<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K/A - NUMBER 1
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission File Number 1-10084
RESORT INCOME INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3593298
(State of other jurisdiction of (I.R.S. Employer Iden-
incorporation or organization) tification Number)
150 South Wacker Drive, Suite 2900, Chicago, Illinois 60606
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 683-3323
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Shares of Common Stock NASDAQ Electronic Bulletin Board
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X . NO .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (subsection 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K/A or any amendment to this Form 10-K/A. [ X ]
Shares of common stock outstanding as of May 22, 1996: 4,156,000. Aggregate
market value of the common stock held by non-affiliates of the Registrant as of
May 22, 1996: $3,106,875. This amount is based on the closing price of the
shares of common stock ($0.75) on May 22, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
A portion of the prospectus of the Registrant dated October 24, 1988 (the
"Prospectus") and filed pursuant to Rule 424 under the Securities Act of 1933
is incorporated by reference into Parts II, III and IV of this Annual Report on
Form 10-K/A.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . 8
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . 9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . 20
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 24
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
The Registrant, Resort Income Investors, Inc. (the "Company"), is a
Delaware corporation organized pursuant to a Certificate of Incorporation filed
on July 20, 1988. The Company commenced a public offering of up to 3,600,000
shares of common stock (subject to increase to 4,140,000 shares to cover
over-allotments) pursuant to a Registration Statement filed on Form S-11 under
the Securities Act of 1933, as amended, which was declared effective by the
Securities and Exchange Commission on October 24, 1988. Pursuant to the public
offering, the Company received gross proceeds of $51,750,000 from the sale of
4,140,000 shares, plus an additional $200,000 from the sale of 16,000 shares to
RC&H, Inc. ("RC&H") at the public offering price of $12.50 per share.
In late June 1995, Mr. Christopher B. Hemmeter ("CBH"), then the
Chairman of the Board, President and Chief Executive Officer of the Company,
informed the Company that interest and principal would not be paid when due on
demand loans made by the Company to him personally or to entities affiliated
with him (the "Affiliated Borrowers"). Further, he informed the Company that
he would not be able to make timely payments of such interest and principal on
behalf of the Affiliated Borrowers pursuant to guarantees he had made in
connection with the Affiliated Borrowers' loans, thereby creating an event of
default for each of the loans. The affected loans constituted all of the
demand loans to related parties held by the Company, aggregating $36,605,000,
of which CBH was personally the borrower of $15,000,000 and the Affiliated
Borrowers were the borrowers of $21,605,000, as of the date of such
announcement.
The Company announced on June 29, 1995, that it would commence an
orderly self-liquidation of its assets over an estimated 24- to 36-month
period. The Company also determined that it would take a charge to income for
the second quarter of 1995 in an amount that, in management's judgment, would
be adequate to absorb estimated losses related to the loan portfolio. The
amount of the charge was based on management's judgments regarding the ability
of CBH and the Affiliated Borrowers to repay such loans and also reflected
management's judgments concerning the extent that the estimated realizable
value of the Company's collateral would not provide for the recovery of the
Company's investment in the loans and accrued interest, in light of CBH's
inability to perform on his guarantees in a timely manner. The Company
reflected, for the second quarter of 1995, an allowance of $10,367,903,
consisting of $9,900,000 for the loan to CBH and $467,903 for uncollectibility
of interest accrued as of December 31, 1994 but unpaid as of June 30, 1995.
Further, interest of $2,043,017 accrued during 1995 but unpaid as of June 30,
1995, was reversed by a charge against interest income. Additionally,
$1,250,000 was provided for amounts that management estimated would be needed
to advance to first lien holders and others to protect the Company's collateral
position while the plan of liquidation is accomplished, which includes
negotiations with CBH and the Affiliated Borrowers.
The Company also announced that Messrs. John R. Young and Daniel D.
Lane, the Company's then independent directors (the "Independent Directors")
would assume responsibility for negotiations with CBH and the Affiliated
Borrowers to maximize the Company's recovery of its investment in loans and
accrued interest. Based on information provided to the Independent Directors
by CBH and the Affiliated Borrowers, the Independent Directors reviewed CBH's
financial condition, the financial condition of the Affiliated Borrowers, the
terms of the Company's loans, the collateral for certain of the loans
2
<PAGE> 4
ITEM 1. BUSINESS (CONTINUED)
(including the existence of senior liens on certain of the collateral),
appraisals of certain of such collateral and other information concerning the
value of the other collateral, and other factors, to determine the amount of
the charge and in reaching a decision to proceed with the liquidation of the
Company's assets.
The Company also decided to cease accruing interest on its current
loans for financial statement purposes only and convert each of its loans to
the Affiliated Borrowers maturing June 30, 1995 to demand loans, and that
periodic liquidating distributions be made to the stockholders of the Company
as loans are repaid, subject to allowances for necessary reserves and working
capital, to allow the Company to protect its remaining collateral position and
assets and, in that regard, that all quarterly distributions be eliminated.
Finally, the Company determined that no new loans would be made by the Company
and that any additional advances related to existing loans to the Affiliated
Borrowers would be made only in an effort to protect the collateral position of
the Company.
In addition, the Company, on June 29, 1995, also terminated its
advisory agreement with RII Advisors, Inc., the Company's investment manager,
which entity was controlled by affiliates of CBH.
On August 8, 1995, CBH resigned as Chairman of the Board, President
and Chief Executive Officer of the Company and Mr. Mark M. Hemmeter, the son
of CBH, resigned his positions with the Company as Executive Vice President,
Secretary, Treasurer and Director of the Company. On such date, the
resignations of CBH and Mark Hemmeter were accepted by the Independent
Directors. Also, the Company decided that Mr. John R. Young, an Independent
Director of the Company since the Company's inception in 1988, would become the
Chairman of the Board of Directors, President, Chief Executive Officer and
Chief Financial Officer of the Company immediately. Also, Mr. Daniel D. Lane,
an Independent Director of the Company since 1990, would remain an Independent
Director of the Company and also be designated as the Company's Secretary,
Treasurer and Chief Accounting Officer. At this time, the Company also
retained the consulting services of Mr. Neil D. Hansen to work with the
Company's Directors in connection with the Company's orderly self-liquidation
of its assets. From the inception of the Company through 1990, Mr. Hansen was
the Company's Executive Vice President, Secretary and Treasurer. The Company
also decided to relocate its headquarters to Chicago, Illinois and establish
banking relations with LaSalle National Bank of Chicago.
The Company also determined to suspend distribution payments to the
Stockholders in light of the pending litigation filed against the Company and
certain of its current and former officers and directors. See Item 3.
From inception of the Company until May 4, 1991, RC&H acted as the
Company's investment manager. On February 16, 1991, a majority of the then
independent directors of the Company authorized the termination of the
investment management agreement with RCH effective May 4, 1991. On such date,
RII Advisors, Inc. ("RII Advisors") became the Company's Investment Manager.
Both advisors were controlled by affiliates of CBH. As described earlier, on
June 29, 1995, the Company terminated its investment management agreement with
RII Advisors and retained Mr. Hansen, an outside consultant, to assist the
Directors in the orderly self-liquidation of the Company. RC&H and RII
Advisors, when discussed in connection with their capacity as the
3
<PAGE> 5
ITEM 1. BUSINESS (CONTINUED)
former investment managers to the Company, shall be referred to herein
collectively as the "Investment Manager."
The original business plan of the Company contemplated the Company
principally making mortgage loans primarily to affiliates of CBH ("Mortgage
Loans") which would generally be secured by either luxury destination resorts
or unimproved property anticipated to be developed into luxury destination
resorts. In light of the state of the real estate market in general during the
early 1990's, and the resort development market in particular, the Company
shifted its focus to making Mortgage Loans secured by gaming related
developments or unimproved property anticipated to be developed into gaming
related developments. The Mortgage Loans were to be secured principally by
junior and, to a lesser extent, senior mortgages on real properties or by
interests in other real estate investment trust-qualifying assets. In
addition, Hemmeter Guaranty Corporation (the "Guarantor"), an affiliate of CBH,
agreed to purchase defaulted Mortgage Loans, if any, made to Affiliated
Borrowers, in an aggregate amount of up to 20% of the gross proceeds of the
Company's public offering (the "Mortgage Loan Purchase Guaranty"). Pursuant to
the Mortgage Loan Purchase Guaranty, the Guarantor was to pay the amount of any
accrued but unpaid base interest plus the amount of the outstanding principal
and interest reserve, subject to the Mortgage Loan Purchase Guaranty.
The Company's objectives in making investments in Mortgage Loans were
to: (i) distribute cash on a quarterly basis to stockholders (the
"Stockholders"); (ii) preserve and protect the Stockholders' capital; and (iii)
realize the benefit of capital appreciation in the value of the assets
collateralizing the Mortgage Loans through the receipt of bonus interest.
The Company's objective was to structure its Mortgage Loan portfolio
to provide for the receipt of points, base interest and bonus interest at
combined rates sufficient to allow the Company to make distributions to the
Stockholders on a quarterly basis, at a rate equal to a 12% per annum,
non-compounded, cumulative return on the initial public offering price ($12.50
per share), or $1.50 per share annually. This return was guaranteed (the "Cash
Flow Guaranty") for the period from October 31, 1988 (initial closing date)
through October 31, 1991 (the "Cash Flow Guaranty Period"). Throughout such
period, Affiliated Borrowers were obligated to pay supplemental interest in
amounts necessary to enable the Company to make the specified distributions,
which amounts were provided by the Guarantor to the Affiliated Borrowers
pursuant to the Cash Flow Guaranty. During the Cash Flow Guaranty Period a
total of $385,528 of supplemental interest was required and subsequently paid
in order that the Company meet its cash flow requirements under the Cash Flow
Guaranty. These amounts could be credited dollar-for-dollar against up to 50%
of the amounts later remitted by the Affiliated Borrowers as bonus interest,
and all but $11,752 of the total amount of supplemental interest was recaptured
in this manner.
Effective with the announcement of an intention to liquidate the
Company, the accounting basis used by the Company in preparing its financial
statements changed from historical cost to the liquidation basis of accounting.
On July 25, 1995, the Company was informed that the Enforcement
Division of the Securities and Exchange Commission (the "Commission") was
conducting an informal inquiry of the Company. The Company has and continues
to provide information to the Commission in response to
4
<PAGE> 6
ITEM 1. BUSINESS (CONTINUED)
the Commission's document requests. On October 25, 1995, the Commission
converted the informal inquiry to a formal investigation.
In October 1995, the Company also decided to retain an independent
financial advisor to review the status of the Company's loans, the financial
position of the Affiliated Borrowers and the proposed work out plans to be
presented by the Affiliated Borrowers. It was determined that an independent
third party with extensive experience in real estate finance related matters
would provide the Directors with additional pertinent information so as to
assist the Directors as the Company proceeds with its self-liquidation. The
Company sought bids from various independent financial advisors and retained
the firm of Coopers & Lybrand L.L.P. ("C&L") on November 3, 1995. C&L analyzed
certain assets securing the Company's Waikiki, Outlaws, Canadian Pavilion, Sint
Maarten and CBH Loans. The scope of services varied from analysis of the
current status of the loans, alternative courses of action and C&L's
recommendations to an appraisal estimating the value of one of the assets
collateralizing one of the Company's loans.
The Company also decided that it would seek to locate an additional
Director who would be considered independent under the terms of the Company's
Amended and Restated By-Laws. On January 26, 1996, Messrs. Young and Lane
appointed Mr. Thomas A. Ellsworth as an Independent Director of the Company, as
well as a member of its Audit Committee. See Item 10.
As of September 30, 1995, the Company's investment in loans had a
carrying value of $21,155,000, which was net of a $12,850,000 allowance for
impairment of the loan to CBH and his wife and $2,600,000 for the Company's
loan to the Canadian Pavilion Limited Partnership, an Affiliated Borrower, in
the original principal amount of $2,600,000. As of September 30, 1995,
$316,279 has been charged against the Company's reserve taken at June 30, 1995
of $1,250,000 relating to expenses associated with the protection of the
Company's collateral. See Item 7.
As of December 31, 1995, the Company's investment in loans had a
carrying value of $12,092,875, which is net of an $14,267,000 allowance for
impairment of the loan to CBH and his wife, a $5,000,000 allowance for
impairment of the Company's loan to R.C.H. Investments, L.L.C., an Affiliated
Borrower, a $1,600,000 allowance for impairment of one of the Company's loans
to the Outlaws Borrower, an Affiliated Borrower, a $1,000,000 allowance for
impairment of the Company's loan to Hemmeter Enterprises, Inc., an Affiliated
Borrower, and $2,600,000 for the Company's Canadian Pavilion loan. All accrued
interest relating to December 31, 1994 has been reserved and accrued interest
related to 1995 has been reversed. Additionally, at December 31, 1995, the
Company had utilized or reversed a total of $1,027,490 of the $1,250,000
reserved earlier in the year for the estimated costs of protecting its
collateral position in certain loans. See Note 3 of the Notes to Financial
Statements for further details regarding the Company's investment in loans.
The Company qualified and will be treated as a real estate investment
trust ("REIT") under Sections 856-860 of the Internal Revenue Code of 1986, as
amended, for the year ended December 31, 1995.
In February 1996, the Company received net proceeds of approximately
$733,000 from the sale of the two homes located in Los Angeles, California
owned by CBH which secured the loan to CBH and his wife. As of September 30,
1995, the loan to CBH had a carrying value of $2,150,000. In addition,
approximately $611,000 of the $1,250,000
5
<PAGE> 7
ITEM 1. BUSINESS (CONTINUED)
collateral preservation reserve made by the Company at June 30, 1995
was allocated to the loan to CBH and his wife. After accounting for the unused
portion of the asset preservation reserve allocated to the collateral for the
loan to CBH, the Company recognized an additional $997,000 reserve against the
loan to CBH to reduce its carrying value to zero. CBH and his wife maintain
their personal obligation to the Company for the remaining $14,267,000 balance
of the loan to CBH.
The Company did not directly employ any persons during 1995. The
Independent Directors were compensated for their services as directors and the
Company entered into consulting arrangements with Messrs. Young and Hansen.
See Items 10 and 11 for further details.
ITEM 2. PROPERTIES
The Company was formed to make Mortgage Loans and Temporary Investments
collateralized by interests in non-operating real property or other real estate
investment trust qualifying assets and will not own any properties unless it is
a result of a foreclosure action against the collateral of its Affiliated
Borrowers. See Notes 3 and 4 of the Notes to Financial Statements for
information pertaining to the properties which collateralize the Company's
loans.
ITEM 3. LEGAL PROCEEDINGS
(a & b)
On July 3, 1995, a complaint was filed against the Company, CBH, Mark
M. Hemmeter ("MMH") and Deloitte & Touche LLP, the Company's independent
auditors, in U.S. District Court for the District of Colorado alleging
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and other provisions of Federal law and the rules promulgated by the Securities
and Exchange Commission, "Sarnoff v. Resort Income Investors, Inc., et al.,
Doc. No. 95 B 1665." On August 24, 1995, a second suit alleging similar
violations was filed in the U.S. District Court for the District of Colorado
against each of the defendants in the lawsuit described earlier, as well as
Daniel D. Lane ("DDL"), Christopher R. Hemmeter ("CRH"), Gregory Hooper ("GH")
and John R. Young ("JRY"), "Contract v. Resort Income Investors, Inc., et al.,
Doc. No. 95 B 2184." In November 1995, the two actions were consolidated. On
November 27, 1995, the plaintiffs moved to have the consolidated actions
certified as a class action for investors who purchased or acquired stock in
the Company between March 31, 1993 and June 29, 1995. On December 6, 1995, the
plaintiffs filed a consolidated amended complaint seeking to prosecute the suit
as a class action. On January 16, 1996, the defendants moved to dismiss the
consolidated amended complaint. On February 29, 1996, the defendants filed
opposition papers to the plaintiffs' motion for class certification. The
consolidated amended complaint seeks an unspecified amount of actual damages
and reimbursement of costs and expenses.
No assessment of the likelihood of any loss can be made at this time.
However, the Company intends to defend against the charges. Pursuant to the
Company's by-laws and Delaware law, the Company will advance CBH's, MMH's,
CRH's, GH's, DDL's and JRY's costs of defense in this matter. No estimates can
reasonably be made at this time of the costs of defense of the Company, CBH,
MMH, CRH, GH, DDL and JRY.
6
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ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
In June 1995, two derivative actions were filed in the Court of
Chancery of the State of Delaware in and for New Castle County, "Alpert v.
Hemmeter et al., Doc. No. 14389," and "Frank, et al. v. Hemmeter et al.," Doc
No. 14413. The Company is a nominal defendant in each of these cases. The
defendants in both cases are: CBH, MMH, DDL and JRY. The complaints purport
to allege that the officers and directors breached their fiduciary duties to
the Company, wasted Company assets and that CBH stood in a conflict of interest
position. The complaints have now been consolidated. The defendants have
moved to dismiss the consolidated derivative action for failure to comply with
the requirements of Delaware law. Pursuant to the Company's by-laws and
Delaware law, the Company will advance to the individual defendants their
defense costs. No estimate can reasonably be made at this time of the costs of
defense. Both complaints pray for unspecified damages.
The Company is a defendant in litigation pending in the Civil
District Court for the Parish of Orleans, State of Louisiana, The Venture
International Group v. C.C. Partners Corp., Canadian Pavilion Limited
Partnership, Resort Income Investors, Inc., the City of New Orleans and The
Ernest N. Morial New Orleans Exhibition Hall Authority, Case No. 93-870. The
plaintiff alleges that the Company, along with the other defendants, caused the
plaintiff to sell its rights and interests to certain water-front property
located in New Orleans, Louisiana. This property was subject to the loan made
by the Company to Canadian Pavilion Limited Partnership. The Company is
alleged to have assisted its Affiliated Borrower in obtaining the property for
less than 50% of its fair value by providing the financing for the acquisition
and failing to timely record its mortgages on the property. The Company has
filed a motion to dismiss the complaint for failure to state a claim. The
Company and the plaintiff are engaged in active settlement discussions in an
attempt to resolve the claims against the Company.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a - d) None
7
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) The Company's shares of common stock are listed and traded on
the American Stock Exchange (the "AMEX") under the symbol "RII." The high and
low sales prices for the shares by quarter for the two years ended December 31,
1995 were as follows:
<TABLE>
<CAPTION>
Quarter Quarter's Quarter's
Ending High Low
<S> <C> <C>
03/31/94 13-5/8 11-3/4
06/30/94 14 9-3/8
09/30/94 11-1/8 9-1/2
12/31/94 10-1/4 8-3/8
03/31/95 10-3/8 8-1/2
06/30/95 10-1/2 2
09/30/95 4-3/8 1-7/8
12/31/95 2-13/16 1
</TABLE>
(b) As of the date hereof, there are approximately 922 holders of
the Company's shares.
(c) The Company paid distributions to the Stockholders for the year
1994 in the amount of $1,558,500 or $0.375 per share on each of May 13, 1994,
August 12, 1994, November 14, 1994 and January 31, 1995. The last distribution
paid by the Company was in the amount of $1,558,500, or $.375 per share, on May
10, 1995. For the years ended December 31, 1994 and 1995 return of capital
constituted $0.54 and $0.375 per share; respectively. These distributions
provided each Stockholder with a cash return on the original issue price
($12.50 per share) equal to 12.0% per annum for 1994 and 3.0% for 1995.
The Company intends to make liquidating distributions as cash
receipts from loan recoveries are received, less any amounts reserved to cover
Company operating needs prior to completion of the liquidation. The Company
intends to make distributions to Stockholders in a amount equal to at least 95%
of its taxable income in order to continue to qualify as a REIT in accordance
with the Code. However, the Company determined to suspend distribution
payments to the Stockholders in light of the pending litigation filed against
the Company and certain of its current and former officers and directors and to
protect the Company's collateral position. See Item 3.
On March 25, 1996, the Company announced that it will not appeal the
decision of the AMEX to remove its common stock from the AMEX and, therefore,
has consented to such removal. This action became necessary since the Company
has decided to self-liquidate in an orderly fashion and no longer satisfies all
the financial guidelines of the AMEX for continued listing. The AMEX has
advised the Company that the last day for trading of the Company's common stock
will be Friday, April 26, 1996. Subsequent to the delisting from the AMEX,
management of the Company established a market for the Company's common stock
via the electronic bulletin board system of the NASDAQ over-the-counter market.
8
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ITEM 6. SELECTED FINANCIAL DATA (1)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
December 31, June 30, Year Ended December 31,
1995 1995 1994 1993 1992 1991
----------- --------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Total
Assets $13,057,684 --- $42,495,546 $45,265,321 $45,378,303 $46,941,591
Total
Revenue --- $1,629,618 $5,445,580 $7,173,577 $5,884,818 $6,161,172
Net Income
(Loss) --- ($10,849,558) $3,975,315 $6,102,917 $4,850,107 $5,155,032
Net Income
(Loss) per
Share of
Common
Stock (2) --- ($2.61) $0.96 $1.47 $1.17 $1.24
Change in
Net Assets
in Liqui-
dation ($15,795,468) --- --- --- --- ---
Cash Distri-
butions
Declared
(3) --- $1,558,500 $6,234,000 $6,234,000 $6,234,000 $6,234,000
Cash Distri-
butions
per Share
of Common
Stock (4) --- $0.375 $1.50 $1.50 $1.50 $1.50
</TABLE>
(1) The above-selected financial data should be read in conjunction with
the financial statements and the related notes appearing elsewhere in
this Annual Report on Form 10-K/A.
(2) Net income per share of common stock was computed based on a weighted
average of 4,156,000 shares outstanding for 1991, 1992, 1993, 1994
and 1995.
(3) See Item 5 for additional information concerning distributions.
(4) Cash distributions per share of common stock were computed based on
4,156,000 shares outstanding on the record date of such
distributions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995, the Company had six temporary investments
outstanding with carrying values totalling $12,092,875. 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, one in December 1995 of $45,125 and
monthly payments in January and February 1996, each in the amount of $15,042.
The borrower ceased making all payment obligations under the terms of the
modified loan agreement effective with the March 1996 payment. The Company has
applied the $45,125 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.
9
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 December 31, 1995, the Company has advanced approximately
$588,000 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 Item 3, 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 C&L, 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 December 31, 1995 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, 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. (the "Sint Maarten Borrower"), in the fourth quarter of 1988,
which was collateralized 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, which did not have a
bonus interest component, 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
10
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 collateralizes 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
$308,000 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 loan. Neither the Affiliated Borrower nor
the Company has made any interest or principal payments on the senior loan
during 1996.
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 has
been granted to complete due diligence by all parties. 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 $14,858,683, as of December 31, 1995, including
accrued interest of $1,492,604 and the $466,079 of additional advances to
preserve the collateral. However, based upon the results of an appraisal
prepared by another 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 (the
"Canadian Pavilion Borrower"), in the amount of $2,600,000 (the "Canadian
Pavilion Loan"), in November 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
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 collateralizing 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 collateralizing 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 a lawsuit brought
by the entity which sold the property to the Canadian Pavilion Borrower under a
lender liability theory. The Company believes that the claim made by the
plaintiffs appears to lack merit and is
12
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
currently in negotiations with the plaintiffs to settle the matter. See Item
3.
On February 11, 1992, the Company made two demand loans to Outlaws
Casino, Ltd. (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 collateralized by an assignment of a
partnership interest in the Outlaws Borrower; the Crook Loan is also
collateralized 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 collateralized 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 collateralized by the Crook Parcel was not made and
that the Outlaws Borrower was currently in negotiations with the senior lender
to revise the terms of the loan in a manner so as to allow the Outlaws Borrower
to make interest only payments until spring 1996. 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 was probably not possible at such time since the
winter months are the least productive
13
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
for the Colorado casinos and that any prospective buyer would defer a purchase
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 collateral 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 collateralized 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 December 31, 1995, the outstanding loan balances, including
interest, were $1,707,447 for the Crook Loan and $645,629 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 $2,650,000. 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 collateralized 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, (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
collateralized 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 such loan went into default.
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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
collateralized 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 such
loan went into default.
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 December 31,
1995, the combined outstanding loan balances were $1,854,875. 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 collateralized by three of Mr. Hemmeter's residences, one in
Hawaii and two in California. This loan was originally collateralized 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,
the cash proceeds of which sale were utilized in their entirety to repay the
senior encumbrance collateralized by the property, 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
15
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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. 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"), 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
collateralized 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. 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
16
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 collateralized 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 is collateralized 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") 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. During the week of May 15, 1995
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
collateralized lenders to protect its collateral position. The Company's
position with the other collateralized 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,
a publicly traded gaming company, 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 December 31, 1995, the Company had approximately $1,652,602 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
As a result of the announcement by the Company on June 29, 1995 of
its intent to liquidate, the Company began reporting on the liquidation basis
of accounting. The 1995 results, therefore, are a combination of operations
for the period January 1, 1995 through June 30 1995 on a going concern basis as
reported on the Statement of Operations and the operations for the period July
1, 1995 to December 31, 1995 are reported on a liquidation basis as reported in
the Statement of Changes in Net Assets in Liquidation. See Note 2, "Basis
17
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
of Presentation and Summary of Significant Accounting Policies" of the Notes to
Financial Statements for further information.
1995 vs 1994
For the year 1995, the Company generated total revenues of $1,723,711
compared to $5,445,580 for the year 1994. This decrease in revenue was
primarily attributable to the default of all the Affiliated Borrowers and CBH
as of June 30, 1995 on all of the Company's loans.
Operating expenses and other charges increased by $1,153,116 over
1994 as a result of operating expenses, primarily litigation and loan workout
costs, increasing $1,709,525 over 1994 offset by a reduction of realized losses
on mortgage backed securities in 1995 of $556,409.
During 1995, the Company also recorded reserves of $25,745,356 for
impairment of loan values and reserves for costs of preserving loan collateral.
Through June 30, 1995, the Company recorded reserves totaling $11,617,903 based
upon a review of each loan and the information then available regarding the
collateral for each loan. Subsequent to June 30th, the Company has recorded
additional reserves of $14,127,453 based on events and additional information
available since then, including new appraisals and market studies, independent
third party reviews of collateral positions, legal proceedings, renegotiation
of loan terms with certain Affiliated Borrowers and the sale of certain
collateral by the borrower and the receipt by the Company of certain sale
proceeds.
Net income for the year ended December 31, 1994 was $3,975,315 and on
an equivalent basis the Company would have had a net loss during 1995 of
$26,645,026. This decrease is directly attributable to decreased revenues and
increased expenses due to the default status of the Company's entire loan
portfolio as described above.
1994 vs 1993
For the year 1994, the Company generated total revenues of $5,445,580
compared to $7,173,577 for the year 1993. This decrease in revenue was largely
attributable to approximately $1,120,000 of bonus interest and accelerated loan
fees earned in 1993 of which there were none in 1994. In addition, the Company
had no Mortgage Loans outstanding during 1994 but rather had funded a number of
Temporary Investments to Affiliated Borrowers in 1994 as it sought new
opportunities for funds received upon the early retirement of the Company's
Black Hawk and Central City loans in December of 1993. Of total 1994 revenue,
none was related to interest and fees on Mortgage Loans compared to 76% in
1993, due to the fact that all of the Company's loans during 1994 were
Temporary Investments.
Operating expenses and other charges increased by $399,605 over 1993
as a result of realized losses on mortgage backed securities in 1994 of
$697,658 offset by reductions in investment management fees of $199,799 and
other operating expense reductions of $98,254. There were, in fact, no
management fees incurred during 1994 as the Company had no Mortgage Loans
outstanding during 1994 which qualified for such fees. The Company revised its
short-term investment policies to specifically prohibit investment in
securities backed by mortgage pools.
18
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
Net income for the year ended December 31, 1994 was $3,975,315,
$2,127,602 less than 1993 net income. This decrease is directly attributable
to decreased revenues and increased expenses, as described above. No bonus
interest was earned by the Company in 1994.
Since inception, the Company has qualified as a REIT and has been
taxed as such under the Code. One of the requirements to maintain REIT status
under the Code is to distribute 95% of taxable income on an annual basis. The
Company will attempt to distribute at least the 95% of taxable income and
comply with all other requirements necessary to remain taxable as a REIT during
the liquidation process. The Company's operations have not been significantly
affected by inflation.
The Company anticipates that it will qualify as a real estate
investment trust under the Internal Revenue Code of 1986, as amended (the
Code), for the year ended December 31, 1995. However, the Company did not
follow a procedural requirement of the Code and regulations thereunder
regarding requesting and retaining certain information from large shareholders.
As a result, the status of the Company as a real estate investment trust for
1995 is uncertain, even though the Company believes that the substantive
requirements of the Code were satisfied. The Company incurred a loss for
income tax reporting purposes for the year ended December 31, 1995;
accordingly, the Company does not believe that there will be any adverse effect
on its net assets or changes in liquidation should it not sustain its status as
a real estate investment trust for 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on Page F-1 of this Annual Report
on Form 10-K/A for the financial statements and financial statements schedules,
where applicable.
Selected quarterly financial information specified by Item 302 of
Regulation S-K is presented in Note 7 of the Financial Statements on Page F-17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
19
<PAGE> 21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a, b, c, d & e) The directors and executive officers of the Company
are:
John R. Young Chairman of the Board of Directors,
President, Chief Executive Officer
and Chief Financial Officer
Daniel D. Lane Director, Secretary, Treasurer and
Chief Accounting Officer+
Thomas A. Ellsworth Director+
John R. Young (62) - Chairman of the Board of Directors and
President. From 1988 through August 1995, Mr. Young was an Independent
Director of the Company. On August 8, 1995, Mr. Young was appointed Chairman
of the Board, President, Chief Executive Officer and Chief Financial Officer of
the Company replacing CBH who had resigned his positions with the Company as of
such date. Since May 1988, Mr. Young has been a consultant to the hotel
industry and since 1990 he has also been a director and senior vice
president-real estate and development of Horizon Hotels, Ltd. Mr. Young was
Senior Vice President and Treasurer of ITT Sheraton Corporation, and Executive
Vice President of ITT Sheraton Realty Corporation, which positions he had held
from 1980 until May 1988. Mr. Young was responsible for directing all domestic
and international treasury and corporate finance activities regarding corporate
financing requirements, cash management, bank relationships and corporate
insurance requirements and risk management. As Executive Vice President of ITT
Sheraton Realty Corporation, Mr. Young participated and consulted in the
acquisition, disposal and development of hotel properties and he has continued
to perform similar services for Horizon Hotels, Ltd. since 1990. Mr. Young
had been employed by ITT Sheraton Corporation and its predecessors since 1967.
Mr. Young is a member of the American Hotel and Motel Association and the Urban
Land Institute, and is a past treasurer and founding member of the Citizens
Housing and Planning Association of Greater Boston. Mr. Young has a Bachelor
of Arts Degree from Middlebury College and received a certificate from the
National Mortgage School of the American Bankers Association at Ohio State
University.
Daniel D. Lane (61) - Director of the Company and member of the Audit
Committee. Mr. Lane has been an Independent Director of the Company since 1990
and, on August 8, 1995, was appointed to be the Company's Secretary, Treasurer
and Chief Accounting Officer, while also retaining his Independent
Directorship. Mr. Lane is one of two founding principals and serves as
Chairman and Chief Executive Officer of Newport Beach-based Lane/Kuhn Pacific,
Inc. The company's business operations have included several originally
formulated master-plan community development and home-building partnerships,
including East Lake Development Company, Lane/Kuhn Pacific Communities and
Lane/Kuhn Pacific Homes. In 1960, Mr. Lane founded Lan Ron Enterprises and its
related entities. These companies engaged in the development of thousands of
single-family homes. Mr. Lane also served as managing partner of Cadillac
Fairview Homes West from 1977 to 1983. Mr. Lane has been a member of the Board
of Directors of Fidelity National Financial, Inc. since 1992 and a member of
the University of Southern California Board of Trustees since 1987. He
received his Bachelors Degree in Real Estate from University of Southern
California.
20
<PAGE> 22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
Thomas A. Ellsworth (57) - Director of the Company and Chairman of
the Audit Committee since January 26, 1996. Mr. Ellsworth is a principal of
PKF Investments, a hotel real estate consulting and brokerage company which is
a subsidiary of PKF Consulting, an international hotel consulting firm. Prior
to joining PKF Investments in 1992, Mr. Ellsworth was a Senior Vice President
and Director of Real Estate of ITT Sheraton Corporation. Mr. Ellsworth had
been employed by ITT Sheraton Corporation and its predecessors since 1965. Mr.
Ellsworth is a board member of the Ipswich Savings Bank, the Trustees of
Reservations, the Massachusetts Farmland Conservation Trust and the Essex
County Greenbelt. Mr. Ellsworth has a Bachelor of Science Degree in Hotel
Administration from Cornell University.
- ----------------------
+ Member of the Audit Committee which is responsible for reviewing the
Company's annual financial statements and other matters relating to
the Company's financial affairs.
ITEM 11. EXECUTIVE COMPENSATION
(a, b) Not applicable.
(c, d, e & f) Not applicable.
(g) The Company pays each Independent Director: (i) a fee
of $20,000 per year (which amount may be increased or decreased at the
discretion of the Directors); and (ii) reimbursements for travel expenses and
other out- of-pocket disbursements incurred in connection with attending any
meetings of the Board of Directors. Mr. Lane received a fee of $20,000 for
serving as an Independent Director for the entire year. Mr. Young received a
fee of $10,000 for serving as an Independent Director for the first six months
of 1995. The Company entered into a consulting arrangement with Mr. Young when
he became the Company's President and Chief Executive Officer, effective July,
1995, pursuant to which Mr. Young receives a fee of $10,000 per month. During
the year ended December 31, 1995, the Company also paid the Independent
Directors reimbursements aggregating $8,202 and Mr. Young reimbursements
subsequent to the initiation of his consulting arrangement of $3,877.
(h) The Company does not have any employment contracts with
any of its executive officers. In addition, the Company has no compensatory
plan or arrangement with any of its executive officers which would be triggered
by the retirement, resignation or any other termination of such executive
officer's employment with the company or a change in such executive officer's
responsibilities following a change-in-control of the Company.
(i) Not applicable.
(j) Compensation Committee Interlocks and Insider
Participation.
(1) The Company does not have a compensation
committee or any other committee performing such function.
(2) Not applicable.
(3) Not applicable.
21
<PAGE> 23
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
(k) Not applicable.
(l) Not applicable.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) None.
(b) The following table sets forth the ownership of shares
owned directly or indirectly by the Directors individually and by the Directors
and officers of the Company as a group as of March 18, 1996.
<TABLE>
<CAPTION>
Title Name and Address of Amount and Nature of Percent
of Class Beneficial Owner Beneficial Ownership of Class
<S> <C> <C> <C>
Common Stock John R. Young 500 shares less than 1%
155 Walpole Street
Dover, Massachusetts 02030
Common Stock Daniel D. Lane 13,000 shares less than 1%
Lane/Kuhn Pacific, Inc.
14 Corporate Plaza
Newport Beach, California
92660
Common Stock Thomas A. Ellsworth None None
PKF Investments
105 Belcher
Essex, Massachusetts 01920
All Directors and executive 13,500 shares less than 1%
officers of the Company as a
group
</TABLE>
(c) There are no known arrangements which may at a
subsequent date result in a change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a & b) The Company entered into an investment management agreement
with RC&H, on October 28, 1988, pursuant to which RC&H was to act as investment
advisor, manager and administrator of the Company until October 1991. However,
on February 16, 1991, a majority of the then independent directors of the
Company authorized the termination of the investment management agreement with
RC&H. Consequently, all rights and responsibilities of RC&H to the Company as
its investment manager terminated on May 4, 1991. On such date, RII Advisors,
an entity controlled by affiliates of CBH, became the Company's new investment
manager. RII Advisors was subject to the same terms and conditions, as
investment manager to the Company, as RC&H was previously.
The Investment Manager was responsible for recommending investments
and supervising the day-to-day operations of the Company. The investment
management agreement directed the Investment Manager to make investment
recommendations to the Directors, subject to the final approval of the
Directors, and to monitor the Company's assets and operations so that the
Company would continue to comply with the requirements of the Code for the
activities of a REIT. The Investment Manager did not receive any compensation
from the Company during 1995.
22
<PAGE> 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
The investment management agreement by and between the Company and
RII Advisors was terminated by the Company as of June 30, 1995. In August
1995, the Company retained Mr. Neil D. Hansen as a consultant to assist the
Company in connection with overseeing its loans and their related collateral,
investor relations, administrative services and accounting and bookkeeping
functions. See Item 1.
Reference is made to Notes 3 and 4 of Notes to Financial
Statements for a description of various loans made to related parties in
accordance with the terms of the Prospectus.
(c) At December 31, 1995, the Company had eight demand
loans outstanding, seven of which were made to affiliates of CBH and one was
made directly to CBH. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a detailed description of
each of the outstanding loans.
(d) There have been no other significant transactions with
promoters.
23
<PAGE> 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this
Report:
(1)(2) The financial statements indicated in Part
II, Item 8 "Financial Statements and
Supplementary Data." Financial Statement
Schedules are omitted as the required
information is included in the financial
statements or the notes thereto or is not
applicable.
The following exhibits are incorporated by reference from the
Registrant'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 of Incorporation
3(b) Amended and Restated By-laws
10(a) Form of Investment Management Agreement
10(b) Form of Cash Flow Guaranty Agreement
10(c) Form of Mortgage Loan Purchase Guaranty Agreement
(b) None
(c) An Annual Report will be sent to Stockholders
subsequent to this filing and the Company will
furnish copies of such report to the Commission at
that time.
(d) Not applicable.
24
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RESORT INCOME INVESTORS, INC.
(Registrant)
By: /s/ John R. Young
John R. Young
Chairman of the Board of Directors,
Chief Executive Officer, President and
Chief Financial Officer
Date: June 3, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ John R. Young By: /s/ Daniel D. Lane
John R. Young Daniel D. Lane
Chairman of the Board of Director, Secretary,
Directors, Chief Executive Treasurer and Chief
Officer, President and Accounting Officer
Chief Financial Officer
Date: June 3, 1996 Date: June 3, 1996
By: /s/ Thomas A. Ellsworth
Thomas A. Ellsworth
Director
Date: June 3, 1996
25
<PAGE> 27
FINANCIAL STATEMENT INDEX
Independent Auditors' Report . . . . . . . . . . . . . . . . . . F-2
Statement of Net Assets in
Liquidation at December 31, 1995 . . . . . . . . . . . . . . . F-3
Statement of Changes in Net Assets
in Liquidation, July 1, 1995 to
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . F-4
Balance Sheet at
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Operations (Historical
Cost Basis) for the Period from January 1, 1995
to June 30, 1995 and for the Years Ended
December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . F-6
Statements of Shareholders' Equity
(Historical Cost Basis) for the Period
January 1, 1995 to June 30, 1995 and for
the Years Ended December 31, 1994 and 1993 . . . . . . . . . . F-7
Statements of Cash Flows (Historical
Cost Basis) for the Period January 1, 1995
to June 30, 1995 and for the Years Ended
December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . F-8
Notes to Financial Statements . . . . . . . . . . . . . . F-9 to F-16
F-1
<PAGE> 28
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Resort Income Investors, Inc.
Chicago, Illinois
We have audited the accompanying statement of net assets in liquidation of
Resort Income Investors, Inc. (the Company) as of December 31, 1995 and the
related statement of changes in net assets in liquidation for the period from
July 1, 1995 to December 31, 1995. In addition, we have audited the
accompanying balance sheet of the Company as of December 31, 1994, the related
statements of operations, shareholders' equity and cash flows for each of the
two years in the period then ended and for the period from January 1, 1995 to
June 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in Note 1 to the financial statements, on June 29, 1995
the Board of Directors of the Company announced that it would commence an
orderly self-liquidation of its assets. As a result, the Company has changed
its basis of accounting from the going-concern basis to the liquidation basis
effective June 30, 1995. Accordingly, the carrying values of the remaining
assets as of December 31, 1995, are presented at estimated realizable values
and all liabilities are presented at estimated settlement amounts. Actual
amounts that will be realized upon liquidation will depend upon
a number of factors, and as a result, such actual amounts are
likely to differ from the amounts presented in the accompanying financial
statements and such differences could be material.
In our opinion, such financial statements present fairly, in all material
respects, (1) the net assets in liquidation of Resort Income Investors, Inc. as
of December 31, 1995, (2) the changes in its net assets in liquidation for the
period from July 1, 1995 to December 31, 1995, (3) its financial position at
December 31, 1994, and (4) the results of its operations and its cash flows for
each of the two years in the period then ended and for the period from January
1, 1995 to June 30, 1995 in conformity with generally accepted accounting
principles on the bases described in the preceding paragraph.
As discussed in Note 6 to the financial statements, the Securities and Exchange
Commission (the "Commission"), pursuant to a formal order of investigation,
authorized its staff to investigate the Company. The Company and its attorneys
are not in a position to assess the likelihood that any enforcement action will
be intiated by the Commission or the likelihood of an adverse outcome if any
such action is taken. Additionally, as more fully discussed in Note 6, there
are two purported class actions and three other actions pending against the
Company.
DELOITTE & TOUCHE LLP
Denver, Colorado
May 30, 1996
F-2
<PAGE> 29
RESORT INCOME INVESTORS, INC.
STATEMENT OF NET ASSETS IN LIQUIDATION (NOTE 1)
<TABLE>
<CAPTION>
December 31,
1995
<S> <C>
ASSETS
Interest receivable from
related parties, net of
allowance $ ---
Demand loans to related
parties, net of
allowances 12,092,875
Cash and cash equivalents 846,768
Investment securities at
market value 805,834
------------
Total Assets 13,745,477
------------
CONTINGENCIES (Note 6) ---
LIABILITIES
Accounts payable and
accrued expenses 687,793
------------
NET ASSETS IN LIQUIDATION $ 13,057,684
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 30
RESORT INCOME INVESTORS, INC.
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1995
<S> <C>
Net assets in liquidation
at July 1, 1995 $ 28,853,152
Interest income on cash and
cash equivalents 94,093
Gain on investment securities 110,001
Impairment of investment in
loans and accrued interest and
provision for collateral
protection costs (14,127,453)
Operating expenses (1,872,109)
------------
Net assets in liquidation at
December 31, 1995 $ 13,057,684
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 31
RESORT INCOME INVESTORS, INC.
BALANCE SHEET (HISTORICAL COST BASIS)
<TABLE>
<CAPTION>
December 31,
1994
<S> <C>
ASSETS
Interest receivable from
related parties $ 1,233,074
Demand loans to related
parties 39,855,000
Cash and cash equivalents 779,298
Investment securities at
market value 560,000
Prepaid expenses and other 68,174
------------
Total Assets $ 42,495,546
============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Liabilities, accounts payable
and accrued expenses $ 54,586
Distributions payable 1,558,500
------------
Total Liabilities 1,613,086
------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY
Common stock, $.01 par value;
authorized 11,000,000
shares; issued and
outstanding 4,156,000 shares 41,560
Additional paid-in capital 46,703,781
Distributions in excess of
income (5,484,131)
Reserve for unrealized loss (378,750)
------------
Total Shareholders' Equity 40,882,460
------------
Total Liabilities and Share-
holders' Equity $ 42,495,546
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 32
RESORT INCOME INVESTORS, INC.
STATEMENTS OF OPERATIONS (HISTORICAL COST BASIS)
<TABLE>
<CAPTION>
Six Months
Ended
June 30, Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
REVENUE
Interest and net fee
income on mortgage and
demand loans to related
parties $ 1,543,635 $ 5,155,575 $ 7,151,833
Interest income from cash
and cash equivalents
and investments 85,983 290,005 21,744
------------ ----------- -----------
Total Revenue 1,629,618 5,445,580 7,173,577
------------ ----------- -----------
EXPENSES
Allowance for impairment
of investment in loans
and accrued interest
and provision for
collateral protection
costs 11,617,903 --- ---
Operating expenses 610,023 772,607 1,070,660
Loss on investment
securities 251,250 697,658 ---
------------ ----------- -----------
Total Expenses 12,479,176 1,470,265 1,070,660
------------ ----------- -----------
NET INCOME (LOSS) $(10,849,558) $ 3,975,315 $ 6,102,917
------------ ----------- -----------
NET INCOME (LOSS) PER
SHARE $ (2.61) $ 0.96 $ 1.47
============ =========== ===========
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 4,156,000 4,156,000 4,156,000
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 33
RESORT INCOME INVESTORS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(HISTORICAL COST BASIS)
FOR THE PERIOD JANUARY 1, 1995 TO JUNE 30, 1995
AND FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
Additional Paid-In Capital
Common Stock Issuance of Distributions in Reserve for
Shares Amount Common Stock Excess of Income Unrealized Losses
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1993 4,156,000 $ 41,560 $46,703,781 $(3,094,363) $ ---
Net income --- --- --- 6,102,917 ---
Distributions to
shareholders ($1.50
per share) classified
as:
Dividends ($1.47 per
share) --- --- --- (6,102,917) ---
Return of capital
($.03 per share) --- --- --- (131,083) ---
--------- -------- ----------- ----------- ---------
BALANCE, DECEMBER 31,
1993 4,156,000 41,560 46,703,781 (3,225,446) ---
Net income --- --- --- 3,975,315 ---
Distributions to
shareholders ($1.50
per share) classified
as:
Dividends ($.96 per
share) --- --- --- (3,975,315) ---
Return of capital
($.54 per share) --- --- --- (2,258,685) ---
Net unrealized losses --- --- --- --- (378,750)
--------- -------- ----------- ----------- ---------
BALANCE, DECEMBER 31,
1994 4,156,000 41,560 46,703,781 (5,484,131) (378,750)
Net loss
--- --- --- (10,849,558) ---
Distributions to
shareholders ($.375
per share) classified
as return of capital --- --- --- (1,558,500) ---
Realized Losses --- --- --- --- 378,750
--------- -------- ---------- ------------ ----------
BALANCE, JUNE 30,
1995 4,156,000 $ 41,560 $46,703,781 $(17,892,189) $ ---
========= ======== =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 34
RESORT INCOME INVESTORS, INC.
STATEMENTS OF CASH FLOWS
(HISTORICAL COST BASIS)
<TABLE>
<CAPTION>
Six Months
Ended
June 30, Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
RECONCILIATION OF NET (LOSS)
INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net (loss) income $(10,849,558) $ 3,975,315 $ 6,102,917
Allowance for impairment of
investment in loans and
accrued interest and
provision for collateral
protection costs 11,617,903 --- ---
Loss on investment
securities 251,250 697,658
Amortization of loan
origination fees --- --- (654,138)
Amortization of
organization costs --- --- 7,091
Changes in operating
assets and liabilities:
Interest receivable
from related parties 765,171 (900,066) 1,029,623
Prepaid expenses and
other (3,793) 97,235 5,784
Accounts payable and
accrued expenses 48,583 (98,220) 43,073
Due to investment
manager --- (34,120) (24,972)
------------ ------------ ------------
Net cash provided by
operating activities 1,829,556 3,737,802 6,509,378
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds of loan sale 6,250,000 --- ---
Demand loans funded (3,000,000) (21,250,000)
Receipt of principal pay-
ments on demand loans --- 580,000 ---
Purchases of investment
securities --- (6,374,695) ---
Sales of investment
securities --- 4,738,287 ---
Receipt of principal pay-
ments on mortgage loans --- --- 24,727,784
------------ ------------ ------------
Net cash provided by (used
in) investing activities 3,250,000 (22,306,408) 24,727,784
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Distributions paid to
shareholders (3,117,000) (6,234,000) (6,234,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,962,556 (24,802,606) 25,003,162
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 779,298 25,581,904 578,742
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 2,741,854 $ 779,298 $ 25,581,904
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE> 35
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS OF THE COMPANY
Resort Income Investors, Inc. (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"), a founder and the former
Chairman and Chief Executive Officer of the Company, collateralized 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 collateralized 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 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 demand
loans to related parties held by the Company, aggregating $36,605,000, of which
CBH and his wife, Patricia Hemmeter, are personally the borrowers of
$15,000,000, and Affiliated Borrowers are the borrowers of $21,605,000.
The 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, would be adequate to absorb estimated losses related to
the loan portfolio. 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, 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
F-9
<PAGE> 36
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS OF THE COMPANY (CONTINUED)
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 December 31, 1995 statement of net assets in liquidation and the
statement of changes in net assets in liquidation for the period from July 1,
1995 to December 31, 1995 have been presented on the liquidation basis. The
December 31, 1995 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 December 31, 1995 statement of net assets.
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
December 31, 1995 statement of net assets, and the difference could be
material.
The financial statements of the Company as of December 31, 1994 and
1993 and for the period ended June 30, 1995 were prepared on the historical
cost (going concern) basis. June 30, 1995 is used as the adoption date for
liquidation- basis accounting because there was no material activity that
affected either the historical cost or liquidation basis financial statements
from June 29, 1995 to June 30, 1995 -- the impairment and other charges
discussed in Note 3 were recorded pursuant to historical cost accounting.
F-10
<PAGE> 37
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
(CONTINUED)
Cash and Cash Equivalents - For purposes of the statement of cash
flows, the Company considers all highly liquid debt instruments with a maturity
of three months or less at the time of purchase to be cash equivalents.
Investments - Effective January 1, 1994, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities,". SFAS No. 115 requires fair value
accounting for certain investments and securities. The Company's portfolio of
debt securities is classified as available for sale. There was no cumulative
effect as a result of implementing SFAS No. 115. The Company determines
realized gains or losses on sales of available-for-sale securities using the
specific identification method.
Demand Loans to Related Parties - Effective January 1, 1995, the
Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," and SFAS No 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures." There was no financial statement effect
at the date of adoption of these standards. On June 29, 1995, the Company
recognized a charge of $10,367,903 in accordance with the provisions of these
accounting standards prior to the adoption of the liquidation basis of
accounting (see Notes 3 and 4).
Financial Instruments - SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments," requires the disclosure of fair value for certain of
the Company's financial instrument assets and liabilities. It defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
At December 31, 1995, 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 bases for determining these amounts for demand loans is described in
footnotes 1 through 4 of these financial statements. Investment securities
fair values are based on market quotes. Based on the nature and terms of
accounts payable and accrued expenses, face amounts represent fair value.
Use of Estimates - 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.
F-11
<PAGE> 38
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. DEMAND LOANS TO RELATED PARTIES
Demand loans to related parties at December 31, 1995 and 1994 consist
of the following:
<TABLE>
<CAPTION>
Face and
Interest Rate/ Carrying Face Carrying
Borrower Maturity Amount 1995 Amount 1995 Amount 1994
<S> <C> <C> <C> <C>
CPLP (a) 27.00%
Demand $ --- $ 2,600,000 $ 2,600,000
Outlaws (b) 11.00%
Demand or February 605,000 2,205,000 2,205,000
29, 1996
MCTC (c) 11.00%
Demand or February 1,854,875 1,854,875 1,900,000
29, 1996
RCH Investments (d) 18.50%
Demand 7,900,000 12,900,000 12,900,000
CBH and Patricia 25.00%
Hemmeter (e) Demand 733,000 15,000,000 14,000,000
HEI (f) 16.00%
Demand 1,000,000 2,000,000 ---
GPCI (g) 14.00%
Demand or February
25, 1998
--- --- 6,250,000
---------- ----------- -----------
$12,092,875 $36,559,875 $39,855,000
Reserve for
Impairment of Loans --- 24,467,000 ---
---------- ----------- -----------
$12,092,875 $12,092,875 $39,855,000
=========== =========== ===========
</TABLE>
(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 to 26%. On May 1, 1995, the interest
rate on the loan was increased to 27%, the default rate, as a result
of a monetary default per the terms of the loan agreement. The
balance of the loan as of December 31, 1995 was fully reserved and
is currently in default. The loan is on non-accrual status as of
December 31, 1995.
F-12
<PAGE> 39
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. DEMAND LOANS TO RELATED PARTIES (CONTINUED)
(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 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 December 31, 1995.
(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 ceased making
all payment obligations under the terms of the modified loan
agreement effective with the March 1996 payment. Interest payments
received totaling $45,125 during 1995 by the Company were applied
against the carrying amount of the loan.
(d) The loan is collateralized by a second mortgage on a 28-acre parcel
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 intends to develop the Property. 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 December
31, 1995.
(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 collateralized 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. The loan is on
non-accrual status as of December 31, 1995. Subsequent to December
31, 1995, 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 at the default
rate. The loan is on non-accrual status at December 31, 1995.
(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
collateralized by interest in and liens upon certain real and
personal property owned by HEI and the personal guaranty of CBH. On
November 7, 1995, HEI filed for protection under Chapter 11 of the
United States Bankruptcy Code. The Company believes the loan to HEI
will be recoverable in 1996; however, there is no assurance of such
recovery. 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
F-13
<PAGE> 40
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. DEMAND LOANS TO RELATED PARTIES (CONTINUED)
(f) (CONTINUED)
fourth quarter 1995 against the outstanding carrying balance. The
loan is on non-accrual status as of December 31, 1995.
(g) The borrower repaid the loan in full in April 1995.
4. IMPAIRMENT OF LOANS, ACCRUED INTEREST AND REVENUE RECOGNITION
In June 1995, the Company charged operations with an allowance of
$11,617,903, consisting of $9,900,000 for the loan to CBH and $467,903 for
interest accrued as of December 31, 1994 but unpaid as of June 30, 1995
which was determined to be uncollectible and $1,250,000 to establish an
estimated liability for collateral protection costs, including amounts that the
Company may need to advance to first-lien holders and others to protect the
Company's collateral position while the plan of liquidation is accomplished,
which includes negotiations with CBH and the Affiliated Borrowers. For the
period July 1, 1995 through December 31, 1995, the Company recorded an
additional allowance of $14,567,000 consisting of $5,000,000 for the RCH
Investments loan reflecting an apparent reduction in market value of the Sint
Maarten parcel which serves as collateral, $2,600,000 for the loan to Canadian
Pavilion Limited Partnership reflecting uncertainty regarding the
enforceability of the lease serving as collateral for the Canadian Pavilion
loan, $4,367,000 for the loan to CBH reflecting an apparent reduction in market
value of the real property serving as collateral for the loan to CBH, based on
recent offers to buy such collateral for amounts less than were estimated as
the net realizable value at June 30, 1995, $1,600,000 for the loan to Outlaws
reflecting market value of the substituted property serving as collateral and
$1,000,000 for the loan to Hemmeter Enterprises, Inc. reflecting a market value
of the substituted property serving as collateral (these loans and the related
collateral are more particularly described later in this Note 3). As of
December 31, 1995, $587,943 had been recorded against the $1,250,000 reserve
for expenses associated with the protection of the Company's collateral.
During the quarter ended December 31, 1995, the reserve was reduced by $439,547
associated with the Company's interest in the CBH loan as no further costs are
required to protect the Company's collateral position on this loan. The
balance of this reserve at December 31, 1995, $222,510, is included in accounts
payable and accrued expenses in the accompanying statement of net assets in
liquidation and represents the Company's estimate of the remaining costs
expected to be incurred in protecting the Company's collateral position.
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. See Note 1. However, the Company still intends to pursue its
collection of all the principal and interest contractually due from the
Affiliated Borrowers including interest of $5,714,933 accrued on the Company's
demand loans during 1995 that has not been recognized in the financial
statements.
5. INCOME TAXES
The Company believes it has qualified in 1995, 1994 and 1993 as a Real
Estate Investment Trust ("REIT"), as defined, under Sections 856 through 860 of
the Internal Revenue Code. In order to continue to qualify, the Company is
required to distribute at least 95% of its taxable income to shareholders and
meet certain other requirements. Under the Internal Revenue Code, qualifying
REITs are relieved of income taxes on earnings distributed to shareholders.
The Company anticipates that it will qualify as a real estate
investment trust under the Internal Revenue Code of 1986, as amended (the
Code), for the year ended December 31, 1995, However, the Company did not
follow a procedural requirement of the Code and regulations thereunder
regarding requesting and retaining certain information from large shareholders.
As a result, the status of the Company as a real estate investment trust for
1995 is uncertain, even though the Company believes that the substantive
requirements of the Code were satisfied. The Company incurred a loss for
income tax reporting purposes for the year ended December 31, 1995;
accordingly, the Company does not believe that there will be any adverse effect
on its net assets or changes in liquidation should it not sustain its status as
a real estate investment trust for 1995.
At December 31, 1995 the Company's tax basis in its demand loans was
$36,559,875 compared to its book basis of $12,092,875 and its tax basis in
interest receivable related to demand loans was $467,903 compared to its book
basis of $0. Also, at December 31, 1995 the Company had a book reserve for
collateral protection costs in the amount of $222,510, the tax basis in this
liability was $0. These differences are related to reserves recorded during
1995 which are not currently deductible for tax purposes. At December 31, 1994
there were no material differences between the Company's book and tax bases in
its assets and liabilities.
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, plaintiffs
moved to have the consolidated actions certified as a class action for
investors who purchased or acquired stock in the Company between March 31, 1993
and June 29, 1995. On December 6, 1995, the plaintiffs filed a consolidated
amended complaint seeking to prosecute the suit as a class action. On January
16, 1996, the defendants moved to dismiss the consolidated amended complaint.
On February 29, 1996, the defendants filed opposition papers to plaintiffs'
motion for class certification. The consolidated amended complaint seeks an
unspecified amount of actual damages and reimbursement of costs and expenses.
No assessment of the 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. 14389," and "Frank, et al. v. Hemmeter et al.," Doc
No. 14413. The Company is a nominal defendant in each of these cases. The
defendants in both cases are CBH, MMH, DDL and JRY. The complaints purport to
allege that the officers and directors breached their fiduciary duties to the
Company, wasted Company assets and that CBH stood in a conflict of interest
position. The complaints have now been consolidated. The defendants have
moved to dismiss the consolidated derivative action for failure to comply with
the requirements of Delaware law. Pursuant to the Company's by-laws and
Delaware law, the Company will advance to the individual defendants their
defense costs. No estimate can reasonably be made at this time of the costs of
defense. Both complaints pray for unspecified damages.
The Company is a defendant in litigation pending in the Civil
District Court for the Parish of Orleans, State of Louisiana, The Venture
International Group v. C.C. Partners Corp., Canadian Pavilion Limited
Partnership, Resort Income Investors, Inc., the City of New Orleans and The
Ernest N. Morial New Orleans Exhibition Hall Authority,
F-14
<PAGE> 41
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LITIGTION (CONTINUED)
Case No. 93-870. The plaintiff alleges that the Company, along with the other
defendants, caused the plaintiff to sell its rights and interests to certain
water-front property located in New Orleans, Louisiana. This property was
subject to the loan made by the Company to Canadian Pavilion Limited
Partnership. The Company is alleged to have assisted its Affiliated Borrower
in obtaining the property for less than 50% of its fair value by providing the
financing for the acquisition and failing to timely record its mortgages on the
property. The Company has filed a motion to dismiss the complaint for failure
to state a claim. The Company and the plaintiff are engaged in active
settlement discussions in an attempt to resolve the claims against 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.
F-15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Resort
Income Investors, Inc.'s December 31, 1995 interim financial statements and is
qualified in its entirety by reference to such financial statements.
The captions below are specified in Exhibit 27, and contemplate that the entity
is a going concern. As discussed in Note 1 to the Company's unaudited
financial statements, the Company is in the process of liquidation as of
December 31, 1995. The amounts above are presented with the caption that, in
management's judgment, most closely correlates to respective financial
statement captions used in the Company's unaudited financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 846,768
<SECURITIES> 805,834
<RECEIVABLES> 36,559,875
<ALLOWANCES> 24,467,000
<INVENTORY> 0
<CURRENT-ASSETS> 13,745,477
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,745,477
<CURRENT-LIABILITIES> 687,793
<BONDS> 0
<COMMON> 13,057,684
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,745,477
<SALES> 0
<TOTAL-REVENUES> 1,723,711
<CGS> 0
<TOTAL-COSTS> 28,368,737
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (25,745,356)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (26,645,026)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,645,026)
<EPS-PRIMARY> (6.41)
<EPS-DILUTED> (6.41)
</TABLE>
