-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wzpy5JgHnE7EPsUfTVD6ufej8vQ3gV30qmo7J38yXZHz5HaUh7YKzGhn7yRvgy1v lWgUwlrbHavATI9yJvtHqw== 0000746262-97-000014.txt : 19971117 0000746262-97-000014.hdr.sgml : 19971117 ACCESSION NUMBER: 0000746262-97-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN REALTY INCOME FUND III LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000842741 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 043025607 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18563 FILM NUMBER: 97721575 BUSINESS ADDRESS: STREET 1: 200 BERKELEY STREET CITY: BOSTON STATE: MA ZIP: 02117 BUSINESS PHONE: 8007225457 10-Q 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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A Commission file number 0-18563 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Massachusetts 04-3025607 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 200 Clarendon Street, Boston, MA 02116 (Address of principal executive offices) (Zip Code) (800) 722-5457 Registrant's telephone number, including area code: N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) INDEX PART I: FINANCIAL INFORMATION PAGE Item 1 - Financial Statements: Balance Sheets at September 30, 1997 and December 31, 1996 3 Statements of Operations for the Three and Nine Months Ended September 30, 1997 and 1996 4 Statements of Partners' Equity for the Nine Months Ended September 30, 1997 and for the Year Ended December 31, 1996 5 Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 6 Notes to Financial Statements 7-15 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 16-23 PART II: OTHER INFORMATION 24 2 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) PART I: FINANCIAL INFORMATION Item 1: Financial Statements BALANCE SHEETS (Unaudited) ASSETS September 30, December 31, 1997 1996 ---- ---- Cash and cash equivalents $2,879,127 $2,663,859 Restricted cash 107,456 107,959 Other assets 277,035 180,542 Deferred expenses, net of accumulated amortization of $1,299,249 in 1997 and $1,025,259 in 1996 1,544,310 1,601,682 Investment in joint venture 7,466,243 7,638,805 Investment in property: Land 8,410,535 8,410,535 Building and improvements 24,942,540 24,942,540 ----------- ----------- 33,353,075 33,353,075 Less: accumulated depreciation 5,271,284 4,649,036 ----------- ----------- 28,081,791 28,704,039 ----------- ----------- Total assets $40,355,962 $40,896,886 =========== =========== LIABILITIES AND PARTNERS' EQUITY Liabilities: Accounts payable and accrued expenses $552,168 $287,374 Accounts payable to affiliates 118,649 93,467 ----------- ----------- Total liabilities 670,817 380,841 Partners' equity/(deficit): General partner's (44,125) (43,423) Limited partners' 39,729,270 40,559,468 ----------- ----------- Total partners' equity 39,685,145 40,516,045 ----------- ----------- Total liabilities and partners' equity $40,355,962 $40,896,886 =========== =========== See Notes to Financial Statements 3 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 ---- ---- ---- ---- Income: Rental income $893,015 $906,320 $2,694,783 $2,687,025 Income from joint venture 184,354 189,930 559,063 572,844 Interest income 37,971 38,997 106,378 108,278 ---------- ---------- ---------- ---------- Total income 1,115,340 1,135,247 3,360,224 3,368,147 Expenses: Depreciation 207,416 207,416 622,248 622,248 Amortization of deferred expenses 91,999 85,589 273,990 239,927 General and administrative expenses 51,966 46,564 237,312 157,885 Property operating expenses 61,719 70,668 174,554 184,655 ---------- ---------- ---------- ---------- Total expenses 413,100 410,237 1,308,104 1,204,715 ---------- ---------- ---------- ---------- Net income $702,240 $725,010 $2,052,120 $2,163,432 ========== ========== ========== ========== Allocation of net income: General Partner $48,749 $49,598 $143,448 $147,541 John Hancock Limited Partner 73,406 121,062 216,259 359,941 Investors 580,085 554,350 1,692,413 1,655,950 ---------- ---------- ---------- ---------- $702,240 $725,010 $2,052,120 $2,163,432 ========== ========== ========== ========== Net Income per Unit $0.24 $0.23 $0.70 $0.69 ========== ========== ========== ==========
See Notes to Financial Statements 4 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF PARTNERS' EQUITY (Unaudited) Nine Months Ended September 30, 1997 and Year Ended December 31, 1996
General Limited Partner Partners Total ------- -------- ----- Partners' equity/(deficit) at January 1, 1996 (2,415,234 Units outstanding) ($44,553) $41,590,304 $41,545,751 Less: Cash distributions (182,286) (3,463,437) (3,645,723) Add: Net income 183,416 2,432,601 2,616,017 --------- ----------- ----------- Partners' equity/(deficit) at December 31, 1996 (2,415,234 Units outstanding) (43,423) 40,559,468 40,516,045 Less: Cash distributions (144,150) (2,738,870) (2,883,020) Add: Net income 143,448 1,908,672 2,052,120 --------- ----------- ----------- Partners' equity/(deficit) at September 30, 1997 (2,415,234 Units outstanding) ($44,125) $39,729,270 $39,685,145 ========= =========== ===========
See Notes to Financial Statements 5 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 1997 1996 ---- ---- Operating activities: Net income $2,052,120 $2,163,432 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 622,248 622,248 Amortization of deferred expenses 273,990 239,927 Cash distributions over equity in income from joint venture 172,562 185,600 ----------- ----------- 3,120,920 3,211,207 Changes in operating assets and liabilities: Decrease/(increase) in restricted cash 503 (8,101) (Increase)/decrease in other assets (96,493) 126,775 Increase in accounts payable and accrued expenses 264,794 228,507 Increase/(decrease) in accounts payable to affiliates 25,182 (3,562) ----------- ----------- Net cash provided by operating activities 3,314,906 3,554,826 Investing activities: Acquisition of deferred expenses (216,618) (351,136) ----------- ----------- Net cash used in investing activities (216,618) (351,136) Financing activities: Cash distributed to Partners (2,883,020) (2,684,717) ----------- ----------- Net cash used in financing activities (2,883,020) (2,684,717) ----------- ----------- Net increase in cash and cash equivalents 215,268 518,973 Cash and cash equivalents at beginning of year 2,663,859 2,431,272 ----------- ----------- Cash and cash equivalents at end of period $2,879,127 $2,950,245 ========== ==========
See Notes to Financial Statements 6 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Unaudited) 1. Organization of Partnership --------------------------- John Hancock Realty Income Fund-III Limited Partnership (the "Partnership") was formed under the Massachusetts Uniform Limited Partnership Act on November 4, 1988. As of September 30, 1997, the Partnership consisted of John Hancock Realty Equities, Inc. (the "General Partner"), a wholly-owned, indirect subsidiary of John Hancock Mutual Life Insurance Company; John Hancock Realty Funding, Inc. (the "John Hancock Limited Partner"); John Hancock Income Fund-III Assignor, Inc. (the "Assignor Limited Partner"); and 2,529 Unitholders (the "Investors"). The Assignor Limited Partner holds five Investor Limited Partnership Interests for its own account and 2,415,229 Assignee Units (the "Units"), representing economic and certain other rights attributable to Investor Limited Partnership Interests in the Partnership, for the benefit of the Investors. The John Hancock Limited Partner, the Assignor Limited Partner and the Investors are collectively referred to as the Limited Partners. The General Partner and the Limited Partners are collectively referred to as the Partners. The initial capital of the Partnership was $2,100, representing capital contributions of $1,000 from the General Partner, $1,000 from the John Hancock Limited Partner, and $100 from the Assignor Limited Partner. The Amended Agreement of Limited Partnership of the Partnership (the "Partnership Agreement") authorized the issuance of up to 5,000,000 Units at $20 per unit. During the offering period, which terminated on February 15, 1991, 2,415,229 Units were sold and the John Hancock Limited Partner made additional capital contributions of $3,863,366. There were no changes in the number of Units outstanding subsequent to the termination of the offering period. The Partnership is engaged solely in the business of acquiring, holding for investment and disposing of existing income-producing retail, industrial and office properties on an all-cash basis, free and clear of mortgage indebtedness. Although the Partnership's properties were acquired and are held free and clear of mortgage indebtedness, the Partnership may incur mortgage indebtedness under certain circumstances as specified in the Partnership Agreement. The latest date on which the Partnership is due to terminate is December 31, 2019, unless it is sooner terminated in accordance with the terms of the Partnership Agreement. It is expected that, in the ordinary course of the Partnership's business, the properties of the Partnership will be disposed of, and the Partnership terminated, before December 31, 2019. 7 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) (Unaudited) 2. Significant Accounting Policies ------------------------------- The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the financial statements and footnotes thereto included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1996. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. The Partnership maintains its accounting records and recognizes rental revenue on the accrual basis. Cash equivalents are highly liquid investments with maturities of three months or less when purchased. These investments are recorded at cost plus accrued interest, which approximates market value. Restricted cash represents funds restricted for tenant security deposits. Investments in property are recorded at cost less any property write- downs for impairment in value. Cost includes the initial purchase price of the property plus acquisition and legal fees, other miscellaneous acquisition costs, and the cost of significant improvements. Depreciation has been provided on a straight-line basis over the estimated useful lives of the various assets: thirty years for the buildings and five years for related improvements. Maintenance and repairs are charged to operations as incurred. 8 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) (Unaudited) 2. Significant Accounting Policies (Continued) ------------------------------- 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, 1997 and 1996 is calculated by dividing the Investors' share of net income by the number of Units outstanding at the end of such periods. Certain 1996 amounts have been reclassified to be consistent with the 1997 presentation. 3. The Partnership Agreement ------------------------- Distributable Cash from Operations (defined in the Partnership Agreement) is distributed 5% to the General Partner and the remaining 95% in the following order of priority: first, to the Investors until they receive a 7% non-cumulative, non-compounded annual cash return on their Invested Capital (defined in the Partnership Agreement); second, to the John Hancock Limited Partner until it receives a 7% non-cumulative, non-compounded annual cash return on its Invested Capital; and third, to the Investors and the John Hancock Limited Partner in proportion to their respective Capital Contributions (defined in the Partnership Agreement). However, any Distributable Cash from Operations which is available as a result of a reduction in working capital reserves funded by Capital Contributions of the Investors will be distributed 100% to the Investors. 9 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) (Unaudited) 3. The Partnership Agreement (Continued) ------------------------- Profits for tax purposes from the normal operations of the Partnership for each fiscal year are allocated to the Partners in the same amounts as Distributable Cash from Operations for that year. If such profits are less than Distributable Cash from Operations for any year, they are allocated in proportion to the amounts of Distributable Cash from Operations for that year. If such profits are greater than Distributable Cash from Operations for any year, they are allocated 5% to the General Partner and 95% to the John Hancock Limited Partner and the Investors, with the allocation made between the John Hancock Limited Partner and the Investors in proportion to their respective Capital Contributions. Losses for tax purposes from the normal operations of the Partnership are allocated 1% to the General Partner and 99% to the John Hancock Limited Partner and the Investors, with the allocation made between the John Hancock Limited Partner and the Investors in proportion to their respective Capital Contributions. However, all tax aspects of the Partnership's payment of the sales commissions from the Capital Contributions made by the John Hancock Limited Partner are allocated 1% to the General Partner and 99% to the John Hancock Limited Partner, and not to the Investors. Depreciation deductions are allocated 1% to the General Partner and 99% to the Investors, and not to the John Hancock Limited Partner. Neither the General Partner nor any Affiliate of the General Partner shall be liable, responsible or accountable in damages to any of the Partners or the Partnership for any act or omission of the General Partner or such Affiliate in good faith on behalf of the Partnership within the scope of the authority granted to the General Partner by the Partnership Agreement and in the best interest of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The Partnership shall not advance any funds to the General Partner or its Affiliates for legal expenses and other costs incurred as a result of any legal action initiated against the General Partner or its Affiliates by a Limited Partner in the Partnership. The General Partner and its Affiliates performing services on behalf of the Partnership shall be entitled to indemnity from the Partnership for any loss, damage, or claim by reason of any act performed or omitted to be performed by the General Partner or such Affiliates in good faith on behalf of the Partnership and in a manner within the scope of the authority granted to the General Partner by the Partnership Agreement and in the best interest of the Partnership, except that they shall not be entitled to be indemnified in respect of any loss, damage, or claim incurred by reason of fraud, negligence, misconduct, or breach of fiduciary duty. Any indemnity shall be provided out of and to the extent of Partnership assets only. 10 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) (Unaudited) 4. Transactions with the General Partner and Affiliates ---------------------------------------------------- Fees, commissions and other costs incurred or paid by the General Partner or its Affiliates during the nine months ended September 30, 1997 and 1996, and to which the General Partner or its Affiliates are entitled to reimbursement from the Partnership were $194,960 and $127,338, 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 Statements of Operations for the nine months ended September 30, 1997 and 1996 were $40,759 and $0, respectively, representing the Partnership's share of costs incurred by the General Partner and its Affiliates relating to the class action complaint. As of September 30, 1997, the Partnership has accrued a total of $82,234 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. 11 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:
September 30, 1997 December 31, 1996 ------------------ ----------------- Palms of Carrollwood Shopping Center $10,930,578 $10,930,578 Yokohama Tire Warehouse 9,352,221 9,352,221 Purina Mills Distribution Building 4,203,406 4,203,406 Allmetal Distribution Building 1,636,050 1,636,050 Stone Container Building 2,088,804 2,088,804 Business Center at Pureland 5,142,016 5,142,016 ----------- ----------- $33,353,075 $33,353,075 =========== ===========
The real estate market is cyclical in nature and is materially affected by general economic trends and economic conditions in the market where a property is located. As a result, determination of real estate values involves subjective judgments. These judgments are based on current market conditions and assumptions related to future market conditions. These assumptions involve, among other things, the availability of capital, occupancy rates, rental rates, interest rates and inflation rates. Amounts ultimately realized from each property may vary significantly from the market values presented and the differences could be material. Actual market values of real estate can be determined only by negotiation between the parties in a sales transaction. 6. Investment in Joint Venture --------------------------- On December 28, 1988, the Partnership invested $75,000 to acquire a 0.5% interest in JH Quince Orchard Partners (the "Affiliated Joint Venture"), a joint venture between the Partnership and John Hancock Realty Income Fund-II Limited Partnership ("Income Fund-II"). The Partnership had an initial 0.5% interest and Income Fund-II had an initial 99.5% interest in the Affiliated Joint Venture. 12 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) (Unaudited) 6. Investment in Joint Venture (Continued) --------------------------- 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 September 30, 1997, 97.55% has been contributed by the Affiliated Joint Venture. The Affiliated Joint Venture continues to hold a 75% interest in QOCC-1 Associates. Net cash flow from QOCC-1 Associates is distributed in the following order of priority: (i) to the payment of all debts and liabilities of QOCC-1 Associates and to fund reserves deemed reasonably necessary; ii) to the partners in proportion to their respective invested capital until each has received a 9% return on invested capital and iii) the balance, if any, to the partners in proportion to their interests. Prior to 1996, QOCC-1 Associates had not provided the partners with a return in excess of 9% on their invested capital. During 1996, the Affiliated Joint Venture received a return on invested capital of approximately 12%. Income and gains of QOCC-1 Associates, other than the gains allocated arising from a sale or 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. 13 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, 1997 December 31, 1996 ----------- ------------------ ----------------- $152,880 of acquisition fees for investment in the Affiliated Joint Venture. This amount is amortized over a period of 31.5 years. $110,616 $114,256 $1,107,446 of tenant improvements. These amounts are amortized over the terms of the leases to which they relate. 803,587 900,220 $509,612 of lease commissions. These amounts are amortized over the terms of the leases to which they relate. 400,047 242,114 $1,073,621 of acquisition fees paid to the General Partner. This amount is amortized over a period of eighty-four months. 230,060 345,092 ---------- ---------- $1,544,310 $1,601,682 ========== ==========
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, 1997 1996 ---- ---- Net income per Statements of Operations $2,052,120 $2,163,432 Add/(less): Excess of book depreciation over tax depreciation 104,592 106,516 Excess of book amortization over tax amortization 141,814 121,355 Other income (12,755) (119,377) ----------- ----------- Net income for federal income tax purposes $2,285,771 $2,271,926 =========== ===========
14 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 $206,000 in legal expenses in connection with this matter. Of this amount, approximately $124,000 relates to the Partnership's own defense and approximately $82,000 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 impact, if any, of the potential indemnification claims on the Partnership's financial statements, taken as a whole. Accordingly, no provision for any liability which could result from the eventual outcome of these matters has been made in the accompanying financial statements. 15 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations General - ------- During the offering period, from February 17, 1989 to February 15, 1991, the Partnership sold 2,415,229 Units representing gross proceeds (exclusive of the John Hancock Limited Partner's contribution which was used to pay sales commissions) of $48,304,580. The proceeds of the offering were used to acquire investment properties, fund reserves and pay acquisition fees and organizational and offering expenses. These investments are described more fully in Notes 5 and 6 to the Financial Statements included in Item 1 of this Report. Forward-looking Statements - -------------------------- In addition to historical information, certain statements contained herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements appear in a number of places in this Report and include statements regarding the intent, belief or expectations of the General Partner with respect to, among other things, the prospective sale of Partnership properties, actions that would be taken in the event of lack of liquidity, unanticipated leasing costs, repair and maintenance expenses, distributions to the General Partner and to Investors, the possible effects of tenants vacating space at Partnership properties, the absorption of existing retail space in certain geographical areas, and the impact of inflation. Forward-looking statements involve numerous known and unknown risks and uncertainties, and they are not guarantees of future performance. The following factors, among others, could cause actual results or performance of the Partnership and future events to differ materially from those expressed or implied in the forward-looking statements: general economic and business conditions; any and all general risks of real estate ownership, including without limitation adverse changes in general economic conditions and adverse local conditions, the fluctuation of rental income from properties, changes in property taxes, utility costs or maintenance costs and insurance, fluctuations of real estate values, competition for tenants, uncertainties about whether real estate sales under contract will close; the ability of the Partnership to sell its properties; and other factors detailed from time to time in the filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect the General Partner's analysis only as of the date hereof. The Partnership assumes no obligation to update forward- looking statements. See also the Partnership's reports to be filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. 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 - ------------------------------- At September 30, 1997, the Partnership had $2,879,127 in cash and cash equivalents and $107,456 in restricted cash. The Partnership has a working capital reserve with a current balance of approximately 3.4% of the Investors' Invested Capital (defined in the Partnership Agreement). The General Partner anticipates that such amount should be sufficient to satisfy the Partnership's general liquidity requirements. The Partnership's liquidity would, however, be materially adversely affected if there were a significant reduction in revenues or significant unanticipated operating costs (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, 1997, the Partnership incurred $216,618 of leasing costs at the Palms of Carrollwood Shopping Center ("Palms of Carrollwood") and Allmetal Distribution Building properties. The General Partner anticipates that the Partnership will incur approximately $5,000 of additional leasing costs at Palms of Carrollwood during the remainder of 1997. 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, 1997, $5,019 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 the Business Center at Pureland properties. The General Partner anticipates that the Partnership will incur additional non-recurring repair and maintenance expenses of approximately $37,000 at the Palms of Carrollwood property during the remainder of 1997. These additional expenses will be funded from the operations of the Partnership's properties and are not expected to have a significant impact on the Partnership's liquidity. 17 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------- 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, 1997. 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 will make a comparable distribution from its operations during the fourth quarter of 1997. The Partnership has incurred an aggregate of approximately $206,000 in legal expenses in connection with the class action lawsuit (see Part II, Item 1 of this Report). Of this amount, approximately $124,000 relates to the Partnership's own defense and approximately $82,000 relates to indemnification of the General Partner and its Affiliates for their defense. 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. A tenant that leases 50% of the Business Center at Pureland notified the Partnership during the third quarter of 1997 that it will vacate the property prior to its lease expiration date in May 2001. The tenant has ceased operations at the property and expects to fully vacate its space by the end of 1997. As a result, the tenant is seeking to sublet the space. The Partnership continues to receive all rental payments due under the lease. The General Partner does not currently believe that there will be a materially adverse affect on the Partnership's liquidity resulting from this tenant vacating the property. 18 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------- During the third quarter of 1997, Allmetal, Incorporated, the sole tenant at the Allmetal Distribution Building, whose lease was scheduled to expire in August 1998, extended the term of its lease through August 2008. The tenant has an option to renew the lease for an additional five year period. The Partnership incurred leasing costs in the amount of $169,939 in connection with this extension. One of the anchor tenants at the Palms of Carrollwood vacated the property during June 1995. In July 1995, the General Partner secured a new anchor tenant to occupy this space under a lease commencing in November 1995. Three tenants' leases at the Palms of Carrollwood contain clauses that make reference to the situation in which the former anchor tenant ceases operations at the property. One of these tenants paid all amounts due under its lease through the lease's scheduled expiration in February 1997 and two of the tenants reduced their rental payments by 25%. As a result of a settlement negotiated with the General Partner, one of these two tenants recommenced making its rental payments at 100% of the contracted amount. The General Partner is using all available legal remedies to obtain collection from the other tenant of all outstanding amounts due. The General Partner does not believe that any reduction in rental payments resulting from the replacement of the original anchor tenant will have a materially adverse affect on the Partnership's liquidity. At September 30, 1997, Palms of Carrollwood was 79% leased. During the remainder of 1997, no significant leases are scheduled to expire at the property. The General Partner will continue to offer competitive leasing packages in an effort to improve the property's occupancy. The Partnership's warehouse properties are presently 100% occupied. The following table sets forth the names of the lessees at each of the Partnership's warehouse properties and the earliest date on which the applicable lessee's lease obligations may terminate.
Property Lessee Lease Expiration --------- ------ ---------------- Yokohama Tire Warehouse Yokohama Tire Corp. March 31, 2006 Purina Mills Distribution Building Purina Mills, Inc. December 1, 1998 Allmetal Distribution Building Allmetal, Inc. August 31, 2008 Stone Container Building Stone Container Corp. December 31, 2011 Business Center at Pureland Forbo Wallcoverings, Inc. December 31, 1998 Business Center at Pureland National Polystyrene Recycling Co., L.P. May 31, 2001
The General Partner anticipates that the warehouse properties should provide the Partnership with stable income performance during the remainder of 1997. 19 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------- During the third quarter of 1997, the General Partner had the Quince Orchard Corporate center property independently appraised. Based upon the appraiser's investigation and analysis, the property's market value is estimated to be approximately $14,600,000 as of September 30, 1997 and the value of the Partnership's investment in the Affiliated Joint Venture is estimated to be approximately $7,125,000. The carrying value of the Partnership's Affiliated Joint Venture investment of approximately $7,402,000 was evaluated in comparison to estimated future undiscounted cash flows and the independent appraisal. Based on such evaluation, the General Partner determined the Partnership's share of the property's estimated future undiscounted cash flows are expected to exceed its carrying value and, therefore, a write-down in value was not required at September 30, 1997. The Partnership's cumulative investment in the Affiliated Joint Venture is approximately $8,915,000. The General Partner evaluated the carrying value of each of the Partnership's properties as of December 31, 1996 by comparing such carrying value to the related property's future undiscounted cash flows and the then most recent internal appraisal in order to determine whether a permanent impairment in value existed. Based upon such evaluations, the General Partner determined that no permanent impairment in values existed and, therefore, no write-downs were recorded as of December 31, 1996. The General Partner will continue to conduct property valuations, using internal or independent appraisals, in order to determine whether a permanent impairment in value exists on any of the Partnership's properties. Results of Operations - --------------------- Net income for the nine months ended September 30, 1997 was $2,052,120, as compared to net income of $2,163,432 for the same period in 1996, representing a decrease of 5% in net income. This decline is primarily due to the legal fees incurred in connection with the class action lawsuit (described in Item 1 of Part II of this Report). 20 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) - --------------------- Average occupancy for the Partnership's investments was as follows: Nine Months Ended September 30, 1997 1996 ---- ---- Palms of Carrollwood Shopping Center 79% 80% 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% Amortization of deferred expenses for the nine months ended September 30, 1997 increased by $34,063, or 14%, as compared to the same period in 1996. This increase is primarily due to the amortization of leasing costs incurred at the Business Center at Pureland and Stone Container properties during 1996 and leasing costs incurred at the Palms of Carrollwood property during 1996 and the first nine months of 1997. General and administrative expenses for the nine months ended September 30, 1997 increased by $79,427, or 50%, primarily due to legal fees incurred by the Partnership in connection with the class action complaint (see Part II, Item 1 of this Report). Excluding such legal fees, general and administrative expenses were consistent between periods. Property operating expenses for the nine months ended September 30, 1997 decreased by $10,101, or 5%, as compared to the same period in 1996. This decrease is primarily due to certain non-recurring maintenance and repair expenses incurred at the Palms of Carrollwood property during the period in 1996 that was partially offset by legal fees incurred in connection with efforts to collect past due rent from an existing tenant (described above). 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, 1997, and the General Partner anticipates that it will not have a significant impact during the remainder of 1997. 21 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:
Net cash provided by operating activities (a) $3,314,906 $3,554,826 Net change in operating assets and liabilities (a) (193,986) (343,619) ---------- ---------- Net cash provided by operations (a) 3,120,920 3,211,207 Increase in working capital reserves (237,900) (328,187) ---------- ---------- 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 1997, 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. 22 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Cash Flow (continued) - --------- The source of future cash distributions is dependent upon cash generated by the Partnership's properties and the use of working capital reserves. The General Partner currently anticipates that the Partnership's Distributable Cash from Operations during the fourth quarter of 1997 will be comparable to that generated during each of the first three quarters of 1997. 23 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 1997. Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the third quarter of 1997. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders of the Partnership during the third quarter of 1997. Item 5. Other information Item 6. Exhibits and Reports on Form 8-K (a) There are no exhibits to this Report. (b) There were no Reports on Form 8-K filed during the third quarter of 1997. 24 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 14th day of November, 1997. John Hancock Realty Income Fund-III Limited Partnership By: John Hancock Realty Equities, Inc., General Partner By: WILLIAM M. FITZGERALD -------------------------------- William M. Fitzgerald, President By: RICHARD E. FRANK -------------------------------- Richard E. Frank, Treasurer (Chief Accounting Officer) EX-27 2
5 0000842741 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP 9-MOS DEC-31-1997 SEP-30-1997 2,986,583 0 262,147 0 0 3,263,618 33,353,075 5,271,284 40,355,962 670,817 0 0 0 0 39,685,145 40,355,962 0 3,360,224 0 411,866 896,238 0 0 2,052,120 0 2,052,120 0 0 0 2,052,120 0.70 0.70
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