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 June 30, 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 This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those identified herein. KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS June 30, December 31, 1996 1995 Multi-family apartment complexes, less accumulated depreciation of $17,330,412 and $16,460,550, respectively $11,805,821 $12,329,503 Cash and cash equivalents 444,422 654,696 Other investment (Note 3) 294,435 - Required repair and replacement reserves 222,588 202,349 Cash restricted for tenant security deposits 172,848 202,950 Prepaid expenses and other assets 519,785 596,254 Deferred expenses, net of accumulated amortization of $144,137 and $121,192, respectively 375,447 398,392 Total assets $13,835,346 $14,384,144 LIABILITIES AND PARTNERS' DEFICIT Mortgage notes payable $19,662,692 $19,826,061 Accounts payable 8,580 54,170 Accrued expenses and other liabilities 615,262 654,603 Total liabilities 20,286,534 20,534,834 Partners' deficit (Note 2): Investor Limited Partners (25,000 Units outstanding) (5,266,734) (4,981,262) Original Limited Partner (883,849) (871,828) General Partners (300,605) (297,600) Total Partners' deficit (6,451,188) (6,150,690) Total liabilities and Partners' deficit $13,835,346 $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 For the Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 Revenue: Rental $1,628,975 $1,584,318 $3,252,859 $3,152,852 Other income 15,668 17,300 31,744 39,754 Total revenue 1,644,643 1,601,618 3,284,603 3,192,606 Expenses: Operating (Note 4) 472,326 399,946 951,831 820,205 Maintenance 140,079 173,368 215,202 252,464 Real estate taxes 120,958 124,516 246,883 258,472 General and administrative (Note 4) 11,966 17,724 38,023 31,200 Management fees (Note 4) 81,210 78,604 160,892 158,241 Depreciation and amortization 450,027 452,004 892,807 847,883 Interest 434,476 429,683 870,778 863,204 Total expenses 1,711,042 1,675,845 3,376,416 3,231,669 Net loss $ (66,399) $ (74,227) $ (91,813) $ (39,063) Allocation of net loss (Note 2): Investor Limited Partner (25,000 Units outstanding) $ (63,079) $ (70,516) $ (87,222) $ (37,109) Per Unit of Investor Limited Partner Interest $ (2.52) $ (2.82) $ (3.49) $ (1.49) Original Limited Partner $ (2,656) $ (2,969) $ (3,673) $ (1,563) General Partners $ (664) $ (742) $ (918) $ (391) 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 Six Months Ended June 30, 1996 1995 Operating activities: Net loss $ (91,813) $ (39,063) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 892,807 847,883 Decrease (increase) in cash restricted for tenant security deposits 30,102 (5,073) Decrease (increase) in prepaid expenses and other assets 76,469 (115,195) Decrease in accounts payable (46,420) (131,767) Decrease in accrued expenses and other liabilities (39,341) (75,304) Net cash provided by operating activities 821,804 481,481 Investing activities: Additions to fixed assets (346,180) (679,099) Funding of replacement reserve (20,239) (30,948) Decrease in required repair and replacement reserves - 313,275 Increase in other investments (294,435) (292,197) Increase in accounts payable related to fixed asset additions 830 - Net cash used in investing activities (660,024) (688,969) Financing activities: Distributions (208,685) (156,576) Principal payments on mortgage notes payable (163,369) (149,396) Net cash used in financing activities (372,054) (305,972) Net decrease in cash and cash equivalents (210,274) (513,460) Cash and cash equivalents, beginning of period 654,696 836,785 Cash and cash equivalents, end of period $ 444,422 $ 323,325 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 (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 June 30, 1996, its results of operations for the three and six months ended June 30, 1996 and 1995, and its cash flows for six months ended June 30, 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 and six months ended June 30, 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 six months ended June 30, 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 (87,222) (3,673) (918) (91,813) Distributions (198,250) (8,348) (2,087) (208,685) Balance at June 30, 1996 $(5,266,734) $(883,849) $(300,605) $(6,451,188) (3) Other Investment At June 30, 1996, the Partnership held an investment in commercial paper maturing within one year. The 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 are as follows: For the Three Months For the Six Months Ended June 30, Ended June 30, 1996 1995 1996 1995 Property management fees $ 81,210 $ 78,604 $160,892 $158,241 Expense reimbursements 50,366 26,185 97,480 45,857 Charged to operations $131,576 $104,789 $258,372 $204,098 KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements including those concerning Management s expectations regarding the future financial performance and future events. These forward-looking statements involve significant risk and uncertainties, including those described herein. Actual results may differ materially from those anticipated by such forward-looking statements. 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. The Partnership has spent approximately $346,000 for capital improvements at its properties to date this year. 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 are expected to continue throughout the year and 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 six months ended June 30, 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 $ 105,000 Items not requiring or (requiring) the use of operating funds: Tax basis depreciation and amortization 696,000 Principal payments on mortgage notes payable (163,000) Expenditures for capital improvements (346,000) Additions to working capital reserves (83,000) Cash Flow $ 209,000 Operations Cash Flow, before additions to working capital reserves, increased during the six months ended June 30, 1996, as compared to the six months ended June 30, 1995, primarily due to a decrease in capital improvement expenditures. Rental revenue during the three and six months ended June 30, 1996 compared to the same time period in 1995, increased as a result of increased rental rates at the Partnership's properties. Interest income, during the same time periods, decreased due to lower cash and cash equivalents available for investment. During the three and six months ended June 30, 1996, total expenses increased as compared to the three and six months ended June 30, 1995. The increase in operating expense is due to an increase in utility consumption as a result of the unusually harsh winter weather, prior years' insurance refunds received in 1995, and an increase in reimbursable expenses relating to the operation of the Partnership and its properties, including computer, accounting, travel, insurance, legal and payroll costs. The decrease in maintenance expense is due primarily to the capital improvement program instituted by management in 1995. Real estate taxes for the three and six months ended June 30, 1996, as compared to the three and six months ended June 30, 1995, decreased due to a 1995 real estate tax refund for Dorsey's Forge received in 1996. Depreciation expense increased in conjunction with capital improvement expenditures. General In accordance with Financial Accounting Standard 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: July , 1996