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 31,1999 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.) One Beacon Street, Boston, Massachusetts 02108 (Address of principal executive offices) (Zip Code) (617) 523-7722 (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 11. 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) March 31,December 31, 1999 1998 Multi-family apartment complexes, net of accumulated depreciation of $22,377,293 and $21,977,268, respectively$9,568,041$9,784,836 Cash and cash equivalents 637,597 932,065 Replacement reserve escrow 178,155 160,954 Cash restricted for tenant security deposits 231,167 229,416 Prepaid expenses and other assets 567,079 614,911 Deferred expenses, net of accumulated amortization of $270,333 and $258,861, respectively 249,251 260,723 Total assets $11,431,290$ 11,982,905 LIABILITIES AND PARTNERS' DEFICIT Liabilities: Mortgage notes payable $ 18,621,037$18,726,677 Accrued expenses and other liabilities 567,666 601,319 Due to affiliates (Note 3) 16,296 199,500 Total liabilities 19,204,999 19,527,496 Partners' deficit (Note 2): Investor Limited Partners (25,000 Units outstanding) (6,523,123)(6,305,460) Original Limited Partner (918,901) (909,737) General Partners (331,685) (329,394) Total Partners' deficit (7,773,709)(7,544,591) Total liabilities and Partners'deficit$11,431,290$11,982,905 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 Ended March 31, 1999 1998 Revenue: Rental $1,889,716 $1,871,136 Other income 15,460 14,835 Total revenue 1,905,176 1,885,971 Expenses: Operating (Note 3) 523,865 499,326 Maintenance 101,062 85,952 Real estate taxes 139,111 139,447 General and administrative (Note 3) 33,552 33,508 Management fees (Note 3) 96,609 92,816 Depreciation and amortization 411,497 411,028 Interest 411,185 423,290 Total expenses 1,716,881 1,685,367 Net income $ 188,295 $ 200,604 Allocation of net income (Note 2): Investor Limited Partners (25,000 Units outstanding) $ 178,880 $ 190,574 Investor Limited Partners Per Unit $ 7.16 $ 7.62 Original Limited Partner $ 7,532 $ 8,024 General Partners $ 1,883 $ 2,006 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 Three Months Ended March 31, 1999 1998 Cash flows from operating activities: Net income $ 188,295 $ 200,604 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 411,497 411,028 Interest earned on replacement reserve escrow (1,727) (1,070) Changes in assets and liabilities: Increase in cash restricted for tenant security deposits (1,751) (325,633) Decrease in prepaid expenses and other assets 47,832 53,013 Decrease in due to affiliates (183,204) - Decrease in accrued expenses and other liabilities (33,653) (31,234) Net cash provided by operating activities 427,289 306,708 Cash flows from investing activities: Increase in accrued expenses and other liabilities related to fixed asset additions - 24,190 Additions to fixed assets (183,230) (260,296) Deposits to replacement reserve escrow (15,474) (15,474) Withdrawals from replacement reserve escrow - 50,502 Net cash used in investing activities (198,704) (201,078) Cash flows from financing activities: Distributions (417,413) (313,028) Principal payments on mortgage notes payable (105,640) (96,595) Net cash used in financing activities (523,053) (409,623) Net decrease in cash and cash equivalents(294,468) (303,993) Cash and cash equivalents, beginning of period 932,065 552,221 Cash and cash equivalents, end of period$ 637,597$ 248,228 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, 1998 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, 1999 and its results of operations and its cash flows for the three months ended March 31, 1999 and 1998. Certain prior period balances have been reclassified to conform with current period consolidated financial statement presentation. The results of operations for the three months ended March 31, 1999 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, 1999 is as follows: Investor Original Total Limited Limited General Partners' Partners Partner Partners Deficit Balance at December 31,1998$(6,305,460)$(909,737)$(329,394)$(7,544,591) Net income 178,880 7,532 1,883 188,295 Distributions (396,543) (16,696) (4,174) (417,413) Balance at March 31, 1999$(6,523,123)$(918,901)$(331,685)$(7,773,709) 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 paid to the General Partners' affiliates were as follows: For the Three Months Ended March 31, 1999 1998 Property management fees $ 96,609 $ 92,816 Expense reimbursements 41,570 19,944 Charged to operations $138,179 $112,760 Due to affiliates consisted of expense reimbursements of $16,296 and $199,500 at March 31, 1999 and December 31, 1998, 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 distribution paid in February, 1999 was increased from an annual rate of $23.79 per Unit, to $31.72 per Unit. In the first quarter of 1999, occupancy rates for the Partnership's properties ("Properties") declined from the historically high levels achieved in 1998 of between 99% and 100% as of December 31, 1998 to approximately 94% (in the case of the Hannibal Grove Apartments), 97% (in the case of the Brookeville Apartments) and 97.5% (in the case of the Dorsey's Forge Apartments) as of March 31, 1999. Moreover, the managing agent for the Properties(an affiliate of the General Partners) ("Property Manager") granted increased rental concessions to tenants in order to achieve these occupancy rates. The Property Manager believes that this decline in occupancy rates is attributable to significantly increased competition resulting from newly constructed or renovated housing entering the markets served by the Properties, a trend that the Property Manager believes is expected to continue over the next several years. In Columbus, Ohio, approximately 8,600 new units have been constructed in the past eighteen months or are currently under construction, and in Columbia, Maryland, approximately 961 newly renovated units have entered the market in the past year, with an additional 974 units currently undergoing renovation. In March 1999, the Property Manager prepared a capital improvement plan(the "Capital Plan") setting forth capital improvements that it believes a third party purchaser of the Properties would regard as necessary to maintain the Properties' current occupancy and rent levels (subject to inflationary increases), in light of the increased competition in the markets served by the Partnership. These capital improvements include interior rehabilitation, replacement of windows, roofs, piping and HVAC systems, as well as improvements to parking lots, landscaping and exterior painting (collectively, the "Improvements"). The aggregate cost of implementing the Capital Plan is estimated to be approximately $10,000,000. The Property Manager has advised the General Partners that in view of the new or newly renovated housing alternatives in the areas served by the Properties, the current occupancy rates enjoyed by the Properties may not be sustained unless the Capital Plan is implemented, particularly since many of the newer residential units will have amenities such as fitness centers, tennis courts and swimming pools that the Properties do not. Continued KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY Liquidity and Capital Resources, Continued The General Partners have not yet determined the Partnership's response to the challenges presented by these market developments. However, the Property Manager believes that prompt and full implementation of the Capital Plan by the Partnership may not be practicable because it would require the investment of additional equity capital, additional borrowings and/or the discontinuation of future cash distributions from the Partnership. 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. Costs incurred by the Partnership are not significant to date. There are no other systems or software that the Partnership is using at the present time. The General Partners of the Partnership are currently in the process of identifying, evaluating and remedying the Partnership's Year 2000 compliance issues with respect to its non-financial systems, such as computer controlled elevators, boilers, chillers or other miscellaneous systems. The General Partners are in the process of completing the Partnership's Year 2000 compliance initiatives at its properties. Based on their identification and assessment efforts to date, the General Partners believe that certain of the computer equipment and software the Partnership currently uses will require modification or replacement. However, the General Partners do not believe that the future efforts to achieve the Partnership's Year 2000 compliance initiatives will result in material cost to the Partnership or significantly interrupt services or operations. The General Partners 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. However, if any of the third party service providers cease to conduct business due to Year 2000 related problems, the General Partners expect to be able to contract with alternate providers without experiencing any material adverse effects on the Partnership's financial condition and results of operations. The Partnership is in the process of coordinating their contingency plan with the property manager in charge of operations. Operations Net income decreased for the three months ended March 31, 1999, as compared to the three months ended March 31, 1998, as the increase in total expenses more than offset the increase in total revenue. Continued KRUPP REALTY FUND, LTD. - III AND SUBSIDIARY Operations, Continued While total revenue increased for the three months ended March 31, 1999, as compared to the three months ended March 31, 1998, primarily due to rental rate increases implemented at all the Partnership's properties, the increases achieved have not been significant as had been planned. Total expenses increased for the three months ended March 31, 1999, as compared to the three months ended March 31, 1998, as a result of increases in operating and maintenance expenses. Operating expense increased primarily due to an increase in utilities as a result of a 1998 adjustment for an overestimate of water and sewer costs at Brookeville Apartments. Maintenance expense increased due to landscaping expenditures at Dorsey's Forge Apartments and snow removal, interior building repairs and carpet cleaning completed at Hannibal Grove Apartments. 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 17, 1999