<PAGE> 1
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 March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition
period from _________ to _________.
Commission File Number 1-10084
RESORT INCOME INVESTORS, INC.
(Exact name of registrant as specified in its certificate of incorporation)
Delaware 36-3593298
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 South Wacker Drive, Suite 2900, Chicago, Illinois 60606
(Address of principal executive offices) (Zip Code)
(312) 683-3323
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X . NO .
APPLICABLE ONLY TO CORPORATE ISSUERS:
Shares of common stock outstanding as of June 3, 1996: 4,156,000
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RESORT INCOME INVESTORS, INC.
STATEMENT OF NET ASSETS IN LIQUIDATION (NOTE 1)
MARCH 31, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
Interest receivable from
related parties, net of
allowance $ --- $ ---
Demand loans to related
parties, net of
allowances 11,329,791 12,092,875
Cash and cash equivalents 872,847 846,768
Investment securities at
market value 729,755 805,834
------------ ------------
Total assets 12,932,393 13,745,477
------------ ------------
LIABILITIES
Accounts payable and
accrued expenses 704,781 687,793
------------ ------------
NET ASSETS IN
LIQUIDATION $ 12,227,612 $ 13,057,684
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE> 3
RESORT INCOME INVESTORS, INC.
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
March 31,
1996
<S> <C>
Net assets in liquidation
at December 31, 1995 $13,057,684
Interest income on cash and
cash equivalents 28,934
Loss on investment securities (72,191)
Operating expenses (786,815)
-----------
Net assets in liquidation at
March 31, 1996 $12,227,612
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE> 4
RESORT INCOME INVESTORS, INC.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(UNAUDITED)
<TABLE>
<S> <C>
REVENUE
Interest and net fee income
on mortgage and demand
loans to related parties $ 1,887,129
Interest income from cash and
cash equivalents and
investments 26,017
------------
Total Revenue 1,913,146
------------
EXPENSES
Operating expenses 143,036
------------
NET INCOME $ 1,770,110
============
NET INCOME PER SHARE $ 0.43
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE> 5
RESORT INCOME INVESTORS, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995
<TABLE>
<S> <C>
RECONCILIATION OF NET INCOME TO NET CASH
FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,770,110
Changes in operating assets
and liabilities:
Interest receivable from
related parties (1,051,669)
Prepaid expenses and other (10,203)
Accounts payable and
accrued expenses 23,862
-----------
Net cash provided by
operating activities 732,100
-----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Distributions paid to
Stockholders (1,558,500)
Loan proceeds received 151,000
-----------
Net cash used in financing
activities (1,407,500)
-----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (675,400)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 779,298
-----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 103,898
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE> 6
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 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 twelve year,
self-liquidating real estate investment trust ("REIT"), as defined under the
Internal Revenue Code. The Company was organized for the purpose of enabling
shareholders 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 constitute 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
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<PAGE> 7
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 (CONTINUED)
(UNAUDITED)
1. OPERATIONS OF THE COMPANY (CONTINUED)
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 currently negotiating with CBH and the Affiliated Borrowers
regarding the plans to recover the Company's investment in loans and accrued
interest. There is no assurance that the outcome of the negotiations will
result in 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 March 31, 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 March 31, 1996 have been presented on the
liquidation basis. The March 31, 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 March 31, 1996 statement of net assets. The
financial statements of the Company as of March 31, 1995 were prepared on the
historical cost (going concern) basis.
The amount ultimately available for distribution to shareholders 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
March 31, 1996 statement of net assets, and the difference could be material.
At March 31, 1996, the Company's financial instruments consist of
demand loans to related parties, 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. Investment securities fair values are based on market quotes.
Based on the
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<PAGE> 8
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 (CONTINUED)
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
(CONTINUED)
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.
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 it would commence an orderly self-liquidation as a result of
CBH's acknowledgement that interest and principal would not be paid when due on
demand loans made by the Company to him personally or to the Affiliated
Borrowers. 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 still intends to pursue its collection of all the principal and
interest contractually due from the Affiliated Borrowers including interest of
$1,812,890 accrued on the Company's demand loans during the three months ended
March 31, 1996 that has not been recognized in the financial statements.
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<PAGE> 9
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 (CONTINUED)
(UNAUDITED)
4. DEMAND LOANS TO RELATED PARTIES
Demand loans to related parties include the following:
<TABLE>
<CAPTION>
Carrying Face Carrying Face
Borrower Interest Rate/ Amount at Amount at March 31, Amount at December Amount at
Maturity March 31, 1996 31, 1995 December 31,
1996 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 7,900,000 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 1,000,000 2,000,000
----------- ----------- ----------- -----------
$11,329,791 $35,796,791 $12,092,875 $36,559,875
Reserve for
Impairment of
Loans --- 24,467,000 --- 24,467,000
----------- ----------- ----------- -----------
$11,329,791 $11,329,791 $12,092,875 $12,092,875
----------- ----------- ----------- -----------
</TABLE>
[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 March 31, 1996 was fully reserved and is currently
in default. The loan is on non-accrual status as of March 31, 1996.
[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 $2,300,000. 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 $2,752,633, 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
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<PAGE> 10
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 (CONTINUED)
(UNAUDITED)
4. DEMAND LOANS TO RELATED PARTIES (CONTINUED)
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 March 31, 1996. As of March 31, 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 increasing its basic interest
rate to 11%, extending the maturity date to February 29, 1996 and
eliminating the Additional Interest. The borrower is current on all
payment obligations under the terms of the modified loan agreement;
however, interest payments received by the Company during the
quarter ended December 31, 1995 and the quarter ended March 31,
1996, $45,125 and $30,084, respectively, were applied against the
carrying amount of the loans.
[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 and is currently investigating the
possibility of developing the Property with a joint venture partner.
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. The loan is on
non-accrual status as of March 31, 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. The loan is on non-accrual status as of March 31,
1996.
[FN] (f) During the second quarter of 1995, the Company made a loan to
Hemmeter Enterprises, Inc. ("HEI") in the amount of $2,000,000. The
loan to HEI bears interest at the rate of 12% per annum and is
secured by interest in and liens upon certain real and personal
property owned by HEI and the personal guaranty of CBH. On November
7, 1995, HEI filed for protection under Chapter 11 of the United
States Bankruptcy Code. The Company is in the process of receiving
a distribution of new collateral under the court approved plan of
reorganization, however, no assurance distribution was received as
of March 31, 1996. As a result of a default under the terms of the
loan agreement, effective May 1, 1995, the Company exercised its
right to increase the interest rate on the loan at the default
interest rate of 16% per annum. An allowance for impairment in the
amount of $1,000,000 was recorded during the fourth quarter 1995
against the outstanding carrying balance. The loan is on
non-accrual status as of March 31, 1996.
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<PAGE> 11
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 (CONTINUED)
(UNAUDITED)
5. LITIGATION
On July 3, 1995, a complaint was filed against the Company, CBH, MMH
and Deloitte & Touche LLP, the Company's independent auditors, in U.S. District
Court for the District of Colorado alleging violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 an 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, 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.
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.
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. 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 Enforcement Division of 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.
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<PAGE> 12
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 (CONTINUED)
(UNAUDITED)
5. LITIGATION (CONTINUED)
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 waterfront 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 the Company, however, 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.
In May 1996, a complaint was filed in the Civil District Court for
the Parish of Orleans, State of Louisiana, against the Company, its affiliated
borrower, Canadian Pavilion Limited Partnership, and the Recorder of Mortgages
for Orleans Parish, Louisiana, seeking to cancel the Company's two mortgages
secured by a subleasehold interest in the Canadian Pavilion, located in New
Orleans, Louisiana, owned by the Canadian Pavilion Limited Partnership,
captioned "City of New Orleans and Ernest N. Morial New Orleans Exhibition Hall
Authority v. Michael P. McCrossen, Canadian Pavilion Limited Partnership and
Resort Income Investors, Inc." Management of the Company is currently
reviewing this complaint, however, due to the recent filing date of the
lawsuit, 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.
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<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 in compliance with all provisions necessary for it to maintain its
REIT status.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company had six temporary investments
outstanding with carrying values totalling $11,329,791. 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), with a combined principal balance of
$1,900,000 have made interest payments, in December 1995 of $45,125 and
payments 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. No payments have been received 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 March 31, 1996, the Company has advanced approximately
$711,019 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, the Company
determined 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 both the Directors and Coopers & Lybrand, 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 March 31, 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
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
that its existing cash, cash equivalents and short-term investment balances
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 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. However, the
Affiliated Borrower has requested an extension of the loan from the senior
lender. The senior lender and the Affiliated Borrower continue discussions
regarding the senior loan, however, to date, the senior lender has taken no
action regarding the maturing of the first mortgage.
The New Sint Maarten Borrower is currently 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. The joint venture with the New Sint
Maarten Borrower would contribute the property free and clear of the Company's
New Sint Maarten Loan and CBH's resort development expertise to the new
partnership. The other three parties would contribute approximately
$15,000,000 in new equity to the transaction. An exclusive 90 day period was
granted to complete due diligence by all parties, which period recently
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<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
expired. Based upon a market study prepared by an independent third party, the
New Sint Maarten Loan could be fully repaid over a period in excess of five
years if various assumptions are realized, of which no assurances can be given.
The New Sint Maarten Loan had an outstanding balance $15,799,832, as of March
31, 1996, including accrued interest of $2,312,449 and $587,383 of additional
advances to preserve the collateral. Based upon the results of an appraisal
prepared by an independent third party, the current carrying value of the New
Sint Maarten Loan is $7,900,000 after a $5,000,000 reserve for impairment of
value was recorded against the loan during the quarter ended December 31, 1995.
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 19,
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 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
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<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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.
The Company continues to maintain its interest in the collateral.
The Company has also been 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 is
currently in negotiations with the plaintiffs to settle these matters.
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
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<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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. In addition, the
Company was advised 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.
As of March 31, 1996, the outstanding loan balances, including
interest, were $1,753,428 for the Crook Loan and $663,016 for the Hudspeth
Loan. The C&L report to the Company 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
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<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 March 31,
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 recent 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
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<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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. Mr. Hemmeter 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 the Investment Manager, 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., an affiliate of the Investment Manager ("HEI"), 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.
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<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 is 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 the Investment Manager, 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. Since the
filing of HEI and GPRI, management of the Company has been negotiating with
representatives of the other secured lenders to protect its collateral
position. The Company's position with the other secured lenders in each plan of
reorganization was recently confirmed by the Courts in each bankruptcy
proceeding. As a result, the Company's collateral position is being converted
to: new secured bonds issued by a reorganized HEI; stock and warrants issued by
Casino America in consideration for its purchase of the riverboat of GPRI; and
minimal equity in the reorganized HEI. Management of the Company believes
these positions to be received have a current value of $1,000,000. For the
quarter ended December 31, 1995, the Company recorded a $1,000,000 reserve
against the carrying value of the HEI Senior Bank Facility.
As of March 31, 1996, the Company had approximately $1,602,602 in
cash and cash equivalents and investments at market value.
Management of the Company continues to analyze the Company's loan
portfolio and is monitoring the activities of its borrowers with a view towards
maximizing the recovery of 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 $12,227,612 at March 31, 1996.
The decrease resulted primarily from operating expenses.
Total revenue for the first quarter of 1996 was $28,934 as compared
to $1,913,146 for the first of 1995. The decrease is due to the non-accrual of
interest income on the demand loan portfolio during the first quarter of 1996.
Operating expenses for the quarter ended March 31, 1996 were
$786,815 as compared to $143,036 for the quarter ended March 31, 1996. 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.
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<PAGE> 21
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 an 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, 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.
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.
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. 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 Enforcement Division of 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.
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
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<PAGE> 22
ITEM 1. LITIGATION (CONTINUED)
OTHER INFORMATION (CONTINUED)
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 waterfront 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 the Company, however, 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.
In May 1996, a complaint was filed in the Civil District Court for
the Parish of Orleans, State of Louisiana, against the Company, its affiliated
borrower, Canadian Pavilion Limited Partnership, and the Recorder of Mortgages
for Orleans Parish, Louisiana, seeking to cancel the Company's two mortgages
secured by a subleasehold interest in the Canadian Pavilion, located in New
Orleans, Louisiana, owned by the Canadian Pavilion Limited Partnership,
captioned "City of New Orleans and Ernest N. Morial New Orleans Exhibition Hall
Authority v. Michael P. McCrossen, Canadian Pavilion Limited Partnership and
Resort Income Investors, Inc." Management of the Company is currently
reviewing this complaint, however, due to the recent filing date of the
lawsuit, 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.
In May 1996, a complaint was filed in the Civil District Court for
the Parish of Orleans, State of Louisiana, against the Company, its affiliated
borrower, Canadian Pavilion Limited Partnership, and the Recorder of Mortgages
for Orleans Parish, Louisiana, seeking to cancel the Company's two mortgages
secured by a subleasehold interest in the Canadian Pavilion, located in New
Orleans, Louisiana, owned by the Canadian Pavilion Limited Partnership,
captioned "City of New Orleans and Ernest N. Morial New Orleans Exhibition Hall
Authority v. Michael P. McCrossen, Canadian Pavilion Limited Partnership and
Resort Income Investors, Inc." Management of the Company is currently
reviewing this complaint, however, due to the recent filing date of the
lawsuit, 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.
- 22 -
<PAGE> 23
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) Reports on Form 8-K. The Company filed the following report on
Form 8-K during the first quarter of 1996:
Date Items Report
March 25, 1996 5
Items 2, 3, 4 and 5 of Part II are omitted because of the absence of
conditions under which they are required.
- 23 -
<PAGE> 24
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: June 4, 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
- 24 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Resort
Income Investors, Inc.'s March 31, 1996 interim financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 872,847
<SECURITIES> 729,755
<RECEIVABLES> 35,796,791
<ALLOWANCES> 24,467,000
<INVENTORY> 0
<CURRENT-ASSETS> 12,932,393
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,932,393
<CURRENT-LIABILITIES> 704,781
<BONDS> 0
<COMMON> 0
13,210,937
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,123,593
<SALES> 0
<TOTAL-REVENUES> 28,934
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (830,072)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (830,072)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
