ITEM 1. BUSINESS
Capital Investment of Hawaii, Inc. (Registrant) was incorporated in Hawaii in 1944. The Registrant and its subsidiaries are engaged principally in real estate, security and other investing activities. Financial information about industry segments is presented in note 11 of the notes to consolidated financial statements. As of July 31, 1999, the Registrant and its subsidiaries had 15 employees.
REAL ESTATE
Real estate activities include the acquisition and development of undeveloped real estate, the sale and leasing of developed real estate and the investment in undeveloped land located principally on the island of Oahu in the state of Hawaii. Also included in real estate activities is interest income on notes receivable arising from property sales and income earned from financing acquisition, development and construction loan commitments in connection with residential real estate projects in Nevada and Utah. Since real estate sales and developments are not made and undertaken on a continuous basis, significant fluctuations will occur from year to year. The results of any one year are not necessarily comparable to other years and should not be a basis of expectation for future years. The identification and location of the Registrant's real estate holdings are discussed in Item 2, PROPERTIES.
SECURITY AND OTHER INVESTING ACTIVITIES
Security and other investing activities include gains and losses from the sale of other investments and dividend and interest income related to the ownership of such investments. The timing of sales and related gains/losses, which tend to vary with market conditions and the Registrant's cash requirements, are subject to significant fluctuations from year to year.
DISCONTINUED WHOLESALE BAKERY ACTIVITIES
Wholesale bakery activities include the production and sale of bakery products primarily to major hotels, commercial airlines and U.S. military installations in Hawaii. The Registrant acquired the assets of an existing bakery in August 1990 and additional assets of another smaller bakery in May 1991. In December 1997, the Company sold certain assets and liabilities of its subsidiary Latipac Fine Foods, Inc. and discontinued its bakery operations.
DISCONTINUED PROPERTY MANAGEMENT ACTIVITIES
Other activities of the Registrant include a property management division in Waikiki, Hawaii that in fiscal year 1999 had revenues of $599,930 and net income of $238,592, compared with revenues of $660,560 and net income of $291,319 in fiscal year 1998. In October 1999, the Company entered into an agreement to sell certain assets of its property management division and discontinued such operations.
ITEM 2.
ITEM 2. PROPERTIES
As of July 31, 1999, the Registrant and its subsidiaries owned properties used in connection with its real estate activities as set forth below. All properties listed with the exception of the lots in Washington County, Utah, are located in the City and County of Honolulu, and the titles are held in fee.
The Company also owns parcels of unimproved real estate totaling approximately 39 acres and interests in real estate at Makaha Valley, Hawaii owned by the Company's 85.8 percent-owned subsidiary, Makaha Valley, Incorporated, among which are (a) 3.825 acres of land zoned "agricultural" fronting the fifth fairway of the Sheraton Makaha Resort golf course, carried at nil on the balance sheet; (b) 2.823 acres of land near Makaha beach zoned "country," but designated on the development plan of the City and County of Honolulu, Hawaii general plan as "commercial," carried at $3,065 on the balance sheet; and (c) a reversionary interest in 8.454 acres of land within the Maunaolu residential subdivision at Makaha zoned "country," title to which will revert to the subsidiary if the land ceases to be used as a reservoir, which is carried at nil on the balance sheet.
See note 5 of the notes to consolidated financial statements for information with respect to real estate pledged as security for indebtedness.
ITEM. 3 LEGAL PROCEEDINGS
There is no litigation which, in the opinion of management, will have a materially adverse affect on the Company's consolidated financial position or results of operations.
ITEM. 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters that were submitted to a vote of security holders during the fourth quarter of the fiscal year ended July 31, 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant's common shares are not listed on any stock exchange, and there is no active trading of the shares. The following is the high and low quarterly bid information for each of the full quarterly periods within the years ended July 31, 1999 and 1998:
The aforementioned quotations were received from Abel-Behnke Corporation which makes a market in the Company's stock.
On July 31, 1999, there were approximately 541 stockholders of record of common stock, excluding individuals and institutions for whom shares are held in the names of nominees or brokerage firms.
There were no common stock dividends declared or paid during fiscal years 1999, 1998, and 1997.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF CONSOLIDATED OPERATIONS
(A) Loss per common share from continuing operations for each year was computed by dividing loss from continuing operations by the weighted average number of shares of common stock outstanding in each year. A detailed analysis of the loss per share computation for each year is presented in Exhibit 11. There were no cash dividends paid on common stock for the five years ended July 31, 1999.
FINANCIAL CONDITION
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company recorded a net loss of $1,086,567 for the fiscal year ended July 31, 1999, (fiscal year 1999), compared with net losses of $266,867 and $846,984 for fiscal years 1998 and 1997, respectively.
The net loss for fiscal year 1999 included a provision for losses on real estate investments of $437,297 relating to losses resulting from defaulted "ADC loans" on certain residential projects in Mesquite, Nevada.
NEVADA AND UTAH FINANCING ACTIVITIES
Income from ADC lending (defined below) for fiscal year 1999 was $279,709, as compared with $828,824 for fiscal year 1998. The sharp decrease in income was due almost entirely to a builder-borrower's default. The default was the result of the borrower's loan default of a loan unrelated to the credit facility made available by the Company. Advances outstanding to other builder-borrowers at the end of fiscal year 1999 were $1,217,871, compared with $1,435,210 at the end of fiscal year 1998.
Since fiscal year 1991, the Company has engaged in making "ADC loans" to homebuilders in southern Nevada and Utah. An ADC loan is an arrangement whereby the Company, which shares in the same risks and potential rewards as those of the builder-borrower, advances funds so that the builder-borrower is able to acquire unimproved land and develop it into finished lots ready for residential construction. Builders seek ADC financing from non-bank sources because federally-insured lending institutions regard ADC loans as carrying higher risk and impose more stringent lending standards as a condition of making ADC loans, usually in the form of low loan-to-value ratios. Because home construction in the Las Vegas area is largely in the hands of small builders who frequently find it difficult to meet those stringent financing standards, the demand for ADC funding is high, as is the pricing of such loans.
The $437,297 provision for losses on real estate investment recorded in fiscal year 1999 was the first write-down to be recorded by the Company since it began making ADC loans in fiscal year 1991. For the six consecutive fiscal years prior to fiscal year 1999, the Company recorded $4,923,766 in receipts from its ADC lending activities. During that six-year period, the average outstanding advances at fiscal year-end was $2,465,528, with a high of $5,169,856 at the end of fiscal year 1994. The decline in the Company's ADC portfolio was chiefly attributable to the diversion of capital to deal
with losses incurred during that period by Latipac Fine Foods, Inc., now a discontinued operation of the Company.
Southern Nevada continues to be an attractive area for ADC lending. The strong growth of the Las Vegas economy continues to be accompanied by the movement of new residents into the area. Although interest rates have steadily risen since the beginning of 1999, it has not diminished the demand for affordable housing in Las Vegas.
The Company will continue to engage in ADC lending activities, but will rely to a greater extent on participating the loans among small groups of investors.
HAWAII OPERATIONS
The economy in Hawaii during fiscal year 1999 was poor, as it has been for a number of years. We do not expect to see any significant improvement in the Hawaii economy in fiscal year 2000, despite signs that business confidence is gradually building in many North Asian economies.
The Company manages more than 300 condominium apartment units in Waikiki, mainly in the Ilikai Apartment Building and the Ilikai Marina Apartment Building, under management agreements with individual apartment owners. This division of the Company from time to time earns brokerage fee income from sales of apartments.
During fiscal year 1999, the property management division contributed revenues of approximately $600,000 compared with approximately $661,000 and $670,000, respectively, for fiscal years 1998 and 1997. The lower comparative results were largely due to declining commission income from apartment rental activity.
In October 1999, the Company entered into an agreement to sell certain assets of its property management division. As a result of the sale of the property management division, the Company expects a decline in future net cash flows of approximately $160,000 in fiscal 2000. This would be offset by the net cash to be realized from the sale of this division of approximately $480,000. For the years subsequent to fiscal 2000, management expects that the Company's overall net cash inflows will decrease by approximately $240,000 without the property management division.
GENERAL AND ADMINISTRATIVE
Management reduced general and administrative expenses in fiscal year 1999 to $849,701, compared with $964,158 in fiscal year 1998, largely due to management's efforts to control personnel and overhead costs.
The Company has made significant reductions in personnel and other management and general expenses in the past fiscal year. Such costs are expected to decrease with the sale of the property management division and the down-sizing of office support personnel. Payroll costs are expected to decline by approximately $268,000 is fiscal 2000 as compared to fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance at July 31, 1999 was $360,769 compared with $752,493 at the end of fiscal year 1998.
Cash requirements for fiscal year 2000 will be satisfied from institutional borrowings, refinancing of notes payable, cash in banks at the year end, net collections of ADC loans and additional loan participation agreements.
The Company has three ADC loan arrangements which are expected to continue during the following twelve months. Two ADC loans will no longer require any additional cash disbursements to the borrower and the Company expects only positive cash flows in the form of collections on advances, profit participation and interest income from these loans. The third ADC loan will require an additional cash disbursement of $110,000 which is expected to be paid out in the second quarter of fiscal 2000. In the event that the Company requires additional cash for this advance, participants will be solicited for the funds.
The Company has several notes payable to individuals, a corporation and a financial institution. Approximately $1,900,000 of these notes are payable on or before July 1, 2001. The Company has had long standing good relationships with these individuals and companies and has been successful in the past in obtaining extensions on these notes as they became due. Management will continue to work with these lenders and expects that these notes will continue to be extended for terms beyond fiscal 2000.
Further, as a result of the sale of certain assets of its property management division, the Company expects to receive approximately $1,072,000 in December 1999. Expenses of the sale and the remittance to the buyer of advance rentals and security deposits will result in a net cash inflow of approximately $480,000.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in accountants nor disagreements on accounting or financial disclosure matters for the years ended July 31, 1999 and 1998.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists all directors of the Registrant as of July 31, 1999:
(1) Mr. Dean T.W. Ho is the brother of Mr. Stuart T.K. Ho.
The present terms of office of all directors will expire at the next annual meeting of the stockholders of the Registrant or upon election of their respective successors. No events have occurred during the past five years that are material to an evaluation of the ability or integrity of any director.
The following table lists all executive officers of the Registrant as of July 31, 1999:
(1) Mr. Dean T.W. Ho is the brother of Mr. Stuart T.K. Ho.
The term of office of the above executive officers is for a period of one year.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation for each of the years ended July 31, 1999, 1998 and 1997 for (a) the Chairman of the Board and President, and (b) all executive officers of the Registrant whose annual compensation exceeds $100,000.
SUMMARY COMPENSATION TABLE
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth, as of July 31, 1999, shareholders of record who beneficially own more than 5% of the voting stock of the Registrant:
(1) Includes: (a) sole voting and investment power, 22,813 shares.
(b) shared voting and investment power for 168,650 shares owned by the Chinn Ho Trust, of which Stuart Ho is one of 3 Trustees, and 29,500 shares owned by the Chinn Ho Foundation, of which Stuart Ho is one of 4 Trustees.
(c) 10,850 shares owned by Mary L. Ho, spouse, who has sole voting and investment power.
(d) 20,723 shares held in an IRA account.
(2) Includes: (a) sole voting and investment power, 27,700 shares.
(b) shared voting and investment power for 168,650 shares owned by the Chinn Ho Trust, of which Dean Ho is one of 3 Trustees, and 29,500 shares owned by the Chinn Ho Foundation, of which Dean Ho is one of 4 Trustees.
(3) Includes: (a) sole voting and investment power, 38,775 shares.
(b) shared voting and investment power for 168,650 shares owned by the Chinn Ho Trust, of which Karen Ho Hong is one of 3 Trustees.
(c) shared voting and investment power for 5,000 shares owned by Karen Ho Hong and Stanley Hong as trustees for David Hong.
The following table sets forth, as of July 31, 1999, the number of shares of the Registrant's equity securities held by each director and all directors and officers of the Registrant as a group:
(1) Includes: (a) 168,650 shares owned by the Chinn Ho Trust as to which two executive officers of the Registrant are Trustees. The trust agreement is effective until 2 years after the death of Mrs. Chinn Ho or at such time as the personal representative of Mrs. Ho's estate is discharged and appropriately released, whichever occurs later, not to exceed 21 years after the death of the last survivor of Chinn Ho, Mrs. Chinn Ho and the children of Chinn Ho.
(b) 29,500 shares owned by the Chinn Ho Foundation qualified under Section 501(c)(3) of the Internal Revenue Service Code, as to which four executive officers of the Registrant are Trustees.
(2) Includes: (a) Shared voting and investment power for 5,000 shares owned by Stanley Hong and Karen Ho Hong as Trustees for David Hong.
(b) 38,775 shares owned by Karen Ho Hong, spouse, who has sole voting and investment power.
(c) 168,650 shares owned by the Chinn Ho Trust, of which Karen Ho Hong, spouse, is one of three trustees.
(3) Includes: (a) Shared voting and investment power for 10,250 owned by Donald M. Wong and Eugenia C. Wong.
(b) 29,500 shares owned by the Chinn Ho Foundation, of which Donald Wong is one of four trustees.
During fiscal year 1995, the Company borrowed $100,000 from certain officers of the Company through unsecured short-term notes. As of July 31, 1999, the balance of these short-term notes was $5,000.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company entered into loan participation agreements during 1999 and 1998, which provided that the Company sell, without recourse, to participants, an undivided participating interest in the loans to Touchstone Development of Utah, LLC, Hearthstone Homes, Inc., Martin Development, Inc., and Hearthstone Homebuilders, Inc. (see footnote 4 to the consolidated financial statements). There were no outstanding amounts due to participants on the loan agreements with Touchstone Development of Utah, LLC, and Hearthstone Homes, Inc., at July 31, 1999. Included in the total participants' share of the loan commitment to Martin Development, Inc., amounting to $351,824 at July 31, 1999, was $58,608 from a director of the Company and $234,608 from an officer of the Company. Included in the total participants' share of the loan commitment to Hearthstone Homebuilders, Inc., amounting to $449,049 at July 31, 1999, was $149,684 from a director of the Company. Included in the total participants' share of the loan commitment to Touchstone Development of Utah, LLC, amounting to $391,538 at July 31, 1998, was $78,307 borrowed from a director of the Company and $39,154 borrowed from an officer of the Company. The participants' share of the loan commitment to Hearthstone Homes, Inc., amounting to $119,804 at July 31, 1998 was from an officer of a subsidiary of the Company.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) Consolidated Financial Statements - See Index to Consolidated Financial Statements and Schedules.
(B) There were no reports on Form 8-K filed during the last quarter of the year ended July 31, 1999.
(C) Exhibits:
Exhibits not listed above are omitted because of the absence of the conditions under which they are required.
* Incorporated by reference as Exhibits 1A and 1B to Registration Statement number 0-4179 filed on November 29, 1969.
(D) Financial Statement Schedules - See Index to Consolidated Financial Statements and Schedules.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedules
Independent Auditors' Report
Consolidated Financial Statements:
Consolidated Balance Sheets - July 31, 1999 and 1998
Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit) - Years ended July 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years ended July 31, 1999, 1998 and
Notes to Consolidated Financial Statements
Schedules:
II Valuation and Qualifying Accounts and Reserves - Years ended July 31, 1999, 1998 and 1997
III Real Estate and Accumulated Depreciation - July 31, 1999
IV Mortgage Loans on Real Estate - July 31, 1999
Schedules not listed above are omitted because of the absence of the conditions under which they are required or because the required information is included elsewhere in the consolidated financial statements or notes thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors Capital Investment of Hawaii, Inc.:
We have audited the consolidated financial statements of Capital Investment of Hawaii, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capital Investment of Hawaii, Inc. and subsidiaries as of July 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 1999, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
/s/ KDMG LLP Honolulu, Hawaii October 22, 1999
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 1999 and 1998
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 1999 and 1998
See accompanying notes to consolidated financial statements.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Consolidated Statements of Operations and Retained Earnings (Accumulated Deficit) Years ended July 31, 1999, 1998 and 1997
See accompanying notes to consolidated financial statements.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended July 31, 1999, 1998 and 1997
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended July 31, 1999, 1998 and 1997
See accompanying notes to consolidated financial statements.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Capital Investment of Hawaii, Inc. and subsidiaries are engaged principally in real estate, security and other investing activities.
Real estate activities include the acquisition and development of undeveloped real estate, the sale and leasing of developed real estate and the investment in undeveloped land located principally on the island of Oahu in the state of Hawaii. Also included in real estate activities are interest income on notes receivable arising from property sales and income earned from financing acquisition, development and construction loan commitments in connection with residential real estate projects in Nevada and Utah.
Security and other investing activities include gains and losses from the sale of investments and dividend and interest income related to the ownership of such investments.
(b) PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of Capital Investment of Hawaii, Inc. and all of its subsidiaries (collectively referred to as the "Company"). All material intercompany balances and transactions have been eliminated from the consolidated financial statements.
(c) REAL ESTATE ACCOUNTING
(a) CARRYING AMOUNTS
Developed real estate and undeveloped land held for sale are carried at the lower of cost or market value.
(b) INCOME RECOGNITION
Profit on sales of real estate is recognized when title has passed, minimum down payment criterion are met, risks and records of ownership have been transferred to the buyer and there is no substantial continuing involvement with the property, collectibility of the sales price is reasonably assured and other criteria set forth in Statement of Financial Accounting Standards (SFAS) No. 66 are met. If any of the aforementioned criteria are not met, profit is deferred and recognized under either the installment, cost recovery, deposit or percentage of completion method.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
(d) DEPRECIATION AND AMORTIZATION
Depreciation and amortization are computed generally by use of the straight-line method. Depreciation and amortization rates are based upon the estimated useful lives of the assets or, if applicable, the remaining terms of leases, whichever is shorter. In general, the ranges of annual rates of depreciation and amortization applicable to major classifications of property and equipment are as follows:
Maintenance and repairs are charged to income as incurred; expenditures for major renewals and betterments that materially extend the economic lives of property and equipment are capitalized. Gains or losses arising from dispositions of depreciable assets are credited or charged to income.
Debt expense is being amortized by the straight-line method over the term of the debt.
(e) SECURITY INVESTMENTS
Investment securities for which no ready market exists are valued at cost.
For all security investments, declines in value below cost that are determined to be other than temporary are reflected in operations and the written-down value of the securities is established as the new cost basis for those securities.
The cost of securities sold is determined on a first-in, first-out basis.
(f) INVESTMENTS IN REAL ESTATE - ACQUISITION, DEVELOPMENT AND CONSTRUCTION LOANS
The Company has originated acquisition, development, and construction (ADC) loans with the following characteristics: (1) the borrower has title to but little or no equity in the underlying security and (2) the Company participates in the profit on the ultimate sale of the project. For financial reporting purposes, the loans have been presented as real estate investments.
The Company recognizes the interest and fees the Company is entitled to under ADC loans ratably as profits are earned on the sale of individual units in the underlying real estate projects.
(g) INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(h) IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
(i) NEWLY ADOPTED ACCOUNTING PRINCIPLES
(a) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130, effective for fiscal years beginning after December 15, 1997, establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as all changes in equity, including net income, except those resulting from investment by and distributions to owners. SFAS No. 130 requires reclassification of financial statements for earlier periods provided for comparative purposes. The application SFAS No. 130, effective from August 1, 1998, did not have a material impact on the Company's consolidated financial statements.
(b) SEGMENTS AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for the way public companies report selected information about business segments, including information on products and services, geographic areas and major customers, based on a management approach to reporting. Reclassification of financial statements for prior periods is required for comparative purposes. The application of SFAS No. 131, effective August 1, 1998, did not have material impact on the consolidated financial statements of the Company.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
(j) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.
(2) DISCONTINUED BAKERY OPERATION
In December 1997, the Company sold certain assets and liabilities of its bakery operations. The Company recognized a gain on the sale of $379,227 in fiscal 1998.
Summary gain (loss) from discontinued operations are as follows:
(3) DEVELOPED REAL ESTATE
The components of developed real estate at July 31, 1999 and 1998 were as follows:
(4) REAL ESTATE INVESTMENTS
(a) UNDEVELOPED LAND
Undeveloped land held for sale at July 31, 1999 and 1998 consisted of approximately 39 acres in Makaha Valley on the island of Oahu, state of Hawaii and approximately 1.3 acres in Washington County, Utah.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
(b) OTHER REAL ESTATE INVESTMENTS
The Company has extended various ADC loan commitments to corporate real estate ventures to finance residential real estate projects in Nevada and Utah. These financing arrangements are being accounted for as in-substance investments in real estate, whereby the interest and fees the Company is entitled to will be recognized ratably as profits are earned on the sale of units in the underlying real estate projects. Each loan commitment has restrictive loan covenants which limit the maximum amount of loan proceeds available for site acquisition and development and building construction.
At July 31, 1999, the ADC loans to Hearthstone Homes, Inc. and Hearthstone Homebuilders, Inc. were made to corporate real estate ventures which are owned by individuals who have personally guaranteed payment of the ADC loans. At July 31, 1998, all ADC loans were made to corporate real estate ventures.
The following summarizes the Company's other investments in real estate and related deferred income which is presented as "other payables" in the accompanying consolidated balance sheets.
HEARTHSTONE HOMES, INC.
On February 10, 1998, the Company extended a $425,000 ADC loan commitment to Hearthstone Homes, Inc. to finance a residential real estate project known as Hearthstone Homes in Clark County, Nevada. At July 31, 1999 and 1998, the Company's aggregate investment in the real estate project amounted to $207,700 and $229,400, respectively, including $7,700 and $4,400 of capitalized interest, respectively. The ADC loan is secured by a parcel of land in Clark County,
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
Nevada. Restrictive loan covenants limit the maximum amount of loan proceeds available during various phases of the project.
The Company entered into a 50% loan participation agreement which provides that the Company sell, without recourse, to a participant an undivided participating interest in the loan to Hearthstone Homes, Inc. The participant's share of the loan commitment amounted to nil and $119,804 at July 31, 1999 and 1998, respectively. The participant is an officer of a subsidiary of the Company.
HEARTHSTONE HOMEBUILDERS, INC.
On December 3, 1998, the Company extended a $415,000 ADC loan commitment to Hearthstone Homebuilders, Inc. to finance a residential real estate project in Clark County, Nevada. As of July 31, 1999, the Company's aggregate investment in the real estate project amounted to $415,441, including $350 of capitalized interest. The ADC loan is secured by a parcel of land in Clark County, Nevada.
The Company entered into 50% loan participation agreements which provide that the Company sell, without recourse, to participants an undivided participating interest in the loan to Hearthstone Homebuilders, Inc. The participants' share of the loan at July 31, 1999 was $449,049 of which $149,684 was from a director of the Company.
MARTIN DEVELOPMENT, INC.
On February 19, 1999, the Company entered into an agreement with Martin Development, Inc. to exchange its interest in 59 parcels of land in the Copper Bluffs project located in Clark County, Nevada, for a promissory note totaling $813,376. As of July 31, 1999, the balance due from Martin Development totals $602,780. The promissory note is secured by the deed to the land parcels in Clark County, Nevada.
The Company entered into 50% loan participation agreements which provide that the Company sell, without recourse, to participants an undivided participating interest in the loan to Martin Development, Inc. The participants' share of the loan at July 31, 1999 was $351,824, of which $58,608 was from a director of the Company and $234,608 from an officer of the Company.
COPPER BLUFFS, LLC
On June 18, 1996, the Company extended a $600,000 ADC loan commitment to Copper Bluffs, LLC to finance a residential real estate project in Clark County, Nevada. At July 31, 1998, the Company's aggregate investment in the real estate project amounted to $392,580, including $27,200 of capitalized interest.
In January 1999, the Company obtained title to 59 parcels of land in Clark County, Nevada in satisfaction of its loan to Copper Bluffs, LLC. Title to the parcels were subsequently assigned to Martin Development, Inc. in exchange for a non-interest bearing loan of $813,376. These transactions resulted in a provision for loss from real estate investment of $100,000.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
Financial information of Copper Bluffs, LLC is as follows:
CONDENSED BALANCE SHEET
JUNE 30, 1998
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
SUNSET BAY, LLC
On July 29, 1996, the Company extended a $608,400 ADC loan commitment to Sunset Bay, LLC to finance a residential real estate project in Clark County, Nevada. The loan commitment was paid in full on November 1, 1996. Subsequently, on December 23, 1996, the Company extended a $800,000 ADC loan commitment to Sunset Bay, LLC to finance another residential real estate project in Clark County, Nevada. At July 31, 1998, the Company's aggregate investment in the real estate project amounted to $288,132, including $38,900 of capitalized interest.
In January 1999, the Company recorded a provision for loss from real estate investment for its ADC loan to Sunset Bay LLC of $300,000. The provision included the write-off of the total principal and interest due on the loan at January 31, 1999.
Financial information of Sunset Bay, LLC is as follows:
CONDENSED BALANCE SHEET JUNE 30, 1998
ASSETS
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
CONDENSED STATEMENTS OF INCOME ELEVEN MONTHS ENDED JUNE 30, 1998
Sales $ 1,674,620 Cost of sales (1,601,856) ----------- Gross profit 72,764 Other income 4,123 Other expense (15,112) ----------- Net income $ 61,775 ===========
RED ROCK CANYON, LLC
On October 2, 1996, the Company extended a $500,000 ADC loan commitment to Red Rock Canyon, LLC to finance a residential real estate project in Washington County, Utah. At July 31, 1998, the Company's aggregate investment in the real estate project amounted to $208,706 including $17,300 of capitalized interest.
The Company obtained title to improved residential housing lots in Washington County, Utah in satisfaction of its ADC loan to Red Rock Canyon, LLC. As a result of this transaction, the Company recorded a provision for loss from real estate investments of $37,297 during the year ended July 31, 1999.
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
Financial information of Red Rock Canyon, LLC is as follows:
CONDENSED BALANCE SHEET JUNE 30, 1998
ASSETS
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
TOUCHSTONE DEVELOPMENT OF UTAH, LLC
On February 4, 1997, the Company extended a $2,337,437 ADC loan commitment to Touchstone Development of Utah, LLC to finance a residential real estate project known as Overlake Estates in Tooele County, Utah. At July 31, 1998, the Company's aggregate investment in the real estate project amounted to $406,592 including $2,400 of capitalized interest.
In April 1999, the Company received approximately $115,800 from a Nevada corporation in exchange for the assignment of its interest in the ADC loan to Touchstone Development of Utah, LLC.
Financial information of Touchstone Development of Utah, LLC is as follows:
CONDENSED BALANCE SHEET
JUNE 30, 1998 ASSETS
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
CONDENSED STATEMENT OF LOSS
ELEVEN MONTHS ENDED JUNE 30, 1998
The Company entered into 15% loan participation agreements which provide that the Company sell, without recourse, to participants an undivided participating interest in the loan to Touchstone Development of Utah, LLC. Participants' share of the loan commitment amounted to $391,538 at July 31, 1998. Certain participants are related parties which, in the aggregate, totaled $117,461 at July 31, 1998.
(5) INDEBTEDNESS
Indebtedness at July 31, 1999 and 1998 is summarized as follows:
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
Maturities of indebtedness are shown in the following summary:
The carrying amounts of assets pledged as collateral for indebtedness as of July 31, 1999 were as follows:
In addition, the rights and interests in insurance policies, income or profits, and other contracts and agreements of the Company were pledged as collateral for indebtedness as of July 31, 1999.
(6) INCOME TAXES
The benefit for income taxes applicable to the net loss for fiscal years 1999, 1998 and 1997 differ from the "expected benefit for income taxes" for those years (computed by applying the U.S. federal income tax rate of 34% to net loss) as follows:
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at July 31, 1999 and 1998 are presented below.
The valuation allowance for deferred tax assets as of August 1, 1998 and 1997 were $2,114,000 and $1,698,600, respectively. The net change in the total valuation allowance for the years ended July 31, 1999 and 1998 were increases of $415,400 and $102,300, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
As of July 31, 1999, the Company had tax net operating loss carryforwards of approximately $5,000,000 and $4,700,000 for federal and state income tax purposes, respectively, which can be used to offset future taxable income through 2013.
(7) DEFERRED COMPENSATION
The Company has a deferred compensation agreement under which the Company is obligated to pay $5,000 each month for 120 consecutive months to the spouse of the late Mr. Chinn Ho, the former chairman of the Executive Committee. The Company commenced monthly payments in accordance with the deferred compensation agreement to Mrs. Chinn Ho in November 1989. The accrued obligation as of
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
July 31, 1999 and 1998 amounted to $149,158 and is included in the consolidated balance sheet as other payables.
(8) LEASE COMMITMENTS
The Company leases various facilities for its office premises and rental agency. These operating leases provide that the Company pay all taxes, maintenance and insurance applicable to the leased properties.
Consolidated future minimum payments required under noncancelable operating leases as of July 31, 1999 are summarized as follows:
Rent expense for all operating leases was $124,208, $176,509 and $408,250 for the years ended July 31, 1999, 1998 and 1997, respectively.
(9) FOURTH QUARTER RESULTS (UNAUDITED)
Fourth quarter results for the years ended July 31, 1999 and 1998 are as follows:
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
(10) LOSS PER COMMON SHARE
Loss per common share was computed by dividing the applicable loss by the weighted average number of shares of common stock outstanding.
(11) SEGMENT INFORMATION
The Company has classified its business activities into significant segments for the years ended July 31, 1999, 1998 and 1997. The Company's operations have been classified into real estate, security and other investing and other activities. Real estate activities include the acquisition and development of undeveloped real estate, the sale and leasing of developed real estate and investment in undeveloped real estate. Also included in real estate activities is interest income from loans made to development projects. Security and other investing activities include gains or losses from security investments and investment income related to the ownership of such investments. Other activities include the Company's rental agency businesses and other miscellaneous activities. The following is a summary of segment financial information for the years ended July 31, 1999, 1998 and 1997:
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
Sales between business segments are immaterial and are netted against the sales of the respective segment.
(12) BUSINESS AND CREDIT CONCENTRATIONS
Substantially all of the Company's business activity is with customers located in Hawaii, Nevada and Utah. The majority of customers of the Company's operating businesses are related to the hospitality industry.
The Company's business activities in Nevada and Utah related solely to financing residential real estate development projects. At July 31, 1999 and 1998, the Company had outstanding ADC loans of $1,217,871 and $1,435,210, respectively, due from corporate real estate ventures. Under participation agreements the Company had sold $800,873 and $511,342 of these loans without recourse as of July 31, 1999 and 1998, respectively (see note 4).
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each applicable class of financial instruments for which it is practicable to estimate that value:
The carrying amount of cash, trade accounts receivable, accounts payable, accrued expenses and debentures payable approximate fair value because of the short maturity of these instruments.
(a) OTHER INVESTMENT SECURITIES
Fair value is based on dealer quotes.
(b) OTHER REAL ESTATE INVESTMENTS
Fair value is determined as the present value of expected future cash flows discounted at the interest rate currently offered by the Company, which approximates rates currently offered by local lending institutions for loans of similar terms to companies with comparable credit risk.
(c) INDEBTEDNESS
Fair value of mortgage notes, other notes, secured and other notes, unsecured is estimated by discounting the future cash flows of each instrument based on the quoted market prices for the same or similar issues or on the current rates offered for debt of the same or similar remaining maturities.
(d) DEFERRED COMPENSATION PAYABLE
The carrying value of deferred compensation payable estimates fair value.
(e) ACCRUED INTEREST
Accrued interest is determined by the present value of interest income recognized by the Company.
(f) OTHER RECEIVABLES
The carrying value of other receivable balances approximates the fair value.
(g) LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are provided for certain existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered.
(14) SUBSEQUENT EVENT
In October 1999, the Company entered into an agreement to sell certain assets of its property management division. Summary operating results of the discontinued operations are as follows:
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Notes Consolidated Financial Statements
July 31, 1999,1998 and 1997
The components of net liabilities of discontinued operations included in the consolidated balance sheets at July 31, 1999 and 1998 are as follows:
SCHEDULE II
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended July 31, 1999, 1998 and 1997
See accompanying independent auditors' report.
SCHEDULE III
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES
Real Estate and Accumulated Depreciation
July 31, 1999
(1) Changes during the two years ended July 31, 1999:
(2) Aggregate original cost for federal income tax purposes amounted to $1,868,966 for 1999.
(3) Presentation on consolidated balance sheet as of July 31, 1999:
See accompanying independent auditors' report.
SCHEDULE III
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Real Estate and Accumulated Depreciation July 31, 1999
SCHEDULE IV
CAPITAL INVESTMENT OF HAWAII, INC. AND SUBSIDIARIES Mortgage Loans on Real Estate July 31, 1999
(1) Changes during the years ended July 31, 1999 and 1998:
See accompanying independent auditors' report.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAPITAL INVESTMENT OF HAWAII, INC.
Date: October 22, 1999 /s/ Stuart T. K. Ho ---------------------------------------- Stuart T. K. Ho, Chairman of the Board, President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: October 22, 1999 /s/ Dean T. W. Ho ---------------------------------------- Dean T. W. Ho, Vice Chairman, Secretary and Director
Date: October 22, 1999 /s/ Donald M. Wong ---------------------------------------- Donald M. Wong, Senior Vice President, Senior Vice President, Treasurer and Director
Date: October 22, 1999 /s/ Harriet H. Matsuo ---------------------------------------- Harriet H. Matsuo, Assistant Secretary and Assistant Treasurer
Date: October 22, 1999 /s/ Greta U. Nakao --------------------------------------- Greta U. Nakao, Assistant Secretary and Assistant Treasurer