UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THEx SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-11210 Krupp Realty Fund, Ltd.-III Massachusetts 04-2763323 (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 470 Atlantic Avenue, Boston, Massachusetts 02210 (Address of principal executive offices) (Zip Code) (617) 423-2233 (Registrant's telephone number, including area code) 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 PART I. FINANCIAL INFORMATION Item 1. CONSOLIDATED FINANCIAL STATEMENTS KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS March 31, December 31, 1996 1995 Multi-family apartment complexes, less accumulated depreciation of $16,891,858 and $16,460,550, respectively $11,931,944 $12,329,503 Cash and cash equivalents 480,439 654,696 Other investments (Note 3) 294,435 - Required repair and replacement reserves 217,608 202,349 Cash restricted for tenant security deposits 169,273 202,950 Prepaid expenses and other assets 541,540 596,254 Deferred expenses, net of accumulated amortization of $132,664 and $121,192, respectively 386,920 398,392 Total assets $14,022,159 $14,384,144 LIABILITIES AND PARTNERS' DEFICIT Mortgage notes payable $19,745,290 $19,826,061 Accounts payable 34,003 54,170 Accrued expenses and other liabilities 627,655 654,603 Total liabilities 20,406,948 20,534,834 Partners' deficit (Note 2): Investor Limited Partners (25,000 Units outstanding) (5,203,656) (4,981,262) Original Limited Partner (881,192) (871,828) General Partners (299,941) (297,600) Total Partners' deficit (6,384,789) (6,150,690) Total liabilities and Partners' deficit $14,022,159 $14,384,144 The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, 1996 1995 Revenue: Rental $1,623,884 $1,568,534 Other income 16,076 22,454 Total revenue 1,639,960 1,590,988 Expenses: Operating (Note 4) 479,505 412,754 Maintenance 75,123 79,096 Real estate taxes 125,925 133,956 Management fees (Note 4) 79,682 79,637 Depreciation and amortization 442,780 395,879 General and administrative (Note 4) 26,057 11,121 Interest 436,302 443,381 Total expenses 1,665,374 1,555,824 Net income (loss) $ (25,414) $ 35,164 Allocation of net income (loss) (Note 2): Investor Limited Partner Interest (25,000 Units outstanding) $ (24,143) $ 33,405 Per Unit of Investor Limited Partner Interest $ (.97) $ 1.34 Original Limited Partner $ (1,017) $ 1,407 General Partners $ (254) $ 352 The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY FUND, LTD.-III AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS __________ For the Three Months Ended March 31, 1996 1995 Operating activities: Net income (loss) $ (25,414) $ 35,164 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 442,780 395,879 Decrease (increase) in cash restricted for tenant security deposits 33,677 (4,525) Decrease in prepaid expenses and other assets 54,714 63,558 Decrease in accounts payable (20,167) (2,803) Decrease in accrued expenses and other liabilities (26,948) (34,063) Net cash provided by operating activities 458,642 453,210 Investing activities: Decrease in accounts payable for fixed asset additions - (225,308) Additions to fixed assets (33,749) (140,619) Funding to replacement reserve (15,259) (15,474) Decrease in required repair and replacement reserves - 272,112 Increase in other investments (294,435) (292,197) Net cash used in investing activities (343,443) (401,486) Financing activities: Distributions (208,685) (156,576) Principal payments on mortgage notes payable (80,771) (73,863) Net cash used in financing activities (289,456) (230,439) Net decrease in cash and cash equivalents (174,257) (178,715) Cash and cash equivalents, beginning of period 654,696 836,785 Cash and cash equivalents, end of period $ 480,439 $ 658,070 The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Accounting Policies Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this report on Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. In the opinion of the General Partners of Krupp Realty Fund, Ltd.-III and Subsidiary (the "Partnership"), the disclosures contained in this report are adequate to make the information presented not misleading. See Notes to Consolidated Financial Statements included in the Partnership's Annual Report on Form 10-K for the year ended December 31, 1995 for additional information relevant to significant accounting policies followed by the Partnership. In the opinion of the General Partners of the Partnership, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Partnership's consolidated financial position as of March 31, 1996 and its results of operations and its cash flows for the three months ended March 31, 1996 and 1995. Certain prior year balances have been reclassified to conform with current year consolidated financial statement presentation. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results which may be expected for the full year. See Management's Discussion and Analysis of Financial Condition and Results of Operations included in this report. (2) Summary of Changes in Partners' Deficit A summary of changes in Partners' deficit for the three months ended March 31, 1996 is as follows: Investor Original Total Limited Limited General Partners' Partners Partner Partners Deficit Balance at December 31, 1995 $(4,981,262) $(871,828) $(297,600) $(6,150,690) Net loss (24,143) (1,017) (254) (25,414) Distributions (198,251) (8,347) (2,087) (208,685) Balance at March 31, 1996 $(5,203,656) $(881,192) $(299,941) $(6,384,789) (3) Other Investments On March 31, 1996, the Partnership held investments in commercial paper maturing within one year. Cost approximates the market value. (4) Related Party Transactions Commencing with the date of acquisition of the Partnership's properties, the Partnership entered into agreements under which property management fees are paid to an affiliate of the General Partners for services as management agent. Such agreements provide for management fees payable monthly at a rate of 5% of the gross receipts from the properties under management. The Partnership also reimburses affiliates of the General Partners for certain expenses incurred in connection with the operation of the Partnership and its properties including accounting, computer, insurance, travel, legal and payroll; and with the preparation and mailing of reports and other communications to the Limited Partners. Amounts accrued or paid to the General Partners or their affiliates were as follows: For the Three Months Ended March 31, 1996 1995 Property management fees $ 79,682 $79,637 Expense reimbursements 47,114 19,672 Charged to operations $126,796 $99,309 KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Partnership's ability to generate cash adequate to meet its needs is dependent primarily upon the operations of its real estate investments. Such ability is also dependent upon the future availability of bank borrowings and the potential refinancing and sale of the Partnership's remaining real estate investments. These sources of liquidity will be used by the Partnership for payment of expenses related to real estate operations, capital expenditures, debt service and expenses. Cash Flow, if any, as calculated under Section 8.2(a) of the Partnership Agreement, will then be available for distribution to the Partners. Due to improvements in the operations of the properties, the Partnership has sufficient Cash Flow to increase semi-annual distributions from an annual rate of $11.90 per Unit in 1995, to an annual rate of $15.86 per Unit in 1996. Improvements at the Partnership's properties continue in 1996. The Partnership believes that the improvements are necessary to compete with current market conditions, produce quality rental units and absorb excess market supply at the properties' respective locations. Renovations include the replacement of countertops, carpeting and appliances. Cash Flow Shown below, as required by the Partnership Agreement, is the calculation of Cash Flow of the Partnership for the three months ended March 31, 1996. The General Partners provide certain of the information below to meet requirements of the Partnership Agreement and because they believe that it is an appropriate supplemental measure of operating performance. However, Cash Flow should not be considered by the reader as a substitute to net income(loss), as an indicator of the Partnership's operating performance or to cash flows as a measure of liquidity. Rounded to $1,000 Net income for tax purposes $ 69,000 Items not requiring or (requiring) the use of operating funds: Tax basis depreciation and amortization 347,000 Principal payments on mortgage notes payable (81,000) Expenditures for capital improvements (34,000) Working capital reserves (196,000) Cash Flow $ 105,000 Operations The Cash Flow increase in the first quarter of 1996, as compared to the first quarter of 1995 is primarily due to a decrease in capital improvement expenditures. Increased rental revenue during the first quarter of 1996, as compared to the first quarter of 1995, is a result of increased rental rates at the Partnerships' properties instituted in 1995. Also, in the first quarter of 1996, interest income decreased as a result of lower cash and cash equivalents available for investment in commercial paper. During the first three months of 1996, as compared to the first three months of 1995, operating expenses increased due to an increase in utility consumption as a result of adverse weather conditions. Real estate taxes decreased in the first quarter of 1996, as compared to the first quarter of 1995, due to a 1995 real estate tax refund for Dorsey's Forge received in 1996. General and administrative expenses increased in the first three months of 1996, as compared to the first three months of 1995, as a result of higher audit expenditures. Depreciation expense also increased in conjunction with the increase in fixed asset expenditures. General In accordance with Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which is effective for fiscal years beginning after December 15, 1995, the Partnership has implemented policies and practices for assessing impairment of its real estate assets. The investments in properties are carried at cost less accumulated depreciation unless the General Partners believe there is a significant impairment in value, in which case a provision to write down investments in properties to fair value will be charged against income. At this time, the General Partners do not believe that any assets of the Partnership are significantly impaired. KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY PART II - OTHER INFORMATION Item 1. Legal Proceedings Response: None Item 2. Changes in Securities Response: None Item 3. Defaults upon Senior Securities Response: None Item 4. Submission of Matters to a Vote of Security Holders Response: None Item 5. Other Information Response: None Item 6. Exhibits and Reports on Form 8-K Response: None SIGNATURE 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. Krupp Realty Fund, Ltd. - III (Registrant) BY: /s/Robert A. Barrows Robert A. Barrows Treasurer and Chief Accounting Officer of The Krupp Corporation, a General Partner. DATE: May 2, 1996