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 March 31, 1998 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 March 31,December 31, 1998 1997 Multi-family apartment complexes, less accumulated depreciation of $20,616,197 and $20,216,642, respectively $10,380,510 $10,519,769 Cash and cash equivalents 248,228 552,221 Replacement reserve escrow 143,820 177,778 Cash restricted for tenant security deposits 528,324 202,691 Prepaid expenses and other assets 542,683 595,696 Deferred expenses, net of accumulated amortization of $224,444 and $212,971, respectively 295,140 306,613 Total assets $12,138,705$12,354,768 LIABILITIES AND PARTNERS' DEFICIT Liabilities: Mortgage notes payable $19,029,776$19,126,371 Accounts payable 57,373 - Accrued expenses and other liabilities 618,996 683,413 Total liabilities 19,706,145 19,809,784 Partners' deficit (Note 2): Investor Limited Partners (25,000 Units outstanding) (6,327,170)(6,220,367) Original Limited Partner (910,648) (906,151) General Partners (329,622) (328,498) Total Partners' deficit (7,567,440)(7,455,016) Total liabilities and Partners'deficit$12,138,705$12,354,768 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, 1998 1997 Revenue: Rental $1,871,136 $1,768,195 Other income 14,835 9,816 Total revenue 1,885,971 1,778,011 Expenses: Operating (Note 3) 499,326 511,118 Maintenance 85,952 90,052 Real estate taxes 139,447 134,841 Management fees (Note 3) 92,816 85,398 General and administrative (Note 3) 33,508 53,767 Depreciation and amortization 411,028 472,203 Interest 423,290 428,668 Total expenses 1,685,367 1,776,047 Net income $ 200,604 $ 1,964 Allocation of net income (Note 2): Investor Limited Partners (25,000 Units outstanding) $ 190,574 $ 1,866 Investor Limited Partners Per Unit $ 7.62 $ .07 Original Limited Partner $ 8,024 $ 78 General Partners $ 2,006 $ 20 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, 1998 1997 Operating activities: Net income $ 200,604 $ 1,964 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 411,028 472,203 Interest earned on replacement reserve escrow (1,070) - Changes in assets and liabilities: Increase in cash restricted for tenant security deposits (325,633) (1,580) Decrease in prepaid expenses and other assets 53,013 32,800 Increase (decrease) in accounts payable 33,183 (9,100) Increase in due to affiliates - 24,517 Decrease in accrued expenses and other liabilities (64,417) (71,996) Net cash provided by operating activities 306,708 448,808 Investing activities: Increase (decrease) in accounts payable for fixed asset additions 24,190 (9,000) Additions to fixed assets (260,296) (117,396) Deposits to replacement reserve escrow (15,474) (15,474) Withdrawals from replacement reserve escrow 50,502 - Net cash used in investing activities (201,078) (141,870) Financing activities: Distributions (313,028) (208,685) Principal payments on mortgage notes payable (96,595) (88,329) Net cash used in financing activities (409,623) (297,014) Net increase (decrease) in cash and cash equivalents (303,993) 9,924 Cash and cash equivalents, beginning of period 552,221 468,735 Cash and cash equivalents, end of period$ 248,228 $ 478,659 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, 1997 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, 1998 and its results of operations and its cash flows for the three months ended March 31, 1998 and 1997. The results of operations for the three months ended March 31, 1998 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, 1998 is as follows: Investor Original Total Limited Limited General Partners' Partners Partner Partners Deficit Balance at December 31, 1997 $(6,220,367) $(906,151)$(328,498)$(7,455,016) Net income 190,574 8,024 2,006 200,604 Distributions (297,377) (12,521) (3,130) (313,028) Balance at March 31, 1998 $(6,327,170)$(910,648)$(329,622)$(7,567,440) 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. The affiliate of the General Partners sold its management agreements 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 Ended March 31, 1998 1997 Property management fees $ 92,816 $ 85,398 Expense reimbursements 19,944 51,078 Charged to operations $112,760 $136,476 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 $260,000 to date and is expected to spend approximately $995,000 for capital improvements at its properties in 1998. The Partnership believes that the improvements are necessary to compete in its current markets, produce quality rental units and absorb excess demands at the properties' respective locations and to both maintain and increase current occupancy levels. Renovations include the replacement of countertops, carpeting, appliances, pavement upgrades and both interior and exterior building improvements. The Partnership expects to fund these improvements from established reserves and cash generated from property operations. Operations Net income increased for the three months ended March 31, 1998, as compared to the three months ended March 31, 1997, with an increase in total revenue and a decrease in total expenses. Total revenue increased for the three months ended March 31, 1998, as compared to the three months ended March 31, 1997, due to increases in average occupancy rates at all of the Partnership's properties. Occupancy rates for the first quarters of 1998 and 1997 at Brookeville, Hannibal Grove, and Dorsey's Forge Apartments averaged 100%, 100%, and 99%, and 98%, 99%, and 98%, respectively. Other income increased as a result of higher interest earned on the replacement reserve escrow account. Total expenses decreased for the three months ended March 31, 1998, as compared to the three months ended March 31, 1997, as a result of lower maintenance, general and administrative and depreciation expenses. Maintenance expense decreased due to completion of landscaping, snow removal expenditures and interior building repairs completed at the Partnership's properties during 1997. General and administrative expense decreased as a result of 1997 legal costs relating to the unsolicited tender offer to purchase Partnership Units. Depreciation expense decreased as fixed asset additions purchased in previous years became fully depreciated. 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, 1998