SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ---------------------------------------------------------------------- For Quarter Ended June 30, 1999 Commission File Number 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 Identification No.) incorporation or organization) 225 Franklin Street, 25th Fl. Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 261-9000 - ------------------------------------------------------------------------------- Former name, former address and former fiscal year if changed since last report Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (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 NEW ENGLAND LIFE PENSION PROPERTIES III; A REAL ESTATE LIMITED PARTNERSHIP FORM 10-Q FOR QUARTER ENDED JUNE 30, 1999 PART I FINANCIAL INFORMATION ---------------------- NEW ENGLAND LIFE PENSION PROPERTIES III; A REAL ESTATE LIMITED PARTNERSHIP BALANCE SHEETS June 30, 1999 December 31, 1998 (Unaudited) (Audited) ----------------- ----------------- ASSETS Real estate investments: Property, net $ 6,093,602 $ 6,156,334 Property held for Disposition, net - 1,197,305 ------------ ------------ 6,093,602 7,353,639 Cash and cash equivalents 1,533,165 1,952,504 ------------ ------------ $ 7,626,767 $ 9,306,143 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Accounts payable $ 82,837 $ 87,947 Accrued management fee 14,968 21,939 ------------ ------------ Total liabilities 97,805 $ 109,886 ------------ ------------ Partners' capital: Limited partners ($194.42 and $231.54 per unit, respectively; 75,000 units authorized, 68,414 units issued and outstanding) 7,520,030 9,196,048 General partners 8,932 209 ------------ ------------ Total partners' capital 7,528,962 9,196,257 ------------ ------------ $ 7,626,767 $ 9,306,143 ============ ============ (See accompanying notes to unaudited financial statements) NEW ENGLAND LIFE PENSION PROPERTIES III; A REAL ESTATE LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended Three Months Ended Six Months Ended June 30, 1999 June 30, 1999 June 30, 1998 June 30 ,1998 -------------- ---------------- -------------- -------------- INVESTMENT ACTIVITY Property rentals $ 277,573 $ 594,440 $ 323,224 $ 647,947 Property operating expenses (60,689) (163,384) (78,346) (139,908) Depreciation and amortization (56,038) (123,690) (75,325) (151,422) ---------------- ---------------- ---------------- --------------- 160,846 307,366 169,553 356,617 Joint venture earnings - - 227,806 552,679 Amortization - - (1,569) (3,138) ---------------- ---------------- ---------------- --------------- Total real estate operations 160,846 307,366 395,790 906,158 Gain on sale of property - 1,509,931 - - ---------------- ---------------- ---------------- --------------- Total real estate activity 160,846 1,817,297 395,790 906,158 Interest on cash equivalents and short-term investments 39,710 61,965 33,071 66,110 ---------------- ---------------- ---------------- --------------- Total investment activity 200,556 1,879,262 428,861 972,268 ---------------- ---------------- ---------------- --------------- Portfolio Expenses General and administrative 60,271 145,252 51,635 108,288 Management fee 14,968 71,216 45,655 91,310 ---------------- ---------------- ---------------- --------------- 75,239 216,468 97,290 199,598 ---------------- ---------------- ---------------- --------------- Net Income $ 125,317 $ 1,662,794 $ 331,571 $ 772,670 ================ ================ ================ =============== NEW ENGLAND LIFE PENSION PROPERTIES III; A REAL ESTATE LIMITED PARTNERSHIP Net income per limited partnership unit $ 1.81 $ 24.06 $ 4.80 $ 11.18 =========== =========== =========== ============ Cash distributions per limited partnership unit $ 45.35 $ 48.56 $ 6.68 $ 13.36 =========== =========== =========== ============ Number of limited partnership units outstanding during the perio 68,414 68,414 68,414 68,414 =========== =========== =========== ============ (See accompanying notes to unaudited financial statements) NEW ENGLAND LIFE PENSION PROPERTIES III; A REAL ESTATE LIMITED PARTNERSHIP STATEMENT OF PARTNERS' CAPITAL (DEFICIT) (Unaudited) Three Months Ended Six Months Ended Three Months Ended June 30, 1999 June 30, 1999 June 30, 1998 ------------------- ---------------- ------------------ General Limited General Limited General Limited Partners Partners Partners Partners Partners Partners ---------- ---------- ---------- ---------- ---------- ---------- Balance at beginning of period $ 13,366 $ 10,498,541 $ 209 $ 9,196,048 $ (57,715) $ 20,838,820 Cash distributions (5,687) (3,102,575) (7,905) (3,322,184) (4,616) (457,006) Net income 1,253 124,064 16,628 1,646,166 3,316 328,255 ---------- ------------ ---------- -------------- ---------- ------------ Balance at end of period $ 8,932 $ 7,520,030 $ 8,932 $ 7,520,030 $ (59,015) $ 20,710,069 ========== ============ ========== ============== ========== ============ Six Months Ended June 30, 1998 --------------- General Limited Partners Partners ---------- ---------- Balance at beginning of period $ (57,510) $ 20,859,138 Cash distributions (9,232) (914,012) Net income 7,727 764,943 ---------- ------------ Balance at end of period $ (59,015) $ 20,710,069 ========== ============ (See accompanying notes to unaudited financial statements) NEW ENGLAND LIFE PENSION PROPERTIES III; A REAL ESTATE LIMITED PARTNERSHIP SUMMARIZED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, ---------------------------------- 1999 1998 ---------- ---------- Net cash provided by operating activities $ 276,126 $ 1,297,236 ------------ ------------ Cash flows from investing activities: Net proceeds from sale of property 2,639,445 - Capital expenditures on owned property (4,821) (7,714) Decrease in short-term investments, net - 931,125 ------------ ------------ Net cash provided by investing activities 2,634,624 923,411 ------------ ------------ Cash flows from financing activity: Distributions to partners (3,330,089) (923,244) ------------ ------------ Net increase (decrease) in cash and cash equivalents (419,339) 1,297,403 Cash and cash equivalents: Beginning of period 1,952,504 1,645,244 ------------ ------------ End of period $ 1,533,165 $ 2,942,647 ============ ============ Non-cash transaction: Effective January 1, 1998, the Partnership's joint venture investment in 270 Technology Park was converted to a wholly-owned property. The carrying value of this investment at conversion was $6,162,959. (See accompanying notes to unaudited financial statements) NEW ENGLAND LIFE PENSION PROPERTIES III; A REAL ESTATE LIMITED PARTNERSHIP NOTES TO UNAUDITED FINANCIAL STATEMENTS (Unaudited) In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the Partnership's financial position as of June 30, 1999 and December 31, 1998 and the results of its operations, its cash flows and partners' capital (deficit) for the three and six months ended June 30, 1999 and 1998. These adjustments are of a normal recurring nature. See notes to unaudited financial statements included in the Partnership's 1998 Annual Report on Form 10-K for additional information relating to the Partnership's financial statements. NOTE 1 - ORGANIZATION AND BUSINESS - ---------------------------------- 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. The Partnership 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 one investment it currently owns prior to the end of 1988. The Partnership 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 Partnership has engaged AEW Real Estate Advisors, Inc. ("AEW") to provide asset management advisory services. NOTE 2 - REAL ESTATE JOINT VENTURES - ----------------------------------- The 270 Technology Park joint venture was restructured to a wholly-owned property effective January 1, 1998 (See Note 3). The following summarized financial information is presented for one the Bayberry venture which was sold on August 7, 1998. Results of Operations -------------------------------------- Six Months ended June 30, -------------------------------------- 1999 1998 ---- ---- Revenue Rental income $ - $ 1,204,840 Other - 2,386 ------------ ------------- - 1,207,226 ------------ ------------- Expenses Operating expenses - 484,673 Depreciation and amortization - 169,874 ------------ ------------- - 654,547 ------------ ------------- Net income $ - $ 552,679 ============ ============= NEW ENGLAND LIFE PENSION PROPERTIES III; A REAL ESTATE LIMITED PARTNERSHIP Expenses exclude amounts owed and attributable to the Partnership on behalf of its various financing arrangements with the joint venture. NOTE 3 - PROPERTY - ----------------- 270 Technology Park ------------------- Effective January 1, 1998, the 270 Technology Park joint venture was restructured and the venture partner's ownership interest was assigned 99% to the Partnership, and 1% to an affiliate of the Partnership. Accordingly, as of this date, the investment is being accounted for as a wholly-owned property. The carrying value of the joint venture investment at conversion ($6,162,959) was allocated to land, building and improvements, and other net operating assets. The building is being depreciated over 30 years, beginning January 1, 1998. 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 located on the land. 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/mortgagor to meet its financial obligations. The Partnership received $85,000 in settlement of the guaranty that had been 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 buildings and improvements (two industrial buildings in Hayward, California) were being depreciated over 25 years beginning November 15, 1994. Prior to 1994, the Managing General Partner determined that the carrying value of this investment should be reduced to its estimated fair market value. Accordingly, the carrying value was reduced by $2,500,000. On March 18, 1999, the North Cabot Industrial Park investment was sold to an unaffiliated third party (the "Buyer") for gross proceeds of $2,800,000. The terms of the sale were determined by arm's length negotiation between the Buyer and the Partnership. The Partnership received net proceeds of $2,639,445 and recognized a gain of $1,509,931 ($21.85 per limited partnership unit). On April 29, 1999, the Partnership made a capital distribution of $2,539,528 ($37.12 per limited partnership unit) from the proceeds of the sale. NEW ENGLAND LIFE PENSION PROPERTIES III; A REAL ESTATE LIMITED PARTNERSHIP The following is a summary of the Partnership's investment in property (one at June 30, 1999, and two at December 31, 1998): June 30, 1999 December 31, 1998 ---------------- ----------------- Land $ 215,404 $ 215,404 Buildings and improvements 5,658,212 5,653,391 Accumulated depreciation and amortization (249,824) (156,156) Net operating assets 469,810 443,695 Property held for disposition - 1,197,305 ---------------- ----------------- $ 6,093,602 $ 7,353,639 ================ ================= NOTE 4 - SUBSEQUENT EVENT - ------------------------- Distributions of cash from operations relating to the quarter ended June 30, 1999 were made on July 29, 1999 in the aggregate amount of $151,340 ($2.19 per limited partnership unit). NEW ENGLAND LIFE PENSION PROPERTIES III; A REAL ESTATE LIMITED PARTNERSHIP 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 nine real estate investments, six of which were sold prior to 1994, and one of which was sold in each of 1998 and 1999. As a result of the sales and similar transactions, capital of $55,112,950 ($805.58 per limited partnership unit) has been returned to the limited partners through June 30, 1999. At June 30, 1999, the Partnership had $1,533,165 in cash and cash equivalents, of which $151,340 was used for operating cash distributions to partners on July 29, 1999; 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 remaining real estate investment and invested cash and cash equivalents. Distributions of cash from operations for the first and second quarters of 1999 were made at the annualized rate of 4.25% on the adjusted capital contribution of $231.54 per limited partnership unit and the weighted average adjusted capital contribution of $205.97 per limited partnership unit, respectively. Distributions of cash from operations for the first two quarters of 1998 were made at the annualized rate of 5.5% on the adjusted capital contribution of $485.54 per limited partnership unit. The distribution rate was lower in 1999 primarily due to the sale of investments in 1998 and 1999 and the consequent reduction in cash flow. The carrying value of real estate investments in the financial statements at June 30, 1999 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 June 30, 1999, the appraised value of the Partnership's remaining real estate investment exceeded its related carrying value by approximately $660,000. The current appraised value of the real estate investment has been determined 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 current appraised value may differ significantly from that which could be realized if the real estate were actually offered for sale in the marketplace. Year 2000 Readiness Disclosure - ------------------------------ The Year 2000 Issue is a result of computer programs being written using two digits rather than four to define the applicable year. 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 miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business operations. The Partnership relies on AEW Capital Management L.P. ("AEW Capital Management"), the parent of the Advisor, to generate financial information and to provide other services, which are dependent on the use of computers. The Partnership has obtained assurances from NEW ENGLAND LIFE PENSION PROPERTIES III; A REAL ESTATE LIMITED PARTNERSHIP AEW Capital Management that: . AEW Capital Management has developed a Year 2000 Plan (the "Plan") consisting of five phases: inventory, assessment, testing, remediation/repair and certification. . As of September 30, 1998, AEW Capital Management had completed the inventory and assessment phases of this Plan and had commenced the testing and remediation/repair of internal systems. . AEW Capital Management concluded the internal testing, remediation/repair and certifications of its Plan in June 1999. The Partnership also relies on joint venture partners and/or property managers to supply financial and other data with respect to its real properties. The Partnership is in the process of surveying these third party providers and assessing their compliance with Year 2000 requirements. To date, the Partnership is not aware of any problems that would materially impact its results of operations, liquidity or capital resources. However, the Partnership has not yet obtained written assurances that these providers would be Year 2000 compliant. The Partnership is developing a contingency plan in the event of a particular provider or system not being Year 2000 compliant. The inability of one of these providers to complete its Year 2000 resolution process could materially impact the Partnership. In addition, the Partnership is also subject to external forces that might generally affect industry and commerce, such as utility or transportation company Year 2000 compliance failures and related service interruptions. Given the nature of its operations, the Partnership will not incur any costs associated with Year 2000 compliance. All such costs are borne by AEW Capital Management and the property managers. Results of Operations - --------------------- Form of Real Estate Investments North Cabot Industrial Park, which was sold in March 1999, was a wholly-owned property. Effective January 1, 1998, 270 Technology Park was converted to a wholly-owned property; it was previously structured as a joint venture with a real estate management/development firm. The Bayberry Apartments investment, which was sold in August 1998, was structured as a joint venture with a real estate management/development firm. Operating Factors The North Cabot Industrial Park was sold on March 18, 1999, and the Partnership recognized a gain of $1,509,931. Occupancy at North Cabot Industrial Park was 92% at the time of the sale. At June 30, 1998, the property was 86% occupied. Occupancy at 270 Technology Park increased to 100% during the second quarter of 1999, up from 97% during the second quarter of 1998. As previously discussed, the Bayberry Apartments investment was sold on August 7, 1998, and the Partnership recognized a gain of $6,391,800. At the time of the sale, the Bayberry Apartments was 95% leased. At June 30, 1998 it was 95% leased. Investment Results Interest on cash equivalents and short-term investments for the three and six months ended June 30, 1999, was $39,710 and $61,965, respectively, compared to $33,071 and $66,110 for the same periods in 1998. The increase of approximately NEW ENGLAND LIFE PENSION PROPERTIES III; A REAL ESTATE LIMITED PARTNERSHIP $6,600 or 20% for the respective three month periods is primarily due to higher average investment balances in 1999 as a result of the receipt of the North Cabot Industrial Park sale proceeds. The decrease of approximately $4,100 or 6% for the respective six month periods is primarily due to lower average investment balances as a result of the distributions related to the sale of Bayberry Apartments in August 1998 and the sale of North Cabot Industrial Park in March 1999. For the three and six months ended June 30, 1999, operating results from real estate operations were $160,846 and $307,366, respectively, compared to $395,790 and $906,158 for the comparable periods in 1998. The decreases of $234,944 and $598,792 for the comparative three and six month periods are primarily due to no joint venture earnings as a result of the sale of Bayberry Apartments in August 1998 and lower property operating results as a result of the North Cabot Industrial Park sale in March 1999. Cash flow from operations decreased by approximately $1,021,000 between the two six-month periods. The decrease is primarily due to the decrease in operating activity as a result of the sales discussed above, a decrease in property working capital and an increase in deferred leasing costs. 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, legal, accounting, printing and servicing agent fees. For the three and six months ended June 30, 1999, management fees were $14,968 and $71,216, respectively, compared to $45,655 and $91,310 for the comparable periods in 1998. The decreases in management fees for the respective three and six month periods are due to lower operational cash distributions as a result of the sales of Bayberry Apartments in 1998 and North Cabot Industrial Park in 1999. General and administrative expenses for the three and six months ended June 30, 1999 were $60,271 and $145,252, respectively, compared to $51,635 and $108,288 for the same periods in 1998. The increases of approximately $8,600 or 17% and $37,000 or 34% for the three and six month periods, respectively, are primarily due to increases in state taxes, accounting fees and investor servicing fees due to sales. NEW ENGLAND LIFE PENSION PROPERTIES III; A REAL ESTATE LIMITED PARTNERSHIP FORM 10-Q FOR QUARTER ENDED JUNE 30, 1999 PART II OTHER INFORMATION ------------------- Items 1-5 Not Applicable Item 6. Exhibits and Reports on Form 8-K a. Exhibits: (27) Financial Data Schedule b. Reports on Form 8-K: During the quarter ended June 30, 1999, one Current Report on Form 8-K was filed on April 2, 1999 reporting on Item No. 2 (Acquisition or Disposition of Assets) and Item No. 7 (Financial statements and Exhibits), relating in both cases to the March 18, 1999 sale of North Cabot Industrial Park. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEW ENGLAND LIFE PENSION PROPERTIES III; A REAL ESTATE LIMITED PARTNERSHIP (Registrant) August 6, 1999 /s/ Alison Husid Cutler ------------------------------- Alison Husid Cutler President, Chief Executive Officer and Director of Managing General Partner, Copley Properties Company III, Inc. August 6, 1999 /s/ Karin J. Lagerlund -------------------------------- Karin J. Lagerlund Principal Financial and Accounting Officer of Managing General Partner, Copley Properties Company III, Inc.