<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 September 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 September 30, 1999 and
December 31, 1998 3
Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and 1998 4
Statements of Partners' Equity for the
Nine Months Ended September 30, 1999 and
for the Year Ended December 31, 1998 5
Statements of Cash Flows for the Nine
Months Ended September 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 13-19
PART II: OTHER INFORMATION 20
</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)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
Cash and cash equivalents $ 3,633,028 $ 5,874,797
Restricted cash 85,041 79,541
Other assets 241,281 348,339
Property held for sale -- 1,504,448
Investment in joint venture 7,023,895 7,036,529
Investment in property:
Land 7,097,135 7,667,535
Building and improvements 18,327,680 21,960,686
------------ ------------
25,424,815 29,628,221
Less: accumulated depreciation 5,242,806 5,633,631
------------ ------------
20,182,009 23,994,590
Deferred expenses, net of accumulated
amortization of $1,855,329 in 1999
and $1,623,405 in 1998 774,687 959,492
------------ ------------
Total assets $ 31,939,941 $ 39,797,736
============ ============
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 410,145 $ 383,720
Accounts payable to affiliates 300,243 232,430
------------ ------------
Total liabilities 710,388 616,150
Partners' equity/(deficit):
General partner's (4,186) (38,068)
Limited partners' 31,233,739 39,219,654
------------ ------------
Total partners' equity 31,229,553 39,181,586
------------ ------------
Total liabilities and partners' equity $ 31,939,941 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income:
Rental income $ 832,823 $1,117,238 $2,277,523 $2,940,826
Income from joint venture 212,302 187,449 637,905 579,420
Interest income 70,264 39,760 194,347 108,178
Gain on sales of properties -- -- 2,065,783 --
---------- ---------- ---------- ----------
Total income 1,115,389 1,344,447 5,175,558 3,628,424
Expenses:
Depreciation 152,292 183,006 466,968 597,838
General and administrative expenses 70,278 125,249 218,775 342,473
Amortization of deferred expenses 34,291 92,535 140,731 276,429
Property operating expenses 107,922 74,078 291,771 187,537
---------- ---------- ---------- ----------
Total expenses 364,783 474,868 1,118,245 1,404,277
---------- ---------- ---------- ----------
Net income $ 750,606 $ 869,579 $4,057,313 $2,224,147
========== ========== ========== ==========
Allocation of net income:
General Partner $ 48,194 $ 56,167 $ 152,609 $ 151,177
John Hancock Limited Partner 63,961 83,516 175,617 226,833
Investors 638,451 729,896 3,729,087 1,846,137
---------- ---------- ---------- ----------
$ 750,606 $ 869,579 $4,057,313 $2,224,147
========== ========== ========== ==========
Net Income per Unit $ 0.26 $ 0.29 $ 1.54 $ 0.76
========== ========== ========== ==========
</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)
NINE MONTHS ENDED SEPTEMBER 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) (11,890,619) (12,009,346)
Add: Net income 152,609 3,904,704 4,057,313
------------ ------------ ------------
Partners' equity/(deficit) at September 30, 1999
(2,415,234 Units outstanding) $ (4,186) $ 31,233,739 $ 31,229,553
============ ============ ============
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
Operating activities:
Net income $ 4,057,313 $ 2,224,147
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 466,968 597,838
Amortization of deferred expenses 140,731 276,429
Cash distributions over equity
in income from joint venture 12,634 142,362
Gain on sales of properties (2,065,783) --
------------ ------------
2,611,863 3,240,776
Changes in operating assets and liabilities:
Increase in restricted cash (5,500) (21,583)
Decrease/(increase) in other assets 107,058 18,987
Increase/(decrease) in accounts payable and
accrued expenses 26,425 268,956
Increase in accounts payable to affiliates 67,814 68,657
------------ ------------
Net cash provided by operating activities 2,807,660 3,575,793
Investing activities:
Increase in deferred expenses (66,522) (16,303)
Proceeds from sales of properties 7,026,439 --
------------ ------------
Net cash provided by (used in) investing activities 6,595,917 (16,303)
Financing activities:
Cash distributed to Partners (12,009,346) (2,883,020)
------------ ------------
Net cash used in financing activities (12,009,346) (2,883,020)
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,241,769) 676,470
Cash and cash equivalents at beginning
of year 5,874,797 2,505,729
------------ ------------
Cash and cash equivalents at end
of period $ 3,633,028 $ 3,182,199
============ ============
</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 September 30, 1999, the Partnership consisted of
John Hancock Realty Equities, Inc. (the "General Partner"), a wholly-owned,
indirect subsidiary of John Hancock Mutual Life Insurance Company; John
Hancock Realty Funding, Inc. (the "John Hancock Limited Partner"); John
Hancock Income Fund-III Assignor, Inc. (the "Assignor Limited Partner");
and 2,235 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 nine-month period ended September 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 nine months ended September 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 nine months ended September 30, 1999 and 1998,
and to which the General Partner or its Affiliates are entitled to
reimbursement from the Partnership were $98,208 and $97,295, 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 nine months ended September 30, 1999 and
1998 are $23,744 and $72,398, respectively, representing the Partnership's
share of costs incurred by the General Partner and its Affiliates relating
to the class action complaint. Through September 30, 1998, the Partnership
has accrued a total of $202,055 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>
September 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 September 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
<TABLE>
<CAPTION>
Deferred expenses consist of the following: Unamortized Unamortized
Balance At Balance At
Description September 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. $ 100,909 $104,549
$1,027,487 of tenant improvements. These
amounts are amortized over the terms
of the leases to which they relate. 477,370 519,358
$376,029 of lease commissions. These
amounts are amortized over the terms
of the leases to which they relate. 196,408 297,241
$1,073,620 of acquisition fees paid to the
General Partner. This amount is amortized
over a period of eighty-four months. -- 38,344
----------- --------
$ 774,687 $959,492
=========== ========
</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,
1999 1998
---- ----
<S> <C> <C>
Net income per Statements of Operations $4,057,313 $2,224,147
Add/(less): Excess of tax gain over book
gain on disposition of assets 180,722 --
Excess of book depreciation
over tax depreciation 32,693 104,373
Excess of book amortization
over tax amortization 125,918 143,431
------------ ------------
Net income for federal income tax purposes $4,396,646 $2,471,951
========== ==========
</TABLE>
11
<PAGE> 12
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. CONTINGENCIES
In February 1996, a putative class action complaint was filed in the
Superior Court in Essex County, New Jersey by a single investor in a
limited partnership affiliated with the Partnership. The complaint named as
defendants the Partnership, the General Partner, certain other Affiliates
of the General Partner, and certain unnamed officers, directors, employees
and agents of the named defendants. The plaintiff sought unspecified
damages stemming from alleged misrepresentations and omissions in the
marketing and offering materials associated with the Partnership and two
limited partnerships affiliated with the Partnership. On March 18, 1997,
the court certified a class of investors who were original purchasers in
the Partnership.
The Partnership and the other defendants answered the complaint denying the
material allegations and raising numerous affirmative defenses. Discovery
was conducted, and the Partnership and other defendants produced documents
relating to the plaintiff's claims. The court ruled on statute of
limitation defenses as to certain claims and ordered a hearing as to
statute of limitations defenses as to other claims. The parties commenced
settlement discussions, which resulted in a settlement agreement which was
preliminarily approved by the court on November 10, 1999. The settlement is
subject to final court approval at a hearing scheduled for December 22,
1999. Under the terms of the settlement, the defendants will guarantee
certain minimum returns to class members on their investments and will pay
fees and expenses for class counsel in an amount to be determined by the
court up to $1.5 million.
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 $510,000 in
legal expenses in connection with this matter. Of this amount,
approximately $309,000 relates to the Partnership's own defense and
approximately $201,000 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
have deployed and are executing a plan 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 identifications, 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 our 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 and non-mission
critical systems has been completed.
The validation phase consists of the compliance testing of renovated systems.
The validation phase for mission critical and non-mission critical systems has
been completed. John Hancock will use its testing facilities 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 performing reviews of "dry run" of year-end activities.
Finally, the implementation phase involves the actual implementation of
converted or replaced platforms, applications, databases, utilities, interfaces,
and contingency planning. All mission critical systems and non-mission critical
systems have been implemented.
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 exchanges), mutual fund companies and recordkeepers, IT vendors,
telecommunications providers and other utilities, financial market data
providers, trading counterparties, depositaries, clearing agencies and clearing
houses, we are engaged in discussions with these third parties, and have
obtained detailed information as to those parties' Year 2000 plans and state of
readiness. Scheduled testing of material relationships with third parties is
completed. Testing with other business partners will continue through the
year-end, where appropriate. However, there is no guarantee that the system 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 that we will be able to resolve all of its 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.
John Hancock's contingency planning initiative related to the Year 2000 project
is underway. The contingency plans address John Hancock's and the Partnership's
readiness as well as that of material business partners on whom we 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 were 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. Contingency planning also includes specific plans,
staffing, and timelines to carry out proactive assessments and monitoring of
equipment and systems on the actual date rollover to Year 2000. John Hancock's
millennium rollover plans have been drafted and will continue to be updated
through year-end.
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain statements contained herein
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Those statements appear in a number of places in this
Report and include statements regarding the intent, belief or expectations of
the General Partner with respect to, among other things, the prospective sale of
Partnership properties, actions that would be taken in the event of lack of
liquidity, unanticipated leasing costs, repair and maintenance expenses,
litigation expenses and indemnification claims, distributions to the General
Partner and to Investors, the possible effects of tenants vacating space at
Partnership properties, the absorption of existing retail space in certain
geographical areas, and the impact of inflation.
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)
Forward-looking statements involve numerous known and unknown risks and
uncertainties, and they are not guarantees of future performance. The following
factors, among others, could cause actual results or performance of the
Partnership and future events to differ materially from those expressed or
implied in the forward-looking statements: general economic and business
conditions; any and all general risks of real estate ownership, including
without limitation adverse changes in general economic conditions and adverse
local conditions, the fluctuation of rental income from properties, changes in
property taxes, utility costs or maintenance costs and insurance, fluctuations
of real estate values, competition for tenants, uncertainties about whether real
estate sales under contract will close; the ability of the Partnership to sell
its properties; and other factors detailed from time to time in the filings with
the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on forward-looking statements,
which reflect the General Partner's analysis only as of the date hereof. The
Partnership assumes no obligation to update forward-looking statements. See also
the Partnership's reports to be filed from time to time with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Partnership had $3,633,028 in cash and cash
equivalents and $85,041 in restricted cash.
The Partnership has a working capital reserve with a current balance of
approximately 4% 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 nine months ended September 30, 1999, cash from working capital
reserves in the aggregate amount of $66,522 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 nine months ended September 30, 1999, approximately $10,875 of cash
generated from the Partnership's operations was used to fund non-recurring
maintenance and repair expenses incurred at 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 $83,000 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 $12,009,346, 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, 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 $2,922,427 $8,453,301
John Hancock Limited Partner 167,098 347,793
General Partner 118,727 --
---------- ----------
Total $3,208,252 $8,801,094
========== ==========
</TABLE>
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)
The Partnership has incurred approximately $510,000 in legal expenses in
connection with the class action lawsuit (see Part II, Item 1 of this Report).
Of this amount, approximately $309,000 relates to the Partnership's own defense
and approximately $201,000 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.
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 September 30, 1999, Palms of Carrollwood was 87% 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
improve the property's occupancy.
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 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 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 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. During the third quarter of 1999, the
partnership made a cash distribution to the Investors that included $4,105,889
generated form the sale of this property.
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)
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 September 30, 1999 Business Center at Pureland was 50% occupied.
The Quince Orchard Corporate Center is occupied by 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.
Real estate conditions in the Washington D.C. area for office space similar to
the Quince Orchard Corporate Center have continued to improve. The supply of
such office space has been unable to keep pace with the demand, resulting in a
slight increase in market rents. Further this condition has given rise to new
real estate development in the area. The General Partner does not anticipate
that this new development will negatively impact the market and, therefore,
expects market conditions are likely 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 determine whether an impairment in value
exists on any of the Partnership's properties.
RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 1999 was $4,057,313, as
compared to net income of $2,224,147 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 September
30, 1999 decreased by $231,617, or 10%, as compared to the prior year. This is
primarily due to the sales of the Stone Container Building, the Allmetal
Distribution Building and the Purina Mills Distribution Building.
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)
Average occupancy for the Partnership's investments was as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Palms of Carrollwood Shopping Center 84% 81%
Quince Orchard Corporate Center (Affiliated Joint Venture) 100% 100%
Yokohama Tire Warehouse 100% 100%
Purina Mills Distribution Building --% 100%
Business Center at Pureland 67% 100%
</TABLE>
Rental Income for the period ended September 30, 1999 decreased by $663,303, or
23%, as compared to the same period during 1998 primarily due to the sales of
the Stone Container, Allmetal and Purina Mills Buildings and to reduced
occupancy as of April 1, 1999 at the Business Center at Pureland. This decrease
was offset by the $227,471 judgment received for Palms of Carrollwood as
discussed previously. Rental income at the Partnership's other properties was
consistent between periods.
Interest income for the nine months ended September 30, 1999 increased by
$86,169, or 79%, as compared to the same period in 1998. This increase was
primarily due to the interest earned on the net sales proceeds received from the
sale of the Miami International Distribution Center, which was sold on August 9,
1999.
Property operating expenses for the period ended September 30, 1999 increased by
$104,234, or 55%, as compared to the same period during 1998. This increase is
primarily due to certain non-recurring legal fees and maintenance and repair
expenses incurred at the Palms of Carrollwood Shopping Center during the current
period. Also, recoveries of such expenses from tenants were lower as a result of
reduced occupancy at the Business Center at Pureland. Property operating
expenses at the Partnership's other properties were consistent between periods.
Depreciation expense for the period ended September 30, 1999 decreased by
$130,870 or 22%, 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. The Purina Mills Building was sold in May
1999.
Amortization expense for the period ended September 30, 1999 decreased by
$135,698, or 49%, as compared to the same period during 1998 primarily due to
the sales and reclassifications of properties as reported above and accordingly
no longer amortizing such amounts for these properties. Also, the acquisition
fees paid to the General Partner were fully amortized at March 31, 1999 and,
therefore, no amortization expense was recorded since that time.
General and administrative expenses for the period ended September 30, 1999
decreased by $123,698, or 36%, as compared to the same period in 1998, primarily
due to a decrease in legal fees incurred by the Partnership in connection with
the class action complaint (see Part II, Item 1 of this Report). Excluding such
legal fees, general and administrative expenses were consistent between periods
The General Partner believes that inflation has had no significant impact on the
Partnership's income from operations during the nine months ended September 30,
1999, and the General Partner anticipates that it will not have a significant
impact during the remainder of 1999.
18
<PAGE> 19
JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP
(A MASSACHUSETTS LIMITED PARTNERSHIP)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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,
1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities (a) $ 2,807,660 $ 3,575,793
Net change in operating assets and liabilities (a) (195,797) (335,017)
----------- -----------
Net cash provided by operations (a) 2,611,863 3,240,776
Increase in working capital reserves -- (357,756)
----------- -----------
Cash from operations (b) 2,611,863 (2,883,020)
Decrease in working capital reserves 24,039 --
----------- -----------
Distributable cash from operations (b) $ 2,635,902 $ 2,883,020
=========== ===========
Allocation to General Partner $ 131,795 $ 144,151
Allocation to John Hancock Limited Partner 185,489 202,879
Allocation to Investors 2,318,618 2,535,990
----------- -----------
$ 2,635,902 $ 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 1999, the Partnership will make a cash distribution
in the amount of $823,720 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 $724,569 and the John Hancock
Limited Partner will receive $57,965. Such amounts represent a 7% annualized
return on Limited Partners' remaining Invested Capital.
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 1999 will be reduced by the effect of
the sales that have taken place during 1999.
19
<PAGE> 20
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 Partnership and the other defendants answered the complaint,
denying the material allegations and raising numerous affirmative
defenses. Discovery was conducted, and the Partnership and other
defendants produced documents relating the plaintiff's claims. The
court ruled on statute of limitations defenses as to certain claims
and ordered a hearing as to statute of limitations defenses as to
other claims. The parties commenced settlement discussions, which
resulted in a settlement agreement which was preliminarily approved by
the court on November 10, 1999. The settlement is subject to final
court approval at a hearing scheduled for December 22, 1999. Under the
terms of the settlement, the defendants will guarantee certain minimum
returns to class members on their investments and will pay fees and
expenses for class counsel in an amount to be determined by the court
up to $1.5 million.
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 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There were no defaults upon senior securities during the third 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 third 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) There were no Reports on Form 8-K filed during the third quarter
of 1999.
20
<PAGE> 21
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 15th day of November, 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)
21
<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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,718,069
<SECURITIES> 0
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0
0
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</TABLE>
