10-Q 1 b39263jhe10-q.txt JOHN HANCOCK REALTY INCOME III 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM N/A COMMISSION FILE NUMBER 0-18563 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Massachusetts 04-3025607 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 200 Clarendon Street, Boston, MA 02116 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (800) 722-5457 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: N/A (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. Yes X No 2 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) INDEX

2 3 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS BALANCE SHEETS (UNAUDITED) ASSETS

See Notes to Financial Statements 3 4 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF OPERATIONS (UNAUDITED)

See Notes to Financial Statements 4 5 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF PARTNERS' EQUITY (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2001 AND YEAR ENDED DECEMBER 31, 2000

See Notes to Financial Statements 5 6 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF CASH FLOWS (UNAUDITED)

See Notes to Financial Statements 6 7 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION OF PARTNERSHIP John Hancock Realty Income Fund-III Limited Partnership (the "Partnership") was formed under the Massachusetts Uniform Limited Partnership Act on November 4, 1988. As of March 31, 2001, 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 2,193 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 was 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 and as discussed in the following paragraph, the properties of the Partnership will be disposed of, and the Partnership terminated, before December 31, 2019. As initially stated in its Prospectus, it was expected that the Partnership would be dissolved upon the sale of its last remaining property, which at that time was expected to be within seven to ten years following the date such property was acquired by the Partnership. During 2000, the Partnership sold the last four properties it its portfolio, one of which was held in a joint venture, resulting in the termination of the operations of the Partnership. The Partnership will be dissolved, in accordance with the terms of the Partnership Agreement, as soon as reasonable practicable. 2. SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001 or 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, 2000. 7 8 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Property held for sale is recorded at the lower of its carrying amount, at the time the property is listed for sale, or its fair value, less cost to sell. Carrying amount includes the property's cost, as described below, less accumulated depreciation thereon and less any property write-downs for impairment in value and plus any related unamortized deferred expenses. Operating results for properties held for sale are reported on the statement of operations along with the operations of other investments in property. Investments in property are recorded at cost less any property write-downs for impairment in value. Cost includes the initial purchase price of the property plus acquisition costs and the cost of significant improvements. Depreciation has been provided on a straight-line basis over the estimated useful lives of the various assets: thirty years for the buildings and five years for related improvements. Maintenance and repairs are charged to operations as incurred. Investment in joint venture is recorded using the equity method. No provision for income taxes has been made in the financial statements as such taxes are the responsibility of the individual Partners and not of the Partnership. The net income per Unit for the three months ended March 31, 2001 and 2000 is calculated by dividing the Investors' share of net income by the number of Units outstanding at the end of such periods. 8 9 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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. Cash from a Sale or Financing of a Partnership Property, is first used to pay all debts and liabilities of the Partnership then due and then to fund any reserves for contingent liabilities. Cash from Sales or Financings is then distributed and paid in the following order of priority: first, to the Investors and the John Hancock Limited Partner, with the distribution made between the Investors and the John Hancock Limited Partner in proportion to their respective Capital Contributions, until the Investors and the John Hancock Limited Partner have received an amount equal to their Invested Capital; second, to the Investors until they have received, after giving effect to all previous distributions of Distributable Cash from Operations and any previous distributions of Cash from Sales or Financings after the return of their Invested Capital, the Cumulative Return on Investment (defined in the Partnership Agreement); third, to the John Hancock Limited Partner until it has received, after giving effect to all previous distributions of Distributable Cash from Operations and any previous distributions of Cash from Sales or Financings after the return of its Invested Capital, the Cumulative return on Investment; fourth, to the General Partner to pay any Subordinated Disposition Fees then payable pursuant to Section 6.4 (c) of the Partnership Agreement; and fifth, 99% to the Investors and the John Hancock Limited Partner and 1% to the General Partner, with the distribution made between the Investors and the John Hancock Limited Partner in proportion to their respective Capital Contributions. Cash from the sale of the last of the Properties is distributed in the same manner as Cash from Sales and Financings, except that before any other distribution is made to the Partners, each Partner shall first receive from such cash, an amount equal to the then positive balance, if any, in such Partner's Capital Account after crediting of charging to such account the profits or losses for tax purposes from such sale. To the extent, if any, that a Partner is entitled to receive a distribution of cash based upon a positive balance in its capital account prior to such distribution, such distribution will be credited against the amount of such cash that Partner would have been entitle to receive based upon the manner of distribution of Cash from Sales and Financings, as specified in the previous paragraph. 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. 9 10 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. THE PARTNERSHIP AGREEMENT (CONTINUED) Profits and Losses from Sales and Financings are generally allocated 99% to the Limited Partners and 1% to the General 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 three months ended March 31, 2001 and 2000, and to which the General Partner or its Affiliates are entitled to reimbursement from the Partnership were $20,497 and $26,350, 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 8. There were no costs included in the Statement of Operations for the three months ended March 31, 2001 and 2000, respectively, representing the Partnership's share of costs incurred by the General Partner and its Affiliates relating to the class action complaint. Through March 31, 2001, the Partnership has accrued a total of $217,871 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 one other affiliated real estate limited partnerships. 10 11 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 5. PROPERTY HELD FOR SALE During the first quarter of 2000, the Pureland Business Center and the Palms of Carrollwood Shopping Center were listed for sale and during December 1999, the Yokohama Tire Warehouse was listed for sale. Accordingly, these properties were classified as "Property Held for Sale" on the Balance Sheet starting at that time at their carrying values, which were not in excess of their estimated fair values, less selling costs. On November 6, 2000, the Partnership sold the Yokohama Tire Warehouse and received net sales proceeds of $9,085,227, after deduction for commissions and selling expenses. This transaction generated a non-recurring gain of $2,160,610, representing the difference between the net sales price and the property's carrying value of $6,924,617. On November 10, 2000, the Partnership sold the Palms of Carrollwood Shopping Center and received net sales proceeds of $11,730,094, after deduction for commissions and selling expenses. This transaction generated a non-recurring gain of $1,550,484, representing the difference between the net sales price and the property's carrying value of $10,179,610. On December 20, 2000, the Partnership sold the Pureland Business Center and received net sales proceeds of $3,491,502, after deductions for commissions and selling expenses. This transaction generated a non-recurring loss of $559,310, representing the difference between the net sales price and the property's carrying value of $4,050,812. 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 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 owned and operated 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 provided that the Affiliated Joint Venture contribute 95% of any required additional capital contributions. Of the cumulative total invested capital in QOCC-1 Associates since 1988, 97.55% was contributed by the Affiliated Joint Venture. The Affiliated Joint Venture held a 75% interest in QOCC-1 Associates. 11 12 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 was distributed in the following order of priority: (i) to the payment of all debts and liabilities of QOCC-1 Associates and to fund reserves deemed reasonably necessary; ii), to the partners in proportion to their respective invested capital until each has received a 9% return on invested capital and iii) the balance, if any, to the partners in proportion to their interests. Prior to 1996, QOCC-1 Associates had not provided the partners with a return in excess of 9% on their invested capital. During 1999, 1998, 1997 and 1996, the partners received returns on invested capital of approximately 12%. Income and gains of QOCC-1 Associates, other than the gains allocated arising from a sale other similar event with respect to the Quince Orchard Corporate Center, were 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 were made and ii) the balance, if any, to the partners, pro rata in accordance with their interests. On September 29, 2000, QOCC-1 Associates sold the Quince Orchard Corporate Center to a non-affiliated buyer for a total net sale price of $12,554,940 after deductions for commissions and selling expenses incurred in connection with the sale of the property. Fifty percent of the net proceeds of the sale, or $6,277,470, was distributed to the Partnership and fifty percent was distributed to Income Fund-II. QOCC-1 Associates was subsequently liquidated in December 2000. 7. 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:

12 13 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 8. CONTINGENCIES In February 1996, a putative class action complaint was filed in the Superior Court in Essex County, New Jersey by a single investor in a limited partnership affiliated with the Partnership. The complaint named as defendants the Partnership, the General Partner, certain other Affiliates of the General Partner, and certain unnamed officers, directors, employees and agents of the named defendants. The plaintiff sought unspecified damages stemming from alleged misrepresentations and omissions in the marketing and offering materials associated with the Partnership and two limited partnerships affiliated with the Partnership. On March 18, 1997, the court certified a class of investors who were original purchasers in the Partnership. A settlement agreement was approved by the court on December 22, 1999. Under the terms of the settlement, the defendants guaranteed certain minimum returns to class members on their investments and have paid fees and expenses for class counsel in an amount determined by the court to be $1.5 million. Payment under the settlement agreement will have no financial impact on the Partnership. The Partnership provides indemnification to the General Partner and its Affiliates for acts or omissions of the General Partner in good faith on behalf of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner believes that this indemnification applies to the class action complaint described above. 13 14 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL During the offering period, from February 17, 1989 to February 15, 1991, the Partnership sold 2,415,229 Units representing gross proceeds (exclusive of the John Hancock Limited Partner's contribution which was used to pay sales commissions) of $48,304,580. The proceeds of the offering were used to acquire investment properties, fund reserves and pay acquisition fees and organizational and offering expenses. These investments are described more fully in Notes 5 and 6 to the Financial Statements included in Item 1 of this Report. FORWARD-LOOKING STATEMENTS In addition to historical information, certain statements contained herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements appear in a number of places in this Report and include statements regarding the intent, belief or expectations of the General Partner with respect to, among other things, the prospective sale of Partnership properties, repayment of mortgage loans, actions that would be taken in the event of lack of liquidity, unanticipated leasing costs, repair and maintenance expenses, distributions to the General Partner and to Investors, the possible effects of tenants vacating space at Partnership properties, the absorption of existing retail space in certain geographical areas, and the impact of inflation. Forward-looking statements involve numerous known and unknown risks and uncertainties, and they are not guarantees of future performance. The following factors, among others, could cause actual results or performance of the Partnership and future events to differ materially from those expressed or implied in the forward-looking statements: general economic and business conditions; any and all general risks of real estate ownership, including without limitation adverse changes in general economic conditions and adverse local conditions, the fluctuation of rental income from properties, changes in property taxes, utility costs or maintenance costs and insurance, fluctuations of real estate values, competition for tenants, uncertainties about whether real estate sales under contract will close; the ability of the Partnership to sell its properties; and other factors detailed from time to time in the filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect the General Partner's analysis only as of the date hereof. The Partnership assumes no obligation to update forward-looking statements. See also the Partnership's reports to be filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, the Partnership had $2,907,432 in cash and cash equivalents. The Partnership has a working capital reserve with a current balance of approximately $2,700,000. The General Partner anticipates that such amount will be sufficient to satisfy the Partnership's general liquidity requirements as the Partnership's business is wound down. The Partnership's liquidity would, however, be materially adversely affected if there were significant unanticipated operating and liquidation costs (including but not limited to litigation expenses). 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 or short-term loans from the General Partner or its affiliates. Cash in the amount of $3,520,438, generated from the Partnership's Distributable Cash from Sales, Financings or Repayments (as defined in the Partnership Agreement), was distributed to the Limited Partners during the three months ended March 31, 2001. This amount was distributed in accordance with the Partnership Agreement and was allocated as follows:

14 15 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS Net income for the period ended March 31, 2001 was $4,216, as compared to net income of $637,176 for the same period in 2000, representing a decrease of $632,960, or 99%, as compared to the prior year. This decrease was primarily due to the sales during 2000 of the Yokohama Tire Warehouse, the Palms of Carrollwood Shopping Center, the Business Center at Pureland and the Partnership's joint venture interest in the Quince Orchard Corporate Center. Average occupancy for the Partnership's investments was as follows:

Rental income for the period ended March 31, 2001 decreased by $612,602, or 100%, as compared to the same period during 2000 primarily due to the sales of the Yokohama Tire Warehouse, the Palms of Carrollwood Shopping Center and the Business Center at Pureland during the fourth quarter of 2000. Income from joint venture for the period ended March 31, 2001 decreased by $223,813, or 100%, as compared to the same period during 2000 primarily due to the sale of the Partnership's joint venture interest in Quince Orchard Corporate Center in September 2000. Property operating expenses for the period ended March 31, 2001 decreased by $75,315, or 100%, as compared to the same period during 2000. This decrease is primarily due to the sales of the Yokohama Tire Warehouse, the Palms of Carrollwood Shopping Center and the Business Center at Pureland during the fourth quarter of 2000. Depreciation expense for the period ended March 31, 2001 decreased by $80,540, or 100%, as compared to the same period during 2000 primarily due to the reclassification of the Palms of Carrollwood and Business Center at Pureland properties as "Property held for sale" during the first quarter of 2000. Accordingly, no depreciation has been recorded on these properties since the time that they were listed for sale. Amortization expense for the period ended March 31, 2001 decreased by $31,639, or 100%, as compared to the same period during 2000 primarily due to the reclassification of the Palms of Carrollwood and Business Center at Pureland properties as "Property held for sale" during the first quarter of 2000. Accordingly, no amortization expense has been recorded since the time that they were listed for sale. General and administrative expenses for the period ended March 31, 2001 increased by $10,101, or 18%, primarily due to payment in the current period of final legal expenses in connection with the class action complaint (see Part II, Item 1 of this Report). The General Partner believes that inflation has had no significant impact on the Partnership's income from operations during the three months ended March 31, 2001, and the General Partner anticipates that it will not have a significant impact during the remainder of 2001. 15 16 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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:

(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 February 2001, the Partnership made a cash distribution in the amount of $3,520,438 to the John Hancock Limited Partner and the Investors that was generated from Distributable Cash from Sales, Financings or Repayments. This amount was distributed in accordance with the Partnership Agreement and was allocated as follows:

The amount of future cash distributions is dependent upon the need to draw down working capital reserves. As of the date of this report, all of the properties in the Partnership have been sold. In order to adequately provide for all future contingencies, the General Partner has determined (as permitted by the Partnership Agreement) to retain rather than distribute to the Limited Partners, net cash provided by the Partnership's normal operations in order to fund cash reserves for contingencies. Accordingly, no cash distributions with respect to Distributable Cash from Operations will be made to the Limited Partners. At such time as all liabilities with respect to the Partnership are resolved, the General Partner will make a final distribution of net assets to the Limited Partners, in accordance with the terms of the Partnership Agreement. No assurances can be given as to whether any distribution can be made after all liabilities of the Partnership are resolved. Such final distribution, if any, will result in the liquidation and termination of the Partnership. 16 17 JOHN HANCOCK REALTY INCOME FUND-III LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In February 1996, a putative class action complaint was filed in the Superior Court in Essex County, New Jersey by a single investor in a limited partnership affiliated with the Partnership. The complaint named as defendants the Partnership, the General Partner, certain other affiliates of the General Partner, and certain unnamed officers, directors, employees and agents of the named defendants. The plaintiff sought unspecified damages stemming from alleged misrepresentations and omissions in the marketing and offering materials associated with the Partnership and two limited partnerships affiliated with the Partnership. The complaint alleged, among other things, that the marketing materials for the Partnership and the affiliated limited partnerships did not contain adequate risk disclosures. On March 18, 1997, the court certified a class of investors who were original purchasers in the Partnership. A settlement agreement was approved by the court on December 22, 1999. Under the terms of the settlement, the defendants have guaranteed certain minimum returns to class members on their investments and paid fees and expenses to class counsel in an amount determined by the court to be $1.5 million. These terms of the settlement will have no financial impact on the Partnership. There are no other material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Partnership, to which the Partnership is a party or to which any of its properties is subject. ITEM 2. CHANGES IN SECURITIES There were no changes in securities during the first quarter of 2001. ITEM 3. DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities during the first quarter of 2001. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders of the Partnership during the first quarter of 2001. 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 first quarter of 2001. 17 18 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 May, 2001. John Hancock Realty Income Fund-III Limited Partnership By: John Hancock Realty Equities, Inc., General Partner By: /s/ Paul F. Hahesy ------------------------------------- Paul F. Hahesy, President By: /s/ Virginia H. Lomasney ------------------------------------- Virginia H. Lomasney, Treasurer (Chief Accounting Officer) 18

HANCOCK JOHN REALTY INCOME FUND III LIMITED PARTNERSHIP 10-Q