-----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, DKvwSd096QtLFNPQhHo1Wtj3D0P6ZvUkPYRWM/xUkhCrf6OUeb03t5VWeED5g+e+ HIdDGxZRxWakky7twJvwmQ== 0000950135-99-002748.txt : 19990518 0000950135-99-002748.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950135-99-002748 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 99625223 BUSINESS ADDRESS: STREET 1: 200 BERKELEY STREET CITY: BOSTON STATE: MA ZIP: 02117 BUSINESS PHONE: 8007225457 10-Q 1 JOHN HANCOCK REALTY 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 March 31, 1999 -------------------------------------------------- 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 March 31, 1999 and December 31, 1998 3 Statements of Operations for the Three Months Ended March 31, 1999 and 1998 4 Statements of Partners' Equity for the Three Months Ended March 31, 1999 and for the Year Ended December 31, 1998 5 Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 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 MARCH 31, DECEMBER 31, 1999 1998 ---- ---- Cash and cash equivalents $ 4,758,226 $ 5,874,797 Restricted cash 79,541 79,541 Other assets 267,395 348,339 Property held for sale 3,456,208 1,504,448 Investment in property: Land 7,097,135 7,667,535 Building and improvements 18,327,680 21,960,686 ------------ ------------ 25,424,815 29,628,221 Less: accumulated depreciation 4,938,222 5,633,631 ------------ ------------ 20,486,593 23,994,590 Investment in joint venture 6,984,176 7,036,529 Deferred expenses, net of accumulated amortization of $1,786,627 in 1999 and $1,718,411 in 1998 778,653 959,492 ------------ ------------ Total assets $ 36,810,792 $ 39,797,736 ============ ============ LIABILITIES AND PARTNERS' EQUITY Liabilities: Accounts payable and accrued expenses $ 313,958 $ 383,720 Accounts payable to affiliates 229,295 232,430 ------------ ------------ Total liabilities 543,253 616,150 Partners' equity/(deficit): General partner's (64,025) (38,068) Limited partners' 36,331,564 39,219,654 ------------ ------------ Total partners' equity 36,267,539 39,181,586 ------------ ------------ Total liabilities and partners' equity $ 36,810,792 $ 39,797,736 ============ ============
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 MARCH 31, 1999 1998 ---------- ---------- Income: Rental income $ 796,684 $ 907,535 Income from joint venture 201,402 191,122 Interest income 57,178 32,894 Gain on sale 575,591 -- ---------- ---------- Total income 1,630,855 1,131,551 Expenses: Depreciation 162,384 207,416 General and administrative expenses 81,574 56,219 Amortization of deferred expenses 72,027 87,456 Property operating expenses 84,232 59,776 ---------- ---------- Total expenses 400,217 410,867 ---------- ---------- Net income $1,230,638 $ 720,684 ========== ========== Allocation of net income: General Partner $ 49,551 $ 48,953 John Hancock Limited Partner -- 73,443 Investors 1,181,087 598,288 ---------- ---------- $1,230,638 $ 720,684 ========== ========== Net Income per Unit $ .49 $ .25 ========== ==========
See Notes to Financial Statements 4 5 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) STATEMENTS OF PARTNERS' EQUITY (UNAUDITED) THREE MONTHS ENDED MARCH 31, 1999 AND YEAR ENDED DECEMBER 31, 1998
GENERAL LIMITED PARTNER PARTNERS TOTAL ------- -------- ----- Partners' equity/(deficit) at January 1, 1998 (2,415,234 Units outstanding) $ (52,449) $ 39,304,074 $ 39,251,625 Less: Cash distributions (192,201) (3,651,827) (3,844,028) Add: Net income 206,582 3,567,407 3,773,989 ------------ ------------ ------------ Partners' equity/(deficit) at December 31, 1998 (2,415,234 Units outstanding) (38,068) 39,219,654 39,181,586 Less: Cash distributions (75,508) (4,069,177) (4,144,685) Add: Net income 49,551 1,181,087 1,230,638 ------------ ------------ ------------ Partners' equity/(deficit) at March 31, 1999 (2,415,234 Units outstanding) $ (64,025) $ 36,331,564 $ 36,267,539 ============ ============ ============
See Notes to Financial Statements 5 6 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 1998 ---- ---- Operating activities: Net income $ 1,230,638 $ 720,684 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 162,384 207,416 Amortization of deferred expenses 72,027 87,456 Cash distributions over equity in income from joint venture 52,354 68,116 Gain on sale of property (575,591) -- ----------- ----------- 941,812 1,083,672 Changes in operating assets and liabilities: Increase in restricted cash -- (1,583) Decrease in other assets 80,944 26,982 Increase/(decrease) in accounts payable and accrued expenses (69,762) 41,445 Increase (decrease) in accounts payable to affiliates (3,135) 1,052 ----------- ----------- Net cash provided by operating activities 949,858 1,151,568 Investing activities: Proceeds from sale of property 2,080,039 -- Increase in deferred expenses (1,784) (6,660) ----------- ----------- Net cash provided by (used in) investing activities 2,078,255 (6,660) Financing activities: Cash distributed to Partners (4,144,685) (961,006) ----------- ----------- Net cash used in financing activities (4,144,685) (961,006) ----------- ----------- Net increase (decrease) in cash and cash equivalents (1,116,571) 183,902 Cash and cash equivalents at beginning of year 5,874,797 2,505,729 ----------- ----------- Cash and cash equivalents at end of period $ 4,758,226 $ 2,689,631 =========== ===========
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 March 31, 1999, 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 2,294 Unitholders (the "Investors"). The Assignor Limited Partner holds five Investor Limited Partnership Interests for its own account and 2,415,229 Assignee Units (the "Units"), representing economic and certain other rights attributable to Investor Limited Partnership Interests in the Partnership, for the benefit of the Investors. The John Hancock Limited Partner, the Assignor Limited Partner and the Investors are collectively referred to as the Limited Partners. The General Partner and the Limited Partners are collectively referred to as the Partners. The initial capital of the Partnership was $2,100, representing capital contributions of $1,000 from the General Partner, $1,000 from the John Hancock Limited Partner, and $100 from the Assignor Limited Partner. The Amended Agreement of Limited Partnership of the Partnership (the "Partnership Agreement") authorized the issuance of up to 5,000,000 Units at $20 per unit. During the offering period, which terminated on February 15, 1991, 2,415,229 Units were sold and the John Hancock Limited Partner made additional capital contributions of $3,863,366. There were no changes in the number of Units outstanding subsequent to the termination of the offering period. The Partnership is engaged solely in the business of acquiring, holding for investment and disposing of existing income-producing retail, industrial and office properties on an all-cash basis, free and clear of mortgage indebtedness. Although the Partnership's properties were acquired and are held free and clear of mortgage indebtedness, the Partnership may incur mortgage indebtedness under certain circumstances as specified in the Partnership Agreement. The latest date on which the Partnership is due to terminate is December 31, 2019, unless it is sooner terminated in accordance with the terms of the Partnership Agreement. It is expected that, in the ordinary course of the Partnership's business, the properties of the Partnership will be disposed of, and the Partnership terminated, before December 31, 2019. 2. SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. 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, 1998. 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. 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 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 three months ended March 31, 1999 and 1998 is calculated by dividing the Investors' share of net income by the number of Units outstanding at the end of such periods. 3. THE PARTNERSHIP AGREEMENT Distributable Cash from Operations (defined in the Partnership Agreement) is distributed 5% to the General Partner and the remaining 95% in the following order of priority: first, to the Investors until they receive a 7% non-cumulative, non-compounded annual cash return on their Invested Capital (defined in the Partnership Agreement); second, to the John Hancock Limited Partner until it receives a 7% non-cumulative, non-compounded annual cash return on its Invested Capital; and third, to the Investors and the John Hancock Limited Partner in proportion to their respective Capital Contributions (defined in the Partnership Agreement). However, any Distributable Cash from Operations which is available as a result of a reduction in working capital reserves funded by Capital Contributions of the Investors will be distributed 100% to the Investors. Profits for tax purposes from the normal operations of the Partnership for each fiscal year are allocated to the Partners in the same amounts as Distributable Cash from Operations for that year. If such profits are less than Distributable Cash from Operations for any year, they are allocated in proportion to the amounts of Distributable Cash from Operations for that year. If such profits are greater than Distributable Cash from Operations for any year, they are allocated 5% to the General Partner and 95% to the John Hancock Limited Partner and the Investors, with the allocation made between the John Hancock Limited Partner and the Investors in proportion to their respective Capital Contributions. Losses for tax purposes from the normal operations of the Partnership are allocated 1% to the General Partner and 99% to the John Hancock Limited Partner and the Investors, with the allocation made between the John Hancock Limited Partner and the Investors in proportion to their respective Capital Contributions. However, all tax aspects of the Partnership's payment of the sales commissions from the Capital Contributions made by the John Hancock Limited Partner are allocated 1% to the General Partner and 99% to the John Hancock Limited Partner, and not to the Investors. Depreciation deductions are allocated 1% to the General Partner and 99% to the Investors, and not to the John Hancock Limited Partner. 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) Neither the General Partner nor any affiliate of the General Partner shall be liable, responsible or accountable in damages to any of the Partners or the Partnership for any act or omission of the General Partner or such affiliate in good faith on behalf of the Partnership within the scope of the authority granted to the General Partner by the Partnership Agreement and in the best interest of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner and its affiliates performing services on behalf of the Partnership shall be entitled to indemnity from the Partnership for any loss, damage, or claim by reason of any act performed or omitted to be performed by the General Partner or such affiliates in good faith on behalf of the Partnership and in a manner within the scope of the authority granted to the General Partner by the Partnership Agreement and in the best interest of the Partnership, except that they shall not be entitled to be indemnified in respect of any loss, damage, or claim incurred by reason of fraud, negligence, misconduct, or breach of fiduciary duty. Any indemnity shall be provided out of and to the extent of Partnership assets only. The Partnership shall not advance any funds to the General Partner or its affiliates for legal expenses and other costs incurred as a result of any legal action initiated against the General Partner or its affiliates by a Limited Partner in the Partnership. 4. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES Fees, commissions and other costs incurred or paid by the General Partner or its Affiliates during the three months ended March 31, 1999 and 1998, and to which the General Partner or its Affiliates are entitled to reimbursement from the Partnership were $38,793 and $36,970, respectively. The Partnership provides indemnification to the General Partner and its Affiliates for any acts or omissions of the General Partner or such Affiliate in good faith on behalf of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner believes that this indemnification applies to the class action complaint described in Note 9. Accordingly, included in the Statement of Operations for the three months ended March 31, 1999 and 1998 are $12,191 and $3,462, respectively, representing the Partnership's share of costs incurred by the General Partner and its Affiliates relating to the class action complaint. Through March 31, 1999, the Partnership has accrued a total of $190,502 as its share of the costs incurred by the General Partner and its Affiliates resulting from this matter. Accounts payable to affiliates represents amounts due to the General Partner or its Affiliates for various services provided to the Partnership, including amounts to indemnify the General Partner or its Affiliates for claims incurred by them in connection with their actions as General Partner of the Partnership. All amounts accrued by the Partnership to indemnify the General Partner or its affiliates for legal fees incurred by them shall not be paid unless or until all conditions set forth in the Partnership Agreement for such payment have been fulfilled. The General Partner serves in a similar capacity for two other affiliated real estate limited partnerships. 5. INVESTMENT IN PROPERTY Investment in property at cost, less any write-downs, consists of managed, fully-operating, commercial real estate as follows:
March 31, December 31, 1999 1998 ----------- ----------- 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 -- -- Business Center at Pureland 5,142,016 5,142,016 ----------- ----------- $29,628,221 $29,628,221 =========== ===========
9 10 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 5. INVESTMENT IN PROPERTY (CONTINUED) During June 1998, the Allmetal Distribution Building was listed for sale. Accordingly, this property was classified as "Property Held for Sale" on the Balance Sheet at December 31, 1998 at its carrying value, which was not in excess of its estimated fair value, less selling costs. On February 25, 1999, the Partnership sold the Allmetal Distribution Building and received net sales proceeds of $2,080,039, after deductions for commissions and selling expenses. This transaction generated a non-recurring gain of $575,591, representing the difference between the net sales price and the property's carrying value of $1,504,448. The real estate market is cyclical in nature and is materially affected by general economic trends and economic conditions in the market where a property is located. As a result, determination of real estate values involves subjective judgments. These judgments are based on current market conditions and assumptions related to future market conditions. These assumptions involve, among other things, the availability of capital, occupancy rates, rental rates, interest rates and inflation rates. Amounts ultimately realized from each property may vary significantly from the values presented and the differences could be material. Actual market values of real estate can be determined only by negotiation between the parties in a sales transaction. 6. INVESTMENT IN JOINT VENTURE On December 28, 1988, the Partnership invested $75,000 to acquire a 0.5% interest in JH Quince Orchard Partners (the "Affiliated Joint Venture"), a joint venture between the Partnership and John Hancock Realty Income Fund-II Limited Partnership ("Income Fund-II"). The Partnership had an initial 0.5% interest and Income Fund-II had an initial 99.5% interest in the Affiliated Joint Venture. Pursuant to the partnership agreement of the Affiliated Joint Venture, the Partnership had the option, exercisable prior to December 31, 1990, to increase its investment and interest in the Affiliated Joint Venture to 50%. During the second quarter of 1989, the Partnership exercised such option and Income Fund-II transferred a 49.5% interest in the Affiliated Joint Venture to the Partnership for cash in the aggregate amount of $7,325,672. The Partnership has held a 50% interest in the Affiliated Joint Venture since the second quarter of 1989. On December 28, 1988, the Affiliated Joint Venture contributed 98% of the invested capital of, and acquired a 75% interest in, QOCC-1 Associates, an existing partnership which owns and operates the Quince Orchard Corporate Center, a three-story office building and related land and improvements located in Gaithersburg, Maryland. The partnership agreement of QOCC-1 Associates provides that the Affiliated Joint Venture contribute 95% of any required additional capital contributions. Of the cumulative total invested capital in QOCC-1 Associates at March 31, 1999, 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 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. 10 11 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 March 31, December 31, Description 1999 1998 ----------- ----------- ----------- $152,880 of acquisition fees for investment in the Affiliated Joint Venture. This amount is amortized over a period of 31.5 years $103,336 $104,549 $1,002,755 of tenant improvements. These amounts are amortized over the terms of the leases to which they relate 497,645 519,358 $336,024 of lease commissions. These amounts are amortized over the terms of the leases to which they relate 177,672 297,241 $1,073,621 of acquisition fees paid to the General Partner. This amount is amortized over a period of eighty-four months -- 38,344 -------- -------- $778,653 $959,492 ======== ========
8. FEDERAL INCOME TAXES A reconciliation of the net income reported in the Statements of Operations to the net income reported for federal income tax purposes is as follows:
Three Months Ended March 31, 1999 1998 ---- ---- Net income per Statements of Operations $1,230,638 $ 720,684 Add/(less): Excess of book depreciation 40,149 34,798 over tax depreciation Excess of book amortization over tax amortization 30,706 46,546 Other income -- 3,847 ---------- ---------- Net income for federal income tax purposes $1,301,493 $ 805,875 ========== ==========
11 12 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 and the other defendants have answered the complaint denying the material allegations and raising numerous affirmative defenses. Discovery has commenced, and the Partnership and other defendants have produced documents relating to the plaintiff's claims. No depositions are scheduled. The court has heard the defendants' motion to dismiss certain claims on grounds of the expiration of the statutes of limitations and has stated it intends to hold a further hearing on that matter to determine whether the case can be resolved by the disposition of certain claims. The Partnership and the other defendants intend to move to decertify the class and for summary judgment dismissing the breach of contract claims. 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 $477,000 in legal expenses in connection with this matter. Of this amount, approximately $286,000 relates to the Partnership's own defense and approximately $191,000 relates to indemnification of the General Partner and its affiliates for their defense. These expenses are funded from the operations of the Partnership. At the present time, the General Partner can not estimate the aggregate amount of legal expenses and indemnification claims to be incurred and their impact on the Partnership's Financial Statements, taken as a whole. Accordingly, no provision for any liability which could result from the eventual outcome of these matters has been made in the accompanying financial statements. However, while it is still too early to estimate potential damages, they could possibly be material. 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 and 6 to the Financial Statements included in Item 1 of this Report. IMPACT OF YEAR 2000 The General Partner and John Hancock Mutual Life Insurance Company, the General Partner's ultimate parent (together, "John Hancock") along with the Partnership, have developed a plan to modify or replace significant portions of the Partnership's computer information and automated technologies so that its systems will function properly with respect to the dates in the year 2000 and thereafter. The Partnership presently believes that with modifications to existing systems and conversions to new technologies, the year 2000 will not pose significant operational problems for its computer systems. However, if certain modifications and conversions are not made, or are not completed timely, the year 2000 issue could have an adverse impact on the operations of the Partnership. John Hancock as early as 1994 had begun assessing, modifying and converting the software related to its significant systems and has initiated formal communications with its significant business partners and customers to determine the extent to which John Hancock's interface systems are vulnerable to those third parties' failure to remediate their own year 2000 issues. While John Hancock is developing alternative third party processing arrangements as it deems appropriate, there is no guarantee that the systems of other companies on which the Partnership's systems rely will be converted timely or will not have an adverse effect on the Partnership's systems. The Partnership expects the project to be substantially complete by early 1999. This completion target was derived utilizing numerous assumptions of future events, including availability of certain resources and other factors. However, there can be no guarantee that this completion target will be achieved. FORWARD-LOOKING STATEMENTS In addition to historical information, certain statements contained herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements appear in a number of places in this Report and include statements regarding the intent, belief or expectations of the General Partner with respect to, among other things, the prospective sale of Partnership properties, repayment of mortgage loans, actions that would be taken in the event of lack of liquidity, unanticipated leasing costs, repair and maintenance expenses, distributions to the General Partner and to Investors, the possible effects of tenants vacating space at Partnership properties, the absorption of existing retail space in certain geographical areas, and the impact of inflation. Forward-looking statements involve numerous known and unknown risks and uncertainties, and they are not guarantees of future performance. The following factors, among others, could cause actual results or performance of the Partnership and future events to differ materially from those expressed or implied in the forward-looking statements: general economic and business conditions; any and all general risks of real estate ownership, including without limitation adverse changes in general economic conditions and adverse local conditions, the fluctuation of rental income from properties, changes in property taxes, utility costs or maintenance costs and insurance, fluctuations of real estate values, competition for tenants, uncertainties about whether real estate sales under contract will close; the ability of the Partnership to sell its properties; and other factors detailed from time to time in the filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect the General Partner's analysis only as of the date hereof. The Partnership assumes no obligation to update forward-looking statements. See also the Partnership's reports to be filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. 13 14 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, the Partnership had $4,758,226 in cash and cash equivalents and $79,541 in restricted cash. The Partnership has a working capital reserve with a current balance of approximately 3.5% of the offering proceeds. The General Partner anticipates that such amount will be sufficient to satisfy the Partnership's general liquidity requirements. The Partnership's liquidity would, however, be materially adversely affected if there were a significant reduction in revenues or significant unanticipated operating costs (including but not limited to litigation expenses), unanticipated leasing costs or unanticipated capital expenditures. If any or all of these events were to occur, to the extent that the working capital reserve would be insufficient to satisfy the cash requirements of the Partnership, it is anticipated that additional funds would be obtained through a reduction of cash distributions to Investors, bank loans, short-term loans from the General Partner or its affiliates, or the sale or financing of Partnership investments. During the three months ended March 31, 1999, cash from working capital reserves in the aggregate amount of $1,784 was used for the payment of leasing costs incurred at the Palms of Carrollwood Shopping Center ("Palms of Carrollwood") property. The General Partner anticipates that the Partnership will incur an aggregate of approximately $875,000 of additional leasing costs during the remainder of 1999, substantially all of which would be incurred at Palms of Carrollwood. The General Partner anticipates that the current balance in the working capital reserve should be sufficient to pay such leasing costs. During the three months ended March 31, 1999, approximately $6,100 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 $88,000 at its properties during the remainder of 1999. These additional expenses will be funded from the operations of the Partnership's properties and are not expected to have a significant impact on the Partnership's liquidity. Cash in the amount of $4,144,685, generated from the Partnership's operations and the sale of the Stone Container Building, was distributed to the General Partner, the John Hancock Limited Partner and the Investors during the three months ended March 31, 1999. These amounts were distributed in accordance with the Partnership Agreement and were allocated as follows:
DIST. CASH DIST. CASH FROM FROM OPERATIONS SALES OR FINANCINGS --------------- ------------------- Investors $1,328,376 $2,439,381 John Hancock Limited Partner 106,270 195,151 General Partner 75,508 - ---------- ---------- Total $1,510,154 $2,634,532 ========== ==========
The Partnership has incurred approximately $477,000 in legal expenses in connection with the class action lawsuit (see Part II, Item 1 of this Report). Of this amount, approximately $286,000 relates to the Partnership's own defense and approximately $191,000 relates to indemnification of the General Partner and its Affiliates for their defense. These expenses are funded from the operations of the Partnership. At the present time, the General Partner cannot estimate the aggregate amount of legal expenses and indemnification claims to be incurred and their impact on the Partnership's future operations. Liquidity would, however, be materially adversely affected by a significant increase in such legal expenses and related indemnification costs. If such increases were to occur, to the extent that cash from operations and the working capital reserve would be insufficient to satisfy the cash requirements of the Partnership, it is anticipated that additional funds would be obtained through a reduction of cash distributions to Investors, bank loans, short-term loans from the General Partner or its Affiliates, or the sale or financing of Partnership properties. 14 15 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) One of the anchor tenants at the Palms of Carrollwood vacated the property during June 1995. In July 1995, the General Partner secured a new anchor tenant to occupy this space under a lease commencing in November 1995. At that time, three tenants' leases at the Palms of Carrollwood contained clauses that made reference to the situation in which the former anchor tenant ceased operations at the property. One of these tenants paid all amounts due under its lease through the lease's scheduled expiration in February 1997. Each of the other two tenants reduced their rental payments by 25%. As a result of a settlement negotiated with the General Partner, one of the other tenants recommenced making its rental payments at 100% of the contracted amount. The Partnership brought an action against the other tenant, who had reduced its rental payments during November 1995, to obtain collection of 100% of the amounts due under the lease agreement. The tenant claimed that it had the right to pay the reduced rent for the remainder of the lease term that is until November 2004. During the first quarter of 1998, this action was heard in a Florida court. The court issued a judgement and written ruling during the second quarter of 1998, finding that the tenant had only a limited period of time (approximately six months) during which it could pay the reduced rent. After that , the tenant must pay the full amount of rent specified in the lease. A judgment and written ruling were issued during the second quarter of 1998. The tenant has appealed the ruling. No assurances can be given that the Partnership will ultimately recover amounts due under the lease pursuant to the ruling of the court. At March 31, 1999, Palms of Carrollwood was 81% occupied. During the remainder of 1999, no significant leases are scheduled to expire. The General Partner will continue to offer competitive leasing packages in an effort to secure lease renewals with existing tenants as well as to secure new tenants for the remaining vacant space. On February 25, 1999, the Partnership sold the Allmetal Distribution Building to a non-affiliated buyer for a gross sales price of $2,180,000. After deductions for commissions and selling expenses, the sale generated net proceeds of $2,080,039 resulting in a gain of $575,591, representing the difference between the net sales price and the property's carrying value of $1,504,448. During January 1999, the General Partner listed the Purina Mills Distribution Building for sale after securing a long term lease with a single tenant for the entire building and due to the current favorable conditions in the St. Louis, Missouri area real estate market. One of the tenants at the Business Center at Pureland, National Polystyrene Recycling Co., L.P., ("NPRC") ceased operations and vacated its space during the fourth quarter of 1997. A replacement tenant was located to occupy this space during the third quarter of 1998. NPRC's lease obligations were terminated as of September 30, 1998 in consideration of NPRC paying a lease buyout fee of approximately $230,000. The new tenant's lease obligations commenced October 1, 1998 for a 32-month term. The other tenant at the Business Center at Pureland, Forbo Wallcoverings, Inc. ("Forbo") had a lease that was scheduled to expire on December 31, 1998. However, Forbo requested and the General Partner agreed, to extend the term of the lease through March 31, 1999. Subsequently, Forbo has vacated. The Bridgeport, New Jersey real estate market currently has a relatively high amount of vacant space. In addition, there is a significant amount of land available for development. The General Partner anticipates competitive market conditions during 1999 and, therefore, will offer competitive rental rates and concessions in an effort to lease the available space at the property. The Quince Orchard Corporate Center is occupied by Boehringer Mannheim Pharmaceuticals, Inc. under a ten-year lease that expires in February 2004. The tenant has two options under the lease agreement, one, to terminate the lease at the end of its seventy-sixth month of the lease, or June 2000, and, two, to extend the term of the lease for an additional five- year period. During the first quarter of 1998, Hoffman-LaRoche, Inc. received approval from the Federal Trade Commission to acquire Boehringer Mannheim Pharmaceuticals, Inc. Subsequently, Hoffman-LaRoche vacated and subleased the space. Hoffman-LaRoche has informed the General Partner that it intends to exercise its right to terminate the lease in June 2000. 15 16 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Real estate market conditions in the Washington D.C. area for office space similar to the Quince Orchard Corporate Center continue to improve. The supply of such office space has been unable to keep pace with the demand, resulting in a slight increase in market rents. Further, this condition has given rise to new real estate development in the area. The General Partner does not anticipate that this new development will negatively impact the market and, therefore, expects market conditions to remain favorable through 1999. The General Partner evaluated the carrying value of each of the Partnership's properties and its joint venture investment as of December 31, 1998 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 impairment in value existed. Based upon such evaluations, the General Partner determined that impairment in values existed and, therefore, no write-downs were recorded as of December 31, 1998. The General Partner will continue to conduct property valuations, using internal or independent appraisals, in order to assist in its evaluation of whether an impairment in value exists on any of the Partnership's properties. RESULTS OF OPERATIONS Net income for the period ended March 31, 1999 was $1,230,637, as compared to net income of $720,684 for the same period in 1998. This increase is the result of the inclusion of a non-recurring gain of $575,591 from the sale of the Allmetal Distribution Building during the first quarter of 1999. Excluding the results of this gain, net income for the period ended March 31, 1999 decreased by $65,638, or 9%, as compared to the prior year. This is primarily due to the sales of the Stone Container and Allmetal Distribution Buildings.. Average occupancy for the Partnership's investments was as follows:
Three Months Ended March 31, 1999 1998 ---- ---- Palms of Carrollwood Shopping Center 81% 81% Quince Orchard Corporate Center (Affiliated Joint Venture) 100% 100% Yokohama Tire Warehouse 100% 100% Purina Mills Distribution Building 100% 100% Allmetal Distribution Building -- 100% Stone Container Building -- 100% Business Center at Pureland 100% 100%
Rental income for the period ended March 31, 1999 decreased by $110,850, or 12%, as compared to the same period during 1998 primarily due to the sale of the Stone Container and the Allmetal Distribution Buildings. Rental income at the Partnership's other properties was consistent between periods. Property operating expenses for the period ended March 31, 1999 increased by $24,456, or 40%, as compared to the same period during 1998. This increase is primarily due to non-recurring legal fees and maintenance and repair expense at the Palms of Carrollwood Shopping Center during the period. Property operating expenses at the Partnership's other properties were consistent between periods. Depreciation expense for the period ended March 31, 1999 decreased by $45,032, or 22% as compared to the same period during 1998 primarily due to the sale of the Stone Container Building in December of 1998 and to the reclassification of the Allmetal Distribution Building as "Property Held for Sale" in June of 1998. Accordingly, no depreciation has been recorded on these properties since the time that they were listed for sale. 16 17 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) General and administrative expenses for the period ended March 31, 1999 increased by $25,355, or 45%, primarily due to an increase in legal fees incurred by the Partnership in connection with the class action complaint (see Part II, Item 1 of this Report). Excluding such legal fees, general and administrative expenses were consistent between periods. The General Partner believes that inflation has had no significant impact on the Partnership's income from operations during the three months ended March 31, 1999, and the General Partner anticipates that it will not have a significant impact during the remainder of 1999. CASH FLOW The following table provides the calculations of Cash from Operations and Distributable Cash from Operations, which are calculated in accordance with Section 17 of the Partnership Agreement:
Three Months Ended March 31, 1999 1998 ---- ---- Net cash provided by operating activities (a) $ 949,858 $ 1,151,579 Net change in operating assets and liabilities (a) (8,047) 67,896 ----------- ----------- Net cash provided by operations (a) 941,811 1,083,672 Increase in working capital reserves (77,413) (122,666) Cash from operations (b) 864,398 961,006 Decrease in working capital reserves -- -- ----------- ----------- Distributable cash from operations (b) $ 864,398 $ 961,006 =========== =========== Allocation to General Partner $ 43,220 $ 48,050 Allocation to John Hancock Limited Partner 60,828 67,626 Allocation to Investors 760,350 845,330 ----------- ----------- $ 864,398 $ 961,006 =========== ===========
(a) Net cash provided by operating activities, net change in operating assets and liabilities, and net cash provided by operations are as calculated in the Statements of Cash Flows included in Item 1 of this Report. (b) As defined in the Partnership Agreement. Distributable Cash from Operations should not be considered as an alternative to net income (i.e. not an indicator of performance) or to reflect cash flows or availability of discretionary funds. During the second quarter of 1999, the Partnership will make a cash distribution in the aggregate amount of $2,925,071 to the General Partner, the John Hancock Limited Partner and the Investors. Of this amount, $864,398 was generated from Distributable Cash from Operations for the three months ended March 31, 1999 and $2,060,673 was generated from Distributable Cash from Sales, Financings and Repayments as a result of the sale of the Allmetal Distribution Building during the quarter. These amounts will be allocated as follows:
DIST. CASH DIST. CASH FROM FROM OPERATIONS SALES OR FINANCINGS --------------- ------------------- Investors $760,350 $1,908,031 John Hancock Limited Partner 60,828 152,642 General Partner 43,220 -- -------- ---------- Total $864,398 $2,060,673 ======== ==========
The source of future cash distributions is dependent upon cash generated by the Partnership's properties and the use of working capital reserves. The General Partner currently anticipates that the Partnership's Distributable Cash from Operations during each of the three remaining quarters of 1999 will be reduced by the effect of the sales that have taken place and that may occur during 1999. 17 18 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In February 1996, a putative class action complaint was filed in the Superior Court in Essex County, New Jersey by a single investor in a limited partnership affiliated with the Partnership. The complaint named as defendants the Partnership, the General Partner, certain other affiliates of the General Partner, and certain unnamed officers, directors, employees and agents of the named defendants. The plaintiff sought unspecified damages stemming from alleged misrepresentations and omissions in the marketing and offering materials associated with the Partnership and two limited partnerships affiliated with the Partnership. The complaint alleged, among other things, that the marketing materials for the Partnership and the affiliated limited partnerships did not contain adequate risk disclosures. On March 18, 1997, the court certified a class of investors who were original purchasers in the Partnership. The certification order should not be construed as suggesting that any member of the class is entitled to recover, or will recover, any amount in the action. The Partnership and the other defendants have answered the complaint, denying the material allegations and raising numerous affirmative defenses. Discovery has commenced, and the Partnership and other defendants have produced documents relating the plaintiff's claims. No depositions are scheduled. The court has heard the defendants' motion to dismiss certain claims on grounds of the expiration of the statutes of limitations and has stated it intends to hold a further hearing on that matter to determine whether the case can be resolved by the disposition of certain claims. The Partnership and the other defendants intend to move to decertify the class and for summary judgment dismissing the breach of contract claims. The General Partner believes the allegations are totally without merit and intends to vigorously contest the action. There are no other material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Partnership, to which the Partnership is a party or to which any of its properties is subject. ITEM 2. CHANGES IN SECURITIES There were no changes in securities during the first quarter of 1999. ITEM 3. DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities during the first quarter of 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders of the Partnership during the first quarter of 1999. ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) There are no exhibits to this report. (b) A Report on Form 8-K was filed during the first quarter of 1999, on February 25, 1999. 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 May, 1999. John Hancock Realty Income Fund-III Limited Partnership By: John Hancock Realty Equities, Inc., General Partner By: /s/ William M. Fitzgerald -------------------------------- William M. Fitzgerald, President By: /s/ Virginia H. Lomasney ------------------------------- Virginia H. Lomasney, Treasurer (Chief Accounting Officer) 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 0000842741 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP 3-MOS DEC-31-1999 MAR-31-1999 4,837,767 0 267,395 0 0 5,105,162 25,424,815 4,938,222 36,810,792 543,253 0 0 0 0 36,267,539 36,810,792 0 1,630,855 0 153,601 246,616 0 0 1,230,638 0 1,230,638 0 0 0 1,230,638 .49 .49
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