Item 1 - Business
The Registrant, John Hancock Realty Income Fund-II Limited Partnership (the "Partnership"), is a limited partnership organized on June 30, 1987 under the Massachusetts Uniform Limited Partnership Act. As of December 31, 1996, 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"), John Hancock Income Fund-II Assignor, Inc. (the "Assignor Limited Partner") and 4,580 Unitholders (the "Investors"). The Assignor Limited Partner holds 2,601,552 Assignee Units (the "Units") for the benefit of the Investors. The John Hancock Limited Partner, the Assignor Limited Partner and the Investors are collectively referred to as the Limited Partners. The initial capital of the Partnership was $2,000, representing capital contributions of $1,000 by the General Partner and $1,000 by the John Hancock Limited Partner. During the offering period, the John Hancock Limited Partner made additional capital contributions of $4,161,483. The Amended Agreement of Limited Partnership of the Partnership (the "Partnership Agreement") authorized the sale of up to 5,000,000 Units representing economic and certain other rights attributable to Investor Limited Partnership Interests in the Partnership.
The Units were offered and sold to the public during the period from October 2, 1987 to January 2, 1989, pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933. The Partnership sold the Units for $20 per Unit. No established public market exists on which the Units may be traded.
The Partnership is engaged solely in the business of (i) acquiring, improving, holding for investment and disposing of existing, income-producing retail, industrial, and office properties on an all-cash basis, free and clear of mortgage indebtedness, and (ii) making mortgage loans consisting of conventional first mortgage loans and participating first mortgage loans secured by income-producing retail, industrial and office properties. 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, 2017, 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 investments of the Partnership will be disposed of, and the Partnership terminated, before December 31, 2017.
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 overbuilding, a decrease in employment, or adverse changes in real estate zoning laws, which may reduce the desirability of real estate in the area and 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 specific retail, industrial or office tenants, the financial failure of any such major tenant, resulting in the termination of the tenant's lease or non-payment of rent when 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.
The Partnership's mortgage loans are subject to the risk of default by the borrowers, in which event the Partnership would have the added responsibility of foreclosing on or pursuing other remedies on the property involved to protect the value of its investment. A borrower's ability to meet its regular mortgage loan payments is dependent upon the risks generally incident to the ownership of real property, as discussed above.
On March 10, 1988, the Partnership made a participating mortgage loan to 205 Newbury Associates secured by a first mortgage on 205 Newbury Street, an office and retail property located in Boston, Massachusetts. The property contains 7,029 net rentable square feet of office and retail space. The loan has a term of 120 months with interest only payable to the Partnership on a monthly basis at a fixed interest rate of 9.5% per annum. The full amount of the principal and accrued but unpaid interest is due and payable to the Partnership on April 1, 1998. In addition to these amounts, the borrower is also obligated to pay contingent interest payments to the Partnership in the amount of 25% of the net cash flow derived from the operations of the property during the term of the loan and a specified portion of the net sales price or mutually agreed upon fair market value of the property upon its sale or refinancing. 205 Newbury Associates remains current on its minimum required debt service payments as of December 31, 1996 and as of the date hereof.
Item 1 - Business (continued)
Contingent interest payments, which are based on the net cash flow from the property, were not received from 1990 through 1995 because the property did not generated any cash flow in excess of the minimum required debt service payments. Although contingent interest payments were received during the year ended December 31, 1996, the amount of such payments was immaterial.
The General Partner has no reason to believe, based upon current information and events, that the minimum debt service payments on the above mortgage loan will not continue to be met or that the outstanding principal balance of the loan will not be repaid.
On July 15, 1988, the Partnership acquired Park Square Shopping Center, a community shopping center located in Brooklyn Park, Minnesota. Over the past couple of years, the retail real estate market within Brooklyn Park, including the Park Square Shopping Center property, has experienced a significant increase in the supply of rentable square feet and, therefore, an increase in competition for available tenants. In addition, the Minnesota market, as a whole, has high occupancy costs primarily resulting from one of the highest real estate taxes rates in the nation. These factors have required property owners to keep rental rates relatively flat over the past few years. The General Partner expects market conditions in Brooklyn Park to remain competitive during 1997 and, therefore, no increase in market rental rates is anticipated.
On December 28, 1988, the Partnership acquired a 99.5% interest in JH Quince Orchard Partners (the "Affiliated Joint Venture"), a joint venture between the Partnership and John Hancock Realty Income Fund-III Limited Partnership ("Income Fund-III"). Pursuant to the terms of the partnership agreement of the Affiliated Joint Venture, Income Fund-III had the option, exercisable prior to December 31, 1990, to increase its investment and interest in the Affiliated Joint Venture to 50%. During the second quarter of 1989, Income Fund-III exercised its option and the Partnership sold a 49.5% interest in the Affiliated Joint Venture to Income Fund-III. The Partnership has since held a 50% interest in the Affiliated Joint Venture.
On December 28, 1988, the Affiliated Joint Venture contributed 98% of the invested capital of, and acquired a 75% interest in, QOCC-1 Associates, an existing partnership which owns and operates a three-story office building and related land and improvements located in Gaithersburg, Maryland (the "Quince Orchard Corporate Center"). The partnership agreement of QOCC-1 Associates provides that the Affiliated Joint Venture shall contribute 95% of any required additional capital contributions. Of the cumulative total invested capital in QOCC-1 Associates at December 31, 1996, 97.55% has been contributed by the Affiliated Joint Venture. The Affiliated Joint Venture continues to hold a 75% interest in QOCC-1 Associates.
The Quince Orchard Corporate Center is occupied by Boehringer Mannheim Pharmaceuticals, Inc. under a ten-year lease which expires in February 2004. The tenant has two options under the lease agreement, one, to terminate the lease at the end of the seventy-sixth month of the lease, or June 2000, and, two, to extend the term of the lease for an additional five- year period.
Item 1 - Business (continued)
On July 31, 1989, the Partnership acquired the Miami International Distribution Center ("MIDC"), a warehouse/distribution facility located in Miami, Florida. The General Partner acquired MIDC in its own name on an interim basis from a non-affiliated seller on December 20, 1988. As of July 31, 1989 the General Partner transferred title to the Partnership at its original cost.
The Miami International Distribution Center is located in an area that the Miami Airport Authority has targeted for future expansion of the Airport. During May 1996, the Miami Airport Authority made an offer to purchase this property which the General Partner did not accept. The General Partner is currently negotiating with the Miami Airport Authority towards a mutually acceptable sale of the property. It is possible that, under certain circumstances, the Miami Airport Authority could obtain this property through its powers of eminent domain, although at this time no such plans have been announced or otherwise communicated to the General Partner. The General Partner anticipates that a sale of this property would result in a gain to the Partnership.
On June 30, 1989, the Partnership made a $5,500,000 mortgage loan to General Camera Corporation ("GCC"), a non-affiliated borrower, secured by a first mortgage on 540 West 36th Street, a 72,000 square foot office/warehouse/service facility located in New York, New York. In addition, the loan is personally guaranteed by the principal stockholders of GCC. Under the original terms of the loan agreement, GCC was required to pay interest only monthly at an annual rate of 11%. Effective June 1, 1994, the loan agreement was amended to require i) GCC to make a one-time payment of $250,000 towards the outstanding principal balance of the loan and ii) future monthly payments of principal and interest. The entire principal balance and all accrued but unpaid interest came due on July 1, 1996.
During the second quarter of 1996, GCC requested a three month extension of time in which to satisfy the loan while it continued to pursue alternate financing. The General Partner granted GCC this extension in consideration of GCC making an additional one-time payment of $250,000 to reduce the outstanding principal balance of the loan and continuing to make monthly loan payments of principal and interest from July 1, 1996 through September 1, 1996. The entire unamortized principal balance and all accrued but unpaid interest came due on October 1, 1996.
During the third quarter of 1996, GCC requested an additional three month extension of time in which to satisfy the loan while it continued to pursue alternate financing. The General Partner granted GCC this extension in consideration of GCC making an additional payment in the aggregate amount of $400,000 to reduce the outstanding principal balance of the loan. In addition, GCC was required to continue making monthly loan payments of principal and interest from October 1, 1996 through December 1, 1996. The entire unamortized principal balance and all accrued but unpaid interest came due on January 1, 1997. On January 9, 1997, GCC paid the entire outstanding principal balance and all accrued but unpaid interest then due. The proceeds from the repayment of the entire original principal balance of $5,500,000 were distributed to the Limited Partners in the manner described below.
Item 1 - Business (continued)
On September 20, 1988, the Partnership acquired Fulton Business Park, a warehouse/distribution/office facility located in Atlanta, Georgia. Real estate market conditions for industrial space in Atlanta have declined since the Partnership purchased Fulton Business Park. However, since late 1993 vacancies in the Atlanta industrial real estate market declined and rental rates increased. With the gradual improvement in market conditions Fulton Business Park sustained a stabilized occupancy rate and improved its income and cash flow performance. Given these market conditions and the income performance of the property, the General Partner listed the Fulton Business Park for sale during May 1996. On December 2, 1996, the Partnership sold the Fulton Business Park property to a non-affiliated buyer and received net sales proceeds of $3,313,190. The distribution of the proceeds of this sale is described in the following paragraph.
The Partnership received an aggregate amount of $8,813,190 from the net sales proceeds from the Fulton Business Park ($3,313,190) and from cumulative repayments on the GCC mortgage loan ($5,500,000). During February 1997, the Partnership distributed $8,794,287, of which $8,142,858 was distributed to the Investors and $651,429 was distributed to the John Hancock Limited Partner. The Partnership retained $18,903 in working capital reserves.
On October 18, 1988, the Partnership made a participating first mortgage loan to Siete Properties IV secured by a first mortgage on the Siete Square IV Office Building ("Siete Square"), a four-story garden office building located in Phoenix, Arizona. During 1990, the borrower was unable to meet the minimum required debt service payments and on July 25, 1990, the Partnership acquired title to this property by a deed-in-lieu of foreclosure. On December 10, 1992, the Partnership sold Siete Square to a non-affiliated buyer and received net sales proceeds of $1,605,675. Of this amount, during 1993 the Partnership distributed $1,456,869 to the Investors, $116,550 to the John Hancock Limited Partner and retained $32,256 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 of this Report.
Industry segment information has not been provided since the Partnership is engaged in only one industry segment.
Item 2

Item 2 - Properties
As of December 31, 1996, the Partnership held the following investment portfolio:
Park Square Shopping Center - --------------------------- On July 15, 1988, the Partnership purchased the Park Square Shopping Center ("Park Square") located in Brooklyn Park, Minnesota, from a non-affiliated seller. The property, substantially completed during the first quarter of 1988, contains approximately 137,108 square feet of rentable space located on a 17 acre site.
The average occupancy for Park Square for the year ended December 31, 1996 was 85%.
JH Quince Orchard Partners - -------------------------- On December 28, 1988, the Partnership acquired a 99.5% interest in JH Quince Orchard Partners (the "Affiliated Joint Venture"), a joint venture between the Partnership and John Hancock Realty Income Fund-III Limited Partnership ("Income Fund-III"). The Partnership had an initial 99.5% interest and Income Fund-III had an initial 0.5% interest in the Affiliated Joint Venture. Pursuant to the partnership agreement of the Affiliated Joint Venture, Income Fund-III had the option, exercisable prior to December 31, 1990, to increase its investment and interest in the Affiliated Joint Venture to 50%. During the second quarter of 1989, Income Fund-III exercised its option and the Partnership sold a 49.5% interest in the Affiliated Joint Venture to Income Fund-III. The Partnership has since held a 50% interest in the Affiliated Joint Venture since the second quarter of 1989.
On December 28, 1988, the Affiliated Joint Venture contributed 98% of the invested capital of, and acquired a 75% interest in, QOCC-1 Associates, an existing partnership that owns and operates the Quince Orchard Corporate Center, a three-story office building and related land and improvements located in Gaithersburg, Maryland. The partnership agreement of QOCC-1 Associates provides that the Affiliated Joint Venture contribute 95% of any required additional capital contributions. Of the cumulative total invested capital in QOCC-1 Associates at December 31, 1996, 97.55% has been contributed by the Affiliated Joint Venture. The Affiliated Joint Venture continues to hold a 75% interest in QOCC-1 Associates.
The average occupancy for the Quince Orchard Corporate Center for the year ended December 31, 1996 was 100%.
Miami International Distribution Center - --------------------------------------- On July 31, 1989, the Partnership purchased the Miami International Distribution Center ("MIDC") located in Miami, Florida, from the General Partner, which transferred title to the property through a nominee corporation. MIDC is a 215,019 square foot warehouse/distribution facility located on a 9 acre site.
Average occupancy for MIDC for the year ended December 31, 1996 was 87%.
Item 2 - Properties
Miami International Distribution Center (continued) - --------------------------------------- As of December 31, 1996, the Partnership held the following mortgage loans in its investment portfolio:
Loan to 205 Newbury Associates - ------------------------------ On March 10, 1988, the Partnership made a $1,700,000 participating non-recourse mortgage loan to 205 Newbury Associates (the "Borrower"), a non-affiliated borrower, secured by a first mortgage on a property located at 205 Newbury Street, Boston, Massachusetts. The property contains 7,029 rentable square feet of office and retail space.
Loan to General Camera Corporation - ---------------------------------- On June 30, 1989, the Partnership made a $5,500,000 mortgage loan to General Camera Corporation, a non-affiliated borrower, secured by a first mortgage on a 72,000 square foot office/warehouse/service facility located at 540 West 36th Street, New York, New York.
The entire outstanding balance of this loan was paid in full on January 9, 1997.
The foregoing investments of the Partnership are further described in Item 7 of this Report.
Item 3

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 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.
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 4

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 1996.
Part II
Item 5

Item 5 - Market for the Partnership's Securities and Related Security Holder Matters
(a) Market Information
The Partnership's outstanding securities consist of 2,601,552 Units originally sold for $20 per Unit. The Units were offered and sold to the public during the period from October 2, 1987 to January 2, 1989. No established public market exists on which the Units may be traded. Consequently, Investors 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 and by applicable law including state "Blue Sky" laws.
(b) Number of Security Holders Number of Record holders Number of Units as of outstanding as of Title of Class December 31, 1996 December 31, 1996 -------------- ----------------- ----------------- Assignee Units 4,580 2,601,552
(c) Dividend History and Restrictions During the fiscal years ended December 31, 1996 and 1995, the Partnership distributed cash in the amount of $2,916,891 and $2,522,718, respectively, from Distributable Cash from Operations (as defined in the Partnership Agreement). These amounts were allocated to the General Partner, John Hancock Limited Partner and the Investors in accordance with the terms of the Partnership Agreement.
The following table reflects cash distributions made during the two year period ended December 31, 1996:
Item 5 - Market for the Partnership's Securities and Related Security Holder Matters - (Continued)
During 1996, the General Partner estimated that the Partnership's Cash from Operations for the year then ending would be sufficient to provide the Investors with cash distributions at an annualized rate of 6%. Therefore, effective with the May 15, 1996 quarterly cash distribution, the Partnership increased cash distributions to the Investors from an annualized rate of 5% to an annualized rate of 6%. The General Partner anticipates that the Partnership's Cash from Operations will be sufficient to make cash distributions in 1997 comparable to those made in 1996. For a further discussion of the financial condition and results of operations of the Partnership see Item 7 of this Report.
Item 6

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, 1996. 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.
Item 6 - Selected Financial Data (continued)
(a) The ordinary tax income for the Partnership was allocated as follows:
(b) The actual ordinary tax income per Unit has not been presented because the actual ordinary tax income is allocated between tax- exempt and tax-paying entities based upon the respective number of Units held by each entity at December 31, 1996, 1995, 1994, 1993 and 1992. The ordinary tax income per Unit as presented for 1996, 1995, 1994, 1993 and 1992 was computed by dividing the Investors' share of ordinary tax income by the number of Units outstanding during the year.
Item 7

Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued) - ------------------------------- The Partnership has a working capital reserve with a current balance of approximately 3.5% of the Investors' Invested Capital (defined in the Partnership Agreement). The General Partner anticipates that such amount should be sufficient to satisfy the Partnership's general liquidity requirements. Based upon the balance of the working capital reserve and the projected level of cash flows to be generated from the Partnership's investments during 1996, the General Partner determined that the Partnership's Cash from Operations was sufficient to provide Investors with quarterly cash distributions at an annualized rate of 6%. Therefore, effective with the May 15, 1996 cash distribution, the Partnership increased quarterly cash distributions to Investors from an annualized rate of 5% to an annualized rate of 6%.
The Partnership's liquidity would, however, be materially adversely affected if there were a significant reduction in revenues or significant unanticipated operating costs, unanticipated leasing costs or unanticipated capital expenditures. If any or all of these events were to occur, to the extent that the working capital reserve would be insufficient to satisfy the cash requirements of the Partnership, it is anticipated that additional funds would be obtained through a reduction of cash distributions to Investors, bank loans, short-term loans from the General Partner or its affiliates, or the sale or financing of Partnership investments.
Due to favorable real estate market conditions and the income performance of the Fulton Business Park, the General Partner listed the property for sale during May 1996. On November 25, 1996, the General Partner entered into a Purchase and Sale Agreement on behalf of the Partnership for the sale of the Fulton Business Park property to a non-affiliated buyer (the "Buyer") for a gross sales price of $3,450,000. On December 2, 1996, the Partnership sold the Fulton Business Park to the Buyer and received net sales proceeds of $3,313,190, after deductions for commissions and selling expenses incurred in connection with the sale of the property. This transaction generated a loss of $561,341, representing the difference between the net sales price and the property's net book value of $3,874,531 and a write-off of $122,403, representing the unamortized balance of lease acquisition costs. For the year ending December 31, 1996, the Fulton Business Park generated approximately 11% of the Partnerships net cash provided by operations.
The mortgage loan to the General Camera Corporation ("GCC"), made in the original amount of $5,500,000 came due on July 1, 1996. At that time, GCC did not have sufficient cash to pay the entire remaining outstanding principal balance of the loan in the amount of $4,606,110. GCC requested a three month extension of time in which to satisfy the loan while it continued to pursue alternate financing. The General Partner granted GCC this extension in consideration of GCC making an additional one-time payment of $250,000 to further reduce the principal balance of the loan. In addition, GCC was required to make minimum monthly payments of principal and interest in the amount of $85,416 from July 1, 1996 through September 1, 1996. The entire outstanding principal balance of the loan, as extended, plus any accrued but unpaid interest came due on October 1, 1996.
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued) - ------------------------------- During the third quarter of 1996, GCC requested an additional three month extension of time in which to satisfy the loan while it continued to pursue alternate financing. The General Partner granted GCC this extension in consideration of GCC making additional principal payments in the aggregate amount of $400,000 to reduce the outstanding principal balance of the loan. In addition, GCC was required to make minimum monthly payments of principal and interest in the amount of $85,416 from October 1, 1996 through December 1, 1996. On October 11, 1996, and November 8, 1996, GCC made additional payments of $200,000 each, as required by the extension agreement. The entire unamortized principal balance and all accrued but unpaid interest came due on January 1, 1997.
On January 9, 1997, GCC paid the entire outstanding principal balance and all accrued but unpaid interest then due.
The Partnership received an aggregate amount of $8,813,190 from the net sales proceeds from the Fulton Business Park ($3,313,190) and from cumulative repayments on the GCC mortgage loan ($5,500,000). During February 1997, the Partnership distributed $8,794,287, of which $8,142,858 was distributed to the Investors and $651,429 was distributed to the John Hancock Limited Partner. The Partnership retained $18,903 in working capital reserves.
During 1996, cash in the aggregate amount of $119,359 was used for the payment of leasing costs incurred at the Miami International Distribution Center and Park Square Shopping Center properties. The General Partner anticipates that the Partnership will incur an aggregate of approximately $118,000 in leasing costs at the Park Square Shopping Center and Miami International Distribution Center properties during 1997. The current balance in the working capital reserve should be sufficient to pay such leasing costs.
During 1996, approximately $51,000 of cash generated from the Partnership's operations was used to fund non-recurring repair and maintenance expenses incurred at the Miami International Distribution Center, Park Square Shopping Center and Fulton Business Park properties. The General Partner anticipates that the Partnership will incur non-recurring repair and maintenance expenses in the aggregate amount of approximately $38,000 at the Park Square Shopping Center and Miami International Distribution Center properties during 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.
During 1996, cash in the amount of $2,916,891, generated from the Partnership's operations, was distributed to the General Partner and the Investors. The General Partner anticipates that the Partnership will be able to make comparable distributions of cash from operations during each of the four quarters in 1997.
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 remaining properties during 1996 and scheduled leasing activity for each investment during 1997:
A former tenant at the Miami International Distribution Center that had occupied approximately 70,000 square feet, or 33% of the property, had been delinquent in rental payments and expense reimbursements since July 1993 and vacated the property in September 1993. The former tenant's lease obligations expired in December 1994. The General Partner brought an action against the former tenant to obtain full collection of all delinquent amounts and other amounts due under the lease agreement in the aggregate amount of approximately $550,000. During January 1997, the Partnership reached a settlement agreement with the former tenant whereby the Partnership agreed to dismiss the action in exchange for the sum of $114,000. Of the settlement amount, the former tenant i) received a $24,143 credit against the settlement amount, which credit represents the former tenant's security deposit held by the Partnership, ii) was required to make a one-time payment of $50,000 to the Partnership, which amount has been received, and iii) is required to make monthly payments commencing February 15, 1997 in the amount of $2,000 until the sum of $39,857 is paid to the Partnership.
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources (continued) - ------------------------------- The General Partner subsequently secured two replacement tenants for this space at MIDC. However, one of these tenants, leasing approximately 28,000 square feet, or 13% of the property, and whose lease is scheduled to expire in September 2004, vacated its space and has been delinquent in its rental payments and expense reimbursements due since November 1994. The General Partner filed a complaint against this tenant demanding payment for delinquent rental amounts as well as all future obligations due under the lease agreement. The Partnership received a final judgment in the amount of approximately $2,010,000 on January 31, 1996. Subsequent to receiving this judgment, the tenant's owner declared personal bankruptcy in a U.S. bankruptcy court in Florida. In March 1997, the Partnership received $10,000 from the bankruptcy court as final settlement of the Partnership's claim. This amount was ordered to be paid as follows: i) $5,000 upon the bankruptcy court approving the settlement and ii) $5,000 thirty days after the approval of the settlement. As of the date hereof, the Partnership has received the first installment. The General Partner continues to seek a replacement tenant for this space.
During October 1996, one tenant occupying approximately 50,000 square feet, or 23% of the space at the Miami International Distribution Center, and whose lease was scheduled to expire in November 1996, renewed its lease for a ten-year term. Pursuant to the lease, the tenant will receive free rent during January and February 1997. The Partnership incurred approximately $79,500 in leasing costs in connection with this lease renewal during 1996.
The Miami International Distribution Center is located in an area that the Miami Airport Authority has targeted for future expansion of the Airport. During May 1996, the Miami Airport Authority made an offer to purchase this property at an amount in excess of its carrying value. The General Partner is currently negotiating with the Miami Airport Authority towards a mutually acceptable sale of the property. It is possible that, under certain circumstances, the Miami Airport Authority could obtain this property through its powers of eminent domain, although at this time no such plans have been announced or otherwise communicated to the General Partner. The General Partner believes that the Miami Airport Authority's desire to acquire the Miami International Distribution Center has hampered its ability to lease the available space at the property.
Results of Operations - --------------------- The Brooklyn Park, Minnesota real estate market, including the Park Square Shopping Center, has experienced increasing vacancy rates as well as competitive pricing for available space in recent years. The General Partner expects market conditions in Brooklyn Park to remain competitive during 1997 and, therefore, no increase in market rental rates is anticipated. The General Partner will continue to offer aggressive rental packages in an effort to retain existing tenants as well as to secure new tenants for the vacant space at the property.
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Results of Operations (continued) - --------------------- 205 Newbury Associates remained current on its minimum required debt service payments as of December 31, 1996 and as of the date hereof. The General Partner has no reason to believe, based upon current information and events, that the minimum required debt service payments will not continue to be met or that the outstanding principal balance of the loan will not be repaid. However, should 205 Newbury Associates fail to make the minimum required debt service payments, there would be a material adverse effect on the Partnership's liquidity and on the carrying value of the mortgage loan. In addition, should there be an unfavorable change in the financial status of the borrower, there could be a material adverse effect on the carrying value of the mortgage loan. The General Partner will continue to monitor the operations of the property and the financial condition of the borrower.
The General Partner had the Park Square Shopping Center property independently appraised during the first quarter of 1996. Based upon the appraiser's investigation and analysis, the property's market value was estimated to be approximately $9,000,000. The carrying value of the Park Square Shopping center property of approximately $10,010,000 at December 31, 1996 was evaluated in comparison to its estimated future undiscounted cash flows, the independent appraisal and a recent internal appraisal. Based upon such evaluation, the General Partner determined that the property's estimated future undiscounted cash flows were expected to exceed its current carrying value. Therefore, no impairment in value existed and a write-down in value was not required. The Partnership's cumulative investment in the property before accumulated depreciation is approximately $12,960,000.
The General Partner evaluated the carrying value of each of the Partnership's other properties and its joint venture investment as of December 31, 1996 by comparing each such carrying value to the related property's future undiscounted cash flows and the then most recent internal appraisal, in order to determine whether any impairment in values existed. In addition, the General Partner evaluated the status of its mortgage investments and their ultimate collectibility as of December 31, 1996. Based upon such evaluations, the General Partner determined that no impairment in values existed and, therefore, no write-downs were recorded.
The General Partner will continue to conduct periodic property and investment valuations, using internal or independent appraisals, in order to determine whether a impairment in value exists on any of the Partnership's investments.
Average occupancy for the Partnership's equity real estate investments was as follows: Years Ended December 31, 1996 1995 1994 ---- ---- ---- Park Square Shopping Center 85% 85% 85% Miami International Distribution Center 87% 87% 70% Quince Orchard Corporate Center (Affiliated Joint Venture) 100% 100% 83% Fulton Business Park N/A 87% 84%
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
Results of Operations (continued) - ---------------------
1996 compared with 1995
Net income for the year ended December 31, 1996 was $1,602,127, as compared to net income of $2,414,024 in 1995. Included in the results for 1996 are non-recurring losses and write-offs in the aggregate amount of $683,744 which resulted from the sale of the Fulton Business Park property in December 1996. Excluding these amounts, the Partnership's net income decreased by 5% during 1996 as compared to 1995 primarily due to a decline in the net income generated by the Park Square Shopping Center, a decline in the amount of income allocated to the Partnership from its joint venture investment and an increase in general and administrative expenses. The impact of these declines were partially offset by increases in the performance of the Miami International Distribution Center and Fulton Business Park properties.
The Partnership's allocation of income from the Affiliated Joint Venture for the year ended December 31, 1996 decreased by $53,210, or 7%, as compared to 1995. This decrease is due the manner in which the partnership agreement of QOCC-1 Associates allocates income to its partners (see the third paragraph of Item 8

Item 8 - Financial Statements and Supplementary Data
The response to this Item appears beginning on page of this Report. The financial statements of QOCC-1 Associates, an investee of the Registrant as of and for the year ended December 31, 1996, 1995 and 1994 are included herewith.
Item 9

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

Item 10 - Directors and Executive Officers of the Registrant
(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 53 Malcolm G. Pittman, III Director 45 Susan M. Shephard Director 44 Richard E. Frank Treasurer (Chief Accounting Officer) 35
The term of office and other positions held by the persons listed above appear in paragraph (e) below.
(c) Identification of certain significant persons
The General Partner is responsible for the identification, analysis, purchase, operation, and disposal of specific Partnership real estate and mortgage loan investments. The General Partner has established a Real Estate Investment Committee utilizing senior real estate personnel of John Hancock and its affiliates 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 54 John Hancock's Real Estate Investment Group
Kevin McGuire Vice President of John Hancock's 50 Real Estate Investment Group, President of John Hancock Realty Services Corp. and subsidiaries
Stephen Kindl Senior Investment Officer of 39 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.
Item 10 - Directors and Executive Officers of the Registrant (continued)
(e) Business experience
William M. Fitzgerald (age 53) 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 1997. 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.
Malcolm G. Pittman III (age 45) 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 1997. 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 44) 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 1997. 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 35) 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 54) 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.
Item 10 - Directors and Executive Officers of the Registrant (continued)
Kevin McGuire (age 50) 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 39), 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
(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 any ownership interest in the Partnership and no person holds more than ten percent of the Units.
Item 11

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.
Item 11 - Executive Compensation (continued)
Compensation Committee Interlocks and Insider Participation:
The Partnership did not have a Compensation Committee in 1996 and does not currently have such a committee. No current or former officer or employee of the General Partner or its Affiliates participated during the 1996 fiscal year in deliberations regarding the General Partner's compensation as it relates to the Partnership.
Item 12

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 2,601,552 outstanding Units as of December 31, 1996.
(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 holds, or 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

Item 13 - Certain Relationships and Related Transactions
See Note 4 to the Notes to 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 or its Affiliates during the years ended December 31, 1996, 1995 and 1994.
The Partnership provides indemnification to the General Partner and its Affiliates (defined in the Partnership Agreement) 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.
The General Partner and its Affiliates performing services on behalf of the Partnership shall be entitled to indemnity from the Partnership for any loss, damage, or claim by reason of any act performed or omitted to be performed by the General Partner or such Affiliates in good faith on behalf of the Partnership and in a manner within the scope of the authority granted to the General Partner by the Partnership Agreement and in the best interest of the Partnership, except that they shall not be entitled to be indemnified in respect of any loss, damage, or claim incurred by reason of fraud, negligence, misconduct, or breach of fiduciary duty. Any indemnity shall be provided out of and to the extent of Partnership assets only. The Partnership shall not advance any funds to the General Partner or its Affiliates for legal expenses and other costs incurred as a result of any legal action initiated against the General Partner or its Affiliates by a Limited Partner in the Partnership, except under certain specified circumstances.
Item 13 - Certain Relationships and Related Transactions (continued)
In accordance with the terms of the Partnership Agreement, the General Partner and its Affiliates are entitled to the following types of compensation, fees, profits/(losses), expense reimbursements and distributions:
An Affiliate of the General Partner may receive a Property Management Fee for providing property management services for Partnership properties. In such circumstances, the Partnership may pay a fee equal to the amount customarily charged in arm's-length transactions by independent parties rendering comparable services for comparable properties in the localities where such properties are located, but in no event may such fee exceed 6% of the gross receipts of the property under management. To date, no Affiliate of the General Partner has provided property management services to the Partnership and the Partnership did not pay any such fees during the years ended December 31, 1996, 1995 and 1994.
An Affiliate of the General Partner is entitled to receive a Mortgage Servicing Fee for providing mortgage servicing services for Partnership mortgage loans. The Partnership may pay a monthly servicing fee equal to the amount customarily charged in arm's-length transactions by independent parties rendering comparable services, but in no event to exceed 1/4 of 1% annually of any mortgage loan serviced under such agreement. The Partnership did not pay any such fees during the years ended December 31, 1996, 1995 and 1994. The General Partner and its Affiliates are also entitled to Reimbursement for Expenses (defined in the Partnership Agreement) 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 similar services in the same geographic area. The Partnership reimbursed the General Partner for $160,863, $135,632 and $135,667 of such expenses during the years ended December 31, 1996, 1995 and 1994, respectively.
A Subordinated Disposition Fee (defined in the Partnership Agreement) for selling properties is payable to the General Partner 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 Subordinated Disposition Fee during the years ended December 31, 1996, 1995 and 1994.
Item 13 - Certain Relationships and Related Transactions (continued)
A share of the Partnership's Distributable Cash from Operations (defined in the Partnership Agreement) is distributable to the General Partner and may be distributable to the John Hancock Limited Partner. Distributable Cash from Operations is distributed 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 $30,483, $25,228 and $25,224 for the years ended December 31, 1996, 1995 and 1994, respectively. The John Hancock Limited Partner was not entitled to receive any such distributions during 1996, 1995 and 1994.
A share of Cash from Sales, Financings or Repayments (defined in the Partnership Agreement) may be distributed to the General Partner and the John Hancock Limited Partner. Cash from Sales, Financings or Repayments 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, Financings or Repayments was $245,587, $0 and $0 during the years ended December 31, 1996, 1995 and 1994, respectively. In accordance with the Partnership Agreement, the General Partner was not entitled to receive any such distributions during 1996,1995 and 1994.
A share of the Partnership's Profits or Losses for tax purposes 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, Financings or Repayments. The General Partner will generally be allocated 1% of Partnership Losses for tax purposes, and the John Hancock Limited Partner will be 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 and Losses were profits of $14,571, $25,150 and $20,256 during the years ended December 31, 1996, 1995 and 1994, respectively. The John Hancock Limited Partner did not receive an allocation of such Profits or Losses during the years ended December 31, 1996, 1995 and 1994.
This table reflects all compensation, fees, profits/(losses), expense reimbursements and distributions made by the Partnership to the General Partner and/or its Affiliates for the three year period ended December 31, 1996: Years Ended December 31, 1996 1995 1994 ---- ---- ----
Reimbursement for Operating Expenses $160,863 $135,632 $135,667 General Partner Share of Distributable Cash from Operations 30,483 25,228 25,224 John Hancock Limited Partner's share of Cash from Sales, Financings or Repayments 245,587 - - General Partner Share of Profits/ (Losses) for tax purposes 14,571 25,150 20,256
Part IV
Item 14

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
Page Number or Exhibit Page Number or Number Under Incorporation by Regulation S-K Description Reference - --------------- ----------- ---------
4 Instruments defining the rights of security holders
4.1 Amended Agreement of Exhibit A to the Limited Partnership* Prospectus filed under the Partnership's Amendment No. 1 to Form S-11 Registration Statement (File 33-15630)
4.2 Subscription Agreement Exhibit C to the Signature Page and Power of Prospectus filed under Attorney whereby a subscriber the Partnership's agrees to purchase Units and Form S-11 adopts the provisions of the Registration Statement Amended Agreement of Limited (File 33-15630) Partnership*
4.3 Copy of Certificate of Exhibit 4.3 to the Limited Partnership filed Partnership's Form S-11 with the Massachusetts Secretary Registration of State on June 30, 1987* Statement (File 33-15630)
4.4 Copy of First Amendment and Exhibit 4.4 to the Restatement of Certificate Partnership's of Limited Partnership filed Amendment No. 1 to with the Massachusetts Secretary Form S-11 of State on September 28, 1987* Registration Statement (File 33-15630)
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 33-15630)
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued)
10.2 Letter from John Hancock Exhibit 10.2 to Subsidiaries, Inc. containing the Partnership's undertaking as to the net Form S-11 worth of the General Partner* Registration Statement (File 33-15630)
10.3 Documents relating to 205 Newbury Street
(a) Promissory Note between Exhibit 10.3 (a) to John Hancock Realty Income the Partnership's Fund-II Limited Partnership Report on Form 10-K and Trustees of 205 Newbury dated December 31, 1987 Associates* (File 33-15630)
(b) Mortgage Deed and Security Exhibit 10.3 (b) to Agreement between John Hancock the Partnership's Realty Income Fund-II Limited Report on Partnership and Trustees of Form 10-K dated 205 Newbury Associates* December 31, 1987 (File 33-15630)
10.4 Documents relating to Park Square Shopping Center
(a) Agreement of Purchase and Sale Exhibit 10.4(a) dated April 11, 1988, between to the Partnership's Carolyn M. Johnson, as Post-Effective Personal Representative of the Amendment No. 2 Estate of Curtis O. Johnson and to Form S-11 John Hancock Realty Equities, Registration Statement Inc.* (File 33-15630)
(b) Lease Guaranty dated July 15, Exhibit 10.4(b) 1988, by CMT Investments to the Partnership's Limited Partnership to and Post-Effective for the benefit of John Hancock Amendment No. 2 Realty Income Fund-II Limited to Form S-11 Partnership* Registration Statement (File 33-15630)
10.5 Documents relating to Fulton Business Park
(a) Agreement of Purchase and Exhibit 10.5(a) to Sale dated August 10, 1988, the Partnership's between Fulton Business Park Post-Effective Associates and John Hancock Amendment No. 3 Realty Equities, Inc.* to Form S-11 Registration Statement (File 33-15630)
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued)
(b) Purchase and Sale Agreement Exhibit 1 to the between John Hancock Realty Partnership's Report Income Fund-II Limited Partnership on Form 8-K dated and FR Acquisitions, Inc. December 2, 1996 dated December 2, 1996* (File 0-17664)
10.6 Documents relating to Siete Square IV
(a) Promissory Note dated Exhibit 10.6(a) to the October 14, 1988, between Partnership's Report John Hancock Realty Income on Form 10-K dated Fund-II Limited Partnership December 31, 1990 and Siete Properties IV (File 33-15630) General Partnership*
(b) Contingent Interest Agreement Exhibit 10.6(b) to the dated October 14, 1988, between Partnership's Report John Hancock Realty Income on Form 10-K dated Fund-II Limited Partnership and December 31, 1990 Siete Properties IV General (File 33-15630) Partnership*
(c) Deed of Trust, Assignment of Exhibit 10.6(c) to the Rents and Security Agreement Partnership's Report dated October 14, 1988, between on Form 10-K dated John Hancock Realty Income December 31, 1990 Fund-II Limited Partnership, (File 33-15630) Founder's Title Company and Siete Properties IV General Partnership*
(d) Letter of Credit Agreement Exhibit 10.6(d) to the dated October 14, 1988, between Partnership's Report Siete Properties IV General on Form 10-K dated Partnership and John Hancock December 31, 1990 Realty Income Fund-II Limited (File 33-15630) Partnership*
(e) Deed-in-lieu of Foreclosure Exhibit 1 to Amendment between Siete Properties IV Number 1 to the General Partnership and Partnership's Report on John Hancock Realty Income Form 10-K dated Fund-II Limited Partnership * December 31, 1991 (File 0-17664)
(f) Agreement of Purchase and Sale Exhibit 1 to the dated November 17, 1992 Partnership's between John Hancock Realty Report on Form 8-K Income Fund-II and Century dated December 10, 1992 National Insurance Company * (File 0-17664)
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued)
10.7 Documents relating to JH Quince Orchard Partners
(a) Amended and Restated Partnership Exhibit 10.7(a) to the Agreement dated December 28, Partnership's Report 1988, for QOCC-1 Associates among on Form 10-K dated JH Quince Orchard Partners and December 31, 1990 Quad Properties Inc.* (File 33-15630)
(b) Amended and Restated Declaration Exhibit 10.7(b) to the of Protective Covenants, Partnership's Report Conditions and Restrictions of on Form 10-K dated Quince Orchard Corporate Park December 31, 1990 dated December 27, 1988* (File 33-15630)
(c) Partnership Agreement dated Exhibit 10.7(c) to the December 23, 1988, between Partnership's Report John Hancock Realty Income on Form 10-K dated Fund-II Limited Partnership December 31, 1990 and John Hancock Realty Income (File 33-15630) Fund-III Limited Partnership*
10.8 Documents relating to General Camera Corporation
(a) Mortgage dated June 30, 1989 Exhibit 1 to the by and between General Partnership's Report Camera Corporation and on Form 8-K dated John Hancock Realty Income June 30, 1989 Fund-II Limited Partnership* (File 33-15630)
(b) Secured Note dated June 30, Exhibit 2 to the 1989 from General Camera Partnership's Corporation to John Hancock Report on Form 8-K Realty Income Fund-II Limited dated June 30, 1989 Partnership.* (File 33-15630)
(c) Guaranty dated June 30, 1989 Exhibit 3 to the by Richard Dibona, Margaret Partnership's Dibona, Milton Keslow and Report on Form Sandra Keslow to and for the 8-K dated benefit of John Hancock June 30, 1989 Realty Income Fund-II (File 33-15630) Limited Partnership.*
(d) First Amendment to Mortgage, Exhibit 10.8(d) to the First Amendment to Assignment Partnership's Report on of Leases, and First Amendment to Form 10-K dated Assignment of Rents dated June 1, December 31, 1994 1994 by and between General (File 0-17664) Camera Corporation and John Hancock Realty Income Fund-II LP*
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued)
(e) First Amendment to Note dated Exhibit 10.8(e) to the June 1, 1994 from General Camera Partnership's Report on Corporation and John Hancock Realty Form 10-K dated Income Fund-II LP* December 31, 1994 (File 0-17664)
10.9 Documents relating to Miami International Distribution Center
(a) Agreement of Purchase and Exhibit 1 to the Sale between National Life Partnership's Insurance Company and John Report on Form 8-K Hancock Realty Equities dated June 30, 1989 Incorporated.* (File 33-15630)
(b) Warranty deed dated July 31, Exhibit 2 to the 1989, between Palms of Partnership's Carrollwood, Inc. and Report on John Hancock Realty Income Form 8-K dated Fund-II Limited Partnership.* June 30, 1989 (File 33-15630)
10.10 Documents relating to Management Agreement
(a) Management Agreement dated Exhibit 10.10(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 0-17664)
(b) Agreement Concerning Subcontracting Exhibit 10.10(b)to the of Management Services Pertaining Partnership's Report on to John Hancock Realty Income Form 10-K dated Fund-II Limited Partnership dated December 31, 1993 May 28, 1993between John Hancock (File 0-17664) Realty Equities,Inc., Hancock Realty Investors, Incorporated and John Hancock Mutual Life Insurance Company*
10.11 Documents relating to Executive Compensation Plans and Arrangements
(a) Amended Agreement of Limited Exhibit A to the Partnership* Prospectus filed under the Partnership's Amendment No. 1 to Form S-11 Registration Statement (File 33-15630)
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued)
(b) During the quarter ended December 31, 1996, the Partnership filed a report on Form 8-K. This report, dated December 2, 1996, disclosed the terms of the sale of the Fulton Business Park property and included the following Pro Forma Financial Statements:
Pro Forma Balance Sheet at September 30, 1996 Pro Forma Statement of Operations for the nine months ended September 30, 1996 Pro Forma Statement of Operations for the year ended December 31,
(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.
+Filed herewith *Incorporated by reference
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, 1997.
JOHN HANCOCK REALTY INCOME FUND-II 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, 1997.
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
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14 (a) (1) AND (2), (c) AND (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 1996
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
BOSTON, MASSACHUSETTS
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
(ITEMS 8 AND 14(a) (1) AND (2))
(1) (a) Financial Statements of the Registrant Page Report of Independent Auditors Balance Sheets at December 31, 1996 and 1995 Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 Statements of Partners' Equity for the Years Ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 Notes to Financial Statements
(b) Financial Statements of the Investee Report of Independent Auditors Balance Sheet at December 31, 1996 Statement of Operations for the Year Ended December 31, 1996 Statement of Partners' Equity for the Year Ended December 31, 1996 Statement of Cash Flows for the Year Ended December 31, 1996 Notes to Financial Statements
Report of Independent Auditors Balance Sheet at December 31, 1995 Statement of Operations for the Year Ended December 31, 1995 Statement of Partners' Equity for the Year Ended December 31, 1995 Statement of Cash Flows for the Year Ended December 31, 1995 Notes to Financial Statements
Report of Independent Auditors Balance Sheet at December 31, 1994 Statement of Operations for the Year Ended December 31, 1994 Statement of Partners' Equity for the Year Ended December 31, 1994 Statement of Cash Flows for the Year Ended December 31, 1994 Notes to Financial Statements
(2) Financial Statement Schedules
Schedule III: Real Estate and Accumulated Depreciation Schedule IV: Mortgage Loans on Real Estate
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.
Report of Independent Auditors
To the Partners John Hancock Realty Income Fund-II Limited Partnership
We have audited the accompanying balance sheets of John Hancock Realty Income Fund-II Limited Partnership as of December 31, 1996 and 1995, and the related statements of operations, partners' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the index at Item 14(a). These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of QOCC-1 Associates (a limited partnership in which JH Quince Orchard Partners, a joint venture in which the Partnership has a 50% interest, has a 75% interest) have been audited by other auditors whose reports have been furnished to us; insofar as our opinion on the financial statements relates to data included for QOCC-1 Associates, it is based solely on their reports.
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 and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of John Hancock Realty Income Fund-II Limited Partnership at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, 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 14, 1997, except for Note 10, as to which the date is March 18, 1997
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
BALANCE SHEETS
ASSETS December 31, 1996 1995 ---- ---- Current assets: Cash and cash equivalents $8,669,990 $3,520,394 Restricted cash 15,166 26,240 Other current assets 112,762 107,596 ---------- ---------- Total current assets 8,797,918 3,654,230
Real estate loans 5,245,361 6,557,159
Investment in property: Land 5,040,000 5,560,000 Buildings and improvements 14,218,208 18,836,994 ---------- ---------- 19,258,208 24,396,994 Less: accumulated depreciation 3,875,115 4,524,369 ---------- ---------- 15,383,093 19,872,625
Investment in joint venture 7,574,268 7,842,586 Long-term restricted cash 96,446 106,027 Deferred expenses, net of accumulated amortization of $1,086,688 in 1996 and $995,374 in 1995 1,034,045 1,316,753 ---------- ---------- Total assets $38,131,131 $39,349,380 ========== ==========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities: Accounts payable and accrued expenses $282,825 $239,566 Accounts payable to affiliates 88,991 35,735 ---------- ---------- Total current liabilities 371,816 275,301
Partners' equity/(deficit): General Partner's deficit (166,057) (152,910) Limited Partners' equity 37,925,372 39,226,989 ---------- ---------- Total partners' equity 37,759,315 39,074,079 ---------- ---------- Total liabilities and partners' equity $38,131,131 $39,349,380 ========== ==========
See Notes to Financial Statements
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
STATEMENTS OF OPERATIONS
Years Ended December 31, 1996 1995 1994 ---- ---- ----
Income: Rental income $2,505,925 $2,447,532 $2,170,416 Interest income 877,475 879,508 843,631 Income from joint venture 701,988 755,198 541,188 ---------- ---------- ---------- Total income 4,085,388 4,082,238 3,555,235
Expenses: Depreciation 615,000 627,886 628,198 Property operating expenses 651,925 536,613 422,514 General and administrative expenses 375,330 231,487 233,511 Amortization of deferred expenses 279,665 272,228 285,905 Loss on sale of property 561,341 - - ---------- ---------- ---------- Total expenses 2,483,261 1,668,214 1,570,128 ---------- ---------- ---------- Net income $1,602,127 $2,414,024 $1,985,107 ========== ========== ==========
Allocation of net income:
General Partner $16,021 $24,140 $19,851 John Hancock Limited Partner (41,165) - - Investors 1,627,271 2,389,884 1,965,256 ---------- ---------- ---------- $1,602,127 $2,414,024 $1,985,107 ========== ========== ==========
Net income per Unit $0.63 $0.92 $0.76 ========== ========== ==========
See Notes to Financial Statements
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY Years Ended December 31, 1996, 1995 and 1994
See Notes to Financial Statements
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
STATEMENTS OF CASH FLOWS
See Notes to Financial Statements
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. Organization of Partnership --------------------------- John Hancock Realty Income Fund-II Limited Partnership (the "Partnership") was formed under the Massachusetts Uniform Limited Partnership Act on June 30, 1987. As of December 31, 1996, the partners in the Partnership consisted of John Hancock Realty Equities, Inc. (the "General Partner"), a wholly-owned, indirect subsidiary of John Hancock Mutual Life Insurance Company; John Hancock Realty Funding, Inc. (the "John Hancock Limited Partner"); John Hancock Income Fund-II Assignor, Inc. (the "Assignor Limited Partner"); and 4,580 Unitholders (the "Investors"). The Assignor Limited Partner holds 2,601,552 Assignee Units (the "Units"), representing economic and certain other rights attributable to Investor Limited Partnership Interests in the Partnership, for the benefit of the Investors. The John Hancock Limited Partner, the Assignor Limited Partner and the Investors are collectively referred to as the Limited Partners. The General Partner and the Limited Partners are collectively referred to as the Partners. The initial capital of the Partnership was $2,000, representing capital contributions of $1,000 by 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 5,000,000 Assignee Units at $20 per Unit. During the offering period, which terminated on January 2, 1989, 2,601,552 Units were sold and the John Hancock Limited Partner made additional capital contributions of $4,161,483. There were no changes in the number of Units outstanding subsequent to the termination of the offering period.
The Partnership is engaged solely in the business of (i) acquiring, improving, holding for investment and disposing of existing income- producing retail, industrial and office properties on an all-cash basis, free and clear of mortgage indebtedness, and (ii) making mortgage loans consisting of conventional first mortgage loans and participating mortgage loans secured by income-producing retail, industrial and office properties. 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, 2017, 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 investments of the Partnership will be disposed of, and the Partnership terminated, before December 31, 2017.
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
2. Significant Accounting Policies (continued) ------------------------------ The Partnership maintains its accounting records and recognizes rental income 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.
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 has been designated as short or long-term based upon the term of the related lease agreement.
Real estate loans are recorded at amortized cost unless it is determined by the General Partner that in economic substance the loan represents an investment in property or joint venture. In such instances, these investments are accounted for using the equity method.
Investments in property are recorded at the lower of cost or market. 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.
Investment in joint venture is recorded using the equity method.
Fees paid to the General Partner for the acquisition of joint venture and mortgage loan investments have been deferred and are being amortized over the life of the investments to which they apply. 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 eight and one-half years, the then estimated remaining life of the Partnership. Capitalized tenant improvements and lease commissions are being amortized on a straight-line basis over the terms of the leases to which they relate.
The net income per Unit for each year was calculated by dividing the Investors' share of net income by the number of Units outstanding during each year.
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
2. Significant Accounting Policies (continued) ------------------------------ No provision for income taxes has been made in the Financial Statements since such taxes are the responsibility of the individual Partners and Investors and not of the Partnership.
In the fourth quarter of 1995, the Partnership adopted the Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (the "Statement 121"). Statement 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The adoption of Statement 121 had no effect on the Partnership's financial statements at December 31, 1996.
3. The Partnership Agreement ------------------------ Distributable Cash from Operations (defined in the Partnership Agreement) is distributed 1% to the General Partner and the remaining 99% in the following order of priority: first, to the Investors until they receive a 7% non-cumulative, non-compounded annual cash return on their Invested Capital (defined in the Partnership Agreement); second, to the General Partner to pay the Subordinated Allocation (defined in the Partnership Agreement) equal to 3 1/2% of Distributable Cash from Operations for managing the Partnership's activities; third, to the John Hancock Limited Partner until it receives a 7% non-cumulative, non-compounded annual cash return on its Invested Capital; fourth, to the Investors and the John Hancock Limited Partner in proportion to their respective Capital Contributions (defined in the Partnership Agreement), until they have received a 10% non-cumulative, non-compounded annual cash return on their Invested Capital; fifth, to the General Partner to pay the Incentive Allocation (defined in the Partnership Agreement) equal to 2 1/2% of Distributable Cash from Operations; and sixth, to the Investors and the John Hancock Limited Partner in proportion to their respective Capital Contributions. Any Distributable Cash from Operations which is available as a result of a reduction of working capital reserves funded by Capital Contributions of the Investors, will be distributed 100% to the Investors.
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
3. The Partnership Agreement (continued) ------------------------- Cash from a Sale, Financing or Repayment (defined in the Partnership Agreement) of a Partnership Investment, is first used to pay all debts and liabilities of the Partnership then due and then to fund any reserves for contingent liabilities. Cash from Sales, Financings or Repayments is then distributed and paid in the following order of priority: first, to the Investors and the John Hancock Limited Partner, with the distribution made between the Investors and the John Hancock Limited Partner in proportion to their respective Capital Contributions, until the Investors and the John Hancock Limited Partner have received an amount equal to their Invested Capital; second, to the Investors until they have received, after giving effect to all previous distributions of Distributable Cash from Operations and any previous distributions of Cash from Sales, Financings or Repayments after the return of their Invested Capital, the Cumulative Return on Investment (defined in the Partnership Agreement); third, to the John Hancock Limited Partner until it has received, after giving effect to all previous distributions of Distributable Cash from Operations and any previous distributions of Cash from Sales, Financings or Repayments after the return of its Invested Capital, the Cumulative Return on Investment; fourth, to the General Partner to pay any Subordinated Disposition Fees then payable pursuant to Section 6.4(c) of the Partnership Agreement; and fifth, 99% to the Investors and the John Hancock Limited Partner and 1% to the General Partner, with the distribution made between the Investors and the John Hancock Limited Partner in proportion to their respective Capital Contributions.
Cash from the sale or repayment of the last of the Partnership's properties or mortgage loans is distributed in the same manner as Cash from Sales, Financings or Repayments, 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, Financings or Repayments, as specified in the previous paragraph.
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
3. The Partnership Agreement (continued) ------------------------- Profits for tax purposes from the normal operations of the Partnership for each fiscal year are allocated to the Partners in the same amounts as Distributable Cash from Operations for that year. If such profits are less than Distributable Cash from Operations for any year, then they are allocated in proportion to the amounts of Distributable Cash from Operations allocated for that year. If such profits are greater than Distributable Cash from Operations for any year, they are allocated 1% to the General Partner and 99% to the John Hancock Limited Partner and the Investors, with the allocation made between the John Hancock Limited Partner and the Investors in proportion to their respective Capital Contributions. Losses for tax purposes from the normal operations of the Partnership are allocated 1% to the General Partner and 99% to the John Hancock Limited Partner and the Investors, with the allocation made between the John Hancock Limited Partner and the Investors in proportion to their respective Capital Contributions.
Profits and Losses from Sales, Financings or Repayments are generally allocated 99% to the Limited Partners and 1% to the General Partners.
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 or such affiliate in good faith on behalf of the Partnership within the scope of the authority granted to the General Partner by the Partnership Agreement and in the best interest of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner and its Affiliates performing services on behalf of the Partnership shall be entitled to indemnity from the Partnership for any loss, damage, or claim by reason of any act performed or omitted to be performed by the General Partner or such Affiliates in good faith on behalf of the Partnership and in a manner within the scope of the authority granted to the General Partner by the Partnership Agreement and in the best interest of the Partnership, except that they shall not be entitled to be indemnified in respect of any loss, damage, or claim incurred by reason of fraud, negligence, misconduct, or breach of fiduciary duty. Any indemnity shall be provided out of and to the extent of Partnership assets only. The Partnership shall not advance any funds to the General Partner or its Affiliates for legal expenses and other costs incurred as a result of any legal action initiated against the General Partner or its Affiliates by a Limited Partner in the Partnership, except under certain specified circumstances.
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
4. Transactions with the General Partner and Affiliates ---------------------------------------------------- Fees and expenses incurred and/or paid by the General Partner or its Affiliates on behalf of the Partnership during the three years ended December 31, 1996, 1995 and 1994 and to which the General Partner or its affiliates are entitled to reimbursement from the Partnership were $160,863, $135,632 and $135,667, respectively. 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 or such affiliate in good faith on behalf of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner believes that this indemnification applies to the class action complaint described in Note 10. Accordingly, the Partnership has accrued $41,475 for the year ended December 31, 1996, which amount is included in the Statements of Operations, and represents the Partnership's share of costs incurred by the General Partner and its affiliates relating to the class action complaint.
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.
5. Investment in Property --------------------- Investment in property at cost consists of managed, fully-operating, commercial real estate as follows:
December 31, 1996 1995 ---- ---- Park Square Shopping Center $12,886,230 $12,886,230 Miami International Distribution Center 6,371,978 6,371,978 Fulton Business Park - 5,138,786 ----------- ----------- $19,258,208 $24,396,994 =========== ===========
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
5. Investment in Property (continued) --------------------- On December 2, 1996, The Partnership sold the Fulton Business Park property to a non-affiliated buyer for a net sales price of $3,313,190, 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 approximately $561,341, representing the difference between the net sales price and the property's net book value of $3,874,531.
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 Partnership leases its properties to non-affiliated tenants primarily under long-term operating leases.
At December 31, 1996, future minimum rentals on non-cancelable leases relating to the above properties were as follows: 1997 $2,017,346 1998 1,920,916 1999 1,719,386 2000 1,247,401 2001 1,060,241 Thereafter 3,882,153 ----------- $11,847,443 ===========
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
6. Real Estate Loans ---------------- On March 10, 1988, the Partnership made a $1,700,000 participating non- recourse mortgage loan to a non-affiliated borrower, secured by a first mortgage on commercial real estate known as 205 Newbury Street, located in Boston, Massachusetts. Under the terms of the loan agreement, the borrower is required to pay interest only monthly at an annual rate of 9.5% with the entire outstanding principal balance due on April 1, 1998. In addition to these amounts, the borrower is obligated to pay the Partnership 25% of the net cash flow derived from the operations of the property during the term of the loan and a specified portion of the net sales price or mutually agreed upon fair market value of the property upon its sale or refinancing. Contingent interest payments, based on the net cash flow from the property, were not received from 1990 through 1995 because the property did not generate any cash flow in excess of the required minimum debt service payments. During the year ended December 31, 1996, the Partnership received two contingent interest payments, the sum of which is not material.
On June 30, 1989, the Partnership made a $5,500,000 mortgage loan to a non-affiliated borrower, secured by a first mortgage on commercial real estate known as the General Camera Corporation Building, located in New York, New York. In addition, the loan is personally guaranteed by the principal stockholders of General Camera Corporation ("GCC"). Under the original terms of the loan agreement, GCC was required to pay interest only monthly at an annual rate of 11%.
Effective June 1, 1994, the loan agreement was amended i) to require GCC to make a one-time payment of $250,000 towards the outstanding balance of the loan and ii) to require that all future monthly payments include amounts to amortize the then outstanding loan balance. GCC was required to make payments of $60,416 per month on the first day of each month commencing on July 1, 1994 and ending on June 1, 1995. Commencing on July 1, 1995 and ending on June 1, 1996, payments of $85,416 per month were required on the first day of each month. The entire unamortized principal balance of $4,606,110 and all accrued but unpaid interest came due on July 1, 1996.
During the second quarter of 1996, GCC requested a three month extension of time in which to satisfy the loan while it continued to pursue alternate financing. The General Partner granted GCC this extension in consideration of GCC making an additional one-time payment of $250,000 to reduce the outstanding principal balance of the loan. In addition, GCC was required to make monthly loan payments of $85,416 from July 1, 1996 through September 1, 1996. On July 1, 1996, GCC made the $250,000 payment as required by the extension agreement. During August 1996, GCC made an additional payment of $125,000 to further reduce the outstanding principal balance of the loan. The entire unamortized principal balance and all accrued but unpaid interest came due on October 1, 1996.
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
6. Real Estate Loans (continued) ----------------- During the third quarter of 1996, GCC requested an additional three month extension of time in which to satisfy the loan while it continued to pursue alternate financing. The General Partner granted GCC this extension in consideration of GCC making an additional payment in the aggregate amount of $400,000 to reduce the outstanding principal balance of the loan. In addition, GCC will continue to make monthly loan payments of $85,416 from October 1, 1996 through December 1, 1996. On October 11, 1996, and November 8, 1996, GCC made additional payments of $200,000 each as required by the extension agreement. The entire unamortized principal balance and all accrued but unpaid interest came due on January 1, 1997. On January 9, 1997, GCC paid the entire outstanding principal balance and accrued but unpaid interest then due.
Real estate loans are evaluated for collectibility on an on-going basis.
7. Investment in Joint Venture --------------------------- On December 28, 1988, the Partnership acquired a 99.5% interest in JH Quince Orchard Partners (the "Affiliated Joint Venture"), a joint venture between the Partnership and John Hancock Realty Income Fund-III Limited Partnership ("Income Fund-III"). The Partnership had an initial 99.5% interest and Income Fund-III had an initial 0.5% interest in the Affiliated Joint Venture. Pursuant to the partnership agreement of the Affiliated Joint Venture, Income Fund-III had the option, exercisable prior to December 31, 1990, to increase its investment and interest in the Affiliated Joint Venture to 50%. During the second quarter of 1989, Income Fund-III exercised its option and the Partnership sold a 49.5% interest in the Affiliated Joint Venture to Income Fund-III. The Partnership has held a 50% interest in the Affiliated Joint Venture since the second quarter of 1989.
On December 28, 1988, the Affiliated Joint Venture contributed 98% of the invested capital of, and acquired a 75% interest in, QOCC-1 Associates, an existing partnership which owns and operates the Quince Orchard Corporate Center, a three-story office building and related land and improvements located in Gaithersburg, Maryland. During the years ended December 31, 1994 and 1993, the partners in QOCC-1 Associates were required to make additional capital contributions towards the funding of leasing costs incurred at the property. In accordance with the terms of the partnership agreement of QOCC-1 Associates, the Affiliated Joint Venture contributed 95% of such additional capital. Of the cumulative total invested capital in QOCC- 1 Associates at December 31, 1996, 97.55% has been contributed by the Affiliated Joint Venture. The Affiliated Joint Venture continues to hold a 75% interest in QOCC-1 Associates.
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
7. Investment in Joint Venture (continued) --------------------------- Net cash flow from QOCC-1 Associates is distributed in the following order of priority: first, to the payment of all debts and liabilities of QOCC-1 Associates and to fund reserves deemed reasonably necessary; second, to the partners in proportion to their respective invested capital until each has received a 9% return on invested capital; third, the balance, if any, to the partners in proportion to their interests. Prior to 1996, QOCC-1 Associates had not provided the partners with a return in excess of 9% on their invested capital. During 1996, the partners did, however, receive a return on invested capital of approximately 12%.
Summarized financial information for QOCC-1 Associates is as follows: Financial Position at December 31, 1996 1995 ---- ---- Current assets $152,573 $168,756 Deferred expenses, net 1,835,645 2,140,529 Other assets 1,724,493 1,623,912 Investment in property, net 12,304,945 12,644,363 ------------ ----------- Total assets $16,017,656 $16,577,560 =========== ===========
Current liabilities $476,658 $465,743 Partners' equity 15,540,998 16,111,817 ------------ ----------- Total liabilities and equity $16,017,656 $16,577,560 =========== ===========
Results of Operations Years Ended December 31, 1996 1995 1994 ---- ---- ---- Total income $2,754,712 $2,719,151 $2,243,942 Total expenses 1,220,531 1,180,460 1,144,080 ---------- ---------- ---------- Net income $1,534,181 $1,538,691 $1,099,862 ========== ========== ==========
The Affiliated Joint Venture's share of QOCC-1 Associates' partners' equity was $15,540,998 and $16,111,817 at December 31, 1996 and 1995, respectively. The Affiliated Joint Venture's share of QOCC-1 Associates' net income was $1,403,992, $1,510,397 and $1,082,373 for the years ended December 31, 1996, 1995 and 1994, respectively. As noted above, the Partnership has a 50% interest in the Affiliated Joint Venture.
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
8. Deferred Expenses ----------------- Deferred expenses consist of the following:
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
9. Federal Income Taxes ------------------ A reconciliation of the net income reported in the Statements of Operations to the net income reported for federal income tax purposes is as follows:
A reconciliation of the Partnership's properties' aggregate cost for book and federal income tax purposes is as follows:
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
10. 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. Accordingly, the Partnership has accrued $41,475 for the year ended December 31, 1996, which amount is included in the Statement of Operations and represents the Partnership's share of costs incurred by the General Partner and its Affiliates relating to the class action complaint.
At the present time, the General Partner can not estimate the impact, if any, of the potential indemnification claims 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.
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
11. Subsequent Events ------------------ On February 14, 1997, the Partnership made a cash distribution in the aggregate amount of $9,556,358. Of this amount, $762,071 was generated from Distributable Cash from Operations for the quarter ended December 31, 1996, $3,315,418 was generated from Distributable Cash from Sales, Financings or Repayments during the year ended December 31, 1996 and $5,478,869 was generated from Distributable Cash from Sales, Financings or Repayments during the first quarter of 1997. These amounts were distributed in accordance with the Partnership Agreement and were allocated as follows:
FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT
QOCC-1 ASSOCIATES
DECEMBER 31, 1996
QOCC-1
PAGE
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS
BALANCE SHEET
STATEMENT OF INCOME
STATEMENT OF PARTNERS' EQUITY
STATEMENT OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Partners QOCC-1 Associates
We have audited the accompanying balance sheet of QOCC-1 Associates as of December 31, 1996, and the related statements of income, partners' equity and cash flows for the year then ended. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 QOCC-1 Associates as of December 31, 1996, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles.
REZNICK FEDDER & SILVERMAN
Bethesda, Maryland January 8, 1997
QOCC-1 Associates BALANCE SHEET December 31, 1996
ASSETS
RENTAL PROPERTY Land $ 3,670,000 Land improvements 35,425 Building 11,461,343 Building improvements 63,136 ----------- 15,229,904 Less accumulated depreciation 2,924,959 -----------
12,304,945 ----------- OTHER ASSETS Cash and cash equivalents 503,566 Prepaid taxes and insurance 96,095 Prepaid leasing commissions 302,122 Deferred rent 1,277,405 Leasing costs, less accumulated amortization of $619,264 1,533,523 ----------- 3,712,711 ----------- $ 16,017,656 =========== LIABILITIES AND PARTNERS' EQUITY
LIABILITIES Accounts payable and accrued expenses $ 29,570 Prepaid rent and security deposit 447,088 ----------- 476,658
COMMITMENT -
PARTNERS= EQUITY 15,540,998 ----------- $ 16,017,656 ===========
See notes to financial statements
QOCC-1 Associates STATEMENT OF INCOME Year ended December 31, 1996
Revenue Rental income - base $ 2,691,797 Rental income - escalations 61,015 Interest income 1,900 --------- Total revenue 2,754,712
Expenses Accounting $ 8,100 Advertising and promotion 1,271 Bad debts 576 Commissions 86,320 Depreciation and amortization 588,496 Insurance 5,503 Legal 1,371 Management fees 50,430 Personnel services 76,801 Repairs and maintenance 199,601 Supplies 2,145 Taxes 191,609 Travel 21 Utilities 8,287 Total expenses --------- 1,220,531 --------- NET INCOME $ 1,534,181 =========
See notes to financial statements
QOCC-1 Associates STATEMENT OF PARTNERS' EQUITY Year ended December 31, 1996
Equity at Net Distri- Equity at January income butions December 1, 1996 31, 1996 --------- --------- --------- -------- JH Quince Orchard $ 15,750,296 $ 1,403,992 $ (1,940,627) $ 15,213,661 Partners
Quad Properties, Inc. 361,521 130,189 (164,373) 327,337 --------- --------- --------- --------- $ 16,111,817 $ 1,534,181 $ (2,105,000) $ 15,540,998 ========== ========== ========== ==========
See notes to financial statements
QOCC-1 Associates STATEMENT OF CASH FLOWS Year ended December 31, 1996
Cash flows from operating activities Net income $ 1,534,181 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 588,496 Decrease in accounts receivable - other 2,186 Increase in prepaid taxes and insurance (1,418) Increase in accounts payable and accrued 10,005 expenses Decrease in prepaid leasing commissions 86,320 Increase in prepaid rent and security deposit 910 Increase in deferred rent (99,671) -------- Net cash provided by operating activities 2,121,009 -------- Cash flows from investing activities Investment in rental property (30,514) -------- Net cash used in investing activities (30,514) -------- Cash flows from financing activities Distributions to partners (2,105,000) -------- Net cash used in financing activities (2,105,000) -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (14,505)
Cash and cash equivalents, beginning 518,071 -------- Cash and cash equivalents, end $ 503,566 ========
See notes to financial statements
QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The partnership was organized on December 27, 1988, as a general partnership under the laws of the State of Maryland for the purpose of operating an office building with approximately 99,782 of net rentable square feet in Gaithersburg, Maryland. The building was acquired in December 1988. The partnership conducts its rental operations under a lease agreement with one tenant.
Use of Estimates ---------------- 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 could differ from those estimates.
Rental Property --------------- Rental property is carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method.
Cash Equivalents ---------------- For purposes of the statement of cash flows, the partnership considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents.
Rental Income ------------- Rental income is recognized as rentals become due. For instances in which rent concession periods are involved, rental income is recognized using the straight-line method over the term of the lease, which includes the rent concession period. The amount applicable to the rent concession is recorded as a deferred asset against which future collections are applied. Rental payments received in advance are deferred until earned. The lease between the partnership and the tenant of the property is an operating lease.
QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually.
Prepaid Leasing Commissions --------------------------- Prepaid leasing commissions are charged to operations using the straight- line method over 76 months.
Leasing Costs ------------- Leasing costs were incurred to obtain a new tenant for the office building and improve the rental space. These costs are being written off using the straight-line method over the ten-year term of the lease.
NOTE B - RENTAL INCOME UNDER OPERATING LEASE
The partnership has leased the office building to a new tenant effective March 1994 under a ten-year term with a five-year renewal option at the discretion of the lessee. The tenant may terminate the lease after the 76th calendar month of the term by notifying the landlord as outlined in the lease agreement. Rental income consists of fixed base rent and variable lease escalation reimbursements, calculated annually.
Future minimum base rental payments due under the noncancelable operating lease are as follows: Year Ending December 31, Amount ------------ ---------- 1997 $ 2,656,929 1998 2,723,352 1999 2,791,436 2000 2,861,222 2001 2,932,752 Thereafter 6,602,927 ---------- $ 20,568,618 ==========
QOCC-1 Associates NOTES TO FINANCIAL STATEMENTS - CONTINUED December 31, 1996
NOTE C - RELATED PARTY TRANSACTION
During 1996, the partnership incurred charges of approximately $129,376 for management fees, personnel services and supplies provided by affiliates of one of the partners.
NOTE D - COMMITMENT
The partnership has entered into a lease commission agreement with Carey Winston. The agreement provides for $546,696 of commissions to be paid for the first 76 months of the tenant's lease, which began March 1994. If the tenant does not exercise its option to terminate the lease after the 76th month, additional commissions in the amount of $376,198 for the remaining 44 months of the tenant's lease will be due at that time.
NOTE E - CONCENTRATION OF CREDIT RISK
The partnership maintains its cash balances in two banks. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000 by each bank. As of December 31, 1996, the uninsured portion of the cash balances held at the banks was $303,566.
FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT
QOCC-1 ASSOCIATES
DECEMBER 31, 1995
QOCC-1 Associates
PAGE
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS:
BALANCE SHEET
STATEMENT OF INCOME
STATEMENT OF PARTNERS' EQUITY
STATEMENT OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Partners QOCC-1 Associates
We have audited the accompanying balance sheet of QOCC-1 Associates as of December 31, 1995, and the related statements of income, partners' equity and cash flows for the year then ended. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 QOCC-1 Associates as of December 31, 1995, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles.
REZNICK FEDDER & SILVERMAN
Bethesda, Maryland January 10, 1996
QOCC-1 Associates
BALANCE SHEET
December 31, 1995
ASSETS
RENTAL PROPERTY Land $3,670,000 Land improvements 35,425 Building 11,461,343 Building improvements 32,622 ----------- 15,199,390 Less accumulated depreciation 2,555,027 ----------- 12,644,363 -----------
OTHER ASSETS Cash and cash equivalents 518,071 Accounts receivable - other 2,186 Prepaid taxes and insurance 94,677 Prepaid leasing commissions 388,442 Deferred rent 1,177,734 Leasing costs, less accumulated amortization of $400,701 1,752,087 ----------- 3,933,197 ----------- $16,577,560 ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES Accounts payable and accrued expenses $19,565 Prepaid rent and security deposit 446,178 ----------- 465,743
COMMITMENT -
PARTNERS' EQUITY 16,111,817 ----------- $16,577,560 ===========
See notes to financial statements
QOCC-1 Associates
STATEMENT OF INCOME
Year ended December 31, 1995
Revenue Rental income - base $2,691,797 Rental income - escalations 25,100 Interest income 1,975 Other revenue 279 ----------- Total revenue 2,719,151
Expenses Accounting $7,800 Advertising and promotion 441 Commissions 103,584 Depreciation and amortization 553,531 Insurance 5,392 Management fees 49,200 Personnel services 66,996 Repairs and maintenance 196,099 Supplies 4,099 Taxes 185,376 Travel 506 Utilities 7,436 ----------- Total expenses 1,180,460 ----------- NET INCOME $1,538,691 ===========
See notes to financial statements
QOCC-1 Associates
STATEMENT OF PARTNERS' EQUITY
Year ended December 31, 1995
See notes to financial statements
QOCC-1 Associates
STATEMENT OF CASH FLOWS
Year ended December 31, 1995
Cash flows from operating activities Net income $1,538,691 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 553,531 Decrease in accounts receivable - other 1,546 Increase in accounts receivable - rent concessions (586,098) Increase in prepaid taxes and insurance (4,051) Increase in accounts payable and accrued expenses 3,263 Decrease in prepaid leasing commissions 103,584 Increase in prepaid rent and security deposit 33,296 ---------- Net cash provided by operating activities 1,643,762 ----------
Cash flows from financing activities Distributions to partners (1,630,000) ---------- Net cash used in financing activities (1,630,000) ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,762
Cash and cash equivalents, beginning 504,309 ---------- Cash and cash equivalents, end $518,071 ==========
See notes to financial statements
QOCC-1 Associates
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The partnership was organized on December 27, 1988 as a general partnership under the laws of the State of Maryland for the purpose of operating an office building with approximately 99,782 of net rentable square feet in Gaithersburg, Maryland. The building was acquired in December, 1988. The partnership conducts its rental operations under a lease agreement with one tenant.
Use of Estimates ---------------- 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 could differ from those estimates.
Rental Property --------------- Rental property is carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method.
Cash Equivalents ---------------- For purposes of the statement of cash flows, the partnership considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. The fair value of cash equivalents approximates its carrying amount.
Rental Income ------------- Rental income is recognized as rentals become due. For instances in which rent concession periods are involved, rental income is recognized using the straight-line method over the term of the lease, which includes the rent concession period. The amount applicable to the rent concession is recorded as a deferred asset against which future collections are applied. Rental payments received in advance are deferred until earned. The lease between the partnership and the tenant of the property is an operating lease.
QOCC-1 Associates
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually.
Prepaid Leasing Commissions --------------------------- Prepaid leasing commissions are charged to operations using the straight- line method over seventy-six months.
Leasing Costs ------------- Leasing costs were incurred to obtain a new tenant for the office building and improve the rental space. These costs are being written off using the straight-line method over the ten-year term of the lease.
NOTE B - RENTAL INCOME UNDER OPERATING LEASE
The partnership has leased the office building to a new tenant effective March 1994 under a ten-year term with a five-year renewal option at the discretion of the lessee. The tenant may terminate the lease after the 76th calendar month of the term by notifying the landlord as outlined in the lease agreement. Rental income consists of fixed base rent and variable lease escalation reimbursements, calculated annually.
Future minimum base rental payments due under the noncancelable operating lease are as follows:
Year Ending December 31, Amount ------------ ------
1996 $2,592,126 1997 2,656,929 1998 2,723,352 1999 2,791,436 2000 2,861,222 Thereafter 9,535,611 ----------- $23,160,745 ===========
QOCC-1 Associates
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE C - RELATED PARTY TRANSACTION
During 1995, the partnership incurred charges of approximately $120,295 for management fees, personnel services and reimbursable maintenance expenses provided by affiliates of one of the partners.
NOTE D - COMMITMENT
The partnership has entered into a lease commission agreement with Carey Winston. The agreement provides for $546,696 of commissions to be paid for the first 76 months of the tenant's lease, which began March 1994. If the tenant does not exercise its option to terminate the lease after the 76th month, additional commissions in the amount of $376,198 for the remaining 44 months of the tenant's lease will be due at that time.
NOTE E - CONCENTRATION OF CREDIT RISK
The partnership maintains its cash balances in two banks. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000 by each bank. As of December 31, 1995, the uninsured portion of the cash balances held at the banks was $293,643.
FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT
QOCC-1 ASSOCIATES
DECEMBER 31, 1994
QOCC-1 Associates
PAGE
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS
BALANCE SHEET
STATEMENT OF INCOME
STATEMENT OF PARTNERS' EQUITY
STATEMENT OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Partners QOCC-1 Associates
We have audited the accompanying balance sheet of QOCC-1 Associates as of December 31, 1994, and the related statements of income, partners' equity and cash flows for the year then ended. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 QOCC-1 Associates as of December 31, 1994, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles.
REZNICK FEDDER & SILVERMAN
Bethesda, Maryland January 4, 1995
QOCC-1 Associates
BALANCE SHEET
December 31, 1994
ASSETS
RENTAL PROPERTY Land $3,670,000 Land improvements 35,425 Building 11,461,343 Building improvements 32,622 Less accumulated depreciation (2,186,250) ----------
13,013,140 ----------
OTHER ASSETS Cash and cash equivalents 504,309 Accounts receivable - rent concessions 591,636 Accounts receivable - other 3,732 Prepaid taxes and insurance 90,626 Prepaid leasing commissions 492,026 Leasing costs, less accumulated amortization of $215,947 1,936,839 --------- 3,619,168 ---------
$16,632,308 ==========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES Accounts payable and accrued expenses $16,300 Prepaid rent and security deposit 412,882 ---------- 429,182
COMMITMENT -
PARTNERS' EQUITY 16,203,126 ----------
$16,632,308 ==========
See notes to financial statements
QOCC-1 Associates
STATEMENT OF INCOME
Year ended December 31, 1994
Revenue Rental income - base $2,243,164 Other revenue 778 --------- Total revenue 2,243,942
Expenses Accounting $7,500 Advertising and promotion 353 Amortization 215,947 Commissions 54,670 Depreciation 370,855 Insurance 8,217 Management fees 42,001 Personnel services 68,351 Repairs and maintenance 153,142 Supplies 2,393 Taxes 180,306 Travel 362 Utilities 39,983 ------- Total expenses 1,144,080 --------- NET INCOME $1,099,862 =========
See notes to financial statements
QOCC-1 Associates
STATEMENT OF PARTNERS' EQUITY
Year ended December 31, 1994
See notes to financial statements
QOCC-1 Associates
STATEMENT OF CASH FLOWS
Year ended December 31, 1994
Cash flows from operating activities Net income $1,099,862 Adjustments to reconcile net income to net cash used in operating activities Depreciation 370,855 Amortization 215,947 Decrease in accounts receivable - other 335,585 Increase in accounts receivable - rent concessions (591,636) Increase in prepaid taxes and insurance (730) Increase in leasing costs (1,596,791) Decrease in accounts payable and accrued expenses (812,003) Increase in prepaid leasing commissions (218,678) Increase in prepaid rent and security deposit 412,882 --------- Net cash used in operating activities (784,707) --------- Cash flows from investing activities Building improvements (29,784) --------- Net cash used in investing activities (29,784) --------- Cash flows from financing activities Distributions to partners (1,051,110) Contributions from partners 2,326,110 Repayments to affiliates (5,576) --------- Net cash provided by financing activities 1,269,424 --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 454,933
Cash and cash equivalents, beginning 49,376 --------- Cash and cash equivalents, end $504,309 =========
See notes to financial statements
QOCC-1 Associates
NOTES TO FINANCIAL STATEMENTS
December 31, 1994
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The partnership was organized on December 27, 1988 as a general partnership under the laws of the State of Maryland for the purpose of operating an office building with approximately 99,782 of net rentable square feet in Gaithersburg, Maryland. The building was acquired in December, 1988.
Rental Property --------------- Rental property is carried at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives by use of the straight-line method.
Cash Equivalents ---------------- For purposes of the statement of cash flows, the partnership considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents.
Rental Income ------------- Rental income is recognized as rentals become due. For instances in which rent concession periods are involved, rental income is recognized using the straight-line method over the term of the lease, which includes the rent concession period. The amount applicable to the rent concession is accrued as an account receivable against which future collections are applied. Rental payments received in advance are deferred until earned. The lease between the partnership and the tenant of the property is an operating lease.
Income Taxes ------------ No provision or benefit for income taxes has been included in these financial statements since taxable income or loss passes through to, and is reportable by, the partners individually.
Prepaid Leasing Commissions --------------------------- Prepaid leasing commissions are charged to operations using the straight- line method over the ten year term of the lease.
QOCC-1 Associates
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Leasing Costs ------------- Leasing costs were incurred to obtain a new tenant for the office building. The tenant has executed a lease beginning March, 1994. These costs are amortized using the straight-line method over the ten year term of the lease.
NOTE B - RENTAL INCOME UNDER OPERATING LEASE
The partnership has leased the office building to a new tenant effective March 1994 under a ten-year term with a five-year renewal option at the discretion of the lessee. The tenant may terminate the lease after the 76th calendar month of the term by notifying the landlord as outlined in the lease agreement. Rental income consists of fixed base rent and variable lease escalation reimbursements, calculated annually.
Future minimum base rental payments due under the noncancelable operating lease are as follows:
Year Ending December 31, Amount ------------ --------- 1995 $2,105,699 1996 2,592,126 1997 2,656,929 1998 2,723,352 1999 2,791,436 Thereafter 12,396,902 ---------- $25,266,444 ==========
NOTE C - RELATED PARTY TRANSACTION
During 1994, the partnership incurred charges of approximately $112,745 for management fees, personnel services and reimbursable maintenance expenses provided by affiliates of one of the partners.
QOCC-1 Associates
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1994
NOTE D - COMMITMENT
The partnership has entered into a lease commission agreement with Carey Winston. The agreement provides for $546,696 of commissions to be paid for the first 76 months of the tenant's lease, which began March 1994. Of this amount, during 1994 the partnership paid the remaining balance due of $273,348 upon commencement of the lease. If the tenant does not exercise its option to terminate the lease after the 76th month, additional commissions in the amount of $376,198 for the remaining 44 months of the tenant's lease will be due at that time.
NOTE E - CONCENTRATION OF CREDIT RISK
The partnership maintains its cash balances in two banks. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000 by each bank. As of December 31, 1994, the uninsured portion of the cash balances held at the banks was $304,309.
The Partnership's aggregate cost for federal income tax purposes may differ from the aggregate cost for Financial Statement purposes.
2) Estimated useful life for buildings 3) Estimated useful life for improvements