FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from N/A Commission file number 0-15680 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) (800) 722-5457 Registrant's telephone number, including area code: N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filling requirements for the past 90 days. Yes X No INDEX PART I: FINANCIAL INFORMATION PAGE Item 1 - Financial Statements: Balance Sheets at June 30, 1997 and December 31, 1996 3 Statements of Operations for the Three and Six Months Ended June 30, 1997 and 1996 4 Statements of Partners' Equity for the Six Months Ended June 30, 1997 and for the Year Ended December 31, 1996 5 Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 6 Notes to Financial Statements 7-15 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 16-25 PART II: OTHER INFORMATION 26 2 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) PART I: FINANCIAL INFORMATION Item 1: Financial Statements BALANCE SHEETS (Unaudited) ASSETS June 30, December 31, 1997 1996 ---- ---- Cash and cash equivalents $1,977,273 $2,197,847 Restricted cash 61,765 59,132 Other assets 192,369 78,999 Property held for sale 2,678,599 2,678,599 Deferred expenses, net of accumulated amortization of $421,255 in 1997 and $361,132 in 1996 415,575 384,808 Investment in property: Land 6,198,330 6,198,330 Buildings and improvements 17,991,609 17,991,609 ---------- ---------- 24,189,939 24,189,939 Less: accumulated depreciation (4,552,146) (4,214,134) ---------- ---------- 19,637,793 19,975,805 ---------- ---------- Total assets $24,963,374 $25,375,190 ============ ============ LIABILITIES AND PARTNERS' EQUITY Liabilities: Accounts payable and accrued expenses $289,726 $340,087 Accounts payable to affiliates 145,408 108,961 ------- ------- Total liabilities 435,134 449,048 Partners' equity/(deficit): General Partner's deficit (234,823) (230,844) Limited Partners' equity 24,763,063 25,156,986 ---------- ---------- Total partners' equity 24,528,240 24,926,142 ---------- ---------- Total liabilities and partners' equity $24,963,374 $25,375,190 =========== =========== See Notes to Financial Statements 3 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 ---- ---- ---- ---- Income: Rental income $741,803 $612,249 $1,442,396 $1,268,284 Interest income 21,276 33,217 43,802 115,175 --------- -------- ---------- ---------- Total income 763,079 645,466 1,486,198 1,383,459 Expenses: Depreciation 164,929 195,669 338,012 391,338 General and administrative expenses 76,956 52,694 206,610 107,892 Property operating expenses 115,578 102,467 199,214 192,695 Amortization of deferred expenses 30,804 42,293 60,123 81,185 Management fee 18,869 18,903 37,772 38,813 Property write-down - 660,000 - 660,000 --------- --------- ---------- ---------- Total expenses 407,136 1,072,026 841,731 1,471,923 --------- --------- ---------- ---------- Net income/(loss) $355,943 ($426,560) $644,467 ($88,464) ========= ========= ========== ========== Allocation of net income/(loss): General Partner $3,560 ($4,266) $6,445 ($885) John Hancock Limited Partner (12,291) (17,348) (24,582) (34,696) Investors 364,674 (404,946) 662,604 (52,883) --------- --------- ---------- ---------- $355,943 ($426,560) $644,467 ($88,464) ========= ========= ========== ========== Net income/(loss) per Unit $3.98 ($4.42) $7.23 ($0.58) ========= ========= ========== ========== See Notes to Financial Statements 4 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF PARTNERS' EQUITY (Unaudited) Six Months Ended June 30, 1997 and Year Ended December 31, 1996 General Limited Partner Partners Total ------- -------- ----- Partners' equity/(deficit) at January 1, 1996 (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 (10,424) (1,031,945) (1,042,369) Add: Net income 6,445 638,022 644,467 -------- --------- ---------- Partners' equity/(deficit) at June 30, 1997 91,647 Units outstanding) ($234,823) $24,763,063 $24,528,240 ======== ========== =========== See Notes to Financial Statements 5 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 1997 1996 ---- ----- Operating activities: Net income/(loss) $644,467 ($88,464) Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation 338,012 391,338 Amortization of deferred expenses 60,123 81,185 Property write-down - 660,000 --------- --------- 1,042,602 1,044,059 Changes in operating assets and liabilities: Increase in restricted cash (2,633) (7,434) (Increase)/decrease in other assets (113,370) 33,003 (Decrease)/increase in accounts payable and accrued expenses (50,361) 14,836 Increase/(decrease) in accounts payable to affiliates 36,447 (973) --------- --------- Net cash provided by operating activities 912,685 1,083,491 Investing activities: Increase in deferred expenses (90,890) (189,429) --------- --------- Net cash used in investing activities (90,890) (189,429) Financing activities: Cash distributed to Partners (1,042,369) (6,443,061) --------- --------- Net cash used in financing activities (1,042,369) (6,443,061) --------- --------- Net decrease in cash and cash equivalents (220,574) (5,548,999) Cash and cash equivalents at beginning of year 2,197,847 8,397,420 --------- --------- Cash and cash equivalents at end of period $1,977,273 $2,848,421 ========== ========== See Notes to Financial Statements 6 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (Unaudited) 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 June 30, 1997, the Partnership consisted of John Hancock Realty Equities, Inc. (the "General Partner"), a wholly-owned, indirect subsidiary of John Hancock Mutual Life Insurance Company; John Hancock Realty Funding, Inc. (the "John Hancock Limited Partner"); and 4,016 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, 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. 7 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) (Unaudited) 2. Significant Accounting Policies ------------------------------- The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the financial statements and footnotes thereto included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1996. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. 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. The General Partner listed the 1300 North Dutton Avenue for sale during October 1996. Accordingly, this property is classified in "Property Held For Sale" on the Balance Sheets at June 30, 1997 and December 31, 1996 at its carrying value, which is not in excess of its estimated fair value, less selling costs. The General Partner believes that this property is likely to be sold during 1997. 8 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) (Unaudited) 2. Significant Accounting Policies (continued) ------------------------------------------- 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. 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 the periods hereof are computed by dividing the Investors' share of net income/(loss) by the number of Units outstanding at the end of such periods. 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. 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. 9 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) (Unaudited) 3. The Partnership Agreement (continued) ------------------------------------ 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. 10 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) (Unaudited) 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. 11 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) (Unaudited) 4. Investment in Property ---------------------- Investment in property at cost and reduced by write-downs consists of managed, fully-operating, commercial real estate as follows: June 30, 1997 December 31, 1996 ------------- ----------------- Marlboro Square Shopping Center $1,649,130 $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 $24,189,939 $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. The General Partner listed the 1300 North Dutton Avenue property for sale during October 1996. Accordingly, this property is classified as "Property Held For Sale" on the Balance Sheets at June 30, 1997 and December 31, 1996 at its carrying value, which is not in excess of its estimated fair value, less selling costs. The General Partner believes that this property is likely to be sold during 1997. 12 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) (Unaudited) 5. Deferred Expenses ----------------- Deferred expenses consist of the following: Unamortized Unamortized Balance at Balance at Description June 30, 1997 December 31, 1996 ------------ -------------- ----------------- $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. $10,707 $21,415 $447,795 of tenant improvements. These amounts are amortized over the terms of the leases to which they relate. 239,716 187,716 $274,541 of lease commissions. These amounts are amortized over the terms of the leases to which they relate. 165,152 175,677 --------- --------- $415,575 $384,808 ========= ========= 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: Six Months Ended June 30, 1997 1996 ----- ----- Reimbursement for operating expenses $162,973 $84,347 Partnership management fee expense 37,772 38,813 -------- -------- $200,745 $123,160 ======== ======== These expenses are included in expenses on the Statements of Operations. 13 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) (Unaudited) 6. Transactions with the General Partner and Affiliates (continued) ---------------------------------------------------------------- The Partnership provides indemnification to the General Partner and its Affiliates for any acts or omissions of the General Partner or an affiliate in good faith on behalf of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner believes that this indemnification applies to the class action complaint described in Note 8. Accordingly, included in the Statements of Operations for the six months ended June 30, 1997 and 1996 were $38,173 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 June 30, 1997, the Partnership has incurred a total of $79,648 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 with respect to 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. 7. Federal Income Taxes -------------------- A reconciliation of the net income/(loss) reported on the Statements of Operations to the net income reported for federal income tax purposes is as follows: Six Months Ended June 30, 1997 1996 ---- ---- Net income/(loss) per Statements of Operations $644,467 ($88,464) Add/(deduct): Excess of tax depreciation over book depreciation (94,766) (38,189) Excess of book amortization over tax amortization 8,093 46,014 Reduction of property's carrying value - 660,000 --------- --------- Net income for federal income tax purposes $557,794 $579,361 ========= ========= 14 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) NOTES TO FINANCIAL STATEMENTS (continued) (Unaudited) 8. Contingencies ------------- In February 1996, a putative class action complaint was filed in the Superior Court in Essex County, New Jersey by a single investor in a limited partnership affiliated with the Partnership. The complaint named as defendants the Partnership, the General Partner, certain other Affiliates of the General Partner, and certain unnamed officers, directors, employees and agents of the named defendants. The plaintiff sought unspecified damages stemming from alleged misrepresentations and omissions in the marketing and offering materials associated with the Partnership and two limited partnerships affiliated with the Partnership. On March 18, 1997, the court certified a class of investors who were original purchasers in the Partnership. 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 $200,000 in legal expenses in connection with the class action lawsuit (see Part II, Item 1 of this Report). Of this amount, approximately $120,000 relates to the Partnership's own defense and approximately $80,000 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 can not estimate the aggregate amount of legal expenses and indemnification claims to be incurred and their impact on the Partnership's financial statements, taken as a whole. Accordingly, no provision for any liability which could result from the eventual outcome of these matters has been made in the accompanying financial statements. 15 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations General - ------- During the offering period from 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. The Partnership's properties are described more fully in Note 4 to the Financial Statements included in Item 1 of this Report. Forward-looking Statements - -------------------------- In addition to historical information, certain statements contained herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements appear in a number of places in this Report and include statements regarding the intent, belief or expectations of the General Partner with respect to, among other things, the prospective sale of Partnership properties, actions that would be taken in the event of lack of liquidity, anticipated leasing costs, repair and maintenance expenses, distributions to the General Partner and to Investors, the possible effects of tenants' vacating space at Partnership properties, the absorption of existing retail space in certain geographical areas, and the impact of inflation. Forward-looking statements involve numerous known and unknown risks and uncertainties, and they are not guarantees of future performance. The following factors, among others, could cause actual results or performance of the Partnership and future events to differ materially from those expressed or implied in the forward-looking statements: general economic and business conditions; any and all general risks of real estate ownership, including without limitation adverse changes in general economic conditions and adverse local conditions, the fluctuation of rental income from properties, changes in property taxes, utility costs or maintenance costs and insurance, fluctuations of real estate values, competition for tenants, uncertainties about whether real estate sales under contract will close; the ability of the Partnership to sell its properties; and other factors detailed from time to time in the filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect the General Partner's analysis only as of the date hereof. The Partnership assumes no obligation to update forward- looking statements. [See also the Partnership's reports to be filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended.] 16 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources - ------------------------------- At June 30, 1997, the Partnership had $1,977,273 in cash and cash equivalents and $61,765 in restricted cash. The Partnership has established a working capital reserve with a current balance of approximately 3% of the Investors' Invested Capital (defined in the Partnership Agreement). Liquidity would, however, be materially adversely affected by a significant reduction in revenues or significant unanticipated operating costs (including but not limited to litigation expenses), unanticipated leasing costs or unanticipated capital expenditures. If any or all of these events were to occur, to the extent that the working capital reserve would be insufficient to satisfy the cash requirements of the Partnership, it is anticipated that additional funds would be obtained through a reduction of cash distributions to investors, bank loans, short-term loans from the General Partner or its Affiliates, or the sale or financing of Partnership properties. During the six months ended June 30, 1997, cash from working capital reserves in the amount of $90,890 was used for the payment of leasing costs incurred at the Carnegie Center and Crossroads Square properties. The General Partner estimates that the Partnership will incur approximately $372,000 of additional leasing costs at its properties during the remainder of 1997. Of this amount, approximately $298,000 is expected to be incurred at Carnegie Center. The General Partner anticipates that the current balance in the working capital reserve will be sufficient to pay such costs. During the six months ended June 30, 1997, approximately $24,000 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 additional non-recurring repair and maintenance expenses of approximately $124,000 at the properties during the remainder of 1997. These additional expenses will be funded from the operations of the Partnership's properties and are not expected to have a significant impact on the Partnership's liquidity. Cash in the amount of $1,042,369, generated from the Partnership's operations, was distributed to the General Partner and Investors during the six months ended June 30, 1997. The General Partner anticipates that the Partnership will be able to make comparable distributions during the remainder of 1997. 17 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------------------- The Partnership has incurred an aggregate of approximately $200,000 in legal expenses in connection with the class action lawsuit (see Part II, Item 1 of this Report). Of this amount, approximately $120,000 relates to the Partnership's own defense and approximately $80,000 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 or 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. The following table summarizes the leasing activity and occupancy status at the Partnership's properties during the six months ended June 30, 1997: 1300 North Marlboro Sq. Crossroads Sq. Carnegie Warner Pl. Dutton Ave. Shopping Ctr. Shopping Ctr. Center Shopping Ctr. ----------- ------------- ------------- ------ ------------- Square Feet 24,120 42,150 174,196 128,059 92,848 Occupancy at January 1, 1997 100% 70% 93% 64% 100% ==== === === === ==== New Leases 0% 0% 2% 4% 0% Lease Renewals 0% 0% 1% 18% 0% Leases Expired (1) 0% 7% 0% 0% 2% Occupancy at June 30, 1997 100% 63% 95% 68% 98% ==== === === === === Leases Scheduled to Expire, Balance of 1997 0% 0% 6% 0% 3% === === === === === Leases Scheduled to Commence, Balance of 1997 0% 0% 0% 5% 0% === === === === === (1) Includes lease terminated by the General Partner for non-payment of rent. 18 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------------------- As a result of a five-year lease for the entire property that commenced in October 1996 and the present favorable conditions of the Santa Rosa, California real estate market, the 1300 North Dutton Avenue property was listed for sale by the General Partner during October 1996. On June 18, 1997, the General Partner entered into a Purchase and Sale Agreement (the "Agreement") on behalf of the Partnership for the sale of 1300 North Dutton Avenue property to a non-affiliated buyer for a gross sales price of $2,828,000. On July 1, 1997, the board of directors of the General Partner approved the sale of the 1300 North Dutton Avenue property pursuant to the terms of the Agreement. The sale is subject to certain conditions which, if not satisfied prior to the scheduled date of sale, may result in the termination of the Agreement. If this potential transaction does not result in the sale of the property, then the General Partner will resume its efforts to locate another buyer for the property. During the second quarter of 1997, the anchor tenant at the Crossroads Square property that occupies 49% of the property under a lease that is 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, or 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 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 past and present rental obligations as of the date hereof. 19 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------------------- During August 1996, a tenant at the Warner Plaza property that occupied 14% of the rentable space at the property, vacated its space. Under the terms of this tenant's lease agreement, it 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 the 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. 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. As of the date hereof, this tenant has recommenced paying rent, but remains two months in arrears on past due rental obligations. The General Partner will pursue full collection of this past due rental amount and any future rental obligations not met by this tenant. 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. A tenant at the Marlboro Square property that had taken occupancy of the property's 3,000 square foot outparcel in October 1996 was delinquent in rental payments due since 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, the amount of which has been received. The General Partner continues to actively seek a replacement tenant for this space. 20 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------------------- The General Partner anticipates that absorption of existing retail space in the Marlboro, Massachusetts area will remain sluggish during the remainder of 1997 based upon both the lack of demand and the increase in the amount of available retail space in the area. This increase in retail space is primarily due to a new retail development near to the Marlboro Square property which commenced operations during August 1996 and the departure of a major tenant which occupied 60,000 square feet at a property near to Marlboro Square. 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. The Carnegie Center's occupancy at June 30, 1997, and as of the date hereof, is 68%. During the first six months of 1997 the General Partner secured leases with three new tenants to occupy, in the aggregate, approximately 11,200 square feet, or 9% of the property. The General Partner anticipates that the Partnership will incur approximately $39,500 in leasing costs in connection with these three new leases. In addition, a 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 Cincinnati industrial real estate market, where Carnegie Center is located, has experienced an oversupply of office/industrial space in recent years, which has resulted in a decline in rental rates and an increase in vacancy rates. The General Partner continues to actively seek new tenants for the remaining vacant space. Rental rates and concessions are priced competitively in an effort to secure new tenants as well as retain existing tenants at the property. 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 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, that a write- down in value was not required. The Partnership's cumulative investment in the property, before accumulated depreciation and write-downs, is approximately $7,925,000. 21 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Liquidity and Capital Resources (continued) - ------------------------------------------- The General Partner evaluated the carrying value of each of the Partnership's properties as of December 31, 1996 by comparing such value to the respective property's future undiscounted cash flows and the then most recent independent or internal appraisal. Based on such evaluations, the General Partner determined that the Carnegie Center property's estimated future undiscounted cash flows were not expected to exceed its carrying value. Therefore, a write-down in value of $1,247,093, representing the difference between the property's carrying value and its then estimated market value (and not its estimated future undiscounted cash flows) was required as of December 31, 1996. No permanent impairment in values existed with respect to the Partnership's other properties as of December 31, 1996 and, therefore, no additional write-downs were recorded. The General Partner will continue to conduct property valuations, using internal or independent appraisals, in order to determine whether a permanent impairment in value exists on any of the Partnership's properties. Results of Operations - --------------------- The Partnership generated net income of $644,467 for the six months ended June 30, 1997 as compared to a net loss of $88,464 for the same period in 1996. Included in the results for the period in 1996 was a $660,000 write- down in the value of the Marlboro Square property. Excluding this amount net income increased by 13% between periods primarily due to increases in the performance at the 1300 North Dutton Avenue, Crossroads Square, and Carnegie Center properties. These increases were partially offset by legal fees incurred in connection with the class action lawsuit (described in Item 1 of Part II of this Report), a decline in interest earned on the Partnership's short-term investments, and declines in the performance at the Warner Plaza and Marlboro Square properties. Average occupancy for the Partnership's investments was as follows: Six Months Ended June 30, 1997 1996 ---- ----- 1300 North Dutton Avenue Office Complex 100% 0% Marlboro Square Shopping Center 66% 76% Crossroads Square Shopping Center 94% 94% Carnegie Center Office/Warehouse 67% 59% Warner Plaza Shopping Center 99% 100% 22 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) - --------------------------------- Rental income for the six months ended June 30, 1997 increased by $174,112, or 14%, as compared to the same period in 1996. This increase is primarily due to an increase in rental income at the 1300 North Dutton Avenue property. In addition, increases in rental income at the Carnegie Center and Crossroads Square properties were offset by decreases in rental income at the Warner Plaza and Marlboro Square properties. Rental income increased at the 1300 North Dutton Avenue and Carnegie Center properties due to an increase in average occupancy at the properties. Rental income increased at the Crossroads Square property primarily because a tenant that was delinquent in making its rental payments during the first six months of 1996 made its scheduled payments, as well as its past due payments, during the first six months of 1997. These increases were partially offset by decreases in rental income at the Warner Plaza and Marlboro Square properties. Rental income decreased at Warner Plaza 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 Warner Plaza declined further due to the nonpayment of two month's rent by a tenant that filed for bankruptcy, as described above. Rental income at Marlboro Square decreased by 27% between periods primarily due to a decline in average occupancy. Rental income also decreased at Marlboro Square because rental rates on leases executed during the year ended December 31, 1996 were less than rental rates contracted under prior leases. Interest income for the six months ended June 30, 1997 decreased by $71,373, or 62%, as compared to the same period in 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. Interest income declined further due to a decrease in the interest earned on the Partnership's working capital reserves as a result of a decrease in the amount of such reserves. Depreciation expense for the six months ended June 30, 1997 decreased by $53,326, or 14%, as compared to the same period in 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 has been recorded on this property since that time. In addition, depreciation expense declined further between periods due to the write-down of Carnegie Center's carrying value at December 31, 1996. General and administrative expenses for the six months ended June 30, 1997 increased by $98,718, or 91%, primarily due to legal fees incurred by the Partnership in connection with the class action complaint (see Part II, Item 1 of this Report). Excluding such legal fees, general and administrative expenses were consistent between periods. 23 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) - --------------------------------- Amortization of deferred expenses for the six months ended June 30, 1997 decreased by $21,062, or 26%, as compared to the same period in 1996. This decrease is primarily due to the write-down in carrying value of the Carnegie Center at December 31, 1996. The net book value of the Carnegie Center plus any unamortized deferred expenses relating to the property at the time the property was written-down were combined to arrive at the property's carrying value (current 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 are being depreciated during 1997. This decrease was partially offset by the amortization of the leasing costs incurred in connection with new leases at the Crossroads Square property in 1996 and 1997, and at the Carnegie Center property in 1997. The General Partner believes that inflation has had no significant impact on the Partnership's operations during the six months ended June 30, 1997, and the General Partner anticipates that inflation will not have a significant impact during the remainder of 1997. 24 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Cash Flow - --------- The following table provides the calculations of Cash from Operations and Distributable Cash from Operations which are calculated in accordance with Section 17 of the Partnership Agreement: Six Months Ended June 30, 1997 1996 ---- ---- Net cash provided by operating activities (a) $912,685 $1,083,491 Net change in operating assets and liabilities (a) 129,917 (39,432) --------- ---------- Cash provided by operations (a) 1,042,602 1,044,059 Increase in working capital reserves (1,159) - Add: Accrual basis Partnership management fee 37,772 38,813 --------- ---------- Cash from Operations (b) 1,079,215 1,082,872 Decrease in working capital reserves - 26,082 Less: Accrual basis Partnership management fee (37,772) (38,813) --------- ---------- Distributable Cash from Operations (b) $1,041,443 $1,070,141 ========= ========== Allocation to General Partner $10,414 $10,701 Allocation to John Hancock Limited Partner - - Allocation to Investors 1,031,029 1,059,440 --------- --------- Distributable Cash from Operations (b) $1,041,443 $1,070,141 ========= ========= (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 1 of this Report. (b) As defined in the Partnership Agreement. Distributable Cash from Operations should not be considered as an alternative to net income (i.e. not an indicator of performance) or to reflect cash flows or availability of discretionary funds. During the third quarter of 1997, the Partnership will make a distribution of Distributable Cash from Operations to the Investors in the amount of $515,972. This amount represents a 5% annualized return on Investors' remaining Invested Capital. The source of future cash distributions is dependent upon cash generated by the Partnership's properties and the use of working capital reserves. The General Partner currently anticipates that the Partnership's Distributable Cash from Operations during each of the remaining two quarters of 1997 will be comparable to that generated during the second quarter of 1997. 25 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) PART II: OTHER INFORMATION Item 1. Legal Proceedings In February 1996, a putative class action complaint was filed in the Superior Court in Essex County, New Jersey by a single investor in a limited partnership affiliated with the Partnership. The complaint named as defendants the Partnership, the General Partner, certain other affiliates of the General Partner, and certain unnamed officers, directors, employees and agents of the named defendants. The plaintiff sought unspecified damages stemming from alleged misrepresentations and omissions in the marketing and offering materials associated with the Partnership and two limited partnerships affiliated with the Partnership. The complaint alleged, among other things, that the marketing materials for the Partnership and the affiliated limited partnerships did not contain adequate risk disclosures. On March 18, 1997, the court certified a class of investors who were original purchasers in the Partnership. The certification order should not be construed as suggesting that any member of the class is entitled to recover, or will recover, any amount in the action. The General Partner believes the allegations are totally without merit and intends to vigorously contest the action. There are no other material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Partnership, to which the Partnership is a party or to which any of its properties is subject. Item 2. Changes in Securities There were no changes in securities during the second quarter of 1997. Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the second quarter of 1997. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders of the Partnership during the second quarter of 1997. Item 5. Other information Item 6. Exhibits and Reports on Form 8-K (a) There are no exhibits to this Report. (b) There were no Reports on Form 8-K filed during the second quarter of 1997. 26 JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP (A Massachusetts Limited Partnership) Signatures ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of August, 1997. John Hancock Realty Income Fund Limited Partnership By: John Hancock Realty Equities, Inc., General Partner By: WILLIAM M. FITZGERALD -------------------------------- William M. Fitzgerald, President By: RICHARD E. FRANK -------------------------------- Richard E. Frank, Treasurer (Chief Accounting Officer)