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, 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 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 Unaudited June 30, December 31, 1998 1997 Multi-family apartment complexes, less accumulated depreciation of $21,013,838 and $20,216,642, respectively$10,230,242$ 10,519,769 Cash and cash equivalents 701,265 552,221 Replacement reserve escrow 159,294 177,778 Cash restricted for tenant security deposits 205,437 202,691 Prepaid expenses and other assets 542,819 595,696 Deferred expenses, net of accumulated amortization of $235,916 and $212,971, respectively 283,668 306,613 Total assets $12,122,725$ 12,354,768 LIABILITIES AND PARTNERS' DEFICIT Liabilities: Mortgage notes payable $18,930,995$ 19,126,371 Accrued expenses and other liabilities (Note 3) 592,706 683,413 Total liabilities 19,523,701 19,809,784 Partners' deficit (Note 2): Investor Limited Partners (25,000 Units outstanding) (6,169,029)(6,220,367) Original Limited Partner (903,989) (906,151) General Partners (327,958) (328,498) Total Partners' deficit (7,400,976)(7,455,016) Total liabilities and Partners' deficit $12,122,725$ 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 (Unaudited) For the Three Months For the Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 Revenue: Rental $1,875,274$1,815,168 $3,746,410$3,583,363 Other income 15,578 17,346 30,413 27,162 Total revenue 1,890,852 1,832,514 3,776,8233,610,525 Expenses: Operating (Note 3) 495,483 502,931 1,013,600 1,014,049 Maintenance 151,299 170,715 237,251 260,767 Real estate taxes 137,738 126,325 277,185 261,166 General and administrative (Note 3) 21,471 24,829 36,188 78,596 Management fees (Note 3) 94,124 89,753 186,940 175,151 Depreciation and amortization 409,113 490,834 820,141 963,037 Interest 415,160 426,671 838,450 855,339 Total expenses 1,724,388 1,832,058 3,409,755 3,608,105 Net income $ 166,464$ 456 $ 367,068 $ 2,420 Allocation of net income (Note 2): Investor Limited Partners (25,000 Units outstanding) $ 158,141$ 433 $ 348,715$ 2,299 Investor Limited Partners Per Unit $ 6.33 $ .02 $ 13.95 $ .09 Original Limited Partner $ 6,659$ 19 $ 14,683 $ 97 General Partners $ 1,664$ 4 $ 3,670 $ 24 The accompanying notes are an integral part of the consolidated financial statements. KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Six Months Ended June 30, 1998 1997 Operating activities: Net income $ 367,068 $ 2,420 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 820,141 963,037 Interest earned on replacement reserve escrow (1,070) (3,774) Changes in assets and liabilities: Increase in cash restricted for tenant security deposits (2,746) (14,370) Decrease in prepaid expenses and other assets 52,877 99,082 Decrease in accrued expenses and other liabilities (91,415) (89,644) Net cash provided by operating activities 1,144,855 956,751 Investing activities: Additions to fixed assets (507,669) (460,928) Deposits to replacement reserve escrow (30,948) (30,947) Withdrawals from replacement reserve escrow 50,502 - Increase in accrued expenses and other liabilities related to fixed asset additions 708 - Net cash used in investing activities (487,407) (491,875) Financing activities: Distributions (313,028) (208,685) principal payments on mortgage notes payable(195,376) (178,654) Net cash used in financing activities (508,404) (387,339) Net increase in cash and cash equivalents 149,044 77,537 Cash and cash equivalents, beginning of period552,221 468,735 Cash and cash equivalents, end of period $ 701,265 $ 546,272 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 necessary to present fairly the Partnership's consolidated financial position as of June 30, 1998, its results of operations for the three and six months ended June 30, 1998 and 1997, and its cash flows for six months ended June 30, 1998 and 1997. Certain prior period balances have been reclassified to conform with current period consolidated financial statement presentation. The results of operations for the three and six months ended June 30, 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 six months ended June 30, 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 348,715 14,683 3,670 367,068 Distributions (297,377) (12,521) (3,130) (313,028) Balance at June 30, 1998 $(6,169,029)$(903,989)$(327,958)$(7,400,976) 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 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 Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 Property management fees $94,124 $ 89,753 $186,940 $175,151 Expense reimbursements 41,523 42,745 61,467 93,823 Charged to operations$135,647 $132,498 $248,407 $268,974 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 has spent approximately $508,000 to date and is expected to spend approximately $1,037,000 for capital improvements at its properties in 1998 to remain competitive in their respective markets. These improvements 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. Financial Accounting Standards Board Statement No. 130 ("FAS 130") "Reporting Comprehensive Income" is effective for fiscal years beginning after December 31, 1997, although earlier application is permitted. FAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. Financial Accounting Standards Board Statement No. 131 ("FAS 131") "Disclosures about Segments of an Enterprise and Related Information" establishes standards for disclosing measures for profit or loss and total assets for each reportable segment. FAS 131 is effective for fiscal years beginning after December 15, 1997. The Partnership does not believe that the implementation of FAS 130 or FAS 131 will have a material impact on the Partnership's financial statements. Operations Net income increased for the three and six months ended June 30, 1998, as compared to the three and six months ended June 30, 1997, with an increase in total revenue and a decrease in total expenses. Total revenue increased for the three and six months ended June 30, 1998, as compared to the three and six months ended June 30, 1997, due to increases in average occupancy rates at all of the Partnership's properties. Occupancy rates for the six months ended June 30, 1998 and 1997 at Brookeville, Hannibal Grove, and Dorsey's Forge Apartments averaged 99%, 100%, and 100%, and 98%, 99%, and 99%, respectively. In addition, rental rate increases were implemented at all the Partnership's properties during the six months ended June 30, 1998. Continued KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY Operations, Continued Total expenses decreased for the three and six months ended June 30, 1998, as compared to the three and six months ended June 30, 1997, as a result of lower maintenance, general and administrative and depreciation expenses. Maintenance expense decreased due to 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 offers 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: August 11, 1998