UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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.
(Name of Small Business Issuer as specified in its Charter)
Delaware 36-3593298
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 South Wacker Drive, Chicago, Illinois 60606
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (312) 683-3323
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the Issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X . NO .
APPLICABLE ONLY TO CORPORATE ISSUERS:
Shares of common stock outstanding as of May 14, 1997: 4,156,000
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
RESORT INCOME INVESTORS, INC.
STATEMENTS OF NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)
MARCH 31, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
MARCH 31, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
Demand loans to related parties,
net of allowances. . . . . . . . . . . $ 2,343,591 $ 4,127,891
Note receivable. . . . . . . . . . . . . 577,634 577,634
Cash and cash equivalents. . . . . . . . 1,426,004 146,037
Investment securities at market value. . 400,898 327,026
----------- -----------
Total assets . . . . . . . . . . . . . . 4,748,127 5,178,588
----------- -----------
LIABILITIES
Accounts payable and accrued expenses. . 171,583 376,998
----------- -----------
NET ASSETS IN LIQUIDATION. . . . . . . . $ 4,576,544 $ 4,801,590
=========== ===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
RESORT INCOME INVESTORS, INC.
STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
1997 1996
----------- -----------
NET ASSETS IN LIQUIDATION
AT DECEMBER 31 . . . . . . . . . . . . $ 4,801,590 $13,057,684
Interest income on cash and
cash equivalents . . . . . . . . . . . 9,030 28,934
Gain (Loss) on investment
securities . . . . . . . . . . . . . . 33,258 (72,191)
Operating expenses . . . . . . . . . . . (267,334) (786,815)
----------- -----------
NET ASSETS IN LIQUIDATION. . . . . . . . $ 4,576,544 $12,227,612
=========== ===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
Readers of this Resort Income Investors, Inc. (the "Company")
quarterly report should refer to its audited financial statements for the
year ended December 31, 1996, which are included in the Company's 1996
Annual Report and Form 10-KSB for the year ended December 31, 1996, as
certain footnote disclosures which would substantially duplicate those
contained in such audited financial statements have been omitted from this
report.
1. OPERATIONS OF THE COMPANY
The Company was organized on July 20, 1988 as a twelve-year, self-
liquidating real estate investment trust ("REIT"), as defined under the
Internal Revenue Code. The Company was organized for the purpose of
enabling stockholders to participate in mortgage loans primarily to
affiliates of Christopher B. Hemmeter ("CBH") secured by real property or
other qualifying assets owned or to be acquired for the development of
luxury destination resorts. During 1991, the Board of Directors amended
the Company's general investment strategy such that the Company would
primarily make loans secured by real and personal property for the
development of gaming related enterprises. As of December 31, 1996, all of
the Company's loans had been made to affiliates of the Company or R.I.I.
Advisors, Inc., the Company's former investment manager (the "Investment
Manager"), also an affiliate of the Company.
In late June 1995, CBH then a director and officer of the Company,
informed the Company that interest and principal would not be paid when due
on demand loans made by the Company to him personally or to entities
affiliated with him (the "Affiliated Borrowers"). Further, he informed the
Company that he would not be able to make timely payment of such interest
and principal on behalf of the Affiliated Borrowers pursuant to guarantees
he had made in connection with the Affiliated Borrowers' loans, thereby
creating an event of default for each of the loans. The affected loans
constituted all of the Company's demand loans, each of which was to a
related party, aggregating $36,605,000, of which CBH and his wife, Patricia
Hemmeter, were personally the borrowers of $15,000,000, and Affiliated
Borrowers were the borrowers of $21,605,000.
The Board of Directors of the Company announced on June 29, 1995, that
it would commence an orderly self-liquidation of the Company's assets over
an estimated 24- to 36-month period. The Company also announced a charge
to income would be made in the second quarter of 1995 in an amount that, in
management's judgment based upon then available information, would reflect
the impaired value. The charge included allowances for losses on loans,
interest receivable and the reversal of certain accrued interest. The
amount of the charge was based on management's judgments regarding the
ability of CBH and the Affiliated Borrowers to repay such loans, and also
reflected management's judgments concerning the extent that the estimated
realizable value of the Company's collateral would not provide for the
recovery of the Company's investment in the loans and accrued interest. On
August 8, 1995, CBH and Mark M. Hemmeter (MMH) resigned their positions as
executive officers and directors of the Company. Throughout the remainder
of 1995, 1996 and the first quarter of 1997, 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
<PAGE>
(including the existence of senior liens on certain of the collateral),
appraisals of certain of such collateral and other information concerning
the value of the other collateral, and other factors, to determine the
amount of the charges and in reaching the decision to proceed with the
liquidation of the Company's assets.
The Company's directors are continuing their negotiations with CBH and
the Affiliated Borrowers to recover the Company's investment in loans and
accrued interest. There is no assurance that the outcome of the
negotiations will result in actual liquidation proceeds consistent with the
estimated liquidation value of the Company's assets.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Effective with the announcement of an intention to liquidate the
Company, the accounting basis used by the Company in preparing its
financial statements changed from historical cost to the liquidation basis
of accounting. Therefore, the March 31, 1997 and December 31, 1996
statements of net assets in liquidation and the statements of changes in
net assets in liquidation for the three months ended March 31, 1997 and
1996 have been presented on the liquidation basis. The March 31, 1997 and
December 31, 1996 statements of net assets in liquidation reflect the
Company's estimates, in management's judgment, based upon then available
information, of amounts expected to be realized by its efforts to collect
its investment in loans and accrued interest, as well as other estimates
about the recovery of assets and the amounts of liabilities. While the
estimates of the realizable amount of the loans and accrued interest were
based on an analysis of each loan, including valuations by independent
appraisers of certain of the collateral, there are few directly comparable
real estate properties that have been sold that can be considered in
preparing such estimates. The amounts the Company will ultimately realize
from liquidation of its assets could differ materially from the amounts
assumed in arriving at the estimates reflected in the March 31, 1997
statement of net assets. Changes in estimates are reflected in the period
in which additional information becomes available.
The amount ultimately available for distribution to stockholders will
depend on a variety of factors in addition to the amounts realized from the
liquidation of assets, including the timing of the liquidation process and
the resolution of contingent liabilities. The amount distributed will
likely differ from the amount of net assets in process of liquidation
presented in the March 31, 1997 statement of net assets, and the difference
could be material.
At March 31, 1997, the Company's financial instruments consist of
demand loans to related parties, a note receivable, cash and cash
equivalents, investment securities, and accounts payable and accrued
expenses. These instruments are included in the accompanying statement of
net assets in liquidation at their estimated net realizable values.
Management believes that the estimated net realizable value of these
financial instruments approximates their fair value. The basis for
determining these amounts for demand loans and the note receivable is
described in Note 3. 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. The unaudited interim financial statements of the Company
reflect all adjustments which are, in the opinion of management of the
Company, necessary to present a fair statement of the results for the
interim periods presented.
<PAGE>
3. ACCRUED INTEREST AND REVENUE RECOGNITION
The accrual of interest on the Company's demand loans was discontinued
effective June 29, 1995 and all accrued but unpaid interest was reserved
when it announced that the Company would commence an orderly self-
liquidation as a result of CBH's acknowledgement that interest and
principal would not be paid when due on demand loans made by the Company to
him personally or to the Affiliated Borrowers. Once a demand loan has been
placed in a non-accrual status, cash collections will be applied to the
carrying amount of the loan. However, the Company is pursuing its
collection of all the principal and interest contractually due from the
Affiliated Borrowers.
4. NOTE RECEIVABLE AND INVESTMENT SECURITIES
On May 13, 1995, the Company agreed to provide Hemmeter Enterprises,
Inc. ("HEI"), an affiliate of CBH, with a senior bank facility in the
amount of $4,000,000 (the "HEI Senior Bank Facility"). The HEI Senior Bank
Facility was collateralized pari passu by deeds of trust for real
properties located in Central City and Black Hawk, Colorado, a second
mortgage on the property securing the Company's Canadian Pavilion Loan and
a second mortgage on the riverboat operated in New Orleans by Grand Palais
Riverboat, Inc. ("GPRI"), an affiliate of HEI. The HEI Senior Bank
Facility was also guaranteed jointly and severally by various subsidiaries
of HEI, certain other affiliated entities and CBH. Prior to June 30, 1995,
the Company had advanced $2,000,000 under the HEI Senior Bank Facility. 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.
During the fourth quarter of 1995, HEI and GPRI both filed for protection
under Chapter 11 of the United States Bankruptcy Code. As of December 31,
1995, the Company had recorded a valuation allowance in the amount of
$1,000,000 against the carrying value of the HEI Senior Bank Facility. The
plans of reorganization of HEI and GPRI were approved by the bankruptcy
courts in June 1996 and in satisfaction of the HEI Senior Bank Facility the
Company received the following in settlement of its claims: (i) a 12%
senior secured pay-in-kind note due 2003 in the principal amount of
$601,702 issued by Colorado Gaming & Entertainment Co., the successor to
HEI ("Colorado Gaming"); (ii) 60,170 shares of common stock of Colorado
Gaming, which entity is not publicly traded; and (iii) 27,089 shares of
common stock of Casino America, Inc., a publicly-held stock traded on the
NASDAQ National Stock Market under the symbol "CSNO." The Company is also
entitled to receive a small number of warrants of Casino America, Inc. On
July 25, 1996, the Company exercised its right to purchase 6,913 additional
shares of common stock of Casino America, Inc. for $40,614 or $5.875 per
share. On December 1, 1996, the Company received cash and proceeds of $899
and an additional note in the principal amount of $34,000 from Colorado
Gaming with terms consistent with the original Colorado Gaming note
representing the payment of interest due on the original Colorado Gaming
note through December 1, 1996.
Based upon information received from an independent third party market
specialist in non-publicly traded stock such as Colorado Gaming, its market
value at March 31, 1997 is estimated to be approximately $5.25 per share
providing a value of the Company's shares of $315,893. The Company
originally recorded its ownership interest in these shares as investment
securities valued at $180,510 as of June 30, 1996. At March 31, 1997, the
Company recorded a marked to market adjustment of $75,213 representing a
gain on investment securities as a result of an increase in the Colorado
Gaming share price from $4.00 to $5.25 per share at March 31, 1997. In
addition, the Company received 27,089 shares of common stock of Casino
America, Inc. which was initially quoted at $9.375 per share and recorded
as investment securities in the amount of $253,824. On July 25, 1996, the
Company exercised its right to purchase 6,913 additional shares of common
stock of Casino America, Inc. for $40,614 or $5.875 per share. At March
31, 1997, the total 34,002 shares of Casino America, Inc. are estimated to
be approximately $2.50 per share providing a value of the Company's shares
<PAGE>
of $85,005. At March 31, 1997, the Company recorded a market adjustment
for a loss on investment securities in the amount of $41,955 regarding the
Casino America, Inc. stock as a result of a decrease in its share price to
$2.50 at March 31, 1997. As of March 31, 1997, the Company had estimated
the net realizable value of the note receivable from Colorado Gaming to be
$577,634. On December 1, 1996, the Company received cash proceeds of $899
and an additional note in the principal amount of $34,000 with terms
consistent with the original Colorado Gaming note representing the payment
of interest due on the original Colorado Gaming note through December 1,
1996. The additional note was reflected in the increase in net realizable
value on the primary note. The Company did not record additional interest
on the note due to various uncertainties regarding the financial
wherewithal of Colorado Gaming. As a result of the HEI bankruptcy
settlement and the subsequent valuation of the above instruments received,
the Company recorded an allowance for losses on demand loans in the amount
of $66 as of December 31, 1996, which was included in other operating
expenses of the Company.
5. DEMAND LOANS TO RELATED PARTIES
Demand loans to related parties include the following:
Carrying Face Carrying Face
Interest Amount at Amount at Amount at Amount at
Rate/ March 31, March 31, December 31, December 31,
Borrower Maturity 1997 1997 1996 1996
- -------- -------- ---------- ---------- ------------ ------------
Outlaws (a) 11.00%
Demand 518,800 2,205,000 518,800 2,205,000
MCTC (b) 11.00%
Demand 1,824,791 1,824,791 1,824,791 1,824,791
RCH Invest-
ments (c) 18.50%
Demand -- -- 1,784,300 12,900,000
CBH and
Patricia 27.00%
Hemmeter (d) Demand -- 14,267,000 -- 14,267,000
----------- ----------- ----------- -----------
2,343,591 18,296,791 4,127,891 31,196,791
Reserve for
Impairment
of Loans -- 15,953,200 -- 27,068,900
----------- ----------- ----------- -----------
$ 2,343,591 $ 2,343,591 $ 4,127,891 $ 4,127,891
=========== =========== =========== ===========
- ----------
(a) 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 $2,205,000. The loans are
collateralized by an assignment of the borrowers' partnership interest and
a mortgage of the underlying collateral subordinated by a first mortgage in
the amount of approximately $2,560,000 and are personally guaranteed by
CBH. The note was modified effective November 1, 1995 increasing the
principal balance of the loan in the amount of $105,598, the interest rate
to 11% and extending the maturity date to February 29, 1996. A charge for
impairment of $105,598 was simultaneously recorded by the Company due to
uncertainty regarding its collectibility. A charge for impairment in the
amount of $1,600,000 was recorded during the fourth quarter of 1995 against
the outstanding carrying balance on one of the loans. In addition, a
charge for impairment in the amount of $86,200 was recorded during the
fourth quarter of 1996 against the outstanding carrying balance of the
Hudspeth Loan. The loans are on non-accrual
<PAGE>
status as of March 31, 1997. As of March 31, 1997, no payments have
been made by the borrower pursuant to the terms of the notes modified on
November 1, 1995. On April 30, 1997, $605,000 was placed in escrow on
behalf of the Company by an affiliate of Outlaws as consideration for the
Company releasing its liens against the property securing the Company's
loans to Outlaws. Thus, the Company no longer maintains any interest in
such property. The effect on the Company's financial statements is not
material at March 31, 1997.
(b) On May 12, 1992, the Company made a demand loan in the amount of
$900,000 to Mideast and China Trading Co. (MCTC) (formerly known as
Hemmeter Investment Company), an affiliate of the Company. The loan is
collateralized by a subleasehold mortgage in the International Marketplace,
located in Honolulu, Hawaii, a collateral assignment in the borrower's
interest as sub-sublessor, and is personally guaranteed by CBH. On
April 8, 1994, the Company funded an additional $1,000,000 demand loan.
Both loans were modified in 1994 to increase the interest rate by
"Additional Interest". The note was modified on November 1, 1995 by
restating the interest rate to 11%, extending the maturity date to February
29, 1996 and eliminating the Additional Interest. Interest payments
received by the Company during the quarter ended December 31, 1995 and the
quarter ended March 31, 1996, of $45,125 and $30,084, respectively, were
applied against the carrying amount of the loans. However, the borrower
did not make any payment under the terms of the modified loan agreement
during the three months ended March 31, 1997. During the second quarter of
1997, the Company completed negotiations with the borrower to obtain title
to the subleasehold interest in the international Marketplace in exchange
for the Company releasing its interest in the loans.
(c) The loan is collateralized by a second mortgage on a 28-acre parcel
of land bordering Simpson Bay Lagoon and the Caribbean Sea on the island of
Sint Maarten, Netherlands Antilles (the Property) and is personally
guaranteed for $5,900,000 by CBH. The borrower is an affiliate of the
Company. As a result of a monetary default under the terms of the
agreement, effective July 1, 1995, the Company exercised its right to
increase the interest rate on the loan and any subsequent advances, at the
default interest rate of 18.5% per annum. A loss reserve in the amount of
$5,000,000 was recorded during the fourth quarter 1995 against the
outstanding carrying balance. During the quarter ended September 30, 1996,
the Company recorded an additional loss reserve in the amount of $5,500,000
based upon the minimum sales price of $7,000,000 established for the
auction of the Property pursuant to the foreclosure sale implemented by the
senior lender and scheduled for November 14, 1996. On November 14, 1996,
the auction for the Sint Maarten Property was continued, however, the
minimum bid was not received and it was rescheduled again until December
12, 1996. As had occurred in September and November of 1996, no minimum
bid was received. The auction then was rescheduled for January 30, 1997.
At the auction on January 30, 1997, a bid was received in an amount
sufficient to retire the amount of the principal balance of the first
mortgage plus all accrued and unpaid interest and the related fees and
costs of the senior lender and provide the Company with approximately
$1,784,300. On February 6, 1997, the Company received the $1,784,300 of
proceeds from the sale by public auction of the Property. As a condition
to this sale, the Company released its liens against the Property. Thus,
the Company no longer maintains any interest in the Property. For the
quarter ended December 31, 1996, the Company recorded a final loss reserve
in the amount of $615,700 to reflect the proceeds received of $1,784,300.
<PAGE>
(d) 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. During February 1996, the
Company received approximately $733,000 as a partial repayment of the loan
from the sale of the California residences that were collateral of the
loan. CBH continues to be liable for the uncollected portion of this loan
plus interest on the default rate of 27% per annum. The loan is on non-
accrual status as of March 31, 1997.
6. LITIGATION
On July 3, 1995, a class action complaint captioned "Sarnoff v. Resort
Income Investors, Inc., et al., Doc. No. 95 B 1665" was filed against the
Company, CBH, Mark M. Hemmeter ("MMH") and Deloitte & Touche LLP, the
Company's independent auditors at that time, 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 the federal
securities laws and the rules promulgated by the Securities and Exchange
Commission (the "Commission"). On August 24,1995, a second class action
suit captioned "Contract v. Resort Income Investors, Inc., et al., Doc. No.
95 B 2184," alleging similar violations of the federal securities laws, was
filed in the U.S. District Court for the District of Colorado against each
of the defendants in the Sarnoff lawsuit and Daniel D. Lane, ("DDL"),
Christopher R. Hemmeter ("CRH"), Gregory Hooper ("GH") and John R. Young
("JRY"). In November 1995, the two actions were consolidated. On
November 27, 1995, the plaintiffs moved to have the consolidated actions
certified as a class action for investors who purchased or acquired stock
in the Company between March 1, 1993 and June 29, 1995. On December 6,
1995, the plaintiffs filed a consolidated amended complaint containing
similar allegations or claims as asserted in the SARNOFF and CONTRACT class
actions. The consolidated amended complaint seeks an unspecified amount of
actual damages and reimbursement of costs and expenses. On January 16,
1996, the defendants moved to dismiss the consolidated amended complaint
for failure to state a claim. On February 29, 1996, the defendants filed
opposition papers to plaintiffs' motion for class certification. On
October 25, 1996, the Court heard arguments on the defendants' motion to
dismiss and the plaintiffs' notice for class certification. No ruling has
been issued to date. The parties are currently engaged in discovery.
No assessment of the outcome of this action or the amount or range of
any loss that might be incurred by the Company can be made at this time.
However, the Company intends to defend against the charges as it believes
it did not violate the federal securities laws. Pursuant to the Company's
by-laws and Delaware law, the Company is advancing CBH's, MMH's, CRH's,
GH's, DDL's and JRY's costs of defense in this matter. CBH, MMH, CRH, GH,
DDL and JRY have executed undertakings to repay the Company for the
advances if it is ever determined that they were not entitled to receive
the advances. No estimates can reasonably be made at this time of the
costs of defense of the Company, CBH, MMH, CRH, GH, DDL and JRY.
In June 1995, two derivative actions were filed in the Court of
Chancery of the State of Delaware in and for New Castle County, "Alpert v.
Hemmeter et al., Doc. No. 14839," and "Frank, et al. v. Hemmeter et al.,"
Doc No. 14413. The Company is a nominal defendant in each of these cases.
The defendants in both cases are CBH, MMH, DDL and JRY. The complaints
purport to allege that the officers and directors breached their fiduciary
duties to the Company, wasted Company assets and that CBH stood in a
conflict of interest position. The complaints have now been consolidated.
The defendants have moved to dismiss the consolidated derivative action for
<PAGE>
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. CBH, MMH, CRH, GH, DDL and JRY
have agreed to repay the Company for the advances if it is ever determined
that they were not entitled to receive the advances. No estimate can
reasonably be made at this time of the costs of defense. Both complaints
pray for unspecified damages.
On October 25, 1995, the 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.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
OR PLAN OF OPERATIONS
GENERAL
The Company was organized in 1988 as a 12-year, self-liquidating real
estate investment trust (REIT) to primarily make loans to affiliates of the
Company. As a REIT, the Company is required to maintain a certain level of
its assets in REIT-qualifying assets, including loans secured by real
estate. The Company must also meet other requirements related to the
source of its income and distributions with Stockholders. The Company
believes that it has been and is currently in compliance with all
provisions necessary for it to maintain its REIT status although there can
be no assurance it will be able to do so in the future.
Certain statements in this quarterly report that are not historical
fact constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Discussions containing
forward-looking statements may be found in this section. Without limiting
the foregoing, words such as "anticipates," "expects," "intends," "plans"
and similar expressions are intended to identify forward-looking
statements. These statements are subject to a number of risks and
uncertainties. Actual results could differ materially from those projected
in the forward-looking statements. The Company undertakes no obligation to
update these forward-looking statements to reflect future events or
circumstances.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, the Company had three temporary investments
outstanding with carrying values totalling $2,343,591. Each of these
temporary mortgage loan investments, the status of which are described
below, were declared in default during 1995. The Company did not receive
any interest payments on the loans during the quarter ended March 31, 1997.
The Company will not make any new loans, however, the Company has
advanced and may continue to advance funds to the Affiliated Borrowers to
the extent deemed necessary to protect the Company's position in the
underlying collateral. As of March 31, 1997, the Company has advanced
approximately $740,000 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
Part II, management of the Company is continuing in its decision that no
periodic liquidating distributions will be made to the Stockholders of the
Company. The Company reevaluates this position on an ongoing basis. The
Company believes that it will not be required to make distributions in the
near term to maintain its status as a REIT. Although reserves have been
established and expenses incurred regarding the protection of its loan
collateral, it is the Company's intent to pursue collection of these costs
as incurred. The statement of net assets reflects the Company's best
estimates of amounts expected to be realized by its efforts to collect its
investment in loans and accrued interest, as well as other estimates about
the recovery of assets and the amounts of liabilities. While the estimates
of the realizable amount of the loans and accrued interest are based on an
analysis of each loan by the Directors, as well as valuations by
independent appraisers of certain of the collateral, there are few directly
comparable real estate properties that have been sold that can be
considered in preparing such estimates. The amounts the Company will
ultimately realize could differ materially from the amounts assumed in
arriving at the estimates reflected in the March 31, 1997 statement of net
assets.
The Company's near term capital requirements will be for ongoing
operating costs during the period of self-liquidation and the costs
incurred in connection with the defense of the pending litigation. The
Company believes that its existing cash, cash equivalents and investment
balances should be adequate to fund near-term capital requirements.
<PAGE>
The Company loaned $12,900,000 (the "Sint Maarten Loan") to R.C.H.
Investments, N.V., an affiliate of the Investment Manager (the "Sint
Maarten Borrower"), which was secured by a second mortgage on a 28-acre
site on the island of Sint Maarten in the Netherlands Antilles (the "Sint
Maarten Property"). This loan matured on May 7, 1992. On May 12, 1992,
the Company agreed to make a new loan to the Sint Maarten Borrower in the
amount of $12,900,000 (the "New Sint Maarten Loan") to replace the Sint
Maarten Loan. The New Sint Maarten Loan had an original term of
approximately 12 months, and was scheduled to mature on May 7, 1993. The
New Sint Maarten Loan was modified a number of times to increase the
interest rate and extend the maturity date. In December 1994, the New Sint
Maarten Borrower transferred its interests in the Sint Maarten Property and
the attendant obligation related to the New Sint Maarten Loan to R.C.H.
Investments, L.L.C., a Delaware limited liability company, whose
constituent members are the shareholders of the Sint Maarten Borrower (the
"New Sint Maarten Borrower"). On December 29, 1994, the New Sint Maarten
Borrower received an extension of the New Sint Maarten Loan to June 30,
1995 and the demand feature was withdrawn in consideration for which the
interest rate could be increased prior to maturity at the option of the
Company. Due to the inability of the Affiliated Borrower, as well as CBH
in his capacity as the guarantor of the New Sint Maarten Loan, to fulfill
their obligations under the terms of the New Sint Maarten Loan, the Company
converted the New Sint Maarten Loan to a demand loan on June 30, 1995, the
date the New Sint Maarten Loan was scheduled to mature.
The Sint Maarten Property also secured a first mortgage in the
principal amount of $4,000,000 in favor of a lender unaffiliated with the
Affiliated Borrowers. Interest payments due the senior lender subsequent
to June 30, 1995 and through December 31, 1995, in the amount of
approximately $354,000 were funded by the Company and charged against the
$1,250,000 provided for by the Company to protect the collateral positions
on the Company's various loans. The senior encumbrance matured on December
31, 1995. The Affiliated Borrower requested an extension of the loan from
the senior lender.
Based upon the results of an appraisal prepared by an independent
third party, the carrying value of the New Sint Maarten Loan was $7,900,000
as of December 31, 1995 after a $5,000,000 reserve for impairment of value
was recorded against the loan during the quarter ended December 31, 1995.
The Affiliated Borrower received a formal demand for payment from the
senior lender which demand stated that if payment was not received by June
13, 1996, the senior lender would institute legal proceedings against both
the Affiliated Borrower and CBH personally, as the guarantor of such loan.
Representatives of the Company met with the senior lender during the second
quarter of 1996 and were informed that the senior lender had commenced the
foreclosure process. In connection with the foreclosure process undertaken
by the senior lender, the Sint Maarten Property was put out to auction.
Pursuant to the terms of the auction, a minimum bid of $8,000,000 was
required and if a bid equal to or in excess of such amount was not
received, the auction process would be continued at a later date with a
lesser minimum bid. On September 26, 1996, the auction for the Sint
Maarten Property was held, however, the minimum bid was not received. In
this regard, the auction was rescheduled for November 14, 1996 and the
minimum bid was reduced to $7,000,000. Based on this new minimum auction
price, the Company took an additional reserve, as of September 30, 1996,
for $5,500,000. On November 14, 1996, the auction for the Sint Maarten
Property was continued, however, the minimum bid was not received and it
was rescheduled again until December 12, 1996. As had occurred in
September and November 1996, no minimum bid was received. The auction then
was rescheduled for January 30, 1997. At the auction on January 30, 1997,
a bid was received in an amount sufficient to retire the amount of the
principal balance of the first mortgage plus all accrued and unpaid
interest and the related fees and costs of the senior lender and provide
the Company with approximately $1,784,300. On February 6, 1997, the
Company received the $1,784,300 of proceeds from the sale by public auction
<PAGE>
of the Sint Maarten Property. As a condition to the sale, the Company
released its liens against the Sint Maarten Property. Thus, the Company no
longer maintains any interest in the Sint Maarten Property. For the
quarter ended December 31, 1996, the Company recorded a final loss reserve
in the amount of $615,700 to reflect the proceeds received of $1,784,300.
On February 11, 1992, the Company made two demand loans to Outlaws
Casino, Ltd., an affiliate of the Investment Manager (the "Outlaws
Borrower") in the amounts of $1,200,000 (the "Crook Loan") and $500,000
(the "Hudspeth Loan") (collectively, the "Outlaws Loans"). The Outlaws
Borrower sought the loans in order to fund a portion of the acquisition of
two adjacent parcels of land in Black Hawk, Colorado, known as the Crook
Parcel (approximately 16,000 square feet) and the Hudspeth Parcel
(approximately 5,500 square feet). The Outlaws Borrower originally planned
to combine the Crook Parcel and the Hudspeth Parcel and construct a casino
of approximately 50,000 square feet containing approximately 800 slot
machines thereon. The Outlaws Loans were collateralized by an assignment
of a partnership interest in the Outlaws Borrower; the Crook Loan is also
secured by a second mortgage on the Crook Parcel which was subordinated to
a seller note with a principal balance at December 31, 1996 of $2,561,621.
The Hudspeth Loan was also secured by a first mortgage on the Hudspeth
parcel. There was no senior encumbrance on the Hudspeth Parcel.
On July 17, 1992, the Outlaws Borrower made draws of $500,000 and
$200,000 against the Crook Loan and Hudspeth Loan, respectively. On
September 2, 1992, the Outlaws Borrower paid the Company $95,000 in
principal towards the then outstanding principal balance of the Hudspeth
Loan. On October 30, 1992 and November 6, 1992, the Outlaws Borrower paid
the Company $150,000 and $50,000, respectively, in principal towards the
outstanding principal balance of the Crook Loan. On November 30, 1992, the
Company agreed to increase the Crook Loan by $100,000 to a total of
$1,600,000. The additional funds were used to cover expenses related to
the planned expansion and renovation of the Outlaws Casino, which plans
were abandoned by the Outlaws Borrower. Subsequent to funding the $100,000
increase, the aggregate principal amount of the Outlaws Loans was increased
to $2,205,000, consisting of $1,600,000 for the Crook Loan and $605,000 for
the Hudspeth Loan. The maturity of the Outlaws Loans was extended by the
Company to June 30, 1995. On such date, the Company ceased accruing
interest on the Outlaws Loans and converted them to demand loans.
In October 1995, representatives of the Outlaws Borrower informed the
Company that the Outlaws Casino had very little cash and that its bills
were approximately 45 days in arrears. Such representatives also told the
Company that it was an absolute necessity for the Outlaws Casino to build
up its working capital reserves to approximately $150,000 so as to be able
to fund the operating deficits which usually occur in the winter due to the
weather conditions which hinder ingress and egress to the casinos located
in Black Hawk, Colorado. The Company was also advised that the October
mortgage payment on the senior encumbrance secured by the Crook Parcel was
not made and that the Outlaws Borrower was in negotiations with the senior
lender to revise the terms of the loan. In addition, these representatives
informed the Company that they were developing a marketing plan for the
Outlaws Casino which would appeal to local patrons who do not desire to
game in a large casino and that a potential sale of the Outlaws Casino
would need to be deferred until spring of 1996.
Based on this information, the Company decided to modify the terms of
the Outlaws Loans to require the Outlaws Borrower to make monthly payments
of "net revenue" from the casino and real estate which the Outlaws Borrower
had mortgaged to the Company as security for the loans (the "Properties").
Net revenue is defined as all operating revenues from the Properties less:
(a) the ordinary and reasonable expenses of the operation of the
Properties; (b) the interest and principal payments required by the
existing senior lender on the property which secures the Crook Loan; and
(c) the funds necessary to maintain no less than $150,000 of working
capital. The Company also stated that in exchange for its forbearance from
<PAGE>
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. Simultaneously, due to
uncertainties about the financial wherewithal of the Outlaws borrower, a
loan loss reserve was taken in the same amount of $105,598. Despite the
revised marketing plan of the Outlaws Borrower, operations at the Outlaws
Casino did not result in the generation of funds necessary to allow for
sufficient working capital, therefore, the Company never received any
monthly payments of net revenue from the Outlaws Borrower during 1996.
As of December 31, 1996, the outstanding loan balances, were
$1,600,000 for the Crook Loan and $605,000 for the Hudspeth Loan. The
report prepared for the Company by Coopers & Lybrand LLP ("C&L") dated
January 15, 1996 concluded that the market value of the fee simple interest
in the Outlaws Casino was $2,500,000. As of December 31, 1996, the senior
encumbrance on the Crook Parcel was $2,561,621. Therefore, the Company set
up a reserve for the entire $1,600,000 of the Crook Loan. During the
fourth quarter of 1996, the Company set up a reserve for the Hudspeth Loan
in the amount of $86,200 based on the valuation from an appraisal by C&L
commissioned by the Company. As of March 31, 1997, the outstanding
principal balance for the Hudspeth Loan was $518,800. On April 30, 1997,
$605,000 was placed in escrow on behalf of the Company by an affiliate of
the Outlaws Borrower in exchange for the Company releasing its interests in
the loans secured by the Properties. The Company no longer maintains any
interest in the Properties.
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 and China Trading Company, a Hawaii general partnership, an
affiliate of the Investment Manager (the "Waikiki Borrower"). The proceeds
of the Waikiki Loan were used to acquire options on various properties in
New Orleans, Louisiana, in connection with gaming-related developments
pursued by the Hemmeter organization. The Waikiki Loan was secured by a
sub-leasehold mortgage on the International Marketplace, a retail center in
Honolulu, Hawaii (the "Waikiki Property"), CBH's personal guaranty and a
collateral assignment of the Waikiki Borrower's interest as the sub-
sublessor of the Waikiki Property. This loan bore interest at the rate of
9.5% per annum, payable quarterly in arrears, and was due on the earlier of
demand or May 12, 1993. The Company agreed to extensions of the term of
the Waikiki Loan through September 30, 1994. On September 30, 1994, the
Waikiki Loan 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 Loan to
June 30, 1995. On June 30, 1995, this loan went into default. As a
result, the Company ceased accruing interest on the Waikiki Loan and
converted it to a demand loan.
On April 8, 1994, the Company made a demand loan in the amount of
$1,000,000 (the "Waikiki II Loan") to the Waikiki Borrower. The proceeds
of the loan were used to fund working capital requirements of Grand Palais
Casino, Inc. ("GPCI"), an affiliate of the Company. The Waikiki II Loan
was also secured by the Waikiki Property, CBH's personal guaranty and a
collateral assignment of the Waikiki Borrower's interest as the sub-
sublessor of the Waikiki Property. This loan bore interest at the rate of
9.5% per annum payable quarterly in arrears, and was due on the earlier of
demand or October 8, 1994. On September 30, 1994, the Waikiki II Loan was
extended to the earlier of demand or March 31, 1995 in consideration for
which the interest rate was increased to 19.5%, 10% of which accrued and
was to be payable at the time the Waikiki II Loan matured. On March 16,
1995, the Company agreed to further extend the maturity of the Waikiki II
<PAGE>
Loan to June 30, 1995. On June 30, 1995, this loan went into default.
Consequently, the Company ceased accruing interest on the Waikiki II Loan
for financial statement purposes only and converted it to a demand loan.
The Company modified the terms of the two Waikiki Loans on November 1,
1995 so as to require the Waikiki Borrower to make monthly payments of
$15,042 with interest accruing at a rate of 11% per annum. As of March 31,
1997, the combined outstanding principal balances were $1,824,791. C&L
appraised the subleasehold interest at International Marketplace at
$2,510,000 at December 31, 1995. In light of this valuation, the Company
has not set up a reserve for the principal amount of the Waikiki Loans.
During the second quarter of 1997, the Company completed negotiations with
the Waikiki Borrower to obtain title to the Waikiki Property in exchange
for the Company releasing its interest in the Waikiki Loans. As of the
date of this filing, the necessary documentation remains in escrow pending
the completion of certain ministerial matters which should be completed
before the end of the second quarter of 1997. At such time, the Company
will have title to the Waikiki Property and receive approximately $25,000
per month from the rental of the subleasehold interest in the Waikiki
Property.
The Company made a loan to Canadian Pavilion Limited Partnership, an
affiliate of the Investment Manager (the "Canadian Pavilion Borrower"), in
the amount of $2,600,000 (the "Canadian Pavilion Loan"), on or about
November 18, 1991. The proceeds of the Canadian Pavilion Loan were applied
as follows: $1,000,000 to purchase the $2,900,000 of defaulted mortgages
and notes encumbering the subleasehold interest in the Canadian Pavilion
and approximately $800,000 was advanced to an affiliate of the Canadian
Pavilion Borrower for it to purchase the subleasehold interest from a third
party. The remaining $800,000 was used to provide working capital to the
Canadian Pavilion Borrower. Immediately after the closing of the Canadian
Pavilion Loan, the interest of this third party was transferred to the
Canadian Pavilion Borrower. The Canadian Pavilion is a wharf-front
property on the Mississippi River in downtown New Orleans. It is part of
the International Pavilion which was erected as an exhibition hall for the
1984 World's Fair. The Canadian Pavilion Loan originally bore interest at
9-1/2% per annum, payable quarterly in arrears and was to mature on the
earlier of demand or November 19, 1992. The Company extended the maturity
of the Canadian Pavilion Loan on a number of occasions. On May 18, 1994,
the loan was again extended to the earlier of demand or December 31, 1994
and the interest rate was increased from 9.5% to 10.5% per annum, payable
quarterly in arrears. On December 7, 1994, the terms of the loan were
further modified to increase the interest rate to 22% per annum, 11.5% of
which accrued and was payable when the Canadian Pavilion Loan was retired.
In addition, this modification provided that the demand feature be removed
from the loan so that the loan could not be called prior to December 31,
1994. On December 16, 1994, the maturity date of the Canadian Pavilion
Loan was further extended by the Company to June 30, 1995. On May 1, 1995,
the interest rate on the loan was increased to 26%, the default rate, as a
result of a monetary default per the terms of the loan agreement. On June
30, 1995, the Company ceased accruing interest on the Canadian Pavilion
Loan and converted it to a demand loan. In addition, the Company made
additional advances to the Canadian Pavilion Borrower to preserve the
underlying collateral in the amount of approximately $113,000 subsequent to
June 30, 1995.
During the third quarter of 1995, negotiations by and between various
governmental agencies, the former owner of the Canadian Pavilion and the
Canadian Pavilion Borrower proved unsuccessful and the Canadian Pavilion
Borrower received a termination letter regarding its lease from the New
Orleans Exhibition Hall Authority ("NOEHA"). After receipt of the NOEHA
letter, the Company had numerous discussions with representatives of the
Canadian Pavilion Borrower and its counsel in New Orleans and real estate
professionals located in New Orleans. After considering the input of these
various parties, as well as the lack of acceptance of riverboat gaming in
the downtown New Orleans area and the poor performance of the temporary
land-based casino in New Orleans, the Company concluded that the value of
<PAGE>
the property securing the loan to the Canadian Pavilion Borrower had been
significantly reduced. Furthermore, certain ongoing financial obligations
of the Canadian Pavilion Borrower, including insurance, payments to
governmental agencies and maintenance expenses were continuing with no
assurance that such amounts, which had been advanced by the Company, would
be repaid to the Company nor was there any assurance that the Company would
receive any of the principal portion of the Canadian Pavilion Loan since,
after extensive marketing of the property securing the Canadian Pavilion
Loan, no significant interest in the acquisition of the property arose.
Based on these factors, the Company took a reserve, as of September 30,
1995, for the full $2,600,000 of the Canadian Pavilion Loan.
The Company was named as a defendant in two lawsuits, one of which was
brought by the entity which sold the property to the Canadian Pavilion
Borrower under a lender liability theory and the second lawsuit was brought
by the City of New Orleans and NOEHA demanding that the Company's mortgages
memorializing the Canadian Pavilion Loan be removed. The Company completed
a settlement with the plaintiffs in 1996 wherein it assigned its interest
in the collateral for the Canadian Pavilion Loan for $50,000 and a
settlement and release from the litigation. Thus, the Company no longer
maintains any interest in the collateral. As the Company had fully
reserved against this loan, the settlement did not require the Company to
take any further reserves.
On January 4, 1994, the Company made a loan to CBH in the amount of
$12,900,000 (the "Hemmeter Loan"), the proceeds of which were used for
working capital purposes for CBH's various gaming affiliates and to retire
certain indebtedness secured by three of Mr. Hemmeter's residences, one in
Hawaii and two in California. This loan was originally secured by junior
mortgages on the aforementioned residences, bore interest at 12% per annum,
was payable quarterly in arrears, and was scheduled to mature on January 3,
1995. On September 14, 1994, the Hemmeter Loan was modified to provide for
an additional $1,100,000 ("Additional Principal") for a total principal
balance of the Loan of $14,000,000. The Additional Principal originally
bore interest at the rate of 22%, 12% of which was payable under the same
terms as the original loan, and the remaining 10% was accrued and was to be
payable upon the maturity or earlier prepayment of the Hemmeter Loan. In
addition, the interest rate on the original $12,900,000 in principal was
increased to 21.7% effective October 1, 1994, 12% of which was payable
under the same terms as the original loan, and the remaining 9.7% was
accrued and was to be payable upon the maturity or earlier prepayment of
the note. On December 16, 1994, CBH informed the Company that he was
selling his residence in Hawaii in late December 1994 and requested a
release of the Company's lien on the Hawaii residence and an extension of
the maturity date of the Hemmeter Loan, including the Additional Principal.
In response to CBH's request, the Company agreed that: (i) it would
release its lien on the Hawaii residence effective January 3, 1995; (ii)
the maturity date of the Hemmeter Loan, including the Additional Principal,
be extended to June 30, 1995; and (iii) the interest rate on the Hemmeter
Loan and the Additional Principal be increased to 22.7% and 23%,
respectively, assuming that the Company's lien on CBH's Hawaiian residence
is released. Thirteen percent of the interest on both the Hemmeter Loan
and the Additional Principal was to be paid under the same terms as
described above, and the remaining 9.7% of the Hemmeter Loan and the
remaining 10% of the Additional Principal would accrue and be payable upon
the maturity or earlier repayment of the Hemmeter Loan and the Additional
Principal. The lien on the Hawaii residence was released on January 3,
1995 and the new interest rates for the Hemmeter Loan and the Additional
Principal took effect on such date. On May 2, 1995, the Company agreed to
a further modification of the Hemmeter Loan to provide for an additional
$1,000,000 (the "Second Additional Principal") thereby increasing the
principal amount of the Hemmeter Loan to $15,000,000. The Second
Additional Principal bore interest at the rate of 23%, 10% of which was to
be payable upon the maturity or earlier prepayment of the Second Additional
Principal.
<PAGE>
The carrying value of the Hemmeter Loan, including the Additional
Principal and the Second Additional Principal, was reduced by the Company
three times, once at June 30, 1995 by a $9,900,000 reserve, again at
September 30, 1995 by a $2,950,000 reserve and finally by $977,000 at the
time the California residences that served as collateral for the loan were
sold. Also, approximately $611,000 of the $1,250,000 collateral
preservation reserve made by the Company at June 30, 1995 was allocated to
the Hemmeter Loan. After paying the costs associated with the sale of
CBH's California residences, the Company received net proceeds of
approximately $733,000. CBH and his wife still have personal liability for
the remaining $14,267,000 balance of the loan. However, the current
carrying value of the Hemmeter Loan is zero.
On February 14, 1994, the Company made a loan to Grand Palais Casino,
Inc. ("GPCI"), an affiliate of CBH, in the amount of $4,000,000 (the "GPCI
Loan"). The proceeds of the GPCI Loan were used to cover certain expenses
of GPCI incurred in connection with the development of the single land-
based casino in New Orleans, Louisiana, of which GPCI was to be a one-third
owner. The GPCI Loan bore interest at a rate of 14% per annum, payable
quarterly in arrears, was secured by the personal guarantee of CBH and was
due to mature on September 30, 1994. On April 8, 1994, an additional loan
was made to GPCI in the amount of $2,250,000 under the same terms and
conditions as the GPCI Loan. On September 30, 1994, both of the loans to
GPCI, in the aggregate amount of $6,250,000, were extended to the earlier
of demand or March 31, 1995. On November 16, 1994, the Company agreed to
subordinate both GPCI loans to senior indebtedness of GPCI in the amount of
$34,000,000 and to extend the term of the loan to February 25, 1998, in
consideration for which the interest rates were increased to a rate equal
to 150 basis points above the coupon rate of the $34,000,000 senior debt
(then 19.75%) beginning January 1, 1995. On April 14, 1995, the Company
sold the two loans made to GPCI to an unaffiliated third party for the sum
of $6,250,000 plus all accrued and unpaid interest through the date of the
sale.
On April 25, 1995, the Company made a loan to Hemmeter Enterprises,
Inc. ("HEI"), an affiliate of CBH, in the amount of $1,000,000, bearing
interest at the rate of 12% per annum, payable quarterly in arrears, and
due on demand (the "HEI Loan"). HEI, either directly or through affiliated
entities, was in the business of developing, owning and operating gaming
and related entertainment facilities. HEI was a one-third partner in the
partnership attempting to develop the sole land-based casino in New
Orleans, Louisiana, and a 50% partner in a joint venture which developed
and operated a riverboat gaming project in New Orleans. In addition, HEI
developed, owned and operated two of the largest casinos in Colorado. The
proceeds of the HEI Loan were utilized by HEI for working capital purposes
and were secured by the guaranty of CBH.
On May 13, 1995, the Company agreed to provide HEI with a senior bank
facility in the amount of $4,000,000 (the "HEI Senior Bank Facility"). The
HEI Senior Bank Facility was secured pari passu by deeds of trust for real
properties known as the Bullwhackers Casinos in Central City and Black
Hawk, Colorado, a second mortgage on the Canadian Pavilion Property and a
second mortgage on the riverboat operated in New Orleans by Grand Palais
Riverboat, Inc. ("GPRI"), an affiliate of CBH, and a collateral assignment
of GPRI's interests in the riverboat joint venture which was operated in
New Orleans. The HEI Senior Bank Facility was also guaranteed jointly and
severally by various subsidiaries of HEI, certain other affiliated entities
and by CBH. The Company made an initial funding of $2,000,000 of the
$4,000,000 HEI Senior Bank Facility and $1,000,000 of the loan proceeds
were utilized to repay the HEI Loan. The HEI Senior Bank Facility bore
interest at the rate of 12% per annum and was scheduled to mature on
September 30, 1995. On June 30, 1995, the Company determined that it would
not advance any additional sums to HEI under the terms of the HEI Senior
Bank Facility. In October 1995, HEI and GPRI both filed for bankruptcy
protection. As of December 31, 1995, the Company recorded a $1,000,000
reserve against the carrying value of the HEI Senior Bank Facility. The
plans of reorganization of HEI and GPRI were approved by the bankruptcy
courts in June 1996, in satisfaction of its interest, the Company received
<PAGE>
the following in settlement of its claims: (i) a 12% senior secured pay-
in-kind note due 2003 in the principal amount of $601,702 issued by
Colorado Gaming & Entertainment Co., the successor to HEI ("Colorado
Gaming"); (ii) 60,170 shares of common stock of Colorado Gaming, which
entity is not publicly traded; and (iii) 27,089 shares of common stock of
Casino America, Inc., a publicly-held stock traded on the NASDAQ National
Stock Market under the symbol "CSNO." On December 1, 1996, the Company
received cash and proceeds of $899 and an additional note in the principal
amount of $34,000 with terms consistent with the original Colorado Gaming
note representing the payment of interest due on the original Colorado
Gaming note through December 1, 1996. In addition, the Company is also
entitled to receive a small number of warrants of Casino America, Inc. On
July 25, 1996, the Company exercised its right to purchase 6,913 additional
shares of common stock of Casino America, Inc. for $40,614 or $5.875 per
share.
As of March 31, 1997, the Company had approximately $1,426,004 in cash
and cash equivalents and investments securities.
Management of the Company is continuing with its negotiations with the
Company's borrowers and is monitoring the activities of such entities with
a view towards maximizing the recovery on each of its loans, and in an
effort to enhance Stockholder value. Management of the Company currently
believes that negotiations with the Company's remaining Affiliated
Borrowers should be completed before the end of the second quarter of this
year.
RESULTS OF OPERATIONS
Net assets in liquidation decreased from a balance of $4,801,590 at
December 31, 1996 to a balance of $4,576,544 at March 31, 1997. The
decrease resulted primarily from the Company's payment of its operating
expenses.
Total revenue for the three months ended March 31, 1997 was $9,030
compared to $28,934 for the same period in 1996. This decrease is
primarily due to a termination of interest payments on the Company mortgage
and demand loans by its Affiliated Borrowers during the second quarter of
1995, as discussed above.
Operating expenses for the three months ended March 31, 1997 were
$267,334 compared to $786,815 for the same period in 1996. This decrease
was due to decreased legal fees and liquidation costs related to the
litigation as discussed in Part II, Item I and the announcement of the
Company's self-liquidation.
OTHER INFORMATION
The Company's shares of common stock are listed on the NASDAQ
Electronic Bulletin Board under trading symbol RIIV.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LITIGATION
On July 3, 1995, a class action complaint captioned "Sarnoff v. Resort
Income Investors, Inc., et al., Doc. No. 95 B 1665" was filed against the
Company, CBH, Mark B. Hemmeter ("MMH") and Deloitte & Touche LLP, the
Company's independent auditors at that time, 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 the federal
securities laws and the rules promulgated by the Securities and Exchange
Commission (the "Commission"). On August 24, 1995, a second class action
suit captioned "Contract v. Resort Income Investors, Inc., et al., Doc. No.
95 B 2184," alleging similar violations of the federal securities laws, was
filed in the U.S. District Court for the District of Colorado against each
of the defendants in the Sarnoff lawsuit and Daniel D. Lane ("DDL"),
Christopher R. Hemmeter ("CRH"), Gregory Hooper ("GH") and John R. Young
("JRY"). In November 1995, the two actions were consolidated. On November
27, 1995, the plaintiffs moved to have the consolidated actions certified
as a class action for investors who purchased or acquired stock in the
Company between March 1, 1993 and June 29, 1995. On December 6, 1995, the
plaintiffs filed a consolidated amended complaint containing similar
allegations or claims as asserted in the SARNOFF and CONTRACT class
actions. The consolidated amended complaint seeks an unspecified amount of
actual damages and reimbursement of costs and expenses. On January 16,
1996, the defendants moved to dismiss the consolidated amended complaint
for failure to state a claim. On February 29, 1996, the defendants filed
opposition papers to plaintiffs' motion for class certification. On
October 25, 1996, the Court heard arguments on the defendants' motion to
dismiss and the plaintiffs' notice for class certification. No ruling has
been issued to date. The parties are currently engaged in discovery.
No assessment of the outcome of this action or the amount or range of
any loss that might be incurred by the Company can be made at this time.
However, the Company intends to defend against the charges as it believes
it did not violate the federal securities laws. Pursuant to the Company's
by-laws and Delaware law, the Company is advancing CBH's, MMH's, CRH's,
GH's, DDL's and JRY's costs of defense in this matter. CBH, MMH, CRH, GH,
DDL and JRY have executed undertakings to repay the Company for the
advances if it is ever determined that they were not entitled to receive
the advances. No estimates can reasonably be made at this time of the
costs of defense of the Company, CBH, MMH, CRH, GH, DDL and JRY.
In June 1995, two derivative actions were filed in the Court of
Chancery of the State of Delaware in and for New Castle County, "Alpert v.
Hemmeter et al., Doc. No. 14839," and "Frank, et al. v. Hemmeter et al.,"
Doc No. 14413. The Company is a nominal defendant in each of these cases.
The defendants in both cases are CBH, MMH, DDL and JRY. The complaints
purport to allege that the officers and directors breached their fiduciary
duties to the Company, wasted Company assets and that CBH stood in a
conflict of interest position. The complaints have now been consolidated.
The defendants have moved to dismiss the consolidated derivative action for
failure to comply with the requirements of Delaware law. Pursuant to the
Company's by-laws and Delaware law, the Company will advance to the
individual defendants their defense costs. CBH, MMH, CRH, GH, DDL and JRY
have agreed to repay the Company for the advances if it is ever determined
that they were not entitled to receive the advances. No estimate can
reasonably be made at this time of the costs of defense. Both complaints
pray for unspecified damages.
<PAGE>
On October 25, 1995, 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.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are incorporated by reference from the
Company's Registration Statement on Form S-11 (File No. 33-23521),
referencing the exhibit numbers used in such Registration Statement.
Exhibit
Number Description
3 (a) Restated Certificate 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) The following report on Form 8-K was filed by the Company
during the quarter ended March 31, 1997: A Current Report on Form 8-K was
filed on February 10, 1997 wherein Item 5. Other Events disclosed that the
Company had received proceeds of approximately $1,784,300 on February 6,
1997 from the sale of the property securing the Company's Sint Maarten
loan.
Items 2, 3, 4 and 5 of Part II are omitted because of the absence of
conditions under which they are required.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 14, 1997 RESORT INCOME INVESTORS, INC.
(Registrant)
By: ___________________________
John R. Young
Chairman of the Board of Directors,
Chief Executive Officer, President and
Chief Financial Officer
By: ____________________________
Daniel D. Lane
Director, Secretary,
Treasurer and Chief
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
"This schedule contains summary financial information extracted from
Resort Income Investors, Inc.'s Form 10QSB for the three months ended
March 31, 1997 and is qualified in its entirety by reference to such
Form 10QSB."
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,426,004
<SECURITIES> 400,898
<RECEIVABLES> 18,296,791
<ALLOWANCES> 15,953,200
<INVENTORY> 0
<CURRENT-ASSETS> 4,748,127
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,748,127
<CURRENT-LIABILITIES> 171,583
<BONDS> 0
<COMMON> 4,576,544
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,748,127
<SALES> 0
<TOTAL-REVENUES> 9,030
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 234,076
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (225,046)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (225,046)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
<FN>
NOTE: The above captions are specified in Exhibit 27, and contemplate
that the entity is a going concern. As discussed in Note 1 to the
Company's unaudited financial statements, the Company is in the process of
liquidation as of March 31, 1997. 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 financial
statements.
</FN>
</TABLE>
