FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from N/A
Commission file number 0-15680
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Massachusetts 04-2921566
(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)
Registrant's telephone number, including area code: (800) 722-5457
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Units of
Investor Limited Partnership Interest
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by
reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to
the date of filing. (See definition of affiliate in Rule 405.) Not
applicable, since the securities are non-voting
NOTE: If a determination as to whether a particular person or entity is an
affiliate cannot be made without involving unreasonable effort and expense,
the aggregate market value of the common stock held by non-affiliates may
be calculated on the basis of assumptions reasonable under the
circumstances, provided that the assumptions are set forth in this Form.
Exhibit Index on Pages 32 - 36
Page 1 of 36
<PAGE>
TABLE OF CONTENTS
PART I
Item 1 Business 3
Item 2 Properties 7
Item 3 Legal Proceedings 8
Item 4 Submission of Matters to a Vote
of Security Holders 9
PART II
Item 5 Market for the Partnership's Securities and Related
Security Holder Matters 9
Item 6 Selected Financial Data 11
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 8 Financial Statements and Supplementary Data 25
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 25
PART III
Item 10 Directors and Executive Officers of the Registrant 25
Item 11 Executive Compensation 28
Item 12 Security Ownership of Certain Beneficial Owners
and Management 29
Item 13 Certain Relationships and Related Transactions 29
PART IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 32
Signatures 37
2
<PAGE>
Part I
Item 1 - Business
The Registrant, John Hancock Realty Income Fund Limited Partnership (the
"Partnership"), is a limited partnership organized on June 12, 1986 under
the Massachusetts Uniform Limited Partnership Act. As of December 31,
1997, the partners in the Partnership consisted of John Hancock Realty
Equities, Inc. (the "General Partner"), John Hancock Realty Funding, Inc.
(the "John Hancock Limited Partner"), and 3,995 Investor Limited Partners
(the "Investors") owning 91,647 Units of Investor Limited Partnership
Interests (the "Units"). The John Hancock Limited Partner and the
Investors are collectively referred to as the Limited Partners. The
initial capital of the Partnership was $2,000 representing capital
contributions of $1,000 from the General Partner and $1,000 from the John
Hancock Limited Partner. During the offering period, the John Hancock
Limited Partner made additional capital contributions of $7,330,760. There
have been no changes in the number of Units outstanding subsequent to the
termination of the offering period. The Amended Agreement of Limited
Partnership of the Partnership (the "Partnership Agreement") authorized the
sale of up to 100,000 Units of Investor Limited Partnership Interests.
The Units were offered and sold to the public during the period from
September 9, 1986 to September 9, 1987, pursuant to a Registration
Statement on Form S-11 under the Securities Act of 1933. The Partnership
sold the Units for $500 per Unit. No established public market exists on
which the Units may be traded.
The Partnership is engaged in the business of acquiring, improving, holding
for investment and disposing of existing, income-producing, commercial and
industrial 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 on its properties under certain circumstances, as
specified in the Partnership Agreement.
The latest date on which the Partnership is due to terminate is December
31, 2016, 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, 2016.
3
<PAGE>
Item 1 - Business (continued)
The Partnership's equity real estate investments are subject to various
risk factors. Although the risks of equity investing are reduced when
properties are acquired on an unleveraged basis, the major risk of owning
income-producing properties is the possibility that the properties will not
generate income sufficient to meet operating expenses and to fund adequate
reserves for repairs, replacements, contingencies and anticipated
obligations. The income received from properties may be affected by many
factors, including: i) adverse changes in general economic conditions and
local conditions, such as competitive over-building, a decrease in
employment, or adverse changes in real estate zoning laws, which may reduce
the desirability of real estate in the area or ii) other circumstances over
which the Partnership may have little or no control, such as fires,
earthquakes and floods. To the extent that the Partnership's properties
are leased in any substantial portion to a specific retail, industrial or
office tenant, the financial failure of any such major tenant, resulting in
the termination of the tenant's lease or non-payment of rental amounts due,
would likely cause at least a temporary reduction in cash flow from any
such property and might result in a decrease in the market value of that
property.
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real property may become liable for the costs of
removal or remediation of certain hazardous substances released on or in
its property. Such laws often impose such liability without regard to
whether the owner or operator knew of, or was responsible for, the release
of such hazardous substances. If any such substances were found in or on
any property owned by the Partnership, the Partnership could be exposed to
liability and be required to incur substantial remediation costs. The
presence of such substances or the failure to undertake proper remediation
could adversely affect the ability to finance, refinance or dispose of such
property.
On February 17, 1987, the Partnership acquired the Marlboro Square Shopping
Center, a neighborhood shopping center located in Marlboro, Massachusetts.
Market conditions in Marlboro have weakened since the Partnership acquired
the property and remain depressed. An excess of supply over demand for
retail space has resulted in continued high vacancy rates and competitive
pricing for available space in the Marlboro area. The General Partner
anticipates that vacancy rates for retail space in the Marlboro,
Massachusetts area will remain high during 1998 based upon both the lack of
demand and the amount of available retail space in the area. The General
Partner will continue to offer competitive rental rates and concessions in
an effort to retain existing tenants as well as to lease the remaining
vacant space at the property.
On November 20, 1987, the Partnership acquired the Crossroads Square
Shopping Center, a neighborhood shopping center located in Jacksonville,
Florida. During the second quarter of 1997, the anchor tenant at
Crossroads Square that occupies 49% of the property under a lease scheduled
to expire in August 2010 informed the General Partner of its intention to
vacate its space during the second half of 1998. As a result, the General
Partner has commenced efforts to find a replacement tenant for the space.
The General Partner does not believe that this situation is likely to have
a materially adverse effect on the Partnership's liquidity.
4
<PAGE>
Item 1 - Business (continued)
Although retail market conditions in the market in which the Crossroads
Square Shopping Center is located have declined since the Partnership
purchased the property, occupancy levels and rental rates have stabilized
over recent years. As a result the General Partner anticipates relatively
favorable retail market conditions in Jacksonville during 1998.
On December 22, 1987, the Partnership acquired the Carnegie Center, a
multi-tenant office/industrial facility located in Cincinnati, Ohio. Since
the Partnership acquired the Carnegie Center, the Cincinnati industrial
real estate market has experienced an oversupply of office/industrial
space, which has resulted in a decline in rental rates and an increase in
vacancy rates. The General Partner anticipates that market conditions in
Cincinnati will remain competitive during 1998 and, therefore, will
continue to offer competitive rental rates and concessions in an effort to
increase occupancy at Carnegie Center.
On February 25, 1988, the Partnership acquired the Warner Plaza Shopping
Center, a neighborhood shopping center located in Chandler, Arizona. The
Partnership acquired Warner Plaza exclusive of areas totaling 55,562
rentable square feet owned by a non-affiliate of the Partnership. Real
estate market conditions have declined in the Chandler area since the
Partnership acquired the property. However, steady population growth in
the Chandler area over the past few years has increased demand for
available retail space and stimulated the development of new retail space.
The Warner Plaza Shopping Center property was 98% leased at December 31,
1997. The General Partner anticipates favorable retail market conditions
to continue in the Chandler area during 1998 and that the property should
provide the Partnership with stable income performance during 1998.
On October 24, 1986, the Partnership acquired the 1300 North Dutton Avenue
property, an office/industrial facility located in Santa Rosa, California.
The tenant that had leased all of the rentable space at the property
notified the Partnership during 1994 that it would not renew its lease,
which expired on January 31, 1995. The property remained vacant after
January 31, 1995 until the General Partner secured a new tenant, Union Oil
Company of California, to occupy the entire property under a five year
lease which commenced in October 1996. Due to this lease at the property
and the then existing favorable market conditions in the Santa Rosa,
California area, the General Partner listed the property for sale during
October 1996. On September 29, 1997, the Partnership sold the property to
a non-affiliated buyer and received net sales proceeds of $2,673,278.
During November 1997, the Partnership distributed $2,126,210 of the net
sales proceeds, of which $1,832,940 was distributed to the Investors, and
$293,270 was distributed to the John Hancock Limited Partner. The
Partnership retained $547,068 in working capital reserves.
5
<PAGE>
Item 1 - Business (continued)
On September 13, 1988, the Partnership acquired the J.C. Penney Credit
Operations Center, an office/service center located in Albuquerque, New
Mexico and 100% occupied by J.C. Penney. During the first quarter of 1995,
the General Partner negotiated an extension of J.C. Penney's lease through
June 2006 and listed the J.C. Penney Credit Operations Center for sale
during July 1995 based upon this lease extension and the then existing
favorable real estate market conditions in Albuquerque, New Mexico. On
December 29, 1995, the Partnership sold the J.C. Penney Credit Operations
Center to a non-affiliated buyer and received net sales proceeds of
$5,392,032. During February 1996, the Partnership distributed $5,315,526
of the net sales proceeds, of which $4,582,350 was distributed to the
Investors, and $733,176 was distributed to the John Hancock Limited
Partner. The Partnership retained $76,506 in working capital reserves.
Within the power accorded to the General Partner under the terms of the
Partnership Agreement, the General Partner contracted, effective as of
January 1, 1992, with Hancock Realty Investors Incorporated ("HRI"), a
wholly-owned, indirect subsidiary of John Hancock Mutual Life Insurance
Company ("John Hancock"), to assist the General Partner in the performance
of its management duties as enumerated in the Partnership Agreement.
Effective May 28, 1993, HRI subcontracted with John Hancock to assist HRI
in the performance of its duties as enumerated in the January 1, 1992
contract. The Partnership has not incurred any additional costs or
expenses as a result of these agreements. The General Partner is further
described in Item 10 ("Directors and Executive Officers of the
Partnership") of this Report.
Industry segment information has not been provided since the Partnership is
engaged in only one industry segment.
6
<PAGE>
Item 2 - Properties
At December 31, 1997, the Partnership held four properties in its
portfolio.
Marlboro Square Shopping Center
- -------------------------------
On February 17, 1987, the Partnership purchased the Marlboro Square
Shopping Center ("Marlboro Square"), located in Marlboro, Massachusetts,
from a non-affiliated seller. The property consists of two buildings. One
of the buildings contains 39,150 rentable square feet, and the other
building contains 3,000 rentable square feet, for a total of 42,150
rentable square feet of space.
For the year ended December 31, 1997, the average occupancy of Marlboro
Square was 65%. At December 31, 1997 Marlboro Square's occupancy was 67%.
Crossroads Square Shopping Center
- ---------------------------------
On November 20, 1987, the Partnership purchased the Crossroads Square
Shopping Center ("Crossroads Square"), located in Jacksonville, Florida,
from a non-affiliated seller. Crossroads Square contains 174,196 rentable
square feet of space with a total land area in excess of 18.5 acres.
For the year ended December 31, 1997, the average occupancy of Crossroads
Square was 95%. At December 31, 1997, Crossroads Square's occupancy was
95%.
Carnegie Center Office/Warehouse
- --------------------------------
On December 22, 1987, the Partnership purchased Carnegie Center, located in
Cincinnati, Ohio, from a non-affiliated seller. The property consists of
two buildings containing an aggregate of 128,059 rentable square feet with
a total land area of approximately 7.8 acres.
For the year ended December 31, 1997, the average occupancy of Carnegie
Center was 68%. At December 31, 1997, Carnegie Center's occupancy was 73%.
Warner Plaza Shopping Center
- ----------------------------
On February 25, 1988, the Partnership purchased 92,848 rentable square feet
of the Warner Plaza Shopping Center ("Warner Plaza") (which consists of a
total of 148,410 rentable square feet), located in Chandler, Arizona, from
a non-affiliated seller.
For the year ended December 31, 1997, average occupancy, for the portion of
Warner Plaza which is owned by the Partnership, was 99%. At December 31,
1997 occupancy for such portion was 98%.
The foregoing properties are described more fully in Items 1, 2 and 7 and
Note 4 to the Financial Statements included in Item 8 of this Report.
7
<PAGE>
Item 3 - Legal Proceedings
In February 1996, a putative class action complaint was filed in the
Superior Court in Essex County, New Jersey by a single investor in a
limited partnership affiliated with the Partnership. The complaint named
as defendants the Partnership, the General Partner, certain other
affiliates of the General Partner, and certain unnamed officers, directors,
employees and agents of the named defendants.
The plaintiff sought unspecified damages stemming from alleged
misrepresentations and omissions in the marketing and offering materials
associated with the Partnership and two limited partnerships affiliated
with the Partnership. The complaint alleged, among other things, that the
marketing materials for the Partnership and the affiliated limited
partnerships did not contain adequate risk disclosures.
On March 18, 1997, the court certified a class of investors who were
original purchasers in the Partnership. The certification order should not
be construed as suggesting that any member of the class is entitled to
recover, or will recover, any amount in the action.
The General Partner believes the allegations are totally without merit and
will continue to vigorously contest the action.
In September 1997, a complaint for damages was filed in the Superior Court
of the State of California for the County of Los Angeles by an investor in
John Hancock Realty Income Fund-II Limited Partnership ("RIF-II"), a
limited partnership affiliated with the Partnership. The complaint named
the General Partner as a defendant.
The plaintiff sought unspecified damages which allegedly arose from the
General Partner's refusal to provide, without reasonable precautions on
plaintiff's use of, a list of Investors in the Partnership and in RIF-II.
Plaintiff alleges that the General Partner's refusal unconditionally to
provide a list was a breach of contract and a breach of the General
Partner's fiduciary duty.
In 1998, the plaintiff amended the complaint to name the Partnership and
RIF-II as defendants. The defendants have filed demurrer motions, asking
that the complaint be dismissed at law. These motions are under
consideration.
There can be no assurances given as to the timing, costs or outcome of this
legal proceeding.
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.
8
<PAGE>
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 fourth quarter of 1997.
Part II
Item 5 - Market for the Partnership's Securities and Related Security
Holder Matters
(a) Market Information
The Partnership's outstanding securities consist of 91,647 Units originally
sold for $500 per Unit. The Units were offered and sold to the public
during the period from September 9, 1986 to September 9, 1987. No
established public market exists on which the Units may be traded.
Consequently, holders of Units may not be able to liquidate their
investments in the event of an emergency, or for any other reason.
Additionally, the assignment or other transfer of Units would be subject to
compliance with the minimum investment and suitability standards imposed by
the Partnership or by applicable law, including state "Blue Sky" laws.
(b) Number of Security Holders
Number of Number of Units
record holders as of outstanding as of
Title of Class December 31, 1997 December 31, 1997
- -------------- ------------------ ------------------
Units of
Investor Limited
Partnership Interests 3,995 91,647
(c) Dividend History and Restrictions
During the fiscal year ended December 31, 1997, the Partnership distributed
cash in the aggregate amount of $4,210,949 to the Partners. Of this
amount, $2,084,739 was generated from Distributable Cash from Operations
(defined in the Partnership Agreement), and $2,126,210 was generated from
Distributable Cash from Sales or Financings (defined in the Partnership
Agreement). During the fiscal year ended December 31, 1996, the
Partnership distributed cash in the aggregate amount of $7,485,429 to the
Partners. Of this amount, $2,169,903 was generated from Distributable Cash
from Operations, and $5,315,526 was generated from Distributable Cash from
Sales or Financings. These amounts were distributed in accordance with the
Partnership Agreement.
9
<PAGE>
Item 5 - Market for the Partnership's Securities and Related Security
Holder Matters (continued)
(c) Dividend History and Restrictions (continued)
The following table reflects aggregate cash distributions with respect to
Distributable Cash from Operations and Distributable Cash from Sales or
Financings made during 1996 and 1997:
<TABLE>
<CAPTION>
Amount Paid to
Date of Amount of Amount Paid to John Hancock Amount Paid Distribution
Distribution Distribution General Partner Limited Partner to Investors Per Unit
------------ ------------ -------------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
February 15, 1996* $5,894,105 $5,785 $733,176 $5,155,144 $56.25
May 15, 1996 548,956 5,489 - 546,467 5.93
August 15, 1996 521,184 5,212 - 515,972 5.63
November 15, 1996 521,184 5,212 - 515,972 5.63
February 14, 1997 521,185 5,212 - 515,973 5.63
May 15, 1997 521,184 5,212 - 515,972 5.63
August 15, 1997 521,185 5,212 - 515,973 5.63
November 14,1997* 2,647,395 5,212 293,270 2,348,913 25.63
* Includes Distributable Cash from Sales or Financings
</TABLE>
The source of future distributions from cash from operations is dependent
upon cash generated by the Partnership's investments and the use of working
capital reserves for leasing costs and capital expenditures. Distributions
of Cash from Operations during the year ended 1997 represent a 5% return on
Investors' Invested Capital. The General Partner anticipates that the
Partnership will make distributions of Cash from Operations in 1998
comparable to those made during both 1997 and 1996. For further discussion
on the financial condition and results of operations of the Partnership see
Item 7 of this Report.
10
<PAGE>
Item 6 - Selected Financial Data
The following table sets forth selected financial information regarding the
Partnership's financial position and operating results for the five year
period ended December 31, 1997. This information should be read in
conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Financial Statements and Notes
thereto, which are included in Items 7 and 8, respectively, of this Report.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Rental income $2,861,166 $2,614,989 $3,065,751 $3,618,826 $3,519,445
Interest income 107,469 171,767 173,286 110,982 71,557
(Loss)/gain on sale of property (5,321) - 128,539 - -
Property write-downs (668,520) (1,907,093) - (512,000)
Net income/(loss) 636,383 (851,115) 1,551,706 1,497,221 1,684,608
Net income/(loss) per Unit (b) 8.41 (5.60) 17.42 17.02 18.95
Ordinary tax income (a) 1,167,990 1,130,346 1,480,158 2,128,148 1,826,365
Ordinary tax income per Unit (b) 13.33 12.74 16.80 23.61 20.35
Cash distribution per Unit from
operations 22.52 23.44 25.00 25.00 28.75
Distributable cash from sales
or financings 2,126,210 - 5,315,526 - -
Cash distribution per Unit from sales or
financings 20.00 50.00 - - -
Cash and cash equivalents at
December 31 2,502,844 2,197,847 8,397,420 3,124,999 2,359,803
Total assets at December 31 21,765,879 25,375,190 33,605,444 34,325,239 35,150,707
</TABLE>
(a) The ordinary tax income for the Partnership was allocated as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
General Partner $11,680 $11,303 $14,802 $21,281 $18,263
John Hancock Limited Partner (65,297) (48,573) (74,321) (56,684) (56,684)
Investors 1,221,607 1,167,586 1,539,677 2,163,551 1,864,786
----------- ---------- ---------- ---------- ----------
Total $1,167,990 $1,130,346 $1,480,158 $2,128,148 $1,826,365
========== ========== ========== ========== ==========
</TABLE>
(b) The actual ordinary tax income/(loss) per Unit has not been presented
because the actual ordinary tax income/(loss) is allocated between tax-
exempt and tax-paying entities based upon the respective number of Units
held by each group at December 31, 1997, 1996, 1995, 1994 and 1993. The
ordinary tax income per Unit as presented was computed by dividing the
Investors' share of ordinary tax income by the number of Units outstanding
at December 31, 1997, 1996, 1995, 1994 and 1993, respectively.
11
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
- -------
During the offering period from September 9, 1986 to September 9, 1987, the
Partnership sold 91,647 Units representing gross proceeds (exclusive of the
John Hancock Limited Partner's contribution which was used to pay sales
commissions, acquisition fees and organizational and offering expenses) of
$45,823,500. The proceeds of the offering were used to acquire investment
properties and fund reserves. These properties are described more fully in
Item 2 and Note 4 to the Financial Statements included in Item 8 of this
Report.
Impact of Year 2000
- -------------------
The General Partner and John Hancock Mutual Life Insurance Company, the
General Partner's ultimate parent (together, John Hancock) along with the
Partnership, have developed a plan to modify or replace significant
portions of the Partnership's computer information and automated
technologies so that its systems will function properly with respect to the
dates in the year 2000 and thereafter. The Partnership presently believes
that with modifications to existing systems and conversions to new
technologies, the year 2000 will not pose significant operational problems
for its computer systems. However, if certain modifications and
conversions are not made, or are not completed timely, the year 2000 issue
could have an adverse impact on the operations of the Partnership.
John Hancock as early as 1994 had begun assessing, modifying and converting
the software related to its significant systems and has initiated formal
communications with its significant business partners and customers to
determine the extent to which John Hancock's interface systems are
vulnerable to those third parties' failure to remediate their own year 2000
issues. While John Hancock is developing alternative third party
processing arrangements as it deems appropriate, there is no guarantee that
the systems of other companies on which the Partnership's systems rely will
be converted timely or will not have an adverse effect on the Partnership's
systems.
The Partnership expects the project to be substantially complete by early
1999. This completion target was derived utilizing numerous assumptions of
future events, including availability of certain resources and other
factors. However, there can be no guarantee that this completion target
will be achieved.
Forward-looking Statements
- --------------------------
In addition to historical information, certain statements contained herein
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Those statements appear in a number of
places in this Report and include statements regarding the intent, belief
or expectations of the General Partner with respect to, among other things,
the prospective sale of Partnership properties, 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.
12
<PAGE>
Item 7 - 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 December 31, 1997, the Partnership had $2,502,844 in cash and cash
equivalents and $58,400 in restricted cash. The Partnership's cash and
cash equivalents increased by $304,997 from December 31, 1996 to December
31, 1997. This increase is due to retaining a portion of the net sales
proceeds from the 1300 North Dutton Avenue property and is partially offset
by the payment of leasing costs at its properties, as described below.
The Partnership has established a working capital reserve with a current
balance of approximately 4.5% of the offering proceeds. The General
Partner anticipates that such amount should be sufficient to satisfy the
Partnership's general liquidity requirements. Liquidity would, however, be
materially adversely affected by a significant reduction in revenues or
significant unanticipated operating costs or unanticipated capital
expenditures. If any or all of these events were to occur, to the extent
that working capital reserves would be insufficient to satisfy the cash
requirements of the Partnership, it is anticipated that additional funds
would be obtained through a further 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.
During 1997, cash from working capital reserves in the aggregate amount of
$224,098 was used for the payment of leasing costs incurred at the Carnegie
Center, Marlboro Square, Crossroads Square, and Warner Plaza properties.
The General Partner estimates that the Partnership will incur approximately
$389,000 of leasing costs at its properties during 1998. The General
Partner anticipates that the current balance in the working capital reserve
should be sufficient to pay such costs.
13
<>PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
During the years ended December 31, 1997 and 1996, approximately $115,000
and $75,000, respectively, of cash from operations was used to fund non-
recurring maintenance and repair expenses incurred at the Partnership's
properties. The General Partner estimates that the Partnership will incur
approximately $250,000 of non-recurring maintenance and repair expenses at
its properties during 1998. These 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.
The Partnership has incurred approximately $239,000 in legal expenses in
connection with the class action lawsuit (see Part II, Item 1 of this
Report). Of this amount, approximately $143,000 relates to the
Partnership's own defense and approximately $96,000 relates to the
indemnification of the General Partner and its Affiliates for their
defense. At the present time, the General Partner cannot estimate the
aggregate amount of legal expenses and indemnification claims to be
incurred and their impact on the Partnership's future operations.
Liquidity would, however, be materially adversely affected by a significant
increase in such legal expenses and related indemnification costs. If such
increases were to occur, to the extent that cash from operations and the
working capital reserve would be insufficient to satisfy the cash
requirements of the Partnership, it is anticipated that additional funds
would be obtained through a reduction of cash distributions to Investors,
bank loans, short-term loans from the General Partner or its Affiliates, or
the sale or financing of Partnership properties.
Cash in the aggregate amount of $4,210,949 was distributed to the Partners
during 1997. Of this amount, $2,084,739 was generated from Distributable
Cash from Operations, and $2,126,210 was generated from Distributable Cash
from Sales or Financings. These amounts were distributed in accordance
with the Partnership Agreement and were allocated as follows:
From Distributable From Distributable
Cash From Cash From
Operations Sales or Financings
---------- -------------------
Investors $2,063,891 $1,832,940
John Hancock Limited Partner - 293,270
General Partner 20,848 -
---------- -----------
Total $2,084,739 $2,126,210
========== ==========
The amount distributed to Investors from Distributable Cash from Operations
during 1997 represented a 5% annualized return on Investors' Invested
Capital.
14
<>PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
The following table summarizes the leasing activity and occupancy status at
the Partnership's properties during 1997:
<TABLE>
<CAPTION>
Marlboro Sq. Crossroads Sq. Carnegie Warner Pl.
Shopping Ctr. Shopping Ctr. Center Shopping Ctr.
------------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Square Feet 42,150 174,196 128,059 92,848
Occupancy at January 1, 1997 70% 93% 64% 100%
==== ==== ==== ====
New Leases 4% 2% 12% 0%
Lease Renewals 0% 7% 18% 3%
Leases Expired (1) 7% 0% 3% 2%
Occupancy at December 31, 1997 67% 95% 73% 98%
==== ==== ==== ====
Leases Scheduled to Expire During 1998 11% 11% 17% 7%
==== ==== ==== ====
Leases Scheduled to
Commence During 1998 16% 2% 0% 0%
==== ==== ==== ====
</TABLE>
(1) Includes leases terminated by the General Partner for non-payment of
rent.
A tenant at the Marlboro Square property that had taken occupancy of the
property's 3,000 square foot outparcel in October 1996 did not make rental
payments due beginning in December 1996. As a result, the General Partner
terminated the tenant's lease effective February 28, 1997. On July 15,
1997, the General Partner reached a settlement agreement with the former
tenant whereby the Partnership agreed to release the former tenant from all
past due and future rental obligations in exchange for a one-time payment
of $16,000, which amount has been received. The General Partner continues
to seek a replacement tenant for this space.
Effective November 1996, the amount of space occupied by the anchor tenant
at the Marlboro Square property declined from approximately 38% of the
property to approximately 28% of the property, in accordance with the terms
of its lease. Also during 1996, an existing tenant at Marlboro Square
whose lease was scheduled to expire during November 1996, expanded the
space it occupies at the property from 8% to 15%. However, due to
declining market conditions in the area where the property is located, the
current rental rate paid by the tenant per square foot is 53% lower than
its previous rental rate.
15
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
At December 31, 1997, Marlboro Square's occupancy was 67%. Effective
January, 1998, a new tenant took occupancy of 6,600 square feet, or 16% of
the property under a lease that will expire in January 1999, at which time
the tenant will have the option to renew its lease for a five-year term.
Approximately $20,000 in leasing costs will be incurred in connection with
this new lease.
During 1998, a lease representing 3,000 square feet, or 7% of the property,
is scheduled to expire. In addition, a tenant with a lease for
approximately 1,600 square feet, or 4% of the property, is delinquent in
rental payments due since February 1998 and the General Partner understands
that the tenant intends to vacate its space at the property. The General
Partner will use all legal remedies to obtain collection from this tenant
of all obligations due under its lease agreement.
The General Partner anticipates that absorption of available retail space
in the Marlboro, Massachusetts area will remain sluggish during 1998 based
upon both the lack of demand and the amount of available retail space in
the area. The General Partner will continue to offer competitive rental
rates and concessions in an effort to retain existing tenants as well as to
lease the remaining vacant space at the property.
During 1997, the General Partner secured leases with four new tenants to
occupy, in the aggregate, approximately 14,900 square feet, or 12%, of the
Carnegie Center property. In addition, the General Partner secured lease
renewals/extensions with two existing tenants at the property. The first
tenant, occupying approximately 19,500 square feet, or 15% of the property,
and whose lease was scheduled to expire in August 1998, extended the term
of its lease through July 2004. The General Partner also secured a lease
renewal with a tenant occupying approximately 3,600 square feet, or 3% of
the property, and whose lease was scheduled to expire in June 1997, through
June 2000. The Partnership incurred approximately $125,000 in leasing
costs in connection with these new and renewal lease transactions. One
tenant at this property who occupied approximately 2,900 square feet of
space under a lease that was scheduled to expire in May 1999 was evicted
from the property for non-payment of rent. The General Partner reached a
settlement agreement with this tenant whereby the tenant agreed to pay
approximately $2,800 in exchange for the General Partner terminating its
lease at the property. The General Partner is seeking a replacement tenant
to occupy this space.
At December 31, 1997, the Carnegie Center was 73% occupied. During 1998,
four leases representing approximately 19,500 square feet, or 17% of the
property are scheduled to expire. The Cincinnati industrial real estate
market, where the Carnegie Center is located, has an oversupply of
office/industrial space, which has resulted in a decline in rental rates
and an increase in vacancy rates. Because of these current market
conditions, rental rates and concessions will be priced aggressively in an
effort to retain existing tenants as well as secure new tenants at the
property.
16
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
During the second quarter of 1997, the anchor tenant at the Crossroads
Square property that occupies 49% of the property under a lease scheduled
to expire in August 2010 informed the General Partner of its intention to
vacate its space during the second half of 1998. As a result, the General
Partner has commenced efforts to find a replacement tenant for the space.
The General Partner does not believe that this situation will have a
materially adverse effect on the Partnership's liquidity.
One tenant at the Crossroads Square property has a clause in its lease that
may be exercisable if the anchor tenant described above ceases to operate
at the property and a replacement tenant is not secured. Such clause
provides that the tenant may i) reduce rental payments to the lesser of
the fixed monthly rent or 2% of gross receipts if the anchor ceases to
operate for 180 days, and ii) terminate lease obligations if the cessation
of operations continues for an additional six months and a substitute
tenant has not been provided. This tenant occupies approximately 10,500
square feet, of 6% of the property, under a lease that is scheduled to
expire in July 2005. The General Partner does not believe that any
reduction in rental payments or any possible lease termination that may
result from the anchor tenant vacating the property will have a materially
adverse affect on the Partnership's liquidity.
A tenant at the Crossroads Square property with a lease for approximately
12,500 square feet, or 7% of the property, filed for bankruptcy protection
under Chapter 11 of the U.S. Bankruptcy Code in March 1996. Prior to
filing for protection, this tenant discontinued satisfying its rental
obligations and subsequently requested a reduction in its rental payments
through the end of its lease, which is scheduled to expire in October 2003.
Given the then existing favorable real estate market conditions in the area
where Crossroads Square is located at that time, the General Partner did
not agree to a reduced rental amount. On March 11, 1997 the bankruptcy
court ordered that the tenant assume the lease at the property. The tenant
is current on all its rental obligations as of the date hereof.
During August 1996, a tenant at the Warner Plaza property that occupied 14%
of the rentable space at the property vacated its space prior to its lease
expiration. Under the terms of its lease agreement, the tenant is
obligated to pay both base rent and percentage rent, which is based on the
tenant's sales at the property. The Partnership continues to receive the
minimum rental payments due but percentage rent payments have not been
received because the tenant, having vacated its space, has no sales at the
property. Under the terms of its lease agreement, the tenant has an option
to terminate its lease obligations in April 1999. The General Partner has
commenced efforts to find a replacement tenant for this space and negotiate
a lease buyout with former tenant. In addition, one tenant at the property
that occupied approximately 1,600 square feet, or 2% of the property, had a
clause in its lease allowing it to terminate its lease if the tenant
described above were to vacate the property. This tenant terminated its
lease, which had been scheduled to expire in August 2000, effective
February 24, 1997.
17
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Liquidity and Capital Resources (continued)
- -------------------------------------------
Another tenant at the Warner Plaza property, with a lease for approximately
6,150 square feet, or 7% of the property, filed for bankruptcy protection
under Chapter 11 of the U.S. Bankruptcy Code in June 1997. During May
1997, this tenant discontinued satisfying its rental obligations. On
September 16, 1997, the bankruptcy court ordered the tenant to assume the
lease at the property and to pay such amounts required to become current on
all rental obligations by November 24, 1997. As of the date hereof, the
tenant is current on it rental obligations.
During the first quarter of 1997, the General Partner had the Warner Plaza
property independently appraised. Based upon the appraiser's investigation
and analysis, the property's market value was estimated to be approximately
$5,600,000. The carrying value of the Warner Plaza property at December
31, 1997 was evaluated in comparison to its estimated future undiscounted
cash flows and the independent appraisal. Based upon such evaluation, the
General Partner determined that the property's estimated future
undiscounted cash flows were expected to exceed its carrying value and,
therefore, a write-down in value was not required at December 31, 1997.
The Partnership's cumulative investment in the property, before accumulated
depreciation and write-downs, is approximately $7,900,000.
The General Partner evaluated the carrying value of the Marlboro Square
property of approximately $1,669,000 at December 31, 1997 in comparison to
its estimated future undiscounted cash flows and a recent internal
appraisal. Based upon such evaluation, the General Partner determined that
the property's estimated future undiscounted cash flows were not expected
to exceed its carrying value. Therefore a write-down of $668,520,
representing the difference between the property's carrying value and its
estimated current market value (and not its estimated future undiscounted
cash flows) was required as of December 31, 1997. The Partnership's
cumulative investment in the property, before accumulated depreciation and
write-downs, is approximately $5,254,000.
The General Partner also evaluated the carrying value of each of the
Partnership's other properties as of December 31, 1997 by comparing such
value to the respective property's future undiscounted cash flows and the
then most recent internal appraisal. Based on such evaluations, the
General Partner determined that no impairment in values exist with respect
to these properties and no additional write-downs were recorded as of
December 31, 1997. The General Partner will continue to conduct property
valuations, using internal or independent appraisals, in order to assist in
its evaluation of whether a permanent impairment in value exists on any of
the Partnership's properties.
18
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations
- ---------------------
Average occupancy for the Partnership's properties was as follows:
Years ended December 31,
1997 1996 1995
---- ---- ----
1300 North Dutton Avenue Office Complex N/A 25% 8%
Marlboro Square Shopping Center 65% 81% 73%
Crossroads Square Shopping Center 95% 93% 94%
Carnegie Center Office/Industrial 68% 61% 47%
Warner Plaza Shopping Center 99% 100% 99%
Results of Operations - 1997 compared with 1996
Net income for the year ended December 31, 1997 was $636,383 as compared to
a net loss of 851,115 in 1996. The 1997 results include a $668,520 write-
down of the value of the Marlboro Square property and a $5,321 non-
recurring loss resulting from the sale of the 1300 North Dutton Avenue
property. Included in the results for 1996 are write-downs in the values
of two of the Partnership's properties in the aggregate amount of
$1,907,093. Excluding these amounts, net income increased by 23% in 1997
as compared to 1996 due to increases in the performance of the Carnegie
Center, Crossroads Square, and 1300 North Dutton Avenue properties. These
increases were partially offset by declines in the performance of the
Marlboro Square and Warner Plaza properties, and by legal fees incurred in
connection with the class action lawsuit (described in Item 3 of Part l of
this Report).
Rental income for the year ended December 31, 1997 increased by $246,177,
or 9%, as compared to 1996. This increase is primarily due to an increase
in rental income at the 1300 North Dutton Avenue property (which property
was sold by the Partnership on September 29, 1997). In addition, increases
in rental income at the Crossroads Square and Carnegie Center properties
were partially offset by decreases in rental income at the Marlboro Square
and Warner Plaza properties. Rental income increased at the 1300 North
Dutton Avenue and Carnegie Center properties due to increases in average
occupancy at the properties. Rental income increased at the Crossroads
Square property primarily because a tenant that was delinquent in making
some of its rental payments during 1996 satisfied its past due 1996 rental
payments during 1997 as well as made all of its scheduled 1997 rental
payments.
Rental income decreased by 9% at Warner Plaza primarily due to a decline in
percentage rent at the property which resulted from one of the tenants at
the property vacating its space, as described above. Rental income at
Marlboro Square decreased by 8% between periods primarily due to a decline
in average occupancy. Rental income also decreased at Marlboro Square
because rental rates on leases executed since 1996 are less than rental
rates contracted under prior leases.
19
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations
- ---------------------
Interest income for the year ended December 31, 1997 decreased by $64,298,
or 37%, as compared to 1996. This decrease was primarily due to the
interest earned during the first quarter of 1996 on the net sales proceeds
received from the sale of J.C. Penney, which was sold on December 29, 1995.
The Partnership distributed the majority of such net sales proceeds in
February 1996. This decrease was partially offset by interest earned on
the net sales proceeds received from the sale of the 1300 North Dutton
Avenue property. The Partnership distributed a substantial portion of such
net sales proceeds in November 1997. Interest income declined further due
to a decrease in the interest earned on the Partnership's working capital
reserves as a result of a reduced amount of such reserves through most of
1997.
The Partnership's share of property operating expenses for the year ended
December 31, 1997 increased by $84,697, or 27%, as compared to 1996
primarily due to increases in the Partnership's share of property operating
expenses at the Crossroads Square, Marlboro Square and 1300 North Dutton
Avenue properties. These increases were partially offset by decreases in
the Partnership's share of property operating expenses at the Carnegie
Center and Warner Plaza properties.
The Partnership's share of property operating expenses at the Crossroads
Square property increased in 1997 as compared to 1996, primarily due to
legal fees paid in connection with the collection of past due rent from a
tenant that had been in bankruptcy. The property incurred approximately
$15,000 and $20,000 in non-recurring maintenance and repair expenses in
1997 and 1996, respectively.
The Partnership's share of property operating expenses at the Marlboro
Square property was consistent between 1997 and 1996. However, non-
recurring maintenance and repair expenses of approximately $2,000 and
$9,000 were incurred at the property during 1997 and 1996, respectively.
Excluding these amounts, the Partnership's share of property operating
expenses at the property increased by 17% in 1997 as compared to 1996.
This increase is primarily due to a decrease in occupancy at the property,
and therefore, decreases in tenant reimbursements for such expenses.
The Partnership's share of property operating expenses at the Carnegie
Center property decreased during 1997 by 34% as compared to 1996. The
property incurred approximately $4,000 and $25,000 of non-recurring
maintenance and repair expenses during 1997 and 1996, respectively.
Excluding these amounts, the Partnership's share of property operating
decreased by 19% between years. This decrease is primarily due to a
successful appeal of the property's 1996 assessed value that resulted in a
refund of a portion that year's real estate taxes during 1997. In
addition, an increase in occupancy at the property resulted in an increase
in tenant reimbursements for such expenses.
20
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
- ---------------------------------
The Partnership's share of property operating expenses increased at the
Warner Plaza property by 120% in 1997 as compared to 1996 due to non-
recurring maintenance and repair expenses. The property incurred
approximately $75,000 and $21,000 of such expenses during 1997 and 1996,
respectively. Excluding these amounts, the Partnership's share of property
operating expenses at the property was consistent between periods.
The Partnership's share of property operating expenses at the 1300 North
Dutton Avenue property increased by 33% in 1997 as compared to 1996. The
property incurred approximately $20,000 of non-recurring maintenance and
repair expenses during 1997. Excluding this amount, the Partnership's
share of property operating expenses was consistent between periods.
General and administrative expenses for the year ended December 31, 1997
increased by $24,031, or 7%, as compared to 1996. The increase in 1997 as
compared to 1996 is primarily due to legal fees incurred by the Partnership
in connection with the class action complaint (See Item 3 Part l of this
Report). Excluding such legal fees, general and administrative expenses
were consistent between years.
Amortization of deferred expenses for the year ended December 31, 1997
decreased by $75,223, or 36%, as compared to 1996. This decrease is
primarily due to the write-down in carrying values of two of the
Partnership's properties during 1996. The net book value of the properties
plus any unamortized deferred expenses relating to the properties at the
time the properties were written down were combined to arrive at each
property's carrying value (estimated market value) after its write-down.
Accordingly, some deferred expense amounts that were amortized during 1996
are now included in the property's carrying value and were depreciated
during 1997. This decrease was partially offset by the amortization of
leasing costs incurred at the Crossroads Square property in 1996 and 1997,
and at the Carnegie Center property in 1997. In addition, included in
amortization expense during the period in 1997 is a write-off of
approximately $9,000 of unamortized leasing costs relating to the tenant's
lease at Marlboro Square that was terminated in February 1997 (as described
above).
Depreciation expense for the year ended December 31, 1997 decreased by
$104,429, or 14%, as compared to 1996. This decrease is primarily due to
the reclassification of the 1300 North Dutton Avenue property as "Property
Held for Sale" during the fourth quarter of 1996. Accordingly, no
depreciation was recorded on this property during 1997. In addition,
depreciation expense declined further between periods due the write-down of
two of the Partnership's properties during 1996.
As referred to above, during 1997, the General Partner determined that the
value of the Marlboro Square property had been impaired. As a result, the
Partnership reduced the carrying amount of the property by $668,520 and
this amount was charged directly to operations. During 1996, the General
Partner determined that the values of the Carnegie Center and Marlboro
Square properties had been impaired. As a result, the Partnership reduced
the carrying amount of the Carnegie Center and Marlboro Square properties
by $1,247,093 and $660,000, respectively, and these amounts were charged
directly to operations.
The General Partner believes that inflation has had no significant impact
on the Partnership's operations during the last three fiscal years, and the
General Partner anticipates that inflation will not have a significant
impact during 1998.
21
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
- ---------------------------------
Results of Operations - 1996 compared with 1995
The Partnership generated a net loss of $851,115 for the year ended
December 31, 1996 as compared to net income of $1,551,706 during the year
ended December 31, 1995. Included in the results for 1996 are write-downs
in the value of two of the Partnership's properties in the aggregate amount
of $1,907,093. Included in the results for 1995 is a non-recurring gain in
the amount of $128,539 resulting from the sale of the J.C. Penney Credit
Operations Center (J.C. "Penney") in December 1995 and approximately
$438,000 of net income generated at the J.C. Penney property during 1995.
Also, the Partnership's 1995 results reflect the collection of a one time
payment of approximately $82,000 made by the former tenant at the 1300
North Dutton Avenue property because of alterations it made to the property
without the consent of the General Partner, as required under the terms of
its lease agreement. Excluding the amounts described above, the
Partnership's net income increased by 17% during 1996 as compared to 1995
as a result of increases in the performance of the Carnegie Center, Warner
Plaza and 1300 North Dutton Avenue properties. Partially offsetting these
increases were a decrease in the performance of the Marlboro Square
property and increases in the Partnership's general and administrative
expenses and amortization of lease acquisition costs.
Rental income for the year ended December 31, 1996 decreased by $450,762,
or 15%, as compared to 1995. This decrease was primarily due to the sale
of J.C. Penney. Excluding the rental income generated by J.C. Penney
during 1995, rental income increased by 6% during 1996 as compared to 1995.
This increase is primarily due to increases in rental income at the 1300
North Dutton Avenue and Carnegie Center properties that were partially
offset by a decrease in rental income at the Marlboro Square property.
Rental income increased by 190% and 35% between periods at the 1300 North
Dutton Avenue and Carnegie Center properties, respectively, primarily due
to an increase in average occupancy at the properties. Although average
occupancy increased between periods at Marlboro Square, rental income
decreased by 18% primarily due to a significant reduction in the rental
rate paid by the anchor tenant at the property. Rental income also
decreased at Marlboro Square because rental rates on leases executed during
1995 and 1996 were less than the rates contracted and paid by previous
tenants at the property. Rental income at the Crossroads Square and Warner
Plaza properties was consistent between periods.
Depreciation expense for the year ended December 31, 1996 decreased by
$179,535, or 19%, as compared to the same period in 1995. This decrease is
primarily due to the sale of J.C. Penney.
The Partnership's share of property operating expenses for the year ended
December 31, 1996 decreased by $179,985, or 37%, as compared to the same
period in 1995. This decrease is primarily due to decreases in the
Partnership's share of operating expenses at the Carnegie Center and Warner
Plaza properties partially offset by Partnership's share of property
operating expenses at the 1300 North Dutton Avenue property.
22
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
- ---------------------------------
Property operating expenses at the Carnegie Center property decreased by
51% as compared to 1995. The property incurred approximately $25,000 and
$87,000 of non-recurring maintenance and repair expenses during 1996 and
1995, respectively. Excluding these amounts, the Partnership's share of
property operating expenses at Carnegie Center decreased by 39%, as a
result of an increase in average occupancy at the property and, therefore,
an increase in tenant reimbursements for such expenses.
The Partnership's share of property operating expenses decreased at the
Warner Plaza property by 57% in 1996 as compared to 1995. The property
incurred approximately $21,000 and $54,000 of non-recurring maintenance and
repair expenses during 1996 and 1995, respectively. Excluding these
amounts, the Partnership's share of property operating expenses at Warner
Plaza decreased by 53% in 1996 as compared to 1995. This decrease
primarily resulted because the accrual of tenant reimbursements due for
1995 and payable in 1996 was understated. Therefore, when the actual 1995
reimbursements were collected in 1996, it had the effect of reducing the
Partnership's share of property operating expenses in 1996.
The Partnership's share of property operating expenses at the Crossroads
Square property was consistent between periods. The property incurred
approximately $20,000 and $22,000 of non-recurring maintenance and repair
expenses during 1996 and 1995, respectively.
The Partnership's share of property operating expenses at the 1300 North
Dutton Avenue property increased by 7% in 1996 as compared to 1995
primarily due to the fact that the property was unoccupied during 1995 and
only minor routine maintenance and repair expenses were incurred during
that time. A new tenant took occupancy of the property in October 1996.
General and administrative expenses for the year ended December 31, 1996
increased by $123,770, or 52%, primarily due to legal fees incurred by the
Partnership in connection with the class action complaint filed against the
Partnership during February 1996. (For further information regarding the
class action complaint, see Item 3-Legal Proceedings). Excluding this
amount, general and administrative expenses increased by 6% between years.
This increase is primarily due an increase in the time required to be
expended by the General Partner in connection with its efforts to secure a
tenant at the 1300 North Dutton Avenue property and to secure new leases at
the Marlboro Square and Carnegie Center properties.
Amortization of deferred expenses for the year ended December 31, 1996
increased by $75,970, or 57%, as compared to 1995 primarily due to the
amortization of lease acquisition costs related to leasing activity which
occurred at the Partnership's properties during both 1996 and 1995.
Management fee expense, which is equal to 3.5% of Cash from Operations,
decreased by $7,320, or 9%, during 1996 as compared to 1995. This decrease
was due to a decline in Cash from Operations between periods primarily
resulting from the sale of J.C. Penney.
23
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations (continued)
- ---------------------------------
As referred to above, during 1996, the General Partner determined that the
values of the Carnegie Center and Marlboro Square Shopping Center
properties had been impaired. As a result, the Partnership reduced the
carrying amount of the Carnegie Center and Marlboro Square properties by
$1,247,093 and $660,000, respectively, and these amounts were charged
directly to operations.
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>
Years Ended December 31,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities (a) $2,066,766 $2,239,462 $2,431,249 $3,118,434 $2,853,183
Net change in operating assets
and liabilities (a) 45,830 (201,460) 77,507 7,210 17,432
---------- ---------- ---------- ---------- ----------
Cash provided by operations (a) 2,112,596 2,038,002 2,508,756 3,125,644 2,870,615
Increase in working capital reserves (39,893) - (194,438) (811,326) (324,865)
Add: Accrual basis Partnership
management fee 75,176 76,619 83,939 83,939 89,101
---------- ---------- ---------- ---------- ----------
Cash from operations (b) 2,147,879 2,114,621 2,398,257 2,398,257 2,634,851
Decrease in working capital reserves - 74,507 - - -
Less: Accrual basis Partnership
management fee (75,176) (76,619) (83,939) (83,939) (89,101)
---------- ---------- ---------- ---------- ----------
Distributable cash from $2,072,703 $2,112,509 $2,314,318 $2,314,318 $2,545,750
operations (b) ========== ========== ========== ========== ==========
Allocation to General Partner $20,727 $21,125 $23,143 $23,143 $25,458
Allocation to John Hancock
Limited Partner - - - - -
Allocation to Investors 2,051,976 2,091,384 2,291,175 2,291,175 2,520,292
--------- --------- --------- --------- ---------
Distributable cash from operations (b) $2,072,703 $2,112,509 $2,314,318 $2,314,318 $2,545,750
========== ========== ========== ========== ==========
</TABLE>
24
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Cash Flow (continued)
- ----------
(a) Net cash provided by operating activities, net change in operating
assets and liabilities, and cash provided by operations are as
calculated in the Statements of Cash Flows included in Item 8 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.
On February 13, 1998, the Partnership made a cash distribution from
Distributable Cash from Operations to the Investors in the amount of
$504,059. This amount represents a 5% annualized return on Investors'
remaining Invested Capital. The General Partner anticipates that the
Partnership's Cash from Operations will be sufficient to make cash
distributions in 1998 comparable to those made in 1997.
Item 8 - Financial Statements and Supplementary Data
The response to this Item appears beginning on page F-1 of this Report.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No events requiring disclosure under this Item have occurred.
Part III
Item 10 - Directors and Executive Officers of the Partnership
(a-b) Identification of Directors and Executive Officers
By virtue of its organization as a limited partnership, the Partnership has
no directors or executive officers. As indicated in Item 1 of this Report,
the General Partner of the Partnership is John Hancock Realty Equities,
Inc., a Delaware corporation. Pursuant to the terms of the Partnership
Agreement, the General Partner is solely responsible for the management of
the Partnership's business. The names and ages of the directors and
executive officers of the General Partner are as follows:
Name Title Age
----- ----- ----
William M. Fitzgerald President and Director 54
Malcolm G. Pittman, III Director 46
Susan M. Shephard Director 45
Richard E. Frank Treasurer (Chief Accounting Officer) 36
The term of office and other positions held by the persons listed above
appear in paragraph (e) below.
25
<PAGE>
Item 10 - Directors and Executive Officers of the Partnership (continued)
(c) Identification of certain significant persons
The General Partner is responsible for the identification, analysis,
purchase, operation, and disposal of specific Partnership real estate
investments. The General Partner has established a Real Estate Investment
Committee utilizing senior real estate personnel of John Hancock and its
Affiliates (defined in the Partnership Agreement) to review each proposed
investment. The members of the Real Estate Investment Committee are
designated each year at the annual meeting of the Board of Directors of
John Hancock Realty Equities, Inc. The current members of the committee
are as follows:
Name Title Age
----- ----- ----
Edward P. Dowd Senior Vice President of 55
John Hancock's Real Estate
Investment Group
Kevin McGuire Vice President of John Hancock's 51
Real Estate Investment Group,
President of John Hancock Realty
Services Corp. and subsidiaries
Stephen Kindl Senior Investment Officer of 40
John Hancock's Real Estate
Investment Group, Assistant Vice
President of John Hancock Realty
Equities, Inc.
(d) Family relationships
There exist no family relationships among any of the foregoing directors or
officers of the General Partner.
(e) Business experience
William M. Fitzgerald (age 54) joined John Hancock in 1968. He has been
President and a Director of the General Partner, and a Senior Investment
Officer of John Hancock, since June 1993 and a Managing Director of Hancock
Realty Investors Incorporated since November 1991. His term as a Director
of the General Partner expires in May 1998. From 1987 to 1991, Mr.
Fitzgerald was a Senior Vice President of John Hancock Properties, Inc.
Prior to that time, he held a number of positions including Senior Real
Estate Management Officer and Real Estate Management Officer of John
Hancock. He holds an M.B.A. from Boston University and an A.B. from Boston
College.
26
<PAGE>
Item 10 - Directors and Executive Officers of the Partnership (continued)
e) Business experience (continued)
Malcolm G. Pittman III (age 46) joined John Hancock in 1986 as an Assistant
Counsel. He has been a Director of the General Partner since November
1991. His term as a Director of the General Partner expires in May 1998.
Mr. Pittman has been a Counsel of John Hancock's Real Estate Law Division
since 1993. From 1989 to 1993, he was an Associate Counsel of John
Hancock. He holds a J.D. from Yale Law School and a B.A. from Oberlin
College.
Susan M. Shephard (age 45) joined John Hancock in 1985 as an Attorney. She
has been a Director of the General Partner since November 1991. Her term
as a Director of the General Partner expires in May 1998. Ms. Shephard has
been a Mortgage Investment Officer of John Hancock since 1991. From 1988
to 1991, she was an Associate Counsel of John Hancock and from 1987 to
1988, she was an Assistant Counsel of John Hancock. She holds a J.D. from
Georgetown University Law Center and a B.A. from the University of Rhode
Island.
Richard E. Frank (age 36) joined John Hancock in 1983. He has been
Treasurer of the General Partner since June 1993. Mr. Frank has been an
Associate Investment Officer of John Hancock since January 1995. From 1993
to 1995, he was a Senior Financial Administrator of John Hancock; from 1991
to 1993, he was an Associate of Hancock Realty Investors, Incorporated;
from 1990 to 1991 he held the position of Assistant Treasurer of John
Hancock Realty Services Corp. He holds a B.S. from Stonehill College.
Edward P. Dowd (age 55) joined John Hancock in 1970. He has been a
Director of Hancock Realty Investors, Incorporated since 1991, and a
Director of John Hancock Realty Services Corp. and subsidiaries and John
Hancock Property Investors Corp. since 1987. Mr. Dowd has been a Senior
Vice President of John Hancock since 1991. From 1989 to 1990, he was a
Vice President of John Hancock and from 1986 to 1989, he was a Second Vice
President of John Hancock. Prior to that time, he held a number of
positions including Senior Real Estate Investment Officer and Real Estate
Investment Officer of John Hancock. From July 1982 to May 1986, Mr. Dowd
was President of the General Partner. He holds an A.B. from Boston
College.
Kevin McGuire (age 51) joined John Hancock in 1968. He has been a Vice
President of John Hancock since June 1993 and President of John Hancock
Realty Services Corp. and subsidiaries since July 1993. He has been a
Managing Director and a Director of Hancock Realty Investors Incorporated
since 1991, and a Director of John Hancock Property Investors Corp. since
1987. Mr. McGuire served as an interim basis President of the General
Partner from May 1991 to November 1991 and was President of John Hancock
Properties, Inc. from 1987 to 1991. Prior to that time, he held a number
of positions including Second Vice President, Senior Real Estate Investment
Officer and Real Estate Investment Officer of John Hancock. He holds an
M.B.A. from Babson College and an A.B. from Boston College.
Stephen Kindl (age 40), joined John Hancock in 1995 as a Senior Real Estate
Investment Officer. Prior to joining John Hancock, he held a number of
positions with Aetna Real Estate Investment, Inc., including Managing
Director and Director. He holds an M.B.A. from the University of Hartford
and a B.S. from the University of Connecticut.
27
<PAGE>
Item 10 - Directors and Executive Officers of the Partnership (continued)
(f) Involvement in certain legal proceedings
None
Compliance with Section 16(a) of the Exchange Act
Under Section 16(a) of the Securities Exchange Act of 1934, as amended, the
General Partner's directors and executive officers, as well as any person
holding more than ten percent of the Units, are required to report their
initial ownership of Units and any subsequent change in such ownership to
the Securities and Exchange Commission and the Partnership (such
requirements hereinafter referred to as "Section 16(a) filing
requirements"). Specific time deadlines for Section 16(a) filing
requirements have been established.
To the Partnership's knowledge, no officer or director of the General
Partner has or had an ownership interest in the Partnership at any time
during the 1996 fiscal year or as of the date hereof. In addition, to the
Partnership's knowledge, the Commonwealth of Massachusetts Pension Reserve
Investment Trust Fund, the greater than ten percent holder of the Units,
was not required to file any reports relating to Section 16(a) filing
requirements during the 1997 fiscal year.
Item 11 - Executive Compensation
None of the officers or directors of the General Partner or any of the Real
Estate Investment Committee members referred to in Item 10(c) receive any
current or proposed direct remuneration from the Partnership in their
capacities as officers, directors or Real Estate Investment Committee
members, pursuant to any standard arrangements or otherwise, nor is any
such remuneration currently proposed. In addition, the Partnership has not
given and does not propose to give any options, warrants or rights,
including stock appreciation rights, to any such persons in such
capacities. No long-term incentive plan exists with any such persons in
such capacities and no remuneration plan or arrangement exists with any
such persons resulting from resignation, retirement or any other
termination. Therefore, tables relating to these topics have been omitted.
Compensation Committee Interlocks and Insider Participation:
The Partnership did not have a Compensation Committee in 1997 and does not
currently have such a committee. During the 1997 fiscal year, no current
or former officer or employee of the General Partner or its Affiliates
participated in deliberations regarding the General Partner's or its
Affiliates' compensation as it relates to the Partnership.
28
<PAGE>
Item 12 - Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners
No person or group, including the General Partner, is known by the
General Partner to own beneficially more than 5% of the Partnership's
91,647 outstanding Units as of December 31, 1997, except as follows:
Title Amount and Percent
of Name and Address Nature of of
Class of Beneficial Owner Beneficial Ownership Class
------ ------------------ -------------------- ------
Units of The Commonwealth of 10,000 Units 10.91%
Investor Massachusetts Pension owned directly
Limited Reserve Investment
Partnership Trust Fund
Interests 125 Summer Street,
10th Floor
Boston, MA
(b) Security ownership of management
By virtue of its organization as a Limited Partnership, the
Partnership has no officers or directors. Neither the General Partner
nor any officer or director of the General Partner possesses the right
to acquire a beneficial ownership of Units.
(c) Changes in control
The Partnership does not know of any arrangements the operations of
which may at a subsequent date result in a change of control of the
Partnership.
Item 13 - Certain Relationships and Related Transactions
See Note 6 of the Notes to the Financial Statements included in Item 8 of
this Report for a description of certain transactions and related amounts
paid by the Partnership to the General Partner and its Affiliates (as
defined in the Partnership Agreement) during the years ended 1997, 1996 and
1995.
In accordance with the terms of the Partnership Agreement, the General
Partner and/or its Affiliates are entitled to the following types of
compensation, fees, profits/(losses), expense reimbursements and
distributions:
The General Partner shall receive a Partnership Management Fee (defined in
the Partnership Agreement) for managing the normal operations of the
Partnership in an amount equal to 3.5% of cash flow from operations. The
General Partner was paid a Partnership Management Fee totaling $75,176,
$76,619 and $83,939 during the years ended December 31, 1997, 1996 and
1995, respectively.
29
<PAGE>
Item 13 - Certain Relationships and Related Transactions (continued)
An Affiliate of the General Partner is entitled to receive a Property
Management Fee (defined in the Partnership Agreement) for providing
property management services to the Partnership's properties. The
Partnership is obligated to pay a fee equal to the amount customarily
charged in arms-length transactions by other entities rendering services in
an area where the Partnership's properties are located, but in no event may
such fees exceed 6% of the gross receipts of any property under management.
To date, no Affiliate of the General Partner has provided property
management services to the Partnership's properties; therefore, the
Partnership did not pay any such fees during the years ended December 31,
1997, 1996 or 1995.
The General Partner and its Affiliates are entitled to receive
reimbursement for expenses relating to the administrative services
necessary to the prudent operation of the Partnership, such as legal,
accounting, computer, transfer agent and other services. The amounts
charged to the Partnership for such administrative services may not exceed
the lesser of the General Partner's or such Affiliates' costs or 90% of
those which the Partnership would be required to pay to independent parties
for comparable services in the same or comparable geographic locations.
The Partnership reimbursed the General Partner for $252,103, $171,710 and
$151,675 of such expenses during the years ended December 31, 1997, 1996
and 1995, respectively.
Upon disposition of any property, the General Partner is entitled to a
Subordinated Disposition Fee (defined in the Partnership Agreement) in the
amount of 3% of the sales price of each property sold. However, no such
Subordinated Disposition Fees may be paid to the General Partner unless and
until the Investors and the John Hancock Limited Partner have received a
return of their total Invested Capital (defined in the Partnership
Agreement) plus the Cumulative Return on Investment (defined in the
Partnership Agreement) of 12% per annum for all fiscal years ended prior to
the date of payment. Such Subordinated Disposition Fees may not exceed 50%
of the competitive real estate commission in the area where the property is
located or, together with any other brokerage commission payable to or by
any other person, exceed 6% of the contract sales price of such property.
The Partnership did not pay any such fees to the General Partner during the
years ended December 31, 1997, 1996 or 1995.
A share of the Partnership's Distributable Cash from Operations (defined in
the Partnership Agreement) may be distributed to the General Partner and
the John Hancock Limited Partner. Distributable Cash from Operations is
distributable 1% to the General Partner and the remaining 99% among the
Investors, the General Partner and the John Hancock Limited Partner, in
accordance with Section 8 of the Partnership Agreement (described more
fully in Note 3 to the Financial Statements included in Item 8 of this
Report). The General Partner's Share of Distributable Cash from Operations
was $20,727, $21,125 and $23,143 for the years ended December 31, 1997,
1996 and 1995, respectively. In accordance with the Partnership Agreement,
the John Hancock Limited Partner was not entitled to receive any such
distributions during the 1997, 1996 and 1995 fiscal years.
30
<PAGE>
Item 13 - Certain Relationships and Related Transactions (continued)
A share of Cash from Sales or Financings (defined in the Partnership
Agreement) may be distributable to the General Partner and the John Hancock
Limited Partner. Cash from Sales or Financings are distributable in
accordance with Section 8 of the Partnership Agreement (described more
fully in Note 3 to the Financial Statements included in Item 8 of this
Report). The John Hancock Limited Partner's share of Cash from Sales or
Financings was $293,270, $0 and $733,176 during the years ended December
31, 1997, 1996 and 1995, respectively. In accordance with the Partnership
Agreement, the General Partner was not entitled to receive any such
distributions during the years ended 1997, 1996 or 1995.
A share of the Partnership's profits or losses for tax purposes (defined in
the Partnership Agreement) is allocable to the General Partner and the John
Hancock Limited Partner. Such allocation generally approximates, insofar
as practicable, their percentage share of Distributable Cash from
Operations and of Cash from Sales or Financings. The General Partner is
generally allocated 1% of the Partnership's losses for tax purposes, while
the John Hancock Limited Partner is allocated tax losses associated with
the Partnership's sales commissions funded by the John Hancock Limited
Partner's Capital Contributions. The General Partner's share of such
profits or losses were profits of $11,680, $11,303 and $14,802 during the
years ended December 31, 1997, 1996 and 1995, respectively. The John
Hancock Limited Partner's share of such profits or losses were losses of
$65,297, $48,573 and $74,321 during the years ended December 31, 1997, 1996
and 1995 respectively.
The following table reflects compensation, fees, profits/(losses), expense
reimbursements or distributions from the Partnership to the General Partner
and/or its Affiliates:
Years Ended December 31,
1997 1996 1995
----- ----- -----
Partnership management
fee expense $75,176 $76,619 $83,939
Reimbursement for operating
expenses 252,103 171,710 151,675
General Partner's share of
Distributable Cash from Operations 20,727 21,125 23,143
John Hancock Limited Partner's share
of Cash from Sales or Financings 293,270 - 733,176
General Partner's share of profits
for tax purposes 11,680 11,303 14,802
John Hancock Limited Partner's share
of losses for tax purposes (65,297) (48,573) (74,321)
The Partnership provides indemnification to the General Partner and its
Affiliates for acts or omissions of the General Partner or its Affiliates
performed in good faith on behalf of the Partnership, subject to certain
specified exceptions, as described in the following paragraph.
31
<PAGE>
Item 13 - Certain Relationships and Related Transactions (continued)
The Partnership Agreement provides that 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 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, except
under certain specified circumstances.
The General Partner believes that this indemnification applies to costs
incurred in the class action complaint described in Item 3 of Part I of
this Report. Accordingly, the Partnership indemnified the General Partner
and its Affiliates for costs of $54,092, $41,475, and $0 relating to the
class action complaint in the years ended December 31, 1997, 1996 and 1995,
respectively.
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) and (2) - Listed on Index to Financial Statements and Financial
Statement Schedules.
(3) - Listing of Exhibits
Exhibit Number Page Number or
Under Incorporation by
Regulation S-K Description Reference
- -------------- ----------- ---------
4 Instruments defining the rights
of security holders
4.1 Amended Agreement of Limited Exhibit A to the
Partnership* final Prospectus
dated September 4, 1986
filed under the
Partnership's Form S-11
Registration Statement
(File 33-6451)
4.2 The Seventeenth Amendment and Exhibit 4.2 to the
Restatement of Certificate of Partnership's Report
Limited Partnership filed with on Form 10-K dated
the Massachusetts Secretary of December 31, 1987
State on September 15, 1987* (File 0-15680)
32
<PAGE>
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
10 Material contracts and other documents
10.1 Form of Escrow Agreement* Exhibit 10.1 to
the Partnership's
Form S-11
Registration Statement
(File 33-6451)
10.2 Letter from John Hancock Exhibit 10.1 to
Subsidiaries, Inc. containing the Partnership's
undertaking as to the net Form S-11
worth of the General Partner* Registration Statement
(File 33-6451)
10.3 Documents relating to
1300 North Dutton Avenue
(a) Agreement of Purchase and Sale Exhibit 10.3(a) to
dated September 30, 1986, and the Post-Effective
First Amendment to Agreement of Amendment No. 1 to
Purchase and Sale dated the Partnership's
October 22, 1986, between Form S-11
Park Campus Associates and Registration Statement
John Hancock Realty Income Fund (File 33-6451)
Limited Partnership*
(b) Lease dated June 12, 1986, and Exhibit 10.3(b) to
First Amendment to Lease dated the Post-Effective
June 12, 1986, between Amendment No. 1 to
Park Campus Associates and the Partnership's
Mag Media Ltd.* Form S-11
Registration Statement
(File 33-6451)
(c) Amended and Restated Statements Exhibit 10.3(c) to
of Development Policy and the Post-Effective
Declarations of Restrictions of Amendment No. 1 to
Santa Rosa Business Park dated the Partnership's
June 5, 1986* Form S-11
Registration Statement
(File 33-6451)
(d) Declaration of Covenants, Exhibit 10.3(d) to
Conditions and Restrictions of the Post-Effective
Park Campus dated October 2, Amendment No. 1 to
1986* the Partnership's
Form S-11
Registration Statement
(File 33-6451)
33
<PAGE>
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
(e) Purchase and Sale Agreement Exhibit 1 to the
between John Hancock Realty Partnership's Report
Income Fund Limited Partnership on Form 8-K dated
and GHB Holdings, Inc. dated September 29, 1997
June 18, 1997 (File 0-15680)
10.4 Documents relating to
Marlboro Square Shopping Center
(a) Agreement of Purchase and Sale Exhibit 10.4(a) to
dated January 17, 1987, between the Post-Effective
Marlborough GLR Realty Trust Amendment No. 2 to the
and John Hancock Realty Equities, Partnership's Form S-11
Inc.* Registration Statement
(File 33-6451)
10.5 Documents relating to
Crossroads Square Shopping Center
(a) Agreement of Purchase and Sale Exhibit 1 to the
dated November 20, 1987, between Partnership's
Crossroads Square Limited Report on
Partnership and John Hancock Form 8-K dated
Realty Income Fund Limited December 8, 1987
Partnership* (File 0-15680)
(b) Limited Warranty Deed dated Exhibit 2 to the
November 20, 1987, relating Partnership's
to Crossroads Square Shopping Report on
Center* Form 8-K dated
December 8, 1987
(File 0-15680)
(c) Master Lease Agreement Exhibit 3 to the
dated November 18, 1987, Partnership's
relating to Crossroads Square Report on
Shopping Center* Form 8-K dated
December 8, 1987
(File 0-15680)
10.6 Documents relating to Carnegie
Center Office/Warehouse
(a) Agreement of Purchase and Sale Exhibit 1 to the
between Carnegie Properties Partnership's
Partnership, Carnegie Properties Report on
Partnership II and John Hancock Form 8-K dated
Realty Income Fund Limited January 22, 1988
Partnership* (File 0-15680)
(b) General Warranty Deed dated Exhibit 2 to the
December 22, 1987, between Partnership's
Carnegie Properties Partnership Report on
and John Hancock Realty Income Form 8-K dated
Fund Limited Partnership* January 22, 1988
(File 0-15680)
34
<PAGE>
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
(c) General Warranty Deed dated Exhibit 3 to the
December 22, 1987, between Partnership's
Carnegie Properties Partnership Report on
II and John Hancock Realty Income Form 8-K dated
Fund Limited Partnership* January 22, 1988
(File 0-15680)
10.7 Documents relating to Warner
Plaza Shopping Center
(a) Agreement of Purchase and Sale Exhibit 1 to the
between First Republic bank Partnership's
Dallas, N.A., and John Hancock Report on
Realty Income Fund Limited Form 8-K dated
Partnership* March 17, 1988
(File 0-15680)
(b) Special Warranty Deed dated Exhibit 2 to the
February 24, 1988, between Partnership's
First Republic bank, Dallas, Report on
N.A., and John Hancock Form 8-K dated
Realty Income Fund Limited March 17, 1988
Partnership* (File 0-15680)
10.8 Documents relating to
J.C. Penney Credit Operations
Center
(a) Agreement of Purchase and Sale Exhibit 1 to the
between Noro-Rocky Mountains Partnership's
B.V., a Netherlands Corporation, Report on
and John Hancock Realty Income Form 8-K dated
Fund Limited Partnership* November 17, 1988
(File 0-15680)
(b) Warranty and Guaranty dated Exhibit 2 to the
August 18, 1988, between Partnership's
Noro-Rocky Mountains Report on
B.V., a Netherlands Corporation, Form 8-K dated
and John Hancock Realty Income November 17, 1988
Fund Limited Partnership* (File 0-15680)
(c) Purchase and Sale Agreement Exhibit 1 to the
between John Hancock Realty Partnership's Report
Income Fund Limited Partnership on Form 8-K dated
and 4580 Paradise Blvd. December 29, 1995
Associates Limited Partnership (File 0-15680)
dated November 20, 1995*
35
<PAGE>
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(continued)
10.9 Documents relating to
Management Agreement
(a) Management Agreement dated Exhibit 10.9(a) to the
January 1, 1992, between Partnership's Report on
Hancock Realty Investors Form 10-K dated
Incorporated and John Hancock December 31, 1992
Realty Equities, Inc.* (File 0-15680)
(b) Agreement Concerning Subcontracting Exhibit 10.9(b) to the
of Management Services Pertaining to Partnership's Report on
John Hancock Realty Income Fund Form 10-K dated
Limited Partnership dated May 28, 1993 December 31, 1993
between John Hancock Realty Equities, (File 0-15680)
Inc., Hancock Realty Investors,
Incorporated and John Hancock Mutual
Life Insurance Company*
10.10 Documents relating to Executive
Compensation Plans and Arrangements
(a) Amended Agreement of Exhibit A to the Final
Limited Partnership* Prospectus dated
September 4, 1986
filed under the
Partnership's Form S-11,
Registration Statement
(File 33-6451)
(b) No reports on Form 8-K were filed during the quarter ended December
31, 1997.
(c) Exhibits - See Item 14 (a) (3) of this Report.
(d) Financial Statement Schedules - The response to this portion of Item
14 is submitted as a separate section of this Report commencing
on Page F-17.
-----------------------
+Filed herewith
*Incorporated by reference
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
31st day of March, 1998.
JOHN HANCOCK REALTY INCOME FUND
LIMITED PARTNERSHIP
By: John Hancock Realty Equities, Inc.
General Partner
By: WILLIAM M. FITZGERALD
--------------------------------
William M. Fitzgerald, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 31st day of March, 1998.
Signatures Title
----------- ------
President (Principal Executive Officer) and
Director of John Hancock Realty Equities,
WILLIAM M. FITZGERALD Inc. (General Partner of Registrant)
---------------------
William M. Fitzgerald
Treasurer (Chief Accounting Officer) of
John Hancock Realty Equities, Inc.
RICHARD E. FRANK (General Partner of Registrant)
---------------------
Richard E. Frank
Director of John Hancock Realty Equities,
MALCOLM G. PITTMAN Inc. (General Partner of Registrant)
---------------------
Malcolm G. Pittman, III
Director of John Hancock Realty Equities,
SUSAN M. SHEPHARD Inc. (General Partner of Registrant)
---------------------
Susan M. Shephard
37
<PAGE>
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14 (a) (1) AND (2), (c) AND (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1997
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
BOSTON, MASSACHUSETTS
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(ITEMS 8 AND 14(a)(1) AND (2))
1. Financial Statements: Page
Report of Independent Auditors F-3
Balance Sheets at December 31, 1997 and 1996 F-4
Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 F-5
Statements of Partners' Equity for the Years Ended
December 31, 1997, 1996 and 1995 F-6
Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 F-7
Notes to Financial Statements F-8
2. Financial Statement Schedules:
Schedule III: Real Estate and Accumulated Depreciation F-17
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore,
have been omitted.
F-2
<PAGE>
Report of Independent Auditors
To the Partners
John Hancock Realty Income Fund Limited Partnership
We have audited the accompanying balance sheets of John Hancock Realty
Income Fund Limited Partnership (the "Partnership") as of December 31, 1997
and 1996, and the related statements of operations, partners' equity and
cash flows for each of the three years in the period ended December 31,
1997. Our audits also included the financial statement schedule listed in
the index at Item 14(a). These financial statements and schedule are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of John Hancock Realty
Income Fund Limited Partnership at December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
ERNST & YOUNG LLP
Boston, Massachusetts
February 13, 1998
F-3
<PAGE>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
BALANCE SHEETS
ASSETS
December 31,
1997 1996
----- -----
Cash and cash equivalents $2,502,844 $2,197,847
Restricted cash 58,400 59,132
Other assets 90,816 78,999
Property held for sale - 2,678,599
Deferred expenses, net of accumulated
amortization of $444,317 in 1997 and
$361,132 in 1996 360,166 384,808
Investment in property:
Land 6,198,330 6,198,330
Buildings and improvements 17,342,479 17,991,609
---------- ----------
23,540,809 24,189,939
Less: accumulated depreciation (4,787,156) (4,214,134)
---------- ----------
18,753,653 19,975,805
---------- ----------
Total assets $21,765,879 $25,375,190
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $263,396 $340,087
Accounts payable to affiliates 150,907 108,961
-------- --------
Total liabilities 414,303 449,048
Partners' equity/(deficit):
General Partner's deficit (245,328) (230,844)
Limited Partners' equity 21,596,904 25,156,986
---------- ---------
Total partners' equity 21,351,576 24,926,142
---------- ----------
Total liabilities and partners'
equity $21,765,879 $25,375,190
=========== ===========
See Notes to Financial Statements
F-4
<PAGE>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF OPERATIONS
Years Ended December 31,
1997 1996 1995
----- ----- -----
Income:
Rental income $2,861,166 $2,614,989 $3,065,751
Interest income 107,469 171,767 173,286
Gain/(loss) on sale of property (5,321) - 128,539
Other income - - 82,008
---------- ---------- ----------
Total income 2,963,314 2,786,756 3,449,584
Expenses:
Depreciation 667,869 772,298 951,833
Property operating expenses 396,136 311,439 491,424
General and administrative expenses 384,727 360,696 236,926
Amortization of deferred expenses 134,503 209,726 133,756
Management fee 75,176 76,619 83,939
Property write-downs 668,520 1,907,093 -
--------- --------- ---------
Total expenses 2,326,931 3,637,871 1,897,878
--------- --------- ----------
Net income/(loss) $636,383 ($851,115) $1,551,706
========= ========= ==========
Allocation of net income/(loss):
General Partner $6,364 ($8,511) $15,517
John Hancock Limited Partner (141,179) (329,810) (60,357)
Investors 771,198 (512,794) 1,596,546
-------- --------- ----------
$636,383 ($851,115) $1,551,706
========= ========= ==========
Net income/(loss) per Unit $8.41 ($5.60) $17.42
===== ====== =======
See Notes to Financial Statements
F-5
<PAGE>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
-------- -------- -------
<S> <C> <C> <C>
Partners' equity/(deficit) at January 1, 1995
(91,647 Units outstanding) ($193,008) $34,218,306 $34,025,298
Less: Cash distributions (23,143) (2,291,175) (2,314,318)
Add: Net income 15,517 1,536,189 1,551,706
------- ---------- ----------
Partners' equity/(deficit) at December 31, 1995
(91,647 Units outstanding) (200,634) 33,463,320 33,262,686
Less: Cash distributions (21,699) (7,463,730) (7,485,429)
Add: Net loss (8,511) (842,604) (851,115)
------ ---------- ---------
Partners' equity/(deficit) at December 31, 1996
(91,647 Units outstanding) (230,844) 25,156,986 24,926,142
Less: Cash distributions (20,848) (4,190,101) (4,210,949)
Add: Net income 6,364 630,019 636,383
------- ---------- ---------
Partners' equity/(deficit) at December 31, 1997
(91,647 Units outstanding) ($245,328) $21,596,904 $21,351,576
======== =========== ===========
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Operating activities:
Net income/(loss) $636,383 ($851,115) $1,551,706
Adjustments to reconcile net (loss)/income to
Net cash provided by operating activities:
Amortization of deferred expenses 134,503 209,726 133,756
Depreciation 667,869 772,298 951,833
Property write-downs 668,520 1,907,093 -
Loss/(gain) on sale of property 5,321 - (128,539)
--------- --------- ---------
2,112,596 2,038,002 2,508,756
Changes in operating assets and liabilities:
Decrease/(increase) in restricted cash 732 (9,527) (4,982)
(Increase)/decrease in other assets (11,817) 104,697 (115,342)
(Decrease)/increase in accounts payable and
accrued expenses (76,691) 57,689 30,422
Increase in accounts payable
to affiliates 41,946 48,601 12,395
--------- --------- ---------
Net cash provided by operating activities 2,066,766 2,239,462 2,431,249
Investing activities:
Proceeds from sale of property 2,673,278 - 5,392,032
Increase in deferred expenses (224,098) (953,606) (236,542)
--------- --------- ---------
Net cash (used in)/provided by investing
activities 2,449,180 (953,606) 5,155,490
Financing activities:
Cash distributed to Partners (4,210,949) (7,485,429) (2,314,318)
--------- --------- ---------
Net cash used in financing activities (4,210,949) (7,485,429) (2,314,318)
--------- --------- ---------
Net increase/(decrease) in cash and
cash equivalents 304,997 (6,199,573) 5,272,421
Cash and cash equivalents at
beginning of year 2,197,847 8,397,420 3,124,999
--------- --------- ---------
Cash and cash equivalents at
end of year $2,502,844 $2,197,847 $8,397,420
========== ========== ==========
</TABLE>
See Notes to Financial Statements
F-7
<PAGE>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Organization of Partnership
---------------------------
John Hancock Realty Income Fund Limited Partnership (the
"Partnership") was formed under the Massachusetts Uniform Limited
Partnership Act on June 12, 1986. As of December 31, 1997, the
Partnership consisted of John Hancock Realty Equities, Inc. (the
"General Partner"), a wholly-owned, indirect subsidiary of John
Hancock Mutual Life Insurance Company; John Hancock Realty Funding,
Inc. (the "John Hancock Limited Partner"); and 3,995 Investor Limited
Partners (the "Investors"), owning 91,647 Units of Investor Limited
Partnership Interests (the "Units"). The John Hancock Limited Partner
and the Investors are collectively referred to as the Limited
Partners. The initial capital of the Partnership was $2,000,
representing capital contributions of $1,000 from the General Partner
and $1,000 from the John Hancock Limited Partner. The Amended
Agreement of Limited Partnership of the Partnership (the "Partnership
Agreement") authorized the issuance of up to 100,000 Units of Limited
Partnership Interests at $500 per unit. During the offering period,
which terminated on September 9, 1987, 91,647 Units were sold and the
John Hancock Limited Partner made additional capital contributions of
$7,330,760. There have been no changes in the number of Units
outstanding subsequent to the termination of the offering period.
The Partnership is engaged in the business of acquiring, improving,
holding for investment and disposing of existing, income-producing,
commercial and industrial 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 on its properties
under certain circumstances, as specified in the Partnership
Agreement.
The latest date on which the Partnership is due to terminate is
December 31, 2016, 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, 2016.
2. Significant Accounting Policies
-------------------------------
The Partnership maintains its accounting records and recognizes rental
revenue on the accrual basis.
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.
F-8
<PAGE>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
2. Significant Accounting Policies (continued)
-------------------------------------------
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 and other escrows.
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 permanent impairment in values. 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.
Deferred expenses relating to tenant improvements and lease
commissions are amortized on a straight-line basis over the terms of
the leases to which they relate. During 1993, the Partnership reduced
the period over which its remaining deferred acquisition fees are
amortized from thirty years, the estimated useful life of the
buildings owned by the Partnership, to four and one-half years, the
then estimated remaining life of the Partnership.
The net income/(loss) per Unit for each year is computed by dividing
the Investors' share of net income/(loss) by the number of Units
outstanding during each year.
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.
Certain 1996 amounts have been reclassified to be consistent with the
1997 presentation.
F-9
<PAGE>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
3. The Partnership Agreement
-------------------------
Distributable Cash from Operations (defined in the Partnership
Agreement) is distributed 99% to the Limited Partners and 1% to the
General Partner. The Limited Partners' share of Distributable Cash
from Operations is distributed as follows: 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
the reduction of working capital reserves funded by Capital
Contributions of the Investors will be distributed 100% to the
Investors.
Cash from Sales or Financings (defined in the Partnership Agreement)
is first used to pay all debts and liabilities of the Partnership then
due and is then used to fund any reserves for contingent liabilities.
Cash from Sales or Financings is then distributed as follows: first,
to the Limited Partners until they receive an amount equal to their
Invested Capital with the distribution being made between the
Investors and the John Hancock Limited Partner in proportion to their
respective Capital Contributions; second, to the Investors until they
have received, with respect to all previous distributions during the
year, their Cumulative Return on Investment (defined in the
Partnership Agreement); third, to the John Hancock Limited Partner
until it has received, with respect to all previous distributions
during the year, its Cumulative Return on Investment; fourth, to the
General Partner to pay any Subordinated Disposition Fees (defined in
the Partnership Agreement); and fifth, 99% to the Limited Partners and
1% to the General Partner, with the distribution being 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 Partnership's properties is to
be distributed in the same manner as Cash from Sales or 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 or 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 the
Partner would have been entitled to receive based upon the manner of
distribution of Cash from Sales or Financings, as specified in the
previous paragraph.
F-10
<PAGE>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
3. The Partnership Agreement (continued)
-------------------------------------
Profits from the normal operations of the Partnership for each fiscal
year are allocated to the Limited Partners and General Partner 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
99% to the Limited Partners and 1% to the General Partner, with the
allocation made between the John Hancock Limited Partner and the
Investors in proportion to their respective Capital Contributions.
Losses from the normal operations of the Partnership are allocated 99%
to the Limited Partners and 1% to the General Partner, with the
allocation made between the John Hancock Limited Partner and the
Investors in proportion to their respective Capital Contributions.
Depreciation deductions are allocated 1% to the General Partner and
99% to the Investors, and not to the John Hancock Limited Partner.
Profits and Losses from Sales or Financings are generally allocated
99% to the Limited Partners and 1% to the General Partners. In
connection with the sale of the last of the Partnership's properties,
and therefore the dissolution of the Partnership, profits will be
allocated to any Partners having a deficit balance in their Capital
Account in an amount equal to the deficit balance. Any remaining
profits will be allocated in the same order as cash from the sale
would be distributed.
Neither the General Partner nor any Affiliate (as defined in the
Partnership Agreement) 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 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 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, except under certain specified
circumstances.
F-11
<PAGE>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
4. Investment in Property
----------------------
Investment in property at cost and reduced by write-downs consists of
managed, fully-operating, commercial real estate as follows:
December 31,
1997 1996
----- -----
Marlboro Square Shopping Center $1,000,000 $1,649,130
Crossroads Square Shopping Center 12,266,920 12,266,920
Carnegie Center Office/Warehouse 3,800,000 3,800,000
Warner Plaza Shopping Center 6,473,889 6,473,889
----------- -----------
Total $23,540,809 $24,189,939
=========== ===========
The real estate market is cyclical in nature and is materially
affected by general economic trends and economic conditions in the
market where a property is located. As a result, determination of
real estate values involves subjective judgments. These judgments are
based on current market conditions and assumptions related to future
market conditions. These assumptions involve, among other things, the
availability of capital, occupancy rates, rental rates, interest rates
and inflation rates. Amounts ultimately realized from each property
may vary significantly from the values presented and the differences
could be material. Actual market values of real estate can be
determined only by negotiation between the parties in a sales
transaction.
On September 29, 1997, the Partnership sold the 1300 North Dutton
Avenue property to a non-affiliated buyer for a net sales price of
$2,673,278, after deductions for commissions and selling expenses
incurred in connection with the sale of the property. This
transaction resulted in a non-recurring loss of $5,321, representing
the difference between the net sales price and the property's carrying
value of $2,678,599.
During 1997, the General Partner determined that the estimated future
undiscounted cash flows from the Marlboro Square Shopping Center
property were less than the property's carrying value, due, in
general, to weak real estate market conditions for similar properties
in the areas where these properties are located. Accordingly, the
Partnership wrote-down the carrying amounts of the Marlboro Square
Shopping Center by $668,520. This write-downs represents the
difference between the property's carrying value and its estimated
fair market value.
F-12
<PAGE>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
4. Investment in Property (continued)
----------------------------------
During 1996, the General Partner determined that the estimated future
undiscounted cash flows from the Carnegie Center and Marlboro Square
Shopping Center properties were less than their respective carrying
amounts, due, in general, to weak real estate market conditions for
similar properties in the areas where these properties are located.
Accordingly, the Partnership wrote-down the carrying amounts of the
Carnegie Center and Marlboro Square Shopping Center by $1,247,093 and
$660,000, respectively. These write-downs represent the difference
between the property's carrying value and its estimated fair market
value.
The Partnership leases its properties to non-affiliated tenants under
primarily long-term operating leases.
At December 31, 1997, future minimum rentals on non-cancelable leases
relating to the above properties were as follows:
1998 $ 2,425,328
1999 2,042,549
2000 1,827,279
2001 1,733,213
2002 1,587,618
Thereafter 6,431,121
-----------
Total $16,047,108
===========
5. Deferred Expenses
-----------------
Deferred expenses consist of the following:
<TABLE>
<CAPTION>
Unamortized Balance at
December 31,
Description 1997 1996
----------- ---- ----
<S> <C> <C>
$114,494 of acquisition fees paid to the General
Partner. This amount was amortized over a period
of thirty years prior to June 30, 1993. Subsequent
to June 30, 1993, the unamortized balance is
amortized over a period of fifty-four months. $0 $21,415
$446,587 of tenant improvements. These amounts
are amortized over the terms of the leases to which
they relate. 221,699 187,716
$243,402 of lease commissions. These amounts
are amortized over the terms of the leases to
which they relate. 138,467 175,677
-------- --------
$360,166 $384,808
======== ========
</TABLE>
F-13
<PAGE>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
6. Transactions with the General Partner and Affiliates
----------------------------------------------------
Fees and expenses incurred or paid by the General Partner or its
affiliates on behalf of the Partnership and to which the General
Partner or its affiliates are entitled to reimbursement from the
Partnership were as follows:
Years Ended December 31,
1997 1996 1995
----- ----- -----
Reimbursement for operating
expenses $252,103 $171,710 $151,675
Partnership management fee
expense 75,176 76,619 83,939
-------- -------- --------
Total $327,279 $248,329 $235,614
======== ======== ========
These expenses are included in expenses on the Statements of
Operations.
The Partnership provides indemnification to the General Partner and
its Affiliates for any acts or omissions of the General Partner 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. Accordingly,
included in the Statements of Operations for the years ended December
31, 1997, 1996, and 1995 were $54,092, $41,475, and $0, respectively,
representing the Partnership's share of costs incurred by the General
Partner and its Affiliates relating to the class action complaint. As
of December 31, 1997, the Partnership has incurred a total of $95,567
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.
F-14
<PAGE>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
7. Federal Income Taxes
--------------------
A reconciliation of the net (loss)/income reported in the Statements
of Operations to the net income reported for federal income tax
purposes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net (loss)/income per Statements of
Operations $636,383 ($851,115) $1,551,706
Add/(deduct): Excess of book gain over tax
gain on disposition of assets (131,409) - (260,176)
Excess of tax depreciation
over book depreciation (162,002) (87,266) (44,106)
Excess of book amortization
over tax amortization 44,071 96,919 70,286
Other income/(loss) 2,573 - 3,573
Reduction of property carrying
value 668,520 1,907,093 -
Other expenses 109,854 64,715 158,875
---------- ---------- ----------
Net income for federal income tax purposes $1,167,990 $1,130,346 $1,480,158
========== ========== ==========
</TABLE>
A reconciliation of the Partnership's properties' aggregate cost for
book and federal income tax purposes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Aggregate cost, book purposes $23,540,809 $24,189,939 $31,605,222
Add/(deduct): Costs capitalized for federal income
tax purposes, cumulative 460,364 370,204 366,219
Book basis property write-downs,
cumulative 11,536,627 10,887,497 6,849,823
----------- ----------- -----------
Aggregate cost, federal income tax purposes $35,537,800 $35,447,640 $38,821,264
=========== =========== ===========
</TABLE>
F-15
<PAGE>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
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.
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 $239,000 in
legal expenses in connection with the class action lawsuit (see Part
l, Item 3 of this Report). Of this amount, approximately $143,000
relates to the Partnership's own defense and approximately $96,000
relates to the 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 Financial Statements, taken as a
whole. Accordingly, no provision for any liability which could result
from the eventual outcome of these matters has been made in the
accompanying financial statements. However, while it is still too
early to estimate potential damages, they could possibly be material.
9. Subsequent Events
-----------------
On February 13, 1998, the Partnership made a cash distribution from
Distributable Cash from Operations to the Investors in the amount of
$504,059.
F-16
<PAGE>
<TABLE>
<CAPTION>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
Year Ended December 31, 1997
Costs
Capitalized
Initial Costs to Subsequent to Gross Amount
Partnership Acquisition At Which Carried at Close of Period
----------------------- ----------------------- -----------------------------------
Buildings Buildings
and and
Description Encumbrances Land Improvements ImprovementsWrite-down (1) Land Improvements Total (2)
- ----------- ------------ ---- ------------ -------------------------- ---- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Marlboro Square Shopping Center
Marlboro, MA - $1,700,000 $ 3,431,725 $121,775 ($4,253,500) $345,000 $ 655,000 $1,000,000
Crossroads Square Shopping Center
Jacksonville, FL - 3,910,000 10,582,095 74,825 (2,300,000) 3,266,000 9,000,920 12,266,920
Carnegie Center Office/Warehouse
Cincinnati, OH - 400,000 6,824,894 132,097 (3,556,991) 315,000 3,485,000 3,800,000
Warner Plaza Shopping Center
Chandler, AZ - 2,800,000 5,069,990 30,035 (1,426,136) 2,272,330 4,201,559 6,473,889
-- ---------- ----------- --------- ---------- ---------- ----------- -----------
Total - $8,810,000 $25,908,704 $358,732 ($11,536,627) $6,198,330 $17,342,479 $23,540,809
== ========== =========== ======== ========== ========== =========== ===========
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
SCHEDULE III (Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION
Year Ended December 31, 1997
Life on Which
Depreciation in
Latest Statement
Accumulated Date of Date of Operations
Description Depreciation (5) Construction Acquired is Computed
----------- ---------------- ------------ -------- -----------
<S> <C> <C> <C> <C>
Marlboro Square Shopping Center
Marlboro, MA $ - 1986 2/17/87 30 Years (3)
15 Years (4)
Crossroads Square Shopping Center
Jacksonville, FL 3,168,635 1986 11/20/87 30 Years (3)
Carnegie Center Office/Warehouse
Cincinnati, OH 166,282 1986 12/22/87 30 Years (3)
Warner Plaza Shopping Center
Chandler, AZ 1,452,239 1985 2/25/88 30 Years (3)
-----------
Total $4,787,156
===========
(1) These write-downs represent impairment in the values of the properties based upon the General
Partner's estimates.
For a further discussion relating to the determination of property write-downs, please see
"Management's Discussion and Analysis of Financial Condition" included in Item 7 of this
Report.
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
SCHEDULE III (continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION
Year Ended December 31, 1997
(2) The Partnership's properties' aggregate cost for federal income tax
purposes at December 31, 1996 are as follows:
Property Amount
-------- -------
Marlboro Square Shopping Center $5,269,490
Crossroads Square Shopping Center 14,667,785
Carnegie Center Office/Warehouse 7,488,123
Warner Plaza Shopping Center 8,112,401
-----------
Total $35,537,800
===========
The Partnership's aggregate cost for federal income tax purposes may
differ from the aggregate cost for Financial Statement purposes.
(3) Estimated useful life for buildings
(4) Estimated useful life for land improvements
(5) Reconciliation of real estate and accumulated depreciation:
Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Investment in Real Estate
Balance at beginning of year $24,189,939 $31,605,222 $38,108,981
Improvements - - -
Sale of property - - (6,503,759)
Property held for sale - (2,835,779) -
Reduction of carrying value,
including leasing costs (649,130) (4,579,504) -
----------- ----------- -----------
Balance at end of year $23,540,809 $24,189,939 $31,605,222
=========== =========== ===========
Accumulated Depreciation
Balance at beginning of year $4,214,134 $7,165,026 $7,453,459
Sale of property - - (1,240,266)
Additions charged to costs
and expenses 667,869 772,298 951,833
Property held for sale - (808,904) -
Reduction of carrying value (94,847) (2,914,286) -
----------- ----------- -----------
Balance at end of year $4,787,156 $4,214,134 $7,165,026
=========== =========== ===========
</TABLE>
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000795196
<NAME> JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,561,244
<SECURITIES> 0
<RECEIVABLES> 90,816
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,652,060
<PP&E> 23,540,809
<DEPRECIATION> 4,787,156
<TOTAL-ASSETS> 21,765,879
<CURRENT-LIABILITIES> 414,303
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 21,351,576
<TOTAL-LIABILITY-AND-EQUITY> 21,765,879
<SALES> 0
<TOTAL-REVENUES> 2,963,314
<CGS> 0
<TOTAL-COSTS> 856,039
<OTHER-EXPENSES> 802,372
<LOSS-PROVISION> 668,520
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 636,383
<INCOME-TAX> 0
<INCOME-CONTINUING> 636,383
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 636,383
<EPS-PRIMARY> 8.41
<EPS-DILUTED> 8.41
</TABLE>
