United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q (Mark One) X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 1997 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: 0-10223 HUTTON/CONAM REALTY INVESTORS 81 Exact Name of Registrant as Specified in its Charter California State or Other Jurisdiction of 13-3069026 Incorporation or Organization I.R.S. Employer Identification No. 3 World Financial Center, 29th Floor, New York, NY Attn: Andre Anderson 10285 Address of Principal Executive Offices Zip Code (212) 526-3237 Registrant's Telephone Number, Including Area Code Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Consolidated Balance Sheets At June 30, At December 31, 1997 1996 Assets Investments in real estate: Land $ 3,630,175 $ 3,630,175 Buildings and improvements 17,975,267 17,975,267 21,605,442 21,605,442 Less accumulated depreciation (10,662,887) (10,303,382) 10,942,555 11,302,060 Cash and cash equivalents 1,431,046 2,741,077 Restricted cash 374,839 351,444 Mortgage fees, net of accumulated amortization of $245,471 in 1997 and $220,063 in 1996 110,246 135,654 Other assets 21,080 14,292 Total Assets $12,879,766 $14,544,527 Liabilities and Partners' Capital Liabilities: Mortgage payable $ 9,887,842 $ 9,943,036 Distribution payable 160,929 1,478,811 Accounts payable and accrued expenses 178,604 177,414 Security deposits 76,087 71,858 Due to general partners and affiliates 12,728 13,045 Total Liabilities 10,316,190 11,684,164 Partners' Capital (Deficit): General Partners (201,261) (201,261) Limited Partners 2,764,837 3,061,624 Total Partners' Capital 2,563,576 2,860,363 Total Liabilities and Partners' Capital $12,879,766 $14,544,527 Consolidated Statement of Partners' Capital (Deficit) For the six months ended June 30, 1997 General Limited Partners Partners Total Balance at January 1, 1996 $ (201,261) $ 3,061,624 $ 2,860,363 Net income 32,186 (7,115) 25,071 Cash distributions (32,186) (289,672) (321,858) Balance at June 30, 1997 $ (201,261) $ 2,764,837 $ 2,563,576 Consolidated Statements of Operations Three months Six Months ended June 30, ended June 30, 1997 1996 1997 1996 Income Rental $ 773,527 $ 915,889 $ 1,577,737 $ 1,827,918 Interest and other 20,550 23,507 57,973 48,463 Total Income 794,077 939,396 1,635,710 1,876,381 Expenses Property operating 398,412 414,526 708,858 880,696 Interest 210,513 251,983 421,610 504,606 Depreciation and amortization 192,457 228,696 384,913 457,393 General and administrative 45,621 51,543 95,258 98,183 Total Expenses 847,003 946,748 1,610,639 1,940,878 Net Income (Loss) $ (52,926) $ (7,352) $ 25,071 $ (64,497) Net Income (Loss) Allocated: To the General Partners $ (529) $ (74) $ 32,186 $ (645) To the Limited Partners (52,397) (7,278) (7,115) (63,852) $ (52,926) $ (7,352) $ 25,071 $ (64,497) Per limited partnership unit (78,290 outstanding) $(.67) $(.09) $(.09) $(.82) Consolidated Statements of Cash Flows For the six months ended June 30, 1997 1996 Cash Flows From Operating Activities: Net Income (loss) $ 25,071 $ (64,497) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 384,913 457,393 Increase (decrease) in cash arising from changes in operating assets and liabilities: Fundings to restricted cash (198,283) (225,961) Release of restricted cash 174,888 231,173 Other assets (6,788) 18,710 Accounts payable and accrued expenses 1,190 (9,929) Security deposits 4,229 4,894 Due to general partners and affiliates (317) (81) Net cash provided by operating activities 384,903 411,702 Cash Flows From Financing Activities: Distributions (1,639,740) (347,956) Mortgage principal payments (55,194) (60,771) Net cash used for financing activities (1,694,934) (408,727) Net increase (decrease) in cash and cash equivalents (1,310,031) 2,975 Cash and cash equivalents, beginning of period 2,741,077 1,499,119 Cash and cash equivalents, end of period $ 1,431,046 $ 1,502,094 Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest $ 421,610 $ 504,606 Notes to the Consolidated Financial Statements The unaudited interim consolidated financial statements should be read in conjunction with the Partnership's annual 1996 audited consolidated financial statements within Form 10-K. The unaudited interim consolidated financial statements include all normal and reoccurring adjustments which are, in the opinion of management, necessary to present a fair statement of financial position as of June 30, 1997, the results of operations for the three and six months ended June 30, 1997 and 1996, cash flows for the six months ended June 30, 1997 and 1996, and the statement of partners' capital (deficit) for the six months ended June 30, 1997. Results of operations for the period are not necessarily indicative of the results to be expected for the full year. Certain prior year amounts have been reclassified in order to conform to the current year's presentation. No significant events have occurred subsequent to fiscal year 1996, and no material contingencies exist, which would require disclosure in this interim report per Regulation S-X, Rule 10-01, Paragraph (a) (5): Part I, Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources At June 30, 1997, the Partnership had cash and cash equivalents of $1,431,046 which were invested in unaffiliated money market funds, compared with $2,741,077 at December 31, 1996. The decrease is primarily due to cash used for distributions and mortgage principal payments exceeding cash provided by operating activities, and a decrease in cash flow from operations due to the sale of Ridge Park Apartments in November 1996. The Partnership also maintains a restricted cash balance, which totaled $374,839 at June 30, 1997, 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 increase in restricted cash is attributable to payments made to the escrow accounts for real estate taxes and property improvements. The Partnership expects sufficient cash to be generated from operations to meet its current operating expenses and debt service requirements. The General Partners declared a cash distribution of $1.85 per Unit for the quarter ended June 30, 1997 which will be paid to investors on or about August 19, 1997. The distribution level was reduced beginning in the first quarter of 1997 from $2.00 per unit in the fourth quarter of 1996 as a result of the decline in cash flow resulting from the sale of Ridge Park in November 1996. 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. The General Partners continue to perform various improvements at the Partnership's two remaining properties; Las Colinas I & II and Tierra Catalina. These improvements include carpet and appliance replacement in selected units and other repairs to prepare vacant units for reoccupancy. These improvements will be funded from the Partnership's cash reserves. The General Partners will monitor the need for property improvements on an ongoing basis to keep the properties competitive in their respective markets. Results of Operations Partnership operations for the three and six months ended June 30, 1997 resulted in a net loss of $52,926 and net income of $25,071, respectively, compared to net losses of $7,352 and $64,497 for the corresponding periods in 1996. The increase in net loss for the three-month period is primarily attributable to a decrease in rental income due to the sale of Ridge Park in November 1996. The change from net loss to net income for the sixth-month period is primarily due to a decrease in property operating, interest and depreciation and amortization expenses resulting from the sale of Ridge Park. These decreases more than offset the reduction in rental income. Net cash provided by operating activities was $384,903 for the six months ended June 30, 1997 compared with $411,702 for the same periods in 1996. The decrease in net cash flow provided by operating activities is primarily attributable to a decrease in the release of restricted cash as a result of the Partnership owning one fewer property during the first six months of 1997. The Partnership's restricted cash balance represents escrows for insurance, real estate taxes, and property replacements and repairs. Rental income for the three and six months ended June 30, 1997 was $773,527 and 1,577,737, respectively, compared with $915,889 and $1,827,918 in the corresponding periods of 1996. The decreases for both periods reflect the sale of Ridge Park in November 1996. Property operating, interest and depreciation and amortization expenses for the three and six months ended June 30, 1997 decreased from the corresponding periods in 1996, primarily due to the sale of Ridge Park. Additionally, the decrease in property operating expense was also due to decreases in repairs and maintenance expenses at the Partnership's two remaining properties. General and administrative expense for the three and six months ended June 30, 1997 was $45,621 and $95,258 compared with $51,543 and $98,183 for the corresponding periods in 1996. The decreases for both periods are primarily attributable to a decrease in legal costs incurred by the Partnership during the 1997 periods as compared to the 1996 periods. During the 1997 periods, certain expenses incurred by an unaffiliated third party service provider in servicing the Partnership, which were voluntarily absorbed by affiliates of RI 81 Real Estate Services, Inc. in prior periods, were reimbursed to RI 81 Real Estate Services, Inc. and its affiliates. During the first six months of 1997 and 1996, average occupancy levels at each of the properties were as follows: Property 1997 1996 Las Colinas I & II 96% 96% Tierra Catalina 89% 89% Part II Other Information Items 1-5 Not applicable. Item 6 Exhibits and reports on Form 8-K. (a) Exhibits (27) Financial Data Schedule (b) Reports on Form 8-K - No reports on Form 8-K were filed during the quarter ended June 30, 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HUTTON/CONAM REALTY INVESTORS 81 BY: RI81 REAL ESTATE SERVICES INC. General Partner Date: August 13, 1997 BY: /s/ Paul L. Abbott Director, President, Chief Executive Officer and Chief Financial Officer