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, 1998
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, 1998: 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, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
-------------------------
ASSETS
Real estate interest held for sale$ 1,925,000$ 1,925,000
Notes receivable. . . . . . . . . 635,702 635,702
Interest receivable on investments 25,428 6,357
Cash and cash equivalents . . . . 760,576 1,090,343
Investment securities at
market value. . . . . . . . . . 441,524 425,594
Deposit for class action settlement
(Note 7). . . . . . . . . . . . 500,000 250,000
----------- -----------
Total assets. . . . . . . . . . . 4,288,230 4,332,996
----------- -----------
LIABILITIES
Accounts payable and accrued expenses275,158 274,731
Accrued litigation settlement . . 1,240,025 1,240,025
----------- -----------
Total liabilities . . . . . . . . 1,515,183 1,514,756
----------- -----------
NET ASSETS IN LIQUIDATION . . . .$ 2,773,047 $ 2,818,240
=========== ===========
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, 1998 AND 1997
(UNAUDITED)
1998 1997
----------- -----------
NET ASSETS IN LIQUIDATION
AT JANUARY 1. . . . . . . . . .$ 2,818,240 $ 4,801,590
Interest income on cash and
cash equivalents. . . . . . . . 7,954 9,030
Interest income on notes receivable 19,071 --
Gain on investment securities . . 15,930 33,258
Rental income . . . . . . . . . . 63,750 --
Operating expenses. . . . . . . . (151,898) (267,334)
----------- -----------
NET ASSETS IN LIQUIDATION AT
MARCH 31. . . . . . . . . . . .$ 2,773,047 $ 4,576,544
=========== ===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
RESORT INCOME INVESTORS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998
(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, 1997, which are included in the Company's 1997
Annual Report on Form 10-KSB for the year ended December 31, 1997, 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 March 31, 1998, all of
the Company's loans had been made to affiliates of the Company or RII
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 resigned their positions as
executive officers and directors of the Company. Throughout the remainder
of 1995, and during 1996 and 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 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 and the financial condition of the Affiliated
Borrowers, as well as the terms of the Company's loans, the collateral for
<PAGE>
certain of the loans (including the existence of senior liens on certain of
the collateral), appraisals of certain of such collateral and other
information concerning the value of the other collateral, and other
factors, to determine the amount of the charges and in reaching the
decision to proceed with the liquidation of the Company's assets.
On September 24, 1997, CBH and his wife, Patricia Hemmeter, filed a
voluntary petition pursuant to Chapter 7 of the Bankruptcy Code in the
United States Bankruptcy Court, Central District of California. Management
of the Company will monitor the bankruptcy proceedings and will file all
necessary claims in order to protect the Company's interest in the
bankruptcy estate. The Company will vigorously pursue its claim in the
bankruptcy proceeding but it is premature to determine what distribution,
if any, the Company will receive from this bankruptcy.
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, 1998 and December 31, 1997
statements of net assets in liquidation and the statements of changes in
net assets in liquidation for the three months ended March 31, 1998 and
1997 have been presented on the liquidation basis. The March 31, 1998 and
December 31, 1997 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
estimate of the realizable amount of the real estate interest held for sale
was based on an analysis of the discounted cash flow, there are few
directly comparable real estate properties that have been sold that can be
considered in preparing such an estimate. 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, 1998 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, 1998 statement of net assets, and the difference
could be material.
At March 31, 1998, the Company's financial instruments consist of,
real estate interest held for sale, notes receivable, interest receivable
on investments, cash and cash equivalents, investment securities, and a
deposit for class action settlement. 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 the amounts for notes receivable is described in
Notes 3 and 4. 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.
<PAGE>
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. The unaudited interim financial statements of the Company
reflect all adjustments which are, in the opinion of management of the
Company, necessary to present a fair statement of the results for the
interim periods presented.
3. 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 was 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 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. On June 23, 1997 and December 19, 1997, the Company
received $38,142 and $38,142, respectively, representing the payment of
interest on the combined Colorado Gaming notes due through December 1,
1997.
Based upon quoted values, the market value of the Colorado Gaming
Stock at March 31, 1998 was $5.75 per share providing a value of the
Company's shares of $345,978. 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, 1998, the Company recorded a
marked to market adjustment of $3,009 representing an unrealized gain on
investment securities as a result of an increase in the Colorado Gaming
share price from $5.70 to $5.75 per share at March 31, 1998. At March 31,
1998, the total value of the 34,002 shares of Casino America, Inc. are
estimated to be approximately $2.81 per share providing a value of the
Company's shares of $95,546. At March 31, 1998, the Company recorded a
market adjustment for an unrealized gain on investment securities in the
amount of $12,921 regarding the Casino America, Inc. stock as a result of
an increase in its share price from $2.43 to $2.81 at March 31, 1998. In
April 1998, the Company sold 34,002 shares of the Casino America, Inc.
stock for a total value of $102,152. As of March 31, 1998, the Company had
<PAGE>
estimated the net realizable value of the notes receivable from Colorado
Gaming to be $642,059. Colorado Gaming has entered into a letter of intent
to be acquired by Ladbroke Group PLC for $6.25 per share plus the
assumption of Colorado Gaming's debt. The transaction is currently
expected to close late in the second quarter or early in the third quarter
of 1998.
4. DEMAND LOANS TO RELATED PARTIES
Demand loans to related parties consist of the following:
Carrying Face Carrying Face
InterestAmount at Amount at Amount at Amount at
Rate/ March 31, March 31, Dec. 31, Dec. 31,
Borrower Maturity 1998 1998 1997 1997
- -------- ----------------- --------- --------- ---------
Outlaws (a) 11.00%
Demand -- 1,600,000 -- 1,600,000
CBH and
Patricia 27.00%
Hemmeter (b) Demand -- 14,267,000 -- 14,267,000
----------------------------------------
-- 15,867,000 -- 15,867,000
Reserve for
Impairment
of Loans -- 15,867,000 -- 15,867,000
----------------------------------------
$ -- $ -- $ -- $ --
========================================
(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 were
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 the Crook Loan. 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, reducing the carrying value at December 31, 1996 to $518,800. 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. On
June 20, 1997, the Company received cash proceeds of $605,000 less $17,000
for a lost note charge resulting in a realized gain of $86,200 in 1997.
Thus, the Company no longer maintains any interest in such property. CBH
continues to be liable for the uncollected portion of the Crook Loan plus
interest at the rate of 11% per annum. The loan is on non-accrual status
as of March 31, 1998.
<PAGE>
(b) 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 at the default rate of 27% per annum. The loan is on non-
accrual status as of March 31, 1998.
5. REAL ESTATE INTEREST HELD FOR SALE
On July 23, 1997, the Company completed negotiations with the
Company's Waikiki borrower resulting in the Company receiving the
borrower's interest in the subleasehold of the International Marketplace
(the "Subleasehold Interest"), a retail center in Honolulu, Hawaii in
exchange for the Company releasing its interest in the loans. In addition
to taking title, the Company received approximately $197,000 of escrowed
rental income for such property from December 1, 1996.
The valuation of the Subleasehold Interest is based upon a discounted
cash flow analysis. The discounted cash flow analysis is a method of
estimating the present worth of future cash flow expectations by
individually discounting each anticipated collection at an appropriate
discount rate. By forecasting the anticipated income stream and
discounting future value to current value, the capitalization process may
be applied to derive a value that an investor would pay to receive the
income stream generated by the International Marketplace. In addition, the
value of the Company's interest in International Marketplace was discounted
a further 15% to reflect the potentially shortened time period the Company
has to market the property. The amount of proceeds to be received from the
disposition of the Subleasehold Interest is dependent on a number of
conditions, many of which are beyond the power of the Company to control.
The Company received approximately $64,000 in monthly rental income
through March 31, 1998 which are recorded as rental income on the Statement
of Changes in Net Assets in Liquidation. The term of the sublease expires
on March 30, 2010. As lessor, the Company receives $23,969 monthly in
minimum rent and percentage rent of 12% of gross sales for the period
through March 31, 2003 increasing to 14% for the period April 1, 2003
through March 30, 2010. As lessee, the Company pays $12,913 monthly for
minimum rent and percentage rent equal to 8% of gross sales. In addition,
the Company receives $19,067 monthly for maintenance, advertising,
promotional and operating fees. The Company pays approximately $11,100 in
common area maintenance fees. The Company currently anticipates that it
will receive approximately $30,000 per month of income from this interest
in the near term.
<PAGE>
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 (collectively
referred to as the "class action litigation").
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
allege that CBH, MMH, DDL and JRY breached their fiduciary duties to the
Company, wasted Company assets and that CBH stood in a conflict of interest
position. The complaints have been consolidated (collectively referred to
as the "derivative litigation"). The plaintiffs in the derivative
litigation in October 1997 filed an action in the U.S. District Court in
Colorado in order to seek approval of the settlement of the derivative
actions in that Court concurrently with the securities class action
settlement, described below. The derivative complaint filed in Colorado
alleges substantially the same claims asserted in the complaints in the
Delaware litigation.
On November 26, 1997, the parties to the class action litigation and
the derivative litigation filed a Stipulation of Settlement with the U.S.
District Court in Denver, Colorado. On December 3, 1997, the District
Court held a hearing at which it granted preliminary approval of the
settlement and authorized the plaintiffs to distribute and publish notice
of the settlements. The court granted final approval of the settlements.
The Stipulation of Settlement emphasizes that the existence of the
settlements should not be considered an admission of liability by any
defendant with respect to any of the claims asserted.
The federal district court granted final approval of the settlements
of both the federal securities class action litigation and derivative
litigation. In approving the settlement, the Court held that it was in all
respects fair, reasonable and adequate to the members of the class, the
Company and all the parties. The settlement was effective on April 14,
1998. On April 28, 1998, the parties to the derivative litigation filed a
motion to dismiss the cases based on the approval of the settlement by the
federal district court. Management of the Company anticipates the motion
will be granted in the near future.
The class action litigation settlement provides that all investors,
other than the defendants, who purchased shares in the Company between
March 31, 1993 and June 29, 1995, will be eligible to participate in the
settlement proceeds. The settlement of the class action litigation
provides for a payment of at least $5,630,000, plus accrued interest on
portions of this amount. The economic components of the settlement are as
follows:
1. $3.63 million paid by the Company's directors' and officers'
issuer, and former auditors;
2. The approximately $1 million left from the settlement of the
derivative action, after attorneys fees are awarded by the Court;
<PAGE>
3. A payment by the Company of an amount equal to the greater of:
(a) 44 percent of the Company's net assets and liquidation valued as of
December 31, 1997, or (b) $1 million. The amounts available for
distribution to the class of investors covered by the settlement will be
determined after court-approved attorneys' fees and expenses have been
awarded. The amount that individual class members may receive will be
determined by the monies available after expenses and attorneys' fees and
the number and amount of claims filed.
The derivative litigation was settled for $1,425,000, contributed by
the Company's directors' and officers' insurer, plus accrued interest. As
stated above, this amount, less derivative counsel's attorney's fees, will
be contributed to the settlement of the class action litigation. The
counsel in the derivative litigation filed a request for fees of 30 percent
of the settlement amount, including expenses. Counsel for the Plaintiffs
in the class action litigation filed a request for 30 percent of the
recovery, not including payment from the settlement of the derivative
litigation, plus expenses. The Court granted the fee and expense requests.
Through April 30, 1998, the Company has paid $1,000,000 (unaudited)
toward settlement and will pay the remaining portion of its contribution,
if any, within five business days of the receipt of audited financial
statements for the period ending December 31, 1997, or the filing of its
Annual Report on Form 10-KSB for that period, whichever is earlier. At
December 31, 1997, the Company has recorded $1,240,025 of accrued
litigation settlement costs. In consideration for the settlement of the
litigation, plaintiffs in the class action litigation on behalf of
themselves and all class members and plaintiffs in the derivative
litigation on behalf of themselves and derivatively on behalf of the
Company provided releases to the defendants in the class action and
derivative litigation. These releases, among other things, release the
defendants from any claims, whether known or unknown, that were or could
have been asserted in the class action and derivative litigation, or in any
way related to the Company, including, but not limited to, the sale or
purchase of stock issued by the Company.
The Company's Board of Directors believes that the settlements were
beneficial to the Company because its liquidation can be more readily
accomplished now that the Company is unencumbered by the expense and
uncertainty of defending the litigation.
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
the class action and derivative litigation. 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. CBH
filed a voluntary bankruptcy petition on September 24, 1997.
On November 14, 1997, the Company was served with a complaint in the
action pending in the Civil District Court for the Parish of Orleans, State
of Louisiana, entitled The Venture International Group v. C.C. Partners
Corp., et al., No. 1993-00870. The claims in the complaint filed by the
Ernest N. Morial New Orleans Exhibition Hall Authority and the City of New
Orleans seek rescission and/or cancellation of any agreements and consent
judgments entered into between the Company, Canadian Pavilion Limited
Partnership, C.C. Partners Corp., Con Demmas, Venture International Holding
Company and Venture International Group. Management of the Company is
currently reviewing its options with regard to the lawsuit and at this time
is unable to make an assessment as to the outcome of the litigation.
<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, or as a reflection upon
any person, entity, or security. The Company cannot, at this time, predict
the outcome of the investigation or the financial impact, if any, to the
Company. The Company, however, is not aware of any investigational
activities undertaken by the SEC during the past year. Accordingly, the
Company believes the investigation may be complete.
7. SUBSEQUENT EVENT
On May 11, 1998, Mr. Daniel D. Lane resigned as a Director of the
Company and its Secretary. Mr. Neil D. Hansen, the Company's Treasurer,
was appointed to be the Company's Secretary.
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, 1998, the Company had real estate interest held for
sale with a carrying value of $1,925,000. See below for further detail
regarding the real estate interest held for sale.
The Company will not make any new loans, however, the Company has
advanced funds to the Affiliated Borrowers to the extent deemed necessary
to protect the Company's position in the underlying collateral. Through
March 31, 1998, the Company had advanced approximately $740,000 to the
Affiliated Borrowers in an effort to protect the Company's collateral
positions. 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 believes that it will not be required to make
distributions in the near term to maintain its status as a REIT. 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
<PAGE>
assets and the amounts of liabilities. While the estimate of the
realizable amount of the real estate interest held for sale is based on a
discounted cash flow analysis of the subleasehold interest by the
Directors, there are few directly comparable real estate properties that
have been sold that can be considered in preparing such an estimate. The
amounts the Company will ultimately realize could differ materially from
the amounts assumed in arriving at the estimates reflected in the March 31,
1998 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 settlement 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.
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 was 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.
<PAGE>
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 was 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 secured the Crook Loan; and
(c) the funds necessary to maintain no less than $150,000 of working
capital. 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 or 1997.
As of December 31, 1996, the outstanding loan balances were $1,600,000
for the Crook Loan and $518,800 for the Hudspeth Loan. The report prepared
for the Company by Coopers & Lybrand LLP 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 commissioned by the Company,
reducing the carrying value at December 31, 1996 to $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. On June 20, 1997, the
Company received cash proceeds of $605,000 less $17,000 for a lost note
charge, resulting in a realized gain of $86,200 in 1997. Thus, the Company
no longer maintains any interest in the Properties. CBH continues to be
liable for the uncollected portion of the Crook Loan plus interest at the
rate of 11% per annum. The loan is on non-accrual status as of March 31,
1998.
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.
<PAGE>
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
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. On July 23,
1997, the Company completed negotiations with the Company's Waikiki
borrower resulting in the Company receiving the borrower's interest in the
subleasehold of the International Marketplace (the "Subleased Interest"), a
retail center in Honolulu, Hawaii in exchange for the Company releasing its
interest in the loans. In addition to taking title, the Company received
approximately $197,000 of escrowed rental income for such property from
December 1, 1996.
The valuation of the Subleasehold Interest is based upon a discounted
cash flow analysis. The discounted cash flow analysis is a method of
estimating the present worth of future cash flow expectations by
individually discounting each anticipated collection at an appropriate
discount rate. By forecasting the anticipated income stream and
discounting future value to current value, the capitalization process may
be applied to derive a value that an investor would pay to receive the
income stream generated by the International Marketplace. In addition, the
value of the Company's interest in International Marketplace was discounted
a further 15% to reflect the potentially shortened time period the Company
has to market the property. The amount of proceeds to be received from the
disposition of the Subleasehold Interest is dependent on a number of
conditions, many of which are beyond the power of the Company to control.
The Company received approximately $64,000 in monthly rental income
through March 31, 1998 which are recorded as rental income on the Statement
of Changes in Net Assets in Liquidation. The term of the sublease expires
on March 30, 2010. As lessor, the Company receives $23,969 monthly in
minimum rent and percentage rent of 12% of gross sales for the period
through March 31, 2003 increasing to 14% for the period April 1, 2003
through March 30, 2010. As lessee, the Company pays $12,913 monthly for
minimum rent and percentage rent equal to 8% of gross sales. In addition,
the Company receives $19,067 monthly for maintenance, advertising,
promotional and operating fees. The Company pays approximately $11,100 in
common area maintenance fees. The Company currently anticipates that it
will receive approximately $30,000 per month of income from this interest
in the near term.
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
<PAGE>
party. The remaining $800,000 was used to provide working capital to the
Canadian Pavilion Borrower. Immediately after the closing of the Canadian
Pavilion Loan, the interest of this third party was transferred to the
Canadian Pavilion Borrower. The Canadian Pavilion is a wharf-front
property on the Mississippi River in downtown New Orleans. It is part of
the International Pavilion which was erected as an exhibition hall for the
1984 World's Fair. The Canadian Pavilion Loan originally bore interest at
9-1/2% per annum, payable quarterly in arrears and was to mature on the
earlier of demand or November 19, 1992. The Company extended the maturity
of the Canadian Pavilion Loan on a number of occasions. On May 18, 1994,
the loan was again extended to the earlier of demand or December 31, 1994
and the interest rate was increased from 9.5% to 10.5% per annum, payable
quarterly in arrears. On December 7, 1994, the terms of the loan were
further modified to increase the interest rate to 22% per annum, 11.5% of
which accrued and was payable when the Canadian Pavilion Loan was retired.
In addition, this modification provided that the demand feature be removed
from the loan so that the loan could not be called prior to December 31,
1994. On December 16, 1994, the maturity date of the Canadian Pavilion
Loan was further extended by the Company to June 30, 1995. On May 1, 1995,
the interest rate on the loan was increased to 26%, the default rate, as a
result of a monetary default per the terms of the loan agreement. On
June 30, 1995, the Company ceased accruing interest on the Canadian
Pavilion Loan and converted it to a demand loan. In addition, the Company
made additional advances to the Canadian Pavilion Borrower to preserve the
underlying collateral in the amount of approximately $113,000 subsequent to
June 30, 1995. During the third quarter of 1995, negotiations by and
between various governmental agencies, the former owner of the Canadian
Pavilion and the Canadian Pavilion Borrower proved unsuccessful and the
Canadian Pavilion Borrower received a termination letter regarding its
lease from the New Orleans Exhibition Hall Authority ("NOEHA"). After
receipt of the NOEHA letter, the Company had numerous discussions with
representatives of the Canadian Pavilion Borrower and its counsel in New
Orleans and real estate professionals located in New Orleans. After
considering the input of these various parties, as well as the lack of
acceptance of riverboat gaming in the downtown New Orleans area and the
poor performance of the temporary land-based casino in New Orleans, the
Company concluded that the value of the property securing the loan to the
Canadian Pavilion Borrower had been significantly reduced. Furthermore,
certain ongoing financial obligations of the Canadian Pavilion Borrower,
including insurance, payments to governmental agencies and maintenance
expenses were continuing with no assurance that such amounts, which had
been advanced by the Company, would be repaid to the Company nor was there
any assurance that the Company would receive any of the principal portion
of the Canadian Pavilion Loan since, after extensive marketing of the
property securing the Canadian Pavilion Loan, no significant interest in
the acquisition of the property arose. Based on these factors, the Company
took a reserve, as of September 30, 1995, for the full $2,600,000 of the
Canadian Pavilion Loan.
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. In November 1997, the Company was served with a
complaint related to the litigation involving the Company which was settled
in 1996, as described above. Management of the Company is currently
reviewing its options with respect to the lawsuit and at this time is
unable to make an assessment as to the outcome of the lawsuit.
<PAGE>
On January 4, 1994, the Company made a loan to CBH in the amount of
$12,900,000 (the "Hemmeter Loan"), the proceeds of which were used for
working capital purposes for CBH's various gaming affiliates and to retire
certain indebtedness secured by three of Mr. Hemmeter's residences, one in
Hawaii and two in California. This loan was originally secured by junior
mortgages on the aforementioned residences, bore interest at 12% per annum,
was payable quarterly in arrears, and was scheduled to mature on January 3,
1995. On September 14, 1994, the Hemmeter Loan was modified to provide for
an additional $1,100,000 ("Additional Principal") for a total principal
balance of the Loan of $14,000,000. The Additional Principal originally
bore interest at the rate of 22%, 12% of which was payable under the same
terms as the original loan, and the remaining 10% was accrued and was to be
payable upon the maturity or earlier prepayment of the Hemmeter Loan. In
addition, the interest rate on the original $12,900,000 in principal was
increased to 21.7% effective October 1, 1994, 12% of which was payable
under the same terms as the original loan, and the remaining 9.7% was
accrued and was to be payable upon the maturity or earlier prepayment of
the note. On December 16, 1994, CBH informed the Company that he was
selling his residence in Hawaii in late December 1994 and requested a
release of the Company's lien on the Hawaii residence and an extension of
the maturity date of the Hemmeter Loan, including the Additional Principal.
In response to CBH's request, the Company agreed that: (i) it would
release its lien on the Hawaii residence effective January 3, 1995; (ii)
the maturity date of the Hemmeter Loan, including the Additional Principal,
be extended to June 30, 1995; and (iii) the interest rate on the Hemmeter
Loan and the Additional Principal be increased to 22.7% and 23%,
respectively, assuming that the Company's lien on CBH's Hawaiian residence
is released. Thirteen percent of the interest on both the Hemmeter Loan
and the Additional Principal was to be paid under the same terms as
described above, and the remaining 9.7% of the Hemmeter Loan and the
remaining 10% of the Additional Principal would accrue and be payable upon
the maturity or earlier repayment of the Hemmeter Loan and the Additional
Principal. The lien on the Hawaii residence was released on January 3,
1995 and the new interest rates for the Hemmeter Loan and the Additional
Principal took effect on such date. On May 2, 1995, the Company agreed to
a further modification of the Hemmeter Loan to provide for an additional
$1,000,000 (the "Second Additional Principal") thereby increasing the
principal amount of the Hemmeter Loan to $15,000,000. The Second
Additional Principal bore interest at the rate of 23%, 10% of which was to
be payable upon the maturity or earlier prepayment of the Second Additional
Principal.
The carrying value of the Hemmeter Loan, including the Additional
Principal and the Second Additional Principal, 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 September 24, 1997, CBH and his wife, Patricia Hemmeter, filed a
voluntary petition pursuant to Chapter 7 of the Bankruptcy Code in the
United States Bankruptcy Court, Central District of California. Management
of the Company will monitor the bankruptcy proceedings and will file all
necessary claims in order to protect the Company's interest in the
bankruptcy estate. The Company will vigorously pursue its claim in the
bankruptcy proceeding but it is premature to determine what distribution,
if any, the Company will receive from this bankruptcy.
<PAGE>
On December 3, 1997, the Company filed preliminary proxy materials
with the Commission, outlining the Company's proposed plan of liquidation.
In arriving at the determination to continue the Company's original plan to
liquidate, the Company's Board of Directors evaluated alternatives to
enhance stockholder value. One alternative considered by the Directors was
the sale of all or substantially all of the assets of the Company to a
single buyer. During the last three quarters of 1997, the Company received
unsolicited informal indications of interest from third parties concerning
possible acquisition of substantially all of the Company's assets. The
Board has not, however, received a written offer, proposal or other
commitment that would provide for a greater distribution to the
stockholders than that which is currently anticipated under the terms of a
liquidation. Based on the Company's valuation of its current assets and
its anticipated expenses related to the liquidation of the Company,
management of the Company currently believes that the liquidation
distribution to the Stockholders will be approximately $.52 to $.62 per
share, however, there can be no assurance that an amount within this range
will be distributed to the Stockholders due to the fact that the exact
amount of the expenses related to the liquidation, the continued revenues
from the Company's assets and the exact amount the Company will receive at
the time it liquidates its assets cannot be quantified at this time.
As of March 31, 1998, the Company had approximately $1,202,100 in cash
and cash equivalents and investments securities.
Management of the Company is continuing in its decision that no
periodic liquidating distributions will be made to the Stockholders of the
Company at this time, however, management of the Company continues to
reevaluate this position on an ongoing basis.
RESULTS OF OPERATIONS
Net assets in liquidation decreased from a balance of $2,818,240 at
December 31, 1997 to a balance of $2,773,047 at March 31, 1998. The
decrease resulted primarily from the Company's payment of its operating
expenses.
Total revenue for the three months ended March 31, 1998 was $90,775
compared to $9,030 for the same period in 1997 due primarily to the rental
income received during 1998 from the Company's ownership of the
Subleasehold Interest.
Operating expenses for the three months ended March 31, 1998 were
$151,898 compared to $267,334 for the same period in 1997. 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 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 (collectively
referred to as the "class action litigation").
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
allege that CBH, MMH, DDL and JRY breached their fiduciary duties to the
Company, wasted Company assets and that CBH stood in a conflict of interest
position. The complaints have been consolidated (collectively referred to
as the "derivative litigation"). The plaintiffs in the derivative
litigation in October 1997 filed an action in the U.S. District Court in
Colorado in order to seek approval of the settlement of the derivative
actions in that Court concurrently with the securities class action
settlement, described below. The derivative complaint filed in Colorado
alleges substantially the same claims asserted in the complaints in the
Delaware litigation.
On November 26, 1997, the parties to the class action litigation and
the derivative litigation filed a Stipulation of Settlement with the U.S.
District Court in Denver, Colorado. On December 3, 1997, the District
Court held a hearing at which it granted preliminary approval of the
settlement and authorized the plaintiffs to distribute and publish notice
of the settlements. The court granted final approval of the settlements.
The Stipulation of Settlement emphasizes that the existence of the
settlements should not be considered an admission of liability by any
defendant with respect to any of the claims asserted.
The federal district court granted final approval of the settlements
of both the federal securities class action litigation and derivative
litigation. In approving the settlement, the Court held that it was in all
respects fair, reasonable and adequate to the members of the class, the
Company and all the parties. The settlement was effective on April 14,
1998. On April 28, 1998, the parties to the derivative litigation filed a
motion to dismiss the cases based on the approval of the settlement by the
federal district court. Management of the Company anticipates the motion
will be granted in the near future.
The class action litigation settlement provides that all investors,
other than the defendants, who purchased shares in the Company between
March 31, 1993 and June 29, 1995, will be eligible to participate in the
settlement proceeds. The settlement of the class action litigation
provides for a payment of at least $5,630,000, plus accrued interest on
portions of this amount. The economic components of the settlement are as
follows:
<PAGE>
1. $3.63 million paid by the Company's directors' and officers'
issuer, and former auditors;
2. The approximately $1 million left from the settlement of the
derivative action, after attorneys fees are awarded by the Court;
3. A payment by the Company of an amount equal to the greater of:
(a) 44 percent of the Company's net assets and liquidation valued as of
December 31, 1997, or (b) $1 million. The amounts available for
distribution to the class of investors covered by the settlement will be
determined after court-approved attorneys' fees and expenses have been
awarded. The amount that individual class members may receive will be
determined by the monies available after expenses and attorneys' fees and
the number and amount of claims filed.
The derivative litigation was settled for $1,425,000, contributed by
the Company's directors' and officers' insurer, plus accrued interest. As
stated above, this amount, less derivative counsel's attorney's fees, will
be contributed to the settlement of the class action litigation. The
counsel in the derivative litigation filed a request for fees of 30 percent
of the settlement amount, including expenses. Counsel for the Plaintiffs
in the class action litigation filed a request for 30 percent of the
recovery, not including payment from the settlement of the derivative
litigation, plus expenses. The Court granted the fee and expense requests.
Notices which thoroughly addressed the settlement terms and the
process for filing claims were previously forwarded to class members and
current stockholders, as of November 18, 1997, from the Clerk of the
Court. Stockholders and class members should address all questions
pertaining to the administration of claims and the process for submitting
proof of claim forms to:
FRG Information Systems Corp.
RE: Resort Income Investors, Inc. Litigation
823 United National Plaza - Suite 500
New York, New York 10017
Telephone: (212) 490-3550
Through April 30, 1998, the Company has paid $1,000,000 toward
settlement and will pay the remaining portion of its contribution, if any,
within five business days of the receipt of audited financial statements
for the period ending December 31, 1997, or the filing of its Annual Report
on Form 10-KSB for that period, whichever is earlier. At December 31,
1997, the Company has recorded $1,240,025 of accrued litigation settlement
costs. In consideration for the settlement of the litigation, plaintiffs
in the class action litigation on behalf of themselves and all class
members and plaintiffs in the derivative litigation on behalf of themselves
and derivatively on behalf of the Company provided releases to the
defendants in the class action and derivative litigation. These releases,
among other things, release the defendants from any claims, whether known
or unknown, that were or could have been asserted in the class action and
derivative litigation, or in any way related to the Company, including, but
not limited to, the sale or purchase of stock issued by the Company.
The Company's Board of Directors believes that the settlements were
beneficial to the Company because its liquidation can be more readily
accomplished now that the Company is unencumbered by the expense and
uncertainty of defending the litigation.
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
the class action and derivative litigation. 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. As
discussed above, CBH filed a voluntary bankruptcy petition on September 24,
1997.
<PAGE>
On November 14, 1997, the Company was served with a complaint in the
action pending in the Civil District Court for the Parish of Orleans, State
of Louisiana, entitled The Venture International Group v. C.C. Partners
Corp., et al., No. 1993-00870. The claims in the complaint filed by the
Ernest N. Morial New Orleans Exhibition Hall Authority and the City of New
Orleans seek rescission and/or cancellation of any agreements and consent
judgments entered into between the Company, Canadian Pavilion Limited
Partnership, C.C. Partners Corp., Con Demmas, Venture International Holding
Company and Venture International Group. Management of the Company is
currently reviewing its options with regard to the lawsuit and at this time
is unable to make an assessment as to the outcome of the litigation.
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, or as a reflection upon
any person, entity, or security. The Company cannot, at this time, predict
the outcome of the investigation or the financial impact, if any, to the
Company. The Company, however, is not aware of any investigational
activities undertaken by the SEC during the past year. Accordingly, the
Company believes the investigation may be complete.
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 during the quarter
ended March 31, 1998.
Date of Report Item Numbers
March 31, 1998 5 and 7
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 20, 1998 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
By: /S/ THOMAS A. ELLSWORTH
____________________________
Thomas A. Ellsworth
Director
By: /S/ NEIL D. HANSEN
____________________________
Neil D. Hansen
Secretary, Treasurer and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
"This schedule contains summary financial information extracted from Resort
Income Investors, Inc.'s Form 10-QSB for the three months ended March 31,
1998 and is qualified in its entirety by reference to such Form 10-QSB."
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 760,576
<SECURITIES> 441,524
<RECEIVABLES> 661,130
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,288,230
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,288,230
<CURRENT-LIABILITIES> 1,515,183
<BONDS> 0
<COMMON> 2,773,047
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,288,230
<SALES> 0
<TOTAL-REVENUES> 106,705
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 151,898
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (45,193)
<INCOME-TAX> 0
<INCOME-CONTINUING> (45,193)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,193)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
<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, 1998. 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>
