2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1996
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 (IRS Employer
Incorporation or Organization) Identification No.)
200 Clarendon Street, Boston, MA 02117
(Address of Principal Executive Office) (Zip Code)
(800) 722-5457
(Registrant's telephone number, including area code)
Not Applicable
(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 __
<PAGE>
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 March 31, 1996 and
December 31, 1995 3
Statements of Operations for the Three
Months Ended March 31, 1996 and 1995 4
Statements of Partners' Equity for the
Three Months Ended March 31, 1996 and
for the Year Ended December 31, 1995 5
Statements of Cash Flows for the Three
Months Ended March 31, 1996 and 1995 6
Notes to Financial Statements 7-16
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-23
PART II: OTHER INFORMATION 24
2
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
BALANCE SHEETS
(Unaudited)
ASSETS
March 31, December 31,
1996 1995
---- ----
Current assets:
Cash and cash equivalents $4,042,109 $3,520,394
Restricted cash 52,359 26,240
Other current assets 182,108 107,596
---------- -----------
Total current assets 4,276,576 3,654,230
Real estate loans 6,433,352 6,557,159
Investment in property:
Land 5,560,000 5,560,000
Buildings and improvements 18,836,994 18,836,000
---------- -----------
24,396,994 24,396,994
Less: accumulated depreciation 4,681,326 4,524,369
---------- -----------
19,715,668 19,872,625
Investment in joint venture 7,748,522 7,842,586
Long-term restricted cash 99,466 106,027
Deferred expenses, net of accumulated
amortization of $1,067,530 in 1996
and $995,374 in 1995 1,255,252 1,316,753
---------- -----------
Total assets $39,528,836 $39,349,380
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $443,390 $239,566
Accounts payable to affiliates 41,559 35,735
---------- -----------
Total current liabilities 484,949 275,301
Partners' equity/(deficit):
General Partner's deficit (153,211) (152,910)
Limited Partners' equity 39,197,098 39,226,989
---------- -----------
Total partners' equity 39,043,887 39,074,079
---------- -----------
Total liabilities and partners'
equity $39,528,836 $39,349,380
=========== ===========
See Notes to Financial Statements
3
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1996 1995
---- ----
Income:
Rental income 608,875 $603,239
Interest income 219,562 218,095
Income from joint venture 181,516 188,211
---------- ----------
Total income 1,009,953 1,009,545
Expenses:
Depreciation 156,957 157,019
Property operating expenses 125,888 128,470
General and administrative expenses 54,466 56,900
Amortization of deferred expenses 72,156 62,156
---------- ----------
Total expenses 409,467 404,545
---------- ----------
Net income $600,486 $605,000
========== ==========
Allocation of net income:
General Partner $6,005 $6,050
John Hancock Limited Partner - -
Investors 594,481 598,950
---------- ----------
$600,486 $605,000
========== ==========
Net income per Unit $0.23 $0.23
========== ==========
See Notes to Financial Statements
4
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF PARTNERS' EQUITY
(Unaudited)
Three Months Ended March 31, 1996 and
Year Ended December 31, 1995
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
Partner's equity/(deficit) at January 1, 1995
(2,601,552 Units outstanding) ($151,822) $39,334,595 $39,182,773
Less: Cash distributions (25,228) (2,497,490) (2,522,718)
Add: Net income 24,140 2,389,884 2,414,024
-------- ----------- -----------
Partner's equity/(deficit) at December 31, 1995
(2,601,552 Units outstanding) (152,910) 39,226,989 39,074,079
Less: Cash distributions (6,306) (624,372) (630,678)
Add: Net income 6,005 594,481 600,486
-------- ----------- -----------
Partner's equity/(deficit) at March 31, 1996
(2,601,552 Units outstanding) ($153,211) $39,197,098 $39,043,887
======== =========== ===========
</TABLE>
See Notes to Financial Statements
5
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
---- ----
<S> <C> <C>
Operating activities:
Net income $600,486 $605,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 156,957 157,019
Amortization of deferred expenses 72,156 62,156
Cash distributions over/(under) equity
in income from joint venture 94,064 (27,253)
---------- ----------
923,663 796,922
Changes in operating assets and liabilities:
(Increase)/decrease in restricted cash (19,558) (24,216)
Increase in other current assets (74,512) (194,590)
Increase in accounts payable
and accrued expenses 203,824 226,169
Increase in accounts payable to
affiliates 5,824 1,231
---------- ----------
Net cash provided by operating activities 1,039,241 805,516
Investing activities:
Principal payments on real estate loans 123,807 39,308
Increase in deferred expenses and other assets (10,655) -
---------- ----------
Net cash provided by investing activities 113,152 39,308
Financing activities:
Cash distributed to Partners (630,678) (630,678)
---------- ----------
Net cash used in financing activities (630,678) (630,678)
---------- ----------
Net increase in cash and cash
equivalents 521,715 214,146
Cash and cash equivalents at beginning
of year 3,520,394 2,561,288
---------- -----------
Cash and cash equivalents at end
of period $4,042,109 $2,775,434
========== ==========
</TABLE>
See Notes to Financial Statements
6
<PAGE>
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 March 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 4,664 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.
7
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
2. Significant Accounting Policies
-------------------------------
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions 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 three month period ended March 31, 1996 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. 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, 1995.
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.
8
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
2. Significant Accounting Policies (continued)
-------------------------------
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 of the three months ended March 31,
1996 and 1995 was calculated by dividing the Investors' share of net
income by the number of Units outstanding at the end of each 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.
9
<PAGE>
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 distributed and paid in the following order of priority:
first, to the Investors and the John Hancock Limited Partner, with the
distribution allocated to 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
allocated to 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.
10
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
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,
subject to the provisions of the Partnership Agreement.
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 months ended
March 31, 1996 and 1995 and to which the General Partner or its
affiliates are entitled to reimbursement from the Partnership were
$41,559 and $31,444, respectively. These expenses are included in
expenses on the Statements of Operations.
Accounts payable to affiliates represents amounts due to the General
Partner and its affiliates for various services provided to the
Partnership.
The General Partner serves in a similar capacity for three other
affiliated real estate limited partnerships.
11
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
5. Investment in Property
----------------------
Investment in property at cost consists of managed, fully-operating,
commercial real estate as follows:
March 31, 1996 December 31, 1995
-------------- -----------------
Park Square Shopping Center $12,886,230 $12,886,230
Fulton Business Park 5,138,786 5,138,786
Miami International Distribution
Center 6,371,978 6,371,978
----------- -----------
$24,396,994 $24,396,994
=========== ===========
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.
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 also
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 first quarter of 1996 the Partnership received
contingent interest payments at a rate of approximately 1/10 of 1% of
the outstanding principal balance.
12
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Real Estate Loans (continued)
-----------------
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 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
are required on the first day of each month. The entire unamortized
principal balance and all accrued but unpaid interest are due on July
1, 1996.
Based upon current information and events, the General Partner
believes it is possible that GCC may not be able to pay the entire
outstanding principal balance of the loan upon its maturity date (July
1, 1996). Should GCC fail to pay the entire outstanding balance of
the loan, the General Partner will pursue all available remedies,
including foreclosing on the property and pursuing the personal
guaranty of GCC's principal stockholders, in order to collect upon all
amounts due. The General Partner believes that the entire principal
balance of the loan will ultimately be collectible.
Real estate loans are evaluated for collectibility on an on-going
basis.
7. Investment in Joint Venture
---------------------------
On December 28, 1988, the Partnership invested $14,726,079 to acquire
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 transferred a 49.5% interest in the
Affiliated Joint Venture to Income Fund-III for cash in the aggregate
amount of $7,325,672. The Partnership has held a 50% interest in the
Affiliated Joint Venture since the second quarter of 1989.
13
<PAGE>
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. 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, the Partnership's share of which amounted to an
aggregate of $1,282,243. Of the cumulative total invested capital in
QOCC-1 Associates at March 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.
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. Since its inception, QOCC-1 Associates has not provided
the partners with a return in excess of 9% on their invested capital.
14
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Deferred Expenses
-----------------
Deferred expenses consist of the following:
<TABLE>
<CAPTION>
Unamortized Balance Unamortized Balance
Description at March 31,1996 at December 31,1995
----------- ---------------- -------------------
<S> <C> <C>
$35,072 acquisition fee for 205 Newbury St.
loan. This amount is amortized over the term
of the loan. $7,583 $8,531
$113,468 acquisition fee for GCC mortgage loan.
This amount is amortized over the term of the loan. 4,052 8,105
$152,880 acquisition fee for investment in the
Affiliated Joint Venture. This amount is amortized
over a period of 31.5 years. 117,895 119,108
$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. 697,210 727,523
$260,132 of tenant improvements. These amounts
are amortized over the terms of the leases to which
they relate. 143,864 156,298
$558,133 of lease commissions. These amounts
are amortized over the terms of the leases to which
they relate. 284,648 297,188
---------- ----------
$1,255,252 $1,316,753
========== ==========
</TABLE>
15
<PAGE>
JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
(A Massachusetts Limited Partnership)
NOTES TO FINANCIAL STATEMENTS (continued)
(Unaudited)
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:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1996 1995
---- ----
<S> <C> <C>
Net income per Statements of Operations $600,486 $605,000
Add/(deduct): Excess of book depreciation
over tax depreciation 25,848 26,706
Excess of book amortization
over tax amortization 25,803 21,056
Other income (39,792) (71,467)
-------- --------
Net income for federal income tax purposes $612,345 $581,295
======== ========
</TABLE>
16
<PAGE>
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.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1996 the Partnership had $4,042,109 in cash and cash
equivalents, $52,359 in restricted cash and $99,466 in long-term restricted
cash.
The Partnership has a working capital reserve with a current balance of
approximately 6% of the offering proceeds. Based upon the current balance
of working capital reserves as well as the projected level of cash flows
from the Partnership's investments during the remainder of 1996, the
Partnership will increase cash distributions to Investors, effective with
the May 15, 1996 distribution, from an annualized rate of 5% to an
annualized rate of 6%. Liquidity would, however, be materially adversely
affected if there were a significant reduction in revenues, unanticipated
operating costs or unanticipated capital expenditures. If any or all of
these events were to occur, to the extent that working capital reserves
would be insufficient to satisfy the cash requirements of the Partnership,
it is anticipated that additional funds would be obtained through a
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 approximately $11,000 of leasing costs at the Park
Square Shopping Center during the first three months of 1996. The General
Partner anticipates that the Partnership will incur an aggregate of
approximately $360,000 of leasing costs at the Park Square Shopping Center,
Fulton Business Park and Miami International Distribution Center during the
remainder of 1996. The current balance in the working capital reserve
should be sufficient to pay such costs.
During the three months ended March 31, 1996, approximately $1,000 of cash
generated from the Partnership's operations was used to fund non-recurring
repair and maintenance costs incurred at the Miami International
Distribution Center. The General Partner anticipates that the Partnership
will incur additional non-recurring repair and maintenance costs in the
aggregate amount of approximately $123,000 at its properties during the
remainder of 1996. These additional costs 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.
17
<PAGE>
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 $630,678, generated from the Partnership's
operations, was distributed to the General Partner and the Investors during
the first quarter of 1996. Effective with the May 15, 1996 distribution
the Partnership will increase cash distributions to approximately $762,000.
The General Partner anticipates that the Partnership will make
distributions during the third and fourth quarters of 1996 comparable to
the distribution made on May 15, 1996.
The following table summarizes the leasing activity at each of the
Partnership's equity investments during the three months ended March 31,
1996 and scheduled leasing activity for each investment during the
remainder of 1996:
<TABLE>
<CAPTION>
Miami International Fulton Park Square Quince Orchard
Distribution Ctr. Business Park Shopping Ctr. Corporate Ctr.
----------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Square Footage 150,535 215,019 137,108 99,782
Occupancy January 1, 1996 85% 100% 86% 100%
== === == ===
New Leases 0% 0% 2% 0%
Lease Renewals 0% 0% 1% 0%
Leases Expired 0% 9% 0% 0%
Occupancy March 31, 1996 87% 91% 88% 100%
== === == ===
Leases Scheduled to Expire
Balance of 1996 23% 3% 10% 0%
== === == ===
Leases Scheduled to Commence
Balance of 1996 0% 0% 0% 0%
== === == ===
</TABLE>
18
<PAGE>
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)
- -------------------------------
A former tenant at the Miami International Distribution Center that had
occupied approximately 70,000 square feet, or 33% of the property, has 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. The matter is now expected to
be heard by the court during the third quarter of 1996. Should the
Partnership prevail in the action, there can be no assurance that the
Partnership will be able to collect all, or any, of this amount. The
General Partner will continue to pursue all available legal remedies in an
effort to obtain collection from this former tenant.
The General Partner subsequently secured two replacement tenants for this
space. 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 default judgment in the amount
of approximately $1,830,000 against this tenant on November 1, 1995 and
received a final judgment in the amount of approximately $2,010,000 on
January 31, 1996. The final judgment amount represents the aggregate of
the default judgment amount plus interest thereon from the date of the
default judgment through the date of the final judgment. Based upon the
financial condition of the tenant, there can be no assurance that the
Partnership will be able to collect all, if any, of the judgment amount.
The General Partner has also been seeking a replacement tenant for this
space.
During 1996, one tenant's lease representing approximately 50,000 square
feet, or 23% of the property, is scheduled to expire. The General Partner
is currently negotiating with this tenant for a lease renewal. If the
General Partner is unable to secure a renewal, then it will seek a
replacement tenant, or tenants, for this space.
19
<PAGE>
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 Miami International Distribution Center is located in an area that the
Miami Airport Authority has targeted for future expansion of the Airport.
The Miami Airport Authority has contacted the General Partner concerning a
potential 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.
During May 1996, the Miami Airport Authority made an offer to purchase this
property. The General Partner is currently evaluating the offer.
Demand for available industrial space in Atlanta, Georgia, where the Fulton
Business Park is located, has increased during the past two years and
rental rates are increasing. The General Partner believes that, given
current real estate market conditions for industrial space in Atlanta, the
property will be able to retain existing tenants as well as secure a new
tenant, or tenants, at the property during 1996.
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 1996 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.
205 Newbury Associates remained current on its minimum required debt
service payments as of March 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.
20
<PAGE>
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)
- -------------------------------
General Camera Corporation ("GCC") remained current on its minimum required
debt service payments as of March 31, 1996 and as of the date hereof. The
General Partner believes, based upon current information and events, that
GCC may not be able to pay the entire outstanding principal balance of the
loan upon the maturity date of the mortgage (July 1, 1996). Should GCC
fail to pay the entire outstanding balance of the loan, the General Partner
will pursue all available remedies, including foreclosing on the property
and pursuing the personal guaranty of GCC's principal stockholders, in
order to collect upon all amounts due. The General Partner believes that
the entire principal balance of the loan will ultimately be collectible.
Should the General Partner fail in its efforts to collect upon amounts due
through foreclosure or collection on the personal guaranty, 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 GCC and the
financial condition of both GCC and the guarantors of the loan.
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 is
estimated to be approximately $9,000,000 as of March 31, 1996. The net
book value of the Park Square Shopping center property of approximately
$10,198,000 at March 31, 1996 was evaluated in comparison to its estimated
future undiscounted cash flows and the recent independent appraisal and,
based upon such evaluation, the General Partner determined that no
permanent impairment in value exists and that a write-down in value was not
required as of March 31, 1996. The Partnership's cumulative investment in
the property before accumulated depreciation is approximately $12,886,000.
The General Partner evaluated the carrying value of each of the
Partnership's properties and its joint venture investment as of December
31, 1995 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.
In addition, the General Partner evaluated the status of its mortgage
investments and their ultimate collectibility as of December 31, 1995.
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 property valuations, using
internal or independent appraisals, in order to determine whether a
permanent impairment in value exists on any of the Partnership's
properties.
21
<PAGE>
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
- ---------------------
Net income for the three months ended March 31, 1996 was $600,486, as
compared to net income of $605,000 for the same period in 1995.
Average occupancy for the Partnership's equity real estate investments was
as follows:
Three Months Ended March 31,
1996 1995
---- ----
Miami International Distribution
Center 87% 87%
Fulton Business Park 91% 83%
Park Square Shopping Center 86% 84%
Quince Orchard Corporate Center
(Affiliated Joint Venture) 100% 100%
Amortization of deferred expenses increased by $10,000, or 16%, during the
three months ended March 31, 1996 as compared to the three months ended
March 31, 1995. This increase is primarily due to leasing costs incurred
at the Fulton Business Park during 1995 and the subsequent amortization of
such costs.
The General Partner believes that inflation has had no significant impact
on income from operations during the three months ended March 31, 1996, and
the General Partner anticipates that inflation will not have a significant
impact during the remainder of 1996.
22
<PAGE>
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)
Cash Flow
- ---------
The following table provides the calculations of Cash from Operations and
Distributable Cash from Operations which are calculated in accordance with
Section 17 of the Partnership Agreement:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1996 1995
---- ----
<S> <C> <C>
Net cash provided by operating
activities (a) $1,039,241 $805,516
Net change in operating assets and liabilities (a) (115,578) (8,594)
---------- --------
Net cash provided by operations (a) 923,663 796,922
Increase in working capital reserves (161,593) (166,244)
---------- --------
Cash from operations (b) 762,070 630,678
Decrease in working capital reserves - -
---------- --------
Distributable cash from operations (b) $762,070 $630,678
========== ========
Allocation to General Partner $7,620 $6,306
Allocation to Investors 754,450 624,372
Allocation to John Hancock Limited Partner - -
---------- --------
$762,070 $630,678
========== ========
</TABLE>
(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 second quarter of 1996, the Partnership will make a cash
distribution in the amount of $754,450 to the Investors, representing a 6%
annualized return to all Investors of record at March 31, 1996, based on
Distributable Cash from Operations for the quarter then ended.
The source of future cash distributions is dependent upon cash generated by
the Partnership's properties and the use of working capital reserves. The
General Partner currently anticipates that the Partnership's Distributable
Cash from Operations during each of the remaining three quarters of 1996
will be comparable to that generated during the first quarter of 1996.
23
<PAGE>
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, two limited partnerships
affiliated with the Partnership, 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.
The General Partner believes the allegations are totally without
merit and intends to vigorously contest the action.
There are no other material pending legal proceedings, other than
ordinary routine litigation incidental to the business of the
Partnership, to which the Partnership is a party or to which any
of its properties is subject.
Item 2. Changes in Securities
There were no changes in securities during the first quarter of
1996.
Item 3. Defaults upon Senior Securities
There were no defaults upon senior securities during the first
quarter of 1996.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders of
the Partnership during the first quarter of 1996.
Item 5. Other information
Item 6. Exhibits and Reports on form 8-K
(a) There are no exhibits to this report
(b) There were no reports on Form 8-K filed during the first
quarter of 1996.
24
<PAGE>
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 15th day of May, 1996.
John Hancock Realty Income Fund-II
Limited Partnership
By: John Hancock Realty Equities, Inc.,
General Partner
By: WILLIAM M. FITZGERALD
--------------------------------
William M. Fitzgerald, President
By: RICHARD E. FRANK
--------------------------------
Richard E. Frank, Treasurer
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000818257
<NAME> JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,193,934
<SECURITIES> 0
<RECEIVABLES> 6,615,460
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,276,576
<PP&E> 24,396,994
<DEPRECIATION> 4,681,326
<TOTAL-ASSETS> 39,528,836
<CURRENT-LIABILITIES> 484,949
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 39,043,887
<TOTAL-LIABILITY-AND-EQUITY> 39,528,836
<SALES> 0
<TOTAL-REVENUES> 1,009,953
<CGS> 0
<TOTAL-COSTS> 180,354
<OTHER-EXPENSES> 229,113
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 600,486
<INCOME-TAX> 0
<INCOME-CONTINUING> 600,486
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 600,486
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
