-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gnx0Eq17aRy1xuUegve5kH+BwfDX58j8KmI7IX6BA4a9E4FlgdPEzFmYhDLLU3ql uGd0r+9Ly/C2SpgS7hsytg== 0000950135-99-004022.txt : 19990816 0000950135-99-004022.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950135-99-004022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANCOCK JOHN REALTY INCOME FUND II LIMITED PARTNERSHIP CENTRAL INDEX KEY: 0000818257 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 042969061 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-17664 FILM NUMBER: 99687809 BUSINESS ADDRESS: STREET 1: 200 BERKELEY STREET CITY: BOSTON STATE: MA ZIP: 02117 BUSINESS PHONE: 8007225457 10-Q 1 JOHN HANCOCK REALTY TRUST II 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM N/A COMMISSION FILE NUMBER 0-17664 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Massachusetts 04-2969061 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 200 Clarendon Street, Boston, MA 02116 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (800) 722-5457 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: N/A (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. Yes X No 2 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) INDEX
PART I: FINANCIAL INFORMATION PAGE Item 1 - Financial Statements: Balance Sheets at June 30, 1999 and December 31, 1998 3 Statements of Operations for the Three and Six Months Ended June 30, 1999 and 1998 4 Statements of Partners' Equity for the Six Months Ended June 30, 1999 and Year Ended December 31, 1998 5 Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 6 Notes To Financial Statements 7-14 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 15-20 PART II: OTHER INFORMATION 21
2 3 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS BALANCE SHEETS (UNAUDITED) ASSETS
JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ Cash and cash equivalents $ 3,213,890 $ 3,261,458 Restricted cash 122,978 122,222 Other assets 136,769 56,769 Deferred expenses, net of accumulated amortization of $1,152,628 in 1999 and $1,400,374 in 1998 463,320 732,094 Property held for sale 5,408,524 -- Investment in joint venture 6,947,158 6,971,992 Investment in property: Land 2,410,000 5,040,000 Buildings and improvements 10,476,229 14,218,208 ------------ ------------ 12,886,229 19,258,208 Less: accumulated depreciation 3,822,773 4,822,969 ------------ ------------ 9,063,456 14,435,239 ------------ ------------ Total assets $ 25,356,095 $ 25,579,774 ============ ============ LIABILITIES AND PARTNERS' EQUITY Accounts payable and accrued expenses $ 249,729 $ 171,824 Accounts payable to affiliates 256,169 211,644 ------------ ------------ Total liabilities 505,898 383,468 Partners' equity/(deficit): General Partners' deficit (188,750) (185,981) Limited Partners' equity 25,038,947 25,382,287 ------------ ------------ Total partners' equity 24,850,197 25,196,306 ------------ ------------ Total liabilities and partners' equity $ 25,356,095 $ 25,579,774 ============ ============
See Notes to Financial Statements 3 4 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Income: Rental income $ 566,070 $ 537,824 $1,150,789 $1,071,543 Income from joint venture 224,202 200,849 425,603 391,971 Interest income 35,504 56,490 73,883 141,575 ---------- ---------- ---------- ---------- Total income 825,776 795,163 1,650,275 1,605,089 Expenses: Depreciation 87,302 118,483 205,784 236,965 Property operating expenses 98,681 96,539 225,029 187,213 General and administrative expenses 70,650 163,358 158,512 219,121 Amortization of deferred expenses 36,662 53,525 93,843 108,867 ---------- ---------- ---------- ---------- Total expenses 293,295 431,905 683,168 752,166 ---------- ---------- ---------- ---------- Net income $ 532,481 $ 363,258 $ 967,107 $ 852,923 ========== ========== ========== ========== Allocation of net income: General Partner $ 5,325 $ 3,632 $ 9,671 $ 8,529 John Hancock Limited Partner -- -- -- -- Investors 527,156 359,626 957,436 844,394 ---------- ---------- ---------- ---------- $ 532,481 $ 363,258 $ 967,107 $ 852,923 ========== ========== ========== ========== Net income per Unit $ 0.20 $ 0.13 $ 0.37 $ 0.32 ========== ========== ========== ==========
See Notes to Financial Statements 4 5 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) STATEMENTS OF PARTNERS' EQUITY (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1999 AND YEAR ENDED DECEMBER 31, 1998
GENERAL LIMITED PARTNER PARTNERS TOTAL ------------ ------------ ------------ Partners' equity/(deficit) at January 1, 1998 (2,601,552 Units outstanding) ($ 175,225) $ 28,223,477 $ 28,048,252 Less: Cash distributions (25,364) (4,287,359) (4,312,723) Add: Net income 14,608 1,446,169 1,460,777 ------------ ------------ ------------ Partner's equity/(deficit) at December 31, 1998 (185,981) 25,382,287 25,196,306 (2,601,552 Units outstanding) Less: Cash distributions (12,440) (1,300,776) (1,313,216) Add: Net income 9,671 957,436 967,107 ------------ ------------ ------------ Partners' equity/(deficit) at June 30, 1999 (2,601,552 Units outstanding) ($ 188,750) $ 25,038,947 $ 24,850,197 ============ ============ ============
See Notes to Financial Statements 5 6 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 1998 ----------- ----------- Operating activities: Net income $ 967,107 $ 852,923 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 205,784 236,965 Amortization of deferred expenses 93,843 108,867 Cash distributions over equity in income from joint venture 24,834 152,758 ----------- ----------- 1,291,568 1,351,513 Changes in operating assets and liabilities: Decrease/(increase) in restricted cash (756) -- Decrease/(increase) in other assets (80,000) 14,736 Increase/(decrease) in accounts payable and accrued expenses 77,904 129,771 Increase in accounts payable to affiliates 44,526 68,784 ----------- ----------- Net cash provided by operating activities 1,333,242 1,564,804 Investing activities: Principal payments on real estate loans -- 1,700,000 Increase in deferred expenses (67,594) (1,815) ----------- ----------- Net cash provided by (used in) investing activities (67,594) 1,698,185 Financing activities: Cash distributed to Partners (1,313,216) (2,999,724) ----------- ----------- Net cash used in financing activities (1,313,216) (2,999,724) ----------- ----------- Net increase/(decrease) in cash and cash equivalents (47,568) 263,265 Cash and cash equivalents at beginning of year 3,261,458 3,393,737 ----------- ----------- Cash and cash equivalents at end of period $ 3,213,890 $ 3,657,002 =========== ===========
See Notes to Financial Statements 6 7 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 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 June 30, 1999, 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 4,113 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. 2. SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair representation have been included. Operating results for the six-month period ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the financial statements and footnotes thereto included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1998. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates. Cash equivalents are highly liquid investments with maturities of three months or less when purchased. These investments are recorded at cost plus accrued interest, which approximates market value. Restricted cash represents funds restricted for tenant security deposits. 7 8 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Property held for sale is recorded at the lower of its carrying amount, at the time the property is listed for sale, or its fair value, less cost to sell. Carrying amount includes the property's cost, as described below, less accumulated depreciation thereon and less any property write-downs for impairment in value and plus any related unamortized deferred expenses. Investments in property are recorded at cost less any property write-downs for impairment in value. Cost includes the initial purchase price of the property plus acquisition and legal fees, other miscellaneous acquisition costs and the cost of significant improvements. 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. The Partnership measures impairment in value in accordance with Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" ("Statement 121"). Statement 121 requires impairment losses to be recorded on long-lived assets used in operations where indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. 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 the periods hereof was calculated by dividing the Investors' share of net income by the number of Units outstanding at the end of such period. 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. 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. 8 9 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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. 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. 9 10 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 3. THE PARTNERSHIP AGREEMENT (CONTINUED) 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. 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 six months ended June 30, 1999 and 1998 and to which the General Partner or its affiliates are entitled to reimbursement from the Partnership were $62,695 and $56,730, 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 an Affiliate in good faith on behalf of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner believes that this indemnification applies to the class action complaint described in Note 10. Accordingly, included in the Statements of Operations for the six months ended June 30, 1999 and 1998 are $15,163 and $39,896, respectively, representing the Partnership's share of costs incurred by the General Partner and its Affiliates relating to the class action complaint. Through June 30, 1999, the Partnership has accrued a total of $193,474 as its share of the costs incurred by the General Partner and its Affiliates resulting from this matter. Accounts payable to affiliates represents amounts due to the General Partner or its Affiliates for various services provided to the Partnership, including amounts to indemnify the General Partner or its Affiliates for claims incurred by them in connection with their actions with respect to the Partnership. All amounts accrued by the Partnership to indemnify the General Partner or its Affiliates for legal fees incurred by them, shall not be paid unless or until all conditions set forth in the Partnership Agreement for such payment have been fulfilled. The General Partner serves in a similar capacity for two other affiliated real estate limited partnerships. 5. INVESTMENT IN PROPERTY Investment in property at cost consists of managed, fully-operating, commercial real estate as follows:
June 30, December 31, 1999 1998 Park Square Shopping Center $12,886,230 $12,886,230 Miami International Distribution Center -- 6,371,978 ----------- ----------- $12,886,230 $19,258,208 =========== ===========
During April 1999, the Miami International Distribution Center was listed for sale. Accordingly, this property is classified as "Property Held for Sale" on the Balance Sheet at June 30, 1999 at is carrying value, which is not in excess of its estimated fair value, less selling costs. 10 11 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 5. INVESTMENT IN PROPERTY (CONTINUED) On August 9, 1999, the Partnership sold the Miami International Distribution Center to a non-affiliated buyer for a net sales price of approximately $10,720,000 after deductions for commissions and selling expenses incurred in connection with the sale of the property. 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. 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 was obligated to pay interest only monthly at an annual rate of 9.5% with the entire outstanding principal balance of the loan due on April 1, 1998. In addition to these amounts the borrower was 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 25% of the Net Appreciated Value of the property (defined in the Contingent Interest Agreement) upon its sale, refinancing or mortgage maturity date. 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. From 1996 until the loan matured, the Partnership received contingent interest payments, the sum of which is not material. On April 1, 1998, the loan matured and the borrower repaid the entire outstanding principal balance of the loan. At that time, the Net Appreciated Value of the property was not sufficient to provide the Partnership with any additional amounts. 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. 11 12 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 7. INVESTMENT IN JOINT VENTURE (CONTINUED) On December 28, 1988, the Affiliated Joint Venture contributed 98% of the invested capital of, and acquired a 75% interest in, QOCC-1 Associates, an existing partnership which owns and operates the Quince Orchard Corporate Center, a three-story office building and related land and improvements located in Gaithersburg, Maryland. The partnership agreement of QOCC-1 Associates provides that the Affiliated Joint Venture shall contribute 95% of any required additional capital contributions. Of the cumulative total invested capital in QOCC-1 Associates at June 30, 1999, 97.55% has been contributed by the Affiliated Joint Venture. The Affiliated Joint Venture continues to hold a 75% interest in QOCC-1 Associates. 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 1998, 1997 and 1996, the partners received returns on invested capital of approximately 12%. Income and gains of QOCC-1 Associates, other than the gains allocated arising from a sale other similar event with respect to the Quince Orchard Corporate Center, are allocated in the following order of priority: i) to the partners who are entitled to receive a distribution of net cash flow, pro rata in the same order and amounts as such distributions are made and ii) the balance, if any, to the partners, pro rata in accordance with their interests. 8. DEFERRED EXPENSES Deferred expenses consist of the following:
Unamortized Unamortized Balance at Balance at Description June 30, 1999 December 31, 1998 ----------- ------------- ----------------- $152,880 acquisition fee for investment in the Affiliated Joint Venture. This amount is amortized over a period of 31.5 years 102,122 104,549 $1,203,097 acquisition fees paid to the General Partner Prior to June 30, 1993, this amount was amortized over a period of 30 years Subsequent to June 30, 1993, the unamortized balance is amortized over a period of 8.5 years 303,134 363,761 $112,217 of tenant improvements. These amounts are amortized over the terms of the leases to which they relate 5,770 38,235 $147,754 of lease commissions. These amounts are amortized over the terms of the leases to which they relate 52,294 225,549 -------- -------- $463,320 $732,094 ======== ========
12 13 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 00 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:
Six Months Ended June 30, 1999 1998 ---------- ---------- Net income per Statements of Operations $ 967,107 $ 852,923 Add/(deduct): Excess of book depreciation over tax depreciation 9,726 38,276 Excess of book amortization over tax amortization 31,246 40,370 Other income and expense -- 7,694 ---------- ---------- Net income for federal income tax purposes $1,008,079 $ 939,263 ========== ==========
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 the Partnership. The complaint named as defendants the Partnership, the General Partner, certain other Affiliates of the General Partner, two limited partnerships affiliated with the Partnership, and certain unnamed officers, directors, employees and agents of the named defendants. The plaintiff sought unspecified damages stemming from alleged misrepresentations and omissions in the marketing and offering materials associated with the Partnership and two limited partnerships affiliated with the Partnership. On March 18, 1997, the court certified a class of investors who were original purchasers in the Partnership. The Partnership and the other defendants have answered the complaint, denying the material allegations and raising numerous affirmative defenses. Discovery has commenced, and the Partnership and other defendants have produced documents relating to the plaintiff's claims. No depositions are scheduled. The court has heard the defendants' motion to dismiss certain claims on grounds of the expiration of the statutes of limitations and has stated it intends to hold a further hearing on that matter to determine whether the case can be resolved by the disposition of certain claims. The Partnership and the other defendants intend to move to decertify the class and for summary judgment dismissing the breach of contract claims. The Partnership provides indemnification to the General Partner and its Affiliates for acts or omissions of the General Partner in good faith on behalf of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner believes that this indemnification applies to the class action complaint described above. The Partnership has incurred approximately $489,000 in legal expenses in connection with the class action lawsuit (see Part II, Item 1 of this Report). Of this amount, approximately $296,000 relates to the Partnership's own defense and approximately $193,000 relates to the indemnification of the General Partner and its Affiliates for their defense. These expenses are funded from the operations of the Partnership. 13 14 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 10. CONTINGENCIES (CONTINUED) In September 1997, a complaint for damages was filed in the Superior Court of the State of California for the County of Los Angeles by an investor in the Partnership. The complaint named the General Partner as a defendant. The plaintiff sought unspecified damages which allegedly arose from the General Partner's refusal to provide, without reasonable precautions on plaintiff's use of, a list of investors in the Partnership and in John Hancock Realty Income Fund Limited Partnership ("RIF"), a limited partnership affiliated with the Partnership. Plaintiff alleges that the General Partner's refusal unconditionally to provide a list was a breach of contract and a breach of the General Partner's fiduciary duty. In 1998, the plaintiff amended the complaint to name the Partnership and RIF as defendants. As a result of the defendants' demurrer (motion to dismiss), in May 1998 plaintiff's additional claims for tortuous interference with prospective economic advantage and intentional interference with contract, were dismissed. In addition, as a result of a motion for summary judgment, in August 1998, the court dismissed all claims involving the Partnership, leaving only the breach of contract and breach of fiduciary duty claims involving RIF. On the eve of trial, plaintiffs dismissed without prejudice those claims not previously dismissed by the court, and subsequently filed a notice of appeal from the dismissal of the claims that the court had dismissed on motion. The Partnership has incurred approximately $105,000 in legal expenses in connection with the above described lawsuit (see Part II, Item 1 of this Report). Of this amount, approximately $70,000 relates to the Partnership's own defense and approximately $35,000 relates to the indemnification of the General Partner and its Affiliates for their defense. These expenses were funded from the operations of the Partnership. At the present time, the General Partner can not estimate the aggregate amount of legal expenses and potential indemnification claims to be incurred and their impact on the Partnership's Financial Statements, taken as a whole. Accordingly, no provision for any liability that could result from the eventual outcome of these matters has been made in the accompanying financial statements. However, while it is still too early to estimate potential damages, they could possibly be material. 14 15 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL During the offering period, from October 2, 1987 to January 2, 1989, the Partnership sold 2,601,552 Units representing gross proceeds (exclusive of the John Hancock Limited Partners' contribution, which was used to pay sales commissions) of $52,031,040. The proceeds of the offering were used to acquire investments, fund reserves, and pay acquisition fees and organizational and offering expenses. These investments are described more fully in Notes 5, 6 and 7 to the Financial Statements included in Item 1 of this Report. IMPACT OF YEAR 2000 The Partnership along with the General Partner is participating in the Year 2000 remediation project of the General Partner's ultimate parent, John Hancock Mutual Life Insurance Company (John Hancock). John Hancock and the Partnership are executing plans to address the impact of the Year 2000 issues that result from computer programs being written using two digits to reflect the year rather than four to define the applicable year and century. Historically, the first two digits were hardcoded to save memory. Many of the Partnership's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in an information technology (IT) system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, cause settlements of trades to fail, lead to incomplete or inaccurate accounting, recording or processing trades in securities, or engage in similar normal business activities. In addition, non-IT systems including, but not limited to, security alarms, elevators and telephones are subject to malfunction due to their dependence on embedded technology such as microcontrollers for proper operation. As described, the Year 2000 project presents a number of challenges for financial institutions since the correction of Year 2000 issues in IT and non-IT systems will be complex and costly for the entire industry. John Hancock began to address the Year 2000 project as early as 1994. John Hancock's plan to address the Year 2000 Project includes an awareness campaign, an assessment period, a renovation stage, validation work and an implementation of solutions. The continuous awareness campaign serves several purposes: defining the problem, gaining executive level support and sponsorship, establishing a team and overall strategy, and assessing existing information system management resources. Additionally, the awareness campaign establishes an education process to ensure that all employees are aware of the Year 2000 issue and knowledgeable of their role in securing solutions. The assessment phase, which was completed for both IT and non-IT systems as of April 1998, included the identification, inventory, analysis, and prioritization of IT and non-IT systems and processes to determine their conversion or replacement. Those systems, which in the event of a Year 2000 failure would have the greatest impact on operations, were deemed to be mission critical and prioritized accordingly. The systems which in the event of a Year 2000 failure would cause minimal disruption to operations were classified as non-mission critical. The renovation stage reflects the conversion, validation, replacement, or elimination of selected platforms, applications, databases and utilities, including the modification of applicable interfaces. Additionally, the renovation stage includes performance, functionality, and regression testing and implementation. The renovation phase for mission critical systems has been completed. Similarly, most of the non-mission critical systems have been renovated and the remaining systems are expected to be renovated by the third quarter of 1999. The validation phase consists of the compliance testing of renovated systems. The validation phase for mission critical systems has been completed. Similarly, the majority of non-mission critical systems have been validated and the remaining systems are expected to be validated by the third quarter of 1999. Testing facilities will be used through the remainder of 1999 to perform special functional testing. Special functional testing includes testing, as required, with material third parties and industry groups and to perform reviews of "dry runs" of year-end activities. Finally, the implementation phase involves the actual implementation of converted or replaced platforms, applications, databases, utilities, interfaces, and contingency planning. Mission critical systems and most non-mission critical systems have been implemented. The few remaining non-mission critical systems are expected to be implemented by the third quarter of 1999. 15 16 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) IMPACT OF YEAR 2000 (CONTINUED) John Hancock and the Partnership face the risk that one or more of our business partners or customers with whom we have a material relationship will not be able to interact with our systems due to third party's failures to resolve its own Year 2000 issues, including those associated with its own external relationships. We have completed an inventory of third party relationships and prioritized each third party relationship based upon the potential business impact, available alternatives and cost of substitution. In the case of mission-critical business partners such as banks, financial intermediaries such as stock exchanges, mutual fund companies and recordkeepers, IT vendors, telecommunications providers and other utilities, and financial market data providers, trading counterparties, depositaries, clearing agencies and clearing houses, we are engaged in discussions with third parties and are obtaining detailed information as to those parties' Year 2000 plans and state of readiness. Scheduled testing of material relationships with third parties is underway. It is anticipated that testing with material business partners will continue through much of 1999. However, there is no guarantee that the systems of other companies, upon which our systems rely, will be timely converted or that a failure to convert by another company, or a conversion that is incompatible with our systems would not have a material adverse effect on us. If John Hancock's, or the Partnership's, Year 2000 issues were unresolved potential consequences would include, among other possibilities, the inability to accurately and timely process claims, update customers' accounts, process financial transactions, bill customers, assess exposure to risks, determine liquidity requirements or report accurate data to management, customers, regulators and others, as well as business interruptions or shutdowns, including, in the case of third party financial intermediaries such as stock exchanges and clearing agents, failed trade settlements, inability to trade in certain markets and disruption of funding flows; financial losses; reputational harm; increased scrutiny by regulators; and litigation related to Year 2000 issues. John Hancock is attempting to limit the potential impact of the Year 2000 by monitoring the progress of its own Year 2000 project and those of its material business partners and by developing contingency plans. However, John Hancock cannot guarantee a resolution for all Year 2000 issues. Any critical unresolved Year 2000 issues, however, could have a material adverse effect on the John Hancock's and the Partnership's results of operations, liquidity or financial condition or net income. John Hancock's contingency planning initiative related to the Year 2000 project is underway. The plan is addressing John Hancock's readiness as well as that of material business partners on whom John Hancock and the Partnership depend. John Hancock's contingency plans are being designed to keep each subsidiary's operations functioning in the event of a failure or delay due to the Year 2000 record format and date calculation changes. Contingency plans are being constructed based on the foundation of extensive business resumption plans that John Hancock has maintained and updated periodically, which outline responses to situations that may affect critical business functions. These plans also provide emergency operations guidance, which defines a documented order of actions to respond to problems. These extensive business resumption plans are being enhanced to cover Year 2000 situations. FORWARD-LOOKING STATEMENTS In addition to historical information, certain statements contained herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements appear in a number of places in this Report and include statements regarding the intent, belief or expectations of the General Partner with respect to, among other things, the prospective sale of Partnership properties, repayment of mortgage loans, actions that would be taken in the event of lack of liquidity, unanticipated leasing costs, repair and maintenance expenses, litigation expenses and indemnification claims, distributions to the General Partner and to Investors, the possible effects of tenants vacating space at Partnership properties, the absorption of existing retail space in certain geographical areas, and the impact of inflation. Forward-looking statements involve numerous known and unknown risks and uncertainties, and they are not guarantees of future performance. The following factors, among others, could cause actual results or performance of the Partnership and future events to differ materially from those expressed or implied in the forward-looking statements: general economic and business conditions; any and all general risks of real estate ownership, including without limitation adverse changes in general economic conditions and adverse local conditions, the fluctuation of rental income from properties, changes in property taxes, utility costs or maintenance costs and insurance, fluctuations of real estate values, competition for tenants, uncertainties about whether real estate sales under contract will close; the ability of the Partnership to sell its properties; and other factors detailed from time to time in the filings with the Securities and Exchange Commission. 16 17 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FORWARD-LOOKING STATEMENTS (CONTINUED) Readers are cautioned not to place undue reliance on forward-looking statements, which reflect the General Partner's analysis only as of the date hereof. The Partnership assumes no obligation to update forward-looking statements. See also the Partnership's reports to be filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1999 the Partnership had $3,213,890 in cash and cash equivalents, $122,978 in restricted cash. The Partnership has a working capital reserve with a current balance of approximately $2.3 million, which represents approximately 5.6% 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. The Partnership's liquidity would, however, be materially adversely affected if there were a significant reduction in revenues or significant unanticipated operating costs (including but not limited to litigation expenses), unanticipated leasing costs or unanticipated capital expenditures. If any or all of these events were to occur, to the extent that the working capital reserve would be insufficient to satisfy the cash requirements of the Partnership, it is anticipated that additional funds would be obtained through a reduction of cash distributions to Investors, bank loans, short-term loans from the General Partner or its Affiliates, or the sale or financing of Partnership investments. The Partnership incurred $67,594 of leasing costs at the Miami International Distribution Center and the Park Square Shopping Center during the six months ended June 30, 1999. The General Partner anticipates that the Partnership will incur an aggregate of approximately $100,000 of leasing costs at these two properties during the remainder of 1999. The current balance in the working capital reserve should be sufficient to pay such costs. The General Partner anticipates that the Partnership will incur approximately $61,000 of non-recurring repair and maintenance expenses at the Park Square Shopping Center and Miami International Distribution Center properties during the remainder of 1999. These expenses will be funded from the operations of the Partnership's properties and are not expected to have a significant impact on the Partnership's liquidity. The Partnership has incurred approximately $489,000 in legal expenses in connection with the class action lawsuit (see Part II, Item 1 of this Report). Of this amount, approximately $203,000 relates to the Partnership's own defense and approximately $135,000 relates to the indemnification of the General Partner and its Affiliates for their defense. In addition, the Partnership incurred approximately $105,000 in legal expenses in connection with the lawsuit filed in the Superior Court of the State of California for the County of Los Angeles by an investor in the Partnership (see Part II, Item 1 of this Report). Of this amount, approximately $70,000 relates to the Partnership's own defense and approximately $35,000 relates to the indemnification of the General Partner and its Affiliates for their defense. These expenses are funded from the operations of the Partnership. At the present time, the General Partner cannot estimate the aggregate amount of legal expenses and indemnification claims to be incurred and their impact on the Partnership's future operations. Liquidity would, however, be materially adversely affected by a significant increase in such legal expenses and related indemnification costs. If such increases were to occur, to the extent that cash from operations and the working capital reserve would be insufficient to satisfy the cash requirements of the Partnership, it is anticipated that additional funds would be obtained through a reduction of cash distributions to investors, bank loans, short-term loans from the General Partner or its Affiliates, or the sale or financing of Partnership properties. 17 18 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Cash in the amount of $1,313,216 generated from the Partnership's operations, was distributed to the General Partner and Investors during the six months ended June 30, 1999. These amounts were distributed in accordance with the Partnership Agreement. The amount distributed to the Investors from Distributable Cash from Operations during the six months ended June 30, 1999 represented an annualized return of 6.25% on remaining Investors' Invested Capital. The General Partner anticipates that the Partnership's Distributable Cash from Operations during the remainder of 1999 will be reduced by the effect of the sale of the Miami International Distribution Center (described below) which took place on August 9, 1999. The following table summarizes the leasing activity and occupancy status at the Partnership's remaining equity investments during the six months ended June 30, 1999 and scheduled leasing activity for each investment during the remainder of 1999:
MIAMI INTERNATIONAL PARK SQUARE QUINCE ORCHARD DISTRIBUTION CTR. SHOPPING CTR. CORPORATE CTR. ----------------- ------------- -------------- Square Footage 215,019 137,108 99,782 Occupancy January 1, 1999 100% 88% 100% New Leases 0% 0% 0% Lease Renewals 0% 0% 0% Leases Expired 0% 0% 0% Occupancy June 30, 1999 100% 88% 100% Leases Scheduled to Expire, Balance of 1999 44% 6% 0% Leases Scheduled to Commence, Balance of 1999 44% 1% 0%
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. Since that time, the Miami Airport Authority has continued to show interest in possibly acquiring the property. The General Partner has continued its efforts to negotiate with the Miami Airport Authority to agree on a mutually acceptable sale of the property. The Miami Airport Authority has not made recent contact with the General Partner regarding this matter. 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 has subsequently sold the property to a non-affiliated buyer on August 9, 1999. The Brooklyn Park, Minnesota real estate market, where the Park Square Shopping Center is located, continues to experience increasing demand for tenants as the development of more retail space continues. The General Partner expects market conditions in Brooklyn Park to remain competitive during the remainder 1999 and, therefore, no increase in market rental rates is anticipated. 18 19 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) The Quince Orchard Corporate Center is leased to Boehringer Mannheim Pharmaceuticals, Inc. under a ten-year lease which expires in February 2004. The tenant has two options under the lease agreement, one, to terminate the lease at the end of its seventy-sixth month of the lease, or June 2000, and, two, to extend the term of the lease for an additional five- year period. During the first quarter of 1998, Hoffman-LaRoche, Inc. received approval from the Federal Trade Commission to acquire Boehringer Mannheim Pharmaceuticals, Inc. Subsequently, Hoffman-LaRoche vacated and subleased the space. Hoffman-LaRoche has informed the General Partner that it intends to exercise its right to terminate the lease in June 2000. Real estate conditions in the Washington D.C. area for office space similar to the Quince Orchard Corporate Center continue to improve. The supply of such office space has been unable to keep pace with the demand, resulting in a slight increase in market rents. Further, this condition has given rise to new real estate development in the area. The General Partner does not anticipate that this new development will negatively impact the market and therefore expects market conditions to remain favorable through 1999. The General Partner evaluated the carrying value of each of the Partnership's properties and its joint venture investment as of December 31, 1998 by comparing 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 permanent impairment in values existed. Based upon such evaluations, the General Partner determined that no permanent 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 assist in its evaluation of whether a permanent impairment in value exists on any of the Partnership's investments. RESULTS OF OPERATIONS Net income for the six months ended June 30, 1999 was $967,107, as compared to net income of $852,923 for the same period in 1998, representing an increase of $114,184, or 13%. This increase is primarily due to an increase in rental income, a decrease in depreciation and amortization expenses and a decrease in general and administrative expenses. Average occupancy for the Partnership's equity real estate investments was as follows:
Six Months Ended June 30, 1999 1998 ---- ---- Miami International Distribution Center 100% 87% Park Square Shopping Center 88% 86% Quince Orchard Corporate Center (Affiliated Joint Venture) 100% 100%
Rental income for the six months ended June 30, 1999 increased by $79,246, or 7%, as compared to the same period during 1998 primarily due to higher average occupancy at the Miami International Distribution Center as a result of a 29,000 square foot tenant secured in October 1998, which increased the property's occupancy rate from 87% to 100%. Rental income at the Partnership's other properties was consistent between periods. Interest income for the six months ended June 30, 1999 decreased by $67,692, or 48%, as compared to the same period in 1998. This decrease was primarily due to the repayment of the 205 Newbury Associates mortgage loan, which was repaid in its entirety on April 1, 1998. Depreciation expense for the six months ended June 30, 1999 decreased by $31,184, or 13%, as compared to the same period in 1998. This decrease is due to the reclassification of the Miami International Distribution Center property as "Property Held for Sale" during the quarter. Accordingly, no depreciation has been recorded since the April 1999. Property operating expenses for the six months ended June 30, 1999 increased by $37,816, or 20%, as compared to the same period in 1998. This increase was primarily due to approximately $10,000 of non-recurring maintenance and repair expenses and $13,000 of incentive property management fees paid at the Park Square Shopping Center. 19 20 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) General and administrative expenses for the six months ended June 30, 1999 decreased by $60,609, or 28%, primarily due to a decrease in legal fees incurred by the Partnership in connection with the legal proceedings described in Item 1 of Part II of this Report. Excluding such legal fees, general and administrative expenses were consistent between periods. Amortization of deferred expenses for the six months ended June 30, 1999 decreased by $15,024, or 14%, due to the reclassifying of deferred expenses for the Miami International Distribution Center to "Property Held for Sale" and, accordingly, no longer amortizing such amounts for this property. The General Partner believes that inflation has had no significant impact on the Partnership's operations during the six months ended June 30, 1999, and the General Partner anticipates that inflation will not have a significant impact during the remainder of 1999. CASH FLOW The following table provides the calculations of Cash from Operations and Distributable Cash from Operations which are calculated in accordance with Section 17 of the Partnership Agreement:
Six Months Ended June 30, 1999 1998 ----------- ----------- Net cash provided by operating activities (a) $ 1,333,242 $ 1,564,804 Net change in operating assets and liabilities (a) (41,674) (213,291) ----------- ----------- Net cash provided by operations (a) 1,291,568 1,351,513 Increase in working capital reserves -- (37,598) ----------- ----------- Cash from operations (b) 1,291,568 1,313,915 Decrease in working capital reserves 21,648 -- ----------- ----------- Distributable cash from operations (b) $ 1,313,216 $ 1,313,915 =========== =========== Allocation to General Partner $ 12,440 $ 13,139 Allocation to Investors 1,300,776 1,300,776 Allocation to John Hancock Limited Partner -- -- ----------- ----------- $ 1,313,216 $ 1,313,915 =========== ===========
(a) Net cash provided by operating activities, net change in operating assets and liabilities, and net cash provided by operations are as calculated in the Statements of Cash Flows included in Item 1 of this Report. (b) As defined in the Partnership Agreement. Distributable Cash from Operations should not be considered as an alternative to net income (i.e., not an indicator of performance) or to reflect cash flows or availability of discretionary funds. During the third quarter of 1999, the Partnership will make a distribution of Distributable Cash from Operations to the General Partner and Investors in the amount of $656,958. This amount represents a 6.25% annualized return on remaining Investors Invested Capital (as defined in the Partnership Agreement). This amount is allocated 1% to the General Partner and 99% to the Investors, in accordance with the Partnership Agreement. The source of future cash distributions from operations is dependent upon cash generated by the Partnership's properties and the use of working capital reserves. The General Partner currently anticipates that the Partnership's Distributable Cash from Operations during each of the remaining two quarters of 1999 will be reduced by the effect of the sale of the Miami International Distribution Center that occurred on August 9, 1999. 20 21 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In February 1996, a putative class action complaint was filed in the Superior Court in Essex County, New Jersey by a single investor in 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 Partnership and the other defendants have answered the complaint, denying the material allegations and raising numerous affirmative defenses. Discovery has commenced, and the Partnership and other defendants have produced documents relating to the plaintiff's claims. No depositions are scheduled. The court has heard the defendants' motion to dismiss certain claims on grounds of the expiration of the statues of limitations and has stated it intends to hold a further hearing on that matter to determine whether the case can be resolved by the disposition of certain claims. The Partnership and the other defendants intend to move to decertify the class and for summary judgment dismissing the breach of contract claims. The General Partner believes the allegations are totally without merit and will continue to vigorously contest the action. In September 1997, a complaint for damages was filed in the Superior Court of the State of California for the County of Los Angeles by an investor in the Partnership. The complaint named the General Partner as a defendant. The plaintiff sought unspecified damages which allegedly arose from the General Partner's refusal to provide, without reasonable precautions on plaintiff's use of, a list of investors in the Partnership and in John Hancock Realty Income Fund Limited Partnership ("RIF"), a limited partnership affiliated with the Partnership. Plaintiff alleges that the General Partner's refusal unconditionally to provide a list was a breach of contract and a breach of the General Partner's fiduciary duty. In 1998, the plaintiff amended the complaint to name the Partnership and RIF as defendants. As a result of the defendant's demurer (motion to dismiss), in May 1998 plaintiff's additional claims for tortious interference with prospective economic advantage and intentional interference with contract, were dismissed. In addition, as a result of a motion for summary judgment, in August 1998, the court dismissed all claims involving the Partnership, leaving only the breach of contract and breach of fiduciary duty claims involving RIF. On the eve of trail, plaintiffs dismissed without prejudice those claims not previously dismissed by the court, and subsequently filed a notice of appeal from the dismissal of the claims that the court had dismissed on motion. The Partnership has commenced its own action against the plaintiff seeking the court's declaration that the claims that remained on the eve of trial are without merit and seeking to bar the plaintiff from attempting to assert those claims at a later date. There can be no assurances given as to the timing, costs or outcome of this legal proceeding. There are no other material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Partnership, to which the Partnership is a party or to which any of its properties is subject. 21 22 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) PART II: OTHER INFORMATION (CONTINUED) ITEM 2. CHANGES IN SECURITIES There were no changes in securities during the second quarter of 1999. ITEM 3. DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities during the second quarter of 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Partnership during the second quarter of 1999. ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) There are no exhibits to this report (b) There were no Reports on Form 8-K filed during the second quarter of 1999. 22 23 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 13th day of August, 1999. John Hancock Realty Income Fund-II Limited Partnership By: John Hancock Realty Equities, Inc., General Partner By: /s/ John M. Garrison --------------------------------- John M. Garrison, President By: /s/ Virginia H. Lomasney --------------------------------- Virginia H. Lomasney, Treasurer (Chief Accounting Officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 0000818257 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP 6-MOS DEC-31-1999 JUN-30-1999 3,336,868 0 136,769 0 0 3,473,637 12,886,229 3,822,773 25,356,095 505,898 0 0 0 0 24,850,197 25,356,095 0 1,650,275 0 683,168 0 0 0 967,107 0 967,107 0 0 0 967,107 0.37 0.37
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