1
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 September 30, 1998
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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
incorporation or organization) Identification No.)
200 Clarendon Street, Boston, MA 02116
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(Address of principal executive offices)
(Zip Code)
(800) 722-5457
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Registrant's telephone number, including area code:
N/A
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(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 September 30, 1998 and
December 31, 1997 3
Statements of Operations for the Three and
Nine Months Ended September 30, 1998 and 1997 4
Statements of Partners' Equity for the
Nine Months Ended September 30, 1998 and
for the Year Ended December 31, 1997 5
Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 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)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
Cash and cash equivalents $ 3,182,199 $ 2,505,729
Restricted cash 131,639 110,056
Other assets 268,971 287,958
Property held for sale 3,293,636 --
Investment in joint venture 7,206,936 7,349,298
Investment in property:
Land 7,667,535 8,410,535
Building and improvements 21,960,686 24,942,540
----------- -----------
29,628,221 33,353,075
Less: accumulated depreciation 5,379,751 5,478,701
----------- -----------
24,248,470 27,874,374
Deferred expenses, net of accumulated
amortization of $1,623,405 in 1998
and $1,373,339 in 1997 942,088 1,467,784
----------- -----------
Total assets $39,273,939 $39,595,199
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 481,085 $ 212,129
Accounts payable to affiliates 200,102 131,445
----------- -----------
Total liabilities 648,685 343,574
Partners' equity/(deficit):
General partner's (45,422) (52,449)
Limited partners' 38,638,174 39,304,074
----------- -----------
Total partners' equity 38,592,752 39,251,625
----------- -----------
Total liabilities and partners' equity $39,273,939 $39,595,199
=========== ===========
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Income:
Rental income $1,117,238 $ 906,320 $2,940,826 $2,694,783
Income from joint venture 187,449 189,930 579,420 559,063
Interest income 39,760 38,997 108,178 106,378
---------- ---------- ---------- ----------
Total income 1,344,447 1,135,247 3,628,424 3,360,224
Expenses:
Depreciation 183,006 207,416 597,838 622,248
General and administrative expenses 125,249 85,589 342,473 237,312
Amortization of deferred expenses 92,535 46,564 276,429 273,990
Property operating expenses 74,078 70,668 187,537 174,554
---------- ---------- ---------- ----------
Total expenses 474,868 410,237 1,404,277 1,308,104
---------- ---------- ---------- ----------
Net income $ 869,579 $ 725,010 $2,224,147 $2,052,120
========== ========== ========== ==========
Allocation of net income:
General Partner $ 56,167 $ 49,598 $ 151,177 $ 143,448
John Hancock Limited Partner 83,516 121,062 226,833 216,259
Investors 729,896 554,350 1,846,137 1,692,413
---------- ---------- ---------- ----------
$ 869,579 $ 725,010 $2,224,147 $2,052,120
========== ========== ========== ==========
Net Income per Unit $ 0.29 $ 0.23 $ 0.76 $ 0.70
========== ========== ========== ==========
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)
SIX MONTHS ENDED SEPTEMBER 30, 1998 AND
YEAR ENDED DECEMBER 31, 1997
GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- ----------- -----------
Partners' equity/(deficit) at January 1, 1997
(2,415,234 Units outstanding) $ (43,423) $40,559,468 $40,516,045
Less: Cash distributions (192,201) (3,651,826) (3,844,027)
Add: Net income 183,175 2,396,432 2,579,607
--------- ----------- -----------
Partners' equity/(deficit) at December 31, 1997
(2,415,234 Units outstanding) (52,449) 39,304,074 39,251,625
Less: Cash distributions (144,150) (2,738,870) (2,883,020)
Add: Net income 151,177 2,072,970 2,224,147
--------- ----------- -----------
Partners' equity/(deficit) at September 30, 1998
(2,415,234 Units outstanding) $ (45,422) $38,638,174 $38,592,752
========= =========== ===========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
----------- -----------
Operating activities:
Net income $ 2,224,147 $ 2,052,120
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 597,838 622,248
Amortization of deferred expenses 276,429 273,990
Cash distributions over equity
in income from joint venture 142,362 172,166
----------- -----------
3,240,776 3,120,920
Changes in operating assets and liabilities:
Increase in restricted cash (21,583) 503)
Decrease/(increase) in other assets 18,987 (96,493)
Decrease/(increase) in accounts payable and
accrued expenses 268,956 264,794
Increase in accounts payable to affiliates 68,657 25,182
----------- -----------
Net cash provided by operating activities 3,575,793 3,314,906
Investing activities:
Acquisition of deferred expenses (16,303) (216,618)
----------- -----------
Net cash used in investing activities (16,303) (216,618)
Financing activities:
Cash distributed to Partners (2,883,020) (2,883,020)
----------- -----------
Net cash used in financing activities (2,883,020) (2,883,020)
----------- -----------
Net increase in cash and cash equivalents 676,470 215,268
Cash and cash equivalents at beginning of year 2,505,729 2,663,859
----------- -----------
Cash and cash equivalents at end of period $ 3,182,199 $ 2,879,127
=========== ===========
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 September 30, 1998, 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 2,344 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.
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 nine-month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998. 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, 1997.
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.
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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)
The Partnership measures impairment in value in accordance with Financial
Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of" ("Statement 121").
Statement 121 requires impairment losses to be recorded on long-lived
assets used in operations where indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amounts.
Depreciation has been provided on a straight-line basis over the estimated
useful lives of the various assets: thirty years for the buildings and five
years for related improvements. Maintenance and repairs are charged to
operations as incurred.
Investment in joint venture is recorded using the equity method.
Acquisition fees for the joint venture investment have been deferred and
are 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 nine months ended September 30, 1998 and
1997 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.
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.
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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)
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 nine months ended September 30, 1998 and 1997,
and to which the General Partner or its Affiliates are entitled to
reimbursement from the Partnership were $69,361 and $194,960, 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, included in the
Statement of Operations for the nine months ended September 30, 1998 and
1997 are $72,398 and $40,759, respectively, representing the Partnership's
share of costs incurred by the General Partner and its Affiliates relating
to the class action complaint. Through September 30, 1998, the Partnership
has accrued a total of $167,965 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:
September 30, 1998 December 31, 1997
------------------ -----------------
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
Stone Container Building -- 2,088,804
Business Center at Pureland 5,142,016 5,142,016
----------- -----------
$29,628,221 $33,353,075
=========== ===========
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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 (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.
During June 1998, the Stone Container Building and Allmetal Distribution
Building were listed for sale. Accordingly, these properties are classified
as "Property Held for Sale" on the Balance Sheet at September 30, 1998 at
their carrying values, which are not in excess of their estimated fair
values, less selling costs.
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, 1998, 97.55% has been contributed
by the Affiliated Joint Venture. The Affiliated Joint Venture continues to
hold a 75% interest in QOCC-1 Associates.
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 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.
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JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. DEFERRED EXPENSES
Deferred expenses consist of the following:
Unamortized Unamortized
Balance At Balance At
Description September 30, 1998 December 31, 1997
----------- ------------------ -----------------
$152,880 of acquisition fees for
investment in the Affiliated Joint
Venture. This amount is amortized
over a period of 31.5 years. $105,762 $ 109,402
$1,002,755 of tenant improvements. These
amounts are amortized over the terms
of the leases to which they relate. 560,274 775,877
$334,239 of lease commissions. These
amounts are amortized over the terms
of the leases to which they relate. 197,365 390,787
$1,073,621 of acquisition fees paid to the
General Partner. This amount is amortized
over a period of eighty-four months. 76,687 191,718
-------- ----------
$942,088 $1,467,784
======== ==========
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:
Nine Months Ended September 30,
1998 1997
---------- ----------
Net income per Statements of Operations $2,224,147 $2,052,120
Add/(less): Excess of book depreciation 104,373 104,592
over tax depreciation
Excess of book amortization
over tax amortization 143,431 141,814
Other income -- (12,755)
---------- ----------
Net income for federal income tax purposes $2,471,951 $2,285,771
========== ==========
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JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. CONTINGENCIES
In February 1996, a putative class action complaint was filed in the
Superior Court in Essex County, New Jersey by a single investor in a
limited partnership affiliated with the Partnership. The complaint named as
defendants the Partnership, the General Partner, certain other Affiliates
of the General Partner, and certain unnamed officers, directors, employees
and agents of the named defendants. The plaintiff sought unspecified
damages stemming from alleged misrepresentations and omissions in the
marketing and offering materials associated with the Partnership and two
limited partnerships affiliated with the Partnership. On March 18, 1997,
the court certified a class of investors who were original purchasers in
the Partnership.
The Partnership provides indemnification to the General Partner and its
Affiliates for acts or omissions of the General Partner in good faith on
behalf of the Partnership, except for acts or omissions constituting fraud,
negligence, misconduct or breach of fiduciary duty. The General Partner
believes that this indemnification applies to the class action complaint
described above.
The Partnership has incurred an aggregate of approximately $420,000 in
legal expenses in connection with this matter. Of this amount,
approximately $252,000 relates to the Partnership's own defense and
approximately $168,000 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 can not estimate the aggregate
amount of legal expenses and indemnification claims to be incurred and
their impact on the Partnership's Financial Statements, taken as a whole.
Accordingly, no provision for any liability which could result from the
eventual outcome of these matters has been made in the accompanying
financial statements.
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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 General Partner and John Hancock Mutual Life Insurance Company, the General
Partner's ultimate parent (together, "John Hancock") along with the Partnership,
have developed a plan to modify or replace significant portions of the
Partnership's computer information and automated technologies so that its
systems will function properly with respect to the dates in the year 2000 and
thereafter. The Partnership presently believes that with modifications to
existing systems and conversions to new technologies, the year 2000 will not
pose significant operational problems for its computer systems. However, if
certain modifications and conversions are not made, or are not completed timely,
the year 2000 issue could have an adverse impact on the operations of the
Partnership.
John Hancock as early as 1994 had begun assessing, modifying and converting the
software related to its significant systems and has initiated formal
communications with its significant business partners and customers to determine
the extent to which John Hancock's interface systems are vulnerable to those
third parties' failure to remediate their own year 2000 issues. While John
Hancock is developing alternative third party processing arrangements as it
deems appropriate, there is no guarantee that the systems of other companies on
which the Partnership's systems rely will be converted timely or will not have
an adverse effect on the Partnership's systems.
The Partnership expects the project to be substantially complete by early 1999.
This completion target was derived utilizing numerous assumptions of future
events, including availability of certain resources and other factors. However,
there can be no guarantee that this completion target will be achieved.
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain statements contained herein
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Those statements appear in a number of places in this
Report and include statements regarding the intent, belief or expectations of
the General Partner with respect to, among other things, the prospective sale of
Partnership properties, 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 September 30, 1998, the Partnership had $3,182,199 in cash and cash
equivalents and $131,639 in restricted cash.
The Partnership has a working capital reserve with a current balance of
approximately 4% of the offering proceeds. The General Partner anticipates that
such amount 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 nine months ended September 30, 1998, cash from working capital
reserves in the aggregate amount of $16,303 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 $73,000 of additional leasing costs
during the remainder of 1998, substantially all 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 nine months ended September 30, 1998, approximately $24,000 of cash
generated from the Partnership's operations was used to fund non-recurring
maintenance and repair expenses incurred at Palms of Carrollwood and Business
Center at Pureland properties. The General Partner anticipates that the
Partnership will incur additional non-recurring repair and maintenance expenses
of approximately $169,000 at its properties during the remainder of 1998. 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.
Cash in the amount of $2,883,020, generated from the Partnership's operations,
was distributed to the General Partner, the John Hancock Limited Partner and the
Investors during the nine months ended September 30, 1998. These amounts were
distributed in accordance with the Partnership Agreement and were allocated as
follows:
Investors $2,535,991
John Hancock Limited Partner 202,879
General Partner 144,150
----------
Total $2,883,020
==========
The Partnership has incurred approximately $420,000 in legal expenses in
connection with the class action lawsuit (see Part II, Item 1 of this Report).
Of this amount, approximately $252,000 relates to the Partnership's own defense
and approximately $168,000 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.
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 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. One current
tenant's lease at the property contains a clause that makes reference to the
situation in which the former anchor tenant ceases operations at the property.
As a result of this clause, the tenant reduced its rental payments by 25% during
November 1995. The Partnership brought an action against this tenant to obtain
collection of 100% of the amounts due under the lease agreement. The tenant
claimed that it had the right to pay the reduced rent for the remainder of the
lease term until November 2004. During the first quarter of 1998, this action
was heard in a Florida court. The court held in favor of the Partnership, ruling
that the tenant had only a limited period of time (approximately six months)
that it could pay the reduced rent. After that, the tenant must pay the full
amount of rent specified in the lease. A judgment and written ruling were issued
during the second quarter of 1998. The tenant has taken steps to appeal the
ruling. No assurances can be given that the Partnership will ultimately recover
amounts due under the lease pursuant to the ruling of the court.
At September 30, 1998, Palms of Carrollwood was 81% occupied. During the
remainder of 1998, no significant leases are scheduled to expire. 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, 2008
Stone Container Building Stone Container Corp. December 31, 2011
Business Center at Pureland Forbo Wallcoverings, Inc. December 31, 1998
Business Center at Pureland National Paintball Supply,Inc. May 31, 2001
During the first quarter of 1998, Purina Mills, Inc., ("PMI") the lessee at the
Purina Mills Distribution Building, notified the Partnership of its intention to
exercise its option to terminate the lease on December 1, 1998, in accordance
with the terms of its lease agreement. PMI will be required to pay a lease
termination fee in the approximate amount of $241,000. PMI had previously
vacated the property and secured a tenant to sublease the space. The General
Partner will attempt to secure a lease with the current subtenant as well as
seek a replacement tenant for the building.
One of the tenants at the Business Center at Pureland, National Polystyrene
Recycling Co., L.P., ("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 commence October 1,
1998 for a 32-month term. The other tenant at the Business Center at Pureland,
Forbo Wallcoverings, Inc. ("Forbo") has a lease that expires on December 31,
1998. Forbo has indicated that it does not intend to renew its lease upon its
expiration. Accordingly, the General Partner is seeking a replacement tenant for
this space.
The Quince Orchard Corporate Center is occupied by Boehringer Mannheim
Pharmaceuticals, Inc. under a ten-year lease which expires in February 2004. The
tenant has two options under the lease agreement, one, to terminate the lease at
the end of 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. As a
result, Hoffman-LaRoche has informed the General Partner that it intends to
terminate operations at the Quince Orchard Corporate Center and to exercise its
right to terminate the lease in June 2000.
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)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Real estate conditions in the Washington D.C. area for office space similar to
the Quince Orchard Corporate Center have improved recently. The supply of such
office space has been unable to keep pace with the demand, resulting in a slight
increase in market rents. Although this condition gives 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 believes market conditions are
likely to remain favorable through 1998.
During the third quarter of 1997, Allmetal, Inc., the sole tenant at the
Allmetal Distribution Building, extended the term of its lease through August
2008. As a result of this lease extension and the current favorable conditions
of the Carrollton, Texas real estate market, the Allmetal Distribution Building
was listed for sale by the General Partner during June 1998. On November 11,
1998, the General Partner entered into a Purchase and Sale Agreement (the
"Allmetal Agreement") on behalf of the Partnership for the sale of the Allmetal
Distribution Building to a non-affiliated buyer for a gross sales price of
$2,300,000. The sale is subject to certain conditions which, if not satisfied
prior to the scheduled date of sale, may result in the termination of the
Allmetal Agreement. If this potential transaction does not result in the sale of
the property, then the General Partner will resume its efforts to locate another
buyer for the property.
During June 1998, the General Partner listed the Stone Container Building for
sale because of the long-term lease with the sole tenant at the property and
current favorable conditions in the Cincinnati real estate market. On October
22, 1998, the General Partner entered into a Purchase and Sale Agreement (the
"Stone Container Agreement") on behalf of the Partnership for the sale of the
Stone Container Building to a non-affiliated buyer for a gross sales price of
$2,775,000. The sale is subject to certain conditions which, if not satisfied
prior to the scheduled date of sale, may result in the termination of the Stone
Container Agreement. If this potential transaction does not result in the sale
of the property, then the General Partner will resume its efforts to locate
another buyer for the property.
The General Partner anticipates that the Partnership's warehouse properties and
Affiliated Joint Venture investment should, in the aggregate, provide the
Partnership with stable income performance during the remainder of 1998.
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,
1997 by comparing such carrying value to the related property's future
undiscounted cash flows and the then most recent internal appraisal in order to
determine whether 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,
1997.
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 nine months ended September 30, 1998 was $2,224,147, as
compared to net income of $2,052,120 for the same period in 1997.
Average occupancy for the Partnership's investments was as follows:
Nine Months
Ended September 30,
1998 1997
---- ----
Palms of Carrollwood Shopping Center 81% 79%
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%
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)
RESULTS OF OPERATIONS (CONTINUED)
Rental Income for the period ended September 30, 1998 increased by $246,043, or
9%, as compared to the same period during 1997 primarily due to the lease buyout
fee paid by one of the tenants at the Business Center at Pureland (described
above). Rental income at all of the Partnership's other properties was
consistent between periods.
Property operating expenses for the period ended September 30, 1998 increased by
$12,983, or 7%, as compared to the same period during 1997. This increase is
primarily due to certain non-recurring maintenance and repair expenses incurred
at the Palms of Carrollwood Shopping Center during the period ended September
30, 1998. Property operating expenses at all the Partnership's other properties
were consistent between periods.
General and administrative expenses for the period ended September 30, 1998
increased by $105,161 or 44%, primarily due to an increase 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 nine months ended September 30,
1998, and the General Partner anticipates that it will not have a significant
impact during the remainder of 1998.
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:
Nine Months
Ended September 30,
1998 1997
---------- ----------
Net cash provided by operating activities (a) $3,575,793 $3,314,906
Net change in operating assets and liabilities (a) (335,017) (193,986)
---------- ----------
Net cash provided by operations (a) 3,240,776 3,120,920
Increase in working capital reserves (357,756) (237,900)
---------- ----------
Cash from operations (b) (2,883,020) 2,883,020
Decrease in working capital reserves -- --
---------- ----------
Distributable cash from operations (b) $2,883,020 $2,883,020
========== ==========
Allocation to General Partner $ 144,151 $ 144,151
Allocation to John Hancock Limited Partner 202,879 202,879
Allocation to Investors 2,535,990 2,535,990
---------- ----------
$2,883,020 $2,883,020
========== ==========
(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 fourth quarter of 1998, the Partnership will make a cash distribution
in the amount of $961,007 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.
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 the fourth quarter of 1998 will be comparable to that
generated during the first three quarters of 1998.
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. 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 third quarter of 1998.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the third quarter
of 1998.
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 third quarter of 1998.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule.
(b) There were no Reports on Form 8-K filed during the third quarter
of 1998.
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 13th day of November, 1998.
John Hancock Realty Income Fund-III
Limited Partnership
By: John Hancock Realty Equities, Inc.,
General Partner
By: /s/ William M. Fitzgerald
-----------------------------------
William M. Fitzgerald, President
By: /s/ Richard E. Frank
-----------------------------------
Richard E. Frank, Treasurer
(Chief Accounting Officer)
19