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, 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) September 30,December 31, 1998 1997 Multi-family apartment complexes, less accumulated depreciation of $21,510,208 and $20,216,642, respectively$ 9,965,151$10,519,769 Cash and cash equivalents 586,146 552,221 Replacement reserve escrow 140,712 177,778 Cash restricted for tenant security deposits 207,387 202,691 Prepaid expenses and other assets 617,924 595,696 Deferred expenses, net of accumulated amortization of $247,388 and $212,971, respectively 272,196 306,613 Total assets $ 11,789,516$12,354,768 LIABILITIES AND PARTNERS' DEFICIT Liabilities: Mortgage notes payable $ 18,829,979$19,126,371 Accrued expenses and other liabilities (Note 3) 607,644 683,413 Total liabilities 19,437,623 19,809,784 Partners' deficit (Note 2): Investor Limited Partners (25,000 Units outstanding) (6,403,801) (6,220,367) Original Limited Partner (913,877) (906,151) General Partners (330,429) (328,498) Total Partners' deficit (7,648,107) (7,455,016) Total liabilities and Partners' deficit$11,789,516 $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 Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 Revenue: Rental $1,878,976 $1,814,193 $5,625,386 $5,397,556 Other income 19,141 12,893 49,554 40,055 Total revenue 1,898,117 1,827,086 5,674,940 5,437,611 Expenses: Operating (Note 3) 479,416 522,059 1,493,016 1,536,108 Maintenance 178,257 146,519 415,508 407,286 Real estate taxes 139,657 140,059 416,842 401,225 General and administrative (Note 3) 16,649 25,072 52,837 103,668 Management fees (Note 3) 94,529 91,176 281,469 266,327 Depreciation and amortization 507,842 504,023 1,327,9831,467,060 Interest 415,868 424,600 1,254,318 1,279,939 Total expenses 1,832,218 1,853,508 5,241,973 5,461,613 Net income (loss) $ 65,899$ (26,422) $ 432,967 $ (24,002) Allocation of net income (loss) (Note 2): Investor Limited Partners (25,000 Units outstanding) $ 62,603$ (25,101) $411,318 $ (22,802) Investor Limited Partners Per Unit $ 2.50$ (1.00) $ 16.45 $ (.91) Original Limited Partner $ 2,636$ (1,057) $17,319 $ (960) General Partners $ 660 $ (264) $4,330 $ (240) 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 Nine Months Ended September 30, 1998 1997 Operating activities: Net income (loss) $ 432,967 $(24,002) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 1,327,983 1,467,060 Interest earned on replacement reserve escrow (2,624) (3,774) Changes in assets and liabilities: Increase in cash restricted for tenant security deposits (4,696) (21,376) Decrease (increase) in prepaid expenses and other assets (22,228) 59,827 Decrease in accrued expenses and other liabilities (75,769) (41,854) Net cash provided by operating activities 1,655,633 1,435,881 Investing activities: Additions to fixed assets (738,948)(749,520) Deposits to replacement reserve escrow (46,421)(46,421) Withdrawals from replacement reserve escrow 86,111 - Decrease in accrued expenses and other liabilities related to fixed asset additions - (5,083) Net cash used in investing activities (699,258) (801,024) Financing activities: Distributions (626,058) (417,370) Principal payments on mortgage notes payable(296,392) (271,023) Net cash used in financing activities (922,450) (688,393) Net increase (decrease) in cash and cash equivalents 33,925 (53,536) Cash and cash equivalents, beginning of period 552,221 468,735 Cash and cash equivalents, end of period $ 586,146 $ 415,199 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 September 30, 1998, its results of operations for the three and nine months ended September 30, 1998 and 1997, and its cash flows for nine months ended September 30, 1998 and 1997. The results of operations for the three and nine months ended September 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 nine months ended September 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 411,318 17,319 4,330 432,967 Distributions (594,752) (25,045) (6,261) (626,058) Balance at September 30, 1998$(6,403,801)$(913,877)$(330,429)$(7,648,107) 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 Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 Property management fees$ 94,529 $ 91,176 $281,469 $266,327 Expense reimbursements 41,522 42,655 102,989 136,478 Charged to operations$136,051 $133,831 $384,458 $402,805 Expense reimbursements due from affiliates of $25,847 are included in prepaid expenses and other assets at September 30, 1998. 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 $739,000 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 General Partners do not believe that the implementation of FAS 130 or FAS 131 will have a material impact on the Partnership's financial statements. The General Partners of the Partnership have conducted an assessment of the Partnership's core internal and external computer information systems and have taken the further necessary steps to understand the nature and extent of the work required to make its systems Year 2000 ready in those situations in which it is required to do so. The Year 2000 readiness issue concerns the inability of computerized information systems to accurately calculate, store or use a date after 1999. This could result in a system failure or miscalculations causing disruptions of operations. The Year 2000 issue affects virtually all companies and all organizations. In this regard, the General Partners of the Partnership, along with certain affiliates, began a computer systems project in 1997 to significantly upgrade its existing hardware and software. The General Partners completed the testing and conversion of the financial accounting operating systems in February 1998. As a result, the General Partners have generated operating efficiencies and believe their financial accounting operating systems are Year 2000 ready. The Partnership incurred hardware costs as well as consulting and other expenses related to the infrastructure and facilities enhancements necessary to complete the upgrade and prepare for the Year 2000. There are no other systems or software that the Partnership is using at the present time. Continued KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY Liquidity and Capital Resources, Continued The General Partners of the Partnership are in the process of evaluating the potential adverse impact that could result from the failure of material third-party service providers (including but not limited to its banks and telecommunications providers) and significant vendors to be Year 2000 ready. No estimate can be made at this time as to the impact of the readiness of such third parties. Operations Net income increased for the three and nine months ended September 30, 1998, as compared to the three and nine months ended September 30, 1997, with an increase in total revenue and a decrease in total expenses. Total revenue increased for the three and nine months ended September 30, 1998, as compared to the three and nine months ended September 30, 1997, primarily due to rental rate increases implemented at all of the Partnership's properties during the nine months ended September 30, 1998. Total expenses decreased for the three months ended September 30, 1998, as compared to the three months ended September 30, 1997, as the decrease in operating expense more than offset the increase in maintenance expense. The decrease in operating expense is due to a reduction in contingent insurance premiums at the Partnership's properties, due to a favorable claim history. Maintenance expense increased due to a rise in landscaping expenditures at Brookeville Apartments. Total expenses decreased for the nine months ended September 30, 1998, as compared to the nine months ended September 30, 1997, with decreases in operating, general and administrative and depreciation expenses. Operating expense decreased due to a reduction in insurance expense, as discussed above. General and administrative expenses 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) BYBy:/s/Wayne H. Zarozny Wayne H. Zarozny Treasurer and Chief Accounting Officer of The Krupp Corporation, a General Partner DATE: November 10, 1998