<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File No. 0-14052
-----------------
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
Massachusetts 04-2847256
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Franklin Street
Boston, Massachusetts 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(617) 261-9000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
No voting stock is held by nonaffiliates of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
None
<PAGE>
PART I
------
Item 1. Business.
--------
New England Life Pension Properties III; A Real Estate Limited
Partnership (the "Partnership") was organized under the Uniform Limited
Partnership Act of the Commonwealth of Massachusetts on November 1, 1984, to
invest primarily in newly constructed and existing income-producing real
properties.
The Partnership was initially capitalized with contributions of $2,000
in the aggregate from Copley Properties Company III, Inc. (the "Managing General
Partner") and ACOP Associates Limited Partnership (the "Associate General
Partner") (collectively, the "General Partners") and $10,000 from Copley Real
Estate Advisors, Inc. (the "Initial Limited Partner"). The Partnership filed a
Registration Statement on Form S-11 (the "Registration Statement") with the
Securities and Exchange Commission on November 15, 1984, with respect to a
public offering of 50,000 units of limited partnership interest at a purchase
price of $1,000 per unit (the "Units") with an option to sell up to an
additional 25,000 Units (an aggregate of $75,000,000). The Registration
Statement was declared effective on January 25, 1985.
The first sale of Units occurred on July 15, 1985, at which time the
Initial Limited Partner withdrew its contribution from the Partnership.
Investors were admitted to the Partnership thereafter at monthly closings; the
offering terminated and the last group of initial investors was admitted to the
Partnership on December 19, 1985. A total of 68,414 Units had been sold, a total
of 11,437 investors had been admitted as limited partners (the "Limited
Partners") and a total of $67,748,960 had been contributed to the capital of the
Partnership. The remaining 6,586 Units were de-registered on February 18, 1986.
The Partnership has no employees. Services are performed for the
Partnership by the Managing General Partner and affiliates of the Managing
General Partner.
As of December 31, 1997, the Partnership had investments in the three
real property investments described below. Additionally, the Partnership sold
six other real estate investments between 1987 and 1993. The principal terms of
these sales are set forth in the following table:
<TABLE>
<CAPTION>
Distribution
Investment Month/Year of Sale Net Sale Proceeds Distribution/Unit/1/ Month/Year
<S> <C> <C> <C> <C>
Investment Four 12/87 $15,771,830 $17.86 1/88
Investment Five 9/88 $3,002,643 $36.00 10/88
Investment Six 3/89 $10,943,495 $150.00 4/89
Investment Seven 2/92 $7,724,589 $102.00 4/92
Investment Eight/2/ 12/92 $11,600,183 $170.00 1/93
Investment Nine 12/93 $2,161,552 $31.00 1/94
</TABLE>
In the opinion of the Managing General Partner, the properties are
adequately covered by insurance.
- ------------------------
/1/In October 1996, an additional distribution of $7.60 per unit was made,
representing proceeds from several prior sales which were being held in working
capital reserves.
/2/These sale proceeds represent the proceeds received by the Partnership when
two mortgage loans made by the Partnership were paid off and the investment was
liquidated.
<PAGE>
A. Light Industrial Facility in Hayward, California ("North Cabot
--------------------------------------------------------------
Industrial Park").
- -----------------
The Partnership continues to own a 3.8-acre parcel of land in Hayward,
California, which it acquired in 1985 for $786,130 and leased back to the
seller. In addition, the Partnership also made a loan to the ground lessee in
the amount of $2,663,870. Two single-story research and development buildings
containing an aggregate of approximately 51,089 square feet of space are
situated on the land. These buildings were 100% leased as of December 31, 1997.
The Partnership entered into a ground lease with the seller which had a
term of 60 years. On November 15, 1994, the Partnership obtained fee simple
title to this property because the ground lessee defaulted on its obligations.
The Partnership accepted $85,000 as a settlement which released the guarantors
from all of their obligations under the lease guaranty. This payment was applied
to past due rent under the ground lease.
B. Research and Development/Office Buildings in Frederick, Maryland
----------------------------------------------------------------
("270 Technology Park").
- -----------------------
In August, 1987, the Partnership exercised its option to purchase for
$247,650 an 8.288-acre parcel of land in 270 Technology Park, Frederick,
Maryland. Situated on the land are three single-story research and
development/office buildings containing an aggregate of 86,169 square feet of
space. The Partnership simultaneously leased the land back to the seller for a
term of 60 years. The ground lease provided for a fixed annual rent of $26,003
plus additional rent equal to 50% of gross revenues from the rental of the
buildings in excess of a base amount. Upon exercising its option, the
Partnership also made a non-recourse mortgage loan to the ground lessee of
$5,712,350.
On January 1, 1988, the Partnership converted this investment to a joint
venture in which it has a 50% interest. The Partnership contributed the land and
funds to retire the mortgage debt. In addition, the Partnership contributed an
additional $260,000 of capital. The Partnership is entitled to receive a 10.5%
per annum preferred return on its invested capital payable currently, and 50% of
remaining cash flow and of sale and refinancing proceeds after return of its
equity. The preferred return may accrue if sufficient cash flow is not
available. In March 1998, ownership of the joint venture was restructured
whereby the Partnership obtained full control over the business of the joint
venture. The restructuring will be effective January 1, 1998.
As of December 31, 1997, the buildings were 98% leased.
C. Apartment Building in Gaithersburg, Maryland ("Bayberry Apartments").
--------------------------------------------------------------------
On April 4, 1988, the Partnership acquired a 65% interest in Bayberry
Associates, a joint venture formed with Christopher B.A. Limited Partnership
(the "Developer"). As of December 31, 1997, the Partnership had contributed
$14,575,940 to the capital of the joint venture out of a maximum commitment of
$14,580,000, $9,327,500 of which is characterized as Senior Capital and
$5,252,500 of which is characterized as Junior Capital. The joint venture
agreement entitles the Partnership to receive a senior priority cumulative
return of 10.25% per annum on the outstanding invested Senior Capital and a
junior priority cumulative return of 10.25% per annum on the outstanding
invested Junior Capital; however, up to $230,000 of Junior Capital is entitled
to a return at the greater of 10.25% per annum or the prime rate of the Maryland
National Bank plus 2% ($225,957 of such amount was contributed as of
December 31, 1997). When an aggregate of $982,107 of priority returns has been
paid, (i) a portion of the senior priority return of up to 1.25% per annum may
accrue if sufficient cash is not available therefor, with 9.0% per annum to be
paid currently, and (ii) the full amount of the junior priority return equal to
10.25% per annum may accrue if sufficient cash is not available therefor. The
joint venture agreement also entitles the Partnership to receive 65% of net cash
flow and of refinancing proceeds and sale proceeds following the return of the
Partnership's equity capital and accrued preferential returns.
The joint venture owns approximately 7.14 acres of land in Gaithersburg,
Maryland on which it completed development of a 230-unit garden apartment
community. As of December 31, 1997, the apartments were 93% leased.
<PAGE>
Item 2. Properties.
----------
The following table sets forth the annual realty taxes for the
Partnership's properties and information regarding tenants who occupy 10% or
more of gross leasable area (GLA) in the Partnership's properties:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Estimated Number of
1997 Tenants with 10% Name(s) of Square Feet of
Property Realty Taxes or More of GLA Tenant(s) Each Tenant
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Light Industrial Facility in Hayward, CA $33,600 1 EMHI America 6,691
R&D Buildings in Frederick, MD $79,964 5 Sac-Tec 15,000
Adaptive Technology 9,003
Abbie Business School 13,209
MCI 15,591
Horizon Cellular 10,111
Telephone
Apartment Building in Gaithersburg, MD $207,408 0 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Annual
Contract
Rent Lease Renewal Line of Business
Property Per Square Foot Expiration Options of Principal Tenants
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Light Industrial Facility in Hayward, CA $5.52 June, 1998 None Automotive Parts
R&D Buildings in Frederick, MD $14.45 March, 2000 Two 3 Year Options Defense
$9.60 May, 1999 One 6 Year Option Technology
$10.57 August, 2001 None Business School
$12.00 February, 1998 None Long Distance Comm.
$11.53 October, 2001 One 3 Year Option Cellular Communications
Apartment Building in Gaithersburg, MD N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The following table sets forth for each of the last five years the gross
leasable area, occupancy rates, rental revenue, and net effective rent for the
Partnership's properties:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Gross Leasable Year-End Rental Net Effective
PROPERTY Area Occupancy Revenue Rent ($/sf/yr)*
Recognized
- --------------------------------------------------------------------------------------------------------
Industrial Facility in Hayward, CA
- ----------------------------------
<S> <C> <C> <C> <C>
1993 51,089 65% $152,961 $4.91
1994 51,089 58% $168,705 $5.37
1995 51,089 94% $197,581 $5.07
1996 51,089 100% $206,603 $4.51
1997 51,089 100% $267,263 $5.23
R&D Buildings in Frederick, MD
- ------------------------------
1993 86,169 93% $930,768 $11.61
1994 86,169 95% $958,157 $11.83
1995 86,169 98% $968,980 $11.56
1996 86,169 98% $976,011 $11.56
1997 86,169 98% $924,087 $11.95
Apartment Building in Gaithersburg, MD
- --------------------------------------
1993 203,642 95% $2,077,226 $10.74
1994 203,642 94% $2,141,017 $11.13
1995 203,642 91% $2,168,956 $11.48
1996 203,642 89% $2,228,222 $11.86
1997 203,642 93% $2,280,583 $11.95
- -------------------------------------------------------------------------------------------------------
</TABLE>
*Net effective rent calculation is based on average occupancy during the
respective year.
<PAGE>
Following is a schedule of lease expirations for each of the next ten
years for the Partnership's properties:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
TENANT AGING REPORT
- ---------------------------------------------------------------------------------------------------
Property # of Lease Total Total Percentage of
Expirations Square Annual Gross Annual
Feet Rental Rental*
- ---------------------------------------------------------------------------------------------------
Light Industrial Facility in Hayward, CA
- -----------------------------------------
<S> <C> <C> <C> <C>
1998 5 17,697 $81,779 31%
1999 2 8,135 $45,816 18%
2000 4 17,311 $95,004 36%
2001 2 7,946 $38,544 15%
2002 0 0 $0 0%
2003 0 0 $0 0%
2004 0 0 $0 0%
2005 0 0 $0 0%
2006 0 0 $0 0%
2007 0 0 $0 0%
R&D Buildings in Frederick, MD
- ------------------------------
1998 6 31,619 $361,401 38%
1999 2 12,003 $119,681 12%
2000 2 17,007 $219,486 23%
2001 2 23,320 $256,195 27%
2002 0 0 $0 0%
2003 0 0 $0 0%
2004 0 0 $0 0%
2005 0 0 $0 0%
2006 0 0 $0 0%
2007 0 0 $0 0%
Apartment Building in Gaithersburg, MD
- --------------------------------------
1998 N/A N/A N/A N/A
1999 N/A N/A N/A N/A
2000 N/A N/A N/A N/A
2001 N/A N/A N/A N/A
2002 N/A N/A N/A N/A
2003 N/A N/A N/A N/A
2004 N/A N/A N/A N/A
2005 N/A N/A N/A N/A
2006 N/A N/A N/A N/A
2007 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------
</TABLE>
*Does not include expenses paid by tenants.
<PAGE>
The following information sets forth for each of the Partnership's
properties the: (i) federal tax basis, (ii) rate of depreciation, (iii) method
of depreciation, (iv) life claimed and (v) accumulated depreciation, with
respect to each property or component thereof for purposes of depreciation:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Rate of Life Accumulated
Entity/Property Tax Basis Depreciation Method in years Depreciation
- ------------------------------------------------------------------------------------------------------------------------------------
Light Industrial Facility in Hayward, California.
- -------------------------------------------------
<S> <C>
Buildings $ 846,184 2.50% SL 40 $ 66,109
Improvements 195,655 2.50% SL 40 11,711
----------- ----------
Total Depreciable Assets $ 1,041,839 $ 77,820
Research and Development/Office
Buildings, Frederick, Maryland.
- -------------------------------------------------
Building & Improvements $ 6,111,187 3.18% SL 31.5 $1,900,886
Improvements 350,418 2.56% SL 39 23,980
----------- ----------
Total Depreciable Assets $ 6,461,605 $1,924,866
Apartment Building in Gaithersburg, Maryland.
- -------------------------------------------------
Buildings $ 7,123,596 3.64% SL 27.5 $2,159,870
Land Improvements 1,380,115 N/A 150%DB 15 850,428
----------- ----------
Total Depreciable Assets $ 8,503,711 $3,010,298
Total Depreciable Assets $16,007,155 $5,012,984
=========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SL=Straight Line
DB=Declining Balance
<PAGE>
Following is information regarding the competitive market conditions for
each of the Partnership's properties. This information has been gathered from
sources deemed reliable. However, the Partnership has not independently verified
the information and, as such, cannot guarantee its accuracy or completeness:
Light Industrial Facility in Hayward, California
- ------------------------------------------------
The property is located in the Hayward/Union City industrial market,
east of San Francisco Bay in Alameda County. Hayward's light industrial market
has been active in 1997, and the limited supply of quality space in many
property types is causing tenants to pay higher rents for less desirable space.
Total 1997 net absorption in the Warehouse/Distribution market of 598,468 square
feet contributed to a reduced year-end vacancy rate of 3.9% for this type of
product. Asking rental rates currently range from $.32 to $.42 per square foot,
approximately 10% higher than rates from year-end 1996.
Research and Development/Office Buildings in Frederick, Maryland
- ----------------------------------------------------------------
The property is located in the Frederick County office/flex and light
industrial market. The Frederick R&D/office market contains approximately
4.9 million square feet of space with a vacancy rate of approximately 16%.
Current market rents range from $8.50 to $10.00 per square foot for R&D and
$9.50 to $12.00 per square foot for office. Due to build-to-suit activity during
1997 which reduced the number of new large tenants to fill vacated space, the
market is currently out of balance. While the office-using sector in Frederick
County is expected to remain stable over the near term, rents are expected to
remain flat through 1998.
Apartment Complex in Gaithersburg, Maryland
- -------------------------------------------
The property is located in Gaithersburg, which is in Montgomery County,
one of the most affluent counties in the region. Due in part to the strong
Federal Government presence and the improving outlook for biomedical firms, the
long-term outlook for Montgomery County remains positive. As Gaithersburg is
relatively strict regarding new development, additional multifamily construction
in the submarket is not anticipated in the near future. Conditions could improve
for the near-term if businesses continue to move up the I-270 corridor in search
of space, as Northern Virginia runs out of space for office and apartment
development.
Item 3. Legal Proceedings.
-----------------
The Partnership is not a party to, nor are any of its properties subject
to, any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
---------------------------------------------------------------------
There is no active market for the Units. Trading in the Units is
sporadic and occurs solely through private transactions.
As of December 31, 1997, there were 10,988 holders of Units.
<PAGE>
The Partnership's Amended and Restated Agreement of Limited Partnership
dated July 15, 1985, as amended to date (the "Partnership Agreement"), requires
that any Distributable Cash (as defined therein) be distributed quarterly to the
Partners in specified proportions and priorities. There are no restrictions on
the Partnership's present or future ability to make distributions of
Distributable Cash. For the year ended December 31, 1997, cash distributions
paid in 1997 or distributed after year-end with respect to 1997 to the Limited
Partners as a group totaled $1,828,022. For the year ended December 31, 1996,
cash distributions paid in 1996 or distributed after year-end with respect to
1996 to the Limited Partners as a group totaled $2,730,403, including $519,946
($7.60 per limited partnership unit) representing undistributed proceeds from
prior sales of various properties, and operating cash distributions of $364,186
($5.27 per limited partnership unit) resulting from a discretionary reduction of
previously accumulated cash reserves. Cash distributions exceeded net income in
1997 and, therefore, resulted in a reduction of partners' capital. Regular
distributions from operations, however, were less than cash provided by
operations in 1997. Reference is made to the Partnership's Statement of
Partners' Capital (Deficit) and Statement of Cash Flows in Item 8 hereof.
Item 6. Selected Financial Data.
-----------------------
<TABLE>
<CAPTION>
For Year For Year For Year For Year For Year
Ended Ended Ended Ended Ended
or as of or as of or as of or as of or as of
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93(1)
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,942,159 $ 1,961,564 $ 1,912,590 $ 1,760,463 $ 2,128,119
Net Income $ 1,310,288 $ 1,313,894 $ 1,287,403 $ 1,360,923 $ 1,218,694
Net Income
per Limited
Partnership
Unit $18.96 $ 19.01 $ 18.63 $ 19.69 $ 17.64
Total Assets $ 20,946,631 $ 21,459,173 $ 22,871,014 $ 23,284,224 $ 25,413,969
Total Cash
Distributions
per Limited
Partnership
Unit, including
amounts
distributed
after year end
with respect to
such year $ 26.72 $ 39.91 $ 24.64 $ 21.60 $ 49.75
------------- ------------- ------------- ------------- -------------
</TABLE>
See financial statements for description of significant transactions:
(1) 1993 - one sale; one provision for impaired mortgage loan.
<PAGE>
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations
- ----------
Liquidity and Capital Resources
- -------------------------------
The Partnership completed its offering of units of limited partnership
interest in December 1985 and a total of 68,414 units were sold. The Partnership
received proceeds of $61,950,285, net of selling commissions and other offering
costs, which were invested in real estate, used to pay related acquisition
costs, or retained as working capital reserves. The Partnership made the real
estate investments described in Item 1 herein, six of which were sold prior to
1994. As a result of the sales, capital of $35,196,266 has been returned to the
limited partners through December 31, 1997.
On January 27, 1994, the Partnership made a capital distribution of $31 per
limited partnership unit from the proceeds of the Heritage Green Plaza sale in
December 1993. The adjusted capital contribution after this distribution was
$493.14 per unit. On October 24, 1996, the Partnership made a capital
distribution of $519,946 ($7.60 per limited partnership unit) representing
undistributed proceeds from the sales of various properties prior to 1994. The
adjusted capital contribution after this distribution is $485.54 per unit. On
October 24, 1996, the Partnership also made a special operating cash
distribution of $364,186 ($5.27 per limited partnership unit) attributable to a
discretionary reduction of previously accumulated cash reserves. The Managing
General Partner will continue to evaluate working capital reserve levels.
At December 31, 1997, the Partnership had $2,592,080 in cash, cash
equivalents and short-term investments, of which $461,622 was used for operating
cash distributions to partners on January 29, 1998; the remainder is being
retained as working capital reserves. The source of future liquidity and cash
distributions to partners will primarily be cash generated by the Partnership's
real estate and short-term investments. Regular distributions of cash from
operations for the four quarters of 1996 and 1997 were made at the annualized
rate of 5.0% on the adjusted capital contribution.
The carrying value of real estate investments in the financial statements
at December 31, 1997 is at depreciated cost, or if the investment's carrying
value is determined not to be recoverable through expected undiscounted future
cash flows, the carrying value is reduced to estimated fair market value. The
fair market value of such investments is further reduced by the estimated cost
of sale for properties held for sale. Carrying value may be greater or less than
current appraised value. At December 31, 1997, the appraised value of each real
estate investment exceeded its related carrying value; the aggregate excess was
approximately $6,600,000. The current appraised value of real estate investments
has been determined by the Managing General Partner and is generally based on a
combination of traditional appraisal approaches performed by AEW Real Estate
Advisors, Inc. ("AEW") and independent appraisers. Because of the subjectivity
inherent in the valuation process, the current appraised value may differ
significantly from that which could be realized if the real estate were actually
offered for sale in the marketplace.
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Partnership's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscaluations causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in normal business operations. The Managing General Partner and its
affiliates are assessing the modifications or replacements of its software that
may be necessary for its computer systems to function properly with respect to
the dates in the year 2000 and thereafter. The Managing General Partner and its
affiliates do not believe that the cost of either modifying existing software or
converting to new software will be significant or that the Year 2000 Issue will
pose significant operational problems for its computer systems.
<PAGE>
Results of Operations
- ---------------------
Form of Real Estate Investments
Effective November 15, 1994, North Cabot Industrial Park (formerly
Marathon/Hayward) was converted to a wholly-owned property; it was previously
structured as a ground lease with a mortgage loan to the ground lessee.
Bayberry Apartments and 270 Technology Center are structured as joint ventures
with real estate management/development firms.
Operating Factors
Occupancy at North Cabot Industrial Park was 100%, 100% and 94% at
December 31, 1997, 1996, and 1995, respectively. Average occupancy during 1996,
however, was 91%.
At December 31, 1997, occupancy at Bayberry Apartments was 93%, up
slightly from 89% and 91% at December 31, 1997 and 1996, respectively. Market
conditions remain competitive; however, the overall demand for apartments in the
Gaithersburg, Maryland market is relatively stable.
Occupancy at 270 Technology Park was 98% at December 31, 1997, 1996
and 1995, although the average occupancy in 1997 was 91% as a tenant
representing 18% of the space vacated on March 31, 1997. The space formerly
leased by this tenant is currently being leased on a month-to-month basis until
a permanent tenant is found.
Investment Results
1997 Compared to 1996
Interest on cash equivalents and short-term investments decreased $43,000,
or 26% due to lower invested balances as a result of additional distributions
from reserves in October 1996. This decrease was partially offset by higher
short-term yields in 1997.
Real estate operating results were $1,608,252 and $1,594,354 in 1997
and 1996, respectively. At North Cabot Industrial Park, 1997 operations
improved due to increased occupancy as well as a slight reduction in operating
costs. These increases in operations were partially offset by increased
amortization expense, commencing in mid-1996, related to certain tenant
improvements. Operating income also increased at Bayberry Apartments primarily
due to the increase in occupancy, in addition to lower depreciation in 1997.
These effects were partially offset by an increase in real estate taxes in 1997.
At 270 Technology Park, operating results declined, consistent with the
occupancy decrease discussed above. Additionally, approximately $56,000 of
tenant improvements related to the vacated tenant mentioned above was written
off during 1997.
Cash from operations increased by approximately $360,000 between 1996
and 1997. The increase is primarily due to increased distributions from 270
Technology Park. In addition, the Partnership received increased cash flow from
North Cabot Industrial Park in 1997 as a result of the increase in occupancy
mentioned above.
<PAGE>
1996 Compared to 1995
Interest on cash equivalents and short-term investments decreased
$34,000 or 17% due to lower short-term interest rates, as well as lower average
invested balances.
Total real estate operations were $1,594,354 in 1996 compared to $1,500,132
in 1995. The increase was primarily due to an improvement in net operating
income at Bayberry Apartments largely due to increased rental rates. At North
Cabot, overall operating results increased slightly; property operating expenses
decreased due to a decrease in property taxes and the write-off of a tenant
receivable in 1995; and amortization expense increased in 1996 due to recent
tenant improvements.
Operating cash flow decreased approximately $290,000 or 15% between
1995 and 1996. This decrease, despite the increase in net income, is primarily
due to the timing of distributions from both 270 Technology Park ($152,000) and
Bayberry ($52,000). In addition, there was a significant increase in property
working capital.
Portfolio Expenses
The Partnership management fee is 9% of distributable cash flow from
operations after any increase or decrease in working capital reserves as
determined by the Managing General Partner. General and administrative expenses
primarily consist of real estate appraisal, printing, legal, accounting and
investor servicing fees.
1997 Compared to 1996
The Partnership management fee decreased due to the decrease in
distributable cash flow. General and administrative expenses increased by
$12,000 or 5% between the respective years primarily due to increased investor
servicing fees and accounting fees.
1996 Compared to 1995
The Partnership management fee increased due to an increase in
distributable cash flow, primarily stemming from the discretionary reduction in
working capital reserves. General and administrative expenses decreased by
$18,000 or 8% primarily due to decreased legal fees.
Inflation
By their nature, real estate investments tend not to be adversely
affected by inflation. Inflation may result in appreciation in the value of the
Partnership's real estate investments over time, if rental rates and replacement
costs increase. Declines in real property values during the period of
Partnership operations, due to market and economic conditions, have overshadowed
the overall positive effect inflation may have on the value of the Partnership's
investments.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
See the Financial Statements of the Partnership included as a part of
this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
-----------------------------------------------------------------
Financial Disclosure.
- --------------------
The Partnership has had no disagreements with its accountants on
any matters of accounting principles or practices or financial statement
disclosure.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
(a) and (b) Identification of Directors and Executive Officers.
--------------------------------------------------
The following table sets forth the names of the directors and
executive officers of the Managing General Partner and the age and position held
by each of them as of December 31, 1997.
<TABLE>
<CAPTION>
Name Position(s) with the Managing General Partner Age
- ---- --------------------------------------------- ---
<S> <C> <C>
Wesley M. Gardiner, Jr. President, Chief Executive Officer and Director 39
Pamela J. Herbst Vice President and Director 42
J. Grant Monahon Vice President and Director 52
James J. Finnegan Vice President 37
Karin J. Lagerlund Treasurer and Principal Financial and Accounting Officer 33
</TABLE>
(c) Identification of Certain Significant Employees.
-----------------------------------------------
None.
(d) Family Relationships.
--------------------
None.
(e) Business Experience.
-------------------
The Managing General Partner was incorporated in Massachusetts on
November 1, 1984. The background and experience of the executive officers and
directors of the Managing General Partner are as follows:
Wesley M. Gardiner, Jr. joined AEW Real Estate Advisors, Inc. ("AEW") ,
formerly known as Copley Real Estate Advisors, Inc., in 1990 and has been a Vice
President at AEW since January, 1994. AEW is a subsidiary of AEW Capital
Management, L.P. ("AEW Capital Management"). From 1982 to 1990, he was employed
by Metric Realty, a nationally-known real estate investment advisor and
syndication firm, as a portfolio manager responsible for several public and
private limited partnerships. His career at AEW has included asset management
responsibility for the company's Georgia and Texas holdings. Presently, Mr.
Gardiner has overall responsibility for all the partnerships advised by AEW
<PAGE>
whose securities are registered under the Securities and Exchange Act of 1934.
He received a B.A. in Economics from the University of California at San
Diego.
Pamela J. Herbst directs AEW Capital Management's Portfolio Advisory
Services, with oversight responsibility for the asset and portfolio management
areas. Ms. Herbst is a member of AEW Capital Management's Investment Policy
Group and Management Committee. She came to AEW Capital Management in December
1996 as a result of the firm's merger with Copley Real Estate Advisors, Inc.,
where she held various senior level positions in asset and portfolio management,
acquisitions, and corporate operations since 1982. Ms. Herbst is a graduate of
the University of Massachusetts (B.A.) and Boston University (M.B.A.).
J. Grant Monahon is AEW Capital Management's General Counsel and a
member of the firm's Management Committee and Investment Policy Group. He has
over 25 years of experience in real estate law and investments. Prior to joining
AEW Capital Management in 1987, Mr. Monahon was a partner with a major Boston
law firm. As the head of that firm's real estate finance department, he
represented a wide variety of institutional clients, both domestic and
international, in complex equity and debt transactions. He is the former
Chairman of the General Counsel section of the National Association of Real
Estate Investment Managers. Mr. Monahon is a graduate of Dartmouth College
(B.A.) and Georgetown University Law Center (J.D.).
James J. Finnegan is the Assistant General Counsel of AEW Capital
Management. Mr. Finnegan served as Vice President and Assistant General Counsel
of Aldrich, Eastman & Waltch, L.P., a predecessor to AEW Capital Management.
Mr. Finnegan has over ten years of experience in real estate law, including
seven years of experience in private practice with major New York City and
Boston law firms. Mr. Finnegan also serves as AEW's securities and regulatory
compliance officer. Mr. Finnegan is a graduate of the University of Vermont
(B.A.) and Fordham University School of Law (J.D.).
Karin J. Lagerlund directs the Advisory Services Portfolio Accounting
Group at AEW Capital Management, overseeing portfolio accounting, performance
measurement and client financial reporting for AEW's private equity investment
portfolios. Ms. Lagerlund is a Certified Public Accountant and has over ten
years experience in real estate consulting and accounting. Prior to joining AEW
Capital Management in 1994, she was an Audit Manager at EY/Kenneth Leventhal
LLP. Ms. Lagerlund is a graduate of Washington State University (B.A.).
(f) Involvement in Certain Legal Proceedings.
----------------------------------------
None.
Item 11. Executive Compensation.
----------------------
Under the Partnership Agreement, the General Partners and their
affiliates are entitled to receive various fees, commissions, cash
distributions, allocations of taxable income or loss and expense reimbursements
from the Partnership. See Note 1, Note 2 and Note 6 of Notes to Financial
Statements.
The following table sets forth the amounts of the fees and cash
distributions and reimbursements for out-of-pocket expenses which the
Partnership paid to or accrued for the account of the General Partners and their
affiliates for the year ended December 31, 1997. Cash distributions to General
Partners include amounts distributed after year end with respect to 1997.
<PAGE>
Amount of
Compensation
and
Receiving Entity Type of Compensation Reimbursement
- ---------------- -------------------- -------------
AEW Real Estate Advisors, Inc. Management Fees and
Reimbursement of Expenses $ 195,620
General Partners Share of Distributable Cash 18,464
New England Securities Corporation Servicing Fees and 18,315
Reimbursement of Expenses ----------
TOTAL $ 232,399
==========
For the year ended December 31, 1997, the Partnership allocated $12,444
of taxable income to the General Partners. See Note 1 of Notes to Financial
Statements for additional information about transactions between the Partnership
and the General Partners and their affiliates.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
-----------------------------------------------
No person or group is known by the Partnership to be the beneficial
owner of more than 5% of the outstanding Units at December 31, 1997. Under the
Partnership Agreement, the voting rights of the Limited Partners are limited
and, in some circumstances, are subject to the prior receipt of certain opinions
of counsel or judicial decisions.
Except as expressly provided in the Partnership Agreement, the right to
manage the business of the Partnership is vested exclusively in the Managing
General Partner.
(b) Security Ownership of Management.
--------------------------------
An affiliate of the Managing General Partner of the Partnership owned
810 Units as of December 31, 1997.
(c) Changes in Control.
------------------
There exists no arrangement known to the Partnership the operation of
which may at a subsequent date result in a change in control of the Partnership.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
The Partnership has no relationships or transactions to report other
than as reported in Item 11, above.
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K.
-------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial Statements--The Financial Statements listed on
the accompanying Index to Financial Statements and Schedule, Financial
Statements Index No. 2 and Financial Statements Index No. 3 are filed as part of
this Annual Report.
(2) Financial Statement Schedule--The Financial Statement
Schedule listed on the accompanying Index to Financial Statements and Schedule
is filed as part of this Annual Report.
(3) Exhibits--The Exhibits listed in the accompanying Exhibit
Index are filed as a part of this Annual Report and incorporated in this Annual
Report as set forth in said Index.
(b) Reports on Form 8-K. During the last quarter of the year ended
December 31, 1997, the Partnership filed no Current Report on Form 8-K.
<PAGE>
New England Life Pension Properties III;
A Real Estate Limited Partnership
Financial Statements
* * * * * * *
December 31, 1997
<PAGE>
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Report of Independent Accountants
Financial Statements:
Balance Sheets - December 31, 1997 and 1996
Statements of Operations - Years ended December 31, 1997, 1996 and 1995
Statement of Partners' Capital (Deficit) - Years ended December 31, 1997,
1996 and 1995
Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995
Notes to Financial Statements
Financial Statement Schedule:
Schedule III - Real Estate and Accumulated Depreciation at December 31,
1997, 1996 and 1995
<PAGE>
Report of Independent Accountants
---------------------------------
To the Partners
New England Life Pension Properties III;
A Real Estate Limited Partnership
In our opinion, based on our audits and the reports of other auditors for the
years ended December 31, 1997, 1996 and 1995, the financial statements listed in
the accompanying index present fairly, in all material respects, the financial
position of New England Life Pension Properties III; A Real Estate Limited
Partnership (the "Partnership") at December 31, 1997 and 1996, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Copley
Properties Company III, Inc., the Managing General Partner of the Partnership;
our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of the Partnership's
joint ventures for the years ended December 31, 1996 and 1995, which results of
operations are recorded using the equity method of accounting in the
Partnership's financial statements and for which equity in joint venture income
aggregated $1,587,249 and $1,499,646 for the years ended December 31, 1996 and
1995, respectively. Those statements were audited by other auditors whose
reports thereon have been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for the equity in joint venture
income for the years ended December 31, 1996 and 1995, is based solely on the
reports of the other auditors. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by the Managing General Partner, and evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors for the years ended December 31, 1997, 1996 and 1995 provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- --------------------------
Boston, Massachusetts
March 16, 1998
<PAGE>
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP
BALANCE SHEETS
December 31,
--------------------------------
1997 1996
------------ ------------
Assets
Real estate investments:
Joint ventures $ 17,184,075 $ 17,762,647
Property, net 1,170,476 1,265,968
------------ ------------
18,354,551 19,028,615
Cash and cash equivalents 1,645,244 1,260,892
Short-term investments 946,836 1,169,666
------------ ------------
$ 20,946,631 $ 21,459,173
============ ============
Liabilities and Partners' Capital
Accounts payable $ 99,348 $ 74,172
Accrued management fee 45,655 45,792
------------ ------------
Total liabilities 145,003 119,964
------------ ------------
Partners' capital (deficit):
Limited partners ($485.54 per unit;
75,000 units authorized, 68,414
units issued and outstanding) 20,859,138 21,391,344
General partners (57,510) (52,135)
------------ ------------
Total partners' capital 20,801,628 21,339,209
------------ ------------
$ 20,946,631 $ 21,459,173
============ ============
(See accompanying notes to financial statements)
<PAGE>
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
Year ended December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Investment Activity
Property rentals $ 267,791 $ 208,142 $ 213,127
Property operating expenses (79,665) (96,953) (147,938)
Depreciation and amortization (121,979) (94,620) (55,239)
---------- ---------- ----------
66,147 16,569 9,950
Joint venture earnings 1,551,569 1,587,249 1,499,646
Amortization (9,464) (9,464) (9,464)
---------- ---------- ----------
Total real estate operations 1,608,252 1,594,354 1,500,132
Interest on cash equivalents
and short-term investments 122,799 166,173 199,817
---------- ---------- ----------
Total investment activity 1,731,051 1,760,527 1,699,949
---------- ---------- ----------
Portfolio Expenses
General and administrative 238,143 225,808 244,142
Management fee 182,620 220,825 168,404
---------- ---------- ----------
420,763 446,633 412,546
---------- ---------- ----------
Net Income $1,310,288 $1,313,894 $1,287,403
========== ========== ==========
Net income per limited
partnership unit $ 18.96 $ 19.01 $ 18.63
========== ========== ==========
Cash distributions per limited
partnership unit $ 26.74 $ 39.37 $ 24.64
========== ========== ==========
Number of limited partnership units
outstanding during the year 68,414 68,414 68,414
========== ========== ==========
(See accompanying notes to financial statements)
<PAGE>
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------
1997 1996 1995
---------- ---------- ----------
General Limited General Limited General Limited
Partners Partners Partners Partners Partners Partners
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning
of year $(52,135) $21,391,344 $(43,319) $22,784,048 $(39,166) $23,195,240
Cash distributions (18,478) (1,829,391) (21,955) (2,693,459) (17,027) (1,685,721)
Net income 13,103 1,297,185 13,139 1,300,755 12,874 1,274,529
-------- ----------- -------- ----------- -------- -----------
Balance at end
of year $(57,510) $20,859,138 $(52,135) $21,391,344 $(43,319) $22,784,048
======== =========== ======== =========== ======== ===========
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,310,288 $ 1,313,894 $ 1,287,403
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 131,443 104,084 64,703
Equity in joint venture net income (1,551,569) (1,587,249) (1,499,646)
Cash distributions from joint ventures 2,120,676 1,931,140 2,048,743
Decrease (increase) in investment income
receivable 1,278 16,268 (17,006)
Increase in deferred leasing costs (14,794) (21,954) (21,691)
Decrease (increase) in property
working capital (1,365) (84,741) 86,898
Increase (decrease) in liabilities 25,039 (10,321) 2,135
----------- ----------- -----------
Net cash provided by operating activities 2,020,996 1,661,121 1,951,539
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures on owned property (10,327) (10,394) (174,934)
Decrease (increase) in short-term
investments, net 221,552 925,674 (1,097,788)
----------- ----------- -----------
Net cash provided by (used in) investing
activities 211,225 915,280 (1,272,722)
----------- ----------- -----------
Cash flows from financing activity:
Distributions to partners (1,847,869) (2,715,414) (1,702,748)
----------- ----------- -----------
Net cash used in financing activity (1,847,869) (2,715,414) (1,702,748)
Net increase (decrease) in cash
and cash equivalents 384,352 (139,013) (1,023,931)
Cash and cash equivalents:
Beginning of year 1,260,892 1,399,905 2,423,836
----------- ----------- -----------
End of year $ 1,645,244 $ 1,260,892 $ 1,399,905
=========== =========== ===========
</TABLE>
(See accompanying notes to financial statements)
<PAGE>
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and Business
- ----------------------------------
General
-------
New England Life Pension Properties III; A Real Estate Limited Partnership
(the "Partnership") is a Massachusetts limited partnership organized for the
purpose of investing primarily in newly constructed and existing income-
producing real properties. It primarily serves as an investment for qualified
pension and profit sharing plans and other entities intended to be exempt from
federal income tax. The Partnership commenced operations in July 1985, and
acquired the three investments it currently owns prior to the end of 1988. It
intends to dispose of its investments within twelve years of their acquisition,
and then liquidate; however, the Managing General Partner could extend the
investment period if it is in the best interest of the limited partners.
The Managing General Partner of the Partnership is Copley Properties Company
III, Inc., a wholly-owned subsidiary of AEW Real Estate Advisors, Inc. ("AEW"),
formerly known as Copley Real Estate Advisors, Inc. ("Copley"). The associate
general partner is ACOP Associates Limited Partnership, a Massachusetts limited
partnership. Subject to the Managing General Partner's overall authority, the
business of the Partnership is managed by AEW pursuant to an advisory contract.
On December 10, 1996, Copley's parent, New England Investment Companies,
Limited Partnership ("NEIC"), a publicly traded master limited partnership,
acquired certain assets subject to then existing liabilities from Aldrich,
Eastman & Waltch, Inc. and its affiliates and principals (collectively, "the AEW
Operations"). Simultaneously, a new entity, AEW Capital Management, L.P. was
formed, into which NEIC contributed its interest in Copley and its affiliates.
As a result, the AEW Operations were combined with Copley to form the business
operations of AEW Capital Management, L.P. At year end 1997, NEIC completed a
restructuring plan under which it contributed all of its operations to a newly
formed private partnership, NEIC Operating Partnership, L.P., in exchange for a
general partnership interest in the newly formed entity. As such, at December
31, 1997, AEW Capital Management, L.P. is wholly owned by NEIC Operating
Partnership, L.P. AEW is a subsidiary of AEW Capital Management, L.P.
Prior to August 30, 1996, New England Mutual Life Insurance Company ("The New
England") was NEIC's principal unit holder and owner of all the outstanding
stock of NEIC's general partner. On August 30, 1996, The New England merged
with and into Metropolitan Life Insurance Company ("Met Life"). Met Life is the
surviving entity and, therefore, through a wholly-owned subsidiary, became the
owner of the units of partnership interest previously owned by The New England
and of the stock of NEIC's general partner.
At December 31, 1997 and 1996, an affiliate of the Managing
General Partner owned 810 and 768 units of limited partnership interest,
respectively, which were repurchased from certain qualified plans within
specified annual limitations provided for in the Partnership Agreement.
Management
----------
AEW, as advisor, is entitled to receive stipulated fees from the Partnership
in consideration of services performed in connection with the management of the
Partnership and the acquisition and disposition of Partnership investments in
real property. Partnership management fees are 9% of distributable cash flow
from operations, as defined, before deducting such fees. AEW is also reimbursed
for expenses incurred in connection with administering the Partnership ($13,000
in 1997, $12,000 in 1996, and $13,368 in 1995). Acquisition fees paid were
based on 2% of the gross proceeds from the offering. Disposition fees are
limited to the lesser of 3% of the selling price of the property, or 50% of the
standard real estate commission customarily charged by an independent real
estate broker. Payments of disposition fees are subject to the prior receipt by
the limited partners of their capital contributions plus a stipulated return
thereon.
<PAGE>
New England Securities Corporation, an indirect subsidiary of Met Life, is
engaged by the Partnership to act as its unit holder servicing agent. Fees and
out-of-pocket expenses for such services totaled $18,315, $17,501 and $15,682 in
1997, 1996 and 1995, respectively.
Note 2 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Accounting Estimates
--------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Managing General Partner to make estimates
affecting the reported amounts of assets and liabilities, and of revenues and
expenses. In the Partnership's business, certain estimates require an
assessment of factors not within management's control, such as the ability of
tenants to perform under long-term leases and the ability of the properties to
sustain their occupancies in changing markets. Actual results, therefore, could
differ from those estimates.
Real Estate Joint Ventures
--------------------------
Investments in joint ventures, which are in substance real estate investments,
are stated at cost plus (minus) equity in undistributed joint venture income
(losses). Allocations of joint venture income (losses) were made to the
Partnership's venture partners as long as they had substantial economic equity
in the project. Economic equity is measured by the excess of the appraised
value of the property over the Partnership's total cash investment plus accrued
preferential returns thereon. Currently, the Partnership records an amount
equal to 100% of the operating results of the property, after the elimination of
all inter-entity transactions. Joint ventures are consolidated with the
accounts of the Partnership if, and when, the venture partner no longer shares
in the control of the business.
Property
--------
Property includes land and buildings and improvements, which are stated at
cost less accumulated depreciation, and other operating net assets
(liabilities). The Partnership's initial carrying value of a property
previously subject to a ground lease/mortgage loan arrangement equals the
Partnership's carrying value of the predecessor investment on the conversion
date.
Capitalized Costs, Depreciation and Amortization
------------------------------------------------
Maintenance and repair costs are expensed as incurred; significant
improvements and renewals are capitalized. Depreciation is computed using the
straight-line method based on estimated useful lives of the buildings and
improvements.
Acquisition fees have been capitalized as part of the cost of real estate
investments. Amounts not related to land are being amortized using the
straight-line method over the estimated useful lives of the underlying real
property.
Leases are accounted for as operating leases. Leasing commissions are
amortized over the terms of the respective leases. Rental income is being
recognized on a straight-line basis over the respective lease terms.
Realizability of Real Estate Investments
----------------------------------------
The Partnership considers a real estate investment, other than a mortgage
loan, to be impaired when it determines the carrying value of the investment is
not recoverable through expected undiscounted cash flows generated from the
operations and disposal of the property. The impairment loss is based on the
excess of the investments' carrying value over its estimated fair market value.
For investments being held for sale, the impairment loss also includes estimated
costs of sale. Property held for sale is not depreciated during the holding
period. Prior to the adoption of Statement of Financial Accounting Standards
No. 121 effective January 1, 1995, the impairment loss was measured based on the
excess of the investment's carrying value over its net realizable value.
<PAGE>
The carrying value of an investment may be greater or less than its current
appraised value. At December 31, 1997 and 1996, the appraised value of each of
the Partnership's investments exceeded its related carrying value; the aggregate
excess was approximately $6,600,000 and $6,100,000, respectively. The current
appraised value of real estate investments has been estimated by the Managing
General Partner and is generally based on a combination of traditional appraisal
approaches performed by AEW and independent appraisers. Because of the
subjectivity inherent in the valuation process, the estimated current appraised
value may differ significantly from that which could be realized if the real
estate were actually offered for sale in the marketplace.
Cash Equivalents and Short-Term Investments
-------------------------------------------
Cash equivalents are stated at cost, plus accrued interest. The
Partnership considers all highly liquid debt instruments purchased with a
maturity of ninety days or less to be cash equivalents; otherwise, they are
classified as short-term investments.
The Partnership has the positive intent and ability to hold all short-term
investments to maturity; therefore, short-term investments are carried at cost,
plus accrued interest, which approximates market value. At December 31, 1997
and 1996, all investments are in commercial paper with less than one month and
three months, respectively, remaining to maturity.
Deferred Disposition Fees
-------------------------
According to the terms of the advisory contract, AEW is entitled to
disposition fees related to sales of real estate investments. Payment of these
fees, however, is contingent upon the limited partners' first receiving their
capital, plus stipulated returns thereon. Since inception, the Partnership sold
several investments and had accrued disposition fees of $1,116,984 through
September 30, 1992. In light of the then current value of the Partnership's
remaining investments and the expectations for improvement over the
Partnership's investment horizon, the Managing General Partner determined in
1992 that the likelihood of payment of these fees was remote. Accordingly, the
previously accrued liability was reduced to zero.
Income Taxes
------------
A partnership is not liable for income taxes and, therefore, no provision
for income taxes is made in the financial statements of the Partnership. A
proportionate share of the Partnership's income is reportable on each partner's
tax return.
Per Unit Computations
---------------------
Per unit computations are based on the number of units of limited
partnership interest outstanding during the year. The actual per unit amount
will vary by partner depending on the date of admission to, or withdrawal from,
the Partnership.
Effective January 1, 1998, the Partnership adopted FAS 128 "Earnings per
Share," which simplifies the standards of reporting earnings per share (EPS)
previously found in APB Opinion No. 15. It provides guidance on the computation
and disclosure of basic and diluted EPS and requires restatement of prior
periods for comparative purposes. The adoption of FAS 128 did not have a
material impact on the Partnership's financial statements.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
<PAGE>
Note 3 - Real Estate Joint Ventures
- -----------------------------------
The Partnership has invested in two real estate joint ventures, each of
which is organized as a general partnership with a real estate
management/development firm. It made capital contributions to the ventures,
which are subject to preferential cash distributions at a specified rate and to
priority distributions with respect to sale or refinancing proceeds. The joint
venture agreements provide for the funding of cash flow deficits by the venture
partners in proportion to ownership interests, and for the dilution of ownership
share in the event a venture partner does not contribute proportionately.
The respective real estate management/development firms are responsible for
day-to-day development and operating activities, although overall authority and
responsibility for the businesses is shared by the venturers. The real estate
management/development firm, or its affiliates, also provides various services
to the respective joint venture for a fee.
270 Technology Park
-------------------
Effective January 1, 1988, one of the Partnership's ground lease/mortgage
loan investments was converted to a 50% ownership interest in a joint venture
with an affiliate of Manekin Corporation. The venture owns and operates three
research and development/office buildings in Frederick, Maryland. The
Partnership was credited with a capital contribution of $5,960,000, an amount
equal to the cost of the land plus the then outstanding principal on the
mortgage loan. In addition, during 1988, the Partnership contributed cash of
$260,000. The preferential return rate on the capital contributed is 10.50% per
annum. In March 1998, ownership of the joint venture was restructured whereby
the Partnership obtained full control over the business of the joint venture.
The restructuring will be effective January 1, 1998.
Future aggregate minimum rents due to the venture under noncancellable
operating leases are: $710,292 in 1998; $528,045 in 1999; $315,774 in 2000; and
$199,350 in 2001.
Bayberry Apartments
-------------------
On April 4, 1988, the Partnership entered into a joint venture with an
affiliate of Bozzuto and Associates to construct and operate a garden apartment
community in Gaithersburg, Maryland. The Partnership has a 65% ownership
interest and committed to a maximum capital contribution of $14,350,000, and a
maximum deficit contribution (characterized as junior capital) of $230,000. The
preferential return rate is 10.25% per annum on the capital contributed and the
greater of the prime rate plus 2% or 10.25% on the deficit contribution. At
December 31, 1997 and 1996, the Partnership had contributed $14,349,983 of its
capital commitment, plus $225,957 as a prorata deficit contribution. Sixty-five
percent of the Partnership's capital contribution is characterized as "senior"
capital. If senior capital is prepaid, the Partnership is entitled to a special
distribution intended to preserve the preferential return yield on senior
capital through the ninth anniversary of the venture. No senior capital was
prepaid as of December 31, 1997.
<PAGE>
Summarized Financial Information
- --------------------------------
The following summarized financial information is presented in the
aggregate for the joint ventures:
Assets and Liabilities
----------------------
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Assets
Real property, net of accumulated
depreciation of $5,110,304 and
$4,812,441, respectively $14,786,221 $15,325,895
Other assets 639,480 659,368
----------- -----------
15,425,701 15,985,263
Liabilities 125,700 115,892
----------- -----------
Net assets $15,300,001 $15,869,371
=========== ===========
</TABLE>
Results of Operations
---------------------
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Revenue
Rental income $3,204,670 $3,204,233 $3,137,936
Other income 36,252 7,637 7,501
---------- ---------- ----------
3,240,922 3,211,870 3,145,437
---------- ---------- ----------
Expenses
Operating expenses 1,126,065 1,085,295 1,070,570
Depreciation and amortization 563,288 539,326 575,221
---------- ---------- ----------
1,689,353 1,624,621 1,645,791
---------- ---------- ----------
Net income $1,551,569 $1,587,249 $1,499,646
========== ========== ==========
</TABLE>
Liabilities and expenses exclude amounts owed and attributable to the
Partnership on behalf of its various financing arrangements with the joint
ventures.
<PAGE>
Note 4 - Property
- -----------------
North Cabot Industrial Park (formerly Marathon/Hayward)
-------------------------------------------------------
In September 1985, the Partnership acquired land in Hayward, California, for
$786,130 and leased it back to the seller. The Partnership also made a
nonrecourse permanent mortgage loan of $2,663,870 to the ground lessee to
finance the two research and development buildings.
On November 15, 1994, the Partnership restructured this ground lease/mortgage
loan investment into a wholly-owned property, due to the inability of the ground
lessee/mortgagee to meet its financial obligations. The Partnership received
$85,000 in settlement of the guaranty provided by principals of the ground
lessee. The Partnership obtained title to the improvements on the land, and to
certain other operating assets in full satisfaction of the related mortgage loan
and obligations under the ground lease, and in consideration of the assumption
by the Partnership of certain operating liabilities. The carrying value of the
ground lease/mortgage loan investment as of the date of restructuring was
allocated to land, buildings and net operating assets.
The following is summary of the Partnership's investment in property:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land $ 347,772 $ 347,772
Buildings and improvements 1,041,839 1,031,512
Accumulated depreciation and amortization (244,868) (138,503)
Net operating assets 25,733 25,187
---------- ----------
$1,170,476 $1,265,968
========== ==========
</TABLE>
The buildings are being depreciated over a 25-year period. The minimum future
rentals under non-cancelable operating leases are: $220,521 in 1998; $188,026 in
1999, $126,705 in 2000; and $19,666 in 2001.
Prior to 1994, the Managing General Partner determined that the carrying value
of the North Cabot Industrial Park investment should be reduced to estimated
fair market value. Accordingly, the carrying value was reduced by $2,500,000.
<PAGE>
Note 5 - Income Taxes
- ---------------------
The Partnership's income (loss) for federal income tax purposes differs
from that reported in the accompanying statement of operations as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income per financial
statements $1,310,288 $1,313,894 $1,287,403
Timing differences:
Joint venture earnings (154,870) (224,467) (94,384)
Depreciation and amortization 85,777 58,395 28,223
Property sales and operations - - (3,313)
Expenses 3,188 3,188 3,188
---------- ---------- ----------
Taxable income $1,244,383 $1,151,010 $1,221,117
========== ========== ==========
</TABLE>
Note 6 - Partners' Capital
- --------------------------
Allocation of net income (losses) from operations and distributions of
distributable cash from operations, as defined, are in the ratio of 99% to the
limited partners and 1% to the general partners. Cash distributions are made
quarterly.
Net sale proceeds and financing proceeds are allocated first to limited
partners to the extent of their contributed capital plus a stipulated return
thereon, as defined, second to pay disposition fees, and then 85% to the limited
partners and 15% to the general partners. As a result of returns of capital from
sale transactions, the adjusted capital contribution per limited partnership
unit was reduced from $1,000 to $982.14 during 1987, to $946.14 during 1988, to
$796.14 during 1989, to $694.14 during 1992, to $524.14 during 1993, to $493.14
during 1994, and to $485.54 during 1996. The capital distribution in 1996 of
$519,946 represented previously undistributed proceeds from sales of various
properties. No capital distributions have been made to the general partners.
Income from sales will be allocated in proportion to the distribution of related
proceeds, provided that the general partners are allocated at least 1%. Income
or losses from sales, if there are no residual proceeds after the repayment of
the related debt, will be allocated 99% to the limited partners and 1% to the
general partners.
Note 7 - Subsequent Event
- -------------------------
Distributions of cash from operations relating to the quarter ended December
31, 1997 were made on January 29, 1998 in the aggregate amount of $461,622
($6.68 per limited partnership unit).
<PAGE>
NEW ENGLAND LIFE PENSION PROPERTIES III
A REAL ESTATE LIMITED PARTNERSHIP
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Initial Cost to Costs Capitalized
the Partnership Subsequent to Acquisition
--------------------------------- --------------------------------------------
Buildings & Other Carrying Additions
Description Land Improvements (Net) Costs (Dispositions) Other
- ----------- -------- -------------- ------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
An R & D building (51,089 sq.ft)
on 3.8 acres of land in $347,772 $0 $0 $0 $1,041,839 $25,733
Hayward, California (See Note A)
--------- --------- ------ --------- ----------- --------
Total Wholly-Owned $347,772 $0 $0 $0 $1,041,839 $25,733
========= ========= ====== ========= =========== ========
50% Interest in 270 Technology
Park. Owner of three R & D
buildings (86,169 square feet) ---------------------------------- See Note B ---------------------------------
situated on 8.3 acres of land
in Frederick, Maryland.
60% Interest in Bayberry Associates.
Owner of nine apartment buildings
(230 units) situated on 17.1 acres ---------------------------------- See Note B --------------------------------
of land in Gaithersburg, Maryland.
Total Joint Ventures
Total Real Estate
<CAPTION>
Gross amount at which
Carried at Close of Period
------------------------------------------------------------------------------------
Investment
Buildings & Valuation
Description Land Improvements Other Allowances Dispositions Total
- ----------- -------- -------------- ------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
An R & D building (51,089 sq.ft)
on 3.8 acres of land in $347,772 $1,041,839 $25,733 $0 $0 $1,415,344
Hayward, California (See Note A)
--------- ----------- ------- --------- ----------- -----------
Total Wholly-Owned $347,772 $1,041,839 $25,733 $0 $0 $1,415,344
========= =========== ======= ========= =========== ===========
50% Interest in 270 Technology
Park. Owner of three R & D
buildings (86,169 square feet) $6,162,959
situated on 8.3 acres of land
in Frederick, Maryland.
60% Interest in Bayberry Associates.
Owner of nine apartment buildings
(230 units) situated on 17.1 acres $11,021,116
of land in Gaithersburg, Maryland.
-----------
Total Joint Ventures $17,184,075
-----------
Total Real Estate $18,599,419
===========
<CAPTION>
Accumulated
Depreciation Date of Date Depreciable
Description & Amortization Construction Acquired Life
- ----------- -------------- ------------ -------- ----
<S> <C> <C> <C> <C>
An R & D building (51,089 sq.ft)
on 3.8 acres of land in ($244,868) Completed 3/20/89 25 Years
Hayward, California (See Note A) (Converted to
Wholly-Owned
on 11/15/94)
----------
Total Wholly-Owned ($244,868)
==========
50% Interest in 270 Technology
Park. Owner of three R & D
buildings (86,169 square feet) N/A Completed 8/29/87 30/15 Yrs
situated on 8.3 acres of land (Converted to
in Frederick, Maryland. Joint Venture
on 1/1/88)
60% Interest in Bayberry Associates.
Owner of nine apartment buildings
(230 units) situated on 17.1 acres N/A Completed 4/4/88 30/15 Yrs
of land in Gaithersburg, Maryland.
Total Joint Ventures
----------
Total Real Estate ($244,868)
==========
</TABLE>
<PAGE>
NEW ENGLAND LIFE PENSION PROPERTIES III
NOTE A TO SCHEDULE III
<TABLE>
<CAPTION>
Reconciliation of Real 1995 1995
Estate Owned COST INVESTMENT INCREASE IN 1995 DECREASE COST
AS OF IN DEFERRED IN PROPERTY BALANCE AT
DESCRIPTION 12/31/94 PROPERTY LEASING COSTS WORKING CAPITAL 12/31/95
----------- -------- -------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
North Cabot Industrial Park $1,191,813 $174,934 $21,691 ($86,898) $1,301,540
=========== =========== =========== =========== ===========
<CAPTION>
1996 1996
COST INVESTMENT INCREASE IN 1996 INCREASE COST
AS OF IN DEFERRED IN PROPERTY BALANCE AT
12/31/95 PROPERTY LEASING COSTS WORKING CAPITAL 12/31/96
-------- -------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
North Cabot Industrial Park $1,301,540 $10,394 $21,954 $70,583 $1,404,471
=========== =========== =========== =========== ===========
<CAPTION>
1997 1997
COST INVESTMENT INCREASE IN 1997 INCREASE COST
AS OF IN DEFERRED IN PROPERTY BALANCE AT
12/31/96 PROPERTY LEASING COSTS WORKING CAPITAL 12/31/97
-------- -------- ------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
North Cabot Industrial Park $1,404,471 $10,327 $14,794 ($14,248) $1,415,344
=========== =========== =========== =========== ===========
<CAPTION>
Reconciliation of Real ACCUMULATED 1995 ACCUMULATED
Estate Owned AMORTIZATION & AMORTIZATION & AMORTIZATION & 12/31/95
DEPRECIATION DEPRECIATION DEPRECIATION PROPERTY
DESCRIPTION AS OF 12/31/94 EXPENSE AS OF 12/31/95 NET
----------- -------------- -------------- -------------- --------
<S> <C> <C> <C> <C>
North Cabot Industrial Park $2,802 $55,239 $58,041 $1,243,499
=========== =========== =========== ===========
<CAPTION>
ACCUMULATED 1996 ACCUMULATED
AMORTIZATION & AMORTIZATION & AMORTIZATION & 12/31/96
DEPRECIATION DEPRECIATION DEPRECIATION PROPERTY
AS OF 12/31/95 EXPENSE AS OF 12/31/96 NET
-------------- -------------- -------------- --------
<S> <C> <C> <C> <C>
North Cabot Industrial Park $58,041 $80,462 $138,503 $1,265,968
=========== =========== =========== ===========
<CAPTION>
ACCUMULATED 1997 ACCUMULATED
AMORTIZATION & AMORTIZATION & AMORTIZATION & 12/31/97
DEPRECIATION DEPRECIATION DEPRECIATION PROPERTY
AS OF 12/31/96 EXPENSE AS OF 12/31/97 NET
-------------- -------------- -------------- --------
<S> <C> <C> <C> <C>
North Cabot Industrial Park $138,503 $106,365 $244,868 $1,170,476
=========== =========== =========== ===========
</TABLE>
<PAGE>
NEW ENGLAND LIFE PENSION PROPERTIES III
NOTE B TO SCHEDULE III
<TABLE>
<CAPTION>
1995
1995 CASH AMORTIZATION
BALANCE 1995 RECEIVED OF BALANCE
PERCENT OF AS OF INVESTMENT 1995 EQUITY IN FROM ACQUISITION AS OF
DESCRIPTION OWNERSHIP 12/31/94 IN PROPERTY INCOME (LOSS) JOINT VENTURES FEES 12/31/95
----------- --------- ----------- ----------- -------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
270 Technology Park 50% $6,405,336 $0 $624,021 ($698,676) ($3,188) $6,327,493
Bayberry Associates 65% 12,269,227 0 875,625 (1,350,067) (6,276) 11,788,509
------------ ------------ ------------ ------------ ------------ ------------
$18,674,563 $0 $1,499,646 ($2,048,743) ($9,464) $18,116,002
============ ============ ============ ============ ============ ============
<CAPTION>
1996
1996 CASH AMORTIZATION
BALANCE 1996 RECEIVED OF BALANCE
PERCENT OF AS OF INVESTMENT 1996 EQUITY IN FROM ACQUISITION AS OF
OWNERSHIP 12/31/95 IN PROPERTY INCOME (LOSS) JOINT VENTURES FEES 12/31/96
--------- ----------- ----------- -------------- -------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
270 Technology Park 50% $6,327,493 $0 $619,367 ($541,400) ($3,188) $6,402,272
Bayberry Associates 65% 11,788,509 0 967,882 (1,389,740) (6,276) 11,360,375
------------ ------------ ------------ ------------ ------------ ------------
$18,116,002 $0 $1,587,249 ($1,931,140) ($9,464) $17,762,647
============ ============ ============ ============ ============ ============
<CAPTION>
1997
1997 CASH AMORTIZATION
BALANCE 1997 RECEIVED OF BALANCE
PERCENT OF AS OF INVESTMENT 1997 EQUITY IN FROM ACQUISITION AS OF
OWNERSHIP 12/31/96 IN PROPERTY INCOME (LOSS) JOINT VENTURES FEES 12/31/97
--------- ----------- ----------- -------------- -------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
270 Technology Park 50% $6,402,272 $0 $531,484 ($767,609) ($3,188) $6,162,959
Bayberry Associates 65% 11,360,375 0 1,020,085 (1,353,067) (6,277) 11,021,116
------------ ------------ ------------ ------------ ------------ ------------
$17,762,647 $0 $1,551,569 ($2,120,676) ($9,465) $17,184,075
============ ============ ============ ============ ============ ============
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
INDEX NO. 2
Independent Auditor's Report and Financial Statements
of MORF Associates III
(referred to elsewhere herein as 270 Technology Park)
Independent Auditor's Report of Wolpoff and Company, LLP
Balance Sheet - December 31, 1997 and 1996
Statement of Income - For the Years ended
December 31, 1997, 1996 and 1995
Statement of Partners' Capital - For the Years ended
December 31, 1997, 1996 and 1995
Statement of Cash Flows - For the Years ended
December 31, 1997, 1996 and 1995
Notes to Financial Statements
<PAGE>
MORF ASSOCIATES III
(A MARYLAND GENERAL PARTNERSHIP)
FINANCIAL REPORT
DECEMBER 31, 1997
<PAGE>
MORF ASSOCIATES III
(A MARYLAND GENERAL PARTNERSHIP)
CONTENTS
DECEMBER 31, 1997
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENTS 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Income 3
Statement of Partners' Capital 4
Statement of Cash Flows 5
Notes to Financial Statements 6 - 8
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTARY INFORMATION 9
SUPPLEMENTARY INFORMATION
Schedule of Partners' Capital 10
Schedule of Changes in Partners' Capital - Income Tax Basis 11
<PAGE>
[LETTERHEAD OF WOLPOFF & COMPANY, LLP APPEARS HERE]
To the Partners
MORF Associates III
(A Maryland General Partnership)
Columbia, Maryland
INDEPENDENT AUDITOR'S REPORT ON FINANCIAL STATEMENTS
We have audited the balance sheet of MORF Associates III (A Maryland General
Partnership) as of December 31, 1997 and 1996, and the related statements of
income, partners' capital, and cash flows for each of the three years ended
December 31, 1997, 1996, and 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MORF Associates III (A Maryland
General Partnership) as of December 31, 1997 and 1996, and the results of its
operations and cash flows for each of the three years ended December 31, 1997,
1996, and 1995, in conformity with generally accepted accounting principles.
/s/ Wolpoff & Company, LLP
WOLPOFF & COMPANY, LLP
Baltimore, Maryland
January 8, 1998
<PAGE>
MORF ASSOCIATES III
-------------------
(A MARYLAND GENERAL PARTNERSHIP)
--------------------------------
BALANCE SHEET
-------------
ASSETS
------
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
PROPERTY, AT COST - Note 1
Buildings and Improvements $ 6,461,425 $ 6,505,771
Land 247,652 247,652
Deferred Leasing Costs 150,685 348,150
----------- -----------
6,859,762 7,101,573
Less Accumulated Depreciation and Amortization 1,321,539 1,364,270
----------- -----------
PROPERTY, NET 5,538,223 5,737,303
----------- -----------
OTHER ASSETS
Cash and Cash Equivalents - Note 1 104,265 166,474
----------- -----------
Receivable From Tenants 79,133 90,782
Deferred Rent Receivable - Note 1 119,406 144,262
Less Allowance for Doubtful Accounts (14,000) (50,000)
----------- -----------
184,539 185,044
----------- -----------
Prepaid Expenses 40,598 11,944
----------- -----------
TOTAL OTHER ASSETS 329,402 363,462
----------- -----------
$ 5,867,625 $ 6,100,765
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
LIABILITIES
Accounts Payable and Accrued Expenses $ 10,419 $ 8,022
Tenant Security Deposits 44,205 43,617
----------- -----------
TOTAL LIABILITIES 54,624 51,639
PARTNERS' CAPITAL - Note 2 5,813,001 6,049,126
----------- -----------
$ 5,867,625 $ 6,100,765
=========== ===========
</TABLE>
- ---------------
The notes to financial statements are an integral part of this statement.
-2-
<PAGE>
MORF ASSOCIATES III
-------------------
(A MARYLAND GENERAL PARTNERSHIP)
--------------------------------
STATEMENT OF INCOME
-------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUE
Gross Rent Potential - Notes 1 and 5 $ 921,387 $ 884,222 $ 876,371
Less Vacancies 96,279 42,955 22,445
----------- ----------- -----------
Net Rental Income 825,108 841,267 853,926
Expense Reimbursements From Tenants 98,979 134,744 115,054
Other Income 31,752 3,489 2,592
----------- ----------- -----------
TOTAL REVENUE 955,839 979,500 971,572
----------- ----------- -----------
OPERATING EXPENSES
Property Taxes 75,769 64,048 70,700
Building and Grounds Maintenance 45,579 48,679 32,535
Utilities 15,444 21,120 12,049
Management Fees - Note 3 27,096 29,445 25,718
General and Administrative 17,758 9,779 10,161
Insurance 4,925 5,560 5,796
Bad Debt Expense 15,090 17,268 25,000
----------- ----------- -----------
TOTAL OPERATING EXPENSES 201,661 195,899 181,959
----------- ----------- -----------
NET OPERATING INCOME 754,178 783,601 789,613
----------- ----------- -----------
ADJUSTMENTS TO ARRIVE AT NET INCOME
Depreciation and Amortization (166,844) (164,234) (165,592)
Abandonment of Tenant Improvements - Note 1 (55,850) -0- -0-
----------- ----------- -----------
(222,694) (164,234) (165,592)
----------- ----------- -----------
NET INCOME - Note 4 $ 531,484 $ 619,367 $ 624,021
=========== =========== ===========
</TABLE>
- ---------------
The notes to financial statements are an integral part of this statement.
-3-
<PAGE>
MORF ASSOCIATES III
-------------------
(A MARYLAND GENERAL PARTNERSHIP)
--------------------------------
STATEMENT OF PARTNERS' CAPITAL
------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
CAPITAL CONTRIBUTIONS $ 6,220,001 $ 6,220,001 $ 6,220,001
CAPITAL PLACEMENT FEE - Note 1 (50,515) (50,515) (50,515)
-------------- -------------- --------------
6,169,486 6,169,486 6,169,486
-------------- -------------- --------------
ACCUMULATED INCOME
Prior Years 5,483,632 4,864,265 4,240,244
Current Year 531,484 619,367 624,021
-------------- -------------- --------------
6,015,116 5,483,632 4,864,265
-------------- -------------- --------------
DISTRIBUTIONS - Note 2
Prior Years (5,603,992) (5,062,591) (4,363,915)
Current Year (767,609) (541,401) (698,676)
-------------- -------------- --------------
(6,371,601) (5,603,992) (5,062,591)
-------------- -------------- --------------
TOTAL PARTNERS' CAPITAL $ 5,813,001 $ 6,049,126 $ 5,971,160
============== ============== ==============
</TABLE>
- -----------------
The notes to financial statements are an integral part of this statement.
-4-
<PAGE>
MORF ASSOCIATES III
-------------------
(A MARYLAND GENERAL PARTNERSHIP)
--------------------------------
STATEMENT OF CASH FLOWS
-----------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 531,484 $ 619,367 $ 624,021
--------- --------- ---------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 166,844 164,234 165,592
Abandonment of Tenant Improvements 55,850 -0- -0-
Change in Tenant Receivables, Net of Allowance 506 16,366 (74,654)
Change in Prepaid Expenses (28,654) (9,631) 1,542
Change in Accounts Payable and Accrued Expenses 2,397 6,171 (7,600)
--------- --------- ---------
Total Adjustments 196,943 177,140 84,880
--------- --------- ---------
Net Cash Provided by Operating Activities 728,427 796,507 708,901
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in Tenant Security Deposits 588 2,726 10,430
Additions to Property (21,441) (76,617) (79,117)
Leasing Commissions (2,174) (35,066) (41,300)
--------- --------- ---------
Net Cash Used by Investing Activities (23,027) (108,957) (109,987)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Partners (767,609) (541,401) (698,676)
--------- --------- ---------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS (62,209) 146,149 (99,762)
CASH AND CASH EQUIVALENTS, BEGINNING 166,474 20,325 120,087
--------- --------- ---------
CASH AND CASH EQUIVALENTS, ENDING $ 104,265 $ 166,474 $ 20,325
========= ========= =========
</TABLE>
- ------------------
The notes to financial statements are an integral part of this statement.
- 5 -
<PAGE>
MORF ASSOCIATES III
-------------------
(A MARYLAND GENERAL PARTNERSHIP)
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1997
-----------------
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
MORF Associates III (A Maryland General Partnership) (the
Partnership) was formed on January 1, 1988, under the Maryland
Uniform Partnership Act. The land and buildings were conveyed to the
Partnership by M.O.R.F. III Associates Limited Partnership, a
general partner. The buildings were in service and partially leased
on the date conveyed.
Cash and Cash Equivalents
-------------------------
The Partnership considers all highly liquid debt instruments
purchased with a maturity of 3 months or less to be cash
equivalents.
The majority of the Partnership's cash is held in financial
institutions with insurance provided by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. Periodically during the
year, the balance may have exceeded the FDIC limitation.
Rental Income
-------------
Rental income for the major leases is being recognized on a
straight-line basis over the terms of the leases. The excess of
the rental income recognized over the amount stipulated in the lease
is shown as deferred rent receivable.
Property
--------
The Partnership owns and operates 3 office buildings in Frederick,
Maryland, containing approximately 86,300 square feet of leasable
area.
In 1996, the Partnership adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No.
121 requires that real estate assets be evaluated for impairment if
impairment indicators are present. An impairment write-down to fair
value would occur only if the estimated undiscounted cash flows from
the asset were less than the carrying amount of the asset. At
December 31, 1997, the Partnership does not hold any assets that
meet the impairment criteria of SFAS No. 121.
All property is recorded at cost. Information regarding the
buildings is as follows:
Occupancy at
---------------------------------------
Square
Building Feet Tenants 12/31/97 12/31/96 12/31/95
- --------------- ----------- ----------- ----------- ----------- -----------
C 45,800 Multiple 100% 100% 100%
D 11,700 Multiple 86% 86% 88%
E 28,800 Multiple 100% 100% 100%
--------- ----------- ----------- -----------
86,300 98% 98% 98%
========= =========== =========== ===========
-6-
<PAGE>
MORF ASSOCIATES III
-------------------
(A MARYLAND GENERAL PARTNERSHIP)
--------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
DECEMBER 31, 1997
-----------------
Note 1 - During 1997, tenant improvements completed in prior years were
(Cont.) demolished in order to build out the space for the new tenant. The
loss on abandonment of tenant improvements is calculated as follows:
Acquired Value $ 65,787
Accumulated Depreciation (9,937)
-----------
Abandonment of Tenant Improvements $ 55,850
===========
Depreciation
------------
Building costs and tenant improvements are being depreciated using the
straight-line method over the estimated useful lives of 50 years.
Amortization
------------
Deferred leasing costs are being amortized over the lease periods.
Income Taxes
------------
Partnerships, as such, are not subject to income taxes. The partners
are required to report their respective share of partnership income or
loss and other tax items on their respective income tax returns.
Capital Placement Costs
-----------------------
Costs incurred for arranging the Partnership's equity have been treated
as a reduction of partners' capital.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Note 2 - PARTNERS' CAPITAL
Capital Investment
------------------
New England Life Pension Properties III (NELPP III) has invested equity
of $6,220,000 in the Partnership. NELPP III is entitled to a cumulative
priority return of 10.5% compounded monthly on its investment.
During 1997, 1996, and 1995, NELPP III was paid $767,609, $541,401, and
$698,676, respectively, under this agreement. As of December 31, 1997,
1996, and 1995, unpaid priority returns amounted to $682,372, $732,013,
and $560,857, respectively.
Note 3 - RELATED PARTY TRANSACTIONS
Management Fees
---------------
The Partnership has entered into an agreement with Manekin Corporation,
an affiliated entity, to act as management agent for the property. The
management agreement provides for fees equal to 3% of rent and tenant
expense billings.
-7-
<PAGE>
MORF ASSOCIATES III
-------------------
(A MARYLAND GENERAL PARTNERSHIP)
--------------------------------
NOTES TO FINANCIAL STATEMENTS - CONTINUED
-----------------------------------------
DECEMBER 31, 1997
-----------------
Note 3 - Leasing Commissions
-------------------
(Cont.) Leasing commissions of $2,174 and $35,961 were paid to Manekin
Corporation during 1997 and 1995. No leasing commissions were paid to
Manekin Corporation during 1996.
Note 4 - TAX ACCOUNTING
Tax accounting differs from financial accounting as follows:
<TABLE>
<CAPTION>
Current Prior
Year Years Total
------------- ------------- -------------
<S> <C> <C> <C>
Financial Statement Income $ 531,484 $5,483,632 $6,015,116
Additional Depreciation (69,586) (623,009) (692,595)
Deferred Rental
Income Not Subject to Tax 24,856 (144,262) (119,406)
Prepaid Property Taxes (29,310) (9,631) (38,941)
Allowance for Doubtful Accounts (36,000) 41,500 5,500
------------- ------------- -------------
Taxable Income $ 421,444 $4,748,230 $5,169,674
============= ============= =============
</TABLE>
Note 5 - LEASES
The following is a schedule of future minimum lease payments to be
received under noncancelable operating leases at December 31, 1997:
Year Ending December 31, 1998 $ 710,292
1999 528,045
2000 315,774
2001 199,350
------------
$1,753,461
============
-8-
<PAGE>
To the Partners
MORF Associates III
(A Maryland General Partnership)
Columbia, Maryland
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTARY INFORMATION
---------------------------------------------------------
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying supplementary
information contained on pages 10 and 11 is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such
information has not been subjected to the auditing procedures applied in the
audits of the basic financial statements, and accordingly, we express no opinion
on it.
/s/ Wolpoff & Company, LLP
WOLPOFF & COMPANY, LLP
Baltimore, Maryland
January 8, 1998
-9-
<PAGE>
MORF ASSOCIATES III
-------------------
(A MARYLAND GENERAL PARTNERSHIP)
--------------------------------
SCHEDULE OF PARTNERS' CAPITAL
-----------------------------
YEAR ENDED DECEMBER 31, 1997
----------------------------
<TABLE>
<CAPTION>
M.O.R.F. III
New England Associates
Life Pension Limited
Properties III Partnership Total
------------------- ------------------ --------------
<S> <C> <C> <C>
OWNERSHIP PERCENTAGE 50% 50% 100%
============== ============== ==============
CAPITAL CONTRIBUTIONS $ 6,220,000 $ 1 $ 6,220,001
CAPITAL PLACEMENT FEE (50,515) -0- (50,515)
-------------- -------------- --------------
6,169,485 1 6,169,486
-------------- -------------- --------------
ACCUMULATED INCOME
Prior Years 5,348,632 135,000 5,483,632
Current Year 531,484 -0- 531,484
-------------- -------------- --------------
5,880,116 135,000 6,015,116
-------------- -------------- --------------
DISTRIBUTIONS - Note 2
Prior Years (5,468,992) (135,000) (5,603,992)
Current Year (767,609) -0- (767,609)
-------------- -------------- --------------
(6,236,601) (135,000) (6,371,601)
-------------- -------------- --------------
TOTAL PARTNERS' CAPITAL $ 5,813,000 $ 1 $ 5,813,001
============== ============== ==============
</TABLE>
- ----------------
See Independent Auditor's Report on Supplementary Information.
-10-
<PAGE>
MORF ASSOCIATES III
-------------------
(A MARYLAND GENERAL PARTNERSHIP)
--------------------------------
SCHEDULE OF CHANGES IN PARTNERS' CAPITAL - INCOME TAX BASIS
-----------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
----------------------------
<TABLE>
<CAPTION>
M.O.R.F. III
New England Associates
Life Pension Limited
Properties III Partnership Total
------------------- ------------------ --------------
<S> <C> <C> <C>
OWNERSHIP PERCENTAGE 50% 50% 100%
============== ============== ==============
CAPITAL CONTRIBUTIONS $ 6,220,000 $ 1 $ 6,220,001
CAPITAL PLACEMENT FEE (50,515) -0- (50,515)
-------------- -------------- --------------
6,169,485 1 6,169,486
-------------- -------------- --------------
ACCUMULATED INCOME
Prior Years 4,613,230 135,000 4,748,230
Current Year 421,444 -0- 421,444
-------------- -------------- --------------
5,034,674 135,000 5,169,674
-------------- -------------- --------------
DISTRIBUTIONS - Note 2
Prior Years (5,468,992) (135,000) (5,603,992)
Current Year (767,609) -0- (767,609)
-------------- -------------- --------------
(6,236,601) (135,000) (6,371,601)
-------------- -------------- --------------
TOTAL PARTNERS' CAPITAL $ 4,967,558 $ 1 $ 4,967,559
============== ============== ==============
</TABLE>
- ---------------
See Independent Auditor's Report on Supplementary Information.
-11-
<PAGE>
FINANCIAL STATEMENTS
INDEX NO. 3
Independent Auditor's Report and Financial Statements
of Bayberry Associates
Independent Auditor Report of Reznick Fedder and Silverman
Balance Sheets - December 31, 1997 and 1996
Statements of Operations - For the Years ended
December 31, 1997, 1996 and 1995
Statements of Partners' Equity - For the Years ended
December 31, 1997, 1996 and 1995
Statements of Cash Flows - For the Years ended
December 31, 1997, 1996 and 1995
Notes to Financial Statements
<PAGE>
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
BAYBERRY ASSOCIATES
DECEMBER 31, 1997 AND 1996
<PAGE>
Bayberry Associates
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS
BALANCE SHEETS 4
STATEMENTS OF OPERATIONS 5
STATEMENTS OF PARTNERS' EQUITY 6
STATEMENTS OF CASH FLOWS 7
NOTES TO FINANCIAL STATEMENTS 8
<PAGE>
[LETTERHEAD OF REZNICK FEDDER & SILVERMAN APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
To the Partners
Bayberry Associates
We have audited the accompanying balance sheets of Bayberry Associates as
of December 31, 1997 and 1996, and the related statements of operations,
partners' equity and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bayberry Associates as of
December 31, 1997 and 1996, and the results of its operations, changes in
partners' equity and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Reznick Fedder & Silverman
Baltimore, Maryland
January 20, 1998
-3-
<PAGE>
Bayberry Associates
BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
------------- ------------
ASSETS
INVESTMENT IN REAL ESTATE
Land $ 3,754,558 $ 3,754,558
Building and improvements 8,503,711 8,503,711
Personal property 778,494 778,494
------------- ------------
13,036,763 13,036,763
Less accumulated depreciation 3,788,765 3,448,171
------------- ------------
9,247,998 9,588,592
OTHER ASSETS
Cash 149,528 140,538
Tenants' security deposits 27,006 28,362
Tenants' accounts receivable 21,306 7,453
Prepaid expenses 112,238 119,553
------------- ------------
$ 9,558,076 $ 9,884,498
============= ============
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses $ 22,936 $ 17,749
Deferred rental income 12,304 12,959
Accrued preferred return 2,846,924 2,479,619
Accrued guaranteed payments 1,532,960 1,335,179
Tenants' security deposits payable 27,006 27,425
Due to affiliates 8,830 6,120
------------- ------------
4,450,960 3,879,051
PARTNERS' EQUITY 5,107,116 6,005,447
------------- ------------
$ 9,558,076 $ 9,884,498
============= ============
See notes to financial statements
-4-
<PAGE>
Bayberry Associates
STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Revenue
Rent $ 2,221,106 $ 2,168,867 $ 2,118,199
Other lease related income 59,477 59,355 50,757
Interest 4,500 4,148 4,909
---------- ---------- ----------
2,285,083 2,232,370 2,173,865
---------- ---------- ----------
Expenses
Furnished apartment expense 14,080 17,384 23,253
Advertising and promotion 45,076 52,631 58,534
Salaries 218,230 203,722 208,734
Administrative 54,985 49,218 47,552
Management fee 79,485 77,525 75,271
Maintenance 169,586 158,702 143,328
Utilities 53,926 72,901 67,098
Real estate taxes 213,150 190,670 196,901
Insurance 18,084 20,338 20,551
Dues and fees 57,802 46,305 47,389
Depreciation 340,594 375,092 409,629
Guaranteed payments 671,616 651,048 632,894
---------- ---------- ----------
1,936,614 1,915,536 1,931,134
---------- ---------- ----------
EXCESS OF REVENUE
OVER EXPENSES $ 348,469 $ 316,834 $ 242,731
========== ========== ==========
See notes to financial statements
-5-
<PAGE>
Bayberry Associates
STATEMENTS OF PARTNER'S EQUITY
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Christopher
Bozzuto New England
Limited Life Pension
Partnership Properties III Total
----------- ---------------- ------------
<S> <C> <C> <C>
Partners' equity (deficit), December 31, 1994 $ (345,536) $ 8,175,881 $ 7,830,345
Distributions (15,527) (1,159,847) (1,175,374)
Excess of revenue over expenses 15,527 227,204 242,731
---------- ---------------- ------------
Partners' equity (deficit), December 31, 1995 (345,536) 7,243,238 6,897,702
Distributions (24,136) (1,184,953) (1,209,089)
Excess of revenue over expenses 24,136 292,698 316,834
---------- ---------------- ------------
Partners' equity (deficit), December 31, 1996 (345,536) 6,350,983 6,005,447
Distributions (26,730) (1,220,070) (1,246,800)
Excess of revenue over expenses 26,730 321,739 348,469
---------- ---------------- ------------
Partners' equity (deficit), December 31, 1997 $ (345,536) $ 5,452,652 $ 5,107,116
========== ================ ============
</TABLE>
See notes to financial statements
-6-
<PAGE>
Bayberry Associates
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Cash flow from operating activities
Excess of revenue over expenses $ 348,469 $ 316,834 $ 242,731
Adjustments to reconcile excess of revenue over
expenses to net cash provided by operating
activities
Depreciation 340,594 375,092 409,629
Changes in assets and liabilities
(Increase) decrease in tenants' accounts receivable (13,853) (42) 202
Decrease (increase) in prepaid expenses 7,315 (13,882) 5,938
Increase (decrease) in accounts payable 5,187 (36,066) 45,335
(Decrease) increase in deferred rental income (655) (103,044) 22,256
Increase in accrued guaranteed payments 197,781 192,524 170,171
Increase (decrease) in due to affiliate 2,710 (25,211) 14,127
Net security deposits received (paid) 937 (373) (565)
---------- ----------- -----------
Net cash provided by operating activities 888,485 705,832 909,824
---------- ----------- -----------
Cash flows from investing activities
Purchase of fixed assets - - (19,755)
---------- ----------- -----------
Net cash used in investing activities - - (19,755)
---------- ----------- -----------
Cash flows from financing activities
Distributions to general partner (879,495) (851,543) (859,344)
---------- ----------- -----------
Net cash used in financing activities (879,495) (851,543) (859,344)
---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 8,990 (145,711) 30,725
Cash, beginning 140,538 286,249 255,524
---------- ----------- -----------
Cash, ending $ 149,528 $ 140,538 $ 286,249
========== =========== ===========
Supplemental disclosure of cash flow information
Cash paid during the year for guaranteed payments $ 473,835 $ 458,524 $ 462,724
========== =========== ===========
</TABLE>
See notes to financial statements
-7-
<PAGE>
Bayberry Associates
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Bayberry Associates (the Partnership) was formed as a general partnership
under the laws of the State of Maryland on April 4, 1988, for the purpose
of constructing, owning and operating a rental housing project. The project
consists of 230 units located in Montgomery County, Maryland, and is
operating as Bayberry Apartments. All leases between the Partnership and
tenants of the property are operating leases.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Investment in Real Estate
-------------------------
Investment in real estate is carried at cost. Management does not believe
that there are any current facts or circumstances that would indicate
impairment of the rental property in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives using accelerated methods.
Rental Income
-------------
Rental income is recognized as rentals become due. Rental payments received
in advance are deferred until earned.
Income Taxes
------------
No provision or benefit for income taxes has been included in these
financial statements since taxable income or loss passes through to, and is
reportable by, the partners individually.
-8-
<PAGE>
Bayberry Associates
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1997, 1996 and 1995
NOTE B - RELATED PARTY TRANSACTIONS
Management Fee
--------------
The Partnership is required to pay a management fee to Bozzuto Management
Company, an affiliate of Christopher Bozzuto Limited Partnership, a general
partner, in an amount equal to 3.5% of gross receipts collected. Management
fees of $79,485, $77,525, and $75,271 were expensed in 1997, 1996 and 1995,
respectively. At December 31, 1997, $8,830 remains unpaid, while $6,120 was
unpaid as of December 31, 1996.
Expenses Incurred and Reimbursed to Affiliates
----------------------------------------------
The Partnership reimburses payroll and other costs incurred by Bozzuto &
Associates, Inc. and Subsidiaries, affiliates of Christopher Bozzuto
Limited Partnership, a general partner, for various administrative and
operating costs relating to the project. During 1997, 1996 and 1995,
$236,313, $224,059, and $229,285 were incurred, respectively. At December
31, 1997 and December 31, 1996, those amounts were paid in full.
NOTE C - PARTNERS' EQUITY
The acquisition and development of the project was funded by capital
contributions from New England Life Pension Properties III (NELP), a
general partner, in the cumulative amount of $14,350,000, which consisted
of senior and junior capital of $9,327,500 and $5,022,500, respectively.
The Partnership agreement provides for both a "Senior and Junior Priority
Return," on the outstanding capital, on a monthly basis, which is
calculated at the rate of 10.25% per annum on the outstanding capital. The
Priority Returns are payable monthly from Operating Cash Flow as defined in
the Partnership agreement, however, (a) to the extent the full amount of
the Senior Priority Return cannot be made from such sources on a monthly
basis, an amount thereof equal to a 10.25% per annum cumulative return on
the Senior Invested Capital may accrue, and such accruals shall bear
interest at the rate of 10.25% per annum compounded monthly and (b) to the
extent the full amount of the Junior Priority Return cannot be made from
such sources on a monthly basis, the amount of the Junior Priority Return
may accrue and such accruals shall bear interest at the rate of 10.25% per
annum compounded monthly. To the extent the Senior Priority Return is
required to be paid currently (and may not be accrued), it will be funded,
if necessary, out of the proceeds of Deficit Contributions and Default
Capital Contributions. These Deficit Contributions and Default Capital
Contributions accrue a return
-9-
<PAGE>
Bayberry Associates
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE C - PARTNERS' EQUITY (Continued)
(Deficit Preferred Return) equal to the greater of NationsBank's prime rate
plus 2% (10.50% at December 31, 1997) or 10.25% per annum. As of December
31, 1997 and 1996, NELP and Christopher Bozzuto Limited Partnership had
made deficit capital contributions in the amounts of $225,956 and $122,500,
respectively.
At December 31, 1997 and 1996, the accrued Junior Priority Return
(including accrued interest of $1,372,467 and $988,654, respectively) due
totaled $4,011,869 and $3,510,514. The Senior Priority Return was paid in
full on an annual basis. The accrued Deficit Preferred Return payable to
NELP and Christopher Bozzuto Limited Partnership at December 31, 1997, was
$215,034 and $152,981, respectively, and at December 31, 1996, was 178,033
and $126,251, respectively.
NOTE D - RECONCILIATION OF FINANCIAL STATEMENTS TO TAX RETURN
The following is a reconciliation of the excess of revenue over expenses
and partners' equity per the financial statements to the tax basis excess
of revenue over expenses and partners' equity for the years ended December
31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Excess of revenue over expenses
(financial statement basis) $ 348,469 $ 316,834 $ 242,731
Deferred rental income (655) (103,044) 22,257
Real estate tax deduction under IRS
Code Section 461 5,965 (14,787) 6,775
------------ ------------- ------------
Tax basis $ 353,779 $ 199,003 $ 271,763
============ ============= ============
Partners' equity (financial statement basis) $ 5,107,116 $ 6,005,447 $ 6,897,702
Deferred rental income 12,304 12,959 116,003
Real estate tax deduction under IRS Code
Section 461 (103,871) (109,836) (95,049)
------------ ------------- ------------
Tax basis $ 5,015,549 $ 5,908,570 $ 6,918,656
============ ============= ============
</TABLE>
-10-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NEW ENGLAND LIFE PENSION PROPERTIES III;
A REAL ESTATE LIMITED PARTNERSHIP
Date: March 26, 1998 By: /s/ Wesley M. Gardiner, Jr.
----------------------------
Wesley M. Gardiner, Jr.
President of the
Managing General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
President, Chief
Executive Officer and
/s/ Wesley M. Gardiner, Jr. Director March 26, 1998
- -----------------------------
Wesley M. Gardiner, Jr.
Vice President and
/s/ Pamela J. Herbst Director March 26, 1998
- -----------------------------
Pamela J. Herbst
Vice President and
/s/ J. Grant Monahon Director March 26, 1998
- -----------------------------
J. Grant Monahon
/s/ James J. Finnegan Vice President March 26, 1998
- -----------------------------
James J. Finnegan
/s/ Karin J. Lagerlund Treasurer and Principal
- ----------------------------- Financial and Accounting
Karin J. Lagerlund Officer March 26, 1998
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Number
- ------- ------- ------
<S> <C> <C>
4. Amended and Restated Agreement of Limited Partnership of New England
Life Pension Properties III; A Real Estate Limited Partnership (filed as
Exhibit 28A to Form 8-K dated July 15, 1985, as filed with the
Commission on July 16, 1985). *
10A. Form of Escrow Deposit Agreement among the Registrant, NEL
Equity Services Corporation and The Bank of Boston (filed as Exhibit
10A to the Registrant's Registration Statement on Form S-11, file no.
2-94351 (the "Registration Statement"). *
10B. Form of Advisory Contract between the Registrant and Copley Real
Estate Advisors, Inc. (filed as Exhibit 10B to the Registration Statement). *
10C. Letter dated June 27, 1985 from Copley Real Estate Advisors, Inc.
on behalf of the Registrant to Norris, Beggs & Simpson, the Developer. *
10D. Lease dated August 29, 1985 by and between the Registrant and NBS
No. VI, a California Limited Partnership. *
10E. Memorandum of Ground Lease dated as of August 29, 1985 by and
between the Registrant and NBS No. VI, a California Limited Partnership. *
10F. Promissory Note dated August 29, 1985 in the principal amount of
$2,663,870 from NBS No. VI to the Registrant. *
10G. Deed of Trust and Security Agreement dated as of August 29, 1985
among NBS No. VI, as Grantor, Santa Clara Land Title Company,
as Trustee, and the Registrant, as Beneficiary. *
10H. Loan Agreement dated August 29, 1985 in the amount of $2,663,870
between NBS No. VI and the Registrant. *
10I. Ground Lease dated as of November 1, 1985 by and between the
Registrant, as Landlord and Vance Charles Mape and Vance
Charles Mape III, as Tenant. *
10J. Construction Loan Agreement dated November 11, 1985 between
Vance Charles Mape and Vance Charles Mape III, and the Registrant. *
10K. Promissory Note dated November 11, 1985 between Vance Charles
Mape and Vance Charles Mape III and the Registrant. *
</TABLE>
*Previously filed and incorporated herein by reference.
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Number
- ------- ------- ------
<S> <C> <C>
10L. Deed of Trust, Assignment of Rents and Security Agreement dated
November 11, 1985 by Vance Charles Mape and Vance Charles
Mape III, Trustor, to Ticor Title Insurance Company, Trustee, for
the Registrant, Beneficiary. *
10M. Joint Venture Agreement dated as of January 31, 1986 by and between
the Registrant and Santa Fe Springs Corporate Center Partnership. *
10N. Promissory Note dated December 30, 1985 in the principal amount of
$4,750,000 by Heritage Green Associates, a Colorado general partnership
to the Registrant. *
10O. Deed of Trust and Security Agreement dated December 30, 1985, made
by Heritage Green Associates for the benefit of the Registrant. *
10P. Ground Lease dated December 30, 1985, between the Registrant,
Landlord, and Heritage Green Associates, Tenant. *
10Q. First Amended and Restated Limited Partnership Agreement and First
Amended and Restated Certificate of Reston Two - Oxford Limited
Partnership, dated February 1, 1986. *
10R. Loan Agreement dated March 19, 1986 by and between Reston Two -
Oxford Limited Partnership and the Registrant. *
10S. Combination Promissory Note in the amount of $9,000,000, dated
March 19, 1986 given by Reston Two - Oxford Limited Partnership to
the Registrant. *
10T. Credit Line Deed of Trust and Security Agreement dated March 19, 1986
given by Reston Two - Oxford Limited Partnership to William J. Dorn and
William L. Stauffer, Jr., Trustees. *
10U. Second Promissory Note in the amount of $1,500,000 dated March 19, 1986
given by Reston Two - Oxford Limited Partnership to The Registrant. *
</TABLE>
*Previously filed and incorporated herein by reference.
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Number
- ------- ------- ------
<S> <C> <C>
10V. Second Credit Line Deed of Trust and Security Agreement dated
March 19, 1986 given by Reston Two - Oxford Limited Partnership to
William J. Dorn and William L. Stauffer, Jr., Trustees. *
10W. Webb-Brown Collier Associates Joint Venture Agreement dated May 23, 1984. *
10X. Ground Lease between the Registrant, as Landlord and Webb-Brown
Collier Associates, dated July 24, 1986. *
10Y. Promissory Note dated July 24, 1986 in the amount of $13,009,000 from
Webb-Brown Collier Associates to the Registrant. *
10Z. Mortgage and Security Agreement, dated as of July 24, 1986, by and
between Webb-Brown Collier Associates, as Borrower, and the Registrant,
as Lender, in the amount of $13,009,000. *
10AA. General Partnership Agreement of Bayberry Associates dated as of April
4, 1988 between Christopher Bozzuto Limited Partnership and the
Registrant. *
10BB. Termination of Lease Agreement dated August 1988 involving New England
Life Pension Properties III and Volpey Way Properties. *
10CC. Purchase and Sale Agreement and Escrow Instructions dated July 28, 1988
by and among the Registrant and Volpey Way Properties (Sellers) and
Rlajm Land Co., Inc. (Buyer). *
10DD. MORF Associates III General Partnership Agreement dated as of January 1,
1988 between M.O.R.F. III Associates Limited Partnership and the
Registrant. *
10EE. First Amendment to Promissory Note dated as of May 1, 1987 by NBS No.
VI in favor of the Registrant. *
10FF. First Amendment to Ground Lease dated as of May 1, 1987 between
the Registrant ("Landlord") and NBS No. VI ("Tenant"). *
10GG. Termination of Lease by and between New England Life Pension
Properties III; A Real Estate Limited Partnership ("Landlord") and
Webb Brown Collier Associates ("Tenant"). *
</TABLE>
*Previously filed and incorporated herein by reference.
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Number
- ------- ------- ------
<S> <C> <C>
10HH. Promissory Note in the principal amount of $469,154 dated January 31,
1989 by Stan Brown Associates, Inc. in favor of Webb-Brown Collier
Associates. *
10II. Agreement by and between the Registrant and Heritage Green Associates
dated as of January 1,1989. *
10JJ. Bill of Sale dated as of January 1, 1989 by and between Heritage Green
Associates and the Registrant. *
10KK. Termination of Ground Lease dated as of January 1, 1989 by and between
Heritage Green Associates and the Registrant. *
10LL. Assignment and Assumption Agreement (Contracts) dated as of January 1,
1989 by and between Heritage Green Associates and the Registrant. *
10MM. Assignment and Assumption Agreement (Leases and Easements) dated as
of January 1, 1989 by and between Heritage Green Associates and the
Registrant. *
10NN. Assignment and Assumption Agreement (Trade Names) dated as of January
1, 1989 by and between Heritage Green Associates and the Registrant. *
10OO. Modification Agreement dated as of January 31, 1990 by and between
Reston Two-Oxford Limited Partnership and the Registrant. *
10PP. Modification Agreement dated as of January 31, 1990 by and between
Reston Two-Oxford Limited Partnership and the Registrant. *
10QQ. Agreement of Sale made as of December 20, 1991, by and among the
Registrant, as successor-in-interest to Webb-Brown Metro One Associates
and Metro Parkway Investment Limited Partnership and Josias & Goren, P.A.,
as escrow agent. *
10RR. First Amendment to Agreement of Sale made as of February 20, 1992, by
and among the Registrant, as successor-in-interest to Webb-Brown Metro
One Associates and Metro Parkway Investment Limited Partnership and
Josias & Goren, P.A., as escrow agent. *
10SS. Warranty Deed dated February 20, 1992, between the Registrant and
Metro Parkway Investment Limited Partnership. *
</TABLE>
*Previously filed and incorporated herein by reference.
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Number
- ------- ------- ------
<S> <C> <C>
10TT. Agreement of Sale made as of December 20, 1991, by and among *
the Registrant, as successor-in- interest to Webb-Brown Metro One
Associates and Metro Parkway Investment Limited Partnership and
Josias & Goren, P.A. as escrow agent.
10UU. Warranty Deed dated February 13, 1992, between the Registrant and *
Metro Parkway Investment Limited Partnership.
10VV. Purchase and Sale Agreement effective November 3, 1993, by and
between the Registrant and Peter L. Rhulen as amended by the First
Amendment to Purchase and Sale Agreement effective November
26, 1993 and a letter dated December 2, 1993. *
10WW. Assignment of Purchase Agreement dated November 9, 1993, by
Peter L. Rhulen to Heritage Green L. L. C. *
10XX. Special Warranty Deed effective December 17, 1993, by and between
Registrant and Heritage Green, L. L. C. *
10YY. Leasehold Assignment, Transfer and Release Agreement dated as
of August 15, 1994 by and between the Registrant and NBS No. VI. *
10ZZ. Assignment of Ground Lease and Transfer of Property in Lieu of Foreclosure
dated as of August 25, 1994 by and between the Registrant and NBS No. VI. *
10AAA. Assignment of Subleases dated as of August 23, 1994 by and between the
Registrant and NBS No. VI. *
27. Financial Data Schedule
</TABLE>
*Previously filed and incorporated herein by reference.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,645,244
<SECURITIES> 946,836
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,592,080
<PP&E> 18,354,551
<DEPRECIATION> 244,868
<TOTAL-ASSETS> 20,946,631
<CURRENT-LIABILITIES> 145,003
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 20,801,628
<TOTAL-LIABILITY-AND-EQUITY> 20,946,631
<SALES> 1,819,360
<TOTAL-REVENUES> 1,942,159
<CGS> 79,665
<TOTAL-COSTS> 79,665
<OTHER-EXPENSES> 552,206
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,310,288
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,310,288
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,310,288
<EPS-PRIMARY> 18.96
<EPS-DILUTED> 18.96
</TABLE>
