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 SEPTEMBER 30, 2000 ------------------------------------------------ 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[ ] 1 2 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) INDEX PAGE PART I: FINANCIAL INFORMATION Item 1 - Financial Statements: Balance Sheets at September 30, 2000 and December 31, 1999 3 Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 1999 4 Statements of Partners' Equity for the Nine Months Ended September 30, 2000 and Year Ended December 31, 1999 5 Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 6 Notes To Financial Statements 7-14 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 15-18 PART II: OTHER INFORMATION 19 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 SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ Cash and cash equivalents $ 15,384,750 $ 2,951,442 Restricted cash 15,513 119,891 Other assets 1,735 7,921 Deferred expenses, net of accumulated amortization of $1,108,354 in 2000 and $1,224,279 in 1999 247,623 391,668 Investment in joint venture 130,000 6,695,633 Investment in property: Land -- 2,410,000 Buildings and improvements -- 10,476,229 ------------ ------------ -- 12,886,229 Less: accumulated depreciation -- 3,997,381 ------------ ------------ -- 8,888,848 ------------ ------------ Total assets $ 15,779,621 $ 19,055,403 ============ ============ LIABILITIES AND PARTNERS' EQUITY Accounts payable and accrued expenses $ 59,943 $ 81,873 Accounts payable to affiliates 117,330 156,512 ------------ ------------ Total liabilities 177,273 238,385 Partners' equity/(deficit): General Partners' deficit (168,975) (145,091) Limited Partners' equity 15,771,323 18,962,109 ------------ ------------ Total partners' equity 15,602,348 18,817,018 ------------ ------------ Total liabilities and partners' equity $ 15,779,621 $ 19,055,403 ============ ============ 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2000 1999 2000 1999 ---- ---- ---- ---- Income: Rental income $ 206,978 $ 387,299 $ 734,359 $ 1,538,088 Income/(loss) from joint venture (37,063) 212,302 446,124 637,905 Interest income 77,278 120,872 155,101 194,755 Gain/(loss) on sale of property (569,970) 5,286,379 (569,970) 5,286,379 ----------- ----------- ----------- ----------- Total income (322,777) 6,006,852 765,614 7,657,127 Expenses: Depreciation -- 87,306 87,302 293,090 Property operating expenses 25,425 145,213 82,259 370,242 General and administrative expenses 79,239 84,833 202,954 243,345 Property write-downs -- -- 2,017,976 -- Amortization of deferred expenses 31,527 36,562 100,002 130,405 ----------- ----------- ----------- ----------- Total expenses 136,191 353,914 2,490,493 1,037,082 ----------- ----------- ----------- ----------- Net income $ (458,968) $ 5,652,938 $(1,724,879) $ 6,620,045 =========== =========== =========== =========== Allocation of net income: General Partner $ (4,319) $ 56,529 $ (16,978) $ 66,200 John Hancock Limited Partner (187,799) 387,668 (187,799) 387,668 Investors (266,850) 5,208,741 (1,520,102) 6,166,177 ----------- ----------- ----------- ----------- $ (458,968) $ 5,652,938 $(1,724,879) $ 6,620,045 =========== =========== =========== =========== Net income per Unit $ (0.10) $ 2.00 $ (0.58) $ 2.37 =========== =========== =========== =========== See Notes to Financial Statements 4 5 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) STATEMENTS OF PARTNERS' EQUITY (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2000 AND YEAR ENDED DECEMBER 31, 1999 GENERAL LIMITED PARTNER PARTNERS TOTAL ------- -------- ----- Partners' equity/(deficit) at January 1, 1999 (2,601,552 Units outstanding) $(185,981) $25,382,287 $25,196,306 Less: Cash distributions (23,567) (13,278,322) (13,301,889) Add: Net income 64,457 6,858,144 6,922,601 --------- ----------- ----------- Partner's equity/(deficit) at December 31, 1999 (145,091) 18,962,109 18,817,018 (2,601,552 Units outstanding) Less: Cash distributions (6,906) (1,482,885) (1,489,791) Add: Net loss (16,978) (1,707,901) (1,724,879) --------- ---------- ---------- Partners' equity/(deficit) at September 30, 2000 (2,601,552 Units outstanding) $(168,975) $15,771,323 $15,602,348 ========= =========== =========== See Notes to Financial Statements 5 6 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 ---- ---- Operating activities: Net income/(loss) $ (1,724,879) $ 6,620,045 Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation 87,302 293,090 Amortization of deferred expenses 100,002 130,405 Property write-downs 2,017,976 -- Cash distributions over equity in income from joint venture 253,957 12,510 Gain/(loss) on sale of property interests 569,970 (5,286,379) ------------ ------------ 1,304,328 1,769,671 Changes in operating assets and liabilities: Decrease in restricted cash 104,378 513 Decrease/(increase) in other assets 6,186 (1,152) Increase/(decrease) in accounts payable and accrued expenses (21,930) 132,381 Increase/(decrease) in accounts payable to affiliates (39,182) 71,878 ------------ ------------ Net cash provided by operating activities 1,353,780 1,973,291 Investing activities: Increase in deferred expenses (25,226) (67,594) Proceeds from sale of property interests 12,594,545 10,694,903 ------------ ------------ Net cash provided by investing activities 12,569,319 10,627,309 Financing activities: Cash distributed to Partners (1,489,791) (1,963,604) ------------ ------------ Net cash used in financing activities (1,489,791) (1,963,604) ------------ ------------ Net increase in cash and cash equivalents 12,433,308 10,636,996 Cash and cash equivalents at beginning of year 2,951,442 3,261,458 ------------ ------------ Cash and cash equivalents at end of period $ 15,384,750 $ 13,898,454 ============ ============ 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 September 30, 2000, the partners in the Partnership consisted of John Hancock Realty Equities, Inc. (the "General Partner"), a wholly-owned, indirect subsidiary of John Hancock 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 4,012 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. As initially stated in its Prospectus, it was expected that the Partnership would be dissolved upon the sale of its last remaining property, which at that time was expected to be within seven to ten years following the date such property was acquired by the Partnership. As of September 30, 2000, the Partnership has sold the two remaining properties in its portfolio, one of which is held through a joint venture. The sale of these last two properties results in the termination of the operations of the Partnership. The Partnership will be dissolved in accordance with the terms of the Partnership Agreement, as soon as reasonably practicable. 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 nine-month period ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. 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, 1999. 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. 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) 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. 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 costs, 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 nine months ended September 30, 2000 and 1999 and to which the General Partner or its affiliates are entitled to reimbursement from the Partnership were $71,325 and $81,555, 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 9. Accordingly, included in the Statements of Operations for the nine months ended September 30, 2000 and 1999 are $0 and $23,744, respectively, representing the Partnership's share of costs incurred by the General Partner and its Affiliates relating to the class action complaint. Through September 30, 2000, the Partnership has accrued a total of $210,098 as its share of the costs incurred by the General Partner and its Affiliates resulting from this matter. The General Partner also believes that the indemnification applies to the complaint filed in the Superior Court of the State of California for the County of Los Angeles described in Note 9. Accordingly, the Partnership incurred and paid $35,138 representing the Partnership's share of costs incurred by the General Partner and its Affiliates relating to this complaint. Accounts payable to affiliates represents amounts due to the General Partner or its Affiliates for various services provided to the Partnership, including amounts to indemnify the General Partner or its Affiliates for claims incurred by them in connection with their actions 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. 10 11 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: September 30, December 31, 2000 1999 ------------- ------------ Park Square Shopping Center $ -- $12,886,229 Accumulated Depreciation -- (3,997,381) -------- ----------- $ -- $ 8,888,848 ======== =========== During March 2000, the Park Square Shopping Center was listed for sale. Accordingly, this property has been classified as "Property held for sale" on the Balance Sheet since March 31, 2000 at its carrying value. During the second quarter of 2000, as a result of changes in the status of the supermarket anchor at the property and, in general, the continued weakness in local real estate market conditions, the General Partner wrote-down the carrying amount of Park Square Shopping center by $2,017,976 to an amount equal to the net proceeds projected to be received as a result of the sales price that had been negotiated with the then prospective buyer. On August 30, 2000, the Partnership sold the Park Square Shopping Center for a net sales price of $6,309,923, after deductions for commissions and selling expenses incurred in connection with the sale of the property. This transaction resulted in a non-recurring loss of $542,917, representing the difference between the net sales price and the property's carrying value of $6,852,840. 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. INVESTMENT IN JOINT VENTURE On December 28, 1988, the Partnership acquired a 99.5% interest in JH Quince Orchard Partners (the "Affiliated Joint Venture"), a joint venture between the Partnership and John Hancock Realty Income Fund-III Limited Partnership ("Income Fund-III"). The Partnership had an initial 99.5% interest and Income Fund-III had an initial 0.5% interest in the Affiliated Joint Venture. Pursuant to the partnership agreement of the Affiliated Joint Venture, Income Fund-III had the option, exercisable prior to December 31, 1990, to increase its investment and interest in the Affiliated Joint Venture to 50%. During the second quarter of 1989, Income Fund-III exercised its option and the Partnership sold a 49.5% interest in the Affiliated Joint Venture to Income Fund-III. The Partnership has held a 50% interest in the Affiliated Joint Venture since the second quarter of 1989. On December 28, 1988, the Affiliated Joint Venture contributed 98% of the invested capital of, and acquired a 75% interest in, QOCC-1 Associates, an existing partnership which owns and operates the Quince Orchard Corporate Center, a three-story office building and related land and improvements located in Gaithersburg, Maryland. 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 September 30, 2000, 97.55% has been contributed by the Affiliated Joint Venture. The Affiliated Joint Venture continues to hold a 75% interest in QOCC-1 Associates. 11 12 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 6. INVESTMENT IN JOINT VENTURE (CONTINUED) Net cash flow from QOCC-1 Associates is distributed in the following order of priority: first, to the payment of all debts and liabilities of QOCC-1 Associates and to fund reserves deemed reasonably necessary; second, to the partners in proportion to their respective invested capital until each has received a 9% return on invested capital; third, the balance, if any, to the partners in proportion to their interests. Prior to 1996, QOCC-1 Associates had not provided the partners with a return in excess of 9% on their invested capital. During 1999, 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. On September 29, 2000, QOCC-1 Associates sold the Quince Orchard Corporate Center to a non-affiliated buyer for a total net sales price of $12,569,246 after deductions for commissions and selling expenses incurred in connection with the sale of the property. $6,284,623, representing fifty percent of the net proceeds of the sale, was distributed to the Partnership and fifty percent was distributed to Income Fund-III. This transaction resulted in a non-recurring loss of $27,053 to the Partnership, representing the difference between the net sales price and the carrying value of the investment of $6,311,676. 7. DEFERRED EXPENSES Deferred expenses consist of the following: UNAMORTIZED UNAMORTIZED BALANCE AT BALANCE AT DESCRIPTION SEPTEMBER 30, 2000 DECEMBER 31, 1999 ----------- ------------------ ----------------- $152,880 acquisition fee for investment in the Affiliated Joint Venture. This amount is amortized over a period of 31.5 years. $ 96,056 $ 99,695 $1,203,097 acquisition fees paid to the General Partner. Prior to September 30, 1993, this amount was amortized over a period of 30 years. Subsequent to September 30, 1993, the unamortized balance is amortized over a period of 8.5 years. 151,567 242,508 Tenant improvements were amortized over the terms of the leases to which they relate. During March, 2000 the General Partner listed its last investment property for sale. Accordingly, the unamortized balance is included in carrying cost of "Property held for sale." -- 5,224 Lease commissions were amortized over the terms of the leases to which they relate. During March, 2000, the General Partner listed its last investment property for sale. Accordingly, the unamortized balance is included in carrying cost of "Property held for sale." -- 44,241 -------- -------- $247,623 $391,668 ======== ======== 12 13 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 8. 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: Nine Months Ended September 30, 2000 1999 ---- ---- Net income per Statements of Operations $(1,724,879) $6,620,045 Add/(deduct): Excess of book gain over tax gain on disposition of assets (667,318) (154,926) Excess of book depreciation over tax depreciation (105,312) 19,452 Excess of book amortization over tax amortization 9,173 62,495 ----------- ---------- Net income for federal income tax purposes $(2,488,336) $6,547,066 =========== ========== 9. 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. A settlement agreement was approved by the Court on December 22, 1999. Under terms of the settlement, the defendants have guaranteed certain returns to class members on their investments and paid fees and expenses to class counsel in an amount determined by the court to be $1.5 million. These terms of the settlement will have no financial impact on the Partnership. The Partnership provides indemnification to the General Partner and its Affiliates for acts or omissions of the General Partner in good faith on behalf of the Partnership, except for acts or omissions constituting fraud, negligence, misconduct or breach of fiduciary duty. The General Partner believes that this indemnification applies to the class action complaint described above. The Partnership has incurred approximately $532,173 in legal expenses in connection with the class action lawsuit (see Part II, Item 1 of this Report). Of this amount, approximately $322,075 relates to the Partnership's own defense and approximately $210,098 relates to the indemnification of the General Partner and its Affiliates for their defense. These expenses are funded from the operations of the Partnership. 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. 13 14 JOHN HANCOCK REALTY INCOME FUND-II LIMITED PARTNERSHIP (A MASSACHUSETTS LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 9. CONTINGENCIES (CONTINUED) 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. A settlement agreement was reached on February 18, 2000 terminating all litigation between the parties. The settlement will not have a material adverse impact on the Partnership's financial position. 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. 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. FORWARD-LOOKING STATEMENTS In addition to historical information, certain statements contained herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements appear in a number of places in this Report and include statements regarding the intent, belief or expectations of the General Partner with respect to, among other things, the prospective sale of Partnership properties, actions that would be taken in the event of lack of liquidity, unanticipated leasing costs, repair and maintenance expenses, litigation 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. 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 As initially stated in its Prospectus, it was expected that the Partnership would be dissolved upon the sale of its last remaining property, which at that time was expected to be within seven to ten years following the date such property was acquired by the Partnership. The Partnership sold Park Square Shopping Center on August 30, 2000 and QOCC-1 sold the Quince Orchard Corporate Center on September 29, 2000. The sale of the Partnership's last remaining investments resulted in the termination of the operations of the Partnership, and the Partnership will be dissolved, in accordance with the terms of the Partnership Agreement, as soon as reasonably practicable. At such time as all liabilities with respect to the Partnership are resolved, the General Partner will make a final distribution of net assets to the Limited Partners, as soon as practicable. No assurances can be given as to whether any distribution can be made after all liabilities of the Partnership are resolved. Such final distribution, if any, will result in the liquidation and termination of the Partnership. At such time of such final distribution, the outstanding Units will be cancelled, and, in accordance with federal securities laws, they will be de-registered with the Securities and Exchange Commission, after which time the Partnership will no longer be required to file periodic reports with the Commission. At September 30, 2000 the Partnership had $15,384,750 in cash and cash equivalents, $15,513 in restricted cash. 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) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) The Partnership has a working capital reserve with a current balance of approximately $2.7 million. The General Partner anticipates that such amount should be sufficient to satisfy the Partnership's general liquidity requirements as the Partnership's business is wound down. Liquidity would, however, be materially adversely affected if there were significant unanticipated operating and liquidation costs (including but not limited to litigation expenses). 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, or short-term loans from the General Partner or its Affiliates. The Partnership incurred $25,226 of leasing costs at the Park Square Shopping Center during the nine months ended September 30, 2000. The current balance in the working capital reserve was sufficient to pay such costs. The Partnership has incurred approximately $532,173 in legal expenses in connection with the class action lawsuit (see Part II, Item 1 of this Report). Of this amount, approximately $322,075 relates to the Partnership's own defense and approximately $210,098 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. Cash in the amount of $1,489,791 generated from the Partnership's operations, was distributed to the Partners during the nine months ended September 30, 2000. This amount was distributed in accordance with the Partnership Agreement. The amount distributed to the Investors from Distributable Cash from Operations during the nine months ended September 30, 2000 represented an annualized return of 6% on remaining Investors' Invested Capital. The General Partner anticipates that the Partnership's Distributable Cash from Operations during the fourth quarter of 2000 will be reduced as an effect of the sales of the Park Square Shopping Center and the Quince Orchard Corporate Center during the third quarter of 2000. The General Partner evaluated the carrying value of each of the Partnership's properties and its joint venture investment as of December 31, 1999 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 an impairment in values existed. Based upon such evaluations, the General Partner determined that no impairment in values existed and, therefore, no write-downs were recorded. As a result of changes in the status of the supermarket anchor tenant at Park Square Shopping Center and, in general, the continued weakness in the local real estate market conditions for properties similar to Park Square, during the second quarter the General Partner wrote down the carrying amount of Park Square by $2,017,976 to an amount equal to the net proceeds projected to be received as a result of the sales price that was being negotiated with a prospective buyer. On August 30, 2000, the Partnership sold the Park Square Shopping Center for a gross sales price of $6,500,000 to an unaffiliated buyer. After deductions for commissions and selling expenses, the sale generated net proceeds of $6,309,923 resulting in a non-recurring net loss of $542,917, representing the difference between the net sales price and the property's carrying value of $6,852,840. During the second quarter of 2000, the General Partner received unsolicited offers to purchase the Quince Orchard Corporate Center. On September 29, 2000, QOCC-1 Associates sold the Quince Orchard Corporate Center to a non-affiliated buyer for a total net sales price of $12,569,246 after deductions for commissions and selling expenses incurred in connection with the sale of the property. $6,284,623, representing fifty percent of the net proceeds of the sale, was distributed to the Partnership and fifty percent was distributed to Income Fund-III. This transaction resulted in a non-recurring loss of $27,053 to the Partnership, representing the difference between the net sales price and the carrying value of the investment of $6,311,676. 16 17 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS The Partnership generated a net loss the nine months ended September 30, 2000 of $1,724,879 , as compared to net income of $6,620,045 for the same period in 1999. The prior period results include a non-recurring gain of $5,286,379 from the sale of the Miami International Distribution Center on August 9, 1999. The current period results include a $2,107,976 write-down of the value of Park Square Shopping Center, a non-recurring loss of $542,917 on the sale of Park Square Shopping Center and a non-recurring loss of $27,053 as a result of QOCC-1's sale of Quince Orchard Corporate Center. Excluding these results, net income for the nine months ended September 30, 2000 decreased by $470,599, or 35%, as compared to the prior year. This decrease is primarily due to a decrease in rental income and income from joint venture and was somewhat offset by decreases in depreciation and property operating expenses. Average occupancy for the Partnership's equity real estate investments was as follows: Nine Months Ended September 30, 2000 1999 ---- ---- Park Square Shopping Center 88% 88% Quince Orchard Corporate Center (Affiliated Joint Venture) 67% 100% Rental income for the nine months ended September 30, 2000 decreased by $803,729, or 52%, as compared to the same period during 1999 primarily due to the sale of the Miami International Distribution Center on August 9, 1999 and the sale of the Park Square Shopping Center on August 30, 2000. Depreciation expense for the nine months ended September 30, 2000 decreased by $205,788 or 70%, as compared to the same period in 1999. This decrease is due to the sale of the Miami International Distribution Center and to the reclassification of the Park Square Shopping Center as "Property Held for Sale" during the first quarter of 2000. Accordingly, no depreciation expense has been recorded since these properties were listed for sale. Property operating expenses for the nine months ended September 30, 2000 decreased by $287,983, or 78%, as compared to the same period in 1999 primarily due to the sale of the Miami International Distribution Center on August 9, 1999. General and administrative expenses for the nine months ended September 30, 2000 decreased by $40,391, or 17%, as compared to the same period in 1999. This decrease was primarily due to lower legal fees incurred by the Partnership in connection with the legal proceedings described in Item 1 of Part II of this Report and to a decrease in time required by the General Partner in managing the activities of the Partnership resulting from the sale of the Miami International Distribution Center in 1999. Amortization of deferred expenses for the nine months ended September 30, 2000 decreased by $30,403, or 23%, as compared to the same period in 1999 due to the sale of the Miami International Distribution Center and to the reclassifying of deferred expenses for Park Square Shopping 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 nine months ended September 30, 2000, and the General Partner anticipates that inflation will not have a significant impact during the remainder of 2000. 17 18 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: NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 ---- ---- Net cash provided by operating activities (a) $ 1,353,780 $ 1,973,291 Net change in operating assets and liabilities (a) (49,452) (203,620) ----------- ----------- Net cash provided by operations (a) 1,304,328 1,769,671 Increase in working capital reserves (358,309) -- ----------- ----------- Cash from operations (b) 946,019 1,769,671 Decrease in working capital reserves -- 199,190 ----------- ----------- Distributable cash from operations (b) $ 946,019 $ 1,968,861 =========== =========== Allocation to General Partner $ 9,460 $ 17,697 Allocation to Investors 936,559 1,951,164 Allocation to John Hancock Limited Partner -- -- ----------- ----------- $ 946,019 $ 1,968,861 =========== =========== (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 fourth quarter of 2000, the Partnership will make a cash distribution in the amount of $12,017,089 to the General Partner and Limited Partners generated from Distributable Cash from Sales or Financings as a result of the sale of the Park Square Shopping Center and QOCC-1's sale of the Quince Orchard Corporate Center. This amount is allocated as follows: DIST. CASH FROM SALES OR FINANCINGS ------------------- Investors $11,550,891 John Hancock Limited Partner 466,198 General Partner -- ----------- Total $12,017,089 =========== The amount of future cash distributions will be dependent upon the need to draw down working capital reserves. As of the date of this report, all of the property interests of the Partnership have been sold. In order to adequately provide for all future contingencies, the General Partner has determined (as permitted by the Partnership Agreement) to retain rather than distribute to the Limited Partners, net cash provided by the Partnership's normal operations in order to fund cash reserves for contingencies. Accordingly, no cash distributions with respect to Distributable Cash from Operations will be made to Limited Partners at least for the last quarter of 2000. At such time as all liabilities with respect to the Partnership are resolved, the General Partner will make a final distribution of net assets to the Limited Partners, in accordance with the terms of the Partnership Agreement. No assurances can be given as to whether any distribution can be made after all liabilities of the Partnership are resolved. Such final distribution, if any, will result in the liquidation and termination of the Partnership. 19 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. A settlement agreement was approved by the Court on December 22, 1999. Under terms of the settlement, the defendants have guaranteed certain returns to class members on their investments and paid fees and expenses to class counsel in an amount determined by the court to be $1.5 million. These terms of the settlement will have no financial impact on the Partnership. 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. A settlement agreement was reached on February 18, 2000 terminating all litigation between the parties. The settlement will not have a material adverse impact on the Partnership's financial position. 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 third quarter of 2000. ITEM 3. DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities during the third quarter of 2000. 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 third quarter of 2000. ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) There are no exhibits to this report (b) A Report on Form 8-K was filed during the third quarter of 2000. 19 20 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 14th day of November, 2000. 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) 20