<PAGE> 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 June 30, 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
----- -----
<PAGE> 2
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
<S> <C>
Item 1 - Financial Statements:
Balance Sheets at June 30, 1999 and
December 31, 1998 3
Statements of Operations for the Three and Six
Months Ended June 30, 1999 and 1998 4
Statements of Partners' Equity for the
Six Months Ended June 30, 1999 and
for the Year Ended December 31, 1998 5
Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 1998 6
Notes to Financial Statements 7-12
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-18
PART II: OTHER INFORMATION 19
</TABLE>
2
<PAGE> 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
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
Cash and cash equivalents $ 7,521,357 $ 5,874,797
Restricted cash 85,041 79,541
Other assets 241,281 348,339
Property held for sale -- 1,504,448
Investment in property:
Land 7,097,135 7,667,535
Building and improvements 18,327,680 21,960,686
----------- -----------
24,424,815 29,628,221
Less: accumulated depreciation 5,090,514 5,633,631
----------- -----------
20,334,301 23,994,590
Investment in joint venture 7,011,571 7,036,529
Deferred expenses, net of accumulated
amortization of $1,821,039 in 1999
and $1,718,411 in 1998 786,730 959,492
----------- -----------
Total assets $35,980,281 $39,797,736
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 355,033 $ 383,720
Accounts payable to affiliates 267,538 232,430
----------- -----------
Total liabilities 622,571 616,150
Partners' equity/(deficit):
General partner's ( 52,380) ( 38,068)
Limited partners' 35,410,090 39,219,654
----------- -----------
Total partners' equity 35,357,710 39,181,586
----------- -----------
Total liabilities and partners' equity $35,980,281 $39,797,736
=========== ===========
</TABLE>
See Notes to Financial Statements
3
<PAGE> 4
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income:
Rental income $ 648,016 $ 916,053 $1,444,700 $1,823,588
Income from joint venture 224,201 200,849 425,603 391,971
Interest income 66,905 35,524 124,083 68,418
Realized gain/(loss) on sale 1,490,192 -- 2,065,783 --
---------- ---------- ---------- ----------
Total income 2,429,314 1,152,426 4,060,169 2,283,977
Expenses:
Depreciation 152,292 207,416 314,676 414,832
General and administrative expenses 66,923 161,005 148,497 217,224
Amortization of deferred expenses 34,413 96,438 106,440 183,894
Property operating expenses 99,617 53,683 183,849 113,459
---------- ---------- ---------- ----------
Total expenses 353,245 518,542 753,462 929,409
---------- ---------- ---------- ----------
Net income $2,076,069 $ 633,884 $3,306,707 $1,354,568
========== ========== ========== ==========
Allocation of net income:
General Partner $ 54,864 $ 46,057 $ 104,415 $ 95,010
John Hancock Limited Partner 111,656 69,874 111,656 143,317
Investors 1,909,549 517,953 3,090,636 1,116,241
---------- ---------- ---------- ----------
$2,076,069 $ 633,884 $3,306,707 $1,354,568
========== ========== ========== ==========
Net Income per Unit $ 0.79 $ 0.21 $ 1.28 $ 0.46
========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements
4
<PAGE> 5
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNER PARTNERS TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Partners' equity/(deficit) at January 1, 1998
(2,415,234 Units outstanding) ($ 52,449) $39,304,074 $39,251,625
Less: Cash distributions ( 192,201) ( 3,651,827) ( 3,844,028)
Add: Net income 206,582 3,567,407 3,773,989
----------- ----------- -----------
Partners' equity/(deficit) at December 31, 1998
(2,415,234 Units outstanding) ( 38,068) 39,219,654 39,181,586
Less: Cash distributions ( 118,727) ( 7,011,856) ( 7,130,583)
Add: Net income 104,415 3,202,292 3,306,707
----------- ----------- -----------
Partners' equity/(deficit) at June 30, 1999
(2,415,234 Units outstanding) ($ 52,380) $35,410,090 $35,357,710
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
5
<PAGE> 6
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
------------ ------------
<S> <C> <C>
Operating activities:
Net income $3,306,707 $1,354,568
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 314,676 414,832
Amortization of deferred expenses 106,440 183,894
Cash distributions over equity
in income from joint venture 24,958 152,758
Gain on sale of property ( 2,065,783) --
------------ ------------
1,686,998 2,106,052
Changes in operating assets and liabilities:
Increase in restricted cash ( 5,500) ( 1,583)
Decrease/(increase) in other assets 107,058 17,208
Increase/(decrease) in accounts payable and
accrued expenses ( 28,687) 216,962
Increase in accounts payable to affiliates 35,109 117,927
------------ ------------
Net cash provided by operating activities 1,794,978 2,456,566
Investing activities:
Increases in deferred expenses ( 44,274) ( 18,166)
Proceeds from sale of property 7,026,439 -
------------ ------------
Net cash provided by (used in) investing activities 6,982,165 ( 18,166)
------------ ------------
Financing activities:
Cash distributed to Partners ( 7,130,583) ( 1,922,012)
------------ ------------
Net cash used in financing activities ( 7,130,583) ( 1,922,012)
------------ ------------
Net increase in cash and cash equivalents 1,646,560 516,388
Cash and cash equivalents at beginning
of year 5,874,797 2,505,729
------------ ------------
Cash and cash equivalents at end
of period $7,521,357 $3,022,117
============ ============
</TABLE>
See Notes to Financial Statements
6
<PAGE> 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 June 30, 1998, the
Partnership consisted of John Hancock Realty Equities, Inc. (the
"General Partner"), a wholly-owned, indirect subsidiary of John Hancock
Mutual Life Insurance Company; John Hancock Realty Funding, Inc. (the
"John Hancock Limited Partner"); John Hancock Income Fund-III Assignor,
Inc. (the "Assignor Limited Partner"); and 2,281 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 six month period ended June 30, 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.
7
<PAGE> 8
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property held for sale is recorded at the lower of its carrying amount,
at the time the property is listed for sale, or its fair value, less
cost to sell. Carrying amount includes the property's cost, as
described below, less accumulated depreciation thereon and less any
property write-downs for impairment in value and plus any related
unamortized deferred expenses.
Investments in property are recorded at cost less any property
write-downs for impairment in value. Cost includes the initial purchase
price of the property plus acquisition and legal fees, other
miscellaneous acquisition costs, and the cost of significant
improvements.
The Partnership measures impairment in value in accordance with
Financial Accounting Standards Board Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets to Be Disposed Of" ("Statement
121"). Statement 121 requires impairment losses to be recorded on
long-lived assets used in operations where indicators of impairment are
present and the undiscounted cash flows estimated to be generated by
those assets are less than the assets' carrying amounts.
Depreciation has been provided on a straight-line basis over the
estimated useful lives of the various assets: thirty years for the
buildings and five years for related improvements. Maintenance and
repairs are charged to operations as incurred.
Investment in joint venture is recorded using the equity method.
Acquisition fees for the joint venture investment have been deferred
and are amortized on a straight-line basis over a period of thirty-one
and a half years. Other deferred acquisition fees are amortized on a
straight-line basis over a period of eighty-four months. Capitalized
tenant improvements and lease commissions are amortized on a
straight-line basis over the terms of the leases to which they relate.
No provision for income taxes has been made in the financial statements
as such taxes are the responsibility of the individual partners and not
of the Partnership.
The net income per Unit for the six months ended June 30, 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.
8
<PAGE> 9
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. THE PARTNERSHIP AGREEMENT (CONTINUED)
Profits for tax purposes from the normal operations of the Partnership
for each fiscal year are allocated to the Partners in the same amounts
as Distributable Cash from Operations for that year. If such profits
are less than Distributable Cash from Operations for any year, they are
allocated in proportion to the amounts of Distributable Cash from
Operations for that year. If such profits are greater than
Distributable Cash from Operations for any year, they are allocated 5%
to the General Partner and 95% to the John Hancock Limited Partner and
the Investors, with the allocation made between the John Hancock
Limited Partner and the Investors in proportion to their respective
Capital Contributions. Losses for tax purposes from the normal
operations of the Partnership are allocated 1% to the General Partner
and 99% to the John Hancock Limited Partner and the Investors, with the
allocation made between the John Hancock Limited Partner and the
Investors in proportion to their respective Capital Contributions.
However, all tax aspects of the Partnership's payment of the sales
commissions from the Capital Contributions made by the John Hancock
Limited Partner are allocated 1% to the General Partner and 99% to the
John Hancock Limited Partner, and not to the Investors. Depreciation
deductions are allocated 1% to the General Partner and 99% to the
Investors, and not to the John Hancock Limited Partner.
Neither the General Partner nor any affiliate of the General Partner
shall be liable, responsible or accountable in damages to any of the
Partners or the Partnership for any act or omission of the General
Partner or such affiliate in good faith on behalf of the Partnership
within the scope of the authority granted to the General Partner by the
Partnership Agreement and in the best interest of the Partnership,
except for acts or omissions constituting fraud, negligence, misconduct
or breach of fiduciary duty. The General Partner and its affiliates
performing services on behalf of the Partnership shall be entitled to
indemnity from the Partnership for any loss, damage, or claim by reason
of any act performed or omitted to be performed by the General Partner
or such affiliates in good faith on behalf of the Partnership and in a
manner within the scope of the authority granted to the General Partner
by the Partnership Agreement and in the best interest of the
Partnership, except that they shall not be entitled to be indemnified
in respect of any loss, damage, or claim incurred by reason of fraud,
negligence, misconduct, or breach of fiduciary duty. Any indemnity
shall be provided out of and to the extent of Partnership assets only.
The Partnership shall not advance any funds to the General Partner or
its affiliates for legal expenses and other costs incurred as a result
of any legal action initiated against the General Partner or its
affiliates by a Limited Partner in the Partnership.
4. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES
Fees, commissions and other costs incurred or paid by the General
Partner or its Affiliates during the six months ended June 30, 1999 and
1998, and to which the General Partner or its Affiliates are entitled
to reimbursement from the Partnership were $74,063 and $69,361,
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 six months ended June
30, 1999 and 1998 are $15,163 and $39,896, respectively, representing
the Partnership's share of costs incurred by the General Partner and
its Affiliates relating to the class action complaint. Through June 30,
1999, the Partnership has accrued a total of $193,474 as its share of
the costs incurred by the General Partner and its Affiliates resulting
from this matter.
Accounts payable to affiliates represents amounts due to the General
Partner or its Affiliates for various services provided to the
Partnership, including amounts to indemnify the General Partner or its
Affiliates for claims incurred by them in connection with their actions
as General Partner of the Partnership. All amounts accrued by the
Partnership to indemnify the General Partner or its affiliates for
legal fees incurred by them shall not be paid unless or until all
conditions set forth in the Partnership Agreement for such payment have
been fulfilled.
The General Partner serves in a similar capacity for two other
affiliated real estate limited partnerships.
9
<PAGE> 10
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. INVESTMENT IN PROPERTY
Investment in property at cost, less any write-downs, consists of
managed, fully-operating, commercial real estate as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<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
Business Center at Pureland 5,142,016 5,142,016
----------- -----------
$25,424,815 $29,628,221
=========== ===========
</TABLE>
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 deduction 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.
During January 1999, the Purina Mills Distribution Building was listed
for sale. Accordingly, this property was classified as "Property Held
for Sale" on the Balance Sheet at March 31, 1999 at its carrying value,
which was not in excess of its estimated fair value, less selling
costs. On May 24, 1999, the Partnership sold the Purina Mills
Distribution Building and received net sales proceeds of $4,946,400,
after deductions for commissions and selling expenses. This transaction
generated a non-recurring gain of $1,490,192, representing the
difference between the net sales price and the property's carrying
value of $3,456,208.
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.
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 June 30, 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.
10
<PAGE> 11
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. INVESTMENT IN JOINT VENTURE(CONTINUED)
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.
7. DEFERRED EXPENSES
Deferred expenses consist of the following:
<TABLE>
<CAPTION>
Unamortized Unamortized
Balance At Balance At
Description June 30, 1999 December 31, 1998
----------- ------------- -----------------
<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. $102,122 $104,549
$1,027,487 of tenant improvements. These
amounts are amortized over the terms
of the leases to which they relate. 499,874 519,358
$353,781 of lease commissions. These
amounts are amortized over the terms
of the leases to which they relate. 184,734 297,241
$1,073,621 of acquisition fees paid to the
General Partner. This amount is amortized
over a period of eighty-four months. -- 38,344
-------- --------
$786,730 $959,492
======== ========
</TABLE>
11
<PAGE> 12
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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>
Six Months Ended June 30,
1999 1998
---------- ----------
<S> <C> <C>
Net income per Statements of Operations $3,306,707 $1,354,568
Add/(less): Excess of tax gain over book gain
on disposition of assets 180,722 --
Excess of book depreciation
over (under) tax depreciation ( 2,657) 69,596
Excess of book amortization
over tax amortization 62,958 93,092
Other income 7,694
---------- ----------
Net income for federal income tax purposes $3,547,730 $1,524,950
========== ==========
</TABLE>
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 $489,000 in
legal expenses in connection with this matter. Of this amount,
approximately $296,000 relates to the Partnership's own defense and
approximately $193,000 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 that 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 the potential damages, they could possibly be material.
12
<PAGE> 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 Partnership along with the General Partner is participating in the Year 2000
remediation project of the General Partner's ultimate parent, John Hancock
Mutual Life Insurance Company (John Hancock). John Hancock and the Partnership
are executing plans to address the impact of the Year 2000 issues that result
from computer programs being written using two digits to reflect the year rather
than four to define the applicable year and century. Historically, the first two
digits were hardcoded to save memory. Many of the Partnership's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in an information
technology (IT) system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, cause settlements of trades to fail, lead to
incomplete or inaccurate accounting, recording or processing trades in
securities, or engage in similar normal business activities. In addition, non-IT
systems including, but not limited to, security alarms, elevators and telephones
are subject to malfunction due to their dependence on embedded technology such
as microcontrollers for proper operation. As described, the Year 2000 project
presents a number of challenges for financial institutions since the correction
of Year 2000 issues in IT and non-IT systems will be complex and costly for the
entire industry.
John Hancock began to address the Year 2000 project as early as 1994. John
Hancock's plan to address the Year 2000 Project includes an awareness campaign,
an assessment period, a renovation stage, validation work and an implementation
of solutions.
The continuous awareness campaign serves several purposes: defining the problem,
gaining executive level support and sponsorship, establishing a team and overall
strategy, and assessing existing information system management resources.
Additionally, the awareness campaign establishes an education process to ensure
that all employees are aware of the Year 2000 issue and knowledgeable of their
role in securing solutions.
The assessment phase, which was completed for both IT and non-IT systems as of
April 1998, included the identification, inventory, analysis, and prioritization
of IT and non-IT systems and processes to determine their conversion or
replacement. Those systems, which in the event of a Year 2000 failure would have
the greatest impact on operations, were deemed to be mission critical and
prioritized accordingly. The systems which in the event of a Year 2000 failure
would cause minimal disruption to operations were classified as non-mission
critical.
The renovation stage reflects the conversion, validation, replacement, or
elimination of selected platforms, applications, databases and utilities,
including the modification of applicable interfaces. Additionally, the
renovation stage includes performance, functionality, and regression testing and
implementation. The renovation phase for mission critical systems has been
completed. Similarly, most of the non-mission critical systems have been
renovated and the remaining systems are expected to be renovated by the third
quarter of 1999.
The validation phase consists of the compliance testing of renovated systems.
The validation phase for mission critical systems has been completed. Similarly,
the majority of non-mission critical systems have been validated and the
remaining systems are expected to be validated by the third quarter of 1999.
Testing facilities will be used through the remainder of 1999 to perform special
functional testing. Special functional testing includes testing, as required,
with material third parties and industry groups and to perform reviews of "dry
runs" of year-end activities.
Finally, the implementation phase involves the actual implementation of
converted or replaced platforms, applications, databases, utilities, interfaces,
and contingency planning. Mission critical systems and most non-mission critical
systems have been implemented. The few remaining non-mission critical systems
are expected to be implemented by the third quarter of 1999.
13
<PAGE> 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)
IMPACT OF YEAR 2000 (CONTINUED)
John Hancock and the Partnership face the risk that one or more of our business
partners or customers with whom we have a material relationship will not be able
to interact with our systems due to third party's failures to resolve its own
Year 2000 issues, including those associated with its own external
relationships. We have completed an inventory of third party relationships and
prioritized each third party relationship based upon the potential business
impact, available alternatives and cost of substitution. In the case of
mission-critical business partners such as banks, financial intermediaries such
as stock exchanges, mutual fund companies and recordkeepers, IT vendors,
telecommunications providers and other utilities, and financial market data
providers, trading counterparties, depositaries, clearing agencies and clearing
houses, we are engaged in discussions with third parties and are obtaining
detailed information as to those parties' Year 2000 plans and state of
readiness. Scheduled testing of material relationships with third parties is
underway. It is anticipated that testing with material business partners will
continue through much of 1999. However, there is no guarantee that the systems
of other companies, upon which our systems rely, will be timely converted or
that a failure to convert by another company, or a conversion that is
incompatible with our systems would not have a material adverse effect on us.
If John Hancock's, or the Partnership's, Year 2000 issues were unresolved
potential consequences would include, among other possibilities, the inability
to accurately and timely process claims, update customers' accounts, process
financial transactions, bill customers, assess exposure to risks, determine
liquidity requirements or report accurate data to management, customers,
regulators and others, as well as business interruptions or shutdowns,
including, in the case of third party financial intermediaries such as stock
exchanges and clearing agents, failed trade settlements, inability to trade in
certain markets and disruption of funding flows; financial losses; reputational
harm; increased scrutiny by regulators; and litigation related to Year 2000
issues. John Hancock is attempting to limit the potential impact of the Year
2000 by monitoring the progress of its own Year 2000 project and those of its
material business partners and by developing contingency plans. However, John
Hancock cannot guarantee a resolution for all Year 2000 issues. Any critical
unresolved Year 2000 issues, however, could have a material adverse effect on
the John Hancock's and the Partnership's results of operations, liquidity or
financial condition or net income.
John Hancock's contingency planning initiative related to the Year 2000 project
is underway. The plan is addressing John Hancock's readiness as well as that of
material business partners on whom John Hancock and the Partnership depend. John
Hancock's contingency plans are being designed to keep each subsidiary's
operations functioning in the event of a failure or delay due to the Year 2000
record format and date calculation changes. Contingency plans are being
constructed based on the foundation of extensive business resumption plans that
John Hancock has maintained and updated periodically, which outline responses to
situations that may affect critical business functions. These plans also provide
emergency operations guidance, which defines a documented order of actions to
respond to problems. These extensive business resumption plans are being
enhanced to cover Year 2000 situations.
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, litigation expenses and indemnification claims,
distributions to the General Partner and to Investors, the possible effects of
tenants vacating space at Partnership properties, the absorption of existing
retail space in certain geographical areas, and the impact of inflation.
Forward-looking statements involve numerous known and unknown risks and
uncertainties, and they are not guarantees of future performance. The following
factors, among others, could cause actual results or performance of the
Partnership and future events to differ materially from those expressed or
implied in the forward-looking statements: general economic and business
conditions; any and all general risks of real estate ownership, including
without limitation adverse changes in general economic conditions and adverse
local conditions, the fluctuation of rental income from properties, changes in
property taxes, utility costs or maintenance costs and insurance, fluctuations
of real estate values, competition for tenants, uncertainties about whether real
estate sales under contract will close; the ability of the Partnership to sell
its properties; and other factors detailed from time to time in the filings with
the Securities and Exchange Commission.
14
<PAGE> 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)
FORWARD-LOOKING STATEMENTS (CONTINUED)
Readers are cautioned not to place undue reliance on forward-looking statements,
which reflect the General Partner's analysis only as of the date hereof. The
Partnership assumes no obligation to update forward-looking statements. See also
the Partnership's reports to be filed from time to time with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Partnership had $7,521,357 in cash and cash equivalents
and $85,041 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 six months ended June 30, 1999, cash from working capital reserves in
the amount of $44,274 was used for the payment of leasing costs incurred at the
Palms of Carrollwood Shopping Center ("Palms of Carrollwood") property. The
General Partner anticipates that the Partnership will incur a total of
approximately $850,000 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 six months ended June 30, 1999, approximately $9,000 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 $85,000 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 $7,130,583, generated from the Partnership's operations
and the sale of the Allmetal Distribution Building, was distributed to the
General Partner, the John Hancock Limited Partner and the Investors during the
six months ended June 30, 1999. These amounts were distributed in accordance
with the Partnership Agreement and were allocated as follows:
<TABLE>
<CAPTION>
Dist. Cash Dist. Cash From
From Operations Sales or Financings
--------------- -------------------
<S> <C> <C>
Investors $2,149,554 $4,347,412
John Hancock Limited Partner 167,098 347,793
General Partner 118,727 -
---------- ----------
Total $2,435,379 $4,695,205
========== ==========
</TABLE>
The Partnership has incurred approximately $489,000 in legal expenses in
connection with the class action lawsuit (see Part II, Item 1 of this Report).
Of this amount, approximately $296,000 relates to the Partnership's own defense
and approximately $193,000 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.
15
<PAGE> 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)
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
judgment 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 appealed the ruling. In July 1999 the
judgment was upheld and the Partnership has received a total of $227,471 from
the tenant in full satisfaction of the judgment.
At June 30, 1999, Palms of Carrollwood was 83% 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. On May 24, 1999, the Partnership sold the
Purina Mills Distribution Building to a non-affiliated buyer for a gross sales
price of $5,090,000. After deductions for commissions and selling expenses, the
sale generated net proceeds of $4,946,400 resulting in a gain of $1,490,192,
representing the difference between the net sales price and the property's
carrying value of $3,456,208. During the third quarter of 1999, the Partnership
will make a cash distribution that will include $4,434,360 generated from sale
of this property.
One of the tenants at the Business Center at Pureland, National Polystyrene
Recycling Co., L.P., ("NPRC") ceased operations and vacated its space during the
fourth quarter of 1997. A replacement tenant was located to occupy this space
during the third quarter of 1998. NPRC's lease obligations were terminated as of
September 30, 1998 in consideration of NPRC paying a lease buyout fee of
approximately $230,000. The new tenant's lease obligations commended October 1,
1998 for a 32-month term. The other tenant at the Business Center at Pureland,
Forbo Wallcoverings, Inc. ("Forbo"), had a lease that was scheduled to expire on
December 31, 1998. However, Forbo requested and the General Partner agreed to
extend the term of the lease through March 31, 1999. 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. At June 30, 1999 Business Center at Pureland was 50% occupied.
The Quince Orchard Corporate Center is leased to Boehringer Mannheim
Pharmaceuticals, Inc. under a ten-year lease which expires in February 2004. The
tenant has two options under the lease agreement, one, to terminate the lease at
the end of its seventy-sixth month of the lease, or June 2000, and, two, to
extend the term of the lease for an additional five- year period. During the
first quarter of 1998, Hoffman-LaRoche, Inc. received approval from the Federal
Trade Commission to acquire Boehringer Mannheim Pharmaceuticals, Inc.
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.
16
<PAGE> 17
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Real estate 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 an
impairment in value existed. Based upon such evaluations, the General Partner
determined that no impairment in values existed and, therefore, no write-downs
were recorded as of December 31, 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 six months ended June 30, 1999 was $3,306,707, as compared to
net income of $1,354,568 for the same period in 1998. This increase is the
result of the inclusion of a non-recurring gain of $2,065,783 from the sales of
the Allmetal and Purina Mills Distribution Buildings during the period.
Excluding the results of this gain, net income for the period ended June 30,
1999 decreased by $113,644, or 8%, as compared to the prior year. This is
primarily due to the sales of the Stone Container Building and the Allmetal and
Purina Mills Distribution Buildings.
Average occupancy for the Partnership's investments was as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
---- ----
<S> <C> <C>
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%
Business Center at Pureland 75% 100%
</TABLE>
Rental income for the period ended June 30, 1999 decreased by $378,888, or 21%,
as compared to the same period during 1998 primarily due to the sales of the
Stone Container, Allmetal and the Purina Mills Buildings and to the reduced
occupancy as of April 1, 1999 at the Business Center at Pureland. Rental income
at the Partnership's other properties was consistent between periods.
Property operating expenses for the period ended June 30, 1999 increased by
$70,390, or 62%, as compared to the same period during 1998. This increase is
primarily due to non-recurring legal fees and maintenance and repair expenses at
the Palms of Carrollwood Shopping Center during the period. Also, recoveries of
such expenses from tenants were lower as a result of reduced occupancy at the
Business Center at Pureland. Property operating expense at the Partnership's
other properties were consistent between periods.
Depreciation expense for the period ended June 30, 1999 decreased by $100,156,
or 24%, as compared to the same period during 1998 primarily due to the sale of
the Stone Container Building in December 1999,the sale of the Allmetal
Distribution Building in February 1999, and to the reclassification of the
Purina Mills Distribution Building as "Property Held for Sale" in January 1999.
Accordingly, no depreciation has been recorded on these properties since the
time that they were listed for sale.
Amortization expense for the period ended June 30, 1999 decreased by $77,454, or
42%, as compared to the same period during 1998 primarily due to the sales and
reclassifications reported above and, accordingly no longer amortizing such
amounts. Also, the acquisition fees paid to the General Partner were fully
amortized at March 31, 1999 and accordingly no amortization expense was recorded
during the second quarter of 1999.
17
<PAGE> 18
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
General and administrative expenses for the period ended June 30, 1999 decreased
by $68,727, or 32%, primarily due to a decrease in legal fees incurred by the
Partnership in connection with the class action complaint (see Part II, Item 1
of this Report). Excluding such legal fees, general and administrative expenses
were consistent between periods
The General Partner believes that inflation has had no significant impact on the
Partnership's income from operations during the six months ended June 30, 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:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
---------- ----------
<S> <C> <C>
Net cash provided by operating
activities (a) $1,794,978 $2,456,566
Net change in operating assets
and liabilities (a) ( 107,980) ( 350,514)
---------- ----------
Net cash provided by operations (a) 1,686,998 2,106,052
Increase in working capital reserves -- ( 184,038)
---------- ----------
Cash from operations (b) 1,686,998 1,922,014
Decrease in working capital reserves 125,186 --
---------- ----------
Distributable cash from operations (b) $1,812,184 $1,922,014
========== ==========
Allocation to General Partner $ 90,609 $ 96,101
Allocation to John Hancock Limited Partner 127,524 135,253
Allocation to Investors 1,594,051 1,690,660
---------- ----------
$1,812,184 $1,922,014
========== ==========
</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 third quarter of 1999, the Partnership will make a cash distribution
in the aggregate amount of $5,321,318 to the General Partner and Limited
Partners. Of this amount, $886,958 was generated from Distributable Cash from
Operations for the three months ended June 30, 1999 and $4,434,360 was generated
from Distributable Cash from Sales, Financings and Repayments as a result of the
sale of the Purina Mills Distribution Building. These amounts will be allocated
as follows:
<TABLE>
<CAPTION>
Dist. Cash Dist. Cash From
From Operations Sales or Financings
--------------- -------------------
<S> <C> <C>
Investors $772,873 $4,105,889
John Hancock Limited Partner 66,696 328,471
General Partner 47,389 --
-------- ----------
Total $886,958 $4,434,360
======== ==========
</TABLE>
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 two remaining quarters of 1999 will be reduced by
the effect of the sales that have taken place and that may occur during 1999.
18
<PAGE> 19
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 statute 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 second quarter of
1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the second
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 second 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 second quarter
of 1999 on May 24, 1999.
19
<PAGE> 20
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 13th day of August, 1999.
John Hancock Realty Income Fund-III
Limited Partnership
By: John Hancock Realty Equities, Inc.,
General Partner
By: /s/ John M. Garrison
-----------------------------------
John M. Garrison, President
By: /s/ Virginia H. Lomasney
-----------------------------------
Virginia H. Lomasney, Treasurer
(Chief Accounting Officer)
20
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000842741
<NAME> JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,606,398
<SECURITIES> 0
<RECEIVABLES> 241,281
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,847,679
<PP&E> 25,424,815
<DEPRECIATION> 5,090,514
<TOTAL-ASSETS> 35,980,281
<CURRENT-LIABILITIES> 622,571
<BONDS> 0
0
0
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</TABLE>
