UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
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 1-10084
RESORT INCOME INVESTORS, INC.
(Exact name of registrant as specified in its certificate of incorporation)
Delaware 36-3593298
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 South Wacker Drive, Suite 2900, Chicago, Illinois 60606
(Address of principal executive offices) (Zip Code)
(312) 683-3323
(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 .
APPLICABLE ONLY TO CORPORATE ISSUERS:
Shares of common stock outstanding as of November 1, 1995: 4,156,000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESORT INCOME INVESTORS, INC.
STATEMENT OF NET ASSETS (NOTE 1)
SEPTEMBER 30, 1995
(Unaudited)
September 30,
1995
ASSETS
Interest receivable from
related parties, net of
allowance $ ---
Demand loans to related
parties, net of
allowances 21,155,000
Cash and cash equivalents 2,069,709
Investment securities at
market value 697,500
Prepaid expenses and other 83,441
------------
Total Assets 24,005,650
------------
LIABILITIES
Accounts payable and
accrued expenses 1,010,737
------------
COMMITMENTS AND
CONTINGENCIES
NET ASSETS IN PROCESS OF
LIQUIDATION $ 22,994,913
============
See notes to financial statements.
RESORT INCOME INVESTORS, INC.
CONDENSED BALANCE SHEET (historical cost basis)
DECEMBER 31, 1994
(Unaudited)
December 31,
1994
(historical
cost basis)
ASSETS
Interest receivable from
related parties $ 1,233,074
Demand loans to related
parties 39,855,000
Cash and cash equivalents 779,298
Investment securities at
market value 560,000
Prepaid expenses and other 68,174
------------
Total Assets $ 42,495,546
============
LIABILITIES
Accounts payable and accrued
expenses $ 54,586
Distributions payable 1,558,500
------------
Total Liabilities 1,613,086
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value;
authorized 6,918,000
shares;
issued and outstanding 41,560
4,156,000 shares
Additional paid-in capital:
Issuance of common stock 46,703,781
Distributions in excess of
income (5,484,131)
Unrealized loss on invest-
ment securities (378,750)
------------
Total Stockholders' Equity 40,882,460
------------
Total Liabilities and Stock-
holders' Equity $ 42,495,546
============
See notes to financial statements.
RESORT INCOME INVESTORS, INC.
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
SEPTEMBER 30, 1995
(UNAUDITED)
September 30,
1995
Net assets in liquidation
at July 1, 1995 $ 28,853,152
Interest income on cash and
cash equivalents 21,725
Gain on investment 10,000
securities
Allowance for impairment of
investment in loans and
accrued interest and
provision for collateral
protection costs (5,550,000)
Operating expenses (339,964)
------------
Net assets in liquidation at
September 30, 1995 $ 22,994,913
============
See notes to financial statements.
RESORT INCOME INVESTORS, INC.
CONDENSED STATEMENTS OF OPERATIONS (historical cost basis)
THREE MONTHS ENDED SEPTEMBER 30, 1994
(UNAUDITED)
September 30,
1994
REVENUE
Interest and net fee income
on mortgage and demand
loans to related parties $ 1,245,541
Interest income on cash and
cash equivalents 20,925
------------
Total Revenue 1,266,466
------------
EXPENSES
Allowance for impairment of
investment in loans and
accrued interest and
provision for collateral
protection costs ---
Operating expenses 158,469
Gain on investment securities ---
------------
Total Expenses 158,469
------------
NET INCOME (LOSS) $ 1,107,997
============
NET INCOME (LOSS) PER SHARE $ 0.27
============
See notes to financial statements.
RESORT INCOME INVESTORS, INC.
CONDENSED STATEMENTS OF OPERATIONS (historical cost basis)
SIX MONTHS ENDED JUNE 30, 1995 AND NINE MONTHS ENDED SEPTEMBER 30, 1994
(UNAUDITED)
June 30, September 30,
1995 1994
REVENUE
Interest and net fee income
on mortgage and demand
loans to related parties $ 1,543,635 $ 3,388,714
Other interest income 85,983 211,201
------------ ------------
Total Revenue 1,629,618 3,599,915
------------ ------------
EXPENSES
Allowance for impairment of
investment in loans and
accrued interest and
provision for collateral
protection costs 11,617,903 ---
Operating expenses 610,023 594,323
Loss on investment 251,250 673,579
securities ------------ ------------
Total Expenses 12,479,176 1,267,902
------------ ------------
NET INCOME (LOSS) $(10,849,558) $ 2,332,013
============ ============
NET INCOME (LOSS) PER SHARE $ (2.61) $ 0.56
============ ============
See notes to financial statements.
RESORT INCOME INVESTORS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (historical cost basis)
SIX MONTHS ENDED JUNE 30, 1995 AND NINE MONTHS ENDED SEPTEMBER 30, 1994
(Unaudited)
June 30, September 30,
1995 1994
RECONCILIATION OF NET (LOSS)
INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net (loss) income $(10,849,558) $ 2,332,013
Allowance for impairment of
investment in loans and
accrued interest and
provision for collateral
protection costs 11,617,903 ---
Loss (gain) on investment
securities 251,250 (301,603)
Changes in operating assets
and liabilities:
Interest receivable from
related parties 765,171 66,946
Prepaid expenses and other (3,793) 152,252
Accounts payable and
accrued expenses 48,583 (133,028)
Due to investment manager --- (34,120)
------------ ------------
Net cash provided by
operating activities 1,829,556 2,082,460
------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds of loan sale 6,250,000 ---
Demand loans funded (3,000,000) (21,250,000)
------------ ------------
Net cash provided by (used
in) investing activities 3,250,000 (21,250,000)
------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Distributions paid to
stockholders (3,117,000) (4,675,500)
------------ ------------
Net cash used in financing (3,117,000) (4,675,500)
activities ------------ ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,962,556 (23,843,040)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 779,298 25,581,904
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 2,741,854 $ 1,738,864
============ ============
See notes to financial statements.
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1995
(Unaudited)
1. OPERATIONS OF THE COMPANY
The Company announced on June 29, 1995, that it would commence an
orderly self-liquidation of the Company's assets over a 24- to 36-month
period. In late June 1995, Christopher B. Hemmeter (CBH), then a director and
officer of the Company, informed the Company that interest and principal would
not be paid when due on demand loans made by the Company to him personally or
to entities affiliated with him (the Affiliated Borrowers) (See Note 4).
Further, he informed the Company that he would not be able to make timely
payment of such interest and principal on behalf of the Affiliated Borrowers
pursuant to guarantees he had made in connection with the Affiliated
Borrowers' loans, thereby creating an event of default for each of the loans.
The affected loans constitute all of the demand loans to related parties held
by the Company, aggregating $36,605,000, of which CBH and his wife, Patricia
Hemmeter, are personally the borrowers of $15,000,000, and Affiliated
Borrowers are the borrowers of $21,605,000.
The Company also announced a charge to income would be made in an amount
that, in management's judgment, is adequate to absorb estimated losses related
to the loan portfolio. The charge, which includes allowances for losses on
loans, interest receivable and the reversal of certain accrued interest, was
taken in the second quarter of 1995. The amount of the charge was based on
management's judgments regarding the ability of CBH and the Affiliated
Borrowers to repay such loans, and also reflected management's judgments
concerning to the extent that the estimated realizable value of the Company's
collateral would not provide for the recovery of the Company's investment in
the loans and accrued interest, in light of CBH's inability to perform on his
guarantees in a timely manner. In the third quarter, the Company has
continued to evaluate the ability of CBH to perform on his guarantees and the
value of collateral underlying the Company's loans. The Company's independent
directors assumed responsibility for negotiations with CBH and the Affiliated
Borrowers to maximize the Company's recovery of its investment in loans and
accrued interest. Based on information provided to the independent directors
by CBH and the Affiliated Borrowers, the independent directors reviewed CBH's
financial condition, the financial condition of the Affiliated Borrowers, the
terms of the Company's loans, the collateral for certain of the loans
(including the existence of senior liens on certain of the collateral),
appraisals of certain of such collateral and other information concerning the
value of the other collateral, and other factors, to determine the amount of
the charge and in reaching a decision to proceed with the liquidation of the
Company's assets. See Note 3.
On August 8, 1995, CBH and Mark M. Hemmeter (MMH) resigned their
positions as executive officers and directors of the Company (see Note 6).
The Company's directors are currently negotiating with CBH and the Affiliated
Borrowers regarding the plans to recover the Company's investment in loans and
accrued interest. There is no assurance that the outcome of the negotiations
will result in a plan of liquidation consistent with the estimated liquidation
value of the Company's assets, which values are based on an orderly - as
opposed to "quick sale"- approach to liquidation.
2. BASIS OF PRESENTATION
Effective with the announcement of an intention to liquidate the
Company, the accounting basis used by the Company in preparing its financial
statements changed from historical cost to the liquidation basis of
accounting. Therefore, the September 30, 1995 statement of net assets has
been presented on the liquidation basis. The September 30, 1995 statement of
net assets reflects the Company's estimates of amounts expected to be realized
by its efforts to collect its investment in loans and accrued interest, as
well as other estimates about the recovery of assets and the amounts of
liabilities. While the estimates of the realizable amount of the loans and
accrued interest were based on an analysis of each loan, including valuations
by independent appraisers of certain of the collateral, there are few directly
comparable real estate properties that have been sold that can be considered
in preparing such estimates. The amounts the Company will ultimately realize
from liquidation of its assets could differ materially from the amounts
assumed in arriving at the estimates reflected in the September 30, 1995
statement of net assets.
The amount ultimately available for distribution to stockholders will
depend on a variety of factors in addition to the amounts realized from the
liquidation of assets, including the timing of the liquidation process and the
resolution of contingent liabilities. The amount distributed will likely
differ from the amount of net assets in process of liquidation presented in
the September 30, 1995 statement of net assets, and the difference could be
material.
The financial statements of the Company as of December 31, 1994, and for
the periods ended September 30, 1994 and June 30, 1995 were prepared on the
historical cost (going concern) basis as described in the notes to the
Company's December 31, 1994 financial statements as presented in its Form 10-
K. (June 30, 1995 is used as the adoption date for liquidation-basis
accounting due to there being no material activity that affected either the
historical cost or liquidation basis financial statements from June 29, 1995
to June 30, 1995 -- the impairment and other charges discussed Note 3 were
recorded pursuant to historical cost accounting).
3. IMPAIRMENT OF LOANS, ACCRUED INTEREST AND REVENUE RECOGNITION
The June 1995 statements of operations included an allowance of
$11,617,903, consisting of $9,900,000 for the loan to CBH and $467,903 for
uncollectibility of interest accrued as of December 31, 1994 but unpaid as of
September 30, 1995. During the third quarter of 1995 the statements of
operations were charged with an additional allowance of $5,550,000 consisting
of $2,600,000 for the loan to Canadian Pavilion Limited Partnership reflecting
uncertainty regarding the enforcibility of the lease serving as collateral for
the Canadian Pavilion loan and $2,950,000 for the loan to CBH reflecting an
apparent reduction in market value of the real property serving as collateral
for the loan to CBH, based on recent offers to buy such collateral for amounts
less than were estimated as the net realizable value at June 30, 1995.
Further, interest of $2,043,017 accrued during 1995 but unpaid as of September
30, 1995 was reversed by a charge against interest income. Additionally,
$1,250,000 has been provided for amounts that the Company may need to advance
to first-lien holders and others to protect the Company's collateral position
while the plan of liquidation is accomplished, which includes negotiations
with CBH and the Affiliated Borrowers. As of September 30, 1995, $316,275 had
been recorded against this liability relating to expenses associated with the
protection of the Company's collateral.
The accrual of interest on the Company's demand loans was discontinued
effective June 29, 1995 when it announced that it would commence an orderly
self-liquidation as a result of CBH's acknowledgement that interest and
principal would not be paid when due on demand loans made by the Company to
him personally or to the Affiliated Borrowers. See Note 1. The balance of
the Company's interest receivable on demand loans as of June 29, 1995 was
charged against interest income or recorded as an allowance for impairment of
investment in loans and accrued interest as discussed above. Once a demand
loan has been placed in a non-accrual status, income is recorded only as cash
payments are received from the borrower or until such time as the borrower has
demonstrated an ability to make payments under the terms of the original or
renegotiated loan agreement. However, the Company still intends to pursue its
collection of all the principal and interest contractually due from the
Affiliated Borrowers.
4. DEMAND LOANS TO RELATED PARTIES
Demand loans to related parties include the following (in thousands):
<TABLE>
<CAPTION>
December
September 30, 1995 31, 1994
Balance and
Carrying Carrying
Borrower Balance Amount Amount
<S> <C> <C> <C>
CPLP $ 2,600 $ 0 $ 2,600
Outlaws 2,205 2,205 2,205
MCTC 1,900 1,900 1,900
RCH Investments 12,900 12,900 12,900
CBH and Patricia Hemmeter 15,000 2,150 14,000
Hemmeter Enterprises 2,000 2,000 ---
GPCI --- --- 6,250
-------- -------- --------
Total $ 36,605 $ 21,155 $ 39,855
======== ======== ========
</TABLE>
In the second quarter of 1995, the Company sold the GPCI loan to an
unrelated party for $6,250,000, made a $2,000,000 unsecured loan to Hemmeter
Enterprises, Inc. (HEI), and advanced an additional $1,000,000 to CBH on May
2, 1995, thereby increasing the principal balance of the loan to CBH to
$15,000,000. The interest rate on the additional $1,000,000 is 23% per annum,
10% per annum of which is to be payable upon maturity or earlier prepayment of
the additional $1,000,000 loan. The loan to HEI bears interest at the rate of
12% per annum and is secured by interest in and liens upon certain real and
personal property owned by HEI and the personal guaranty of CBH. On November
7, 1995 HEI filed for protection under Chapter 11 of the United States
Bankruptcy Code. The Company believes the loan to HEI will be recoverable in
1995, however, there is no assurance of such recovery. See Note 3 to the
Company's financial statements, included in the Company's Form 10-K for the
year ended December 31, 1994, for additional information on the loans
outstanding at both December 31, 1994 and September 30, 1994. See Notes 1, 2
and 3 to these unaudited financial statements for information on the factors
considered by the Company in determining carrying value of the loans as of
September 30, 1995, and the uncertainties associated therewith.
5. LITIGATION
On July 3, 1995, a complaint was filed against the Company, CBH, MMH and
Deloitte & Touche LLP, the Company's independent auditors, in U.S. District
Court for the District of Colorado alleging violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and other provisions of Federal
law and the rules promulgated by the Securities and Exchange Commission,
"Sarnoff v. Resort Income Investors, Inc., et al., Doc. No. 95 B 1665". On
August 24, 1995, second suit alleging similar violations was filed in the U.S.
District Court for the District of Colorado against each of the defendants in
the lawsuit described earlier, as well as Daniel D. Lane (DDL) and John R.
Young (JRY), "Contract v. Resort Income Investors, Inc., et al. Doc. No. 95 B
2184". The parties have agreed to consolidate both cases. The plaintiffs are
filing a consolidated complaint and seek to prosecute the consolidated suit as
a class action. The complaint seeks an unspecified amount of actual damages,
and reimbursement of costs and expenses.
No assessment of the likelihood of any loss can be made at this time,
because the complaint has only been recently filed, and the defendants have
not yet prepared their answers, nor has any discovery commenced. The Company
intends to defend against the charges. Pursuant to the Company's by-laws and
Delaware law, the Company will advance CBH's, MMH's, DDL's and JRY's costs of
defense in this matter. No estimates can reasonably be made at this time of
the costs of defense of the Company, CBH, MMH, DDL and JRY.
In June 1995, two derivative actions were filed in the Court of Chancery
of the State of Delaware in and for New Castle County, "Alpert v. Hemmeter et
al., Doc. No. 14389" and "Frank et al. v. Hemmeter et al., Doc. No. 14413".
The Company is a nominal defendant in each of these cases. The defendants in
both cases are: CBH, MMH, DDL and JRY. The complaints purport to allege that
the officers and directors breached their fiduciary duties to the Company,
wasted Company assets and that CBH stood in a conflict of interest position.
Pursuant to the Company's by-laws and Delaware law, the Company will advance
to individual defendants the costs of defense. No estimate can reasonably be
made at this time of the costs of defense. Both complaints pray for
unspecified damages.
6. OTHER INFORMATION
On August 8, 1995, CBH and MMH resigned their positions as Chairman of
the Board, President and Chief Executive Officer and Executive Vice President,
Secretary, Treasurer and Director, respectively of the Company. On the same
date, JRY was appointed Chairman of the Board, President and Chief Executive
Officer of the Company. JRY has been a Director of the Company and chairman of
its Audit committee since the Company's inception in 1988. The Company also
terminated its advisory agreement with RII Advisors, Inc. and retained the
consulting services of Mr. Neil D. Hansen to work with the Company's directors
in connection with the Company's orderly self-liquidation of its assets. From
the inception of the Company through 1990, Mr. Hansen was the Company's
Executive Vice President, Secretary and Treasurer. In addition, MMH was
appointed a consultant to the Company to provide transition services for the
remainder of the calendar year. The Company also relocated its headquarters
from Denver to Chicago.
7. SUBSEQUENT EVENT
The Company has been advised by the Enforcement Division of the
Securities and Exchange Commission (the "Commission") that it is the subject
of a formal investigation. The Company has been requested to voluntarily
produce certain documents and information. The Company has complied with
these requests. The Company has been advised that the investigaiton should
not be construed as an indication by the Commission or its staff that any
violation of law has occurred, nor as a reflection upon any person, entity, or
security. The Company anticipates, at this time, continuing to voluntarily
cooperate with the Commission in its investigation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company was organized in 1988 as a 12-year, self-liquidating real
estate investment trust (REIT). The Company was organized primarily to make
loans to affiliates of the Company. As a REIT, the Company is required to
maintain a certain level of its assets in REIT-qualifying assets, including
loans secured by real estate. The Company must also meet other requirements
related to the source of its income and distributions with stockholders. The
Company believes that it has been and is in compliance with all provisions
necessary for it to maintain its REIT status.
LIQUIDITY AND CAPITAL RESOURCES
As discussed in Note 1 to the accompanying unaudited financial
statements, the Company has commenced an orderly liquidation of assets, which
consist principally of loans collateralized by real estate. The directors of
the Company will oversee the liquidation. The plan to liquidate was adopted
by the directors (in order to maximize the value of the Company's assets).
The decision to liquidate was made after Christopher B. Hemmeter (CBH), then a
director and officer of the Company, informed the Company that interest and
principal would not be paid when due on loans made by the Company to him
personally or to entities affiliated with him (the Affiliated Borrowers).
Further, he announced that he would not be able to make timely payment of such
interest and principal on behalf of the Affiliated Borrowers pursuant to
guarantees he had made, thereby creating an event of default for each of the
loans. On November 7, 1995 Hemmeter Enterprises, Inc., an Affiliated Borrower
and the Borrower on a $2,000,000 loan by the Company, filed for protection
under Chapter 11 of the United States Banruptcy Code. The affected loans
constitute all of the demand loans to related parties held by the Company,
aggregating $36,605,000, of which CBH and his wife, Patricia Hemmeter, are
personally the borrowers of $15,000,000, and Affiliated Borrowers are the
borrowers of $21,605,000. Accrued interest related to these loans had been
approximately $2,500,000 at June 29, 1995 of which approximately $2,000,000
has been reversed and recorded as a charge against interest income and
approximately $500,000 has been recorded as an allowance for impairment of
investment in loans and accrued interest.
As of September 30, 1995, investment in loans has a carrying value of
$21,155,000, which is net of a $12,850,000 allowance for impairment of the
loan to CBH and his wife and $2,600,000 for the Canadian Pavilion loan. All
accrued interest relating to December 31, 1994 has been reserved and accrued
interest related to 1995 has been reversed. Based on information provided to
the independent directors by CBH and the Affiliated Borrowers, the independent
directors reviewed CBH's financial condition, the financial condition of the
Affiliated Borrowers, the terms of the Company's loans, the collateral for
certain of the loans (including the existence of senior liens on certain of
the collateral), appraisals of such collateral and other information
concerning the value of the collateral, and other factors, to determine the
amount of the allowance and in reaching a decision to proceed with the
liquidation of the Company's assets over a 24- to 36-month period.
Additionally, the Company has provided $1,250,000 for the estimated costs of
protecting its collateral position in certain loans. As of September 30, 1995
$316,279 had been charged against this reserve relating to expenses associated
with the protection of the Company's collateral.
The allowance on the Canadian Pavilion investment was made in the third
quarter of 1995 after the negotiations by and between various governmental
agencies, the former owner of the property and the Canadian Pavilion borrower
proved unsuccessful and the Canadian Pavilion borrower received a termination
letter regarding its lease from the New Orleans Exhibition Hall Authority
("NOEHA"). The Company made this determination based on receipt of the NOEHA
letter and discussions with representatives of the Canadian Pavilion Limited
Partnership and its counsel in New Orleans and real estate professionals
located in New Orleans. The input of these various parties, as well as the
lack of acceptance of riverboat gaming in the downtown New Orleans area and
the poor performance of the temporary land-based casino in New Orleans,
significantly reduced the value of the property securing the loan to the
Canadian Pavilion Borrower. Furthermore, certain ongoing financial
obligations of the Canadian Pavilion Borrower, including insurance, payments
to governmental agencies and maintenance expenses were continuing with no
assurance that such amounts, which were being advanced by the Company, would
be repaid to the Company nor was there any assurance that the Company would
receive any of the principal portion of the Canadian Pavilion investment
since, after extensive marketing of the property securing the Canadian
Pavilion investment, no significant interest in the acquisition of the
property arose.
The additional reserve made during the third quarter for the CBH loan
reflects a decrease in the market value of the two residences in Los Angeles,
California which act as security for the CBH loan. Offers for the purchase of
both properties were recently received by Mr. Christopher B. Hemmeter. Mr.
Christopher B. Hemmeter provided counter offers totalling $8,550,000 for the
properties located at 537 Perugia Way and 525 Perugia Way. At the time of the
filing of this report, the counter offers were not accepted or rejected. The
Company, therefore has increased its loan loss reserve on the CBH loan by
$2,950,000 to a total of $12,850,000 for a net carrying value of $2,150,000.
The additional reserve is to reflect the apparent decrease in market value of
the collateral after considering costs associated with the collateral's
disposition, including senior indebtedness (principal and accrued interest),
real estate taxes and brokers commissions.
Although reserves have been established and expenses incurred regarding
the protection of its loan collateral, it is the Company's intent to pursue
collection of these costs as incurred. The September 30, 1995 statement of
net assets reflects the Company's best estimates of amounts expected to be
realized by its efforts to collect its investment in loans and accrued
interest, as well as other estimates about the recovery of assets and the
amounts of liabilities. While the estimates of the realizable amount of the
loans and accrued interest are based on an analysis of each loan, including
valuations by independent appraisers of certain of the collateral, there are
few directly comparable real estate properties that have been sold that can be
considered in preparing such estimates. The amounts the Company will
ultimately realize could differ materially from the amounts assumed in
arriving at the estimates reflected in the September 30, 1995 statement of net
assets.
The Company will not make any new loans, however, the Company may
advance funds to the Affiliated Borrowers to the extent deemed necessary to
protect the Company's position in the underlying collateral. The Company will
consider making distributions to stockholders during the course of the
liquidation process, although the amount and timing of such distributions are
not predictable. As a result of the uncertainty caused by the lawsuits
described in Part II, Item 1, the Company has determined that no periodic
liquidating distributions will be made to the stockholders of the Company at
this time. The Company will reevaluate this position on an ongoing basis.
The Company believes that it will not be required to make distributions in the
near term to maintain its status as a REIT.
The Company's near term capital requirements will be for ongoing
operating costs during the period of self-liquidation. The Company believes
that its existing cash, cash equivalents and short-term investment balances
will be adequate to fund near-term capital requirements.
As of September 30, 1995, the Company had cash and cash equivalents and
investment securities at market value of $2,767,209 compared with $1,339,298
at December 31, 1994. The primary source of the increase in these funds was
the sale of one of its demand loans in April 1995 in the amount of $6,250,000,
which was partially offset by new loan advances of $3,000,000. In addition,
$1,157,411 of cash was provided by operations and $3,117,000 of distributions
were paid to stockholders.
RESULTS OF OPERATIONS
The Company had a decrease in net assets in liquidation of ($5,858,239),
or ($1.41) per share, for the quarter ended September 30, 1995 compared with
income of $1,107,997 or $0.27 per share, for the quarter ended September 30,
1994. The decrease is due to an allowance for loan loss reserve and the non-
accrual of interest income on the demand loan portfolio during the third
quarter of 1995 and an increase in legal fees related to the announcement of
the Company's self-liquidation.
Total revenue for the third quarter of 1995 was $21,725 as compared to
$1,266,466 for the third quarter of 1994. The decrease is due to the non-
accrual of interest income on the demand loan portfolio during the third
quarter of 1995.
Operating expenses for the quarter ended September 30, 1995 were
$5,879,964 as compared to $158,469 for the quarter ended September 30, 1994.
This increase was due to the loan loss reserve recorded in the third quarter
of 1995 and to increased legal fees related to the announcement of the
Company's self-liquidation.
The factors that affected results of operations for the nine months
ended September 30, 1995 compared to 1994 are principally the same as
described above for the quarter ended September 30, 1995 compared to 1994.
PART II
OTHER INFORMATION
ITEM 1. LITIGATION
On July 3, 1995, a complaint was filed against the Company, CBH, MMH and
Deloitte & Touche LLP, the Company's independent auditors, in U.S. District
Court for the District of Colorado alleging violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and other provisions of Federal
law and the rules promulgated by the Securities and Exchange Commission,
"Sarnoff v. Resort Income Investors, Inc., et al., Doc. No. 95 B 1665". On
August 24, 1995, second suit alleging similar violations was filed in the U.S.
District Court for the District of Colorado against each of the defendants in
the lawsuit described earlier, as well as Daniel D. Lane (DDL) and John R.
Young (JRY), "Contract v. Resort Income Investors, Inc., et al., Doc. No. 95 B
2184". The parties have agreed to consolidate both cases. The plaintiffs are
filing a consolidated complaint and seek to prosecute the consolidated suit as
a class action. The complaint seeks an unspecified amount of actual damages,
and reimbursement of costs and expenses.
No assessment of the likelihood of any loss can be made at this time,
because the complaint has only been recently filed, and the defendants have
not yet prepared their answers, nor has any discovery commenced. The Company
intends to defend against the charges. Pursuant to the Company's by-laws and
Delaware law, the Company will advance CBH's, MMH's, DDL's and JRY's costs of
defense in this matter. No estimates can reasonably be made at this time of
the costs of defense of the Company, CBH, MMH, DDL and JRY.
In June 1995, two derivative actions were filed in the Court of Chancery
of the State of Delaware in and for New Castle County, "Alpert v. Hemmeter et
al., Doc. No. 14389" and "Frank et al. v. Hemmeter et al., Doc. No. 14413".
The Company is a nominal defendant in each of these cases. The defendants in
both cases are: CBH, MMH, DDL and JRY. The complaints purport to allege that
the officers and directors breached their fiduciary duties to the Company,
wasted Company assets and that CBH stood in a conflict of interest position.
Pursuant to the Company's by-laws and Delaware law, the Company will advance
to individual defendants the costs of defense. No estimate can reasonably be
made at this time of the costs of defense. Both complaints pray for
unspecified damages.
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) The following exhibits are incorporated by reference from the
Company's Registration Statement on Form S-11 (File No. 33-23521),
referencing the exhibit numbers used in such Registration
Statement.
Exhibit Number Description
3.(a) Restated Certificate on Incorporation
3.(b) Amended and Restated By-Laws
(b) Reports on Form 8-K. The Company filed the following reports on
Form 8-K during the third quarter of 1995:
Date Items Report
June 29, 1995 5
August 8, 1995 5
Items 2, 3, 4 and 5 of Part II are omitted because of the absence of
conditions under which they are required.
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.
RESORT INCOME INVESTORS, INC.
(Registrant)
DATE: November 14, 1995 By: /s/ John R. Young
Name: John R. Young
Title: Chairman of the Board of Directors,
Chief Executive Officer,
President and Chief Financial
Officer
By: /s/ Daniel D. Lane
Name: Daniel D. Lane
Title: Director, Secretary, Treasurer
and Chief Accounting Officer
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.
RESORTS INCOME INVESTORS, INC.
(Registrant)
DATE: November 14, 1995 By: __________________________________
Name: John R. Young
Title: Chairman of the Board of Directors,
Chief Executive Officer,
President and Chief Financial
Officer
By: __________________________________
Name: Daniel D. Lane
Title: Director, Secretary, Treasurer
and Chief Accounting Officer
RESORT INCOME INVESTORS, INC.
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
SEPTEMBER 30, 1995
(Unaudited)
This schedule contains summary financial information extracted from Resort
Income Investors, Inc.'s September 30, 1995 interim financial statements and
is qualified in its entirety by reference to such financial statements.
Item Number Item DescriptionAmount
5-02(1) Cash and cash items$ 2,069,709
5-02(2) Marketable securities687,500
5-02(3)(a)(1) Notes and accounts receivable-trade36,605,000
5-02(4) Allowances for doubtful accounts15,450,000
5-02(6) Inventory0
5-02(9) Total current assets0
5-02(13) Property, plan and equipment0
5-02(14) Accumulated depreciation0
5-02(18) Total assets22,994,913
5-02(21) Total current liabilities1,010,737
5-02(22) Bonds, mortgage and similar debt0
5-02(28) Preferred stock-mandatory redemption0
5-02(29) Preferred stock-no mandatory redemption0
5-02(30) Common stock41,560
5-02(31) Other stockholders' equity22,953,353
5-02(32) Total liabilities and stockholders' equity22,994,913
5-03(b)(1)(a) Net sales of tangible products0
5-03(b)(1) Total revenues1,651,342
5-03(b)(2)(a) Cost of tangible goods sold0
5-03(b)(2) Total costs and expenses applicable to
sales and revenues18,359,140
5-03(b)(3) Other costs and expenses0
5-03(b)(5) Provision for doubtful accounts and notes(17,167,903)
5-03(b)(8) Interest and amortization of debt discount0
5-03(b)(10) Income before taxes and other items(16,707,798)
5-03(b)(11) Income tax expense0
5-03(b)(14) Income-loss continuing operations(16,707,798)
5-03(b)(15) Discontinued operations0
5-03(b)(17) Extraordinary items0
5-03(b)(18) Cumulative effect-changes in accounting
principles0
5-03(b)(19) Net income or loss(16,707,798)
5-03(b)(20) Earnings per share - primary$(4.02)
5-03(b)(20) Earnings per share - fully diluted0
NOTE: The above captions are specified in Exhibit 27, and contemplate that
the entity is a going concern. As discussed in Note 1 to the
Company's unaudited financial statements, the Company is in the
process of liquidation as of September 30, 1995. The amounts above
are presented with the caption that, in management's judgment, most
closely correlates to respective financial statement captions used in
the Company's unaudited financial statements.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
"This schedule contains summary financial information extracted
from Resort Income Investors, Inc.'s 10Q for the quarter ended
September 30, 1995 and is qualified in its entirety by reference
to such Form 10-Q."
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 2,069,709
<SECURITIES> 697,500
<RECEIVABLES> 36,605,000
<ALLOWANCES> 15,450,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,767,209
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,005,650
<CURRENT-LIABILITIES> 1,010,737
<BONDS> 0
<COMMON> 22,994,913
0
0
<OTHER-SE> 22,994,913
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 1,651,343
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 18,359,140
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 17,167,903
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (16,707,797)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,707,797)
<EPS-PRIMARY> (4.02)
<EPS-DILUTED> (4.02)
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