UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 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 The total number of pages in this document is 10. 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 March 31, December 31, 1997 1996 Multi-family apartment complexes, less accumulated depreciation of $18,742,370 and $18,281,640, respectively $11,161,896 $11,505,230 Cash and cash equivalents 478,659 468,735 Replacement reserve escrow 126,468 110,994 Cash restricted for tenant security deposits 185,338 183,758 Prepaid expenses and other assets 570,290 603,090 Deferred expenses, net of accumulated amortization of $178,554 and $167,081, respectively 341,030 352,503 Total assets $12,863,681 $13,224,310 LIABILITIES AND PARTNERS' DEFICIT Liabilities: Mortgage notes payable $19,403,524 $19,491,853 Accounts payable 4,297 22,397 Due to affiliates (Note 3) 24,517 - Accrued expenses and other liabilities 652,485 724,481 Total liabilities 20,084,823 20,238,731 Partners' deficit (Note 2): Investor Limited Partners (25,000 Units outstanding) (5,998,188) (5,801,804) Original Limited Partner (896,795) (888,525) General Partners (326,159) (324,092) Total Partners' deficit (7,221,142) (7,014,421) Total liabilities and Partners' deficit $12,863,681 $13,224,310 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, 1997 1996 Revenue: Rental $1,768,195 $1,623,884 Other income 9,816 16,076 Total revenue 1,778,011 1,639,960 Expenses: Operating (Note 3) 511,118 479,505 Maintenance 90,052 75,123 Real estate taxes 134,841 125,925 Management fees (Note 3) 85,398 79,682 General and administrative (Note 3) 53,767 26,057 Depreciation and amortization 472,203 442,780 Interest 428,668 436,302 Total expenses 1,776,047 1,665,374 Net income (loss) $ 1,964 $ (25,414) Allocation of net income (loss) (Note 2): Investor Limited Partner Interest (25,000 Units outstanding) $ 1,866 $ (24,143) Per Unit of Investor Limited Partner Interest $ .07 $ (.97) Original Limited Partner $ 78 $ (1,017) General Partners $ 20 $ (254) 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, 1997 1996 Operating activities: Net income (loss) $ 1,964 $ (25,414) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 472,203 442,780 Changes in assets and liabilities: Decrease (increase) in cash restricted for tenant security deposits (1,580) 33,677 Decrease in prepaid expenses and other assets 32,800 54,714 Decrease in accounts payable (9,100) (20,167) Increase in due to affiliates 24,517 - Decrease in accrued expenses and other liabilities (71,996) (26,948) Net cash provided by operating activities 448,808 458,642 Investing activities: Decrease in accounts payable for fixed asset additions (9,000) - Additions to fixed assets (117,396) (33,749) Funding to replacement reserve escrow (15,474) (15,259) Increase in other investments - (294,435) Net cash used in investing activities (141,870) (343,443) Financing activities: Distributions (208,685) (208,685) Principal payments on mortgage notes payable (88,329) (80,771) Net cash used in financing activities (297,014) (289,456) Net increase (decrease) in cash and cash equivalents 9,924 (174,257) Cash and cash equivalents, beginning of period 468,735 654,696 Cash and cash equivalents, end of period $ 478,659 $ 480,439 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, 1996 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, 1997 and its results of operations and its cash flows for the three months ended March 31, 1997 and 1996. Certain prior period balances have been reclassified to conform with current period financial statement preparation. The results of operations for the three months ended March 31, 1997 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, 1997 is as follows: Investor Original Total Limited Limited General Partners' Partners Partner Partners Deficit Balance at December 31, 1996 $(5,801,804) $(888,525) $(324,092) $(7,014,421) Net income 1,866 78 20 1,964 Distributions (198,250) (8,348) (2,087) (208,685) Balance at March 31, 1997 $(5,998,188) $(896,795) $(326,159) $(7,221,142) (3) 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. These management agreements were sold to BRI OP Limited Partnership, a publicly traded real estate investment trust and an affiliate of the General Partners, on February 28, 1997. 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, 1997 1996 Property management fees $ 85,398 $ 79,682 Expense reimbursements 51,078 47,114 Charged to operations $136,476 $126,796 Due to affiliates consisted of expense reimbursements of $24,517 at March 31, 1997. 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. The Partnership is planning to spend approximately $1,043,000 for capital improvements at its properties in 1997. In order to fund the improvements the Partnership will use its existing cash reserves, reserves for replacement and cash flow from operations. The Partnership believes that the improvements are necessary to compete with current market conditions, produce quality rental units and absorb excess demand at the properties' respective locations and to both maintain and increase its current occupancy levels. Renovations include the replacement of countertops, carpeting, appliances, asphalt repairs, and both interior and exterior building improvements. 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, 1997. The General Partners provide 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 $ 66,000 Items not requiring or (requiring) the use of operating funds: Tax basis depreciation and amortization 408,000 Principal payments on mortgage notes payable (88,000) Expenditures for capital improvements (117,000) Additions to working capital reserves (60,000) Cash Flow $ 209,000 Operations Cash Flow, as calculated by Section 8.2(a) of the Partnership Agreement, before additions to working capital reserves, decreased during the three months ended March 31, 1997, as compared to the three months ended March 31, 1996, primarily due to an increase in capital improvement expenditures. Total revenue for the first quarter of 1997, as compared to the first quarter of 1996, increased due to increases in rental rates and average occupancy rates at all the Partnership's properties. Occupancy rates for the first quarter of 1997 and 1996 for Brookeville, Hannibal Grove ("Hannibal"), and Dorsey's Forge ("Dorsey's") Apartments averaged 98%, 99%, and 98%, and 95%, 93%, and 93%, respectively. Interest income, during the same time period, decreased as a result of lower cash and cash equivalents available for investment. During the three months ended March 31, 1997, as compared to the three months ended March 31, 1996, total expenses increased, with higher operating expenses, real estate taxes, maintenance, general and administrative and depreciation expenses. Operating expense increased due to an increase in advertising and leasing expenses which resulted in the higher occupancy rates discussed above. Real estate taxes increased due to higher property assessments at Brookeville and Hannibal and also because of a real estate tax refund received in 1996 for Dorsey's. Maintenance expense increased as landscaping, parking lot repairs, and interior building repairs were completed at the Partnership's properties. General and administrative expense increased as a result of legal costs related to the recent unsolicited tender offer made to purchase Partnership Units. Depreciation expense increased in conjunction with capital improvement expenditures. 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/Wayne H. Zarozny Wayne H. Zarozny Treasurer and Chief Accounting Officer of The Krupp Corporation, a General Partner DATE: May 13, 1997