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, 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 1-10084
RESORT INCOME INVESTORS, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 36-3593298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 South Wacker Drive, Chicago, Illinois 60606
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 683-3323
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 13, 1996: 4,156,000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESORT INCOME INVESTORS, INC.
STATEMENTS OF NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
1996 1995
ASSETS
Interest receivable from
related parties,net of
allowance $ --- $ ---
Demand loans to related
parties, net of
allowances 4,829,791 12,092,875
Note receivable 565,600 ---
Cash and cash equivalents 514,658 846,768
Investment securities at
market value 434,079 805,834
------------ ------------
Total assets 6,344,128 13,745,477
------------ ------------
LIABILITIES
Accounts payable and
accrued expenses 524,927 687,793
------------ ------------
NET ASSETS IN LIQUIDATION $ 5,819,201 $ 13,057,684
============ ============
The accompanying notes are an integral part of the financial statements.
RESORT INCOME INVESTORS, INC.
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
NET ASSETS IN LIQUIDATION
AT DECEMBER 31, 1995 $13,057,684
Interest income on cash and
cash equivalents 66,593
Allowance for impairment
of investment in loans
and accrued interest (5,500,000)
Loss on investment securities (117,200)
Operating expenses (1,687,876)
-----------
NET ASSETS IN LIQUIDATION
AT SEPTEMBER 30, 1996 $ 5,819,201
===========
The accompanying notes are an integral part of the financial statements.
<TABLE>
RESORT INCOME INVESTORS, INC.
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<CAPTION>
1996 1995
<S> <C> <C>
NET ASSETS IN LIQUIDATION
AT JUNE 30 $11,680,010 $28,853,152
Interest income on cash and
cash equivalents 6,630 21,725
Gain on investment securities 30,085 10,000
Allowance for impairment of
investment in loans and
accrued interest (5,500,000) (5,550,000)
Operating expenses (397,524) (339,964)
----------- -----------
NET ASSETS IN LIQUIDATION $ 5,819,201 $22,994,913
=========== ===========
<FN> The accompanying notes are an integral part of the financial statements.
</TABLE>
The accompanying notes are an integral part of the financial statements.
RESORT INCOME INVESTORS, INC.
STATEMENT OF OPERATIONS
(GOING CONCERN BASIS)
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
REVENUES
Interest and net fee income on
mortgage and demand loans $ 1,543,635
Interest income on cash and cash
equivalents 85,983
-----------
Total Revenue 1,629,618
-----------
EXPENSES
Allowance for impairment of
investment in loans and
accrued interest and provisions
for collateral protection costs 11,617,903
Operating expenses 610,023
Loss on investment securities 251,250
-----------
Total Expenses 12,479,176
-----------
NET LOSS $10,849,558
===========
NET LOSS PER SHARE $ (2.61)
===========
The accompanying notes are an integral part of the financial statements.
RESORT INCOME INVESTORS, INC.
STATEMENT OF CASH FLOWS
(GOING CONCERN BASIS)
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
RECONCILIATION OF NET LOSS TO NET CASH
FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,849,558)
Allowances for impairment of
investment in loans and accrued
interest and provision for
collateral protection costs 11,617,903
Loss on investment securities 251,250
Changes in operating assets and
liabilities:
Interest receivable 765,171
Prepaid expenses and other
assets (3,793)
Accounts payable and
accrued expenses 48,583
------------
Net cash provided by
investing activities 1,829,556
------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Demand loans funded (3,000,000)
Proceeds of loan sale 6,250,000
------------
Net cash provided by
investing activities 3,250,000
------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Distribution paid to stockholders (3,117,000)
------------
Net cash used in financing
activities (3,117,000)
------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 1,962,556
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 779,298
------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 2,741,854
============
The accompanying notes are an integral part of the financial statements.
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Readers of this Resort Income Investors, Inc. quarterly report should
refer to its audited financial statements for the year ended December 31, 1995,
which are included in Amendment No. 1 to the 1995 Annual Report on Form 10-K/A
for Resort Income Investors, Inc. (the "Company"), as certain footnote
disclosures which would substantially duplicate those contained in such audited
financial statements have been omitted from this report.
1. OPERATIONS OF THE COMPANY
The Company was organized on July 20, 1988 as a 12-year, self-liquidating
real estate investment trust ("REIT"), as defined under the Internal Revenue
Code. The Company was organized for the purpose of enabling stockholders to
participate in mortgage loans primarily to affiliates of Christopher B. Hemmeter
("CBH") secured by real property or other qualifying assets owned or to be
acquired for the development of luxury destination resorts. During 1991, the
Board of Directors amended the Company's general investment strategy such that
the Company would primarily make loans secured by real and personal property for
the development of gaming related enterprises. As of December 31, 1995, all of
the Company's loans had been made to affiliates of the Company or R.I.I.
Advisors, the Company's former investment manager, also an affiliate of the
Company.
In late June 1995, 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"). 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 constituted all of the
Company's demand loans, each of which was to a related party, aggregating
$36,605,000, of which CBH and his wife, Patricia Hemmeter, were personally the
borrowers of $15,000,000, and Affiliated Borrowers were the borrowers of
$21,605,000.
The Board of Directors of the Company announced on June 29, 1995, that it
would commence an orderly self-liquidation of the Company's assets over an
estimated 24- to 36-month period. The Company also announced a charge to income
would be made in the second quarter of 1995 in an amount that, in management's
judgment based upon then available information, would reflect the impaired
value. The charge included allowances for losses on loans, interest receivable
and the reversal of certain accrued interest. 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. In the third and fourth quarter of 1995, the
Company continued to evaluate the ability of CBH to perform on his guarantees
and the value of collateral underlying the Company's loans and recorded
additional charges for estimated losses. The Company's independent directors
have 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 charges and
in reaching the decision to proceed with the liquidation of the Company's
assets.
On August 8, 1995, CBH and Mark M. Hemmeter (MMH) resigned their positions
as executive officers and directors of the Company. The Company's directors are
continuing their negotiations with CBH and the Affiliated Borrowers to recover
the Company's investment in loans and accrued interest. There is no assurance
that the outcome of the negotiations will result in actual liquidation proceeds
consistent with the estimated liquidation value of the Company's assets.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 1996 and December 31, 1995 statements of net assets in
liquidation and the statement of changes in net assets in liquidation for the
period from December 31, 1995 to September 30, 1996 have been presented on the
liquidation basis. The September 30, 1996 statement of net assets in
liquidation 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, 1996 statement of net assets. The
financial statements of the Company as of June 30, 1995 were prepared on the
historical cost (going concern) basis.
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, 1996 statement of net assets, and the difference could be
material.
At September 30, 1996, the Company's financial instruments consist of
demand loans to related parties, a note receivable, cash and cash equivalents,
investment securities, and accounts payable and accrued expenses. These
instruments are included in the accompanying statement of net assets in
liquidation at their estimated net realizable values. Management believes that
the estimated net realizable value of these financial instruments approximates
their fair value. The basis for determining these amounts for demand loans is
described in Note 3. Based on the nature and terms of accounts payable and
accrued expenses, face amounts represent fair value.
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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The unaudited interim financial statements of the Company reflect
all adjustments which are, in the opinion of management of the Company,
necessary to present a fair statement of the results for the interim periods
presented.
3. ACCRUED INTEREST AND REVENUE RECOGNITION
The accrual of interest on the Company's demand loans was discontinued
effective June 29, 1995 and all accrued but unpaid interest was reserved when it
announced that the Company 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. Once a demand loan has been placed in a non-accrual
status, cash collections will be applied to the carrying amount of the loan.
However, the Company is pursuing its collection of all the principal and
interest contractually due from the Affiliated Borrowers.
4. NOTE RECEIVABLE AND INVESTMENT SECURITIES
On May 13, 1995, the Company agreed to provide Hemmeter Enterprises, Inc.
("HEI") with a senior bank facility in the amount of $4,000,000 (the "HEI
Loan"). The HEI Loan was collateralized pari passu by deeds of trust for real
properties located in Central City and Black Hawk, Colorado, a second mortgage
on the property securing the Company's Canadian Pavilion Loan and a second
mortgage on the riverboat operated in New Orleans by Grand Palais Riverboat,
Inc. ("GPRI"), an affiliate of HEI. The HEI Loan was also guaranteed jointly
and severally by various subsidiaries of HEI, certain other affiliated entities
and CBH. Prior to June 30, 1995 the Company had advanced $2,000,000 under the
HEI loan. On June 30, 1995, the Company determined that it would not advance
any additional sums to HEI under the terms of the HEI Loan. During the fourth
quarter of 1995, HEI and GPRI both filed for protection under Chapter 11 of the
United States Bankruptcy Code. As of December 31, 1995, the Company had
recorded a valuation allowance in the amount of $1,000,000 against the carrying
value of the HEI Loan. The plans of reorganization of HEI and GPRI, were
approved by the bankruptcy courts and in June 1996 and in satisfaction of the
HEI Loan the Company received the following in settlement of its claims: (i) a
12% senior secured pay-in-kind note due 2003 in the principal amount of $601,702
issued by Colorado Gaming & Entertainment Co., the successor to HEI ("Colorado
Gaming"); (ii) 60,170 shares of common stock of Colorado Gaming, which entity is
not publicly traded; and (iii) 27,089 shares of common stock of Casino America,
Inc., a publicly-held stock traded on the NASDAQ National Stock Market under the
symbol "CSNO." In addition, the Company is also entitled to receive a small
number of warrants of Casino America, Inc., the exact number has not yet been
determined. The Company has accorded no value to the warrants as of September
30, 1996.
On June 7, 1996, the Company received 60,170 shares of common stock of
Colorado Gaming pursuant to the bankruptcy settlement. Based upon information
received from an independent third party market specialist in non-publicly
traded stock such as Colorado Gaming, its market value at September 30, 1996 is
estimated to be approximately $3.50 per share. The Company originally recorded
its ownership interest in these shares as investment securities valued at
$180,510 as of June 30, 1996. At September 30, 1996, the Company recorded a
marked to market adjustment of $30,085 representing a gain on investment
securities as a result of an increase in the Colorado Gaming share price from
$3.00 to $3.50 per share. In addition, the Company received 27,089 shares of
common stock of Casino America, Inc. which was initially quoted at $9.375 per
share and recorded as investment securities in the amount of $253,824. At
September 30, 1996, the Company recorded a market adjustment for a loss on
investment securities in the amount of $30,340 regarding the Casino America,
Inc. stock as a result of a decrease in its share price to $8.25. As of
September 30, 1996, the Company had estimated the net realizable value of the
note receivable from Colorado Gaming to be $565,600. In addition, the Company
did not record interest income pursuant to the terms of the Colorado Gaming note
due to various uncertainties regarding the financial wherewithal of Colorado
Gaming. As a result of the HEI bankruptcy settlement and the subsequent
valuation of the above instruments received, the Company recorded an allowance
for losses on demand loans in the amount of $66 as of September 30, 1996, which
was included in other operating expenses of the Company.
5. DEMAND LOANS TO RELATED PARTIES
Demand loans to related parties include the following:
<TABLE>
<CAPTION>
Carrying Face Carrying Face
Interest Amount at Amount at Amount at Amount at
Rate/ September 30, September 30, December 31, December 31,
Borrower Maturity 1996 1996 1995 1995
<S> <C> <C> <C> <C> <C>
CPLP (a) 26.00%
Demand $ --- $ 2,600,000 $ --- $ 2,600,000
Outlaws (b) 11.00%
Demand 605,000 2,205,000 605,000 2,205,000
MCTC (c) 11.00%
Demand 1,824,791 1,824,791 1,854,875 1,854,875
RCH Investments 18.50%
(d) Demand 2,400,000 12,900,000 7,900,000 12,900,000
CBH and Patricia 27.00%
Hemmeter (e) Demand --- 14,267,000 733,000 15,000,000
HEI (f) 16.00%
Demand --- --- 1,000,000 2,000,000
----------- ----------- ----------- -----------
$ 4,829,791 $33,796,791 $12,092,875 $36,559,875
Reserve for
Impairment of
Loans --- 28,967,000 --- 24,467,000
----------- ----------- ----------- -----------
$ 4,829,791 $ 4,829,791 $12,092,875 $12,092,875
=========== =========== =========== ===========
<FN> (a) On November 18, 1991, the Company made a demand note to Canadian
Pavilion Limited Partnership (CPLP), an affiliate of the Company.
The loan is collateralized by a subleasehold interest in the
Canadian Pavilion, located in New Orleans, Louisiana, and is
personally guaranteed by CBH. The note was modified in 1994 to
increase the interest rate. On May 1, 1995, the interest rate on
the loan was increased to 26%, the default rate, as a result of a
monetary default per the terms of the loan agreement. The balance
of the loan as of September 30, 1996 was fully reserved and is
currently in default. The loan is on non-accrual status as of
September 30, 1996. In October 1996, the Company completed a
settlement regarding the loan wherein it assigned its interest in
the CPLP collateral for $50,000 as consideration for settlement and
release from pending litigation associated with the loan. Thus, the
Company has no further interest in the CPLP collateral.
<FN> (b) On February 11, 1992, the Company made two demand loans to borrowers
collectively known as the Outlaws, an affiliate of the Company. The
original amount of the borrowings aggregated $2,400,000. The loans
are collateralized by an assignment of the borrowers' partnership
interest and a mortgage of the underlying collateral subordinated by
a first mortgage in the amount of approximately $2,800,000 and are
personally guaranteed by CBH. The note was modified effective
November 1, 1995 increasing the principal balance of the loan in the
amount of $105,598, the interest rate to 11% and extending the
maturity date to February 29, 1996. A charge for impairment of
$105,598 was simultaneously recorded by the Company due to
uncertainty regarding its collectibility. In addition, a charge for
impairment in the amount of $1,600,000 was recorded during the
fourth quarter of 1995 against the outstanding carrying balance.
The loan is on non-accrual status as of September 30, 1996. As of
September 30, 1996, no payments have been made by the borrower
pursuant to the terms of the notes modified on November 1, 1995.
<FN> (c) On May 12, 1992, the Company made a demand loan in the amount of
$900,000 to Mideast China Trading Co. (MCTC) (formerly known as
Hemmeter Investment Company), an affiliate of the Company. The loan
is collateralized by a subleasehold mortgage in the International
Marketplace, located in Honolulu, Hawaii, a collateral assignment in
the borrower's interest as sub-sublessor, and is personally
guaranteed by CBH. On April 8, 1994, the Company funded an
additional $1,000,000 demand loan. Both loans were modified in 1994
to increase the interest rate by "Additional Interest". The note
was modified on November 1, 1995 by restating the interest rate to
11%, extending the maturity date to February 29, 1996 and
eliminating the Additional Interest. Interest payments received by
the Company during the quarter ended December 31, 1995 and the
quarter ended March 31, 1996, of $45,125 and $30,084, respectively,
were applied against the carrying amount of the loans. However, the
borrower did not make any payment under the terms of the modified
loan agreement during the quarter ended September 30, 1996.
<FN> (d) The loan is collateralized by a second mortgage on a 28-acre parcel
of land bordering Simpson Bay Lagoon and the Caribbean Sea on the
island of Sint Maarten, Netherlands Antilles (the Property) and is
personally guaranteed for $5,900,000 by CBH. The borrower is an
affiliate of the Company. As a result of a monetary default under
the terms of the agreement, effective July 1, 1995, the Company
exercised its right to increase the interest rate on the loan and
any subsequent advances, at the default interest rate of 18.5% per
annum. A loss reserve in the amount of $5,000,000 was recorded
during the fourth quarter 1995 against the outstanding carrying
balance. During the quarter ended September 30, 1996, the Company
recorded an additional loss reserve in the amount of $5,500,000
based upon the minimum sales price of $7,000,000 established for the
auction of the Property pursuant to the foreclosure sale implemented
by the senior lender and scheduled for November 14, 1996. The loan
is on non-accrual status as of September 30, 1996.
<FN> (e) On January 4, 1994, the Company made a demand loan to CBH, in the
amount of $12,900,000. In September 1994, an additional $1,100,000
was extended under the loan. The loan was secured by junior
mortgages on certain residential properties in Hawaii and
California. The loan was modified in 1994 to release the Hawaii
residence as collateral effective January 3, 1995 and to increase
the interest rate. On May 2, 1995, the Company advanced an
additional $1,000,000 to CBH. 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. During 1995, a total allowance of approximately $14,267,000
was recorded against the carrying value of the loan. During
February 1996, the Company received approximately $733,000 as a
partial repayment of the loan from the sale of the California
residences that were collateral of the loan. CBH continues to be
liable for the uncollected portion of this loan plus interest on the
default rate of 27% per annum. The loan is on non-accrual status as
of September 30, 1996.
<FN> (f) During the second quarter of 1995, the Company funded a loan to HEI
in the amount of $2,000,000. The HEI Loan bore interest at the rate
of 12% per annum and was secured by, among other things, interests
in and liens upon certain real and personal property owned by HEI
and its affiliates and the personal guaranty of CBH. Upon default
by the borrower under the loan terms, the interest rate was
increased to 16% per annum, the default rate. On November 7, 1995,
HEI filed for protection under Chapter 11 of the United States
Bankruptcy Code. The plans of reorganization of HEI and GPRI were
approved by the bankruptcy courts and in June 1996 in satisfaction
of its loan the Company received the following in settlement of its
claims: (i) a 12% senior secured pay-in-kind note due 2003 in the
principal amount of $601,702 issued by Colorado Gaming &
Entertainment Co., the successor to HEI ("Colorado Gaming"); (ii)
60,170 shares of common stock of Colorado Gaming, which entity is
not publicly traded; and (iii) 27,089 shares of common stock of
Casino America, Inc., a publicly-held stock traded on the NASDAQ
National Stock Market under the symbol "CSNO." In addition, the
Company is also entitled to receive a small number of warrants of
Casino America, Inc., the exact number has not yet been determined.
</TABLE>
6. 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,
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 1, 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 for failure to state a
claim. On February 29, 1996, the defendants filed opposition papers to
plaintiff's motion for class certification. The consolidated amended complaint
seeks an unspecified amount of actual damages and reimbursement of costs and
expenses. On October 25, 1996, the Court heard arguments on the defendants'
motion to dismiss and the plaintiff's notice for class certification.
No assessment of the outcome of this action or the amount or range of
any loss that might be incurred by the Company can be made at this time.
However, the Company intends to defend against the charges as it believes it did
not violate the federal securities laws. 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. 14839," 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.
On October 25, 1995, the Securities and Exchange Commission (the
"Commission") issued a formal order of investigation captioned In the Matter of
Resort Income Investors, Inc., Case No. HO-5327. In connection with the
investigation, the Company was requested to produce certain documents and
information. The Company has complied with these requests. The Company has
been advised that the investigation 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 cannot, at this
time, predict the outcome of the investigation or the financial impact, if any,
to the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATIONS
GENERAL
The Company was organized in 1988 as a 12-year, self-liquidating real
estate investment trust (REIT) to primarily 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 currently in compliance with all provisions necessary for it to maintain its
REIT status although there can be no assurance it will be able to do so in the
future.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had five temporary investments
outstanding with carrying values totalling $4,829,791. Each of these temporary
mortgage loan investments, the status of which are described below, were
declared in default during 1995. Since June 30, 1995, the Affiliated Borrower
of the Waikiki and Waikiki II loans (collectively, the Mideast China Trading
Company ("MCTC") Loans), such loans having a combined principal balance of
$1,900,000, made interest payments in December 1995 of $45,125 and during the
quarter ended March 31, 1996, in the amount of $30,084. The Company has applied
the $75,209 of interest payments received against the carrying amount of the
loan. The Company did not receive any additional interest payments on the MCTC
Loans during the quarter ended September 30, 1996, nor has the Company received
any additional interest payments on any of the Company's other loans subsequent
to the announcement on June 29, 1995 of the Company's plan to commence an
orderly self-liquidation.
The Company will not make any new loans, however, the Company has
advanced and may continue to advance funds to the Affiliated Borrowers to the
extent deemed necessary to protect the Company's position in the underlying
collateral. As of September 30, 1996, the Company has advanced approximately
$715,639 to the Affiliated Borrowers in an effort to protect the Company's
collateral positions. 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. However, as a result of
the uncertainty caused by the lawsuits described in Part II, management of the
Company is continuing in its decision that no periodic liquidating distributions
will be made to the Stockholders of the Company. The Company reevaluates 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.
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 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 by the Directors, as well as 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, 1996 statement of net assets.
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 and cash equivalents balance and investment securities
combined with recoveries on its demand loans receivable should be adequate to
fund near-term capital requirements.
The Company loaned $12,900,000 (the "Sint Maarten Loan") to R.C.H.
Investments, N.V., an affiliate of the Investment Manager (the "Sint Maarten
Borrower"), which was secured by a second mortgage on a 28-acre site on the
island of Sint Maarten in the Netherlands Antilles (the "Sint Maarten
Property"). This loan matured on May 7, 1992. On May 12, 1992, the Company
agreed to make a new loan to the Sint Maarten Borrower in the amount of
$12,900,000 (the "New Sint Maarten Loan") to replace the Sint Maarten Loan. The
New Sint Maarten Loan had an original term of approximately 12 months, and was
scheduled to mature on May 7, 1993. The New Sint Maarten Loan was extended by
the Company for 30 days at which time it was replaced with a temporary
investment in the amount of $12,900,000 which was to mature on the earlier of
demand or June 7, 1994. The New Sint Maarten Loan was further extended on June
7, 1994 to mature on the earlier of demand or December 31, 1994 in consideration
for which the interest rate was increased from 14% to 14.5%, payable quarterly
in arrears. In December 1994, the New Sint Maarten Borrower transferred its
interests in the Sint Maarten Property and the attendant obligation related to
the New Sint Maarten Loan to R.C.H. Investments, L.L.C., a Delaware limited
liability company, whose constituent members are the shareholders of the Sint
Maarten Borrower (the "New Sint Maarten Borrower"). On December 29, 1994, the
New Sint Maarten Borrower received an extension of the New Sint Maarten Loan to
June 30, 1995 and the demand feature was withdrawn in consideration for which
the interest rate could be increased prior to maturity at the option of the
Company. Due to the inability of the Affiliated Borrower, as well as CBH in his
capacity as the guarantor of the New Sint Maarten Loan, to fulfill their
obligations under the terms of the New Sint Maarten Loan, the Company converted
the New Sint Maarten Loan to a demand loan on June 30, 1995, the date the New
Sint Maarten Loan was scheduled to mature.
The Sint Maarten Property also secures a first mortgage in the principal
amount of $4,000,000 in favor of a lender unaffiliated with the Affiliated
Borrowers. Interest payments due the senior lender subsequent to June 30, 1995
and through December 31, 1995, in the amount of approximately $354,000 were
funded by the Company and charged against the $1,250,000 provided for by the
Company to protect the collateral positions on the Company's various loans. The
senior encumbrance matured on December 31, 1995. The Affiliated Borrower
requested an extension of the loan from the senior lender.
The New Sint Maarten Borrower had been negotiating a proposed
transaction with a major hospitality company for a hotel and time share
development on the Sint Maarten Property. The preliminary structure of the
proposed transaction would be for the Company and the New Sint Maarten Borrower
to form a joint venture which would become a partner in a new entity which would
also include the major hospitality company, a construction company and an equity
investor as the other partners. An exclusive 90 day period was granted to
complete due diligence by all parties, which period expired during the second
quarter of 1996. These discussions with the hospitality company have not moved
forward. Based upon the results of an appraisal prepared by an independent
third party, the carrying value of the New Sint Maarten Loan was $7,900,000 as
of June 30, 1996 after a $5,000,000 reserve for impairment of value was recorded
against the loan during the quarter ended December 31, 1995. The Affiliated
Borrower received a formal demand for payment from the senior lender which
demand stated that if payment was not received by June 13, 1996, the senior
lender would institute legal proceedings against both the Affiliated Borrower
and CBH personally, as the guarantor of such loan. Representatives of the
Company met with the senior lender during the second quarter of 1996 and were
informed that the senior lender had commenced the foreclosure process. In
connection with the foreclosure process undertaken by the senior lender, the
Sint Maarten Property was put out to auction. Pursuant to the terms of the
auction, a minimum bid of $8,000,000 was required and if a bid equal to or in
excess of such amount was not received, the auction process would be continued
at a later date with a lesser minimum bid. On September 26 1996, the auction
for the Sint Maarten Property was held, however, the minimum bid was not
received. In this regard, the auction has been rescheduled for November 14,
1996 and the minimum bid has been reduced to $7,000,000. Based on this new
minimum auction price, the Company took an additional reserve, as of September
30, 1996, for $5,500,000 resulting in a current carrying value as of September
30, 1996 for the New Sint Maarten Loan of $2,400,000. Management of the Company
continues to work with both the senior lender and the Affiliated Borrower in an
effort to protect the Company's collateral position on the New Sint Maarten
Loan.
The Company made a loan to Canadian Pavilion Limited Partnership, an
affiliate of the Investment Manager (the "Canadian Pavilion Borrower"), in the
amount of $2,600,000 (the "Canadian Pavilion Loan"), on or about November 18,
1991. The proceeds of the Canadian Pavilion Loan were applied as follows:
$1,000,000 to purchase the $2,900,000 of defaulted mortgages and notes
encumbering the subleasehold interest in the Canadian Pavilion and approximately
$800,000 was advanced to an affiliate of the Canadian Pavilion Borrower for it
to purchase the subleasehold interest from a third party. The remaining
$800,000 was used to provide working capital to the Canadian Pavilion Borrower.
Immediately after the closing of the Canadian Pavilion Loan, the interest of
this third party was transferred to the Canadian Pavilion Borrower. The
Canadian Pavilion is a wharf-front property on the Mississippi River in downtown
New Orleans. It is part of the International Pavilion which was erected as an
exhibition hall for the 1984 World's Fair. The Canadian Pavilion Loan
originally bore interest at 9-1/2% per annum, payable quarterly in arrears and
was to mature on the earlier of demand or November 19, 1992. The Company
extended the maturity of the Canadian Pavilion Loan on a number of occasions.
On May 18, 1994, the loan was again extended to the earlier of demand or
December 31, 1994 and the interest rate was increased from 9.5% to 10.5% per
annum, payable quarterly in arrears. On December 7, 1994, the terms of the loan
were further modified to increase the interest rate to 22% per annum, 11.5% of
which accrued and was payable when the Canadian Pavilion Loan was retired. In
addition, this modification provided that the demand feature be removed from the
loan so that the loan could not be called prior to December 31, 1994. On
December 16, 1994, the maturity date of the Canadian Pavilion Loan was further
extended by the Company to June 30, 1995. On May 1, 1995, the interest rate on
the loan was increased to 26%, the default rate, as a result of a monetary
default per the terms of the loan agreement. On June 30, 1995, the Company
ceased accruing interest on the Canadian Pavilion Loan and converted it to a
demand loan. In addition, the Company made additional advances to the Canadian
Pavilion Borrower to preserve the underlying collateral in the amount of
approximately $113,000 subsequent to June 30, 1995.
During the third quarter of 1995, negotiations by and between various
governmental agencies, the former owner of the Canadian Pavilion 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"). After receipt of the NOEHA letter, the
Company had numerous discussions with representatives of the Canadian Pavilion
Borrower and its counsel in New Orleans and real estate professionals located in
New Orleans. After considering 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, the
Company concluded that the value of the property securing the loan to the
Canadian Pavilion Borrower had been significantly reduced. 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 had been 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 Loan
since, after extensive marketing of the property securing the Canadian Pavilion
Loan, no significant interest in the acquisition of the property arose. Based
on these factors, the Company took a reserve, as of September 30, 1995, for the
full $2,600,000 of the Canadian Pavilion Loan.
As previously reported, the Company was named as a defendant in two
lawsuits, one of which was brought by the entity which sold the property to the
Canadian Pavilion Borrower under a lender liability theory and the second
lawsuit was brought by the City of New Orleans and NOEHA demanding that the
Company's mortgages memorializing the Canadian Pavilion Loan be removed. The
Company has completed a settlement with the plaintiffs wherein it assigned its
interest in the collateral for the Canadian Pavilion Loan for $50,000 and a
settlement and release from the litigation. Thus, the Company no longer
maintains any interest in the collateral. As the Company had fully reserved
against this loan, the settlement does not require the Company to take any
further reserves.
On February 11, 1992, the Company made two demand loans to Outlaws
Casino, Ltd., an affiliate of the Investment Manager (the "Outlaws Borrower") in
the amounts of $1,200,000 (the "Crook Loan") and $500,000 (the "Hudspeth Loan")
(collectively, the "Outlaws Loans"). The Outlaws Borrower sought the loans in
order to fund a portion of the acquisition of two adjacent parcels of land in
Black Hawk, Colorado, known as the Crook Parcel (approximately 16,000 square
feet) and the Hudspeth Parcel (approximately 5,500 square feet). The Outlaws
Borrower originally planned to combine the Crook Parcel and the Hudspeth Parcel
and construct a casino of approximately 50,000 square feet containing
approximately 800 slot machines thereon. The Outlaws Loans are secured by an
assignment of a partnership interest in the Outlaws Borrower; the Crook Loan is
also secured by a second mortgage on the Crook Parcel which is subordinated to a
seller note with a principal balance at December 31, 1995 of $2,752,633. The
Hudspeth Loan is also secured by a first mortgage on the Hudspeth parcel. There
is no senior encumbrance on the Hudspeth Parcel.
On July 17, 1992, the Outlaws Borrower made draws of $500,000 and
$200,000 against the Crook Loan and Hudspeth Loan, respectively. On September
2, 1992, the Outlaws Borrower paid the Company $95,000 in principal towards the
then outstanding principal balance of the Hudspeth Loan. On October 30, 1992
and November 6, 1992, the Outlaws Borrower paid the Company $150,000 and
$50,000, respectively, in principal towards the outstanding principal balance of
the Crook Loan. On November 30, 1992, the Company agreed to increase the Crook
Loan by $100,000 to a total of $1,600,000. The additional funds were used to
cover expenses related to the planned expansion and renovation of the Outlaws
Casino, which plans were abandoned by the Outlaws Borrower. Subsequent to
funding the $100,000 increase, the aggregate principal amount of the Outlaws
Loans was increased to $2,205,000, consisting of $1,600,000 for the Crook Loan
and $605,000 for the Hudspeth Loan. The maturity of the Outlaws Loans was
extended by the Company to June 30, 1995. On such date, the Company ceased
accruing interest on the Outlaws Loans and converted them to demand loans.
In October 1995, representatives of the Outlaws Borrower informed the
Company that the Outlaws Casino had very little cash and that its bills were
approximately 45 days in arrears. Such representatives also told the Company
that it was an absolute necessity for the Outlaws Casino to build up its working
capital reserves to approximately $150,000 so as to be able to fund the
operating deficits which usually occur in the winter due to the weather
conditions which hinder ingress and egress to the casinos located in Black Hawk,
Colorado. The Company was also advised that the October mortgage payment on the
senior encumbrance secured by the Crook Parcel was not made and that the Outlaws
Borrower is in negotiations with the senior lender to revise the terms of the
loan. In addition, these representatives informed the Company that they were
developing a marketing plan for the Outlaws Casino which would appeal to local
patrons who do not desire to game in a large casino and that a potential sale of
the Outlaws Casino would need to be deferred until spring of 1996.
Based on this information, the Company decided to modify the terms of
the Outlaws Loans to require the Outlaws Borrower to make monthly payments of
"net revenue" from the casino and real estate which the Outlaws Borrower had
mortgaged to the Company as security for the loans (the "Properties"). Net
revenue is defined as all operating revenues from the Properties less: (a) the
ordinary and reasonable expenses of the operation of the Properties; (b) the
interest and principal payments required by the existing senior lender on the
property which secures the Crook Loan; and (c) the funds necessary to maintain
no less than $150,000 of working capital. The Company also stated that in
exchange for its forbearance from foreclosing on the Outlaws Loans, the Outlaws
Borrower must deliver to the Company, on the first day of each month: (a)
monthly operating reports setting forth the current financial performance of the
Properties; (b) current balance sheets evidencing the financial condition of the
Properties; and (c) rolling three-month projections for the businesses located
on the Properties. In addition, the previous unpaid interest as of October 31,
1995, in the amount of $105,598, was capitalized and added to the outstanding
balances of the Outlaws Loans. Despite the revised marketing plan of the
Outlaws Borrower, operations at the Outlaws Casino have not resulted in the
generation of funds necessary to allow for sufficient working capital,
therefore, the Company has not yet received any monthly payments of net revenue
from the Outlaws Borrower.
As of September 30, 1996, the outstanding loan balances, were $1,600,000
for the Crook Loan and $605,000 for the Hudspeth Loan. The report prepared for
the Company by Coopers and Lybrand ("C&L") concluded that the market value of
the fee simple interest in the Outlaws Casino was $2,500,000. As of December
31, 1995, the senior encumbrance on the Crook Parcel was $2,752,633. Therefore,
the Company set up a reserve for the entire $1,600,000 of the Crook Loan. No
reserve was taken by the Company against the Hudspeth Loan since there was no
senior encumbrance and such loan was secured by the parking facility and not the
Outlaws Casino.
On May 12, 1992, the Company made a demand loan in the amount of
$900,000 (the "Waikiki Loan") to Hemmeter Investment Company, now known as
Mideast China Trading Company, a Hawaii general partnership, an affiliate of the
Investment Manager (the "Waikiki Borrower"). The proceeds of the Waikiki Loan
were used to acquire options on various properties in New Orleans, Louisiana, in
connection with gaming-related developments pursued by the Hemmeter
organization. The Waikiki Loan is secured by a sub-leasehold mortgage on the
International Marketplace, a retail center in Honolulu, Hawaii (the "Waikiki
Property"), CBH's personal guaranty and a collateral assignment of the Waikiki
Borrower's interest as the sub-sublessor of the Waikiki Property. This loan
bore interest at the rate of 9.5% per annum, payable quarterly in arrears, and
was due on the earlier of demand or May 12, 1993. The Company agreed to
extensions of the term of the Waikiki Investment through September 30, 1994.
On September 30, 1994, the Waikiki Investment was further extended to March 31,
1995 in consideration for which the interest rate was increased to 19.5%, 10% of
which accrued and was to be payable at the time the Waikiki Loan matured. On
March 16, 1995, the Company agreed to further extend the maturity of the Waikiki
Investment to June 30, 1995. On June 30, 1995, the Company ceased accruing
interest on the Waikiki Loan and converted it to a demand loan.
On April 8, 1994, the Company made a demand loan in the amount of
$1,000,000 (the "Waikiki II Loan") to the Waikiki Borrower. The proceeds of the
loan were used to fund working capital requirements of Grand Palais Casino, Inc.
("GPCI"), an affiliate of the Company. The Waikiki II Loan is also secured by
the Waikiki Property, CBH's personal guaranty and a collateral assignment of the
Waikiki Borrower's interest as the sub-sublessor of the Waikiki Property. This
loan bore interest at the rate of 9.5% per annum payable quarterly in arrears,
and was due on the earlier of demand or October 8, 1994. On September 30, 1994,
the Waikiki II Loan was extended to the earlier of demand or March 31, 1995 in
consideration for which the interest rate was increased to 19.5%, 10% of which
accrued and was to be payable at the time the Waikiki II Loan matured. On March
16, 1995, the Company agreed to further extend the maturity of the Waikiki II
Loan to June 30, 1995. On June 30, 1995, the Company ceased accruing interest
on the Waikiki II Loan and converted it to a demand loan for financial statement
purposes only.
The Company modified the terms of the two Waikiki Loans on November 1,
1995 so as to require the Waikiki Borrower to make monthly payments of $15,042
with interest accruing at a rate of 11% per annum. As of September 30, 1996,
the combined outstanding principal balances were $1,824,791. C&L appraised the
subleasehold interest at International Marketplace at $2,510,000 at December 31,
1995. In light of this valuation, the Company has not set up a reserve for the
principal amount of the Waikiki Loans.
On January 4, 1994, the Company made a loan to CBH in the amount of
$12,900,000 (the "Hemmeter Loan"), the proceeds of which were used for working
capital purposes for CBH's various gaming affiliates and to retire certain
indebtedness secured by three of Mr. Hemmeter's residences, one in Hawaii and
two in California. This loan was originally secured by junior mortgages on the
aforementioned residences, bore interest at 12% per annum, was payable quarterly
in arrears, and was scheduled to mature on January 3, 1995. On September 14,
1994, the Hemmeter Loan was modified to provide for an additional $1,100,000
("Additional Principal") for a total principal balance of the Loan of
$14,000,000. The Additional Principal originally bore interest at the rate of
22%, 12% of which was payable under the same terms as the original loan, and the
remaining 10% was accrued and was to be payable upon the maturity or earlier
prepayment of the Hemmeter Loan. In addition, the interest rate on the original
$12,900,000 in principal was increased to 21.7% effective October 1, 1994, 12%
of which was payable under the same terms as the original loan, and the
remaining 9.7% was accrued and was to be payable upon the maturity or earlier
prepayment of the note. On December 16, 1994, CBH informed the Company that he
was selling his residence in Hawaii in late December 1994 and requested a
release of the Company's lien on the Hawaii residence and an extension of the
maturity date of the Hemmeter Loan, including the Additional Principal. In
response to CBH's request, the Company agreed that: (i) it would release its
lien on the Hawaii residence, effective January 3, 1995; (ii) the maturity date
of the Hemmeter Loan, including the Additional Principal, be extended to June
30, 1995; and (iii) the interest rate on the Hemmeter Loan and the Additional
Principal be increased to 22.7% and 23%, respectively, assuming that the
Company's lien on CBH's Hawaiian residence is released. Thirteen percent of the
interest on both the Hemmeter Loan and the Additional Principal was to be paid
under the same terms as described above, and the remaining 9.7% of the Hemmeter
Loan and the remaining 10% of the Additional Principal would accrue and be
payable upon the maturity or earlier repayment of the Hemmeter Loan and the
Additional Principal. The lien on the Hawaii residence was released on January
3, 1995 and the new interest rates for the Hemmeter Loan and the Additional
Principal took effect on such date. On May 2, 1995, the Company agreed to a
further modification of the Hemmeter Loan to provide for an additional
$1,000,000 (the "Second Additional Principal") thereby increasing the principal
amount of the Hemmeter Loan to $15,000,000. The Second Additional Principal
bore interest at the rate of 23%, 10% of which was to be payable upon the
maturity or earlier prepayment of the Second Additional Principal.
The carrying value of the Hemmeter Loan, including the Additional
Principal and the Second Additional Principal, has been reduced by the Company
three times, once at June 30 1995 by a $9,900,000 reserve, again at September
30, 1995 by a $2,950,000 reserve and finally by $977,000 at the time the
California residences that served as collateral for the loan were sold. Also,
approximately $611,000 of the $1,250,000 collateral preservation reserve made by
the Company at June 30, 1995 was allocated to the Hemmeter Loan. After paying
the costs associated with the sale of CBH's California residences, the Company
received net proceeds of approximately $733,000. CBH and his wife still have
personal liability for the remaining $14,267,000 balance of the loan. However,
the current carrying value of the Hemmeter Loan is zero.
On February 14, 1994, the Company made a loan to Grand Palais Casino,
Inc. ("GPCI"), an affiliate of CBH, in the amount of $4,000,000 (the "GPCI
Loan"). The proceeds of the GPCI Loan were used to cover certain expenses of
GPCI incurred in connection with the development of the single land-based casino
in New Orleans, Louisiana, of which GPCI was to be a one-third owner. The GPCI
Loan bore interest at a rate of 14% per annum, payable quarterly in arrears, was
secured by the personal guarantee of CBH and was due to mature on September 30,
1994. On April 8, 1994, an additional loan was made to GPCI in the amount of
$2,250,000 under the same terms and conditions as the GPCI Loan. On September
30, 1994, both of the loans to GPCI, in the aggregate amount of $6,250,000, were
extended to the earlier of demand or March 31, 1995. On November 16, 1994, the
Company agreed to subordinate both GPCI loans to senior indebtedness of GPCI in
the amount of $34,000,000 and to extend the term of the loan to February 25,
1998, in consideration for which the interest rates were increased to a rate
equal to 150 basis points above the coupon rate of the $34,000,000 senior debt
(then 19.75%) beginning January 1, 1995. On April 14, 1995, the Company sold
the two loans made to GPCI to an unaffiliated third party for the sum of
$6,250,000 plus all accrued and unpaid interest through the date of the sale.
On April 25, 1995, the Company made a loan to Hemmeter Enterprises, Inc.
("HEI"), an affiliate of CBH, in the amount of $1,000,000, bearing interest at
the rate of 12% per annum, payable quarterly in arrears, and due on demand (the
"HEI Loan"). HEI, either directly or through affiliated entities, was in the
business of developing, owning and operating gaming and related entertainment
facilities. HEI was a one-third partner in the partnership attempting to
develop the sole land-based casino in New Orleans, Louisiana, and a 50% partner
in a joint venture which developed and operated a riverboat gaming project in
New Orleans. In addition, HEI developed, owned and operated two of the largest
casinos in Colorado. The proceeds of the HEI Loan were utilized by HEI for
working capital purposes and were secured by the guaranty of CBH.
On May 13, 1995, the Company agreed to provide HEI with a senior bank
facility in the amount of $4,000,000 (the "HEI Senior Bank Facility"). The HEI
Senior Bank Facility was secured pari passu by deeds of trust for real
properties known as the Bullwhackers Casinos in Central City and Black Hawk,
Colorado, a second mortgage on the Canadian Pavilion Property and a second
mortgage on the riverboat operated in New Orleans by Grand Palais Riverboat,
Inc. ("GPRI"), an affiliate of CBH, and a collateral assignment of GPRI's
interests in the riverboat joint venture which was operated in New Orleans. The
HEI Senior Bank Facility was also guaranteed jointly and severally by various
subsidiaries of HEI, certain other affiliated entities and by CBH. The Company
made an initial funding of $2,000,000 of the $4,000,000 HEI Senior Bank Facility
and $1,000,000 of the loan proceeds were utilized to repay the HEI Loan. The HEI
Senior Bank Facility bore interest at the rate of 12% per annum and was
scheduled to mature on September 30, 1995. On June 30, 1995, the Company
determined that it would not advance any additional sums to HEI under the terms
of the HEI Senior Bank Facility. In October 1995, HEI and GPRI both filed for
bankruptcy protection. The plans of reorganization of HEI and GPRI were approved
by the bankruptcy courts and in June 1996 in satisfaction of its interest the
Company received the following in settlement of its claims: (i) a 12% senior
secured pay-in-kind note due 2003 in the principal amount of $601,702 issued by
Colorado Gaming & Entertainment Co., the successor to HEI ("Colorado Gaming");
(ii) 60,170 shares of common stock of Colorado Gaming, which entity is not
publicly traded; and (iii) 27,089 shares of common stock of Casino America,
Inc., a publicly-held stock traded on the NASDAQ National Stock Market under the
symbol "CSNO." In addition, the Company is also entitled to receive a small
number of warrants of Casino America, Inc., the exact number has not yet been
determined. See Note 4, "Note Receivable and Investment Securities", of the
Notes to Financial Statements for further details regarding the Company interest
in these instruments pursuant to the bankruptcy settlements.
As of September 30, 1996, the Company had approximately $948,737 in cash
and cash equivalents and investments securities.
Management of the Company is continuing with its negotiations with the
Company's borrowers and is monitoring the activities of such entities with a
view towards maximizing the recovery on each of its loans, and in an effort to
enhance Stockholder value.
RESULTS OF OPERATIONS
Net assets in liquidation decreased from a balance of $13,057,684 at
December 31, 1995 to a balance of $5,819,201 at September 30, 1996. The
decrease resulted from the Company's payment of its operating expenses as well
as the recognition of an allowance for impairment of investment in loans and
accrued interest in the amount of $5,500,000.
Total revenue for the nine months ended September 30, 1996 was $66,593
compared to $1,651,343 for the same period in 1995. This decrease is primarily
due to a termination of interest payments on the Company mortgage and demand
loans by its Affiliated Borrowers during the second quarter of 1995, as
discussed above. Total revenue for the quarter ended September 30, 1996 was
$6,630 as compared to $21,725 for the same period in 1995. The decrease in
total revenue is primarily due to a decrease in interest income on cash and cash
equivalents. Interest income decreased due to a decrease in cash available for
investment.
Operating expenses for the nine months ended September 30, 1996 were
$1,687,876 compared to $949,987 for the same period in 1995. Operating expenses
for the quarter ended September 30, 1996 were $397,524 as compared to $339,964
for the quarter ended September 30, 1995. This increase was due to increased
legal fees and liquidation costs related to the announcement of the Company's
self-liquidation and the litigation as discussed in Part II, Item 1. During the
nine months and quarter ended September 30, 1996, the Company recognized an
allowance for impairment on loans and accrued interest in the amount of
$5,500,000 regarding its New Sint Maarten Loan based upon the minimum sales
price of $7,000,000 established for the auction of the Sint Maarten Property
pursuant to the foreclosure sale implemented by the senior lender and scheduled
for November 14, 1996. In addition, during the nine months and quarter ended
September 30, 1995, the Company recognized allowances for impairment in loans
and accrued interest and provisions for collateral protection costs of
$17,167,903 and $5,550,000, respectively, as a result of the initial defaults on
its mortgage and demand loans receivable as discussed above in Liquidity and
Capital Resources.
OTHER INFORMATION
During June 1996 the Company's shares of common stock were approved for
listing on the NASDAQ Electronic Bulletin Board under trading symbol RIIV.
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,
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 1, 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 for failure to state a
claim. On February 29, 1996, the defendants filed opposition papers to
plaintiff's motion for class certification. The consolidated amended complaint
seeks an unspecified amount of actual damages and reimbursement of costs and
expenses. On October 25, 1996, the Court heard arguments on the defendants'
motion to dismiss and the plaintiff's notice for class certification.
No assessment of the outcome of this action or the amount or range of
any loss that might be incurred by the Company can be made at this time.
However, the Company intends to defend against the charges as it believes it did
not violate the federal securities laws. 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. 14839," 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.
On October 25, 1995, the Securities and Exchange Commission (the
"Commission") issued a formal order of investigation captioned In the Matter of
Resort Income Investors, Inc., Case No. HO-5327. In connection with the
investigation, the Company was requested to produce certain documents and
information. The Company has complied with these requests. The Company has
been advised that the investigation 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 cannot, at this
time, predict the outcome of the investigation or the financial impact, if any,
to the Company.
ITEM 6. EXHIBITS AND REPORTS 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) No reports on Form 8-K were filed by the Company for the
quarter ended September 30, 1996:
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.
Date: November 13, 1996 RESORT INCOME INVESTORS, INC.
(Registrant)
By: /s/ John R. Young
John R. Young
Chief Executive Officer, President and
Chief Financial Officer
By:/s/ Daniel D. Lane
Daniel D. Lane
Director, Secretary,
Treasurer and Chief
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
"This schedule contains summary financial
information extracted from Resort Income
Investors, Inc.'s Form 10-Q for the period
ended September 30, 1996 and is qualified
in its entirety by reference to such 10-Q."
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 514,658
<SECURITIES> 434,079
<RECEIVABLES> 34,362,391
<ALLOWANCES> 28,967,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,344,128
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,344,128
<CURRENT-LIABILITIES> 524,927
<BONDS> 0
0
0
<COMMON> 5,819,201
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,344,128
<SALES> 0
<TOTAL-REVENUES> 66,593
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,805,076
<LOSS-PROVISION> 5,500,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,238,483)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,238,483)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,238,483)
<EPS-PRIMARY> (1.74)
<EPS-DILUTED> (1.74)
</TABLE>
