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, 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 charter)
Delaware 36-3593298
(State of other jurisdiction of (I.R.S. Employer Iden-
incorporation or organization) tification Number)
150 South Wacker Drive, Suite 2900, Chicago, Illinois 60606
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 683-3323
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Shares of Common Stock American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(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 (subsection 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of 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 )
Shares of common stock outstanding as of April 8, 1996: 4,156,000. Aggregate
market value of the common stock held by non-affiliates of the Registrant as
of April 1, 1996: $4,142,500. This amount is based on the closing price of
the shares of common stock ($1.00) on April 1, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
A portion of the prospectus of the Registrant dated October 24, 1988 (the
"Prospectus") and filed pursuant to Rule 424 under the Securities Act of 1933
is incorporated by reference into Parts II, III and IV of this Annual Report
on Form 10-K.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . 2
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . 8
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . 20
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . 24
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PART I
ITEM 1. BUSINESS
The Registrant, Resort Income Investors, Inc. (the "Company"), is a
Delaware corporation organized pursuant to a Certificate of Incorporation
filed on July 20, 1988. The Company commenced a public offering of up to
3,600,000 shares of common stock (subject to increase to 4,140,000 shares to
cover over-allotments) pursuant to a Registration Statement filed on Form S-11
under the Securities Act of 1933, as amended, which was declared effective by
the Securities and Exchange Commission on October 24, 1988. Pursuant to the
public offering, the Company received gross proceeds of $51,750,000 from the
sale of 4,140,000 shares, plus an additional $200,000 from the sale of 16,000
shares to RC&H, Inc. ("RC&H") at the public offering price of $12.50 per
share.
In late June 1995, Mr. Christopher B. Hemmeter ("CBH"), then the
Chairman of the Board, President and Chief Executive 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"). Further, he informed the Company that
he would not be able to make timely payments 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 constituted all of the
demand loans to related parties held by the Company, aggregating $36,605,000,
of which CBH was personally the borrower of $15,000,000 and the Affiliated
Borrowers were the borrowers of $21,605,000, as of the date of such
announcement.
The Company announced on June 29, 1995, that it would commence an
orderly self-liquidation of its assets over an estimated 24- to 36-month
period. The Company also determined that it would take a charge to income for
the second quarter of 1995 in an amount that, in management's judgement, would
be adequate to absorb estimated losses related to the loan portfolio. 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 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. The Company
reflected, for the second quarter of 1995, an allowance of $10,367,903,
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 June 30, 1995.
Further, interest of $2,043,017 accrued during 1995 but unpaid as of June 30,
1995, was reversed by a charge against interest income. Additionally,
$1,250,000 was provided for amounts that management estimated would be needed
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.
The Company also announced that Messrs. John R. Young and Daniel D.
Lane, the Company's then independent directors (the "Independent Directors")
would assume 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.
The Company also decided to cease accruing interest on its current
loans for financial statement purposes only and convert each of its loans to
the Affiliated Borrowers maturing June 30, 1995 to demand loans, and that
periodic liquidating distributions be made to the stockholders of the Company
as loans are repaid, subject to allowances for necessary reserves and working
capital, to allow the Company to protect its remaining collateral position and
assets and, in that regard, that all quarterly distributions be eliminated.
Finally, the Company determined that no new loans would be made by the Company
and that any additional advances to the Affiliated Borrowers will be made in
an effort to protect the collateral position of the Company.
In addition, the Company, on June 29, 1995, also terminated its
advisory agreement with RII Advisors, Inc., the Company's investment manager,
which entity was controlled by affiliates of CBH.
On August 8, 1995, CBH resigned as Chairman of the Board, President and
Chief Executive Officer of the Company and Mr. Mark M. Hemmeter, the son of
CBH, resigned his positions with the Company as Executive Vice President,
Secretary, Treasurer and Director of the Company. On such date, the
resignations of CBH and Mark Hemmeter were accepted by the Independent
Directors. Also, the Company decided that Mr. John R. Young, an Independent
Director of the Company since the Company's inception in 1988, would become
the Chairman of the Board of Directors, President, Chief Executive Officer and
Chief Financial Officer of the Company immediately. Also, Mr. Daniel D. Lane,
an Independent Director of the Company since 1990, would remain an Independent
Director of the Company and also be designated as the Company's Secretary,
Treasurer and Chief Accounting Officer. At this time, the Company also
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. The Company
also decided to relocate its headquarters to Chicago, Illinois and establish
banking relations with LaSalle National Bank of Chicago.
The Company also determined to suspend distribution payments to the
Stockholders in light of the pending litigation filed against the Company and
certain of its current and former officers and directors. See Item 3.
From inception of the Company until May 4, 1991, RC&H acted as the
Company's investment manager. On February 16, 1991, a majority of the then
independent directors of the Company authorized the termination of the
investment management agreement with RCH effective May 4, 1991. On such date,
RII Advisors, Inc. ("RII Advisors") became the Company's Investment Manager.
Both advisors were controlled by affiliates of CBH. As described earlier, on
June 29, 1995, the Company terminated its investment management agreement with
RII Advisors and retained Mr. Hansen, an outside consultant, to assist the
Directors in the orderly self-liquidation of the Company. RC&H and RII
Advisors, when discussed in connection with their capacity as the former
investment managers to the Company, shall be referred to herein collectively
as the "Investment Manager."
The original business plan of the Company contemplated the Company
principally making mortgage loans primarily to affiliates of CBH ("Mortgage
Loans") which would generally be secured by either luxury destination resorts
or unimproved property anticipated to be developed into luxury destination
resorts. In light of the state of the real estate market in general during
the early 1990's, and the resort development market in particular, the Company
shifted its focus to making Mortgage Loans secured by gaming related
developments or unimproved property anticipated to be developed into gaming
related developments. The Mortgage Loans were to be secured principally by
junior and, to a lesser extent, senior mortgages on real properties or by
interests in other real estate investment trust-qualifying assets. In
addition, Hemmeter Guaranty Corporation (the "Guarantor"), an affiliate of
CBH, agreed to purchase defaulted Mortgage Loans, if any, made to Affiliated
Borrowers, in an aggregate amount of up to 20% of the gross proceeds of the
Company's public offering (the "Mortgage Loan Purchase Guaranty"). Pursuant
to the Mortgage Loan Purchase Guaranty, the Guarantor was to pay the amount of
any accrued but unpaid base interest plus the amount of the outstanding
principal and interest reserve, subject to the Mortgage Loan Purchase
Guaranty.
The Company's objectives in making investments in Mortgage Loans were
to: (i) distribute cash on a quarterly basis to stockholders (the
"Stockholders"); (ii) preserve and protect the Stockholders' capital; and
(iii) realize the benefit of capital appreciation in the value of the assets
securing the Mortgage Loans through the receipt of bonus interest.
The Company's objective was to structure its Mortgage Loan portfolio to
provide for the receipt of points, base interest and bonus interest at
combined rates sufficient to allow the Company to make distributions to the
Stockholders on a quarterly basis, at a rate equal to a 12% per annum, non-
compounded, cumulative return on the initial public offering price ($12.50 per
share), or $1.50 per share annually. This return was guaranteed (the "Cash
Flow Guaranty") for the period from October 31, 1988 (initial closing date)
through October 31, 1991 (the "Cash Flow Guaranty Period"). Throughout such
period, Affiliated Borrowers were obligated to pay supplemental interest in
amounts necessary to enable the Company to make the specified distributions,
which amounts were provided by the Guarantor to the Affiliated Borrowers
pursuant to the Cash Flow Guaranty. During the Cash Flow Guaranty Period a
total of $385,528 of supplemental interest was required and subsequently paid
in order that the Company meet its cash flow requirements under the Cash Flow
Guaranty. These amounts could be credited dollar-for-dollar against up to 50%
of the amounts later remitted by the Affiliated Borrowers as bonus interest,
and all but $11,752 of the total amount of supplemental interest was
recaptured in this manner.
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.
On July 25, 1995, the Company was informed that the Enforcement
Division of the Securities and Exchange Commission (the "Commission") was
conducting an informal inquiry of the Company. The Company has and continues
to provide information to the Commission in response to the Commission's
document requests. On October 25, 1995, the Commission converted the informal
inquiry to a formal investigation.
In October 1995, the Company also decided to retain an independent
financial advisor to review the status of the Company's loans, the financial
position of the Affiliated Borrowers and the proposed work out plans to be
presented by the Affiliated Borrowers. It was determined that an independent
third party with extensive experience in real estate finance related matters
would provide the Directors with additional pertinent information so as to
assist the Directors as the Company proceeds with its self-liquidation. The
Company sought bids from various independent financial advisors and retained
the firm of Coopers & Lybrand L.L.P. ("C&L") on November 3, 1995. C&L
analyzed certain assets securing the Company's Waikiki, Outlaws, Canadian
Pavilion, Sint Maarten and CBH Loans. The scope of services varied from
analysis of the current status of the loans, alternative courses of action and
C&L's recommendations to an appraisal estimating the value of one of the
assets securing one of the Company's loans.
The Company also decided that it would seek to locate an additional
Director who would be considered independent under the terms of the Company's
Amended and Restated By-Laws. On January 26, 1996, Messrs. Young and Lane
appointed Mr. Thomas A. Ellsworth as an Independent Director of the Company,
as well as a member of its Audit Committee. See Item 10.
As of September 30, 1995, the Company's investment in loans had a
carrying value of $21,155,000, which was net of a $12,850,000 allowance for
impairment of the loan to CBH and his wife and $2,600,000 for the Company's
loan to the Canadian Pavilion Limited Partnership, an Affiliated Borrower, in
the original principal amount of $2,600,000. As of September 30, 1995,
$316,279 has been charged against the Company's reserve taken at June 30, 1995
of $1,250,000 relating to expenses associated with the protection of the
Company's collateral. See Item 7.
As of December 31, 1995, the Company's investment in loans had a
carrying value of $12,092,875, which is net of an $14,267,000 allowance for
impairment of the loan to CBH and his wife, a $5,000,000 allowance for
impairment of the Company's loan to R.C.H. Investments, L.L.C., an Affiliated
Borrower, a $1,600,000 allowance for impairment of one of the Company's loans
to the Outlaws Borrower, an Affiliated Borrower, a $1,000,000 allowance for
impairment of the Company's loan to Hemmeter Enterprises, Inc., an Affiliated
Borrower, and $2,600,000 for the Company's Canadian Pavilion loan. All
accrued interest relating to December 31, 1994 has been reserved and accrued
interest related to 1995 has been reversed. Additionally, at December 31,
1995, the Company had utilized or reversed a total of $1,027,490 of the
$1,250,000 reserved earlier in the year for the estimated costs of protecting
its collateral position in certain loans.
The Company qualified and will be treated as a real estate investment
trust ("REIT") under Sections 856-860 of the Internal Revenue Code of 1986, as
amended, for the year ended December 31, 1995.
In February 1996, the Company received net proceeds of approximately
$733,000 from the sale of the two homes located in Los Angeles, California
owned by CBH which secured the loan to CBH and his wife. As of September 30,
1995, the loan to CBH had a carrying value of $2,150,000. In addition,
approximately $611,000 of the $1,250,000 collateral preservation reserve made
by the Company at June 30, 1995 was allocated to the loan to CBH and his wife.
After accounting for the unused portion of the asset preservation reserve
allocated to the collateral securing the loan to CBH, the Company recognized
an additional $1,100,000 reserve against the loan to CBH to reduce its
carrying value to zero. CBH and his wife maintain their personal obligation
to the Company for the remaining approximately $14,300,000 balance of the loan
to CBH.
The Company did not directly employ any persons during 1995. The
Independent Directors were compensated for their services as directors and the
Company entered into consulting arrangements with Messrs. Young and Hansen.
See Items 10 and 11 for further details.
ITEM 2. PROPERTIES
The Company was formed to make Mortgage Loans and Temporary Investments
secured or collateralized by interests in non-operating real property or other
real estate investment trust qualifying assets and will not own any properties
unless it is a result of a foreclosure action against the collateral of its
Affiliated Borrowers. See Notes 3 and 4 of the Notes to Financial Statements
for information pertaining to the properties which collateralize the Company's
loans.
ITEM 3. LEGAL PROCEEDINGS
(a & b)
On July 3, 1995, a complaint was filed against the Company, CBH, Mark
M. Hemmeter ("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, a 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"), Christopher R. Hemmeter ("CRH"), Gregory
Hooper ("GH") and John R. Young ("JRY"), "Contract v. Resort Income Investors,
Inc., et al., Doc. No. 95 B 2184." In November 1995, the two actions were
consolidated. On November 27, 1995, the plaintiffs moved to have the
consolidated actions certified as a class action for investors who purchased
or acquired stock in the Company between March 31, 1993 and June 29, 1995. On
December 6, 1995, the plaintiffs filed a consolidated amended complaint
seeking to prosecute the suit as a class action. On January 16, 1996, the
defendants moved to dismiss the consolidated amended complaint. On February
29, 1996, the defendants filed opposition papers to the plaintiffs' motion for
class certification. The consolidated amended 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.
However, 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,
CRH's, GH'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, CRH, GH, 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. The complaints have now been consolidated. The defendants
have moved to dismiss the consolidated derivative action for failure to comply
with the requirements of Delaware law. Pursuant to the Company's by-laws and
Delaware law, the Company will advance to the individual defendants their
defense costs. No estimate can reasonably be made at this time of the costs
of defense. Both complaints pray for unspecified damages.
The Company is a defendant in litigation pending in the Civil District
Court for the Parish of Orleans, State of Louisiana, The Venture International
Group v. C.C. Partners Corp., Canadian Pavilion Limited Partnership, Resort
Income Investors, Inc., the City of New Orleans and The Ernest N. Morial New
Orleans Exhibition Hall Authority, Case No. 93-870. The plaintiff alleges
that the Company, along with the other defendants, caused the plaintiff to
sell its rights and interests to certain water-front property located in New
Orleans, Louisiana. This property was subject to the loan made by the Company
to Canadian Pavilion Limited Partnership. The Company is alleged to have
assisted its Affiliated Borrower in obtaining the property for less than 50%
of its fair value by providing the financing for the acquisition and failing
to timely record its mortgages on the property. The Company has filed a
motion to dismiss the complaint for failure to state a claim. The Company and
the plaintiff are engaged in active settlement discussions in an attempt to
resolve the claims against RII.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a - d) None
<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)
</TABLE>
