
Business Center at Pureland -- 5,142,016
----------- -----------
$ -- $16,072,594
=========== ===========
The real estate market is cyclical in nature and is materially affected by
general economic trends and economic conditions in the market where a
property is located. As a result, determination of real estate values
involves subjective judgments. These judgments are based on current market
conditions and assumptions related to future market conditions. These
assumptions involve, among other things, the availability of capital,
occupancy rates, rental rates, interest rates and inflation rates. Amounts
ultimately realized from each property may vary significantly from the
values presented and the differences could be material. Actual market
values of real estate can be determined only by negotiation between the
parties in a sales transaction.
6. PROPERTY HELD FOR SALE
During the first quarter of 2000, the Pureland Business Center and the
Palms of Carrollwood Shopping Center were listed for sale and during
December 1999, the Yokohama Tire Warehouse was listed for sale.
Accordingly, these properties are classified as "Property Held for Sale" on
the Balance Sheet at March 31, 2000 at their carrying values, which are not
in excess of their estimated fair values, less selling costs.
Property held for sale consists of commercial real estate as follows:
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
Yokohama Tire Warehouse $ 6,924,617 $ 6,924,617
Palms of Carrollwood Shopping Center 9,608,960 --
Business Center at Pureland 4,050,812 --
----------- -----------
$20,584,389 $ 6,924,617
=========== ===========
7. 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, 2000, 97.55% has been contributed
by the Affiliated Joint Venture. The Affiliated Joint Venture continues to
hold a 75% interest in QOCC-1 Associates.
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JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. 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 1999, 1998, 1997 and 1996, the partners
received returns 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.
8. DEFERRED EXPENSES
Deferred expenses consist of the following:
Unamortized Unamortized
Balance At Balance At
DESCRIPTION March 31, 2000 December 31, 1999
- ----------- -------------- -----------------
$152,880 of acquisition fees for investment in the Affiliated
Joint Venture. This amount is amortized over a period of
31.5 years $ 98,482 $ 99,696
Tenant improvements were amortized over the terms of the leases to
which they relate. As of March 31, 2000, the General Partner listed its
three investments in property for sale. Accordingly, the unamortized
balance is included in carrying cost of "Properties held for sale" -- 476,432
Lease Commissions were amortized over the terms of the leases to which
they relate. As of March 31, 2000, the General Partner listed its three
investments in property for sale. Accordingly, the unamortized balance
is included in carrying cost of "Properties held for sale -- 185,726
-------- --------
$ 98,482 $761,854
======== ========
9. 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,
2000 1999
---- ----
Net income per Statements of Operations $ 641,736 $1,230,638
Add/(less): Excess of book depreciation (133,815) 40,149
over tax depreciation
Excess of book amortization
over tax amortization 2,516 30,706
Other income -- --
---------- ----------
Net income for federal income tax purposes $ 510,437 $1,301,493
========== ==========
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JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. CONTINGENCIES
In February 1996, a putative class action complaint was filed in the
Superior Court in Essex County, New Jersey by a single investor in a
limited partnership affiliated with the Partnership. The complaint named as
defendants the Partnership, the General Partner, certain other Affiliates
of the General Partner, and certain unnamed officers, directors, employees
and agents of the named defendants. The plaintiff sought unspecified
damages stemming from alleged misrepresentations and omissions in the
marketing and offering materials associated with the Partnership and two
limited partnerships affiliated with the Partnership. On March 18, 1997,
the court certified a class of investors who were original purchasers in
the Partnership.
A settlement agreement was approved by the court on December 22, 1999.
Under the terms of the settlement, the defendants guaranteed certain
minimum returns to class members on their investments and have paid fees
and expenses for class counsel in an amount determined by the court to be
$1.5 million. Payment under the settlement agreement will have no financial
impact on the Partnership.
The Partnership provides indemnification to the General Partner and its
Affiliates for acts or omissions of the General Partner in good faith on
behalf of the Partnership, except for acts or omissions constituting fraud,
negligence, misconduct or breach of fiduciary duty. The General Partner
believes that this indemnification applies to the class action complaint
described above.
The Partnership has incurred an aggregate of approximately $528,668 in
legal expenses in connection with this matter. Of this amount,
approximately $318,570 relates to the Partnership's own defense and
approximately $210,098 relates to indemnification of the General Partner
and its affiliates for their defense. These expenses are funded from the
operations of the Partnership.
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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.
IMPACT OF YEAR 2000
The Partnership participated in the Year 2000 remediation project of its parent,
John Hancock Life Insurance Company (John Hancock). By late 1999, John Hancock
and the Partnership completed their Year 2000 readiness plan to address issues
that could result from computer programs written using two digits to define the
applicable year rather than four to define the applicable year and century. As a
result, John Hancock and the Partnership were prepared for the transition to the
Year 2000 and did not experience any significant Year 2000 problems with respect
to mission critical information technology ("IT") or non-IT systems,
applications or infrastructure. During the date rollover to the year 2000, John
Hancock and the Partnership implemented and monitored their millennium rollover
plan and conducted business as usual on Monday, January 3, 2000.
Since January 3, 2000, the information systems, including mission critical
systems which in the event of a Year 2000 failure would have the greatest impact
on operations, have functioned properly. In addition, neither John Hancock nor
the Partnership experienced any significant Year 2000 issues related to
interactions with material business partners. No disruptions have occurred which
impact John Hancock or the Partnership's ability to process claims, update
customer accounts, process financial transactions, report accurate data to
management and no business interruptions due to Year 2000 issues have been
experienced. While Jon Hancock and the Partnership continue to monitor their
systems, and those of material business partners, closely to ensure that no
unexpected Year 2000 issues develop, as of the date of this report neither John
Hancock nor the Partnership have reason to expect any such issues.
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain statements contained herein
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Those statements appear in a number of places in this
Report and include statements regarding the intent, belief or expectations of
the General Partner with respect to, among other things, the prospective sale of
Partnership properties, repayment of mortgage loans, actions that would be taken
in the event of lack of liquidity, unanticipated leasing costs, repair and
maintenance expenses, distributions to the General Partner and to Investors, the
possible effects of tenants vacating space at Partnership properties, the
absorption of existing retail space in certain geographical areas, and the
impact of inflation.
Forward-looking statements involve numerous known and unknown risks and
uncertainties, and they are not guarantees of future performance. The following
factors, among others, could cause actual results or performance of the
Partnership and future events to differ materially from those expressed or
implied in the forward-looking statements: general economic and business
conditions; any and all general risks of real estate ownership, including
without limitation adverse changes in general economic conditions and adverse
local conditions, the fluctuation of rental income from properties, changes in
property taxes, utility costs or maintenance costs and insurance, fluctuations
of real estate values, competition for tenants, uncertainties about whether real
estate sales under contract will close; the ability of the Partnership to sell
its properties; and other factors detailed from time to time in the filings with
the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on forward-looking statements,
which reflect the General Partner's analysis only as of the date hereof. The
Partnership assumes no obligation to update forward-looking statements. See also
the Partnership's reports to be filed from time to time with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended.
13
14
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
At March 31, 2000, the Partnership had $2,736,431 in cash and cash equivalents
and $88,845 in restricted cash.
The Partnership has a working capital reserve with a current balance of
approximately 3.7% 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, 2000, cash from working capital reserves
in the amount of $3,500 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 $846,500 of additional leasing costs during the remainder of 2000,
at the Palms of Carrollwood and the Business Center at Pureland. 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, 2000, approximately $10,237 of cash
generated from the Partnership's operations was used to fund non-recurring
maintenance and repair expenses incurred at the Palms of Carrollwood and
Business Center at Pureland properties. The General Partner anticipates that the
Partnership will incur additional non-recurring repair and maintenance expenses
of approximately $508,000 at its properties during the remainder of 2000. These
expenses will be funded from the operations of the Partnership's properties and
may reduce the amount of cash available for distribution during 2000.
Cash in the amount of $737,442, generated from the Partnership's operations
during the three months ended December 31, 1999, was distributed to the General
Partner, and the Investors during the three months ended March 31, 2000. These
amounts were distributed in accordance with the Partnership Agreement and were
allocated as follows:
Dist. Cash
From Operations
---------------
Investors $700,416
John Hancock Limited Partner --
General Partner 37,026
--------
Total $737,442
========
The Partnership has incurred approximately $528,668 in legal expenses in
connection with the class action lawsuit (see Part II, Item 1 of this Report).
Of this amount, approximately $318,570 relates to the Partnership's own defense
and approximately $210,098 relates to indemnification of the General Partner and
its Affiliates for their defense. These expenses are funded from the operations
of the Partnership.
At March 31, 2000, Palms of Carrollwood was 87% occupied. During the remainder
of 2000, no significant leases are scheduled to expire. The General Partner will
continue to offer competitive leasing packages in an effort to secure lease
renewals with existing tenants as well as to secure new tenants for the
remaining vacant space.
14
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 (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
One of the tenants at the Business Center at Pureland, National Polystyrene
Recycling Co., L.P., ("NPRC") ceased operations and vacated its space during the
fourth quarter of 1997. A replacement tenant was located to occupy this space
during the third quarter of 1998. NPRC's lease obligations were terminated as of
September 30, 1998 in consideration of NPRC paying a lease buyout fee of
approximately $230,000. The new tenant's lease obligations commenced October 1,
1998 for a 32-month term. The other tenant at the Business Center at Pureland,
Forbo Wallcoverings, Inc. ("Forbo") had a lease that was scheduled to expire on
December 31, 1998. However, Forbo requested and the General Partner agreed, to
extend the term of the lease through March 31, 1999 and subsequently, Forbo has
vacated. The Bridgeport, New Jersey real estate market currently has a
relatively high amount of vacant space. In addition, there is a significant
amount of land available for development. The General Partner anticipates
competitive market conditions during 2000 and, therefore, will offer competitive
rental rates and concessions in an effort to lease the available space at the
property.
The Quince Orchard Corporate Center is leased to Boehringer Mannheim
Pharmaceuticals, Inc. under a ten-year lease that expires in February 2004. The
tenant has two options under the lease agreement, one, to terminate the lease at
the end of its seventy-sixth month of the lease, or June 2000, and, two, to
extend the term of the lease for an additional five-year period. During the
first quarter of 1998, Hoffman-LaRoche, Inc. received approval from the Federal
Trade Commission to acquire Boehringer Mannheim Pharmaceuticals, Inc.
Subsequently, Hoffman-LaRoche vacated and subleased the space. Hoffman-LaRoche
has informed the General Partner that it intends to exercise its right to
terminate the lease in June 2000. The subtenant has subsequently vacated the
space.
Real estate market conditions in the Washington D.C. area for office space
similar to the Quince Orchard Corporate Center continue to improve. The supply
of such office space has been unable to keep pace with the demand, resulting in
a slight increase in market rents. Further, this condition has given rise to new
real estate development in the area. The General Partner does not anticipate
that this new development will negatively impact the market and, therefore,
expects market conditions to remain favorable through 2000. The General Partner
is actively seeking a tenant(s) for the property and will offer competitive
leasing packages in an effort to secure new tenants for the building.
The Yokohama Tire 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 has one remaining option to purchase
the property on April 1, 2001 for $10,578,173. In addition the tenant has the
option to expand the square footage of the facility up to 220,000 square feet at
any time during the term of the lease. In consideration of the property's strong
leasing position and due to the existing favorable market conditions in the
Louisville Kentucky area, the Yokohama Warehouse was listed for sale by the
General Partner during December 1999. The General Partner is in the process of
negotiating terms of a Purchase and Sale Agreement with a prospective buyer. No
assurances can be given that an agreement will be reached with a prospective
buyer.
The General Partner evaluated the carrying value of each of the Partnership's
properties and its joint venture investment as of December 31, 1999 by comparing
such carrying value to the related property's future undiscounted cash flows and
the then most recent internal appraisal in order to determine whether an
impairment in value existed. Based upon such evaluations, the General Partner
determined that no impairment in values existed and, therefore, no write-downs
were recorded as of December 31, 1999.
The General Partner will continue to conduct property valuations, using internal
or independent appraisals, in order to assist in its evaluation of whether an
impairment in value exists on any of the Partnership's properties.
15
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)
RESULTS OF OPERATIONS
Net income for the period ended March 31, 2000 was $641,736, as compared to net
income of $1,230,637 for the same period in 1999. Results for the period ended
March 31, 1999 included a non-recurring gain of $575,591 from the sale of the
Allmetal Distribution Building during the first quarter of 1999. Excluding the
results of this gain, net income for the period ended March 31, 2000 decreased
by $13,310, or 2%, as compared to the prior year. Although rental income
decreased between periods due to the sales of the Allmetal Distribution Building
and the Purina Mills Distribution Building, this was mostly offset by a
reduction in property operating expenses, depreciation and amortization expense,
and general and administrative expenses as discussed below.
Average occupancy for the Partnership's investments was as follows:
Three Months Ended
March 31,
2000 1999
---- ----
Palms of Carrollwood Shopping Center 87% 81%
Quince Orchard Corporate Center (Affiliated Joint Venture) 100% 100%
Yokohama Tire Warehouse 100% 100%
Purina Mills Distribution Building N/A 100%
Business Center at Pureland 50% 100%
Rental income for the period ended March 31, 2000 decreased by $183,335, or 23%,
as compared to the same period during 1999 primarily due to the sales of the
Allmetal and Purina Mills Distribution Buildings. Rental income at Palms of
Carrollwood Shopping Center improved in the current period due to higher average
occupancy compared to the prior period. This was offset by lower rental income
at the Business Center at Pureland due to lower occupancy in the current period
compared to the prior period.
Property operating expenses for the period ended March 31, 2000 decreased by
$11,286, or 13%, as compared to the same period during 1999. This decrease is
primarily due to the sales of the Allmetal and Purina Mills Distribution
Buildings. Property operating expenses at the Partnership's other properties
were consistent between periods.
Depreciation expense for the period ended March 31, 2000 decreased by $81,844,
or 50% as compared to the same period during 1999 primarily due to the sale of
the Purina Mills Distribution Building during 1999 and to the reclassification
of the Yokohama Tire Warehouse as "Property held for sale" in December of 1999.
Accordingly, no depreciation has been recorded on these properties since the
time that they were listed for sale.
Amortization expense for the period ended March 31, 2000 decreased by $41,581 or
58%, as compared to the same period during 1999 primarily due to full
amortization at March 31, 1999 of the acquisition fees paid to the General
Partner, and, therefore, no amortization expense has been recorded since that
time.
General and administrative expenses for the period ended March 31, 2000
decreased by $14,463, or 18%, primarily due to a decrease in 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.
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,
2000, and the General Partner anticipates that it will not have a significant
impact during the remainder of 2000.
16
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)
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,
2000 1999
---- ----
Net cash provided by operating
activities (a) $ 578,283 $ 949,858
Net change in operating assets
and liabilities (a) (22,579) (8,047)
--------- ---------
Net cash provided by operations (a) 600,862 941,811
Increase in working capital reserves -- (77,413)
--------- ---------
Cash from operations (b) 600,862 864,398
Decrease in working capital reserves 136,419 --
--------- ---------
Distributable cash from operations (b) $ 737,281 $ 864,398
========= =========
Allocation to General Partner $ 36,864 $ 43,220
Allocation to John Hancock Limited Partner -- 60,828
Allocation to Investors 700,417 760,350
--------- ---------
$ 737,281 $ 864,398
========= =========
(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 2000, the Partnership will make a cash distribution
in the aggregate amount of $737,281 to the General Partner, the John Hancock
Limited Partner and the Investors. This amount was generated from Distributable
Cash from Operations for the three months ended March 31, 2000, and will be
allocated as follows:
Dist. Cash
From Operations
---------------
Investors $700,417
John Hancock Limited Partner --
General Partner 36,864
--------
Total $737,281
========
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 2000 will be reduced
by the effect of the sales that have taken place and that may occur during 2000.
17
18
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.
A settlement agreement was approved by the court on December 22, 1999.
Under the terms of the settlement, the defendants have guaranteed
certain minimum returns to class members on their investments and paid
fees and expenses to class counsel in an amount determined by the
court to be $1.5 million. These terms of the settlement will have no
financial impact on the Partnership.
There are no other material pending legal proceedings, other than
ordinary routine litigation incidental to the business of the
Partnership, to which the Partnership is a party or to which any of
its properties is subject.
ITEM 2. CHANGES IN SECURITIES
There were no changes in securities during the first quarter of 2000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the first quarter
of 2000.
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 2000.
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 2000.
18
19
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, 2000.
John Hancock Realty Income Fund-III
Limited Partnership
By: John Hancock Realty Equities, Inc.,
General Partner
/s/ John M. Garrison
By: ________________________________
John M. Garrison, President
/s/ Virginia H. Lomasney
By: ________________________________
Virginia H. Lomasney, Treasurer
(Chief Accounting Officer)
19