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 THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30,1997 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 June 30, December 31, 1997 1996 Multi-family apartment complexes, less accumulated depreciation of $19,221,732 and $18,281,640, respectively$11,026,066 $11,505,230 Cash and cash equivalents 546,272 468,735 Replacement reserve escrow 145,715 110,994 Cash restricted for tenant security deposits 198,128 183,758 Prepaid expenses and other assets 504,008 603,090 Deferred expenses, net of accumulated amortization of $190,026 and $167,081, respectively 329,558 352,503 Total assets $12,749,747 $13,224,310 LIABILITIES AND PARTNERS' DEFICIT Liabilities: Mortgage notes payable $19,313,199 $19,491,853 Accrued expenses and other liabilities (Note 3) 657,234 746,878 Total liabilities 19,970,433 20,238,731 Partners' deficit (Note 2): Investor Limited Partners (25,000 Units outstanding) (5,997,755) (5,801,804) Original Limited Partner (896,776) (888,525) General Partners (326,155) (324,092) Total Partners' deficit (7,220,686) (7,014,421) Total liabilities and Partners' deficit $12,749,747 $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 For the Six Months Ended June 30, Ended June30, 1997 1996 1997 1996 Revenue: Rental $1,815,168 $1,628,975 3,583,363 $3,252,859 Other income 17,346 15,668 27,162 31,744 Total revenue1,832,514 1,644,643 3,610,525 3,284,603 Expenses: Operating (Note 3)502,931 472,326 1,014,049 951,831 Maintenance 170,715 140,079 260,767 215,202 Real estate taxes 126,325 120,958 261,166 246,883 General and administrative (Note 3) 24,829 11,966 78,596 38,023 Management fees (Note 3) 89,753 81,210 175,151 160,892 Depreciation and amortization 490,834 450,027 963,037 892,807 Interest 426,671 434,476 855,339 870,778 Total expenses 1,832,058 1,711,042 3,608,105 3,376,416 Net income (loss)$ 456 $ (66,399) $ 2,420 $ (91,813) Allocation of net income (loss) (Note 2): Investor Limited Partner (25,000 Units outstanding) $433 $(63,079) $ 2,299 $ (87,222) Per Unit of Investor Limited Partner Interest $.02 $ (2.52) $ .09 $ (3.49) Original Limited Partner $19 $(2,656) $ 97 $ (3,673) General Partners $ 4 $ (664) $ 24 $ (918) 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, 1997 1996 Operating activities: Net income (loss) $ 2,420 $ (91,813) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 963,037 892,807 Interest earned on replacement reserve escrow (3,774) - Changes in assets and liabilities: Decrease (increase) in cash restricted for tenant security deposits (14,370) 30,102 Decrease in prepaid expenses and other assets 99,082 76,469 Decrease in accrued expenses and other liabilities (89,644) (85,761) Net cash provided by operating activities 956,751 821,804 Investing activities: Additions to fixed assets (460,928) (346,180) Deposits to replacement reserve escrow (30,947) (30,947) Withdrawals from replacement reserve escrow - 10,708 Increase in other investments - (294,435) Increase in accounts payable related to fixed asset additions - 830 Net cash used in investing activities (491,875) (660,024) Financing activities: Distributions (208,685) (208,685) Principal payments on mortgage notes payable (178,654) (163,369) Net cash used in financing activities (387,339) (372,054) Net increase (decrease) in cash and cash equivalents 77,537 (210,274) Cash and cash equivalents, beginning of period 468,735 654,696 Cash and cash equivalents, end of period $ 546,272 $ 444,422 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 June 30, 1997, its results of operations for the three and six months ended June 30, 1997 and 1996, and its cash flows for six months ended June 30, 1997 and 1996. 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, 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 six months ended June 30, 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 2,299 97 24 2,420 Distributions (198,250) (8,348) (2,087) (208,685) Balance at June 30, 1997 $(5,997,755)$(896,776)$(326,155)$(7,220,686) Continued KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (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 subsidiary of Berkshire Realty Company Inc., 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 For the Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 Property management fees $ 89,753 $ 81,210 $175,151 $160,892 Expense reimbursements 42,745 50,366 93,823 97,480 Charged to operations $132,498 $131,576 $268,974 $ 258,322 Expense reimbursements due to affiliates of $3,258 is included in accrued expenses and other liabilities at June 30, 1997. 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. The Partnership is planning to spend approximately $1,083,000 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 in the current marketplace. 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 six months ended June 30, 1997. The General Partners provide the information below to meet requirements of the Partnership Agreement. 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 $ 149,000 Items not requiring (requiring) the use of operating funds: Tax basis depreciation and amortization 817,000 Principal payments on mortgage notes payable (179,000) Expenditures for capital improvements (461,000) Additions to working capital reserves (117,000) Cash Flow $ 209,000 Continued KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY Operations Cash Flow, as calculated by Section 8.2(a)of the Partnership Agreement, before additions to working capital reserves, increased during the six months ended June 30, 1997, as compared to the six months ended June 30, 1996, as the increase in net income, plus depreciation and amortization, more than offset the increase in capital improvements. Rental revenue during the three and six months ended June 30, 1997 as compared to the same periods in 1996, increased as a result of increased rental rates and average occupancy rates at all of the Partnership's properties. Occupancy rates at Brookeville Apartments averaged 98% and 95% for the six months ended June 30, 1997 and June 30, 1996, respectively. At Hannibal Grove Apartments ("Hannibal"), occupancy rates averaged 99% and 93% for the six months ended June 30, 1997 and June 30, 1996, respectively. Occupancy rates at Dorsey's Forge Apartments ("Dorsey's") averaged 99% and 92% for the six months ended June 30, 1997 and June 30, 1996, respectively. During the six months ended June 30, 1997, as compared to the six months ended June 30, 1996, total expenses increased, primarily due to operating expenses 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. 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 unsolicited tendor offers 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: August 11, 1997