FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from N/A
Commission file number 0-18563
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Massachusetts 04-3025607
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Clarendon Street, Boston, MA 02116
(Address of principal executive offices)
(Zip Code)
(800) 722-5457
Registrant's telephone number, including area code:
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
INDEX
PART I: FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements:
Balance Sheets at September 30, 1997 and
December 31, 1996 3
Statements of Operations for the Three and
Nine Months Ended September 30, 1997 and 1996 4
Statements of Partners' Equity for the
Nine Months Ended September 30, 1997 and
for the Year Ended December 31, 1996 5
Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1996 6
Notes to Financial Statements 7-15
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-23
PART II: OTHER INFORMATION 24
2
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
1997 1996
---- ----
Cash and cash equivalents $2,879,127 $2,663,859
Restricted cash 107,456 107,959
Other assets 277,035 180,542
Deferred expenses, net of accumulated
amortization of $1,299,249 in 1997 and
$1,025,259 in 1996 1,544,310 1,601,682
Investment in joint venture 7,466,243 7,638,805
Investment in property:
Land 8,410,535 8,410,535
Building and improvements 24,942,540 24,942,540
----------- -----------
33,353,075 33,353,075
Less: accumulated depreciation 5,271,284 4,649,036
----------- -----------
28,081,791 28,704,039
----------- -----------
Total assets $40,355,962 $40,896,886
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $552,168 $287,374
Accounts payable to affiliates 118,649 93,467
----------- -----------
Total liabilities 670,817 380,841
Partners' equity/(deficit):
General partner's (44,125) (43,423)
Limited partners' 39,729,270 40,559,468
----------- -----------
Total partners' equity 39,685,145 40,516,045
----------- -----------
Total liabilities and
partners' equity $40,355,962 $40,896,886
=========== ===========
See Notes to Financial Statements
3
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Rental income $893,015 $906,320 $2,694,783 $2,687,025
Income from joint venture 184,354 189,930 559,063 572,844
Interest income 37,971 38,997 106,378 108,278
---------- ---------- ---------- ----------
Total income 1,115,340 1,135,247 3,360,224 3,368,147
Expenses:
Depreciation 207,416 207,416 622,248 622,248
Amortization of deferred expenses 91,999 85,589 273,990 239,927
General and administrative expenses 51,966 46,564 237,312 157,885
Property operating expenses 61,719 70,668 174,554 184,655
---------- ---------- ---------- ----------
Total expenses 413,100 410,237 1,308,104 1,204,715
---------- ---------- ---------- ----------
Net income $702,240 $725,010 $2,052,120 $2,163,432
========== ========== ========== ==========
Allocation of net income:
General Partner $48,749 $49,598 $143,448 $147,541
John Hancock Limited Partner 73,406 121,062 216,259 359,941
Investors 580,085 554,350 1,692,413 1,655,950
---------- ---------- ---------- ----------
$702,240 $725,010 $2,052,120 $2,163,432
========== ========== ========== ==========
Net Income per Unit $0.24 $0.23 $0.70 $0.69
========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
4
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY
(Unaudited)
Nine Months Ended September 30, 1997 and
Year Ended December 31, 1996
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
Partners' equity/(deficit) at January 1, 1996
(2,415,234 Units outstanding) ($44,553) $41,590,304 $41,545,751
Less: Cash distributions (182,286) (3,463,437) (3,645,723)
Add: Net income 183,416 2,432,601 2,616,017
--------- ----------- -----------
Partners' equity/(deficit) at December 31, 1996
(2,415,234 Units outstanding) (43,423) 40,559,468 40,516,045
Less: Cash distributions (144,150) (2,738,870) (2,883,020)
Add: Net income 143,448 1,908,672 2,052,120
--------- ----------- -----------
Partners' equity/(deficit) at September 30, 1997
(2,415,234 Units outstanding) ($44,125) $39,729,270 $39,685,145
========= =========== ===========
</TABLE>
See Notes to Financial Statements
5
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net income $2,052,120 $2,163,432
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 622,248 622,248
Amortization of deferred expenses 273,990 239,927
Cash distributions over equity
in income from joint venture 172,562 185,600
----------- -----------
3,120,920 3,211,207
Changes in operating assets and liabilities:
Decrease/(increase) in restricted cash 503 (8,101)
(Increase)/decrease in other assets (96,493) 126,775
Increase in accounts payable and
accrued expenses 264,794 228,507
Increase/(decrease) in accounts payable
to affiliates 25,182 (3,562)
----------- -----------
Net cash provided by operating activities 3,314,906 3,554,826
Investing activities:
Acquisition of deferred expenses (216,618) (351,136)
----------- -----------
Net cash used in investing activities (216,618) (351,136)
Financing activities:
Cash distributed to Partners (2,883,020) (2,684,717)
----------- -----------
Net cash used in financing activities (2,883,020) (2,684,717)
----------- -----------
Net increase in cash and cash equivalents 215,268 518,973
Cash and cash equivalents at beginning
of year 2,663,859 2,431,272
----------- -----------
Cash and cash equivalents at end
of period $2,879,127 $2,950,245
========== ==========
</TABLE>
See Notes to Financial Statements
6
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Organization of Partnership
---------------------------
John Hancock Realty Income Fund-III Limited Partnership (the
"Partnership") was formed under the Massachusetts Uniform Limited
Partnership Act on November 4, 1988. As of September 30, 1997, the
Partnership consisted of John Hancock Realty Equities, Inc. (the
"General Partner"), a wholly-owned, indirect subsidiary of John
Hancock Mutual Life Insurance Company; John Hancock Realty Funding,
Inc. (the "John Hancock Limited Partner"); John Hancock Income
Fund-III Assignor, Inc. (the "Assignor Limited Partner"); and 2,529
Unitholders (the "Investors"). The Assignor Limited Partner holds
five Investor Limited Partnership Interests for its own account and
2,415,229 Assignee Units (the "Units"), representing economic and
certain other rights attributable to Investor Limited Partnership
Interests in the Partnership, for the benefit of the Investors. The
John Hancock Limited Partner, the Assignor Limited Partner and the
Investors are collectively referred to as the Limited Partners. The
General Partner and the Limited Partners are collectively referred to
as the Partners. The initial capital of the Partnership was $2,100,
representing capital contributions of $1,000 from the General Partner,
$1,000 from the John Hancock Limited Partner, and $100 from the
Assignor Limited Partner. The Amended Agreement of Limited
Partnership of the Partnership (the "Partnership Agreement")
authorized the issuance of up to 5,000,000 Units at $20 per unit.
During the offering period, which terminated on February 15, 1991,
2,415,229 Units were sold and the John Hancock Limited Partner made
additional capital contributions of $3,863,366. There were no changes
in the number of Units outstanding subsequent to the termination of
the offering period.
The Partnership is engaged solely in the business of acquiring,
holding for investment and disposing of existing income-producing
retail, industrial and office properties on an all-cash basis, free
and clear of mortgage indebtedness. Although the Partnership's
properties were acquired and are held free and clear of mortgage
indebtedness, the Partnership may incur mortgage indebtedness under
certain circumstances as specified in the Partnership Agreement.
The latest date on which the Partnership is due to terminate is
December 31, 2019, unless it is sooner terminated in accordance with
the terms of the Partnership Agreement. It is expected that, in the
ordinary course of the Partnership's business, the properties of the
Partnership will be disposed of, and the Partnership terminated,
before December 31, 2019.
7
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
2. Significant Accounting Policies
-------------------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 1997
are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997. For further information, refer to
the financial statements and footnotes thereto included in the
Partnership's Annual Report on Form 10-K for the year ended December
31, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results may differ
from those estimates.
The Partnership maintains its accounting records and recognizes rental
revenue on the accrual basis.
Cash equivalents are highly liquid investments with maturities of
three months or less when purchased. These investments are recorded
at cost plus accrued interest, which approximates market value.
Restricted cash represents funds restricted for tenant security
deposits.
Investments in property are recorded at cost less any property write-
downs for impairment in value. Cost includes the initial purchase
price of the property plus acquisition and legal fees, other
miscellaneous acquisition costs, and the cost of significant
improvements.
Depreciation has been provided on a straight-line basis over the
estimated useful lives of the various assets: thirty years for the
buildings and five years for related improvements. Maintenance and
repairs are charged to operations as incurred.
8
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
2. Significant Accounting Policies (Continued)
-------------------------------
Investment in joint venture is recorded using the equity method.
Acquisition fees for the joint venture investment have been deferred
and are amortized on a straight-line basis over a period of thirty-one
and a half years. Other deferred acquisition fees are amortized on a
straight-line basis over a period of eighty-four months. Capitalized
tenant improvements and lease commissions are amortized on a straight-
line basis over the terms of the leases to which they relate.
No provision for income taxes has been made in the financial
statements as such taxes are the responsibility of the individual
Partners and not of the Partnership.
The net income per Unit for the nine months ended September 30, 1997
and 1996 is calculated by dividing the Investors' share of net income
by the number of Units outstanding at the end of such periods.
Certain 1996 amounts have been reclassified to be consistent with the
1997 presentation.
3. The Partnership Agreement
-------------------------
Distributable Cash from Operations (defined in the Partnership
Agreement) is distributed 5% to the General Partner and the remaining
95% in the following order of priority: first, to the Investors until
they receive a 7% non-cumulative, non-compounded annual cash return on
their Invested Capital (defined in the Partnership Agreement); second,
to the John Hancock Limited Partner until it receives a 7%
non-cumulative, non-compounded annual cash return on its Invested
Capital; and third, to the Investors and the John Hancock Limited
Partner in proportion to their respective Capital Contributions
(defined in the Partnership Agreement). However, any Distributable
Cash from Operations which is available as a result of a reduction in
working capital reserves funded by Capital Contributions of the
Investors will be distributed 100% to the Investors.
9
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
3. The Partnership Agreement (Continued)
-------------------------
Profits for tax purposes from the normal operations of the Partnership
for each fiscal year are allocated to the Partners in the same amounts
as Distributable Cash from Operations for that year. If such profits
are less than Distributable Cash from Operations for any year, they
are allocated in proportion to the amounts of Distributable Cash from
Operations for that year. If such profits are greater than
Distributable Cash from Operations for any year, they are allocated 5%
to the General Partner and 95% to the John Hancock Limited Partner and
the Investors, with the allocation made between the John Hancock
Limited Partner and the Investors in proportion to their respective
Capital Contributions. Losses for tax purposes from the normal
operations of the Partnership are allocated 1% to the General Partner
and 99% to the John Hancock Limited Partner and the Investors, with
the allocation made between the John Hancock Limited Partner and the
Investors in proportion to their respective Capital Contributions.
However, all tax aspects of the Partnership's payment of the sales
commissions from the Capital Contributions made by the John Hancock
Limited Partner are allocated 1% to the General Partner and 99% to the
John Hancock Limited Partner, and not to the Investors. Depreciation
deductions are allocated 1% to the General Partner and 99% to the
Investors, and not to the John Hancock Limited Partner.
Neither the General Partner nor any Affiliate of the General Partner
shall be liable, responsible or accountable in damages to any of the
Partners or the Partnership for any act or omission of the General
Partner or such Affiliate in good faith on behalf of the Partnership
within the scope of the authority granted to the General Partner by
the Partnership Agreement and in the best interest of the Partnership,
except for acts or omissions constituting fraud, negligence,
misconduct or breach of fiduciary duty. The Partnership shall not
advance any funds to the General Partner or its Affiliates for legal
expenses and other costs incurred as a result of any legal action
initiated against the General Partner or its Affiliates by a Limited
Partner in the Partnership. The General Partner and its Affiliates
performing services on behalf of the Partnership shall be entitled to
indemnity from the Partnership for any loss, damage, or claim by
reason of any act performed or omitted to be performed by the General
Partner or such Affiliates in good faith on behalf of the Partnership
and in a manner within the scope of the authority granted to the
General Partner by the Partnership Agreement and in the best interest
of the Partnership, except that they shall not be entitled to be
indemnified in respect of any loss, damage, or claim incurred by
reason of fraud, negligence, misconduct, or breach of fiduciary duty.
Any indemnity shall be provided out of and to the extent of
Partnership assets only.
10
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Transactions with the General Partner and Affiliates
----------------------------------------------------
Fees, commissions and other costs incurred or paid by the General
Partner or its Affiliates during the nine months ended September 30,
1997 and 1996, and to which the General Partner or its Affiliates are
entitled to reimbursement from the Partnership were $194,960 and
$127,338, respectively.
The Partnership provides indemnification to the General Partner and
its Affiliates for any acts or omissions of the General Partner or
such Affiliate in good faith on behalf of the Partnership, except for
acts or omissions constituting fraud, negligence, misconduct or breach
of fiduciary duty. The General Partner believes that this
indemnification applies to the class action complaint described in
Note 9. Accordingly, included in the Statements of Operations for the
nine months ended September 30, 1997 and 1996 were $40,759 and $0,
respectively, representing the Partnership's share of costs incurred
by the General Partner and its Affiliates relating to the class action
complaint. As of September 30, 1997, the Partnership has accrued a
total of $82,234 as its share of the costs incurred by the General
Partner and its Affiliates resulting from this matter.
Accounts payable to affiliates represents amounts due to the General
Partner or its Affiliates for various services provided to the
Partnership, including amounts to indemnify the General Partner or its
Affiliates for claims incurred by them in connection with their
actions as General Partner of the Partnership. All amounts accrued by
the Partnership to indemnify the General Partner or its Affiliates for
legal fees incurred by them shall not be paid unless or until all
conditions set forth in the Partnership Agreement for such payment
have been fulfilled.
The General Partner serves in a similar capacity for two other
affiliated real estate limited partnerships.
11
<PAGE>
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:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Palms of Carrollwood Shopping Center $10,930,578 $10,930,578
Yokohama Tire Warehouse 9,352,221 9,352,221
Purina Mills Distribution Building 4,203,406 4,203,406
Allmetal Distribution Building 1,636,050 1,636,050
Stone Container Building 2,088,804 2,088,804
Business Center at Pureland 5,142,016 5,142,016
----------- -----------
$33,353,075 $33,353,075
=========== ===========
</TABLE>
The real estate market is cyclical in nature and is materially
affected by general economic trends and economic conditions in the
market where a property is located. As a result, determination of
real estate values involves subjective judgments. These judgments are
based on current market conditions and assumptions related to future
market conditions.
These assumptions involve, among other things, the availability of
capital, occupancy rates, rental rates, interest rates and inflation
rates. Amounts ultimately realized from each property may vary
significantly from the market values presented and the differences
could be material. Actual market values of real estate can be
determined only by negotiation between the parties in a sales
transaction.
6. Investment in Joint Venture
---------------------------
On December 28, 1988, the Partnership invested $75,000 to acquire a
0.5% interest in JH Quince Orchard Partners (the "Affiliated Joint
Venture"), a joint venture between the Partnership and John Hancock
Realty Income Fund-II Limited Partnership ("Income Fund-II"). The
Partnership had an initial 0.5% interest and Income Fund-II had an
initial 99.5% interest in the Affiliated Joint Venture.
12
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Investment in Joint Venture (Continued)
---------------------------
Pursuant to the partnership agreement of the Affiliated Joint Venture,
the Partnership had the option, exercisable prior to December 31,
1990, to increase its investment and interest in the Affiliated Joint
Venture to 50%. During the second quarter of 1989, the Partnership
exercised such option and Income Fund-II transferred a 49.5% interest
in the Affiliated Joint Venture to the Partnership for cash in the
aggregate amount of $7,325,672. The Partnership has held a 50%
interest in the Affiliated Joint Venture since the second quarter of
1989.
On December 28, 1988, the Affiliated Joint Venture contributed 98% of
the invested capital of, and acquired a 75% interest in, QOCC-1
Associates, an existing partnership which owns and operates the Quince
Orchard Corporate Center, a three-story office building and related
land and improvements located in Gaithersburg, Maryland. The
partnership agreement of QOCC-1 Associates provides that the
Affiliated Joint Venture contribute 95% of any required additional
capital contributions. Of the cumulative total invested capital in
QOCC-1 Associates at September 30, 1997, 97.55% has been contributed
by the Affiliated Joint Venture. The Affiliated Joint Venture
continues to hold a 75% interest in QOCC-1 Associates.
Net cash flow from QOCC-1 Associates is distributed in the following
order of priority: (i) to the payment of all debts and liabilities of
QOCC-1 Associates and to fund reserves deemed reasonably necessary;
ii) to the partners in proportion to their respective invested capital
until each has received a 9% return on invested capital and iii) the
balance, if any, to the partners in proportion to their interests.
Prior to 1996, QOCC-1 Associates had not provided the partners with a
return in excess of 9% on their invested capital. During 1996, the
Affiliated Joint Venture received a return on invested capital of
approximately 12%.
Income and gains of QOCC-1 Associates, other than the gains allocated
arising from a sale or other similar event with respect to the Quince
Orchard Corporate Center, are allocated in the following order of
priority: i) to the partners who are entitled to receive a
distribution of net cash flow, pro rata in the same order and amounts
as such distributions are made and ii) the balance, if any, to the
partners, pro rata in accordance with their interests.
13
<PAGE>
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:
<TABLE>
<CAPTION>
Unamortized Unamortized
Balance At Balance At
Description September 30, 1997 December 31, 1996
----------- ------------------ -----------------
<S> <C> <C>
$152,880 of acquisition fees for
investment in the Affiliated Joint
Venture. This amount
is amortized over a period
of 31.5 years. $110,616 $114,256
$1,107,446 of tenant improvements. These
amounts are amortized over the terms
of the leases to which they relate. 803,587 900,220
$509,612 of lease commissions. These
amounts are amortized over the terms
of the leases to which they relate. 400,047 242,114
$1,073,621 of acquisition fees paid to the
General Partner. This amount is amortized
over a period of eighty-four months. 230,060 345,092
---------- ----------
$1,544,310 $1,601,682
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
---- ----
<S> <C> <C>
Net income per Statements of Operations $2,052,120 $2,163,432
Add/(less): Excess of book depreciation
over tax depreciation 104,592 106,516
Excess of book amortization
over tax amortization 141,814 121,355
Other income (12,755) (119,377)
----------- -----------
Net income for federal income tax purposes $2,285,771 $2,271,926
=========== ===========
</TABLE>
14
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
9. Contingencies
-------------
In February 1996, a putative class action complaint was filed in the
Superior Court in Essex County, New Jersey by a single investor in a
limited partnership affiliated with the Partnership. The complaint
named as defendants the Partnership, the General Partner, certain
other Affiliates of the General Partner, and certain unnamed officers,
directors, employees and agents of the named defendants. The
plaintiff sought unspecified damages stemming from alleged
misrepresentations and omissions in the marketing and offering
materials associated with the Partnership and two limited partnerships
affiliated with the Partnership. On March 18, 1997, the court
certified a class of investors who were original purchasers in the
Partnership.
The Partnership provides indemnification to the General Partner and
its Affiliates for acts or omissions of the General Partner in good
faith on behalf of the Partnership, except for acts or omissions
constituting fraud, negligence, misconduct or breach of fiduciary
duty. The General Partner believes that this indemnification applies
to the class action complaint described above.
The Partnership has incurred an aggregate of approximately $206,000 in
legal expenses in connection with this matter. Of this amount,
approximately $124,000 relates to the Partnership's own defense and
approximately $82,000 relates to indemnification of the General
Partner and its Affiliates for their defense. These expenses are
funded from the operations of the Partnership.
At the present time, the General Partner can not estimate the impact,
if any, of the potential indemnification claims on the Partnership's
financial statements, taken as a whole. Accordingly, no provision for
any liability which could result from the eventual outcome of these
matters has been made in the accompanying financial statements.
15
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
- -------
During the offering period, from February 17, 1989 to February 15, 1991,
the Partnership sold 2,415,229 Units representing gross proceeds (exclusive
of the John Hancock Limited Partner's contribution which was used to pay
sales commissions) of $48,304,580. The proceeds of the offering were used
to acquire investment properties, fund reserves and pay acquisition fees
and organizational and offering expenses. These investments are described
more fully in Notes 5 and 6 to the Financial Statements included in Item 1
of this Report.
Forward-looking Statements
- --------------------------
In addition to historical information, certain statements contained herein
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Those statements appear in a number of
places in this Report and include statements regarding the intent, belief
or expectations of the General Partner with respect to, among other things,
the prospective sale of Partnership properties, actions that would be taken
in the event of lack of liquidity, unanticipated leasing costs, repair and
maintenance expenses, distributions to the General Partner and to
Investors, the possible effects of tenants vacating space at Partnership
properties, the absorption of existing retail space in certain geographical
areas, and the impact of inflation.
Forward-looking statements involve numerous known and unknown risks and
uncertainties, and they are not guarantees of future performance. The
following factors, among others, could cause actual results or performance
of the Partnership and future events to differ materially from those
expressed or implied in the forward-looking statements: general economic
and business conditions; any and all general risks of real estate
ownership, including without limitation adverse changes in general economic
conditions and adverse local conditions, the fluctuation of rental income
from properties, changes in property taxes, utility costs or maintenance
costs and insurance, fluctuations of real estate values, competition for
tenants, uncertainties about whether real estate sales under contract will
close; the ability of the Partnership to sell its properties; and other
factors detailed from time to time in the filings with the Securities and
Exchange Commission.
Readers are cautioned not to place undue reliance on forward-looking
statements, which reflect the General Partner's analysis only as of the
date hereof. The Partnership assumes no obligation to update forward-
looking statements. See also the Partnership's reports to be filed from
time to time with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended.
16
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources
- -------------------------------
At September 30, 1997, the Partnership had $2,879,127 in cash and cash
equivalents and $107,456 in restricted cash.
The Partnership has a working capital reserve with a current balance of
approximately 3.4% of the Investors' Invested Capital (defined in the
Partnership Agreement). The General Partner anticipates that such amount
should be sufficient to satisfy the Partnership's general liquidity
requirements. The Partnership's liquidity would, however, be materially
adversely affected if there were a significant reduction in revenues or
significant unanticipated operating costs (including but not limited to
litigation expenses), unanticipated leasing costs or unanticipated capital
expenditures. If any or all of these events were to occur, to the extent
that the working capital reserve would be insufficient to satisfy the cash
requirements of the Partnership, it is anticipated that additional funds
would be obtained through a reduction of cash distributions to Investors,
bank loans, short-term loans from the General Partner or its Affiliates, or
the sale or financing of Partnership investments.
During the nine months ended September 30, 1997, the Partnership incurred
$216,618 of leasing costs at the Palms of Carrollwood Shopping Center
("Palms of Carrollwood") and Allmetal Distribution Building properties.
The General Partner anticipates that the Partnership will incur
approximately $5,000 of additional leasing costs at Palms of Carrollwood
during the remainder of 1997. The General Partner anticipates that the
current balance in the working capital reserve should be sufficient to pay
such leasing costs.
During the nine months ended September 30, 1997, $5,019 of cash generated
from the Partnership's operations was used to fund non-recurring
maintenance and repair expenses incurred at the Palms of Carrollwood and
the Business Center at Pureland properties. The General Partner
anticipates that the Partnership will incur additional non-recurring repair
and maintenance expenses of approximately $37,000 at the Palms of
Carrollwood property during the remainder of 1997. These additional
expenses will be funded from the operations of the Partnership's properties
and are not expected to have a significant impact on the Partnership's
liquidity.
17
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
Cash in the amount of $2,883,020, generated from the Partnership's
operations, was distributed to the General Partner, the John Hancock
Limited Partner and the Investors during the nine months ended September
30, 1997. These amounts were distributed in accordance with the
Partnership Agreement and were allocated as follows:
Investors $2,535,991
John Hancock Limited Partner 202,879
General Partner 144,150
----------
Total $2,883,020
==========
The Partnership will make a comparable distribution from its operations
during the fourth quarter of 1997.
The Partnership has incurred an aggregate of approximately $206,000 in
legal expenses in connection with the class action lawsuit (see Part II,
Item 1 of this Report). Of this amount, approximately $124,000 relates to
the Partnership's own defense and approximately $82,000 relates to
indemnification of the General Partner and its Affiliates for their
defense. At the present time, the General Partner cannot estimate the
aggregate amount of legal expenses and indemnification claims to be
incurred and their impact on the Partnership's future operations.
Liquidity would, however, be materially adversely affected by a significant
increase in such legal expenses and related indemnification costs. If such
increases were to occur, to the extent that cash from operations and the
working capital reserve would be insufficient to satisfy the cash
requirements of the Partnership, it is anticipated that additional funds
would be obtained through a reduction of cash distributions to Investors,
bank loans, short-term loans from the General Partner or its Affiliates, or
the sale or financing of Partnership properties.
A tenant that leases 50% of the Business Center at Pureland notified the
Partnership during the third quarter of 1997 that it will vacate the
property prior to its lease expiration date in May 2001. The tenant has
ceased operations at the property and expects to fully vacate its space by
the end of 1997. As a result, the tenant is seeking to sublet the space.
The Partnership continues to receive all rental payments due under the
lease. The General Partner does not currently believe that there will be a
materially adverse affect on the Partnership's liquidity resulting from
this tenant vacating the property.
18
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
During the third quarter of 1997, Allmetal, Incorporated, the sole tenant
at the Allmetal Distribution Building, whose lease was scheduled to expire
in August 1998, extended the term of its lease through August 2008. The
tenant has an option to renew the lease for an additional five year period.
The Partnership incurred leasing costs in the amount of $169,939 in
connection with this extension.
One of the anchor tenants at the Palms of Carrollwood vacated the property
during June 1995. In July 1995, the General Partner secured a new anchor
tenant to occupy this space under a lease commencing in November 1995.
Three tenants' leases at the Palms of Carrollwood contain clauses that make
reference to the situation in which the former anchor tenant ceases
operations at the property. One of these tenants paid all amounts due
under its lease through the lease's scheduled expiration in February 1997
and two of the tenants reduced their rental payments by 25%. As a result
of a settlement negotiated with the General Partner, one of these two
tenants recommenced making its rental payments at 100% of the contracted
amount. The General Partner is using all available legal remedies to
obtain collection from the other tenant of all outstanding amounts due.
The General Partner does not believe that any reduction in rental payments
resulting from the replacement of the original anchor tenant will have a
materially adverse affect on the Partnership's liquidity.
At September 30, 1997, Palms of Carrollwood was 79% leased. During the
remainder of 1997, no significant leases are scheduled to expire at the
property. The General Partner will continue to offer competitive leasing
packages in an effort to improve the property's occupancy.
The Partnership's warehouse properties are presently 100% occupied. The
following table sets forth the names of the lessees at each of the
Partnership's warehouse properties and the earliest date on which the
applicable lessee's lease obligations may terminate.
<TABLE>
<CAPTION>
Property Lessee Lease Expiration
--------- ------ ----------------
<S> <C> <C>
Yokohama Tire Warehouse Yokohama Tire Corp. March 31, 2006
Purina Mills Distribution Building Purina Mills, Inc. December 1, 1998
Allmetal Distribution Building Allmetal, Inc. August 31, 2008
Stone Container Building Stone Container Corp. December 31, 2011
Business Center at Pureland Forbo Wallcoverings, Inc. December 31, 1998
Business Center at Pureland National Polystyrene
Recycling Co., L.P. May 31, 2001
</TABLE>
The General Partner anticipates that the warehouse properties should
provide the Partnership with stable income performance during the remainder
of 1997.
19
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------
During the third quarter of 1997, the General Partner had the Quince
Orchard Corporate center property independently appraised. Based upon the
appraiser's investigation and analysis, the property's market value is
estimated to be approximately $14,600,000 as of September 30, 1997 and the
value of the Partnership's investment in the Affiliated Joint Venture is
estimated to be approximately $7,125,000. The carrying value of the
Partnership's Affiliated Joint Venture investment of approximately
$7,402,000 was evaluated in comparison to estimated future undiscounted
cash flows and the independent appraisal. Based on such evaluation, the
General Partner determined the Partnership's share of the property's
estimated future undiscounted cash flows are expected to exceed its
carrying value and, therefore, a write-down in value was not required at
September 30, 1997. The Partnership's cumulative investment in the
Affiliated Joint Venture is approximately $8,915,000.
The General Partner evaluated the carrying value of each of the
Partnership's properties as of December 31, 1996 by comparing such carrying
value to the related property's future undiscounted cash flows and the then
most recent internal appraisal in order to determine whether a permanent
impairment in value existed. Based upon such evaluations, the General
Partner determined that no permanent impairment in values existed and,
therefore, no write-downs were recorded as of December 31, 1996.
The General Partner will continue to conduct property valuations, using
internal or independent appraisals, in order to determine whether a
permanent impairment in value exists on any of the Partnership's
properties.
Results of Operations
- ---------------------
Net income for the nine months ended September 30, 1997 was $2,052,120, as
compared to net income of $2,163,432 for the same period in 1996,
representing a decrease of 5% in net income. This decline is primarily due
to the legal fees incurred in connection with the class action lawsuit
(described in Item 1 of Part II of this Report).
20
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
- ---------------------
Average occupancy for the Partnership's investments was as follows:
Nine Months Ended September 30,
1997 1996
---- ----
Palms of Carrollwood Shopping Center 79% 80%
Quince Orchard Corporate Center
(Affiliated Joint Venture) 100% 100%
Yokohama Tire Warehouse 100% 100%
Purina Mills Distribution Building 100% 100%
Allmetal Distribution Building 100% 100%
Stone Container Building 100% 100%
Business Center at Pureland 100% 100%
Amortization of deferred expenses for the nine months ended September 30,
1997 increased by $34,063, or 14%, as compared to the same period in 1996.
This increase is primarily due to the amortization of leasing costs
incurred at the Business Center at Pureland and Stone Container properties
during 1996 and leasing costs incurred at the Palms of Carrollwood property
during 1996 and the first nine months of 1997.
General and administrative expenses for the nine months ended September 30,
1997 increased by $79,427, or 50%, primarily due to legal fees incurred by
the Partnership in connection with the class action complaint (see Part II,
Item 1 of this Report). Excluding such legal fees, general and
administrative expenses were consistent between periods.
Property operating expenses for the nine months ended September 30, 1997
decreased by $10,101, or 5%, as compared to the same period in 1996. This
decrease is primarily due to certain non-recurring maintenance and repair
expenses incurred at the Palms of Carrollwood property during the period in
1996 that was partially offset by legal fees incurred in connection with
efforts to collect past due rent from an existing tenant (described above).
The General Partner believes that inflation has had no significant impact
on the Partnership's income from operations during the nine months ended
September 30, 1997, and the General Partner anticipates that it will not
have a significant impact during the remainder of 1997.
21
<PAGE>
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:
<TABLE>
<CAPTION
Nine Months Ended September 30,
1997 1996
---- ----
<S> <C> <C>
Net cash provided by operating
activities (a) $3,314,906 $3,554,826
Net change in operating assets
and liabilities (a) (193,986) (343,619)
---------- ----------
Net cash provided by operations (a) 3,120,920 3,211,207
Increase in working capital reserves (237,900) (328,187)
---------- ----------
Cash from Operations (b) 2,883,020 2,883,020
Decrease in working capital reserves - -
---------- ----------
Distributable Cash from Operations (b) $2,883,020 $2,883,020
========== ==========
Allocation to General Partner $144,151 $144,151
Allocation to John Hancock Limited Partner 202,879 202,879
Allocation to Investors 2,535,990 2,535,990
---------- ----------
$2,883,020 $2,883,020
========== ==========
</TABLE>
(a) Net cash provided by operating activities, net change in
operating assets and liabilities, and net cash provided by
operations are as calculated in the Statements of Cash
Flows included in Item 1 of this Report.
(b) As defined in the Partnership Agreement. Distributable
Cash from Operations should not be considered as an
alternative to net income (i.e. not an indicator of
performance) or to reflect cash flows or availability of
discretionary funds.
During the fourth quarter of 1997, the Partnership will make a cash
distribution in the amount of $961,007 to the General Partner and Limited
Partners. This amount is allocated 5% to the General Partner and 95% to
the Limited Partners, in accordance with the Partnership Agreement. Of the
amount to be distributed to the Limited Partners, the Investors will
receive $845,330 and the John Hancock Limited Partner will receive $67,626.
Such amounts represent a 7% annualized return on Limited Partners' Invested
Capital.
22
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Cash Flow (continued)
- ---------
The source of future cash distributions is dependent upon cash generated by
the Partnership's properties and the use of working capital reserves. The
General Partner currently anticipates that the Partnership's Distributable
Cash from Operations during the fourth quarter of 1997 will be comparable
to that generated during each of the first three quarters of 1997.
23
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
In February 1996, a putative class action complaint was filed in
the Superior Court in Essex County, New Jersey by a single investor
in a limited partnership affiliated with the Partnership. The
complaint named as defendants the Partnership, the General Partner,
certain other affiliates of the General Partner, and certain
unnamed officers, directors, employees and agents of the named
defendants.
The plaintiff sought unspecified damages stemming from alleged
misrepresentations and omissions in the marketing and offering
materials associated with the Partnership and two limited
partnerships affiliated with the Partnership. The complaint
alleged, among other things, that the marketing materials for the
Partnership and the affiliated limited partnerships did not contain
adequate risk disclosures.
On March 18, 1997, the court certified a class of investors who
were original purchasers in the Partnership. The certification
order should not be construed as suggesting that any member of the
class is entitled to recover, or will recover, any amount in the
action.
The General Partner believes the allegations are totally without
merit and intends to vigorously contest the action.
There are no other material pending legal proceedings, other than
ordinary routine litigation incidental to the business of the
Partnership, to which the Partnership is a party or to which any of
its properties is subject.
Item 2. Changes in Securities
There were no changes in securities during the third quarter of
1997.
Item 3. Defaults Upon Senior Securities
There were no defaults upon senior securities during the third
quarter of 1997.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders of
the Partnership during the third quarter of 1997.
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
(a) There are no exhibits to this Report.
(b) There were no Reports on Form 8-K filed during the third
quarter of 1997.
24
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 14th day of November, 1997.
John Hancock Realty Income Fund-III
Limited Partnership
By: John Hancock Realty Equities, Inc.,
General Partner
By: WILLIAM M. FITZGERALD
--------------------------------
William M. Fitzgerald, President
By: RICHARD E. FRANK
--------------------------------
Richard E. Frank, Treasurer
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000842741
<NAME> JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,986,583
<SECURITIES> 0
<RECEIVABLES> 262,147
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,263,618
<PP&E> 33,353,075
<DEPRECIATION> 5,271,284
<TOTAL-ASSETS> 40,355,962
<CURRENT-LIABILITIES> 670,817
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 39,685,145
<TOTAL-LIABILITY-AND-EQUITY> 40,355,962
<SALES> 0
<TOTAL-REVENUES> 3,360,224
<CGS> 0
<TOTAL-COSTS> 411,866
<OTHER-EXPENSES> 896,238
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,052,120
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,052,120
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,052,120
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.70
</TABLE>
