10-Q 1 b37234jhe10-q.txt JOHN HANCOCK REALTY INCOME III 1 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) 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, 2000 ------------------------------------------------- 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 ---- ---- 2 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, 2000 and December 31, 1999 3 Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 1999 4 Statements of Partners' Equity for the Nine Months Ended September 30, 2000 and for the Year Ended December 31, 1999 5 Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 6 Notes to Financial Statements 7-12 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 13-17 PART II: OTHER INFORMATION 18 2 3 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, 2000 1999 ----------- ----------- Cash and cash equivalents $ 9,081,863 $ 2,899,090 Restricted cash 85,684 88,844 Other assets 106,200 110,669 Property held for sale 20,718,448 6,924,617 Investment in joint venture 130,000 6,760,170 Investment in property: Land -- 6,355,135 Building and improvements 9,717,459 ----------- ----------- -- 16,072,594 Less: accumulated depreciation 2,967,494 ----------- ----------- 13,105,100 Deferred expenses, net of accumulated amortization of $56,824 in 2000 and $1,855,329 in 1999 96,056 761,854 ----------- ----------- Total assets $30,218,251 $30,650,344 =========== =========== LIABILITIES AND PARTNERS' EQUITY Liabilities: Accounts payable and accrued expenses 387,314 $ 205,003 Accounts payable to affiliates 125,388 168,288 --------- ----------- Total liabilities 512,702 373,291 Partners' equity/(deficit): General partner's (7,779) ( 67,086) Limited partners' 29,713,328 30,344,139 ---------- ----------- Total partners' equity 29,705,549 30,277,053 ----------- ----------- Total liabilities and partners' equity $30,218,251 $30,650,344 =========== ===========
See Notes to Financial Statements 3 4 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, 2000 1999 2000 1999 -------- --------- ---------- ---------- Income: Rental income $709,560 $ 832,823 $1,940,180 $2,277,523 Income/(loss) from joint venture (37,062) 212,302 446,124 637,905 Interest income 43,864 70,264 125,696 194,347 Gain/(loss) on sales of property interests (91,590) -- (91,590) 2,065,783 --------- ----------- ---------- ---------- Total income 624,772 1,115,389 2,420,410 5,175,558 Expenses: Depreciation -- 152,292 80,540 466,968 General and administrative expenses 86,915 70,278 205,261 218,775 Amortization of deferred expenses 1,213 34,291 34,085 140,731 Property operating expenses 319,619 107,922 533,753 291,771 --------- ----------- ---------- ---------- Total expenses 407,747 364,783 853,639 1,118,245 --------- ----------- ---------- ---------- Net income $217,025 $ 750,606 $1,566,771 $4,057,313 ======== ========== ========== ========== Allocation of net income: General Partner $ 17,812 $ 48,194 $ 96,333 $ 152,609 John Hancock Limited Partner -- 63,961 -- 175,617 Investors 199,213 638,451 1,470,438 3,729,087 -------- ----------- ---------- ---------- $217,025 $ 750,606 $1,566,771 $4,057,313 ======== ========== ========== ========== Net Income per Unit $ 0.08 $ 0.26 $ 0.61 $ 1.54 ======== ========== ========== ==========
See Notes to Financial Statements 4 5 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) STATEMENTS OF PARTNERS' EQUITY (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2000 AND YEAR ENDED DECEMBER 31, 1999
GENERAL LIMITED PARTNER PARTNERS TOTAL ---------- ----------- ------------ Partners' equity/(deficit) at January 1, 1999 (2,415,234 Units outstanding) $ (38,068) $39,219,654 $ 39,181,586 Less: Cash distributions (207,302) (13,068,321) (13,275,623) Add: Net income 178,284 4,192,806 4,371,090 --------- ----------- ------------ Partners' equity/(deficit) at December 31, 1999 (2,415,234 Units outstanding) (67,086) 30,344,139 30,277,053 Less: Cash distributions (37,026) ( 2,101,249) ( 2,138,275) Add: Net income 96,333 1,470,438 1,566,771 --------- ----------- ------------ Partners' equity/(deficit) at September 30, 2000 (2,415,234 Units outstanding) $ (7,779) $29,713,328 $ 29,705,549 ========= =========== ============
See Notes to Financial Statements 5 6 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 ---------- ----------- Operating activities: Net income $1,566,771 $ 4,057,313 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 80,540 466,968 Amortization of deferred expenses 34,085 140,731 Cash distributions over equity in income from joint venture 253,958 12,634 (Gain)/loss on sales of property interests 91,590 (2,065,783) ----------- ------------ 2,026,944 2,611,863 Changes in operating assets and liabilities: Decrease/(Increase) in restricted cash 3,160 (5,500) Decrease/(increase) in other assets 4,469 107,058 Increase/(decrease) in accounts payable and accrued expenses 182,311 26,425 Increase/(decrease) in accounts payable to affiliates (42,900) 67,814 ------------ ------------- Net cash provided by operating activities 2,173,984 2,807,660 Investing activities: Increase in deferred expenses (137,559) (66,522) Proceeds from sales of property interests 6,284,623 7,026,439 ----------- ------------ Net cash provided by investing activities 6,147,064 6,595,917 Financing activities: Cash distributed to Partners (2,138,275) (12,009,346) ----------- ----------- Net cash used in financing activities (2,138,275) (12,009,346) ----------- ----------- Net increase/(decrease) in cash and cash equivalents 6,182,773 (2,241,769) Cash and cash equivalents at beginning of year 2,899,090 5,874,797 ----------- ----------- Cash and cash equivalents at end of period $9,081,863 $3,633,028 ========== ==========
See Notes to Financial Statements 6 7 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, 2000, the Partnership consisted of John Hancock Realty Equities, Inc. (the "General Partner"), a wholly-owned, indirect subsidiary of John Hancock Mutual Life Insurance Company; John Hancock Realty Funding, Inc. (the "John Hancock Limited Partner"); John Hancock Income Fund-III Assignor, Inc. (the "Assignor Limited Partner"); and 2,202 Unitholders (the "Investors"). The Assignor Limited Partner holds five Investor Limited Partnership Interests for its own account and 2,415,229 Assignee Units (the "Units"), representing economic and certain other rights attributable to Investor Limited Partnership Interests in the Partnership, for the benefit of the Investors. The John Hancock Limited Partner, the Assignor Limited Partner and the Investors are collectively referred to as the Limited Partners. The General Partner and the Limited Partners are collectively referred to as the Partners. The initial capital of the Partnership was $2,100, representing capital contributions of $1,000 from the General Partner, $1,000 from the John Hancock Limited Partner, and $100 from the Assignor Limited Partner. The Amended Agreement of Limited Partnership of the Partnership (the "Partnership Agreement") authorized the issuance of up to 5,000,000 Units at $20 per unit. During the offering period, which terminated on February 15, 1991, 2,415,229 Units were sold and the John Hancock Limited Partner made additional capital contributions of $3,863,366. There were no changes in the number of Units outstanding subsequent to the termination of the offering period. The Partnership is engaged solely in the business of acquiring, holding for investment and disposing of existing income-producing retail, industrial and office properties on an all-cash basis, free and clear of mortgage indebtedness. Although the Partnership's properties were acquired and are held free and clear of mortgage indebtedness, the Partnership may incur mortgage indebtedness under certain circumstances as specified in the Partnership Agreement. The latest date on which the Partnership is due to terminate is December 31, 2019, unless it is sooner terminated in accordance with the terms of the Partnership Agreement. It is expected that, in the ordinary course of the Partnership's business, the properties of the Partnership will be disposed of, and the Partnership terminated, before December 31, 2019. As initially stated in its Prospectus, it was expected that the Partnership would be dissolved upon the sale of its last remaining property, which at that time was expected to be within seven to ten years following the date such property was acquired by the Partnership. As of September 30, 2000, the Partnership has three properties remaining in its portfolio, all of which are listed for sale. Upon the sale of the last remaining property, the operations of the Partnership will terminate, and the Partnership will be dissolved, in accordance with the terms of the Partnership Agreement, as soon as reasonably practicable. 2. SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. 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, 1999. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. 7 8 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 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. Property held for sale is recorded at the lower of its carrying amount, at the time the property is listed for sale, or its fair value, less cost to sell. Carrying amount includes the property's cost, as described below, less accumulated depreciation thereon and less any property write-downs for impairment in value and plus any related unamortized deferred expenses. Operating results for properties held for sale are reported on the statement of operations along with the operations of other investments in property. Investments in property are recorded at cost less any property write-downs for impairment in value. Cost includes the initial purchase price of the property plus acquisition and legal fees, other miscellaneous acquisition costs, and the cost of significant improvements. The Partnership measures impairment in value in accordance with Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" ("Statement 121"). Statement 121 requires impairment losses to be recorded on long-lived assets used in operations where indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. Depreciation has been provided on a straight-line basis over the estimated useful lives of the various assets: thirty years for the buildings and five years for related improvements. Maintenance and repairs are charged to operations as incurred. 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, 2000 and 1999 was 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. 8 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 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, 2000 and 1999, and to which the General Partner or its Affiliates are entitled to reimbursement from the Partnership were $101,972 and $98,208, respectively. The Partnership provides indemnification to the General Partner and its Affiliates for any acts or omissions of the General Partner or such Affiliate in good faith on behalf of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner believes that this indemnification applies to the class action complaint described in Note 10. Accordingly, included in the Statement of Operations for the nine months ended September 30, 2000 and 1999 are $0 and $23,744, 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, 2000, the Partnership has accrued a total of $210,098 as its share of the costs incurred by the General Partner and its Affiliates resulting from this matter. Accounts payable to affiliates represents amounts due to the General Partner or its Affiliates for various services provided to the Partnership, including amounts to indemnify the General Partner or its Affiliates for claims incurred by them in connection with their actions as General Partner of the Partnership. All amounts accrued by the Partnership to indemnify the General Partner or its affiliates for legal fees incurred by them shall not be paid unless or until all conditions set forth in the Partnership Agreement for such payment have been fulfilled. The General Partner serves in a similar capacity for two other affiliated real estate limited partnerships. 9 10 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, 2000 DECEMBER 31, 1999 ------------------ ----------------- Palms of Carrollwood Shopping Center $ -- $10,930,578 Business Center at Pureland -- 5,142,016 ---------- ----------- -- 16,072,594 Accumulated Depreciation -- (2,967,494) ---------- ----------- $ -- $13,105,100 ========== =========== 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. PROPERTY HELD FOR SALE During the first quarter of 2000, the Pureland Business Center and the Palms of Carrollwood Shopping Center were listed for sale and during December 1999, the Yokohama Tire Warehouse was listed for sale. Accordingly, these properties are classified as "Property Held for Sale" on the Balance Sheet at September 30, 2000 at their carrying values, which are not in excess of their estimated fair values, less selling costs. Property held for sale consists of commercial real estate as follows: SEPTEMBER 30, 2000 DECEMBER 31, 1999 ------------------ ----------------- Yokohama Tire Warehouse $ 6,924,617 $6,924,617 Palms of Carrollwood Shopping Center 9,743,019 -- Business Center at Pureland 4,050,812 -- ----------- ---------- $20,718,448 $6,924,617 =========== ========== On November 6, 2000, the Partnership sold the Yokohama Tire Warehouse and received net proceeds of approximately $9,085,000, resulting in a net gain of approximately $2,160,000, representing the difference between the net sales price and the property's carrying value. On November 10, 2000, the Partnership sold the Palms of Carrollwood Shopping Center and received net proceeds of approximately $11,926,000. This transaction resulted in a net gain of approximately $1,749,000, representing the difference between the net sales price and the property's carrying value of approximately $10,177,000. 7. INVESTMENT IN JOINT VENTURE On December 28, 1988, the Partnership invested $75,000 to acquire a 0.5% interest in JH Quince Orchard Partners (the "Affiliated Joint Venture"), a joint venture between the Partnership and John Hancock Realty Income Fund-II Limited Partnership ("Income Fund-II"). The Partnership had an initial 0.5% interest and Income Fund-II had an initial 99.5% interest in the Affiliated Joint Venture. Pursuant to the partnership agreement of the Affiliated Joint Venture, the Partnership had the option, exercisable prior to December 31, 1990, to increase its investment and interest in the Affiliated Joint Venture to 50%. During the second quarter of 1989, the Partnership exercised such option and Income Fund-II transferred a 49.5% interest in the Affiliated Joint Venture to the Partnership for cash in the aggregate amount of $7,325,672. The Partnership has held a 50% interest in the Affiliated Joint Venture since the second quarter of 1989. 10 11 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 7. INVESTMENT IN JOINT VENTURE (CONTINUED) 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, 2000, 97.55% has been contributed by the Affiliated Joint Venture. The Affiliated Joint Venture continues to hold a 75% interest in QOCC-1 Associates. Net cash flow from QOCC-1 Associates is distributed in the following order of priority: (i) to the payment of all debts and liabilities of QOCC-1 Associates and to fund reserves deemed reasonably necessary; ii), to the partners in proportion to their respective invested capital until each has received a 9% return on invested capital and iii) the balance, if any, to the partners in proportion to their interests. Prior to 1996, QOCC-1 Associates had not provided the partners with a return in excess of 9% on their invested capital. During 1999, 1998, 1997 and 1996, the partners received returns on invested capital of approximately 12%. Income and gains of QOCC-1 Associates, other than the gains allocated arising from a sale other similar event with respect to the Quince Orchard Corporate Center, are allocated in the following order of priority: i) to the partners who are entitled to receive a distribution of net cash flow, pro rata in the same order and amounts as such distributions are made and ii) the balance, if any, to the partners, pro rata in accordance with their interests. On September 29, 2000, QOCC-1 Associates sold the Quince Orchard Corporate Center to a non-affiliated buyer for a total net sales price of $12,569,246 after deductions for commissions and selling expenses incurred in connection with the sale of the property. $6,284,623, representing fifty percent of the net proceeds of the sale, was distributed to the Partnership and fifty percent was distributed to Income Fund-II. This transaction resulted in a non-recurring loss of $91,950 to the Partnership, representing the difference between the net sales price and the carrying value of the investment of $6,376,213. 8. DEFERRED EXPENSES Deferred expenses consist of the following:
Unamortized Unamortized Balance At Balance At Description September 30, 2000 December 31, 1999 ----------- ------------------ ----------------- $152,880 of acquisition fees for investment in the Affiliated Joint Venture. This amount is amortized over a period of 31.5 years. $96,056 $ 99,696 Tenant improvements were amortized over the terms of the leases to which they relate. As of September 30, 2000, the General partner had listed its three investments in property for sale. Accordingly, the unamortized balance is included in carrying cost of "Properties held for sale". -- 476,432 Lease Commissions were amortized over the terms of the leases to which they relate. As of September 30, 2000, the General Partner had listed its three investments in property for sale. Accordingly, the unamortized balance is included in carrying cost of "Properties held for sale". -- 185,726 ------- -------- $96,056 $761,854 ======= ========
11 12 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 9. FEDERAL INCOME TAXES A reconciliation of the net income reported in the Statements of Operations to the net income reported for federal income tax purposes is as follows:
Nine Months Ended September 30, 2000 1999 ---------- ---------- Net income per Statements of Operations $1,566,771 $4,057,313 Add/(less): Excess of tax gain over book gain on disposition of assets -- 180,722 Excess of book depreciation over tax depreciation (401,445) 32,693 Excess of book amortization over tax amortization 7,548 125,918 ---------- ---------- Net income for federal income tax purposes $1,172,874 $4,396,646 ========== ==========
10. CONTINGENCIES In February 1996, a putative class action complaint was filed in the Superior Court in Essex County, New Jersey by a single investor in a limited partnership affiliated with the Partnership. The complaint named as defendants the Partnership, the General Partner, certain other Affiliates of the General Partner, and certain unnamed officers, directors, employees and agents of the named defendants. The plaintiff sought unspecified damages stemming from alleged misrepresentations and omissions in the marketing and offering materials associated with the Partnership and two limited partnerships affiliated with the Partnership. On March 18, 1997, the court certified a class of investors who were original purchasers in the Partnership. A settlement agreement was approved by the court on December 22, 1999. Under the terms of the settlement, the defendants guaranteed certain minimum returns to class members on their investments and have paid fees and expenses for class counsel in an amount determined by the court to be $1.5 million. Payment under the settlement agreement will have no financial impact on the Partnership. The Partnership provides indemnification to the General Partner and its Affiliates for acts or omissions of the General Partner in good faith on behalf of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner believes that this indemnification applies to the class action complaint described above. The Partnership has incurred an aggregate of approximately $532,173 in legal expenses in connection with this matter. Of this amount, approximately $322,075 relates to the Partnership's own defense and approximately 210,098 relates to indemnification of the General Partner and its affiliates for their defense. These expenses are funded from the operations of the Partnership. 12 13 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, 6 and 7 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, litigation expenses and indemnification claims, 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. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2000, the Partnership had $9,081,863 in cash and cash equivalents and $85,684 in restricted cash. The Partnership has a working capital reserve with a current balance of approximately $2,500,000. 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, 2000, cash from working capital reserves in the aggregate amount of $137,559 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 a total of approximately $700,000 of additional leasing costs during the remainder of 2000 at Palms of Carrollwood and the Business Center at Pureland. The General Partner anticipates that the current balance in the working capital reserve should be sufficient to pay such leasing costs. 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 (CONTINUED) During the nine months ended September 30, 2000, approximately $324,049 of cash generated from the Partnership's operations was used to fund non-recurring maintenance and repair expenses incurred at the Palms of Carrollwood and Business Center at Pureland properties. The General Partner anticipates that the Partnership will incur additional non-recurring repair and maintenance expenses of approximately $204,000 at its properties during the remainder of 2000. These expenses will be funded from the operations of the Partnership's properties and may reduce the amount of cash available for distribution during 2000. Cash in the amount of $2,138,275, 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, 2000. These amounts were distributed in accordance with the Partnership Agreement and were allocated as follows: Dist. Cash From Operations --------------- Investors $2,101,249 John Hancock Limited Partner - General Partner 37,026 ---------- Total $2,138,275 ========== The Partnership has incurred approximately $532,173 in legal expenses in connection with the class action lawsuit (see Part II, Item 1 of this Report). Of this amount, approximately $322,075 relates to the Partnership's own defense and approximately $210,098 relates to indemnification of the General Partner and its Affiliates for their defense. These expenses are funded from the operations of the Partnership. At September 30, 2000, Palms of Carrollwood was 92% occupied. During the remainder of 2000, no significant leases are scheduled to expire. The General Partner has secured a lease with a 24,000 square foot tenant for a start date of October 1, 2000. During the second quarter another tenant representing 10,000 square feet with a lease expiring in January 2005 announced its intention to close its store at the property. The General Partner negotiated a termination payment of approximately $97,000 that was received during the quarter. Given the current status of the property and due to the existing favorable market conditions in the Carrollwood, Hillsborough County, Florida area, the property was listed for sale during March 2000. During the quarter, the General Partner entered into a purchase and sale agreement on behalf of the Partnership for the sale of the Palms of Carrollwood to a non-affiliated buyer for a gross sales price of $12,300,000. On November 10, 2000, the Partnership sold the Palms of Carrollwood Shopping Center and received net proceeds of approximately $11,926,000. This transaction generated a net gain of approximately $1,749,000, representing the difference between the net sales price and the property's carrying value of approximately $10,177,000. 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 commended October 1, 1998 for a 32-month term. The other tenant at the Business Center at Pureland, Forbo Wallcoverings, Inc. ("Forbo"), had a lease that was scheduled to expire on December 31, 1998. However, Forbo requested and the General Partner agreed to extend the term of the lease through March 31, 1999, and subsequently, Forbo has vacated. The Bridgeport, New Jersey real estate market currently has a relatively high amount of vacant space. In addition, there is a significant amount of land available for development. The General Partner anticipates continued competitive market conditions during 2000 and, therefore will offer competitive rental rates and concessions in an effort to lease the available space at the property. At September 30, 2000 Business Center at Pureland was 50% occupied. Given the current status of the property and the existing supply and demand conditions in the Bridgeport area, the General partner listed the Business Center at Pureland for sale during first quarter of 2000. 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) The Quince Orchard Corporate Center was occupied by Boehringer Mannheim Pharmaceuticals, Inc. under a ten-year lease which expired in February 2004. The tenant had two options under the lease agreement, one, to terminate the lease at the end of its seventy-sixth month of the lease, or June 2000, and, two, to extend the term of the lease for an additional five- year period. During the first quarter of 1998, Hoffman-LaRoche, Inc. received approval from the Federal Trade Commission to acquire Boehringer Mannheim Pharmaceuticals, Inc. Subsequently Hoffman-LaRoche vacated and subleased the space. Hoffman-LaRoche informed the General Partner that it intended to exercise its right to terminate the lease in June 2000. The subtenant has subsequently vacated the space. Real estate conditions in the Washington D.C. area for office space similar to the Quince Orchard Corporate Center have continued to improve. The supply of such office space has been unable to keep pace with the demand, resulting in a slight increase in market rents. Further this condition has given rise to new real estate development in the area. The General Partner does not anticipate that this new development will negatively impact the market and, therefore, expects market conditions remain favorable through 2000. During the second quarter, the General Partner received unsolicited offers to purchase the property. On September 29, 2000, QOCC-1 Associates sold the Quince Orchard Corporate Center to a non-affiliated buyer for a total net sales price of $12,569,246 after deductions for commissions and selling expenses incurred in connection with the sale of the property. $6,284,623, representing fifty percent of the net proceeds of the sale, was distributed to the Partnership and fifty percent was distributed to Income Fund-II. This transaction resulted in a non-recurring loss of $91,950 to the Partnership, representing the difference between the net sales price and the carrying value of the investment of $6,376,213. The Yokohama Tire Warehouse is 100% leased to the Yokohama Tire Corporation under a lease that expires on March 31, 2006. Under the terms of the lease agreement, the Yokohama Tire Corporation has one remaining option to purchase the property on April 1, 2001 for $10,578,173. In addition the tenant has the option to expand the square footage of the facility up to 220,000 square feet at any time during the term of the lease. In consideration of the property's strong leasing position and due to the existing favorable market conditions in the Louisville Kentucky area, the Yokohama Warehouse was listed for sale by the General Partner during December 1999. On November 6, 2000, the Partnership sold the Yokohama Tire Warehouse to non-affiliated buyer for a gross sales price of $9,300,000. After deductions for commissions and selling expenses, the sale generated net proceeds of approximately $9,085,000 resulting in a gain of approximately $2,160,000, representing the difference between the net sales price and the property's carrying value of $6,925,000. The General Partner evaluated the carrying value of each of the Partnership's properties and its joint venture investment as of December 31, 1999 by comparing such carrying value to the related property's future undiscounted cash flows and the then most recent internal appraisal in order to determine whether an impairment in value existed. Based upon such evaluations, the General Partner determined that no impairment in values existed and, therefore, no write-downs were recorded as of December 31, 1999. The General Partner will continue to conduct property valuations, using internal or independent appraisals, in order to determine whether an impairment in value exists on any of the Partnership's properties. RESULTS OF OPERATIONS Net income for the nine months ended September 30, 2000 was $1,566,771, as compared to net income of $4,057,313 for the same period in 1999. The prior period results include a non-recurring gain of $2,065,783 from the sales of the Allmetal and Purina Mills Distribution Buildings during the period. The current period results include a non-recurring loss of $91,590 from QOCC-1 Associate's sale of Quince Orchard Corporate Center. Excluding these amounts, net income for the period ended September 30, 2000 decreased by $333,169, or 17%, as compared to the prior year. Although rental income and interest income decreased between periods, this was somewhat offset by a reduction in depreciation and amortization expenses. Income from joint venture was lower in the current period and property operating expenses were higher than in the prior period due to the sales of the Allmetal Distribution Building and the Purina Mills Distribution Building. 15 16 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) Average occupancy for the Partnership's investments was as follows:
Nine Months Ended September 30, 2000 1999 ---- ---- Palms of Carrollwood Shopping Center 87% 84% Quince Orchard Corporate Center (Affiliated Joint Venture) 67% 100% Yokohama Tire Warehouse 100% 100% Business Center at Pureland 50% 67%
Rental income for the period ended September 30, 2000 decreased by $337,343, or 15%, as compared to the same period during 1999 primarily due to the sales of the Allmetal and Purina Mills Distribution Buildings. Rental income at the Palms of Carrollwood Shopping Center improved in the current period due to higher average occupancy compared to the prior period. This was offset by lower rental income at Business Center at Pureland due to lower occupancy in the current period and to the sales mentioned previously. Income from joint venture for the period ended September 30, 2000 decreased by $191,781, or 30%, as compared to the same period during 1999 primarily due to the termination of the lease, as of June 30, 2000 with the tenant that leased 100% of the building. Interest income for the nine months ended September 30, 2000 decreased by $68,741, or 35%, as compared to the same period in 1999. This decrease was primarily due to the inclusion of net proceeds from the sales of the Allmetal and Purina Mills Distribution Buildings in cash available for investment during the prior period from the time of the sales until the next distribution date to Investors. Property operating expenses for the period ended September 30, 2000 increased by $241,982, or 83%, as compared to the same period during 1999. This increase is primarily due to certain non-recurring maintenance and repair expenses incurred at the Palms of Carrollwood Shopping Center during the current period which were somewhat offset by lower expenses due to the sales of the Allmetal and Purina Mills Distribution Buildings. Depreciation expense for the period ended September 30, 2000 decreased by $386,428 or 83%, as compared to the same period during 1999, primarily due to the reclassification of the Yokohama Tire Warehouse in December 1999 and the Business Center at Pureland and Palms of Carrollwood Shopping Center during the first quarter of 2000 as "Property Held for Sale." Accordingly, no depreciation has been recorded on these properties since the time that they were listed for sale. Amortization expense for the period ended September 30, 2000 decreased by $106,646, or 76%, as compared to the same period during 1999 primarily due to the sales and reclassifications of properties as reported above and accordingly no longer amortizing such amounts for these properties. Also, the acquisition fees paid to the General Partner were fully amortized at March 31, 1999 and, accordingly, no amortization expense has been recorded since that time. General and administrative expenses for the period ended September 30, 2000 decreased by $13,514, or 6%, as compared to the same period in 1999, primarily due to a decrease in legal fees incurred by the Partnership in connection with the class action complaint (see Part II, Item 1 of this Report). Excluding such legal fees, general and administrative expenses were consistent between periods. The General Partner believes that inflation has had no significant impact on the Partnership's income from operations during the nine months ended September 30, 2000, and the General Partner anticipates that it will not have a significant impact during the remainder of 2000. 16 17 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CASH FLOW The following table provides the calculations of Cash from Operations and Distributable Cash from Operations, which are calculated in accordance with Section 17 of the Partnership Agreement:
Nine Months Ended September 30, 2000 1999 ---------- ---------- Net cash provided by operating activities (a) $2,173,984 $2,807,660 Net change in operating assets and liabilities (a) (147,040) (195,797) ---------- ---------- Net cash provided by operations (a) 2,026,944 2,611,863 Increase in working capital reserves -- -- ---------- ---------- Cash from operations (b) 2,026,944 2,611,863 Decrease in working capital reserves 184,897 24,039 ---------- ---------- Distributable cash from operations (b) $2,211,841 $2,635,902 ========== ========== Allocation to General Partner $ 110,592 $ 131,795 Allocation to John Hancock Limited Partner -- 185,489 Allocation to Investors 2,101,249 2,318,618 ---------- ---------- $2,211,841 $2,635,902 ========== ==========
(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 2000, the Partnership will make a cash distribution in the amount of $16,022,782 to the General Partner and Limited Partners. Of this amount, $737,281 is generated from Distributable Cash from Operations for the quarter ended September 30, 2000 and is allocated 5% to the General Partner and 95% to the Limited Partners, in accordance with the Partnership Agreement. The remainder of the amount is generated from Distributable Cash from Sales and includes net proceeds from the Partnership's share of QOCC-1 Associate's sale of Quince Orchard Corporate Center on September 29, 2000 and the sale of the Yokohama Tire Warehouse on November 6, 2000. These amounts will be distributed in accordance with the Partnership Agreement and will be allocated as follows: Dist. Cash Dist. Cash From Operations From Sale --------------- ----------- Investors $700,417 $14,153,242 John Hancock Limited Partner -- 1,132,259 General Partner 36,864 -- -------- ----------- $737,281 $15,285,501 ======== =========== 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 2000 will be reduced by the effect of the sales that have taken place during 2000. A cash distribution generated from Distributable Cash from Sales resulting from the sale of the Palms of Carrollwood Shopping Center on November 10, 2000 will be made during December 2000. 17 18 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In February 1996, a putative class action complaint was filed in the Superior Court in Essex County, New Jersey by a single investor in a limited partnership affiliated with the Partnership. The complaint named as defendants the Partnership, the General Partner, certain other affiliates of the General Partner, and certain unnamed officers, directors, employees and agents of the named defendants. The plaintiff sought unspecified damages stemming from alleged misrepresentations and omissions in the marketing and offering materials associated with the Partnership and two limited partnerships affiliated with the Partnership. The complaint alleged, among other things, that the marketing materials for the Partnership and the affiliated limited partnerships did not contain adequate risk disclosures. On March 18, 1997, the court certified a class of investors who were original purchasers in the Partnership. A settlement agreement was approved by the court on December 22, 1999. Under the terms of the settlement, the defendants have guaranteed certain minimum returns to class members on their investments and paid fees and expenses to class counsel in an amount determined by the court to be $1.5 million. These terms of the settlement will have no financial impact on the Partnership. There are no other material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Partnership, to which the Partnership is a party or to which any of its properties is subject. ITEM 2. CHANGES IN SECURITIES There were no changes in securities during the third quarter of 2000. ITEM 3. DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities during the third quarter of 2000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders of the Partnership during the third quarter of 2000. ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) There are no exhibits to this report. (b) There were no Reports on Form 8-K filed during the third quarter of 2000. 18 19 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of November, 2000. John Hancock Realty Income Fund-III Limited Partnership By: John Hancock Realty Equities, Inc., General Partner By: /s/ John M. Garrison ---------------------------------------- John M. Garrison, President By: /s/ Virginia H. Lomasney --------------------------------------- Virginia H. Lomasney, Treasurer (Chief Accounting Officer) 19