-----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, Qnr9dqpBJ1DAevdopVquxN+e1vnGmdKdiRLbe5N8/NX7pXmRnYb/tDTQgV/lWCRI cnP7DD/cWOYmypXMz1tRQg== 0000928790-97-000052.txt : 19970401 0000928790-97-000052.hdr.sgml : 19970401 ACCESSION NUMBER: 0000928790-97-000052 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUTTON CONAM REALTY INVESTORS 4 CENTRAL INDEX KEY: 0000722745 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 112685746 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13329 FILM NUMBER: 97570971 BUSINESS ADDRESS: STREET 1: 3 WORLD FINANCIAL CENTER, 29TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10285 BUSINESS PHONE: 2125263237 MAIL ADDRESS: STREET 1: 3 WORLD FINANCIAL CENTER STREET 2: 29TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10285 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 from _____ to _____ Commission file number: 0-13329 HUTTON/CONAM REALTY INVESTORS 4 ----------------------------------- Exact name of Registrant as specified in its charter California 11-2685746 -------------- ------------- State or other jurisdiction of incorporation or organization I.R.S. Employer 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 January 13, 1984 (included in Amendment No. 1 to Registration Statement No. 2-84863, filed January 13, 1984) 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 4 (the "Registrant" or the "Partnership") is a California limited partnership of which RI 3-4 Real Estate Services Inc. ("RI 3-4 Services," formerly Hutton Real Estate Services VIII, Inc.), a Delaware corporation, and ConAm Property Services IV, Ltd., a California limited partnership ("ConAm Services"), are the general partners (together, the "General Partners"). Commencing January 13, 1984, the Registrant began offering through E.F. Hutton & Company Inc., an affiliate of the Registrant ("Hutton"), up to a maximum of 130,000 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. 2-84863, which Registration Statement was declared effective on January 13, 1984. The offering of Units was terminated on October 11, 1984. Upon termination of the offering, the Registrant had accepted subscriptions for 128,110 Units for an aggregate of $64,055,000. Narrative Description of Business The Registrant is engaged in the business of acquiring, operating and holding for investment multifamily residential properties which by virtue of their location and design and the nature of the local real estate market have the potential for long-term capital appreciation and generation of current income. All of the proceeds available for investment in real estate were originally invested in three residential apartment properties and three limited partnerships, each of which owns a specified property. Funds held as a working capital reserve are invested in bank certificates of deposit, 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 continue 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 have begun to sell the properties, and intend to sell the remaining four 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 six residential apartment complexes (collectively, the "Properties"), either directly or through investments in limited partnerships or joint ventures. Two of these, Trails at Meadowlakes Apartments and Cypress Lakes Apartments were sold on July 20, 1995. As of December 31, 1996, the Registrant had interests in the Properties as follows: (1) Pelican Landing, a 204-unit apartment complex located in Clearwater, Florida; (2) Village at the Foothills II, a 120-unit apartment complex located in Tucson, Arizona; (3) River Hill Apartments, a 192-unit apartment complex located in the Las Colinas area of Irving, Texas; (4) Shadowood Village, a 110-unit apartment complex located in Jacksonville, Florida. In September 1996, the Partnership signed a contract to sell River Hill Apartments, however, in November 1996, the prospective buyer executed its right to terminate the purchase agreement during the due diligence period. On January 24, 1997, the Partnership signed a contract to sell the property to another institutional investor. However, on March 17, 1997, the General Partners opted to allow the prospective buyer to exercise its right to terminate the purchase agreement. The General Partners have since resumed marketing River Hill Apartments for sale. 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. 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 and Florida 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 3-4 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 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 real estate investments 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. River Hill Apartments - Irving, Texas Situated approximately 15 miles northwest of Dallas, this 192-unit apartment complex is located in Las Colinas, a 12,220 acre master-planned community in the city of Irving. Following a period of overbuilding during the 1980s, limited new construction and sustained population growth have fueled a healthy multifamily housing market in this area in recent years. The Las Colinas submarket reported average occupancy of 95% as of the second quarter of 1996, compared with 96% in third quarter of 1995. While average rental rates in the overall Dallas market increased 5% from the second quarter of 1995 to the second quarter of 1996, the Las Colinas submarket reported a 1% decrease during the same period. Although approximately 1,020 units have been approved for construction in the Las Colinas submarket, a two-year building moratorium instituted in the market during 1995 remains in effect. Nonetheless, competition for tenants remains strong as there are a number of competing properties within River Hill's submarket. One factor which could hinder the Partnership's ability to complete a sale of River Hill and the ultimate sales value of the property are defects related to the original design and construction of the property. The Partnership favorably settled claims against several parties related to the soil condition and defects in April 1991 and used the settlement proceeds to repair certain aspects of the defective work, as previously disclosed. Nevertheless, the presence of these original structural problems may have an adverse impact on the Partnership's ability to complete the sale and the final selling price. Shadowood Village - Jacksonville, Florida Shadowood Village is a 110-unit luxury apartment complex located in an oceanside residential area in Jacksonville in the Southeast submarket. The area has experienced generally favorable market conditions in recent years, with physical occupancy in the Southeast submarket reaching 95% in the second quarter of 1996, largely unchanged from 94% a year earlier. Although rents have remained relatively flat during the past year for the Southeast submarket, a number of newer properties have implemented rent increases over the past year, and in Shadowood Village's immediate area, rents rose 8% from the second quarter of 1995 to the second quarter of 1996. These Favorable market conditions have led to an increase in new multifamily construction, including five complexes with more than 1,400 units proposed for the near future. Furthermore, there were more total units permitted (1,597) for new construction in the first half of 1996 than in any full year since 1991. Nonetheless, the robust Jacksonville economy and strong population growth is expected to keep pace with the new supply and it is expected that the apartment market will remain relatively stable in 1997. Village at the Foothills II - Tucson, Arizona This 120-unit apartment community is situated near the prestigious "foothills" section of Tucson. Village at the Foothills II 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 Village at the Foothills II is located, occupancy rates declined from 91% in the second quarter of 1995 to 84.5% in the same period in 1996. Pelican Landing - Clearwater, Florida This 204-unit apartment complex is situated in southeast Clearwater in Pinellas County. Overall occupancy in the Pinellas County was 96% in the third quarter of 1996, compared with 97% in the third quarter of 1995, and rental rates increased by approximately 6% during the same period. Pelican Landing is located in the Gateway submarket which reported an average occupancy rate of 96% in the third quarter. In keeping with Pinellas County averages, rental rates in the Gateway submarket also increased by 6% from 1995 to 1996. As much of the surrounding area is already built up, new construction has remained minimal with only 374 units permitted for the first nine months of 1996. It is not expected that there will be significant new construction in the market in the foreseeable future. The minimal new construction coupled with continuing population growth are expected to result in sustained strength in market conditions. 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 Partnership's Limited Partnership Units and Related Security Holder Matters As of December 31, 1996, the number of Unitholders of record was 6,985. No established public trading market has developed for the Units, and it is not anticipated that such 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 $2,314,876, which were invested in unaffiliated money market funds, a decrease of $121,480 from the balance at December 31, 1995. The decrease is attributable to cash used for distributions, and additions to real estate exceeding cash provided by operating activities. The Partnership expects sufficient cash to be generated from operations to meet its current operating expenses. The Partnership had signed a contract, dated September 26, 1996, to sell River Hill Apartments. On November 8, 1996, the prospective buyer executed its right to terminate the purchase agreement during the due diligence period. Subsequently, the Partnership resumed marketing the property for sale and signed a contract dated January 24, 1997 to sell the property to an unaffiliated institutional investor. However, on March 17, 1997, the General Partners opted to allow the prospective buyer to exercise its right to terminate the purchase agreement. The General Partners have since resumed marketing River Hill Apartments for sale. Accordingly, River Hill Apartments was reclassified on the consolidated balance sheet as of December 31, 1996, as "Property held for disposition" at its net book value. The General Partners declared a cash distribution of $3.75 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. Given the anticipated sale of River Hill Apartments and the corresponding reduction in the Partnership's cash flow, the General Partners expect that the level of cash distributions will be reduced to reflect cash flow from the remaining three properties. 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 properties in an orderly manner over the next few years. Assuming these efforts are successful, the General Partners 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 $181,438 at December 31, 1995 to $108,269 at December 31, 1996 primarily due to write-offs of holdback deposits and legal fees related to the sale of Cypress Lakes, and a reduction in the accrual of appraisal fees due to the sale of Cypress Lakes and Trails at Meadowlakes in July 1995. The General Partners continue to perform various improvements at the properties including interior repairs at Village at the Foothills II, Pelican Landing and Shadowood Village and other repairs to prepare vacant apartments for reoccupancy. In addition, exterior painting at Pelican Landing commenced in the first quarter of 1997 and is scheduled to be finished by the end of the second quarter. The General Partners will monitor the need for additional improvement work at the properties on an ongoing basis to keep them competitive in their respective markets. 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 in 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 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 $1,022,553, compared with net income of $3,259,624 for the year ended December 31, 1995. The decline in net income is primarily attributable to the $2,854,884 gain recognized on the sale of Trails at Meadowlakes and Cypress Lakes. Excluding the gain, the Partnership generated income of $404,740 for the year ended December 31, 1995. Net cash provided by operating activities was $2,137,022 for the year ended December 31, 1996, compared to $2,363,323 in fiscal 1995. The decrease is primarily due to the decrease in cash flow from property operations resulting from the sale of Trails at Meadowlakes and Cypress Lakes in July 1995. Rental income for the year ended December 31, 1996 was $4,778,238, compared with $6,351,434 for the year ended December 31, 1995. The decrease in 1996 reflects lower revenues primarily due to the sale of Trails at Meadowlakes and Cypress Lakes, partially offset by increased rental income at three of the four remaining properties. Interest and other income for the year ended December 31, 1996 was $148,102, compared with $245,330 in 1995. The decrease is primarily due to the Partnership maintaining lower average cash balances in 1996. Total expenses for the year ended December 31, 1996 were $3,903,787, compared with $6,192,024 for 1995. The decrease in 1996 reflects a decrease in depreciation, interest and property operating expenses and the absence of a loss on write-down of real estate. Depreciation and property operating expenses declined primarily as a result of the sale of Trails at Meadowlakes and Cypress Lakes. There was no interest expense in 1996 due to the July 1995 pre-payment of the mortgage loan secured by Trails at Meadowlakes. Total expenses were also higher in the 1995 period due to a $477,170 loss on the write-down of River Hill Apartments. General and administrative expenses for 1996 decreased from 1995 as a result of decreases in legal fees and appraisal fees, partially offset by higher partnership administrative expenses. 1995 versus 1994 Partnership operations for the year ended December 31, 1995 resulted in net income of $3,259,624, compared with net income of $984,628 for the year ended December 31, 1994. The increase in net income was attributable to the $2,854,884 gain recognized on the sale of Trails at Meadowlakes and Cypress Lakes, partially offset by a decrease in rental income and the $477,170 loss recognized on the write-down of River Hill Apartments. Excluding the gain recognized on the sale of the properties, income from operations was down for 1995 compared to 1994, primarily as a result of the sale of Trails at Meadowlakes and Cypress Lakes, write-down of River Hill Apartments, and, to a lesser extent, from an increase in repairs and maintenance expenses at three of the remaining properties and higher insurance expense. Rental income for the year ended December 31, 1995 was $6,351,434, compared with $7,552,784 for the year ended December 31, 1994. The decrease in 1995 reflects lower revenues primarily due to the sale of Trails at Meadowlakes and Cypress Lakes, partially offset by increased rental income at the four remaining properties. Interest income for the year ended December 31, 1995 was $245,330, compared with $79,860 in 1994. The increase in 1995 is due primarily to increased available cash balances resulting from the suspension of cash distributions beginning in the third quarter of 1994, and higher interest rates in 1995. Total expenses for the year ended December 31, 1995 were $6,192,024, compared with $6,648,016 for 1994. The decrease in 1995 reflects a decrease in interest expense, depreciation and property operating expenses. All three expense categories declined primarily as a result of the sale of Trails at Meadowlakes and Cypress Lakes. Partially offsetting the reduction in property operating expenses due to the sales, was the $477,170 loss on the write-down of River Hill Apartments and an increase in repairs and maintenance at three of the remaining properties and insurance expense. General and administrative expenses for 1995 increased from 1994 as a result of increases in audit and other partnership administration expenses. The average occupancy levels at each of the properties for the years ended December 31, 1996, 1995 and 1994 were as follows: Twelve Months Ended December 31, Property 1996 1995 1994 Pelican Landing 97% 97% 97% Village at the Foothills II 95% 95% 95% River Hill Apartments 96% 96% 96% Shadowood Village 95% 95% 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 3-4 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 3-4 Services RI 3-4 Services (formerly Hutton Real Estate Services VIII, Inc.) is a Delaware corporation formed on October 29, 1982, and is an affiliate of Lehman Brothers Inc. See the section captioned "Certain Matters Involving Affiliates of RI 3-4 Services" 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 name to RI 3-4 Services. Certain officers and directors of RI 3-4 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 ages of, as well as the positions held by, the directors and executive officers of RI 3-4 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 August 30, 1982. The sole general partner of ConAm Services is Continental American Development, Inc. ("ConAm Development"). The names and ages of, as well as the 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 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 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 of Science degree in Accounting from the University of Illinois. Mr. Svatos is a Certified Public Accountant. Ralph W. Tilley, 42, is a Vice President and Treasurer of ConAm Management. He is responsible for the financial aspects of syndications and acquisitions, and ConAm Management'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 of Science degree in Accounting from San Diego State University and is a Certified Public Accountant. J. Bradley Forrester, 39, currently serves as a Senior 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 3-4 Services On July 31, 1993, Shearson sold certain of its domestic retail brokerage and asset management businesses to Smith Barney. Subsequent to this 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 general partner changed its name to "RI 3-4 Real Estate Services, Inc." and the Hutton Group changed its name to "LB I Group Inc." to delete any references 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 and 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. 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 3-4 Services and ConAm Services each received $106,758.50 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. Pursuant to the Amended and Restated Certificate and Agreement of Limited Partnership of the Registrant, for the year ended December 31, 1996, $213,517 of the Registrant's net income was allocated to the General Partners ($106,758.50 to RI 3-4 Services and $106,758.50 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 48 through 51 of the Prospectus of the Registrant dated January 13, 1984 (the "Prospectus"), contained in Amendment No. 1 to Registrant's Registration Statement No. 2-84863, filed January 13, 1984, under the section captioned "Distributions and Allocations," 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 on pages 32 and 33 of the Prospectus under the caption "Investment Objectives and Policies - Management of Properties," which description is herein incorporated by reference. A summary of property management fees earned by ConAm Management during the past three fiscal years is incorporated by reference to Note 6 to the Consolidated Financial Statements included in 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 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 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 (a)(1) Financial Statements: Page 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)(2) Financial Statement Schedule: Schedule III - Real Estate Investments and Property Held for Disposition 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) Certificate and Agreement of Limited Partnership (included as, and incorporated herein by reference to, Exhibit A to the Prospectus of Registrant dated January 13, 1984 (the "Prospectus"), contained in Amendment No. 1 to Registration Statement No. 2-84863 of Registrant, filed January 13, 1984 (the "1984 Registration Statement")). (4) Subscription Agreement and Signature Page (included as, and incorporated herein by reference to, Exhibit 3.1 to the Prospectus). (10)(A) Purchase Agreement relating to Pelican Landing (formerly Feather Sound Apartments), between the Registrant and Feather Sound, Inc., and the exhibits thereto (included as, and incorporated herein by reference to, Exhibit (10)(B) to the 1984 Annual Report). (B) Purchase Agreement relating to River Hill Apartments (formerly Oxbow Ridge I), between the Registrant and Tres Titan Investors, and the exhibits thereto (included as, and incorporated herein by reference to, Exhibit (10)(D) to the 1984 Annual Report). (C) Purchase Agreement relating to Village at the Foothills II (formerly Ina Village Apartments), between the Registrant and Epoch Properties, Inc. and the exhibits thereto (included as, and incorporated herein by reference to, Exhibit (10)(E) to the 1984 Annual Report). (D) Documents relating to Shadowood Village (included as, and incorporated herein by reference to, Exhibit (10)(A) to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1985 (the "1985 Quarterly Report" (Commission File No. 0- 13329)). (E) 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 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992 (Commission File No. 0-13329)). (F) Amended and Restated Agreement of Limited Partnership of Village at the Foothills II Joint Venture 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- 13329)). (G) Certificate and Agreement of Limited Partnership of River Hill Apartments, Ltd (included as, and incorporated herein by reference to Exhibit 10(I) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (Commission File No. 0-13329)). (H) Amended and Restated Agreement of Limited Partnership of Shadowood Village, Ltd., 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. 0-13329)). (I) Property Management Agreement between Hutton/ConAm Realty Investors 4 and ConAm Management Corporation for the Pelican Landing 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- 13329)). (J) Property Management Agreement between Hutton/ConAm Realty Investors 4 and ConAm Management Corporation for the River Hill property (included as, and incorporated herein by reference to Exhibit 10-N to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (Commission File No. 0-13329)). (K) Property Management Agreements between Hutton/ConAm Realty Investors 4 and ConAm Management Corporation for the Shadowood Village property (included as, and incorporated herein by reference to Exhibit 10-O to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (Commission File No. 0- 13329)). (L) Property Management Agreement between Hutton/ConAm Realty Investors 4 and ConAm Management Corporation for the Village at the Foothills II property (included as, and incorporated herein by reference to Exhibit 10-Q to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 (Commission File No. 0-13329)). (13) Annual Report to Unitholders for the year ended December 31, 1996. (21) List of Subsidiaries, Joint Ventures or Limited Partnerships (included as, and incorporated herein by reference to Exhibit 22 of the Registrant's Annual Report on Form 10-K filed March 27, 1992 (Commission File No. 0-13329)). (27) Financial Data Schedule. (99) Portions of the Prospectus of Registrant dated January 13, 1984 (included as, and incorporated herein by reference to Exhibit 28 to the Registrant's 1988 Annual Report on Form 10-K for the fiscal year ended December 31, 1988 (Commission File No. 0-13329)). (b) Reports on Form 8-K: No reports on Form 8-K were filed in the fourth quarter of 1996. 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 4 BY: RI 3-4 Real Estate Services 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 IV, 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 3-4 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 E. Petrow Donald E. 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 IV, 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 RI4 1996 ANNUAL REPORT TO UNITHOLDERS Hutton/ConAm Realty Investors 4 Annual Report 1996 Exhibit 13 Hutton/ConAm Realty Investors 4 is a California limited partnership formed in 1984 to acquire, operate and hold for investment multifamily housing properties. At December 31, 1996, the Partnership's portfolio consisted of four apartment properties located in Arizona, Texas and Florida. Provided below is a comparison of average occupancy levels for the years ended December 31, 1996 and 1995. Average Occupancy Property Location 1996 1995 Pelican Landing Clearwater, Florida 97% 97% River Hill Apartments Irving, Texas 96% 96% Shadowood Village Jacksonville, Florida 95% 95% Village at the Foothills II Tucson, Arizona 95% 95% 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 4. In this report, we review Partnership operations and discuss general market conditions affecting the Partnership's properties. We have also included a performance summary which addresses operating results at each of the properties and financial highlights for the year. Property Update The Partnership signed a contract dated January 24, 1997 to sell River Hill Apartments to an unaffiliated institutional investor. However, on March 17, 1997, the General Partners opted to allow the prospective buyer to exercise its right to terminate the purchase agreement. The General Partners have since resumed marketing River Hill Apartments for sale. 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. In particular, Jacksonville and Clearwater were among the strongest multifamily housing markets in the country. The improving conditions prompted a rise in new construction in the markets where the Partnership owns properties, causing a slowdown in leasing activity towards the end of the year. In Tucson, market conditions were also impacted by new construction and the decision of many renters to purchase homes. This increased the use of rent specials to attract new tenants at many apartment properties, including Village at the Foothills II. Nonetheless, all of the Partnership's properties maintained average occupancy levels for the year of at least 95%, and the Partnership's rental income for the four properties increased by 3.1% 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. Cash Distributions The Partnership paid cash distributions totaling $15 per Unit for the year ended December 31, 1996, including the fourth quarter distribution of $3.75 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 $333.01 per original $500 Unit, including $94 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. Given the anticipated sale of River Hill Apartments and the corresponding reduction in the Partnership's cash flow, we expect that the level of cash distributions will be reduced to reflect cash flow from the remaining three properties. 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 98% of the outstanding Units agreed that these offers were inadequate, rejected the offers 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 We will continue to explore opportunities to sell the Partnership's 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, or that certain prices will be achieved, within this time frame. In the interim, we will seek to maximize the performance of the properties and further 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 3-4 Real Estate Services Inc. Continental American Development, Inc. General Partner of ConAm Property Services IV, Ltd. March 26, 1997 Performance Summary --------------------- Pelican Landing - Clearwater Florida This 204-unit apartment complex maintained strong operating results in 1996, with average occupancy of 97%, unchanged for the third consecutive year, and a 2% increase in rental income from 1995. These favorable operating results reflect the continued strength of the Clearwater apartment market. Overall occupancy in Pinellas County was 96% in the third quarter of 1996, compared with 97% a year earlier, and rental rates increased by approximately 6% during the same period. In keeping with Pinellas County averages, rental rates in Pelican Landing's submarket also increased by 6% from 1995 to 1996. New construction has remained minimal with only 374 units permitted for the first nine months of 1996, and it is not expected that there will be significant new construction in the foreseeable future. The minimal new construction coupled with an increasing population are expected to result in continuing strong market conditions. River Hill Apartments - Irving, Texas River Hill Apartments reported stable occupancy of 96% in 1996, unchanged for the fourth consecutive year. Rental rate increases were instituted on renewal units during the year, bringing about a 6% increase in rental income from 1995 to 1996. River Hill is located in the Las Colinas submarket of Irving, which reported average occupancy of 95% as of the second quarter of 1996, compared with 96% in third quarter of 1995. While average rental rates in the overall Dallas market increased 5% from the second quarter of 1995 to the second quarter of 1996, the Las Colinas submarket reported a 1% decrease during the same period. Although approximately 1,020 units have been approved for construction in the Las Colinas submarket, a two-year building moratorium instituted in the market during 1995 remains in effect. Nonetheless, competition for tenants remains strong as there are a number of competing properties within River Hill's submarket. Shadowood Village - Jacksonville, Florida Shadowood Village is a 110-unit luxury apartment complex located in an oceanside residential area in Jacksonville. The property reported an average occupancy level of 95% in 1996, unchanged from 1995, and a 3.8% increase in rental income from the prior year. Property improvements for the year included carpet replacement, irrigation repairs and other improvements to maintain the property's competitive position. Favorable market conditions in the Jacksonville area have led to an increase in new multifamily construction, including five complexes with more than 1,400 units proposed for the near future. Furthermore, there were more total units permitted (1,597) for new construction in the first half of 1996 than in any full year since 1991. Nonetheless, the robust Jacksonville economy and strong population growth is expected to keep pace with the new supply and it is expected that the apartment market will remain relatively stable in 1997. Village at the Foothills II - Tucson, Arizona This 120-unit apartment community is situated near the prestigious "foothills" section of Tucson. Village at the Foothills II competes with a number of apartment complexes and condominium developments within the Tucson area. The property reported an average occupancy of 95% in 1996, unchanged from 1995. 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 Village at the Foothills II is located, occupancy rates declined from 91% in the second quarter of 1995 to 84.5% in the same period in 1996. 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 $ 4,926 $ 6,597 $ 7,633 $ 7,299 $ 7,020 Gain on Sale of Properties - 2,855 - - - Net Income 1,023 3,260 985 724 719 Net Cash Provided by Operating Activities 2,137 2,363 3,034 2,778 2,706 Long-term Obligations at Year End - - 5,051 5,091 5,127 Total Assets at Year End 26,010 27,247 44,686 45,646 47,463 Net Income per Limited Partnership Unit* 6.32 22.28 2.12 2.30 1.31 Distributions per Limited Partnership Unit* 15.00 11.25 9.00 18.00 17.00 Special Distributions per Limited Partnership Unit* - 111.25 - - - * 128,110 units outstanding - - Total income decreased in 1996 primarily due to the July 1995 sale of Trails at Meadowlakes and Cypress Lakes. This was partially offset by increased rental income at the three of the four remaining properties. - - The decline in net income in 1996 is primarily attributable to the $2,854,884 gain recognized on the sale of Trails at Meadowlakes and Cypress Lakes in 1995. Excluding the gain, the Partnership generated income from operations of $404,740 for the year ended December 31, 1995, as compared to $1,022,553 in 1996. Cash Distributions Per Limited Partnership Unit 1996 1995 Special Distributions* $ _ $ 111.25 First Quarter 3.75 _ Second Quarter 3.75 3.75 Third Quarter 3.75 3.75 Fourth Quarter 3.75 3.75 Total $ 15.00 $ 122.50 *On August 22, 1995, the Partnership paid a special cash distribution totaling $111.25 per Unit, reflecting net proceeds received from the sale of Trails at Meadowlakes and Cypress Lakes of $94 per Unit and excess cash reserves of $17.25 per Unit which the General Partners determined could be distributed since the loan secured by Trails at Meadowlakes was paid off. Consolidated Balance Sheets At December 31, At December 31, 1996 1995 Assets Property: Land $ 5,627,763 $ 7,526,126 Building and improvements 20,448,021 26,226,602 26,075,784 33,752,728 Less accumulated depreciation (9,754,730) (8,958,549) 16,321,054 24,794,179 Property held for disposition 7,358,300 - Cash and cash equivalents 2,314,876 2,436,356 Other assets 15,370 16,206 Total Assets $26,009,600 $27,246,741 Liabilities and Partners' Capital Liabilities: Accounts payable and accrued expenses $ 108,269 $ 181,438 Distribution payable 533,792 587,171 Due to general partners and affiliates 20,443 19,602 Security deposits payable 144,220 143,040 Total Liabilities 806,724 931,251 Partners' Capital: General Partners - - Limited Partners 25,202,876 26,315,490 Total Partners' Capital 25,202,876 26,315,490 Total Liabilities and Partners' Capital $26,009,600 $27,246,741 Consolidated Statement of Partners' Capital (Deficit) For the years ended December 31, 1996, 1995 and 1994 General Limited Partners Partners Total Balance at December 31, 1993 $(584,636) $ 40,036,129 $ 39,451,493 Net Income 712,746 271,882 984,628 Cash distributions (128,110) (1,152,990) (1,281,100) Balance at December 31, 1994 - 39,155,021 39,155,021 Net Income 405,680 2,853,944 3,259,624 Cash distributions (405,680) (15,693,475) (16,099,155) Balance at December 31, 1995 - 26,315,490 26,315,490 Net Income 213,517 809,036 1,022,553 Cash distributions (213,517) (1,921,650) (2,135,167) Balance at December 31, 1996 $ - $ 25,202,876 $ 25,202,876 Consolidated Statements of Operations For the years ended December 31, 1996 1995 1994 Income Rental $4,778,238 $6,351,434 $7,552,784 Interest and other 148,102 245,330 79,860 Total Income 4,926,340 6,596,764 7,632,644 Expenses Property operating 2,545,471 3,630,788 3,927,435 Loss on write-down of real estate - 477,170 - Depreciation 1,184,781 1,610,725 2,034,770 Interest - 283,556 513,636 General and administrative 173,535 189,785 172,175 Total Expenses 3,903,787 6,192,024 6,648,016 Income from operations 1,022,553 404,740 984,628 Gain on sale of properties - 2,854,884 - Net Income $1,022,553 $3,259,624 $ 984,628 Net Income Allocated: To the General Partners $ 213,517 $ 405,680 $ 712,746 To the Limited Partners 809,036 2,853,944 271,882 $1,022,553 $3,259,624 $ 984,628 Per limited partnership unit (128,110 outstanding) Income from operations $ 6.32 $ 2.00 $ 2.12 Gain on sale - 20.28 - Net Income $ 6.32 $ 22.28 $ 2.12 Consolidated Statements of Cash Flows For the years ended December 31, 1996 1995 1994 Cash Flows From Operating Activities: Net Income $ 1,022,553 $ 3,259,624 $ 984,628 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,184,781 1,610,725 2,034,770 Loss on write-down of real estate - 477,170 - Gain on sale of properties - (2,854,884) _ Increase (decrease) in cash arising from changes in operating assets and liabilities: Other assets 836 6,321 (2,205) Accounts payable and accrued expenses (73,169) 21,651 1,041 Security deposits payable 1,180 (145,295) 15,144 Due to affiliates 841 (11,989) 208 Net cash provided by operating activities 2,137,022 2,363,323 3,033,586 Cash Flows From Investing Activities: Net proceeds from sale of properties - 17,551,351 - Additions to real estate (69,956) (149,631) (39,087) Net cash provided by (used for) investing activities (69,956) 17,401,720 (39,087) Cash Flows From Financing Activities: Mortgage principal payments - (5,051,086) (39,742) Distributions (2,188,546) (15,511,984) (1,921,650) Net cash used for financing activities (2,188,546) (20,563,070) (1,961,392) Net increase (decrease) in cash and cash equivalents (121,480) (798,027) 1,033,107 Cash and cash equivalents, beginning of period 2,436,356 3,234,383 2,201,276 Cash and cash equivalents, end of period $ 2,314,876 $ 2,436,356 $ 3,234,383 Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest $ - $ 283,556 $ 513,636 Notes to the Consolidated Financial Statements December 31, 1996, 1995 and 1994 1. Organization Hutton/ConAm Realty Investors 4 (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 May 10, 1984. 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 3-4 Real Estate Services, Inc., an affiliate of Lehman Brothers (see below), and ConAm Property Services IV, Ltd. ("ConAm"), 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 business 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 8, 1993, the Hutton Real Estate Services VIII, Inc. General Partner changed its name to RI 3-4 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 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. 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 have been eliminated in consolidation. Real Estate Investments - Real estate investments are recorded at the lower of cost, less accumulated depreciation or fair value. Cost includes the initial purchase price of the property, legal fees, 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. Assets held for disposition are recorded at the lessor of carrying value or fair market value less costs to sell. The Partnership adopted FAS 121 in the fourth quarter of 1995. Property Held for Disposition - During the fourth quarter of 1996 River Hill Apartments was reclassified to "Property held for disposition" at its net book value. Accordingly, River Hill Apartments will no longer be depreciated. 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 $91,641 and $87,579 at December 31, 1996 and 1995 respectively, restricted under certain state statutes. 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 disclosures of contingent assets and liabilities at the date of 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 reclassed 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 and all depreciation for any fiscal year will be allocated 99% to the limited partners and 1% to the General Partners. Net income before depreciation will be allocated as follows: (a) To the extent that net income from operations before depreciation does not exceed the amount of net cash from operations distributable to the partners with respect to such fiscal year, net income from operations before depreciation shall be allocated among the partners, pro rata in accordance with the amount of net cash from operations distributable to each partner with respect to such fiscal year to the extent thereof; and (b) To the extent that net income from operations before depreciation exceeds the amount of net cash from operations distributable to the partners with respect to such fiscal year, such excess shall be allocated (1) first, 100% to the General Partners, pro rata, in an amount equal to the excess, if any, of the General Partners' deficits, if any, in their capital accounts, over an amount equal to 1% of the aggregate capital contributions to the Partnership as reduced by the amount of the General Partners' capital contributions, and (2) second, 99% to the limited partners and 1% to the General Partners. Net proceeds from sales or refinancing will be distributed 100% to the limited partners until each limited partner has received an amount equal to his adjusted capital value (as defined) and an annual, cumulative 7% return thereon. The balance, if any, will be distributed 85% to the limited partners and 15% to the General Partners. 4. Real Estate Investments Real estate investments consist of four residential apartment complexes acquired either directly or through investments in joint ventures and limited partnerships as follows: Apartment Date Purchase Property Name Units Location Acquired Price Pelican Landing 204 Clearwater, FL 3/28/85 $ 12,179,329 Village at the Foothills II 120 Tucson, AZ 5/30/85 7,216,400 River Hill Apartments 192 Irving, TX 6/12/85 11,488,015 Shadowood Village 110 Jacksonville, FL 7/3/86 5,400,000 Pelican Landing Apartments was acquired directly by the Partnership. Village at the Foothills II was acquired through a joint venture with an unaffiliated developer and River Hill Apartments and Shadowood Village were acquired through limited partnerships with unaffiliated developers. To each limited partnership and joint venture, the Partnership assigned its rights to acquire the above properties and contributed cash equal to the purchase price of the properties. The Partnership's partners did not make initial capital contributions to these limited partnerships and joint ventures. On July 20, 1995, the Partnership sold Trails at Meadowlakes and Cypress Lakes (the "Properties"). Trails at Meadowlakes and Cypress Lakes sold for $8,940,000 and $8,825,000, respectively, to an institutional buyer (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 $17,551,351 from the transaction of which $5,057,952, representing outstanding principal and interest, was used to fully satisfy the Partnership's mortgage obligation on Trails at Meadowlakes. The transaction resulted in a gain on sale of $2,854,884 for financial statement purposes. On August 22, 1995, the Partnership paid a special distribution of $14,252,238 to the limited partners. The special distribution was comprised of net proceeds from the sale of the Properties and from Partnership cash reserves. On January 24, 1997, the Partnership executed an agreement for the purchase and sale of River Hill Apartments with an institutional investor. However, on March 17, 1997, the General Partners opted to allow the prospective buyer to exercise its right to terminate the purchase agreement. The General Partners have since resumed marketing River Hill Apartments for sale. Accordingly, River Hill Apartments has been reclassified on the balance sheet as "Property held for disposition" at its net book value. Based on the adoption of FAS 121, the Partnership recorded a write-down of $477,170 in 1995 to reduce the carrying value of River Hill Apartments to its estimated fair value. The impairment was caused by the need for necessary property improvements and changing market conditions. The limited partnership agreement of River Hill Apartments substantially provides that: a. Net cash from operations of River Hill Apartments will be distributed 100% to the Partnership until it has received an annual, noncumulative return of 10% on its adjusted capital contribution. Any remaining balance will be distributed 60% to the Partnership and 40% to the co-venturer. b. Net income of the limited partnership will be allocated to the Partnership and the co-venturers basically in accordance with the distribution of net cash from operations. All net losses and depreciation will be allocated to the Partnership. c. Net proceeds from a sale or refinancing of River Hill Apartments will be distributed 100% to the Partnership, until it has received an amount equal to 110% of its adjusted capital contribution. Distributions will then be made 75% to the Partnership and 25% to the co-venturer, until the Partnership has received an additional 110% of the Partnership's adjusted capital contribution. Any remaining balance will be distributed 50% to the Partnership and 50% to the co-venturer. The joint venture and limited partnership agreements of Village at the Foothills II and Shadowood Village substantially provide that: a. Available cash from operations will be distributed 100% to the Partnership until it has received its annual, noncumulative 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 and, then, 99% to the Partnership and 1% to the corporate General Partners. c. Income from a sale will be allocated to the Partnership until the Partnership's capital accounts, as defined, are equal to the fair market value of the venture's 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 a positive capital account balance, as defined; thereafter, 99% to the Partnership and 1% to the corporate General Partners. 5. Mortgage Payable On July 19, 1985, the Partnership obtained financing of $5,200,000, collateralized by a first mortgage encumbering Trails at Meadowlakes. The loan had an initial term of five years bearing interest at an annual rate of 12.50% with monthly payments of interest only. The loan was extended in 1990 for an additional five years bearing interest at a rate of 10.125% with monthly principal and interest payments. On July 20, 1995 the partnership closed on the sale of Trails at Meadowlakes and used a portion of the sales proceeds to satisfy the Partnership's outstanding mortgage obligation of $5,029,661. 6. Transactions with Related Parties The following is a summary of fees earned and reimbursable expenses paid 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 3-4 Real Estate Services, Inc. and affiliates: Out-of-pocket expenses $ - $ 724 $ 3,541 $ 2,227 ConAm and affiliates: Property operating salaries - 307,565 411,731 610,064 Property management fees 20,443 239,560 322,934 378,727 Total $20,443 $547,849 $738,206 $991,018 7. Reconciliation of Financial Statement and Tax Information The following is a reconciliation of the net income for financial statement purposes to net income for federal income tax purposes for the years ended December 31, 1996, 1995 and 1994: 1996 1995 1994 Net income per financial statements $ 1,022,553 $ 3,259,624 $ 984,628 Depreciation deducted for tax purposes in excess of depreciation expense per financial statements (92,628) (105,426) (159,133) Tax basis joint venture net loss in excess of GAAP basis joint venture net income (104,176) (103,451) (106,637) Financial statements loss on write-down of real estate over tax basis loss on write-down of real estate - 477,170 - Gain on sale of properties for tax purposes in excess of gain per financial statements - 5,305,729 - Other (2,213) 470 (25,567) Taxable net income $ (823,536)$ 8,834,116 $ 693,291 The following is a reconciliation of partners' capital for financial statement purposes to partners' capital for federal income tax purposes as of December 31, 1996, 1995 and 1994: 1996 1995 1994 Partners' capital per financial statements $25,202,876 $26,315,490 $39,155,021 Adjustment for cumulative difference between tax basis net income and net income per financial statements (1,834,166) (1,635,149) (7,209,641) Partners' capital per tax return $23,368,710 $24,680,341 $31,945,380 8. Distributions Paid Cash distributions, per the consolidated statements of partners' capital, 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 amounts as presented on the consolidated financial statements: Distributions Distributions Payable Distributions Distributions Payable Beginning of Year Declared Paid December 31, 1996 $587,171 $ 2,135,167 $ 2,188,546 $ 533,792 1995 - 16,099,155 15,511,984 587,171 1994 640,550 1,281,100 1,921,650 - Report of Independent Accountants ------------------------------------- To the Partners of Hutton/ConAm Realty Investors 4: We have audited the consolidated balance sheets of Hutton/ConAm Realty Investors 4, a California limited partnership, and Consolidated Ventures as of December 31, 1996 and 1995, and the related consolidated statements of operations, partners' capital 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 4, 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 $406 Unit at December 31, 1996 (Unaudited) Acquisition Cost (Purchase Price Partnership's Plus General Share of Partners' December 31, Date of Acquisition 1996 Appraised Property Acquisition Fees) Value (1) Pelican Landing 03-28-85 $ 12,700,000 $ 11,200,000 Village at the Foothills II 05-30-85 7,376,000 4,600,000 River Hill Apartments 06-12-85 12,016,575 7,500,000 Shadowood Village 07-03-86 5,649,540 4,400,000 $ 37,742,115$ 27,700,000 Cash and cash equivalents 2,314,876 Other assets 15,370 30,030,246 Less: Total liabilities (806,724) Partnership Net Asset Value (2) $ 29,223,522 Net Asset Value Allocated: Limited Partner $ 29,223,522 General Partners - $ 29,223,522 Net Asset Value Per Unit (128,110 units outstanding) $228.11 (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 is likely to 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 Investments and Property Held for Disposition: December 31, 1996 Village Residential Property: Pelican at the River Hill Shadowood Consolidated Ventures: Landing Foothills Apts Village Total Location Clearwater Irving Tucson Jacksonville na ,FL ,TX ,AZ ,FL Construction date 1984-1985 1984-1985 1984-1985 1985-1986 na Acquisition date 03-11-87 06-12-85 05-30-85 07-03-86 na Life on which depreciation in latest income statements is computed (3) (3) (3) (3) na Encumbrances - - - - - Initial cost to Partnership: Land $ 3,484,946 $1,584,049 $3,059,866 $ 566,000$ 8,694,861 Buildings and improvements 9,422,260 5,838,595 9,060,195 5,125,065 29,446,115 Costs capitalized subsequent to acquisition: Land, buildings and improvements (539) 11,134 125,472 44,274 180,341 Write-down (4) - - (4,498,633) - (4,498,633) Elimination of accumulated depreciation - - (388,600) - (388,600) Gross amount at which carried at close of period: Land $ 3,474,525 $1,583,964 $1,898,363 $ 569,274$ 7,526,126 Buildings and improvements 9,432,142 5,849,814 5,459,937 5,166,065 25,907,958 12,906,667 7,433,778 7,358,300 5,735,339 33,434,084 Accumulated depreciation 4,624,707 2,827,357 - 2,302,666 9,754,730 (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 $23,106,082. (3) Buildings and improvements - 25 years; personal property - 10 years. (4) In 1995, the Partnership recorded a write-down to reduce the carrying value of River Hill Apartments to its estimated fair value. 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 and property held for disposition: Beginning of year $33,752,728 $60,325,756 $60,286,669 Additions 69,956 149,631 39,087 Write-down - (4,498,633) - Dispositions - (22,224,026) - Reclassification to held for disposition (388,600) - - End of year $33,434,084 $33,752,728 $60,325,756 Accumulated depreciation: Beginning of year $ 8,958,549 $18,896,846 $16,862,076 Depreciation expense 1,184,781 1,610,725 2,034,770 Elimination of accumulated depreciation - (388,600) - Write-down - (4,021,463) - Dispositions - (7,527,559) - End of year $ 9,754,730 $ 8,958,549 $18,896,846 Report of Independent Accountants ------------------------------------ Our report on the consolidated financial statements of Hutton/ConAm Realty Investors 4, 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 4 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 RI4 FINANCIAL DATA SCHEDULE FOR 1996 10K
5 12-MOS DEC-31-1996 DEC-31-1996 2,314,876 000 000 000 000 15,370 33,434,084 9,754,730 26,009,600 806,724 000 000 000 000 25,202,876 26,009,600 4,778,238 4,926,340 000 2,545,471 1,358,316 000 000 1,022,553 000 1,022,553 000 000 000 1,022,553 6.32 6.32
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