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 September 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 9. 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 September 30,December 31, 1997 1996 Multi-family apartment complexes, less accumulated depreciation of $19,714,282 and $18,281,640, respectively$10,822,108 $11,505,230 Cash and cash equivalents 415,199 468,735 Replacement reserve escrow 161,189 110,994 Cash restricted for tenant security deposits 205,134 183,758 Prepaid expenses and other assets (Note 3) 543,263 603,090 Deferred expenses, net of accumulated amortization of $201,499 and $167,081, respectively 318,085 352,503 Total assets $12,464,978$13,224,310 LIABILITIES AND PARTNERS' DEFICIT Liabilities: Mortgage notes payable $19,220,830 19,491,853 Accrued expenses and other liabilities 699,941 746,878 8 Total liabilities 19,920,771 20,238,731 Partners' deficit (Note 2): Investor Limited Partners (25,000 Units outstanding) (6,221,106) (5,801,804) Original Limited Partner (906,181) (888,525) General Partners (328,506) (324,092) Total Partners' deficit (7,455,793) (7,014,421) Total liabilities and Partners' deficit $12,464,978 $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 Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 Revenue: Rental $1,814,193 $1,642,708 $5,397,556 $4,895,567 Other income 12,893 15,061 40,055 46,805 Total revenue 1,827,086 1,657,769 5,437,611 4,942,372 Expenses: Operating (Note 3) 522,059 516,207 1,536,108 1,468,038 Maintenance 146,519 163,400 407,286 378,602 Real estate taxes 140,059 136,452 401,225 383,335 General and administrative (Note 3) 25,072 21,236 103,668 59,259 Management fees (Note 3) 91,176 82,819 266,327 243,711 Depreciation and amortization 504,023 477,649 1,467,060 1,370,456 Interest 424,600 432,583 1,279,939 1,303,361 Total expenses 1,853,508 1,830,346 5,461,613 5,206,762 Net loss $ (26,422) $ (172,577) $ (24,002)$ (264,390) Allocation of net loss (Note 2): Investor Limited Partners (25,000 Units outstanding)$ (25,101)$ (163,949)$ (22,802) $ (251,171) Per Unit of Investor Limited Partner Interest $ (1.00) $ (6.56) $ (.91) $ (10.05) Original Limited Partner $ (1,057) $ (6,902) $ (960)$ (10,575) General Partners $ (264) $ (1,726) $ (240)$ (2,644) 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 Nine Months Ended September 30, 1997 1996 Operating activities: Net loss $ (24,002)$ (264,390) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,467,060 1,370,456 Interest earned on replacement reserve escrow (3,774) - Changes in assets and liabilities: Decrease (increase) in cash restricted for tenant security deposits (21,376) 30,835 Decrease in prepaid expenses and other assets 59,827 47,188 Decrease in accrued expenses and other liabilities (41,854) (43,831) Net cash provided by operating activities 1,435,881 1,140,258 Investing activities: Additions to fixed assets (749,520) (692,205) Deposits to replacement reserve escrow (46,421) (46,422) Withdrawals from replacement reserve escrow - 40,272 Increase (decrease) in accounts payable related to fixed asset additions (5,083) 2,744 Net cash used in investing activities (801,024) (695,611) Financing activities: Distributions (417,370) (417,371) Principal payments on mortgage notes payable (271,023) (247,834) Net cash used in financing activities (688,393) (665,205) Net decrease in cash and cash equivalents (53,536) (220,558) Cash and cash equivalents, beginning of the period 468,735 654,696 Cash and cash equivalents, end of the period $ 415,199 $ 434,138 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, 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 necessary to present fairly the Partnership's financial position as of September 30, 1997, its results of operations for the three and nine months ended September 30, 1997 and 1996 and its cash flows for the nine months ended September 30, 1997 and 1996. Certain prior year balances have been reclassified to conform with the current year consolidated financial statement presentation. The results of operations for the three and nine months ended September 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 nine months ended September 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 loss (22,802) (960) (240) (24,002) Distributions (396,500) (16,696) (4,174) (417,370) Balance at September 30,1997 $(6,221,106)$(906,181)$(328,506)$(7,455,793) Continued KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued (3)Related Party Transactions The Partnership pays property management fees to an affiliate of the General Partners for management services. Pursuant to the management agreements, management fees are 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 administrative expenses. Amounts accrued or paid to the General Partners' affiliates were as follows: For the Three Months For the Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 Property management fees$ 91,176 $ 82,819 $266,327 $243,711 Expense reimbursements 42,655 48,456 136,478 145,936 Charged to operations $133,831 $131,275 $402,805 $389,647 Expense reimbursements due from affiliates of $5,949 and $0 are included in prepaid expenses and other assets at September 30, 1997 and December 31, 1996, respectively. 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 has spent approximately $750,000 to date and is expected 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 market. Renovations include the replacement of countertops, carpeting, appliances, asphalt repairs, and both interior and exterior building improvements. Operations Net loss decreased for the three and nine months ended September 30, 1997, as compared to the three and nine months ended September 30, 1996, as the increase in revenue more than offset the increase in expenses. Rental revenue increased for the three and nine months ended September 30, 1997, as compared to the three and nine months ended September 30, 1996, as a result of increased rental rates and average occupancy rates at all three of the Partnership's properties. Occupancy rates at Brookeville Apartments ("Brookeville") averaged 98% and 95% for the nine months ended September 30, 1997 and September 30, 1996, respectively. At Hannibal Grove ("Hannibal"), occupancy rates averaged 99% and 94% for the nine months ended September 30, 1997 and September 30, 1996, respectively. Occupancy rates at Dorsey's Forge Apartments ("Dorsey's") averaged 99% and 95% for the nine months ended September 30, 1997 and September 30, 1996, respectively. During the three and nine months ended September 30, 1997 as compared to the three and nine months ended September 30, 1996, total expenses increased, primarily due to operating, general and administrative and depreciation expenses. Operating expenses increased due to increased salary and payroll expense along with increases in advertising and leasing expenses,which have contributed to the higher occupancy rates discussed above. General and administrative expense increased as a result of legal costs related to the unsolicited tender offers made to purchased Partnership Units. Depreciation expense increased in conjunction with capital improvement expenditures. Maintenance expense increased during the nine months ended September 30, 1997 as compared to the nine months ended September 30, 1996, due to increases in landscaping, parking lot repairs,and interior building repairs at the Partnership's properties. 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: November 12, 1997