-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JDYZUXrM9p+ysbqejmqqToof2MLzd4kVJ5EwWCgWwtyuB0SeV4QgNNZ+/7m4pvLg ZlNUcC6JjuC9Rnlm9rw+qw== 0000928790-97-000030.txt : 19970329 0000928790-97-000030.hdr.sgml : 19970329 ACCESSION NUMBER: 0000928790-97-000030 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUTTON CONAM REALTY INVESTORS 81 CENTRAL INDEX KEY: 0000350023 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 133069026 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-10223 FILM NUMBER: 97566581 BUSINESS ADDRESS: STREET 1: 388 GREENWICH ST CITY: NEW YORK STATE: NY ZIP: 10013 BUSINESS PHONE: 2125263237 MAIL ADDRESS: STREET 1: 3 WORLD FINANCIAL CENTER STREET 2: 29TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10285 FORMER COMPANY: FORMER CONFORMED NAME: HUTTON CONAM PROPERTIES 81 DATE OF NAME CHANGE: 19810616 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period _____ to _____ Commission file number: 0-10223 HUTTON/CONAM REALTY INVESTORS 81 Exact name of Registrant as specified in its charter California 13-3069026 State or other jurisdiction of I.R.S. Employer incorporation or organization Identification No. Attention: Andre Anderson 3 World Financial Center, 29th Floor, New York, New York 10285 Address of principal executive offices zip code Registrant's telephone number, including area code: (212) 526-3237 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: UNITS OF LIMITED PARTNERSHIP INTEREST Title of Class 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) Documents Incorporated by Reference: Portions of Prospectus of the Registrant dated June 24, 1981 (included in Amendment No. 2 to Registrant's Registration Statement No. 2-70331, filed June 24, 1981 and in Amendment No. 1 to Registrant's Registration Statement No. 2-73558, filed August 20, 1981) are incorporated by reference into Part III of this report. Portions of Parts I, II, III and IV are incorporated herein by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1996. PART I Item 1. Business General Development of Business Hutton/ConAm Realty Investors 81 (the "Registrant" or the "Partnership") is a California limited partnership formed on April 30, 1981, of which RI 81 Real Estate Services Inc. ("RI 81 Services", formerly Hutton Real Estate Services III, Inc.) a Delaware corporation, and ConAm Property Services, Ltd., a California limited partnership ("ConAm Services"), are the general partners (together, the "General Partners"). Commencing June 24, 1981, the Registrant began offering through E.F. Hutton & Company Inc., an affiliate of the Registrant ("Hutton"), up to a maximum of 55,000 units of limited partnership interest (the "Units") at $500 per Unit. Investors who purchased the Units (the "Limited Partners") are not required to make any additional capital contributions. The Units were registered under the Securities Act of 1933, as amended (the "Act"), under Registration Statement No. 2-70331, which Registration Statement was declared effective on June 24, 1981. On August 6, 1981, the Registrant filed under the Act its Registration Statement No. 2-73558 covering an additional 25,000 Units. The offering of Units was terminated on October 1, 1981. Upon termination of the offering, the Registrant had accepted subscriptions for 78,290 Units, including 200 Units purchased by the General Partners for an aggregate of $39,145,000. All unsold Units, aggregating $855,000, were de-registered pursuant to Post-Effective Amendment No. 1 to Registrant's Registration Statement No. 2-73558, filed November 5, 1981. Narrative Description of Business The Registrant is engaged in the business of acquiring, operating and holding for investment multi-family residential properties, which by virtue of their location and design and the nature of the local real estate market have potential for capital appreciation and generation of current income. All of the proceeds available for investment in real estate were invested in two joint ventures and three limited partnerships, each owning a single property. Funds held as a working capital reserve are invested in unaffiliated money market funds or other highly liquid short-term investments where there is appropriate safety of principal in accordance with the Registrant's investment objectives and policies. The Registrant's principal investment objectives with respect to its interests in real property are: (1) capital appreciation; (2) distributions of net cash from operations attributable to rental income; and (3) preservation and protection of capital. Distributions of net cash from operations will be the Registrant's objective during its operational phase, while preservation and appreciation of capital continues to be the Registrant's longer term objectives. The attainment of the Registrant's objectives will depend on many factors, including future economic conditions in the United States as a whole and, in particular, in the localities in which the Registrant's properties are located, especially with regard to achievement of capital appreciation. From time to time the Registrant expects to sell its real property interests taking into consideration such factors as the amount of appreciation in value, if any, to be realized and the possible risks of continued ownership. In consideration of these factors and improving market conditions, the General Partners intend to sell the remaining two properties over the next few years. No property will be sold, financed or refinanced by the Registrant without the agreement of both General Partners. Proceeds from any future sale, financing or refinancing of properties will not be reinvested and may be distributed to the General Partners and Limited Partners (sometimes referred to together herein as the "Partners"), so that the Registrant will, in effect, be self-liquidating. If deemed necessary, the Registrant may retain a portion of the proceeds from any sale, financing or refinancing as capital reserves. As partial payment for properties sold, the Registrant may receive purchase money obligations secured by mortgages or deeds of trust. In such cases, the amount of such obligations will not be included in Net Proceeds From Sale or Refinancing (distributable to the Partners) until and only to the extent the obligations are realized in cash, sold or otherwise liquidated. Originally, the Registrant acquired five residential apartment complexes (collectively, the "Properties") either directly or through investments in joint ventures. Two of these, Cedar Bay Village and Kingston Village, were sold on July 20, 1995. A third, Ridge Park Apartments ("Ridge Park") was sold on November 27, 1996. Ridge Park sold for $3,385,000 to an institutional buyer, which is unaffiliated with the Partnership. The selling price was determined by arms length negotiations between the Partnership and the buyer. Consequently, as of December 31, 1996, the Registrant had interests in the Properties as follows: (1) Las Colinas Apartments I and II, a 300-unit apartment complex located in Scottsdale, Arizona; and (2) Tierra Catalina, a 120-unit apartment complex located in Tucson, Arizona. For further information on each of the Properties, see Item 2 of this report, and Note 4 to the Consolidated Financial Statements incorporated herein by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1996, which is included as an exhibit under Item 14. Reference is made to Item 7 of this report for a more detailed discussion of the Ridge Park sale. Competition The Registrant's real property investments are subject to competition from similar types of properties in the vicinities in which they are located and such competition has increased since the Registrant's investment in the Properties due principally to the addition of newly constructed apartment complexes offering increased residential and recreational amenities. The Properties have also been subject to competition from condominiums and single-family properties, especially during periods of low mortgage interest rates. The Registrant competes with other real estate owners and developers in the rental and leasing of its Properties by offering competitive rental rates and, if necessary, leasing incentives. Such competition may affect the occupancy levels and revenues of the Properties. The occupancy levels at the Properties in Arizona reflect some seasonality, which is also reflected in the markets. In some cases, the Registrant may compete with other partnerships affiliated with either General Partner of the Registrant. For a discussion of current market conditions in each of the areas where the Partnership's Properties are located, see Item 2 below. Employees The Registrant has no employees. General services are performed by RI 81 Services, ConAm Services, ConAm Management Corporation ("ConAm Management"), an affiliate of ConAm Services, as well as Service Data Corporation and First Data Investor Services Group, both unaffiliated companies. The Registrant has entered into management agreements pursuant to which ConAm Management provides management services with respect to the Properties. First Data Investor Services Group has been retained by the Registrant to provide all accounting and investor communication functions, while Service Data Corporation provides transfer agent services. See Item 13 for a further description of the service and management agreements between the Registrant and affiliated entities. Item 2. Properties Below is a description of the Properties and a discussion of current market conditions in each of the areas where the Properties are located. For information on the purchase and sale of the Properties, reference is made to Note 4 to the Consolidated Financial Statements in the Partnership's Annual Report to Unitholders for the year ended December 31, 1996, which is filed as an exhibit under Item 14. Average occupancy rates and appraised values of the Partnership's remaining real estate investments are incorporated by reference to the Partnership's Annual Report to Unitholders, for the year ended December 31, 1996, which is included as an exhibit under Item 14. Las Colinas I & II - Scottsdale, Arizona This 300-unit apartment community is located in a suburban setting approximately eight miles northwest of downtown Phoenix. The Scottsdale apartment market experienced continued strong competition during 1996, reflecting high levels of construction in the area and notable competition from condominiums and single family houses as affordable prices and low mortgage rates entice renters to buy. City-wide, 5,229 apartment units were permitted during the first six months of 1996, 1,938 of these in the Scottsdale submarket and 1,042 of these had been completed or were currently under construction. Although vacancy rates in Phoenix and the Scottsdale submarket remained low in 1996, declining to 4.4% and 3.5% as of the second quarter, respectively, vacancies are expected to increase with the new construction. While the area's strong population and job growth are likely to absorb much of this new supply, competition for tenants is expected to remain strong. Tierra Catalina - Tucson, Arizona This 120-unit apartment community is situated near the "foothills" section of Tucson in the Catalina Foothill submarket. Tierra Catalina competes with a number of apartment complexes and condominium developments within the Tucson area. While Tucson's economy began to slow in 1995 and 1996, construction of multifamily properties has increased significantly. The addition of new properties is beginning to put downward pressure on occupancy rates and limiting rental rate increases. The increased competition has also led to the reemergence of rental incentives. In addition, the multifamily market has been unfavorably impacted by relatively low interest rates which has made home ownership a viable alternative for renters. A local survey of metropolitan Tucson conducted in the second quarter of 1996 showed an average occupancy rate of 88.9% among multifamily properties, down from 91.1% at the same period in 1995. In the Catalina Foothills submarket, where Tierra Catalina is located, occupancy rates declined from 91% in the second quarter of 1995 to 84.5% in the same period in 1996. Both Las Colinas I & II and Tierra Catalina are encumbered by a mortgage loan. See Note 5 to the Consolidated Financial Statements for a description of such mortgage financing. Item 3. Legal Proceedings The registrant is not subject to any material pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of the year ended December 31, 1996, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise. PART II Item 5. Market for the Registrant's Limited Partnership Units and Related Security Holder Matters As of December 31, 1996, the number of Unitholders of record was 3,607. No established public trading market exists for the Units and it is not anticipated that a market will develop in the future. Distributions of Net Cash Flow From Operations, when made, are paid on a quarterly basis, with distributions generally occurring approximately 45 days after the end of each quarter. Such distributions have been made primarily from net operating income with respect to the Registrant's investment in the Properties and from interest on short-term investments, and partially from excess cash reserves. Information on cash distributions paid by the Partnership for the past two years is incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1996, which is filed as an exhibit under Item 14. The level of future distributions will be evaluated on a quarterly basis and will depend on the Partnership's operating results and future cash needs. Reference is made to Item 7 for a discussion of the General Partners' expectations for future cash distributions. Item 6. Selected Financial Data Incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1996, which is filed as an exhibit under Item 14. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources At December 31, 1996, the Partnership had cash and cash equivalents of $2,741,077, which were invested in unaffiliated money market funds, an increase from $1,499,119 at December 31, 1995. The increase is attributable to net proceeds from the sale of a property and cash provided by operating activities exceeding cash used for distributions and mortgage principal payments. The Partnership also maintains a restricted cash balance, which totaled $351,444 at December 31, 1996, representing escrows for insurance, real estate taxes, and property replacements and repairs, required under the terms of the current mortgage loans. Pursuant to the terms of the loans, as costs are incurred for property improvements or when real estate taxes and insurance are due, reimbursements are made from the escrow accounts maintained by the lender to the Partnership. The Partnership expects sufficient cash to be generated from operations to meet its current operating expenses and debt service requirements. On November 27, 1996, the Partnership closed on the sale of Ridge Park. Ridge Park sold for $3,385,000 to Ridge Park Limited Partnership, an Oklahoma limited partnership (the "Buyer"), which is unaffiliated with the Partnership. The selling price was determined by arm's length negotiations between the Partnership and the Buyer. The Partnership received net proceeds of $3,196,264 from the transaction, of which $1,902,666, representing outstanding principal and interest, was used to fully satisfy the Partnership's mortgage obligation on Ridge Park. On February 27, 1997, the General Partners paid a special distribution to the Limited Partners from the net sales proceeds in the amount of $1,291,785 or $16.50 per Unit. RI 81 Services and ConAm Services received $8,699 and $4,349, respectively, as their share of the sales proceeds from the sale of Ridge Park. The General Partners declared a cash distribution of $2.00 per Unit for the quarter ended December 31, 1996 which was paid to investors on February 5, 1997. The level of future distributions will be evaluated on a quarterly basis and will depend on the Partnership's operating results and future cash needs. Commencing with the first quarter 1997 distribution, which will be paid on or about May 15, 1997, cash distributions will be reduced to reflect the decline in cash flow resulting from the sale of Ridge Park. The General Partners continue to perform various improvements at the properties. These improvements include roof repairs at Las Colinas I and II, interior repairs at Tierra Catalina and Las Colinas I and II and other repairs to prepare vacant units for reoccupancy. The General Partners will monitor the need for property improvements on an ongoing basis to keep the properties competitive in their respective markets. Given the performance of the Partnership's properties, and the improvement in the real estate capital markets which has increased demand by potential buyers, the General Partners have determined that it is in the best interest of the Partnership to attempt to sell the remaining two properties in an orderly manner over the next few years. Assuming these efforts are successful, the General Partners would expect to distribute the sales proceeds and subsequently dissolve the Partnership in 1998 or 1999. However, meeting this objective will be dependent upon a variety of factors, many of which are not within the Partnership's control. Consequently, there can be no assurance that any specific property or all the properties can be sold, that particular prices will be achieved, or that all the properties can be sold within this time frame. Accounts payable and accrued expenses decreased from $225,751 at December 31, 1995 to $177,414 at December 31, 1996 primarily due to the timing of payments and accruals for audit fees, and lower real estate taxes and legal fees. On March 15, 1996, based upon, among other things, the advice of legal counsel, Skadden, Arps, Slate, Meagher & Flom, the General Partners adopted a resolution that states, among other things, if a Change of Control (as defined below) occurs, the General Partners may distribute the Partnership's cash balances not required for its ordinary course day-to-day operations. "Change of Control" means any purchase or offer to purchase more than 10% of the Units that is not approved in advance by the General Partners. In determining the amount of the distribution, the General Partners may take into account all material factors. In addition, the Partnership will not be obligated to make any distribution to any partner and no partner will be entitled to receive any distribution until the General Partners have declared the distribution and established a record date and distribution date for the distribution. Results of Operations 1996 versus 1995 Partnership operations for the year ended December 31, 1996 resulted in net income of $1,285,707, compared with net income of $1,141,669 in 1995. The increase in net income in 1996 is attributable to the decline in total expenses resulting from the sale of Cedar Bay Village and Kingston Village in July 1995 more than offsetting the corresponding decline in rental income. Rental income for the year ended December 31, 1996, was $3,622,403 compared with $4,313,044 for 1995. The decrease reflects the sale of Cedar Bay Village and Kingston Village in July 1995, the sale of Ridge Park in November 1996 and lower rental income at Tierra Catalina resulting from a decline in occupancy. Partially offsetting the decrease was an increase in rental income at Las Colinas, due to an increase in rental rates and occupancy. Interest income totaled $91,282 in 1996 compared with $102,535 in 1995. The decrease is attributable to the Partnership maintaining a lower average cash balance in 1996. Total expenses for the year ended December 31, 1996 were $3,838,600 compared with $4,759,031 in 1995. Property operating expenses decreased from $2,261,179 in 1995 to $1,817,928 in 1996, reflecting the decline in operating expenses primarily resulting from the sale of Cedar Bay Village and Kingston Village. Interest expense and depreciation and amortization also decreased from 1995 to 1996 primarily due to the sale of Cedar Bay Village and Kingston Village. General and administrative expenses decreased from 1995 to 1996 due primarily to lower legal fees and audit fees in 1996. 1995 versus 1994 Partnership operations for the year ended December 31, 1995 resulted in net income of $1,141,669, compared with a net loss of $252,627 in 1994. The change from net loss in 1994 to net income in 1995 was primarily due to the gain on the sale of Cedar Bay Village and Kingston Village, partially offset by the resulting decrease in rental income. Excluding the gain recognized on the sale of the properties, the loss from operations in 1995 increased from 1994 as a result of the sale, higher repairs and maintenance expenses and legal expenses associated with the offer for the limited partnership units. Rental income for the year ended December 31, 1995, was $4,313,044 compared with $4,702,059 for 1994. The decrease reflects the sale of Cedar Bay Village and Kingston Village in July 1995, partially offset by increases in rental income at the three remaining properties, particularly Las Colinas, due to increased rental rates. Interest income totaled $102,535 in 1995 compared with $58,009 in 1994. The increase was due to the Partnership's increased cash balance and higher interest rates in 1995. Total expenses for the year ended December 31, 1995 were $4,759,031 compared with $5,012,695 for 1994. Property operating expenses decreased from $2,301,465 in 1994 to $2,261,179 in 1995, reflecting decreases in operating expenses at Cedar Bay Village and Kingston Village due to their sales, offset by higher repairs and maintenance expenses at Tierra Catalina and Las Colinas. Interest expense and depreciation and amortization also decreased from 1994 to 1995 due to the sales of Cedar Bay Village and Kingston Village. General and administrative expenses increased from 1994 to 1995 reflecting legal expenses due to the Partnership's response to the offer for the limited partnership units in the third quarter of 1995. The average occupancy levels at each of the remaining Properties for the years ended December 31, 1996, 1995 and 1994 were as follows: Twelve Months Ended December 31, Property 1996 1995 1994 Las Colinas I & II 96% 93% 96% Tierra Catalina 90% 93% 96% Item 8. Financial Statements and Supplementary Data The Financial Statements are incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1996, which is filed as an exhibit under Item 14. Supplementary Data is incorporated by reference to pages F-1 and F-2 of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The Registrant has no officers or directors. RI 81 Services and ConAm Services, the co-General Partners of the Registrant, jointly manage and control the affairs of the Registrant and have general responsibility and authority in all matters affecting its business. RI 81 Services RI 81 Services (formerly Hutton Real Estate Services III, Inc.) is a Delaware corporation formed on October 30, 1980, an affiliate of Lehman Brothers Inc. See the section captioned "Certain Matters Involving Affiliates of RI 81 Services" below for a description of the Hutton Group's acquisition by Shearson Lehman Brothers, Inc. ("Shearson") and the subsequent sale of certain of Shearson's domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"), which was followed by a change in the general partner's name. Certain officers and directors of RI 81 Services are now serving (or in the past have served) as officers or directors of entities which act as general partners of a number of real estate limited partnerships which have sought protection under the provisions of the Federal Bankruptcy Code. The partnerships which have filed bankruptcy petitions own real estate which has been adversely affected by the economic conditions in the markets in which the real estate is located and, consequently, the partnerships sought the protection of the bankruptcy laws to protect the partnerships' assets from loss through foreclosure. The names and positions held by the directors and executive officers of RI 81 Services are set forth below. There are no family relationships between any executive officers or directors. Name Office Paul L. Abbott Director, President, Chief Financial Officer and Chief Executive Officer Donald E. Petrow Vice President David Sclafani Vice President Paul L. Abbott, 51, is a Managing Director of Lehman Brothers. Mr. Abbott joined Lehman Brothers in August 1988, and is responsible for investment management of residential, commercial and retail real estate. Prior to joining Lehman Brothers, Mr. Abbott was a real estate consultant and a senior officer of a privately held company specializing in the syndication of private real estate limited partnerships. From 1974 through 1983, Mr. Abbott was an officer of two life insurance companies and a director of an insurance agency subsidiary. Mr. Abbott received his formal education in the undergraduate and graduate schools of Washington University in St. Louis. Donald E. Petrow, 40, is a First Vice President of Lehman Brothers Inc. Since March 1989, he has been responsible for the investment management and restructuring of various investment portfolios, including but not limited to, federal insured mortgages, tax exempt bonds, multifamily and commercial real estate. From November 1981 to February 1989, Mr. Petrow, as Vice President of Lehman, was involved in investment banking activities relating to partnership finance and acquisitions. Prior to joining Lehman, Mr. Petrow was employed in accounting and equipment leasing firms. Mr. Petrow holds a B.S. Degree in accounting from Saint Peters College and an M.B.A in Finance from Pace University. David Sclafani, 24, is an Associate of Lehman Brothers Inc. Mr. Sclafani joined Lehman Brothers in March 1996 and is responsible for the investment management and restructuring of various limited partnerships holding multi-family real estate. Prior to joining Lehman Brothers, Mr. Sclafani worked in the real estate finance department of a major foreign bank managing performing and non-performing loans. Mr. Sclafani holds a B.S. Degree in Finance from Siena College in Loudonville, N.Y. ConAm Services ConAm Services is a California limited partnership organized on December 11, 1980. The sole general partner of ConAm Services is Continental American Development, Inc. ("ConAm Development"). The names and positions held by the directors and executive officers of ConAm Development are set forth below. There are no family relationships between any executive officers or directors. Name Office Daniel J. Epstein President and Director E. Scott Dupree Vice President/Director Robert J. Svatos Vice President/Director Ralph W. Tilley Vice President J. Bradley Forrester Vice President Daniel J. Epstein, 57, has been the President and a Director of ConAm Development and ConAm Management (or its predecessor firm) and a general partner of Continental American Properties, Ltd. ("ConAm"), an affiliate of ConAm Services, since their inception. Prior to that time Mr. Epstein was Vice President and a Director of American Housing Guild, which he joined in 1969. At American Housing Guild, he was responsible for the formation of the Multi-Family Division and directed its development and property management activities. Mr. Epstein holds a Bachelor of Science degree in Engineering from the University of Southern California. E. Scott Dupree, 46, is a Senior Vice President and general counsel of ConAm Management responsible for negotiation, documentation, review and closing of acquisition, sale and financing proposals. Mr. Dupree also acts as principal legal advisor on general legal matters ranging from issues and contracts involving the management company to supervision of litigation and employment issues. Prior to joining ConAm Management in 1985, he was corporate counsel to Trusthouse Forte, Inc., a major international hotel and restaurant corporation. Mr. Dupree holds a B.A. from United States International University and a Juris Doctorate degree from the University of San Diego. Robert J. Svatos, 38, is a Senior Vice President and Chief Financial Officer of ConAm Management, and has been with the company since 1988. His responsibilities include the accounting, treasury and data processing functions of the organization. Mr. Svatos is part of the firm's due diligence team, analyzing a broad range of projects for ConAm Management's fee client base. Prior to joining ConAm Management, he was the Chief Financial Officer for AmeriStar Financial Corporation, a nationwide mortgage banking firm. Mr. Svatos holds an M.B.A. in Finance from the University of San Diego and a Bachelor's of Science degree in Accounting from the University of Illinois. Mr. Svatos is a Certified Public Accountant. Ralph W. Tilley, 42, is a Senior Vice President and Treasurer of ConAm Management. He is responsible for the financial aspects of syndications and acquisitions, the company's asset management portfolio and risk management activities. Prior to joining ConAm Management in 1980, he was a senior accountant with KPMG Peat Marwick, specializing in real estate. He holds a Bachelor's of Science degree in Accounting from San Diego State University and is a Certified Public Accountant. J. Bradley Forrester, 39, currently serves as an Executive Vice President of ConAm Management Corporation. He is responsible for property acquisition and disposition on a nationwide basis. Additionally, he is involved with the company's real estate development activities. Prior to joining ConAm, Mr. Forrester served as Senior Vice President - Commercial Real Estate for First Nationwide Bank in San Francisco, where he was responsible for a $2 billion problem asset portfolio including bank-owned real estate and non-performing commercial real estate loans. His past experience includes significant involvement in real estate development and finance, property acquisitions and dispositions and owner's representation matters. Prior to entering the real estate profession, he worked for KPMG Peat Marwick in Dallas, Texas. Mr. Forrester holds a Bachelor of Science degree in Accounting from Louisiana State University. He received his CPA certification in the State of Texas. Certain Matters Involving Affiliates of RI 81 Services On July 31, 1993, Shearson sold certain of its domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham and Co. Incorporated. Subsequent to the sale, Shearson changed its name to "Lehman Brothers Inc." The transaction did not affect the ownership of the Partnership's General Partners. However, the assets acquired by Smith Barney included the name "Hutton." Consequently, the Hutton Real Estate Services III, Inc. general partner changed its name to "RI 81 Real Estate Services Inc.," and the Hutton Group changed its name to "LB I Group Inc." to delete any reference to "Hutton." Item 11. Executive Compensation Neither of the General Partners nor any of their directors or executive officers received any compensation from the Registrant. See Item 13 of this report for a description of certain transactions of the General Partners or their affiliates with the Registrant. Item 12. Security Ownership of Certain Beneficial Owners and Management As of December 31, 1996, no person was known by the Registrant to be the beneficial owner of more than five percent of the Units of the Registrant. The General Partners own 200 Units (134 owned by RI 81 Services and 66 owned by ConAm Services), as required by the terms of the offering described in the Prospectus of Registrant dated June 24, 1981 (the "Prospectus"), contained in Amendment No. 2 to Registrant's Registration Statement No. 2-70331, filed June 24, 1981 and in Amendment No. 1 to Registrant's Registration Statement, No. 2-73558, filed August 20, 1981. Daniel J. Epstein, President and Director of ConAm Services, owned twenty Units as of December 31, 1996. No other directors or executive officers of the General Partners own any Units. Item 13. Certain Relationships and Related Transactions RI 81 Services and ConAm Services received $43,495 and $39,144, respectively, as its allocable share of Net Cash from Operations with respect to the year ended December 31, 1996, pursuant to the Amended and Restated Certificate and Agreement of Limited Partnership of the Registrant. Of those amounts, RI 81 Services and ConAm Services received $8,699 and $4,349, respectively, as their share of the sales proceeds from the sale of Ridge Park Apartments in November 1996. Pursuant to the Amended and Restated Certificate and Agreement of Limited Partnership of the Registrant, for the year ended December 31, 1996, $69,591 of Registrant's net income was allocated to the General Partners ($34,795.50 to RI 81 Services and $34,795.50 to ConAm Services). For a description of the share of net cash from operations and the allocation of income and loss to which the General Partners are entitled, reference is made to the material contained on pages 72-74 of the Prospectus, under the section captioned "Profit and Losses and Cash Distributions," which section is incorporated herein by reference thereto. The Registrant has entered into property management agreements with ConAm Management pursuant to which ConAm Management has assumed direct responsibility for day-to-day management of the Properties. It is the responsibility of ConAm Management to select resident managers and monitor their performance. ConAm Management's services also include the supervision of leasing, rent collection, maintenance, budgeting, employment of personnel, payment of operating expenses and related services. For such services, ConAm Management is entitled to receive a management fee as described under the sections captioned "Investment Objectives and Policies--Management of Properties" on pages 32 through 33 of the Prospectus, which section is incorporated herein by reference thereto. A summary of property management fees earned by ConAm Management during the past three years is incorporated by reference to Note 6 to the Consolidated Financial Statements, incorporated herein by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1996, which is filed as an exhibit under Item 14. Pursuant to Section 12(g) of the Registrant's Amended and Restated Certificate and Agreement of Limited Partnership, the General Partners and their affiliates may be reimbursed by the Registrant for certain of their costs as described on page 16 of the Prospectus, which description is incorporated herein by reference. First Data Investor Services Group provides partnership accounting and investor relations services for the Registrant. Prior to May 1993, these services were provided by an affiliate of a general partner. The Registrant's transfer agent and certain tax reporting services are provided by Service Data Corporation. Both First Data Investor Services Group and Service Data Corporation are unaffiliated companies. A summary of amounts paid to the General Partners or their affiliates during the past three years is incorporated by reference to Note 6 to the Consolidated Financial Statements, included in the Partnership's Annual Report to Unitholders for the fiscal year ended December 31, 1996, which is filed as an exhibit under Item 14. PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K Page (a)(1) Financial Statements: Number Consolidated Balance Sheets - December 31, 1996 and 1995 (1) Consolidated Statements of Partners' Capital (Deficit) - For the years ended December 31, 1996, 1995 and 1994 (1) Consolidated Statements of Operations - For the years ended December 31, 1996, 1995 and 1994 (1) Consolidated Statements of Cash Flows - For the years ended December 31, 1996, 1995 and 1994 (1) Notes to the Consolidated Financial Statements (1) Report of Independent Accountants (1) (a)(3) Financial Statement Schedule: Schedule III - Real Estate and Accumulated Depreciation F-1 Report of Independent Accountants on Schedule III F-2 (1) Incorporated by reference to the Partnership's Annual Report to Unitholders for the year ended December 31, 1996, filed as an exhibit under Item 14. (a)(3) Exhibits: (3) Amended and Restated Certificate and Agreement of Limited Partnership (included as, and incorporated herein by reference to, Exhibit A to the Prospectus of Registrant dated June 24, 1981 (the "Prospectus"), contained in Amendment No. 2 to Registration Statement, No. 2-70331, of Registrant filed June 24, 1981, (the "Registration Statement"), and in Amendment No. 1 to Registration Statement, No. 2-73558, of Registrant filed August 20, 1981). (4) Subscription Agreement and Signature Page (included as, and incorporated herein by reference to, Exhibit B to the Prospectus). (10)(A) Financing Documents relating to Las Colinas I and II (Promissory Note, Deed of Trust, Assignment of Rents and Leases) (included as, and incorporated herein by reference to, Exhibit 10-I to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 (Commission file No. 0-10223)). (B) Financing Documents relating to Ridge Park (Promissory Note, Deed of Trust, Assignment of Rents and Leases) (included as, and incorporated herein by reference to, Exhibit 10-J to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 (Commission file No. 0- 10223)). (C) Financing Documents relating to Tierra Catalina (Promissory Note, Deed of Trust, Assignment of Rents and Leases) (included as, and incorporated herein by reference to, Exhibit 10-K to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 (Commission file No. 0- 10223)). (D) Settlement Agreement by and among the Managing Joint Venturers and the Epoch Joint Venturers dated July 1, 1992 (included as, and incorporated herein by reference to, Exhibit 10.I to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992 (Commission file No. 0- 10223)). (E) Agreement of Limited Partnership of RI-81 Las Colinas Limited Partnership dated as of July 1, 1992 (included as, and incorporated herein by reference to, Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992 (Commission file No. 0-10223)). (F) Agreement of Limited Partnership of RI-81 Tierra Catalina Limited Partnership dated as of July 1, 1992 (included as, and incorporated herein by reference to, Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992 (Commission file No. 0- 10223)). (G) Amended and Restated Agreement of Limited Partnership of Ridge Park Associates Limited Partnership dated as of April 23, 1992 (included as, and incorporated herein by reference to, Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992 (Commission file No. 0-10223)). (H) Property Management Agreement between Hutton/ConAm Realty Investors 81 and ConAm Management Corp. for the Las Colinas I & II properties (included as, and incorporated herein by reference to Exhibit 10-L to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (Commission file No. 0-10223)). (I) Property Management Agreement between Hutton/ConAm Realty Investors 81 and ConAm Management Corp. for the Tierra Catalina property (included as, and incorporated herein by reference to Exhibit 10-M to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (Commission file No. 0-10223)). (13) Annual Report to Unitholders for the year ended December 31, 1996. (21) List of Subsidiaries - Joint Ventures (included as, and incorporated herein by reference to Exhibit 22 to the Registrant's 1991 Annual Report on Form 10-K for the year ended December 31, 1991(Commission file No. 0-10223)). (27) Financial Data Schedule (99) Portions of the Prospectus of Registrant dated June 24, 1981 (included as, and incorporated herein by reference to Exhibit 28 to the Registrant's 1988 Annual Report on Form 10-K for the year ended December 31, 1988 (Commission file No. 0-10223)). (b) Reports on Form 8-K: On December 12, 1996, the Partnership filed a Form 8-K on the closing of the Ridge Park sale. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Dated: March 26, 1997 HUTTON/CONAM REALTY INVESTORS 81 BY: RI 81 Real EstateServices Inc. General Partner BY: /S/ Paul L. Abbott Name: Paul L. Abbott Title: Director, President, Chief Executive Officer and Chief Financial Officer BY: ConAm Property Services, Ltd. General Partner BY: Continental American Development, Inc. General Partner BY: /S/ Daniel J. Epstein Name: Daniel J. Epstein Title: President, Director and Principal Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capabilities and on the dates indicated. RI 81 REAL ESTATE SERVICES INC. A General Partner Date: March 26, 1997 BY: /S/ Paul L. Abbott Paul L. Abbott Director, President, Chief Executive Officer and Chief Financial Officer Date: March 26, 1997 BY: /S/ Donald Petrow Donald Petrow Vice President Date: March 26, 1997 BY: /S/ David Sclafani David Sclafani Vice President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. CONAM PROPERTY SERVICES, LTD. A General Partner By: Continental American Development, Inc. General Partner Date: March 26, 1997 BY: /S/ Daniel J. Epstein Daniel J. Epstein Director and President Date: March 26, 1997 BY: /S/ E. Scott Dupree E. Scott Dupree Vice President/Director Date: March 26, 1997 BY: /S/ Robert J. Svatos Robert J. Svatos Vice President/Director Date: March 26, 1997 BY: /S/ Ralph W. Tilley Ralph W. Tilley Vice President Date: March 26, 1997 BY: /S/ J. Bradley Forrester J. Bradley Forrester Vice President EX-13 2 REPORT TO UNITHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1996 Hutton/ConAm Realty Investors 81 1996 Annual Report Exhibit 13 Hutton/ConAm Realty Investors 81 Hutton/ConAm Realty Investors 81 is a California limited partnership formed in 1981 to acquire, operate and hold for investment multifamily housing properties. At December 31, 1996, the Partnership's portfolio consisted of two apartment properties located in Arizona. Provided below is a comparison of average occupancy levels for the years ended December 31, 1996 and 1995. Average Occupancy Property Location 1996 1995 Las Colinas I & II Scottsdale, Arizona 96% 93% Tierra Catalina Tucson, Arizona 90% 93% Contents 1 Message to Investors 3 Financial Highlights 4 Consolidated Financial Statements 7 Notes to the Consolidated Financial Statements 13 Report of Independent Accountants 14 Net Asset Valuation Administrative Inquiries Performance Inquiries/Form 10-Ks Address Changes/Transfers First Data Investor Services Group Service Data Corporation P.O. Box 1527 2424 South 130th Circle Boston, Massachusetts 02104-1527 Omaha, Nebraska 68144-2596 Attn: Financial Communications 800-223-3464 800-223-3464 Message to Investors Presented for your review is the 1996 Annual Report for Hutton/ConAm Realty Investors 81. In this report, we review Partnership operations and discuss general market conditions affecting the Partnership's two remaining properties. Property Sale The most significant event during 1996 was the sale of Ridge Park Apartments on November 27, 1996, to an unaffiliated institutional buyer for an adjusted sales price of $3,385,000. The Partnership received net sales proceeds of $3,196,264, of which $1,902,666, representing outstanding principal and interest, was used to fully satisfy the Partnership's mortgage obligation on Ridge Park. The transaction resulted in a gain on the sale of approximately $1,410,622 which was reflected in the Partnership's consolidated statements of operations for the period ending, December 31, 1996. The General Partners paid a special cash distribution of $16.50 per Unit from the sales proceeds on February 27, 1997. Cash Distributions The Partnership paid cash distributions totaling $8.00 per Unit for the year ended December 31, 1996, including the fourth quarter distribution of $2.00 per Unit, which was credited to your brokerage account or sent directly to you on February 5, 1997. Since inception, the Partnership has paid distributions totaling $442.15 per original $500 Unit, including $254.50 per Unit in return of capital payments. The level of future distributions will be evaluated on a quarterly basis and will depend on the Partnership's operating results and future cash needs. Commencing with the first quarter 1997 distribution, which will be paid on or about May 15, 1997, cash distributions will be reduced to reflect the decline in cash flow resulting from the sale of Ridge Park. Operations Overview Multi-family real estate continued to perform well during 1996, with property values and apartment rents increasing in many areas of the country. The improving conditions, as well as positive job and population growth forecasts, prompted a rise in new construction in the markets where the Partnership owns properties. The addition of these new apartment properties caused a slowdown in leasing activity towards the end of the year, particularly in Tucson. In that market, conditions were also impacted by the decision of many renters to purchase homes. This increased the use of rent specials at many large apartment properties, including Tierra Catalina, to attract new tenants. The Scottsdale market also experienced slow growth during the year as a result of increased construction, even though Metro Phoenix was ranked as the nation's strongest labor market in 1996. Nonetheless, both of the Partnership's properties maintained average occupancy levels for the year of at least 90%, and the Partnership's rental income for these two properties increased by 2.8% from the previous year. It is expected that the competitive conditions will persist in each market in 1997, but continued economic growth and a slowdown in construction should prevent these areas from becoming significantly overbuilt. Property Review Las Colinas I & II This 300-unit apartment community is located eight miles northeast of Phoenix in southwest Scottsdale, and is comprised of two complexes. Las Colinas I and II reported average occupancy of 96% in 1996 compared to 93% in 1995. In addition, the property reported an increase in rental income of 5.7% from the prior year. The Scottsdale apartment market experienced continued strong competition during 1996, reflecting high levels of construction and notable competition from condominiums and single family houses, as affordable prices and low mortgage rates enticed renters to buy. City-wide, 5,229 apartment units were permitted during the first six months of 1996, 1,938 of these in the Scottsdale submarket and 1,042 of these had been completed or were currently under construction. Although vacancy rates in Phoenix and the Scottsdale submarket remained low in 1996, declining to 4.4% and 3.5%, respectively, as of the second quarter, vacancies are expected to increase with the new construction. While the area's strong population and job growth are likely to absorb much of this new supply, competition for tenants is expected to remain strong. Tierra Catalina Tierra Catalina contains 120 units and is located near the Foothills region of Tucson. The property maintained an average occupancy rate of 90% during 1996 compared to 93% for 1995. The slight decline in occupancy caused a similar decrease in the property's rental income. These operating results are indicative of the increasing competition in the Tucson market. While Tucson's economy began to slow in 1995 and 1996, construction of multifamily properties has increased significantly. The addition of new properties is beginning to put downward pressure on occupancy rates and is limiting rental rate increases. The increased competition has also led to the reemergence of rental incentives. In addition, the multifamily market has been unfavorably impacted by relatively low interest rates which has made home ownership a viable alternative for renters. A local survey of metropolitan Tucson conducted in the second quarter of 1996 showed an average occupancy rate of 88.9% among multifamily properties, down from 91.1% in the same period in 1995. In the Catalina Foothills submarket, where Tierra Catalina is located, occupancy rates declined from 91% in the second quarter of 1995 to 84.5% in the same period in 1996. General Information As you are probably aware, several third parties have commenced partial tender offers to purchase Units of the Partnership at grossly inadequate prices which are substantially below the Partnership's Net Asset Value. In response, we recommended that limited partners reject these offers because they do not reflect the underlying value of the Partnership's assets. To date, holders of over 93% of the outstanding Units agreed that these offers were inadequate, rejected the offer and did not tender their Units. Please be assured that if any additional tender offers are made for your Units, we will make every effort to provide you with our position regarding such offer on a timely basis. Summary During 1997, we intend to monitor market conditions in an effort to sell the Partnership's two remaining properties within the next few years. Assuming these efforts are successful, we would expect to distribute the sales proceeds and subsequently dissolve the Partnership in 1998 or 1999. However, meeting this objective will be dependent upon a variety of factors, many of which are not within the Partnership's control. Consequently, there can be no assurance that any specific property or all the properties can be sold, that certain prices will be achieved, or that both of the properties can be sold within this time frame. In the interim, we will continue to manage and maintain the properties to maximize their performance and improve their marketability and appeal. We will keep you apprised of significant developments affecting your investment in future reports. Very truly yours, /s/ Paul L. Abbott /s/ Daniel J. Epstein Paul L. Abbott Daniel J. Epstein President President RI 81 Real Estate Services Inc. Continental American Development, Inc. General Partner of ConAm Property Services, Ltd. March 26, 1997 Financial Highlights Selected Financial Data For the periods ended December 31, 1996 1995 1994 1993 1992 Dollars in thousands, except for per unit data Total Income $ 3,714 $ 4,416 $ 4,760 $ 4,485 $ 4,284 Gain on Sale of Properties 1,411 1,485 -- -- -- Net Income (Loss) 1,286 1,142 (253) (618) (465) Net Cash Provided by (Used for) Operating Activities 753 974 949 1,020 (362) Long-term Obligations at Year End 9,943 11,954 15,601 15,736 15,861 Total Assets at Year End 14,545 16,022 22,497 23,565 24,518 Net Income (Loss) per Limited Partnership Unit* 15.53 (1.38) (3.19) (7.81) (5.88) Distributions per Limited Partnership Unit* 8.00 8.00 8.00 3.50 -- Special Distributions per Limited Partnership Unit* 16.50 40.50 -- -- -- * 78,290 units outstanding - Total income decreased in 1996, reflecting the sale of Cedar Bay Village and Kingston Village in July 1995 and lower rental income from Tierra Catalina resulting from the decline in occupancy. This was partially offset by increased rental income at Las Colinas I and II. - The increase in net income from 1995 to 1996 is primarily attributable to the decline in operating expenses resulting from the sale of Cedar Bay Village and Kingston Village which more than offset the corresponding decline in rental income. - Net cash provided by operating activities declined in 1996 reflecting decreases in the release of restricted cash resulting from the sale of Cedar Bay Village and Kingston Village in July 1995. Cash Distributions Per Limited Partnership Unit 1996 1995 Special Distributions* $16.50 $40.50 First Quarter 2.00 2.00 Second Quarter 2.00 2.00 Third Quarter 2.00 2.00 Fourth Quarter 2.00 2.00 Total $24.50 $48.50 *On August 17, 1995, the Partnership paid a special cash distribution totaling $40.50 per Unit, reflecting net proceeds received from the sale of Cedar Bay Village and Kingston Village and excess cash reserves. On February 27, 1997, the Partnership paid a special cash distribution totaling $16.50 per Unit, reflecting a return of capital from the net proceeds of the November 1996 sale of Ridge Park. Consolidated Balance Sheets At December 31, At December 31, 1996 1995 Assets Investments in real estate: Land $ 3,630,175 $ 3,944,195 Buildings and improvements 17,975,267 21,299,382 21,605,442 25,243,577 Less accumulated depreciation (10,303,382) (11,370,295) 11,302,060 13,873,282 Cash and cash equivalents 2,741,077 1,499,119 Restricted cash 351,444 394,147 Mortgage fees, net of accumulated amortization of $220,063 in 1996 and $209,153 in 1995 135,654 230,519 Other assets 14,292 24,946 Total Assets $ 14,544,527 $ 16,022,013 Liabilities and Partners' Capital Liabilities: Mortgages payable $ 9,943,036 $ 11,954,188 Distribution payable 1,478,811 173,978 Accounts payable and accrued expenses 177,414 225,751 Security deposits 71,858 77,433 Due to general partners and affiliates 13,045 15,263 Total Liabilities 11,684,164 12,446,613 Partners' Capital (Deficit): General Partners (201,261) (188,213) Limited Partners 3,061,624 3,763,613 Total Partners' Capital 2,860,363 3,575,400 Total Liabilities and Partners' Capital $ 14,544,527 $ 16,022,013 Consolidated Statements of Partners' Capital (Deficit) For the years ended December 31, 1996, 1995 and 1994 General Limited Partners Partners Total Balance at December 31, 1993 $ (1,244,798) $ 8,545,519 $ 7,300,721 Net loss (2,526) (250,101) (252,627) Cash distributions (69,591) (626,320) (695,911) Balance at December 31, 1994 (1,316,915) 7,669,098 6,352,183 Net income (loss) 1,250,091 (108,422) 1,141,669 Cash distributions (121,389) (3,797,063) (3,918,452) Balance at December 31, 1995 (188,213) 3,763,613 3,575,400 Net income 69,591 1,216,116 1,285,707 Cash distributions (82,639) (1,918,105) (2,000,744) Balance at December 31, 1996 $ (201,261) $ 3,061,624 $ 2,860,363 Consolidated Statements of Operations For the years ended December 31, 1996 1995 1994 Income Rental $ 3,622,403 $ 4,313,044 $ 4,702,059 Interest and other 91,282 102,535 58,009 Total Income 3,713,685 4,415,579 4,760,068 Expenses Property operating 1,817,928 2,261,179 2,301,465 Interest 992,745 1,191,397 1,327,560 Depreciation and amortization 880,445 1,087,749 1,227,183 General and administrative 147,482 218,706 156,487 Total Expenses 3,838,600 4,759,031 5,012,695 Loss from operations (124,915) (343,452) (252,627) Gain on sale of properties 1,410,622 1,485,121 -- Net Income (Loss) $ 1,285,707 $ 1,141,669 $ (252,627) Net Income (Loss) Allocated: To the General Partners $ 69,591 $ 1,250,091 $ (2,526) To the Limited Partners 1,216,116 (108,422) (250,101) $ 1,285,707 $ 1,141,669 $ (252,627) Per limited partnership unit (78,290 outstanding) Loss from operations $ (1.58) $ (4.34) $ (3.19) Gain on sale of properties 17.11 2.96 -- Net Income (Loss) $ 15.53 $ (1.38) $ (3.19) Consolidated Statements of Cash Flows For the years ended December 31, 1996 1995 1994 Cash Flows From Operating Activities: Net income (loss) $ 1,285,707 $ 1,141,669 $ (252,627) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 880,445 1,087,749 1,227,183 Gain on sale of properties (1,410,622) (1,485,121) -- Increase (decrease) in cash arising from changes in operating assets and liabilities: Fundings to restricted cash (450,460) (536,471) (581,675) Release of restricted cash to property operations 493,163 801,400 543,194 Other assets 10,654 16,109 (3,609) Accounts payable and accrued expenses (48,337) 16,898 3,501 Security deposits (5,575) (63,975) 11,700 Due to general partners and affiliates (2,218) (4,567) 946 Net cash provided by operating activities 752,757 973,691 948,613 Cash Flows From Investing Activities: Net proceeds from sale of properties 3,196,264 6,555,332 -- Net cash provided by investing activities 3,196,264 6,555,332 -- Cash Flows From Financing Activities: Distributions (695,911) (3,918,452) (695,911) Mortgage principal payments (2,011,152) (3,646,843) (135,365) Net cash used for financing activities (2,707,063) (7,565,295) (831,276) Net increase (decrease) in cash and cash equivalents 1,241,958 (36,272) 117,337 Cash and cash equivalents, beginning of period 1,499,119 1,535,391 1,418,054 Cash and cash equivalents, end of period $ 2,741,077 $ 1,499,119 $ 1,535,391 Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest $ 992,745 $ 1,191,397 $ 1,327,560 Notes to the Consolidated Financial Statements December 31, 1996, 1995 and 1994 1. Organization Hutton/ConAm Realty Investors 81 (the "Partnership") was organized as a limited partnership under the laws of the State of California pursuant to a Certificate and Agreement of Limited Partnership (the "Partnership Agreement") dated April 30, 1981, as amended and restated August 31, 1981. The Partnership was formed for the purpose of acquiring and operating certain types of residential real estate. The general partners of the Partnership are RI 81 Real Estate Services Inc., an affiliate of Lehman Brothers (see below), and ConAm Property Services, Ltd., an affiliate of Continental American Properties, Ltd (the "General Partners"). The Partnership will continue until December 31, 2010 unless sooner terminated pursuant to the terms of the Partnership Agreement. On July 31, 1993, Shearson Lehman Brothers Inc. sold certain of its domestic retail brokerage and asset management businesses to Smith Barney, Harris Upham & Co. Incorporated ("Smith Barney"). Subsequent to the sale, Shearson Lehman Brothers Inc. changed its name to Lehman Brothers Inc. ("Lehman Brothers"). The transaction did not affect the ownership of the General Partners. However, the assets acquired by Smith Barney included the name "Hutton." Consequently, effective October 29, 1993, the Hutton Real Estate Services III, Inc. General Partner changed its name to RI 81 Real Estate Services Inc. On March 15, 1996, based upon, among other things, the advice of legal counsel, Skadden, Arps, Slate, Meagher & Flom, the General Partners adopted a resolution that states, among other things, if a Change of Control (as defined below) occurs, the General Partners may distribute the Partnership's cash balances not required for its ordinary course day-to-day operations. "Change of Control" means any purchase or offer to purchase more than 10% of the Units that is not approved in advance by the General Partners. In determining the amount of the distribution, the General Partners may take into account all material factors. In addition, the Partnership will not be obligated to make any distribution to any partner and no partner will be entitled to receive any distribution until the General Partners have declared the distribution and established a record date and distribution date for the distribution. 2. Significant Accounting Policies Financial Statements - The consolidated financial statements include the accounts of the Partnership and its affiliated ventures. The effect of transactions between the Partnership and its ventures has been eliminated in consolidation. Real Estate Investments - Real estate investments are recorded at cost less accumulated depreciation which includes the initial purchase price of the property, legal fees, capitalized interest, acquisition and closing costs. Leases are accounted for under the operating method. Under this method, revenue is recognized as rentals are earned and expenses (including depreciation) are charged to operations when incurred. Leases are generally for terms of one year or less. Depreciation is computed using the straight-line method based upon the estimated useful lives of the properties. Maintenance and repairs are charged to operations as incurred. Significant betterments and improvements are capitalized and depreciated over their estimated useful lives. For assets sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income for the period. Accounting for Impairment - In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. FAS 121 also addresses the accounting for long- lived assets that are expected to be disposed of. The Partnership adopted FAS 121 in the fourth quarter of 1995. Fair Value of Financial Instruments - Statements of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("FAS 107"), requires that the Partnership disclose the estimated fair values of its financial instruments. Fair values generally represent estimates of amounts at which a financial instrument could be exchanged between willing parties in a current transaction other than in forced liquidation. Fair value estimates are subjective and are dependent on a number of significant assumptions based on management's judgment regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. In addition, FAS 107 allows a wide range of valuation techniques, therefore, comparisons between entities, however similar, may be difficult. Mortgage Fees - Included in mortgage fees are deferred mortgage costs incurred in connection with obtaining financing on the Partnership's properties. Such costs are amortized over the 7-year term of the applicable loans. Offering Costs - Costs relating to the sale of limited partnership units were deferred during the offering period and charged to the limited partners' capital accounts upon the consummation of the public offering. Income Taxes - No provision for income taxes has been made in the financial statements since income, losses and tax credits are passed through to the individual partners. Cash and Cash Equivalents - Cash equivalents consist of short-term highly liquid investments which have maturities of three months or less from the date of issuance. The carrying amount approximates fair value because of the short maturity of these instruments. Cash and cash equivalents include security deposits of $0 and $17,670 for December 31, 1996 and 1995, respectively, restricted under certain state statutes. Restricted Cash - Restricted cash consists of escrows for betterments and improvements, real estate taxes, and casualty insurance as required by the first mortgage lender. Concentration of Credit Risk - Financial instruments which potentially subject the Partnership to a concentration of credit risk principally consist of cash and cash equivalents in excess of the financial institutions' insurance limits. The Partnership invests available cash with high credit quality financial institutions. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications - Certain prior year amounts have been reclassified in order to conform to the current year's presentation. 3. The Partnership Agreement The Partnership Agreement provides that net cash from operations, as defined, will be distributed quarterly, 90% to the limited partners and 10% to the General Partners. Net loss for any year will be allocated 99% to the limited partners and 1% to the General Partners. Net income will generally be allocated in accordance with the distribution of net cash from operations. Net proceeds from sales or refinancing will be distributed 99% to the limited partners and 1% to the General Partners until each limited partner has received an amount equal to his adjusted capital value (as defined) and an annual, cumulative 7% return thereon, and until the General Partners have received 15% of the aggregate distributions of net proceeds. The balance, if any, will be distributed 85% to the limited partners and 15% to the General Partners. Gain from sales will be allocated to each partner having a negative capital account balance, pro rata, to the extent of such negative balance. Thereafter, such gain will be allocated in accordance with the distribution of net proceeds from sale or refinancing, with the balance allocated to the limited partners. 4. Real Estate Investments Real estate investments consist of three residential apartment complexes acquired either directly or through investments in joint ventures as follows: Apartment Date Purchase Property Name Units Location Acquired Price Las Colinas I 226 Scottsdale, AZ 5/20/81 $9,266,864 Las Colinas II 74 Scottsdale, AZ 9/23/82 3,564,919 Tierra Catalina 120 Tucson, AZ 3/9/84 7,012,650 Cedar Bay Village, Ridge Park, Kingston Village and Tierra Catalina were originally acquired through joint ventures with unaffiliated developers. On March 30, 1984, the co-venturer's interest with respect to Tierra Catalina was acquired for $400,000. To each venture, the Partnership contributed the apartment projects as its initial capital contribution. On November 27, 1996, the Partnership sold Ridge Park (the "Property") to Ridge Park Limited Partnership, an Oklahoma limited partnership ("Ridge Park L.P."), which is unaffiliated with the Partnership. The selling price was determined by arm's length negotiations between the Partnership and Ridge Park L.P. Ridge Park was sold for $3,385,000. The Partnership received net proceeds of $3,196,264 from the transaction of which $1,902,666, representing outstanding principal and interest, was used to fully satisfy the Partnership's mortgage obligation on the Property. The transaction resulted in a gain on sale of $1,410,622 which included the recognition of mortgage prepayment penalties of $36,843, and a $33,154 write-off of the unamortized portion of mortgage fees. The gain was allocated in accordance with the Partnership Agreement. On February 27, 1997, the General Partners paid a special distribution of $1,291,785 ($16.50 per unit) to the Limited Partners, representing the net proceeds from the sale of the Property. On July 20, 1995, the Partnership sold Kingston Village and Cedar Bay Village (the "Properties") to an institutional buyer (the "Buyer"), which was unaffiliated with the Partnership. The selling price was determined by arm's length negotiations between the Partnership and the Buyer. Kingston Village and Cedar Bay Village were sold for $5,370,000 and $1,410,000, respectively. The Partnership received net proceeds of $6,555,332 from the transaction of which $3,541,400, representing outstanding principal and interest, was used to fully satisfy the Partnership's mortgage obligations on the Properties. The transaction resulted in a gain on sale of $1,485,121 which included the recognition of mortgage prepayment penalties of $120,926 and a $101,146 write-off of the unamortized portion of mortgage fees. The gain was allocated in accordance with the Partnership Agreement. On August 17, 1995, the Partnership paid a special distribution of $3,170,745 or $40.50 per Unit to the limited partners. The special distribution was comprised of the net proceeds from the sale of the Properties and Partnership cash reserves. The joint venture and limited partnership agreements for Cedar Bay Village, Kingston Village, Ridge Park Associates, Tierra Catalina and Las Colinas substantially provide that: a. Available cash from operations will be distributed 100% to the Partnership until it has received an annual, non-cumulative preferred return, as defined. Any remaining balance will be distributed 99% to the Partnership and 1% to the corporate General Partners. b. Net income will be allocated first, proportionately to partners with negative capital accounts, as defined, until such capital accounts, as defined, have been increased to zero. Then, to the Partnership up to the amount of any payments made on account of its preferred return; thereafter, 99% to the Partnership and 1% to the corporate General Partners. All losses will be allocated first, to the partners with positive capital accounts, as defined, until such accounts have been reduced to zero. Then, 99% to the Partnership and 1% to the corporate General Partners. c. Income from a sale will be allocated first, to the Partnership until the Partnership's capital accounts, as defined, are equal to the fair market value of the ventures' assets at the date of the amendments. Then, any remaining balance will be allocated 99% to the Partnership and 1% to the corporate General Partners. Net proceeds from a sale or refinancing will be distributed first to the partners with the positive capital account balance, as defined; thereafter, 99% to the Partnership and 1% to the corporate General Partners. 5. Mortgages Payable Mortgages payable, at December 31, 1996, consist of the following first mortgage loans: Interest Date of Property Name Principal Rate Loan Term Las Colinas I and II $6,325,637 8.50% 9/1/92 7 years Tierra Catalina 3,617,399 8.50% 9/1/92 7 years On August 27, 1992, the Partnership obtained new first mortgage loans on all of its properties from Washington Mortgage Financial Group, an unaffiliated party. Total proceeds of $15,900,000 were received and collateralized by deeds of trust and assignments of rents as security encumbering the properties. Additionally, these mortgages contain provisions for prepayment penalties if the mortgages are repaid prior to their maturity date of September 1, 1999. On November 27, 1996, Ridge Park was sold. A portion of the sales proceeds, in the amount of $1,939,509 representing outstanding principal, interest and pre-payment penalties, was used to fully satisfy the Partnership's mortgage obligation on the Property. On July 20, 1995, Kingston Village and Cedar Bay Village were sold. A portion of the sales proceeds, in the amount of $3,662,325, representing outstanding principal, interest and pre- payment penalties, was used to fully satisfy the Partnership's mortgage obligations on the Properties. Annual maturities of mortgage notes principal over the next three years are as follows: Year Amount 1997 $ 112,775 1998 122,743 1999 9,707,518 $ 9,943,036 Based on borrowing rates currently available to the Partnership for mortgage loans with similar terms and average maturities, the fair value of long-term debt approximates carrying value. 6. Transactions with Related Parties The following is a summary of fees earned and reimbursable expenses to the General Partners and affiliates for the years ended December 31, 1996, 1995 and 1994, and the unpaid portion at December 31, 1996: Unpaid at December 31, Earned 1996 1996 1995 1994 RI 81 Real Estate Services, Inc. and affiliates: Out-of-pocket expenses $ -- $ 3,968 $ 2,244 $ 1,132 ConAm and affiliates: Property operating salaries -- 296,558 394,663 418,143 Property management fees 13,045 181,291 217,706 234,723 Total $ 13,045 $481,817 $614,613 $653,998 7. Reconciliation of Financial Statement and Tax Information The following is a reconciliation of the net income (loss) for financial statement purposes to net income (loss) for federal income tax purposes for the years ended December 31, 1996, 1995 and 1994: 1996 1995 1994 Net income (loss) per financial statements $ 1,285,707 $ 1,141,669 $ (252,627) Tax basis joint venture net loss in excess of GAAP basis joint venture net income (loss) (74,666) (443,083) (253,640) Gain on sale of property for tax purposes in excess of gain per financial statements 1,357,592 2,755,883 -- Other (700) 1,000 1,050 Taxable net income (loss) $ 2,567,933 $ 3,455,469 $ (505,217) The following is a reconciliation of partners' capital for financial statement purposes to partners' capital (deficit) for federal income tax purposes as of December 31, 1996, 1995 and 1994: 1996 1995 1994 Partners' capital per financial statements $ 2,860,363 $ 3,575,400 $ 6,352,183 Accrued distribution from sale of property 1,304,833 -- -- Adjustment for cumulative difference between tax basis loss and net income (loss) per financial statements (2,994,721) (4,276,947) (6,590,747) Partners' capital (deficit) per tax return $ 1,170,475 $ (701,547) $ (238,564) 8. Distributions Paid Cash distributions, per the consolidated statements of partners' capital (deficit), are recorded on the accrual basis, which recognizes specific record dates for payments within each calendar year. The consolidated statements of cash flows recognize actual cash distributions paid during the calendar year. The following table discloses the annual differences as presented on the consolidated financial statements: Distributions Distributions Payable Distributions Distributions Payable Beginning of Year Declared Paid December 31 1996 $173,978 $2,000,744 $ 695,911 $1,478,811 1995 173,978 3,918,452 3,918,452 173,978 1994 173,978 695,911 695,911 173,978 Report of Independent Accountants To the Partners of Hutton/ConAm Realty Investors 81: We have audited the consolidated balance sheets of Hutton/ConAm Realty Investors 81, a California limited partnership, and Consolidated Ventures as of December 31, 1996 and 1995, and the related consolidated statements of operations, partners' capital (deficit) and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hutton/ConAm Realty Investors 81, a California limited partnership, and Consolidated Ventures as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Hartford, Connecticut February 14, 1997 Net Asset Valuation Comparison of Acquisition Costs to Appraised Value and Determination of Net Asset Value Per $262 Unit at December 31, 1996 (Unaudited) Acquisition Cost (Purchase Price Partnership's Plus General Share of Partners' December 31, Acquisition 1996 Appraised Property Date of Acquisition Fees) Value (1) Las Colinas I & II 5/20/81 & 9/23/82 $ 13,326,613 $ 14,100,000 Tierra Catalina 3/9/84 7,759,670 6,000,000 $ 21,086,283 20,100,000 Cash and cash equivalents 3,092,521 Other assets 14,292 23,206,813 Less: Total liabilities (10,379,331) Partnership Net Asset Value (2) $ 12,827,482 Net Asset Value Allocated: Limited Partners $ 12,458,860 General Partners 368,622 $ 12,827,482 Net Asset Value Per Unit (78,290 units outstanding) $ 159.14 (1) This represents the Partnership's share of the December 31, 1996 Appraised Values which were determined by an independent property appraisal firm. (2) The Net Asset Value assumes a hypothetical sale at December 31, 1996 of all the Partnership's properties at a price based upon their value as a rental property as determined by an independent property appraisal firm, and the distribution of the proceeds of such sale, combined with the Partnership's cash after liquidation of the Partnership's liabilities, to the Partners. Limited Partners should note that appraisals are only estimates of current value and actual values realizable upon sale may be significantly different. A significant factor in establishing an appraised value is the actual selling price for properties which the appraiser believes are comparable. In addition, the appraised value does not reflect the actual costs which would be incurred in selling the properties. As a result of these factors and the illiquid nature of an investment in Units of the Partnership, the variation between the appraised value of the Partnership's properties and the price at which Units of the Partnership could be sold may be significant. Fiduciaries of Limited Partners which are subject to ERISA or other provisions of law requiring valuations of Units should consider all relevant factors, including, but not limited to Net Asset Value per Unit, in determining the fair market value of the investment in the Partnership for such purposes. Schedule III - Real Estate and Accumulated Depreciation December 31, 1996 Residential Property: Las Colinas Las Colinas Consolidated Ventures: Apts I Apts II Tierra Catalina Total Location Scottsdale, AZ Scottsdale, AZ Tucson, AZ na Construction date 1981 1982 1983, 1984 na Acquisition date 05-20-81 09-23-82 03-09-84 na Life on which depreciation in latest income statements is computed (3) (3) (3) na Encumbrances $ 6,325,637 $ -- $ 3,617,399 $ 9,943,036 Initial cost to Partnership: Land $ 1,582,000 $ 514,564 $ 1,497,150 $ 3,593,714 Buildings and improvements $ 8,268,721 $3,268,996 $ 6,403,622 $17,941,339 Costs capitalized subsequent to acquisition: Land, buildings and improvements $ 29,123 $ 8,494 $ 32,772 $ 70,389 Gross amount at which carried at close of period: (1) Land $ 1,611,123 $ 515,719 $ 1,503,333 $ 3,630,175 Buildings and improvements 8,268,721 3,276,335 6,430,211 17,975,267 $ 9,879,844 $3,792,054 $ 7,933,544 $21,605,442 Accumulated depreciation (2) $ 5,126,566 $1,878,005 $ 3,298,811 $10,303,382 (1) Represents aggregate cost for both financial reporting and Federal income tax purposes. (2) The amount of accumulated depreciation for Federal income tax purposes is $17,151,014. (3) Buildings and improvements - 25 years; personal property - 10 years. A reconciliation of the carrying amount of real estate and accumulated depreciation for the years ended December 31, 1996, 1995, and 1994 follows: 1996 1995 1994 Real estate investments: Beginning of year $ 25,243,577 $ 33,729,297 $ 33,729,297 Dispositions (3,638,135) (8,485,720) -- End of year $ 21,605,442 $ 25,243,577 $ 33,729,297 Accumulated depreciation: Beginning of year $ 11,370,295 $ 13,875,550 $ 12,735,626 Depreciation expense 818,734 1,011,400 1,139,924 Dispositions (1,885,647) (3,516,655) -- End of year $ 10,303,382 $ 11,370,295 $ 13,875,550 Report of Independent Accountants Our report on the consolidated financial statements of Hutton/ConAm Realty Investors 81, a California Limited Partnership, and Consolidated Ventures has been incorporated by reference in this Form 10-K from the Annual Report to unitholders of Hutton/ConAm Realty Investors 81 for the year ended December 31, 1996. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Hartford, Connecticut February 14, 1997 EX-27 3 RI81 FINANCIAL DATA SCHEDULE FOR 1996 FORM 10-K
5 12-MOS DEC-31-1996 DEC-31-1996 3,092,521 000 000 000 000 000 21,605,442 10,303,382 14,544,527 1,741,128 9,943,036 000 000 000 2,860,363 14,544,527 3,622,403 3,713,685 000 1,817,928 1,027,927 000 992,745 000 000 000 000 000 000 1,285,707 15.53 15.53
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